The EU's benefactor

China lends support to European integration through various measures

China is poised to become the European Union's most important commercial partner while simultaneously being a serious challenger in trade and a competitor for resources. The distinctive characteristics of the Chinese political system elicit mixed feelings across Europe, raising questions as to what use the new leaders will make of their country's increased capabilities.

Yet, it is precisely the People's Republic of China, informed by values and principles quite different from those of the EU and its member states, that has come to support the EU's integration process, including key initiatives such as the European common currency, unwaveringly. These are some of the conclusions of a report recently published by the EU Institute for Security Studies, an EU agency based in Paris. The study "Brussels-Beijing: Changing the Game?" examines and assesses EU policy toward China in trade, investment, the euro and global economic governance, environment and resources, defense and security, politics, and the regional context.

The EU-China relationship is one of the most important in the world and has developed at a dramatic pace in the last decades. The two sides launched a strategic partnership in 2003, upgrading it in 2010 to include foreign affairs, security matters and global challenges such as climate change and global economic governance. A large number of sectoral dialogues (more than 50) underpin the strategic partnership that is characterized by a high degree of institutionalization. Since 1998, there is an annual EU-China Summit complemented, since 2008, by a EU-China High-Level Trade and Economic Dialogue and, since 2010, by an EU-China High-Level Strategic Dialogue. The development of EU-China relations has been greatly facilitated by the absence of conflicting issues that could bring the two sides to a military confrontation.

Economic considerations have traditionally been the driving force of the relationship. Today, China is the EU's second biggest trading partner and the EU is China's first commercial partner. EU-China trade amounted to 428 billion euros in 2011 and it is expected to be higher in 2012. Former premier Wen Jiabao had said that "the two sides have become indispensable partners in each other's development endeavour". But the growth in China-Europe ties has led to significant trade imbalances. The EU's trade deficit with China is Europe's biggest bilateral trade deficit with any country; it has increased from 89.6 billion euros in 2002 to an estimated 170 billion euros by the end of 2012.

A defensive discourse has emerged in some EU member states based on the perception that China has been flooding European markets with cheap products and taking away jobs in the manufacturing sector. As highlighted by the European Commission in its last European Competitiveness Report, China has established itself as a low-cost competitor in high-skill industries. The rapid growth of skill-intensive imports from China largely explains the growing EU trade deficit and it represents a serious challenge for some European industrial sectors that are considered sensitive.

EU-China relations have recently come under strain amid concerns about unfair competition. In September 2012, the European Commission began a broad investigation into whether Chinese companies had exported solar power equipment for less than the cost of making it. Moreover, it is widely felt in Europe that many Chinese sectors, most notably the public procurement market, are closed to outside competitors, leading some EU policy makers such as Karel De Gucht, the EU Commissioner for Trade, to increase calls for more reciprocity in EU-China relations. But the domestic politicization of China and the consequent linkages between commercial and political issues has remained significantly less marked than in the United States.

Besides some (almost inevitable) trade frictions, the EUISS study maintains that the sheer size of the Chinese market and the growing purchasing power of its expanding middle class represent a formidable opportunity for many export-oriented European companies. As reported by China Daily a few weeks ago, China has become "hugely important" for Europe to escape its current economic downturn. The current crisis has, in fact, encouraged European businesses to invest in China where growth prospects are stronger.

Investments have begun flowing also in the other direction. According to the Rhodium Group, Europe is experiencing the start of a structural surge in outbound direct investment by Chinese firms. Annual inflows tripled between 2006 and 2009 and tripled again by 2011 to total $10 billion (7.4 billion euros) for the year. A report published by the Asia Society in 2011 predicts that Chinese outbound investments are likely to rise to $1 trillion by 2020, with the greater part directed toward developed markets. Accordingly, Europe would receive cumulatively at least $250 billion in this period. The EUISS report argues that this trend is likely to accelerate in the future, as the debt crisis in the eurozone provides investors with lucrative opportunities. The Chinese government injected $30 billion into China Investment Corp in March 2012 to be used specifically for acquiring industrial and strategic assets in Europe.

China has become a staunch supporter of the eurozone. The EUISS research shows that Chinese officials have intervened on a number of occasions since the beginning of the eurozone's debt crisis to reassure markets and Europeans that they will continue to buy eurozone bonds. Chinese investors would make up a large proportion of the buyers of Portuguese and Irish bailout bonds auctioned by the eurozone's 440-billion-euro rescue fund since 2010. And Beijing has also showed an interest in investing in fully guaranteed and safe eurobonds once they become a reality. Throughout the crisis, China has consistently been more euro-optimistic, in contrast to widespread euro-scepticism coming mainly from Anglo-American banks and hedge funds.

Since summer 2011, after the US' credit rating was downgraded by S&P, China has begun disinvesting in earnest from dollar-denominated assets and increasing its holdings in euro that now account, according to the EUISS study, for around 30 percent of China's foreign reserves (which at around $3.3 trillion are the world's largest). This means that Beijing has bought around 1 trillion euros so far, which would confirm former premier Wen's declarations that the euro has been the prime target of China's acquisitions in the last couple of years.

China's support for European integration has not been confined to monetary issues. Beijing has also backed Europe's space ambitions, lending both political and financial support to Galileo, the EU-led global navigation satellite system alternative to the American GPS. When Galileo was launched, the US firmly opposed it for fear of a challenge to its space primacy and leadership in key strategic and high-tech industrial sectors. China, instead, contributed to propping up the European project, committing tens of millions of euros and becoming Galileo's most important non-EU partner. It is noteworthy that most of the EU countries involved in the Galileo project are also members of the eurozone. The EUISS report concludes that for the EU and in particular the core members of central and western Europe more active in promoting integration, China presents a strategic opportunity to enhance Europe's role in world affairs and gain autonomy from the US.

There seems thus to be a dual and sometimes overlapping image of China across Europe: that of a rising power challenging the Old Continent's values and standards of living; and that of an enormous opportunity for European companies and EU global aspirations. Hopefully, EU and Chinese leaders will be able to devise a course of action in the next months and years that emphasizes the win-win aspects of their relationship, keeping at bay the inevitable frictions that such a broad and complex partnership naturally entails.

The author is a research fellow at the Paris-based European Union Institute for Security Studies. The views do not necessarily reflect those of China Daily.

(China Daily 04/05/2013 page9)