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2007-11-27 | All chapters

European Opinion Split over Benefits of Eastern Engagement
Alan Beattie, Financial Times, 27th November 2007

Is the European Union getting a raw deal from its growing trade relationship with China? The answer depends critically on whom you ask.

The loudest voices say yes. Peter Mandelson, EU trade commissioner, has repeatedly warned of rising discontent among European companies with China over unfairly cheap imports, an undervalued currency and disregard of intellectual property rights.

Those complaints may not yet have reached the intensity of their US counterparts but Mr Mandelson warned last month that the EU was "sitting on a policy time bomb".

The EU as a whole ran a goods trade deficit with China of €131bn (£94bn) last year out of an overall trade deficit of €193bn, though much of that reflects China's role as the final assembly stage for products made elsewhere in east Asia.

However, especially when it comes to taking action against perceived Chinese unfairness, companies and member states are frequently divided. Retailers who source from China like the country more than manufacturers who compete against Chinese companies. Northern member states are more positive than southern ones, having more companies involved in services, pharmaceuticals and high-technology engineering such as aerospace (including Airbus), which are more likely to complement than compete with Chinese businesses.

Joerg Wuttke, president of the EU Chamber of Commerce in Beijing, said last week: "The investment climate is unfortunately not getting better." Yet the chamber's survey of European companies in China showed that, although 25 per cent thought China was "willing and able" to meet its commitments as a member of the World Trade Organisation, 22 per cent thought it was actively trying to avoid or delay them.

The splits are also evident in Mr Mandelson's protracted review of the EU's "trade defence instruments" - emergency tariffs used against underpriced or state-subsidised goods. The review showed 28 per cent of companies, unions and consumer groups in favour of more anti-subsidy cases against economies such as China's and 35 per cent opposed.

When the EU decided to split the difference between protectionists and liberalisers recently and agree a temporary extension of emergency tariffs against Chinese lightbulbs, not a single EU member state voted in favour; 15 abstained and 10 voted against.

Peter Bradley of Stephenson Harwood, an international law firm, who helps Chinese companies list on London's Alternative Investment Market, said: "Companies have different experiences but those like, for example, Ricardo [a UK-based transport and energy technology company] that are doing things the Chinese can't do as well themselves, such as high-end engineering, have opened up in China and done very well."

Mr Bradley accepts Chinese regulations are skewed against foreigners. A new rule last autumn requiring Chinese companies to gain approval from regulators and the ministry of finance before establishing an offshore holding company has slowed the stream listing on Aim to a trickle.

Yet Mr Bradley says: "The service sector has been harder to get into but that is always the case when economies open up."

Europe has the kind of rich-nation trade profile that appears shortchanged from integration with China. The EU already has low tariff barriers against most of the manufactured goods in which China specialises. But service sectors in which European companies are relatively strong - telecommunications, legal and business services - are traditionally slower to open up to foreign competition and easier to restrict with domestic regulation. Last year, the EU ran a services trade surplus with China of just €1.7bn.

Meanwhile, the benefits to the EU from Chinese imports - cheaper goods for consumers, inputs for companies and returns on investments accruing to European shareholders - have few vocal champions.

Complaints about China are unlikely to dissipate, particularly if there is an economic slowdown in the EU. And even what appears to be a vote of confidence from China in Europe's economic solidity, the rumoured shift of its reserves from the dollar to the euro, might be damaging. Unlike the US, which has been running huge current account deficits, the eurozone economy has been roughly in trade balance. So it has much less need to attract foreign capital into euro-denominated government bonds to head off the risk of destabilising falls in asset prices.

A wall of central bank money flooding into the euro could push it yet higher against the dollar and renminbi, so hurting European exporters by making them more uncompetitive. As one European official once put it, global flows of capital and trade mean China gets jobs and Europe gets screwed.

Such a bitter analysis may not represent the diversity of opinion in the EU but it reflects a sentiment that appears to be growing.

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