NEW TRENDS IN EU'S ECONOMIC RELATIONS WITH CHINA

Abstract

EU's economic relations with China in 2012 may be sum up in 4 points. Firstly, EU tried to seek Chinese support in order to facilitate the efforts of stabilizing the market confidence and gain some time for seeking solutions for the European Sovereign Debt Crisis. Secondly, EU tried to expand exports to China, but the effects of its measures are limited. Thirdly, EU strengthened the market defence actions to protect European market, which led to harsh trade disputes between EU and China. Fourthly, EU accelerated the implementation of Global FTA Strategy with the aim to promote exports and to set up new standards in world trade, which could weaken the Chinese competitive advantages. EU's actions could be understood as a kind of pragmatism, and the contradictions of the actions exposed the lack of vision on its strategy for China and its vague position on EU-China Comprehensive Strategic Partnership. There is an urgency on behalf of the EU to clarify its strategic position toward China, otherwise it would be harmed the continuity of the EU-China Comprehensive Strategic Partnership.

Headnote

Abstract

EU's economic relations with China in 2012 may be sum up in 4 points. Firstly, EU tried to seek Chinese support in order to facilitate the efforts of stabilizing the market confidence and gain some time for seeking solutions for the European Sovereign Debt Crisis. Secondly, EU tried to expand exports to China, but the effects of its measures are limited. Thirdly, EU strengthened the market defence actions to protect European market, which led to harsh trade disputes between EU and China. Fourthly, EU accelerated the implementation of Global FTA Strategy with the aim to promote exports and to set up new standards in world trade, which could weaken the Chinese competitive advantages. EU's actions could be understood as a kind of pragmatism, and the contradictions of the actions exposed the lack of vision on its strategy for China and its vague position on EU-China Comprehensive Strategic Partnership. There is an urgency on behalf of the EU to clarify its strategic position toward China, otherwise it would be harmed the continuity of the EU-China Comprehensive Strategic Partnership.

Keywords: EU-China Economic Relationship, EU-China trade disputes, EU FTA, EU-China Comprehensive Strategic Partnership

JEL Classification: E 44, E 61, F 13, F 34

Introduction

The article tries to present the EU's economic relations with China and especially her support for stabilizing the EU market and increasing actors confidence and solving the European Sovereign Debt Crisis. The article analyzes EU export to China and also the actions for protecting European market leading to trade disputes between EU and China. EU has focused on the implementation of Global FTA Strategy with the aim to promote European exports and to set up new standards in world trade, which may affect negatively the Chinese competitive advantages.

1. Seeking China's support

There was a strong unrest of the European Sovereign Debt Crisis in 2012, wave after wave. The markets heavily doubted on the Greek exit from the Eurozone.

Spanish and Italian bonds market bore huge pressure and although their governments had implemented massive austerity measures the market suspicions remained. The collapse of Euro and break-up of EMU were in headline of western media. As the EU's biggest trade partner, US was still struggling with its troubles caused by huge deficits and debts and slow growth, the Europeans were moving their eyes on China, the second largest trade partner, who held the biggest currency reserve in the world, in the hope of a strong China's support.

In fact, the Europeans had already expected China's support in 2011, especially in autumn, when it became a hot topic in the world media. In September 2011, Chinese Premier Wen Jiabao had a round-table discussion with entrepreneurs during the Summer Davos Forum in China Dalian. His expression reflected the consideration on China's support to Europe.1 On 27 October 2011, French president Nicolas Sarkozy initiated a telephone conference with China's president Hu Jintao, right after the European Summit finished. Mr Sarkozy shared the information on the just closed European Summit and the European latest actions dealing with sovereign debt crisis and exchanged the views on the soon coming G20 Summit in Cannes.2 The very next day of the French phone call, Mr. Klaus Regling, CEO of EFSF, flied to Beijing, trying to persuade China to involve in the leveraging EFSF. In February 2012, soon after the Chinese traditional holiday, the Spring Festival, the German Chancellor Angela Merkel visited Beijing, and 10 days later the president of the European Council Mr. Herman van Rompuy and the president of the European Commission Mr. Jose Manuel Barroso came to Beijing for the 14th EU-China Summit which had been postponed in 2011 because of the crisis. One of the topics of these visits was China's support to Europe.

Europe is China's biggest export market, and also China's biggest trade partner. China as a responsible power in the world, took well-meant responses on account of the Europeans expectation. During the Summer Davos Forum in September 2011, Premier Wen expressed that "China is willing to extend a helping hand to Europe, and to boost investment in Europe".3 On 14 February 2012, at the press conference after the EU-China Summit, Premier Wen announced that "China is ready to provide more involvement in combating the European Sovereign Debt Crisis, and will have a close communication and cooperation with Europeans".4 Mr van Rompuy welcomed China's position and expressed the European gratitude; he also declared that China had already participated in solving the European crisis in different forms such as purchasing bonds issued by EU member states and involving in the European stabilization mechanism. Both sides agreed to further exchange views on China's involvement and to discuss how to cooperate.5 On 18 June 2012, when Chinese president Hu Jintao attended the 7th G20 summit in Los Cabos in Mexico, he announced that China would inject 43 billion USD into IMF, which showed, on the one hand, that China took her responsibility on common actions dealing with the crisis and financial stability6 7 8 and, on the other hand, that China indirectly provided help to Europe. On 11 September 2012, when Premier Wen attended the Summer Davos Forum in Tianjin, he repeated the Chinese solid support to the European integration and the development of Eurozone. Premier Wen said Chinese export to Europe was experiencing a decline because of the Debt Crisis, so "in this sense, providing help to Europe will contribute to the world, and at same time it will help ourselves".7

Unfortunately, China's well-meant gestures were not recognized fully by the Europeans. In November 2012, European Strategic Partnerships Observatory (ESPO), a project financed by Finnish and Gennan ministries of foreign affairs, published a report, which sustained that China's help to Europe was mainly on the purpose of protecting its own Euro stock; lending political support to the euro-area was at a time when there was a real risk of break-up; and China's activism kept the value of the euro high and benefited the competitiveness of Chinese products. Moreover, China's contribution to address the Eurozone debt crisis through the IMF comes alongside renewed discussion on IMF refonn, including redistributing voting rights away from European countries to emerging economies.8

There was a turning point of the European Sovereign Debt Crisis in September 2012 when the ECB announced the Outright Monetary Transaction (OMT) and the financial market was calmed down. It was very strange that along with the process of the crisis being somehow contained, the European attitude on China's involvement has changed.

China's help to Europe on combating with the Debt Crisis was mainly on a strategic dimension, which reflected China's strong support to the European integration. And Euro is the core and symbol of the European integration. Such kind of support was in accordance with the EU-China Comprehensive Strategic Partnership.

It brought benefits for both sides, and provided win-win results. As an English proverb used to say, a friend in need is a friend in deed. China did not follow the way the Anglo-Saxon media shouted on the Euro skepticism, and provided firm support to the Euro. It is hard to imagine what a mess it could have been in Europe, and also in the world, if China would not have thought in a strategic way. It is regretful that there is a lack of such kind of strategic thinking on the European side.

2. Promoting EU export

During the debt crisis, the domestic demand weakened in the internal market, so trade could be a major driver for the Europeans to boost economic growth. Promoting export is one of the major focus for EU.

According to Eurostat, EU exports to most of its major partners grew in 2012 compared to 2011. The most notable export increases were in two digits, such as South Korea by 16%, Russia by 14%, Japan by 13%, Brazil by 11% and US by 11%.

As regards import, there was a 12% increase with Switzerland, and a 7% increase with US, Russia and Nomay respectively. The biggest fall in imports were from Japan by 8%, India by 6%, and Brazil and South Korea by 5% each. EU export to China increased only by 6%, and imports decreased only by \%}

The Chinese statistics show that EU was replaced by US as China's biggest export market after 8 years, although EU remained China's biggest trade partner and biggest import resource. The bilateral trade volume was 546 billion USD in 2012, 3.7% less than the previous year. China's export to EU was 334 billion USD (decreased by 6.2%), and import from EU was 212 billion USD (slightly increased, by 0.4%). The trade balance lowered by 15.8%, with 122 billion USD surplus for China. By comparison, China's whole trade volume reached 3867 billion USD, a 6.2% increase compared to the previous year. China's export was 2049 billion USD recording a 7.9% increase, and import was 1818 billion USD recording a 4.3% increase.

Comparing with the strong increase of China's trade with Russia (11.2%), ASEAN (10.2%) and the US (8.5%), trade with EU showed lack of dynamic.* 1 2

Both data from EU and China show that EU-China trade weakened in 2012. On the one hand, the negative impact of the European Sovereign Debt Crisis on the internal demand emerged, which produced a shock to China's exports to the EU. On the other hand, when compared with its other major trade partners, EU's effort to promote export to China was impeded.

Actually, in order to help Europe out of the Debt Crisis, China had sent trade delegations to Europe, trying to import more from Europe. But such kind of help was not recognized by EU trade officers. Because the focus of the EU trade officers are on the 15openness of China's public procurement market, on the state subsidies which generate unfair competition according to their views, and not on the trade delegations.

EU's concerns were not rewarded by Chinese active responses, so the EU rested its hope in strengthening trade defence measures.

3. Intensifying trade disputes

It is no doubt that China became the biggest target country of EU trade defence system, in the recent years. There was no change in 2012.

According to European Commission DG Trade, EU initiated 13 anti-dumping cases on 7 products, and 4 products refer to China, which takes 30% of the cases with more than half in products. At the same time, EU initiated 6 anti-subsidy cases on 5 products, 3 products refer to China, which takes half of the anti-subsidy investigations with 60% of the products. Further more, EU initiated 14 expiry reviews where China took 4, and concluded 12 cases with confirmation of duty where China took 5 cases.

EU also initiated 6 cases on anti-circumvention investigation, and all the 6 cases refer to China.1 2

Meanwhile, EU concluded 8 anti-dumping investigations in 2012 on 6 products, among which 5 products were imported from China. EU also concluded 7 anti-dumping investigations without duty, 4 products refer to China.

There were 5 characteristics of EU trade defence practices toward China in 2012.

Firstly, a new case with "gigantic" value appeared. Usually there is a common view that the value of the anti-dumping cases does not exceed 2% of the EU-China trade volume. Fundamental change happened in 2012 in this regard.

Solar World Co., a company headquartered in Germany, reached a preliminary result in an anti-dumping and anti-subsidy investigations toward Chinese solar panel products in US in May 2012. After then, Solar World initiated an EU ProSun consortium with more than 20 European companies associated and requested the European Commission to start investigations on China solar panel products export to Europe in July 2012. European Commission DG Trade accepted the application and announced the investigation on 6 September 2012. On 26 September, EU ProSun also requested the anti-subsidy investigation. And DG Trade started the anti-subsidy investigation procedure 45 days later. As around 70% of Chinese PV products go to Europe, comparing with 10% products going to the US, the Solar Panel case has a significant importance to the Chinese PV industry. If EU would apply a punishing duty like the US, it would cause disaster for the whole Chinese PV industry. China had exported 21 billion Euro PV products to Europe in 2011. Based on estimations, the Solar Panel case itself takes 7% of the Chinese export to Europe.3 It is the biggest trade dispute in the history of the EU-China relationship.

Secondly, the investigated products moving from low added value to high technology content. EU anti-dumping investigations toward China are no longer focusing on textile products and shoes, they are looking at the electronics and new energy products. Besides, steel industry is again in focus.

Thirdly, anti-dumping and anti-subsidy measures are going together. EU trade defence measures toward Chinese products are no longer limited in anti-dumping measures, anti-dumping together with anti-subsidy became the new tendency in the latest new investigations. EU trade defence practice goes tougher.

Fourthly, preparing for investigation were initiated by DG Trade itself.

According to the opinion of the EU trade officers, European companies would have not requested investigation because they worried about their on going businesses China. So the EU trade officers felt the responsibility and tried to get more mandate from European leaders and legislators, in order to initiate investigations directly by DG Trade itself, based on their judgment, without an official request from European industry.1 ITC products are in the DG Trade's focus.

Fifthly, emphasizing reciprocity, especially focusing on public procurement market. European Commission drafted an amendment on the Directive of Public Procurement in 2011. The Committee on International Trade of the European Parliament held 4 round discussions on the amendment, and concluded a final opinion on 7 November 2012,2 leaving the parliaments of the member states to decide approval. The amendment of the Directive mainly focuses on reciprocity. Based on the proposal from DG Trade, if an European trade partner does not open its public procurement market, then EU will close its own public procurement market for that trade partner. The amended Directive will affect countries such as the US, China, etc. Trade dispute tensions between EU and China will go stronger.

4. Promoting FTA Negotiations

The European Commission presented its renewed Trade Strategy in November 2010. As compared with the initial one, which had been published in 2006, EU had a more assertive manner. The assertiveness was not only in the determination to promote EU export and push the main trade partners to open their markets, especially the public procurement market, but was also in the design of the new mies on investment and trade by concluding a new generation FTAs. A notable progress had been reached in EU's global FTA strategy in 2012.

The European Parliament approved EU's trade agreements with 6 Central American countries in December 2012, which would be effective in the second quarter of 2013. EU also accelerated negotiations with Canada on the Comprehensive Economic and Trade Agreement (CETA), which would be concluded, hopefully, in 2013.

Big progress was reached in preparing transatlantic trade negotiation in 2012. Europe and US jointly presented midterm evaluation reports on transatlantic cooperation in summer 2012, and plan to start the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations in 2013.1

Asia is one of EU's essential focus in FTA negotiation. South Korea was the first country in Asia who singed FTA with EU. EU-Korea FTA came into force since July 2011. Another breakthrough is Singapore, who reached FTA with EU in December 2012. EU also started FTA negotiations with Malaysia and makes preparations with Vietnam.

Japan is the next core of EU FTA strategy in Asia. During the EU-Japan Summit in May 2011, both sides announced they would soon prepare the FTA negotiations. European Commission reached an agreement on the negotiation agenda in May 2012, and afterwards asked for opinions of the member states seeking the mandate for negotiations. In November 2012, European Council agreed on the mandate for the Commission to start FTA negotiation with Japan.2 *

Besides, EU takes into consideration a potential FTA negotiation with China Taiwan, and accelerates FTA negotiations with India who kicked off with EU in 2007.

EU's global FTA strategy will promote EU export, and bring employment and growth. It will also have potential negative impact for the future development of China's foreign trade.

Firstly, China is not listed in the EU global FTA strategy. The EU's new trade strategy in 2010 had split focus from tw7o countries (US and China) to 6 countries (US, Japan and 4 BRICs countries), with special focus on US, China, Russia and Japan. EU had decided to start FTA negotiation with US and Japan. Russia is the third largest trade partner of EU, and the two parties signed Partnership and Cooperation Agreement (PCA) in 1994, and started a new round negotiation in 2008 for updating PCA. No agreement had been reached since then. China is the second biggest trade partner of the EU. The two parties had signed a "Trade and Cooperation Agreement" in 1985, and started PCA negotiation in 2007. The two parties also agreed in 2010 to initiate a negotiation on investment agreement, as soon as possible. Up to now, there is no intention from the EU to put China into its FTA wish-list.

Secondly, EU's FTA strategy implied an option to encourage less dependency on trade with China, especially import from China. As EU trade officers indicate in different occasions that the objectives of EU FTA strategy are, on the one hand, to promote employment and drive the economic growth and, on the other hand, to be a measure to combat the challenges rising from emerging countries, especially the rapid growth of Chinese foreign trade.

There is a deep inter-dependency between EU and other developed countries. And among the emerging countries, EU still cannot get rid of dependency from tw7o countries, one is Russia and the other is China. From trade patterns, we can see that energy and raw material are the two main categories in EU's imports from Russia, and Russia is a huge export market for the EU machinery, transportation equipment, chemicals and agriculture products. Therefore, EU's dependency on Russia is based on energy, raw material and export market. However, EU's dependency on China is a different story comparing with Russia. China is EU's largest import source, and EU's import from China is mainly industrial products, especially machinery, transportation equipment, and manufactured products. At least half of the imports are products coming from processing trade. EU's export to China is also mainly industrial products, in the same category of machinery, transportation equipment and manufactured products, with small proportion of chemical products. Based on geographical facts, Russia's status in EU's energy supply will be less likely to be replaced in a foreseable future. However, if the locations of the processing trade were moved, EU's industrial products imported from China would be slightly changed, thus the dependency on China would be lowered. EU's FTA strategy could encourage such kind of change to a certain extent.

Thirdly, EU's FTA in Asia could irritate the growth of the China's foreign trade. As well known, more than half of the China's export is realized by processing trade. Manufacturers from Japan, Korean and China Taiwan relocated production capacities to China by investment, then exported parts and semi-products to China, produced and assembled them and sold them all over the world. Such kind of processing trade diminished the export from East Asian economies to Europe and America, and, at the same time, accumulated massive export from China to Europe and America, which made the Chinese trade surplus to increase dramatically. The processing trade became the main growth model of China's rapid export. In recent years, along with the increasing labour costs in China, some industries relying on processing trade have started to move from China coastal area to South and East Asia.

EU FTAs with South East Asian countries will encourage such kind of process of industry relocation. EU's FTAs in East and South East Asia look like a "Soft Pearl Chain"1 in front of China, which would tie up China's trade development, and undermine its trade growth model.

Fourthly, EU FTA negotiation with developed countries will contain the new rules setting in international trade, and affect China's trade potential development.

EU FTA negotiations with Japan and US are different from the other ongoing and concluded trade agreements. The differences hint that these negotiations are deals between developed and mature economies; the purpose of the FTA is not only to promote bilateral trade, but also on responde to the challenges of the rising emerging countries; and the FTA agreements will set up standards, rules and laws, in order to establish a new global trade environment. If the EU had faced serious challenges from emerging countries in the round of globalization in 21st century, EU remained the hope in FTA with other developed countries, making full use of its soft power to occupy the rule-setting height in international trade.

When we entered into 2013, EU-China Comprehensive Strategic Partnership had been born for 10 years. Economic and trade relationship was one of the three main pillars of EUChina relationship, and it was the most important part. Comparing with 10 years ago, both China and the EU have experienced dramatic changes. China became the 2nd largest economic power in the world, and soon will be the biggest trading power. China's economic growth model is experiencing a shift from export driven to domestic consumption, a market with the biggest population in the world, which indicates unthinkable possibilities for the world trade.

It was also a live drama for the Europeans in the past 10 years. Europe has finished its ever biggest enlargement with expanded market, implemented Lisbon Treaty, which was a milestone in the European integration history. Hit by the financial tsunami in 2008, EU lacked growth potential. Lasting Sovereign Debt Crisis induced the weak economic recovery in Europe. And the same crisis affected EU-China trade in 2012.

We are in a world of transformation, and facing a number of strategic challenges. In a time when Chinese economy goes up and European faces downturn or stagnation, at the same time China is not in the EU FTA wish-list and absent from the rule setting on the international trade between EU and the developed economies, it leaves the strategic meanings of the EUChina Comprehensive Strategic Partnership into a bold question. Taking into consideration that the PCA negotiation reached a dead-lock between EU and China, negotiation on investment protection is still waiting for the start, it is worth for both sides to re-evaluate the strategic positioning of the bilateral relationship, to explore the possibility of designing a new framework for the bilateral economic and trade relations, and to promote EU-China Relationship to a healthy and stable path.

Conclusions

2012 is the third year of European Sovereign Debt Crisis. The Crisis stroke the European strategic planning and obstructed European ambitions. In the second half of 2012, the crisis situation calmed down, and European economic governance went deeper, the Europeans started to rethink about strategic issues with major partners and strategic positioning. EU's economic relations with China in 2012 showed a certain pragmatism, but a contradictory and inconsistent one, which reflects muddle through mentality and lack of strategic thinking. EU-China Comprehensive Strategic Partnership is still a mystery for the Europeans even after 10 years. Trends in 2012 showed that EU would enhance trade defence practices, trade disputes would be intensified, and reciprocity and DG Trade initializing trade investigations would further increase the tension between EU and China. EU promoted FTA strategy with major partners but China will have its own vision on the future development of EU-China Comprehensive Strategic Partnership. Both EU and China need a new framework for bilateral relations in the next decade.

Footnote

1 http://news.cntv.cn/china/20110915/100276. shtml.

2 http://news.xinhuanet.com/world/2011 -10/27/c_l 11129294.htm.

3 http://news.cntv.cn/china/20110915/100276.shtml.

4 http://news.xinhuanet.com/politics/2012-02/14/c_l 11524302.htm.

5 http://news.xinhuanet.com/politics/2012-02/14/c_l 11524302.htm.

6 http://www.people.com.cn/li/2012/0620/c25408-l 11910006.html.

7 http://www.tj.gov.cn/zwgk/zwxx/zwyw/201209420120912_181412.htm.

8 Nicola Casarini, The EU and China: Investing in a troubled partnership. In Giovanni Grevi and Thomas. Renard eds., Partners in Crisis: EU Strategic Partnerships and tire Global Economic Downturn. European Strategic Partnerships Observatory (ESPO) Report 1, November, 2012. p23.

Footnote

1 EuroStat NewsRelease, Eurolndicators, 43/2013, 18 March 2013.

2 http://www.customs.gov.cn/pubhsli/portalO/tabl/mfo412938.htm.

Footnote

1 http://tiade.ec.emopa.eu/doclib/docs/2012/december/tradoc_l 50133.pdf.

2 Data from http://trade.ec.eui'opa.eu/doclib/press/index.cfm?id=829.

3 Based on the data published by EuroStat on 16 March 2012, EU import from China in 2011 was 292 billion Euro. EuroStat, NewsRelease, Euroindicators, 44/2012, 16 March 2012.

Footnote

1 Note: European Commission proposed to modernize the EU's trade defence instruments on 10 April 2013.

2 Committee on International Trade, European Parliament, 2011/0437(COD), 7.11.2012.

Footnote

1 Note: On 13 March 2013, EU and US leaders decided to launch TTIP in 2013, after the hade officer at both sides approved the final report by the High Level Working Group on Jobs and Growth.

2 Note: On 25 March 2013, EU and Japan announced to start EU-Japan FTA negotiation.

Footnote

1 Note: US takes its military alliance in East and South East Asia as "Hard Pearl Chain".

References

References

* Casarini Nicola (2012). The EU and China: Investing in a troubled partnership. In Giovanni Grevi and Thomas Renard eds.. Partners in Crisis: EU Strategic Partnerships and the Global Economic Downturn. European Strategic Partnerships Observatory (ESPO) Report 1, November, 2012. p23

* Giovanni Grevi and Thomas Renard et al (2012). Partners in Crisis: EU Strategic Partnerships and the Global Economic Downturn. European Strategic Partnerships Observatory (ESPO) Report 1, November

* Xin Chen (2009). Policy Evolution of the Chma-EU Trade and Economic Relationship, in Viginia Campeanu, Sarmiza Pencea, et al. China's market: Challenges and Oportunities for Romania and EU, Romania's Academy, Institute for World Economy

* European Parliament (2012). Committee on International Trade, 2011/0437(COD), 7.11.2012

* European Commission(2013) Proposal for modernizing the EU's trade defence instruments, 10 April 2013

* Eurostat (2012). EU import from China in 2011, Eurostat, NewsRelease, Euroindicators, 44/2012, 16 March 2012

* http://news.cntv.cn/china/20110915/100276.shtml

* http://news.xinhuanet. com/world/2011 -10/27/c 111129294.htm

* http://news.cntv.cn/china/20110915/100276.shtml

* http://news.xinhuanet. com/politics/2012-02/14/c 111524302.htm

* http://news.xinhuanet. com/politics/2012-02/14/c 111524302.htm

* http://www.people.com.cn/li/2012/0620/c25408-l 11910006.html

* http://trade.ec.europa.eu/dochb/docs/2012/december/tradoc_l 50133.pdf

* http://trade.ec.europa.eu/ doc lib/pres s/index. c fin ?id= 8 29

* http://www.customs.gov. cn/publish/portalO/tab 1 /info412938 htm

* http://trade.ec.europa.eu/dochb/docs/2012/december/tradoc_l 50133.pdf