Two of the three largest economies in the world, China and the EU, are rethinking their economic relationship, after decades of moving closer together. The future direction of that relationship will have major implications for the world economy, not only for China and Europe.
The last two decades have seen an extraordinary change in the economic weight and prospects of the EU and China. The EU has experienced steady erosion of its global economic importance and its self-confidence as an economic and political entity. China, by contrast, has taken a more commanding position on the world stage, as an economy set to rival that of the USA within the next ten years and as a political and military power determined to assert its interests within Asia and beyond. The Chinese and European economies have become interdependent since China’s re-emergence, and in some areas, interdependence is still increasing. The political mood of the China–EU relationship, however, has changed. The EU’s original vision of itself as a missionary for open markets and democratic political systems addressing a China ready to listen to its advice has lost all credibility. Meanwhile, China has become more active in promoting new international economic institutions and alternative economic models to those of the developed world.
During this period of change, the EU and China have sought to enhance their economic and political relations. In 2003, they committed themselves to developing a Comprehensive Strategic Partnership, in which they would not only seek to improve their already close economic ties but also consult on political and security issues and cooperate across a wide spectrum of common interests, ranging from research and education to environmental issues to “people-to-people” dialogue. Twelve years later, it is widely acknowledged (if not yet officially) that the results of the Strategic Partnership have been disappointing. Whilst contacts between the two sides continue to multiply, there has been little fundamental change in the structure of their economic relationship, which many in Europe see as “one-sided,” and no major policy decision by either side that has offered the prospect of such change. More frequent dialogue may have increased mutual understanding, but no major step towards genuine mutuality and cooperation has been taken that goes beyond multilateral commitments. Economic exchanges are no longer growing at the hectic pace of the first decade of this century, and attempts to extend China–EU cooperation into new areas have so far failed to show results. Today’s debate within a number of EU Member States about the potential risks of allowing Chinese direct investment to increase, when an overall increase in infrastructure investment is badly needed, illustrates that, for many people in Europe, China is different.
This book examines the political factors within the EU and China that may explain the apparent stalling of the EU–China Strategic Partnership in economic terms, and offers a more realistic prognosis of how the relationship might develop over the coming years than can be obtained from official communications.
As the following chapters show, the background conditions for close cooperation and productive interchange between China and the EU are favourable in many respects. The economic challenges facing both economies are similar: a deficiency of natural resources, an ageing labour force, pressure for industrial restructuring, and the creation of new jobs through innovation. Each side’s economic policy goals, whether defined in Five-Year Plans or the EU’s 2020 Agenda, contain similar commitments to promote innovation in knowledge-based industries, to ensure environmental sustainability, to improve education, and to deliver cost-effective health services and social protection. The two sides speak the same policy language, at least on the surface.
They also have complementary assets. Europe has technological and organisational expertise in many areas that could make a critical contribution to China’s economic growth, whether in emerging industrial technologies, environmental or health services, or the operation of financial markets. China has surplus capital that it wishes to invest profitably around the globe, at the very time when Europe is looking to renovate its ageing infrastructure and to raise more capital for the expansion of innovative companies. It also has an increasingly skilled and well-educated workforce. A combination of European ideas or expertise and Chinese capital and skilled labour could be a winning combination, if such collaboration could be made to work. The EU also has the distinct advantage of not being perceived by China as a rival regional power, and indeed, not as a power at all in the traditional sense. 1
The thesis of this book, however, is that this promising potential for cooperation is repeatedly undermined by major political differences, not only between China and the EU but also within China and within the EU, some of which are unlikely to disappear in the foreseeable future. At least three types of political differences that constitute major obstructions to EU–China economic cooperation will be illustrated in the course of this narrative.
The most obvious example is provided by the different political assumptions that underlie economic policy in the EU and in China. Differences of view regarding the role of competition in the market, or the place of the state and the private sector in the economy, complicate discussion of economic relations between the People’s Republic of China and any developed economy. The dominant position of state-owned enterprises (SOEs) in China, for example, affects the structure of the market, its efficiency and prospects for future growth, as well as the space available for non-Chinese competitors. China’s determination to develop indigenous industrial sectors and technologies capable of competing internationally leads it to overlook or bypass the normal rules of the game. More fundamentally, the Chinese Communist Party (CCP)’s restrictive approach to property rights, open access to information, and the rule of law, all fundamental tenets of economic governance in the West, generate uncertainties and lack of trust that inhibit cooperation over the long term. The analysis in the following chapters will show how economic reform in China aims to address some of these problems, but fundamental differences of opinion persist in China over the choice of a market-driven or a state-driven economic model. Nationalism remains a powerful force, given new vigour by President Xi’s “Chinese Dream.” 2 Economic reform has so far been tentative and gradual. It has not yet reached a point where economic cooperation with China can be approached in anything like the same way as with other partners.
Differences in the political leverage exercised by a sovereign state like China and an association of sovereign states like the EU accentuate the difficulties arising from different political assumptions. The EU treaties confer a political role on the Union, including responsibility for the management of key aspects of the external economic relations of its Member States, such as trade and investment, but, as later chapters will show, the Union has considerable difficulty in exercising its mandate. The complicated division of competences between the Union and the Member States, combined with disagreements between Member States on some economic fundamentals, often means that it cannot formulate and deliver a coherent external economic policy, particularly towards a partner as large, strong, and fast-changing as China. Some of its biggest Member States do not always accept that their interests are best served by collective external action. Meanwhile, China has shown its willingness to deal with individual EU Member States or groups of them where it can, whilst repeating its commitment to closer relations with the EU as a whole. This tension between centralised and decentralised decision-making affects China as well as the EU: one of the more difficult political issues in China’s economic reform is that of greater fiscal autonomy for China’s provincial governments. The capacity of both China and the EU to manage the balance between centralised and decentralised power, albeit from very different starting points, will be an important factor in shaping future EU–China economic relations.
A third example of political difference affecting EU–China economic relations is the debate within the EU over the nature of the EU’s common external policy: should it be values-based or interest-based? 3 Advocates of a values-based approach maintain that the EU’s foreign policy cannot separate economic goals related to trade, investment, or other forms of international cooperation from the promotion of European values, such as the protection of human rights, democratic freedom of expression, and the rule of law. Such a values-based approach would stand in the way of closer EU–China economic relations as long as China does not undertake fundamental political reform, which the present Chinese leadership is not contemplating. Many in the EU, however, advocate a more interest-based policy, in which economic interests are to be pursued with international partners separately from and (by implication) without conditionality in terms of acceptance of European values by the EU’s international partners. China presents this choice of approach for the EU in its most acute form, and it will be central to, for example, future discussion by the European Parliament of proposals to conclude agreements between the EU and China on investment or on free trade.
Why Another Book on China?
Academic literature on EU–China economic relations is fairly abundant, if much less so than analysis of USA-China relations. Many of the works take the form of journal articles or edited volumes that focus on specific features of the relationship, such as trade or investment or environmental policies, whilst some have included a combination of issues aimed at a particular audience. A recent example of this type is a wide-ranging guide to EU–China relations for European businessmen and potential investors produced by participants in the European Commission’s Europe-China Research and Advisory Network (ECRAN). 4 The authors recognise their debt to the work already done by many others in this field of scholarship.
However, this book is different and offers three distinctive characteristics. First, the chapters presented here deliver an analysis of each of the main components of the EU–China economic relationship within a single framework, which takes into account a new background of changing economic fortunes in the EU and China. Such an integrated examination can help to identify recurring common features in the relationship across different sectors and allow cross-cutting conclusions to be drawn about its nature and direction.
A second distinguishing feature of this analysis is that it takes account of the economic and political environment emerging from the post-2008 economic and financial crisis. Attitudes to China across the EU have changed as a result of the economic crisis. China’s continuing economic growth, in spite of the post-2008 recession in other parts of the world, has helped China become the second most important market for European exports after the USA, and its growing activity as an overseas direct investor has led to its being solicited by heavily indebted EU Member States as a long-term investment partner. Meanwhile, because of the effects of the recession on China’s export markets, the Chinese leadership has recognised that economic reform, aimed inter alia at changing the China’s economic model from an export-dependent to a domestic consumption-dependent one, is bec...