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Tuesday, 29 July 2014
China-EU relations have potential despite risks PDF Print E-mail
Written by Europe Business Center International   
Monday, 04 July 2011 09:40

JOHN Ross is currently Visiting Professor at Antai College of Economics and Management, Shanghai Jiao Tong University. He was consultant to Fortune Global 500 companies and from 2000 to 2008 London's director (currently equivalent to deputy mayor) for economic and business policy.

The end of Wen Jiabao's visit to Germany, the United Kingdom and Hungary is an appropriate time to make a balance sheet of China's current relations with the European Union. It shows big potentials and some risks.

The potentials are clear. The EU sits at the top of the international value added chain with the United States. EU GDP is larger than the US. Taken together companies owned by the EU's member states are larger than US companies. The EU is China's largest export market, while China is the world's most rapidly growing import destination.

China occupies a different part of the international value chain than the EU. The mutual benefits for both sides are clearly illustrated by China-German relations. Germany is a producer of high-tech equipment. Germany now exports more to China than to the US. China uses imported German equipment to manufacture consumer goods which are exported to Germany at prices at which that country could no longer profitably produce due to its higher wages.

The "win-win" character of this is clear. Without it, Germany would lose a key export market while having to pay more for consumer goods produced domestically. China's factories would be less efficient without German equipment, while proceeds from Germany's exports allow it to purchase China's output.

Other EU countries also gain. France and Italy, among other things, are the world's most important producers of high quality and luxury consumer goods - for which China is a growing market. London is Europe's financial center, whose companies can aid Shanghai to establish itself as an international financial hub.

All this explains why China-EU trade and investment are booming. What are the risks?

The first political ones were illustrated by British Prime Minister David Cameron who, as the Financial Times put it, was "sharply rebuked" by Wen on his visit. It noted "a senior Chinese official in London told the Financial Times that Britain was falling down the league table of China's trade partners." That this was not mere words was shown as: "the total value of the Sino-German deals (signed on the trip) was put at about US$15 billion - dwarfing the US$2.2 billion of trade agreements with British companies."

This negative result was due to Cameron's attempt to "lecture" China on human rights. Cameron appeared not to notice how ridiculous this was even in its own terms. It came from the government of a country which historically waged war on China to force it to import opium, seized one of its largest islands, Hong Kong, for more than a century, and never allowed democratic government in Hong Kong while ruling it. Britain's government invaded Iraq as part of a US-led coalition, resulting in several hundred thousand deaths, and is losing a war, also as an ally of the United States, in Afghanistan. Cameron's remarks therefore carry no moral authority but do succeed in loosing British citizens jobs and incomes through souring trade relations with China. Germany's position, sticking to discussing business rather than mutual finger pointing, naturally yielded better results.

Alongside political complications is financial risk. China has bought bonds from Spain and other EU countries in financial difficulties, creating good will. But China needs to be aware Greece's bailout is not going to work - its debts are too big. Eventually Greek debt will have to be rescheduled to the disadvantage of its creditors with possible knock on effects.

This is not a disaster for China. Financial loss may be worth it for goodwill. But the benefits and disadvantages in any agreement must be calculated accurately. China must be aware of the overall financial risk.

But overall the benefits in China-EU relations are clearly far bigger than any downsides.