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2008-10-01 | All chapters
Trading strains
John Thornhill, Financial Times, 1st October 2008
Even by the standards of euro-pessimism, Giulio Tremonti’s warning of “reverse colonisation” was stark.
For centuries, “Europe had an immense power that projected outwards, while China endured an internal crisis. Now, at the beginning of this new century, the tables have turned,” the Italian opposition politician wrote last year. “If globalisation continues to develop at breakneck speed, the Chinese dragon will make the meek and ‘polite’ Europe its own; and it will do so with Europe’s consent,” he wrote in his book Fear and Hope. Mr Tremonti is once again Italy’s finance minister.
China’s astonishing economic rise over the past three decades has unsettled many countries and regions, but perhaps nowhere more than Europe, which in some respects still regards itself as the centre of the world.
For a while, Europe’s politicians and business leaders marvelled at China’s economic dynamism and applauded its successes in reducing mass poverty. Alarmed at US unilateralism at the time of the Iraq war, leaders such as Jacques Chirac of France and Gerhard Schröder of Germany even held out the prospect of a fully-fledged strategic partnership with the growing power. The European Union has been steadily developing an extensive – and largely positive – dialogue with China over a vast range of subjects spanning economics and trade, the role of the United Nations, counter-terrorism, cultural exchanges, Iran, North Korea, Darfur and Burma.
However, as the world’s centre of economic gravity slips inexorably eastwards, the perception appears to be spreading among European voters that China’s rise is as much of a curse as a blessing. As China has regained its reputation as the workshop of the world, it has seemingly sucked manufacturing plants and jobs out of Europe and flooded the EU with cheap manufactured imports. The EU’s trade deficit with China has recently been rising by an estimated €15m an hour.
Whereas European political leaders have long argued that globalisation is beneficial for both developed and developing countries, some now present it as more of a zero-sum game. In the words of Nicolas Sarkozy, France’s president, the world has moved from an era of abundance to one of scarcity in which competition for markets and resources is intensifying.
In this changing world, China is blamed for pushing up commodity prices and increasing the cost of energy and food in Europe as the country’s voracious industries scour the world for raw materials. In European eyes, China has become synonymous with globalisation, for better and worse.
“Europe has switched from China hype to China angst,” says Eberhard Sandschneider, director of the German Council on Foreign Relations. “The popular view is that the Chinese are stealing our jobs, that they are competing with us for energy. Our populations are realising that we are not only gaining from globalisation but losing and those people who are losing are very sceptical that globalisation is a good thing.”
As Europe grapples with an increasingly severe financial crisis and worries about an imminent recession, the question is perhaps no longer whether there will be a European backlash against China. It is how serious and long-lasting that backlash will be.
David Shambaugh, a professor at George Washington university who has written extensively on the Europe-China relationship, says there is a growing list of antagonisms between the two partners, ranging from trade and investment to Tibet and human rights, that will not be easy to resolve. “Of China’s global relationships it is now the most strained,” he says.
At a conference on Europe and China in Hamburg earlier this month, Chinese and European politicians and business leaders expressed warm words about the extent of their co-operation. But many feared the yawning trade deficit was becoming politically unsustainable. Something must give.
Lucas Papademos, vice-president of the European Central Bank, said Europe had benefited enormously from the growth of trade with China but warned of the “asymmetries” between the two partners. China has recently seen its exports to the EU grow at a rate of about 20 per cent a year and is now Europe’s biggest source of imports, accounting for €230bn of manufactured goods in 2007.
In turn, European companies have found a lucrative market in China, which has become the EU’s fastest growing export market. But as Mr Papademos observed, the EU exports more to Switzerland, with a population of 7.5m, than it does to China, with 1.3bn. The EU’s exports to China amounted to €72bn last year, less than a third of imports. The EU argues that China’s non-tariff barriers are severely impeding the trade relationship, costing European businesses €20bn in lost opportunities every year.
Peter Mandelson, the EU’s trade commissioner, has strongly criticised the restrictions placed on foreign companies in China, saying that economic nationalism is on the rise. “China appears to have put out the mat for foreign investment, but the door is still half closed,” he told the Financial Times on a visit to Beijing. “In some cases it appears to be swinging shut.”
The European Chamber of Commerce in China has highlighted the theft of intellectual property rights, an unpredictable mergers and acquisitions regime, and the exclusion of foreign companies from many government procurement contracts as big deterrents to doing business in China. European investment in China dropped from €6bn in 2006 to €1.8bn last year, accounting for just 2 per cent of European foreign direct investment.
European leaders are increasingly complaining of a lack of reciprocity in the relationship with China. Europe is realising that its much-vaunted “soft” power – relying on political engagement and dialogue – has its limits, while US “hard” power backed by military force seems more effective. As a result, Europe is increasingly talking to China with an American accent, in the words of one analyst, and is toughening its rhetoric towards Beijing.
In a speech in Toulon last week, Mr Sarkozy sharpened his criticisms of “monetary dumping” emanating from China (and the US) and again called for Beijing to revalue its currency upwards against the euro. He warned that the manipulation of exchange rates could lead to “extremely violent commercial wars and open the way for the worst of protectionisms.” Accusing China of artificially suppressing its exchange rate, he said: “The French manufacturer can make all the gains in productivity that he wants, he can compete with rigour against the low salaries of Chinese workers, but he cannot compensate for the undervaluation of the Chinese currency.”
In many ways, however, Europe’s fears of China’s economic rise look overblown, an even more exaggerated version of the US’s extended exercise in China-bashing of recent years. At $16,800bn, the EU’s gross domestic product is five times bigger than that of China. In terms of GDP per capita, Europeans are some 13 times richer than the Chinese.
Nor, unlike the US, does the EU even have a big overall trade deficit that it can seek to pin on Beijing. Looking at the EU’s bilateral trade deficit with China is also somewhat misleading, as it largely reflects a massive shift of production within Asia itself. The region’s share of EU imports has increased only modestly over the past decade.
For all the waning of Sino-enthusiasm, many member states will surely resist any lurch back into protectionism. Britain, the Netherlands, and the Nordic countries remain forceful proponents of free trade and open markets.
It is possible that the lop-sided trade relationship between China and Europe may correct itself in the same way that US trade with China is rebalancing as a result of the falling dollar and the slowing US economy. With EU economies decelerating sharply, the demand for imports is falling while the euro’s slide should sharpen the competitiveness of European exports. China is increasingly relying on surging domestic demand – rather than export-led growth – to fuel its economy.
In his book, Mr Tremonti’s “hope” is that Europe will regain pride in its original principles, ideas, and values and assert them more vigorously through a more overtly politicised EU. Europe’s clout in the world will rise if only it can learn to speak with one voice. In this sense, many of Europe’s frustrations with China are an external projection of its own internal failings.
Mr Sandschneider says that Europe is far from having a truly integrated foreign policy following the rejection of the Lisbon treaty’s constitutional reforms by Irish voters. Indeed, there is not even a consensus within Germany about policy towards China. He warns that basing a foreign policy on values would be a source of permanent friction with China.
“You do not have to be friendly to have a successful relationship with the Chinese. We are not partners. We are rivals and competitors,” he says. “We should engage where our interests intersect not where our values clash.”