CHINA-EU RELATIONS：IMPLICATIONS AND FUTURE （Zhang Jianxiong）

The European Union and China are both important bodies in the world with a combined population of 1.8 billion, almost one third of the global total. Development of the bilateral economic and political relations not only brings about huge benefits to the two bodies, but also exert significant influences on regions concerned, as well as on the whole world.

The official diplomatic relationship between the European Economic Community and China was established in 1975. In 1974, the EEC made a decision that all trade agreements of member states with third countries should be suspended and new trade agreements with countries outside the community must be negotiated and concluded at the Community level. That is to say, China had to deal with the European Economic Community directly since then, otherwise it would lose a number of its European trading partners.

China accepted this reality and completed the necesary negotiations and signed the agreement on the establishment of official  relationship with the European Economic Community in 1974. In fact, the negotiations were not really tough, because China had had official diplomatic relations with 8 of the 9 EEC Member States before that. The official relationship was started in 1975.

The establishment of the bilateral official relationship was an important event to China. At that time, China deeply plunged in the Cultural Revolution, its poor economy was at the brink of collapse under the attacks of political movements. The establishment of its diplomatic relationship with the EEC was helpful to the economic recovery at that time, as well as to the economic reform and openess in the following decades. It built up a bridge for the  modernizations in China.

On the other hand, the establishment also opened a huge market for the EEC side. With one fourth of the global population, China became a leading trading partner later on.

Since then, China has been carrying out cooperation with Europe for 35 years. Within this period, the EU-China relations, particularly economic and trade relations see a continuous development. In 1975 when the bilateral official relationship was just set up, the bilateral trade volume registered merely 2.3 billion dollars. In 2004, China became the second largest trading partner of the EU, with the bilateral trade flows registered 177.3 billion dollars. And, in last year, the bilateral trade flows regained 479.7 billion dollars in spite of the financial storm, which was 200 times as much as that in 1975.

 Apart from a trading partner, EU is one of the major FDI sources of China. Up to last year, EU member state-funded projects in China had reached some 14000 in number, with paid-in investment totaling some 80 billion euros. The EU-invested enterprises are largely among the most successful foreign funded enterprises in China, in terms of quality of products and profitablity.

The bilateral economic and trade relations since the 1990s gained impetus from the bilateral political cooperation. It was a series of EU’s policy papers toward China that activated the bilateral political cooperation. Of them, two played key roles.

The first of the two key papers was adopted in 1995, tittled “Long-term Policy for China-Europe Relations”. This paper highly evaluated China’s reform since the late 1970s and declared to support the reform by boosting EU’s cooperation and exchanges with China in politics, economy, science, and culture. In the meantime, the paper proposed that the EU should take it as its overwhelming goal to promote a full engagement of China with the international community. The paper held that, because of the substantial shares of China's economy and trade flows in the world, China's economic policy had become globally significant.

The other EU paper titled "Building a Comprehensive Partnership with China" was released in 1998. This paper, as its title described, proposed to build a "comprehensive partnership" with China. The refreshed policy paper suggested to set up a mechanism of annual summit meeting with China and regular ministerial contacts. That implied the EU upgraded its relationship with China to the level that was similar to the relationships of it with USA, Canada, Japan and Russia.
    
In turn, China’s attitude is also positive. China supports the EU’s deepening and enlargement drive. It hopes to see a strong and unified Europe. This position reflects in its paper of policy toward the European Union, which was released on the 13th October 2003. That is the first foreign strategy paper China has ever issued in public. The publication of the paper suggests that the relationship between the EU and China was striding into maturity.

 With that paper, China highly evaluated the role of the European Union in the world arena and pointed out that the EU had become a powerful union of states with the highest degree of integration, which exerted increasing influences in regional and global affairs.

The paper proposed to strengthen bilateral exchanges and cooperation in the fields of politics, economy, education, science, culture, society, justice, administration and the military. It meaned that China held high expectation for the prospect of its relations with the EU.

Since 1998 when the EU issued its second policy paper toward China, the two parties set up mechanisms of annual bilateral summit and a series of bilateral consultations of high ranking officials. The mechanisms strengthened the ties between the two sides, which substantially refueled to momentum of the bilateral economic and trade cooperation. The growth in bilateral trade flows even exceeded the expectation. For example, at the summit of 2003, China projected to raise the bilateral trade flows to 150 billion dollars in 2007, and to 200 billion dollars in 2013, and to 280 billion dollars in 2020. The cases happened afterwards were, however, the bilateral trade flows in 2007 reached 356.2 billion dollars, more than twice as much as expected, and in the last year, it hit 479.7 billion dollars, which is 80% higher than projected target for the year of 2020.

The fast development in EU-China economic and trade relations is attributable, firstly, to the sincere cooperation between the two sides; and secondly, to the favorable treatment the EU granted to China. Industrialized nations normally do not classify China as a developing country, but the EU granted China with GSP treatment since the 1980s. The third cause is, the deepening and enlargement of European integration provided China with a expanding market, and the fourth cause is, the success of China in reform and openess led to an economic rise in the country, which, in turn, opened a rapidly growing market to the European Union.

It should be noted that while the bilateral economic exchanges growing, the trade disputes increase. Each side criticized the other of pursuing protectionism. The EU complains of China’s market access obstacles and underestimation of RMB exchange rate, while China criticizes the EU of abusing anti-dumping measures to block its exports. Regardless of the disputes, one fact is acknowledged, that is, EU’s trade with China has been in deficit since the late 1980s. Some economists find out the root of the phenomenon, that is, China’s economic growth is over-dependent on exports. The observation is basically correct. This is a structural problem on China side. This structural deficiency should be tackled, for the sake of both China and its trading partners. The latest global financial and economic crisis provided China an opportunity to remedy the deficiency.

The global financial and economic crisis severely hits every continent and leading economy. China was also attacked by the economic disasters, as the exports sharply decreased in 2008. The Chinese government adopted a series of anti-crisis measures. In retrospect today, the measures are successful. Last year, while the global economy was still commonly gloomy, China regained a 10.3% growth rate. That is to say, China has kept out the financial storm. The secret of success of the country is based on the understanding of a basic fact, that is, China has a population of 1.3 billion, which is well larger than that of the United States, the European Union and Japan combined. As a result, so long as the potential of home market could be tapped, the impacts of the shrinking of the international market would well be offset. Upon that, the central government decided to boost public expenditure, so as to stimulate internal consumers’ demand.

The central government mapped out a programme to finance 4 trillion yuan (400 billion euro) in two years from 2008, to boost the demands in the home market. The money was to be channeled into three areas. The first area was infrastructure; the second  for development in the poor west part of the country, and the third was welfare of inhabitants, particularly those in rural areas. Provinces that wanted to share the allocation should manage to raise an additional fund to match the programme. Thus, the 4 trillion yuan allocated by the central government pulled out several times of public expenditure at provincial level. So, in the past two years, quite a number of expressways, high-speed railways, urban underground systems, seaports, airports, country highways, and reservoirs were started up or refueled under the programme. The construction of these facilities effectively activated relevant industries and expanded employment.

With regards to welfare of inhabitants, the central government launched a programme that is called “home appliance going countryside”, to promote sales of durables in rural area by granting subsidies. Under this programes, farmer buyers of television set, washing machine, mobilephone enjoy a reduction of 13% in price. In some provinces, the coverage of price reduction are extended to air-conditioner, computer, water-heater, microwave stove, induction cooker, electric bicycle and farming truck, etc. The implementation of this programme enlarged the market of manufacturing. In 2008, the government input 10.4 billion yuan (1.04 billion euro) in the “home appliance going countryside” programme and brought about 920 billion yuan (92 billion euro) consumption.

The 4 trillion yuan-programme successfully broadened the internal market, so that the China’s growth model of depending external market is largely modified. In 2009, China’s foreign trade volume fell to 2.21 trillion from 2.52 trillion US dollars of previous year, while the GDP went up to 4.91 trillion from 4.47 trillion dollars. This change also reflected in EU-China bilateral trade. According to EUROSTAT, in 2009 EU’s export to China declined merely by 1.5% while its import from China sharply fell by 17.3%. This trend will help to mitigate the trade frictions between.

This trend is expected to be bolstered in the years to come. According to the 12th five-year plan that was enacted by the People’s Congress in early March this year, the Chinese government will hammer at optimizing the country’s economic structure,  which, while lowering the growth rate to 7% on average, will raise the weight of service sector in the GDP by 4 percentages, turn the productive economy into a innovative one, change the extensive growth into an intensive one, upgrade productivity and quality of industry, increase the portion of non-fossil fuel in total energy consumption to 11.9% from the present 9 percent, and further cut down the energy consumption and carbon dioxide emission per unit of GDP separately by 16% and 17%. In the coming five years, the government is to set up a long-term mechanizm to boost domestic consumption, so as to further expand the home market. The lowering growth rate coupled with boosting the domestic consumption will further cut down exports, while the technology innovation drive will boost imports, thus a new Chinese growth model — one that relies on the potential of internal consumer demand will be built up.

As regards the bilateral political relationship, the 7 years up to 2005 is a period when EU-China political relations rapidly developed. In the 7 years, the bilateral relationship strode through five stages in succession.

In 1998, the two parties built up the Long-term Constructive Partnership Toward the 21st Century. In 2001, the two sides set up the Comprehensive Partnership. In 2003, the bilateral partnership was upgraded into a Comprehensive Strategic Partnership. In 2004, the two parties set a goal to establish a Closer Comprehensive Strategic Partnership. In 2005, both sides decided to start up a new round of talks on bilateral cooperative framework, or Partnership of Cooperation Agreements, which was to extend the bilateral cooperation from economic and trade cooperation to areas covering politics, service, energy, communication, environment protection, science and technology, culture, education, international and regional affairs, etc.

Since 2005, however, the momentum of EU-China comprehensive strategic partnership halted. The change was related to two events in 2005.

Firstly, the EU Constitutional Treaty was vetoed in France and the Netherlands, which made all other things insignificant and negligible. Secondly, severe frictions burst between the EU and China on textile trade in 2005, which worsened the political atmosphere between the two parties。

In the five years since 2005, some changes also occurred on China side, which exerted subtle impacts on the bilateral relations. The change was, the rank of China in the world in terms of economic size upgraded from the fifth to the third place. With this change, the profile of China from perspective of some Europeans was becoming a economic monster or gorilla. China looks like a competitor, rather than a partner.

In the past two years, China managed averting the hit of global financial crisis by broadening home market and maintained high-speed growth, becoming a bright spot in the gloomy world economy. China, however, does not forget its responsibility. It gives a hand to its partners in difficulty. Mrs. Hilary Clinton’s first international mission after she took office of US secretary of state was visiting East Asia, with China in her destinations. Her mission to Beijing was to promote US public debt. To help the United States to pull out of difficulty, China bought a great deal of US bonds and now hold one fifth of US national debt.

Two years ago, Greek budget deficit reached 12.7% of GDP, well beyond the ceiling of 3% of the Euro Zone’s criterion, triggering a crisis of the Euro Zone. In addition to Greece, three euro states, Ireland, Spain and Portugal, also face debt crisis. Other members in the Euro Zone faced very difficult choices in setting up a rescue mechanism. China declared not decreasing its holding of euro, to underpin the stability of the Euro Zone. In that moment, China bought Greek debt. Furthermore, Prime Minister Wen Jiabao promised to buy more Greek debt when he visited Athens last year, so as to help Greece pull out of difficulty. China also bought Spanish national debt in last July. It is reported that China has held 13% of Spain’s national debt. Vice Prime Minister Li Ke-qiang commit to buy more Spain’s debt when he visited the country early this year. He also commit to buy Portugal’s debt when he visited that country. The support by China substantially enhances the confidence in euro, contributing to the stability of the Euro Zone.

Helping EU member states pull out of debt difficulties is in China’s interests, as the European Union is the first largest trading partner, and the prosperity of Europe would bring about impetus to China. In return, China’s economic rise would imply a larger market for Europe. China is a stakeholder. The year of 2010 is a milestone. In that year China became the first largest market for EU’s exports. Europe benefits from China’s economic success.

It should be noted that trade disputes between the two sides would take place from time to time and sometimes even more frequently, but this is a normal phenomenon, as partnership and competition go hand in hand. The trade disputes should not be politicized. Europe has much more trade disputes with the United States, which does never weaken the close strategic alliance relationship between them. There is a tough divarication between Europe and China, that is RMB exchange rate mechanism. Europe complains of RMB exchange rate being underestimated. China adopted a managed floating exchange rate regime in 1994. Factually, China has been reforming its exchange rate formation mechanism since then, so as to make it more flexible. The Chinese currency has appreciated 57.9 percent since then, and the reform of RMB's exchange rate formation mechanism is still under way (to be based on a basket of foreign currencies instead of pegging to the US dollar alone).

If Europe takes China’s economic rise as an opportunity, it will benefit from it. The rising China is a rapidly growing market. This market has not been made the best use by Europe. The market consumes one fourth of steel products and one second of cement of the world and digests 18 million cars each year. Considering that the country has 74000 kilometers of expressway, 91000 kilometers of railroad, 121 million internet users, 933 million mobile phone users, producers of vehicles, communication and electronic facilities allover the world will have good opportunity there. In this moment, the GDP per capita there is only 4300 dollars, or one tenth as much as Europe’s average. It implies that the potential of China’s market is tremendous. When the living standard of Chinese people approaches the Europeans’ level, the market demands will be multiplied. As a result, the economic rise of China is beneficial to the rest of the world, as well as to Europe. Just imagine, supposing each Chinese eats a piece of Belgian chocolate in a year, Belgian chocolate producers would have to quadruple their production capacity; if one of 100 Chinese make a tour to Belgium, Belgian hotels would have no extra room for guests from other places in many years. So, to further develop EU-China partnership is in interests of both sides, and the partnership will certainly have a bright future.

（Contact Zhang Jianxiong：zhang-jx@cass.org.cn）