Living with China - EU Trade Commissioner Peter Mandelson's Speech Go back »

2008-04-16 | All chapters

Living with China
Speech by Peter Mandelson, EU Trade Commissioner
15th April 2008, London

Last time I was in China I was told that the boom in construction in Shanghai is so intense that its street maps have to be redone every few months. It's a useful image for China itself – because China is the boom that is redrawing the map.  It's redrawing the economic map – something that the people in this room know better than anyone. It's also redrawing the political map in fundamental ways.

When we in Europe and the US see China from the outside, it both astounds and unnerves us.  We see an export powerhouse. We see a low-cost, high-volume industrial competitor. A challenge to the existing geopolitical order. A one-party state struggling with the internal political pressures created by growing prosperity, growing expectations and growing inequalities amongst its billion and more people.

We also see a market for our own goods and services. As one nineteenth century Englishman put it: if everyone in China lengthened their shirt tails by a foot, the textile mills of England would spin for a year. The twenty-first century version would run: if everyone in China drove a Volkswagen. Or drank Bordeaux. Or had a Barclays bank account. Which they may yet.

It is important we recognise that China is all these things and more. Rather than seeing China as simply an unstoppable juggernaut, we must also recognise that it is grappling with a governance challenge so large that it probably has no precedent in political history. It must transform its superheated growth model into something that is economically more balanced, and politically and environmentally more sustainable.

The mistake would be to imagine that we in Europe, and in the US, don't have a stake in China's successful transformation. We have the biggest stake imaginable.  And because I believe that, I want to make this topical observation to you.

Whatever our political differences, our interdependence remains a central fact of the global political economy. China is taking up a lot of the slack in a slowing world economy.  It is the indispensable partner for a serious climate change strategy. It will reshape the political dynamic in the UN, in Africa, and in Asia. As China grows, so will our mutual interests. Our need to help China come to terms with the vast challenges it faces, will grow. Our challenge is to build and sustain a constructive working relationship with China that can address issues like trade barriers and Tibet, without coming off the tracks.

I say this, because some appear to assume that a course of direct confrontation in connection with the Olympics and Tibet serves our interests, and indeed Tibet's. But modern China presents us with a dilemma. Our concerns, our protest must go hand in hand with a strategy for ensuring that China continues to look outwards, to pursue internationalism.

There is only one thing more frightening than China’s exponential growth. It is that growth suddenly stalling or crashing. China's economic failure or a decision by China to work against or to isolate itself outside the international security or trading system would be catastrophic, for China and for us.
We will not be able to dictate the solutions to China's problems. But we do not have the luxury of ignoring them either. We can and should insist on our values and our concerns. But we must also not lose sight of the fact that we are bound to work with China, to live alongside China, to help China succeed.  For the international system, China is like a bridge that is being rebuilt under our feet. We have an obvious interest in the work being soundly done.
 
China's critical moment

China faces huge pressures from within and without. The industrial policies that drove its development to date are being rethought, and this will affect how we invest in China in the future.   China is searching not just for a presence in global markets, but for outlets for its products in global brands. The model of state capitalism that underwrote the Chinese boom is pressing against the limits of sustainability. The Chinese banking sector is hobbled with high levels of bad or highly vulnerable debt. The export sector is overheated by state-directed investment and cheap capital.  Foreign exchange reserves are being accumulated at unsustainable and inflationary levels.

Domestic demand, suppressed by a weak currency and high levels of precautionary saving, is still extremely low. Inflation, especially in food prices, is a growing source of social tension.

A quarter of a billion people will move into cities in the next twenty years. The infrastructure boom that this is creating will put intense pressure on China's environment. The tensions between the needs of a new urban class and those who stay on the land could become a growing problem for the Chinese authorities.

At home, China's policymakers certainly have their hands full, and they know it. As if that was not enough, China also has to manage the legitimate and rising expectations of the rest of the world.   Because if we have an interest and responsibility to help China succeed, China too has responsibilities.

Take climate change.  China needs to be a constructive part of a global strategy because it is becoming the largest emitter of greenhouse gasses. This will be a central theme of the visit by President Barroso, and members of the European Commission to Beijing next week. 

In trade the expectations are also pressing. China’s phenomenal growth is built on the worlds open trading system and our open markets. As the dollar falls against the yuan the bulk of China's export growth is now being absorbed by the EU.  At the same time, trade barriers in the Chinese market are costing European businesses more than €20billion every year in lost exports. So in Europe, we face booming imports and constrained export growth. That spells growing anxiety, and frustration.

The wave of Chinese investment on the horizon risks deepening those anxieties.  Europeans will only accept an open trading and investment relationship with China – which we should welcome - if they feel that this relationship is a two-way street. So we expect China to match our openness with openness of its own.

The High Level Mechanism

The overwhelming interest of Europe, indeed of the world, is that China deals with these challenges effectively and responds to those expectations. But getting Beijing's attention means pitching our expectations right and recognising the balances that Chinese policy makers are trying to strike, and the speed at which they can move.

In Beijing next Friday the EU and China will launch a new High Level Mechanism for managing their longer term trade and economic relations. On the Chinese side it will be chaired by Vice Premier Wang Qishan. A delegation of seven Commissioners will attend the inaugural meeting.

Like the US Strategic Economic Dialogue with China, the real value of this Mechanism lies not just in its ability to help us manage and resolve frictions, but in the institutional framework that it creates for senior policymakers. Managed well, an institutional channel of communication ensures that the EU and China keep talking and acting on trade and economic issues – even when they have strong differences.

It's important that this was a Chinese initiative – a response to the growing concerns about the spiralling trade deficit and barriers to trade.  Many of the issues that will be high on the agenda are central to China's interests as well as ours. But for the mechanism to work, China will have genuinely to engage. China has had the political courage to bring both sides to the table. If it has the further measure of courage to seriously engage, then both sides can win.  If they do not, they risk a lot more exhausted patience in Europe. And that patience, in some political markets, is already pretty thin.

A good example is intellectual property rights protection. China knows that it will not be able to transform its economy away from a heavy focus on low value production unless it can ensure effective protection of intellectual property. Chinese firms have less incentive to innovate, and western companies are increasingly nervous about losing proprietary technology to theft. China wants technology transfer but it cannot yet guarantee the legal protection that makes this viable for foreign companies. Improving the situation is clearly in the interests of both sides.

The same goes for investment in China. China wants FDI, and it clearly has legitimate ambitions to become a major investor abroad in its own right. But EU investors in China still face ownership caps, onerous local partner requirements and other restrictions. Last year, for the first time in a decade, EU investment volume in China actually fell.  Part of that is probably cyclical – but it is not a coincidence that the European Chamber of Commerce last year released its most critical report ever into the Chinese investment climate.

China gains little by driving away European capital. Given the need to strengthen the Chinese banking and insurance sectors if China is to develop durable capital markets, the experience of European banks and financial services firms is invaluable. But they can operate in China only under very limited conditions. We are also shut out of telecoms markets – despite China's WTO obligation to open its license system to foreign providers. Europe is committed to maintaining an open market for Chinese investment, which is only going to grow in the years ahead. China can and should offer the same.

Even on an issue like the trade deficit we can agree on a few fundamentals. The deficit reflects a number of things, not all linked to restrictions in the Chinese market. It is a result of the shift of European supply chains into China from other parts of Asia. But it is also a symptom of insufficient domestic demand that leaves the Chinese economy heavily skewed towards exports.

We want China to strengthen consumer purchasing power by maintaining the gradual appreciation of the yuan and the development of stronger social safety nets that allow ordinary Chinese people to reduce their huge levels of precautionary saving. But that is also the only way for China to develop a strong services and retail economy and slow its inflationary accumulation of hard currency reserves.

These are defining questions for the EU-China economic relationship. But what is important about them is that they are all rooted in shared strategic interests. That does not necessarily mean that they will be easy to resolve. But it does mean that we have a common ground on which to work.
 
Conclusion

Inevitably, people will ask how our trade relationship should sit in our wider political relationship with China. I do not think that it is possible or desirable to wall off trade from the rest of our ties with China – including the issue of human rights, where we have legitimate influence to exert on China. It is to be expected that some on both sides of an issue like Tibet will call for boycotts of one kind or another. I do not support these because, while it is easy to see how they would hurt the interests of ordinary Europeans and Chinese, it is not possible to see how they would help. What we know for absolutely certain is that if we really want to shape the twenty-first century, we have to shape it with, not against, China.

There is no getting away from that.  And our policies, and our behaviour, and China's too, need to be conditioned by that reality.