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The EU and China


With the fourth largest economy in the world, an average annual GDP growth rate of 9 per cent for over a decade, a population of 1.3 billion and a territory of 9.6 million square kilometres, China is a major global economic and, (not least because she is a permanent member of the UN Security Council), an important political player as well.

The EU’s relationship with China has developed rapidly, largely as a result of the more than sixty-fold increase in EU-China trade, since it was first put on a formal basis in 1975. The EU is China’s largest trading partner and China the second largest of the EU. The Chinese economic revival has been accompanied by her parallel re-emergence as a global political power.

The events of Tiananmen Square in 1989 proved to be only a temporary setback but served to confirm Western concerns about human rights in China. Although relations have improved since then, there are continuing concerns about China’s human rights record and lack of respect for the rule of law in crucial economic areas like intellectual property, its reluctance to fully open its markets to European companies and the dumping of cheap Chinese goods in European markets.

In 2007 the EU and China are expected to negotiate their first Partnership and Co-operation Agreement – the most important such agreement since the earlier 1978 Trade and Co-operation Agreement. Despite Chinese sensitivities and European complaints about unfair trading practices the relationship is likely to continue to develop and strengthen.

This note covers first some brief history, then the economic relationship and finally the political relationship.


Communist China did not share the Soviet Union’s hostility to the EC; indeed, it saw Europe as an ally against the Soviet Union and as equally distrusted by it. The first visit by a Commissioner in 1975 led on to establishing diplomatic relations the same year. Three years later the two parties signed a trade and co-operation agreement, which was replaced by an expanded agreement in 1985. Political relations remained limited with the first political consultations at Ministerial level not taking place until 1984.

These improvements in relations suffered a major setback in 1989 with the Chinese Government’s suppression of the democracy protests in Tiananmen Square. The relationship between the EU and China was effectively frozen for over a year and an EU arms embargo against China was introduced.

Since the gradual thawing of relations began in the autumn of 1990, the EU and China have grown closer together with both sides recognising the importance of the relationship. The European Commission first published a strategy for the EU’s relationship with China in 1995 and on the Chinese side a policy paper on the EU was published for the first time in 2003. The EU has worked hard to improve relations with a largely positive response from the Chinese side. But important issues still trouble the relationship.

The Economic Relationship

The growth in trade between the EU-China over the last twenty five years has been astonishing. China was the 25th largest destination for EU exports in the early 1980s and the 22nd largest source for the then fifteen Member States. Since then trade has multiplied over sixty-fold and it continues to grow at a dizzying pace – by over 20 per cent in 2006. The effect of this surge in trade has been to displace other Asian countries (notably Japan) and to turn the EU’s large trade surplus with China in the 1980s to a large trade deficit today (€128 billion in 2006).

The difficulties created by the growth in Chinese exports have been considerable. In some sectors, such as textile and clothing produce, where China is the EU's largest supplier, major problems have led to anti-dumping measures (see below).

China’s economy is more open than it used to be (particularly since it joined the WTO in 2001) but there are still restrictions on EU investment in several key sectors (such as manufacturing and services sectors). There are punitive tariffs charged on certain EU products too – including textiles, clothing, ceramics, steel and vehicles. Hidden barriers to trade include complex regulatory requirements in areas like telecommunications and financial services, China’s application of laws can be inconsistent and its national standards often differ from international standards. There is also a persistent problem of corruption in China and a major problem of the counterfeiting of goods.

The surge in Chinese exports of cheap clothing in early 2005 (a 100 per cent increase in the EU), triggered by the end of quotas on textiles and clothes, led to outrage amongst European producers. Although some of the exports from China were judged by the EU to amount dumping (i.e. the exports were priced below the cost of production and significant damage was being caused), and were in breach of commitments made by China when she joined the WTO in 2001, the EU (and the United States) had had 10 years since the end of these quotas were agreed to prepare their domestic producers.

The absence of adequate preparation and the sudden growth in Chinese exports made EU anti-dumping action inevitable. Quotas on Chinese clothing imports were imposed by the EU in June 2005. This led to nearly 80 million items of Chinese-made clothing being held up in European ports by August. In September 2005 an agreement was reached that half would be released immediately and the remainder would count against the 2006 quota. This was a victory for those retailers who had objected to the blocking of Chinese clothing exports (supported by Germany and Sweden) and a defeat for those who had wanted to maintain the restrictions (supported by France, Italy, Portugal and Spain).

Concern about the enormous growth of Chinese exports is a far bigger political issue in the United States. As the US trade deficit with China has got larger and larger ($232 billion in 2006), calls for protectionist measures in Washington have got louder. There is a significant anti-China (and pro-Taiwan) group of Congressmen.

For the EU as for the US, China’s exchange rate policy is also a major concern. The low value of the Yuan makes China’s exports cheap and exports to China relatively expensive but China has been reluctant to allow her currency to appreciate in value. The US has some concerns about China’s accumulation of enormous reserves held in dollars, which, if China chose to sell a large part of her reserves, could dramatically reduce the value of the dollar (but this of course would affect the Chinese economy too). China is committed to diversifying its reserves (about 75 per cent of China’s one US $ trillion of reserves; about 20 per cent are in euros) but this has proceeded at a very slow pace.

So far the Bush administration has resisted measures against Chinese exports and entered into a substantial dialogue with China but demands within Congress for action against “unfair” trading practices will continue. For her part, China says US calculations exaggerate the size of the trade deficit and calls for the lifting of the US ban on the export of some high-tech items to China.

The world’s trading relationship with China will continue to be difficult as China adapts to her new status as the world’s leading exporter. EU action is concentrated on enabling China to become more integrated into the world trading system (the EU helped to facilitate China joining the WTO), including tackling barriers to trade, counterfeiting and corruption. But China remains the biggest target of EU anti-dumping action.

Defence & the Arms Embargo

Chinese military power has been growing for some years as China has increased her defence budget in real terms. The EU has been less worried about this development than the United States. The big difference between the US and the EU is that the US has vital strategic interests and defence commitments in the Pacific (Japan, S. Korea and, most sensitively, Taiwan). The US is also concerned at the effect on its superpower status of the rise of Chinese strategic and military power and so is tempted to see the relationship as a competitive and even adversarial rather than co-operative one, and there has been military tension over incidents close to Taiwan.

The EU has no such strategic commitments and attaches greater importance to drawing China into a co-operative relationship which will moderate the effects of its reviving power. To this end it has sought to develop a political as well as commercial relationship through political dialogue in what both sides call a “strategic partnership”.

The 1989 EU arms embargo has remained in force despite the general improvement in EU-Chinese relations. The Chinese wish to see it lifted and have suggested that there may be opportunities for defence co-operation with the EU. In spite of the embargo, the EU did allow China to join the global positioning project Galileo in 2003, ostensibly a civilian project but one with potential military applications. Despite US pressure against, the EU, led then by President Chirac and Chancellor Schroeder, came close to lifting the embargo in 2005, but drew back in the light of Chinese legislation authorising the use of force in the event that Taiwan declared independence. Britain and Germany now oppose the lifting of the embargo but do so largely because of US pressure.

The Political Relationship

China’s influence in the world has increased alongside her growing economic importance but at a slow pace and in a direction which is still hard to characterise with any certainty. China has had to look outward more as she seeks the resources to meet her ever-growing energy needs, but also as she has become more integrated into the world’s power networks. Joining the WTO in 2001, the invitation to attend the G8 Summit in 2005 and helping to establish the Shanghai Co-operation Organisation (an organisation of growing importance which brings together China, Russia, Kazakhstan and other central Asian countries and which opposes American presence and influence in those countries, enhancing Chinese influence there) were all signs of greater Chinese political influence.

While the EU is less fearful of Chinese power than its critics in the United States, it does have some significantly different views on international questions from China. In part this reflects China’s objection to what she sees as interference in the internal affairs of sovereign states. China irritates the West with her apparent support for dictatorships such as those in Sudan, Burma, Angola and Zimbabwe. China’s approach is driven by her economic growth substantially increasing her need for oil and other raw materials as well as for support on Taiwan at the UN. This has led to China taking a major interest in Africa for the first time. For example, her reluctance to condemn the Sudanese Government over the massacres in Darfur and impose economic sanctions on that country reflects her oil agreement with Sudan.

The mechanics of the EU-China relationship are now well-established. Summits are held each autumn – there have been nine so far – and dialogue takes place continuously on a range of subjects including human rights, energy, textiles, regulation of financial markets, science and trade. Progress in such discussions varies but agreements have been reached for co-operation in the field of science and technology and on clean coal (China’s environment is badly polluted by coal-fired power stations). The reality is that the political relationship is not that substantial because the EU has less interest in the Asian security questions that matter most to China. The EU’s main contribution to the Taiwan issue has been to anger the Americans by wanting to lift the arms embargo and to irritate the Chinese by failing to do so. In practice the main European political concern has so far come down to human rights, which the Chinese find tiresome. Climate change – of increasing concern in Europe but viewed differently in China where the difficulties of reconciling the need to deal with climate change with promoting economic growth are particularly acute - could be a developing source of tension in the relationship, as could be China’s role in Africa. Much will depend in future on the extent to which both China and the EU develop global external policies and, if they do, whether they can work together or become rivals.

The Asia-Europe Meetings, held biennially since 1996, provide a further opportunity for dialogue between the EU, China and other Asian countries. Although informal, a number of initiatives have developed as a result of the meetings such as the trust fund established to help Asian countries deal with the effects of the 1997 financial crisis.

The negotiations between the EU and China for a partnership and co-operation agreement mark a new phase in the relationship. Rather than being confined to trade and economic issues, it is expected that the new agreement will cover political relations as well. If the negotiations succeed, they will reinforce the EU’s growing relationship with China and mark a further stage in the re-emergence of China as a global political force. J

July 2007

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