Thursday, November 29, 2007

China is losing its EU friends

by Katinka Barysch

The EU is getting tough on China. That, at least, is the impression one gets from high-ranking EU officials that arrived for the annual EU-China summit in Beijing this week. Economics is the main reason for Europe’s changing mood. The EU’s trade deficit with China is set to reach €170 billion this year, and European business is losing an estimated €55 million a day because of Chinese red tape, trademark violations and unfair subsidies. The EU’s economic troika – Joaquin Almunia, Jean-Claude Juncker and Jean-Claude Trichet – called on China to let its currency rise against the euro. Commission President Barroso and his trade commissioner, Peter Mandelson, warned that they would no longer be able to withstand rising protectionist pressure in Europe, unless the Chinese made it easier for European companies to sell in their markets.

Will the Chinese be frightened? Maybe they should be. Those industries in the EU that compete directly with Chinese mass manufacturers – think Italian textiles, German light bulbs or Czech consumer electronics – have occasionally lobbied for protection. But European retailers and those industries that rely on cheap Chinese inputs, for example steel, have lobbied against. At the political level, the Chinese could usually rely on Germany, the UK and the Commission to make the case for open markets. However, this may no longer be the case.

The Commission’s patience seems to be wearing thin. Mandelson in October wrote a letter to Barroso that suggested that the EU’s dialogue-based approach to solving economic disputes with China may have run its course.
The British may be instinctive free traders. But British business is unlikely to lobby on China’s behalf. UK companies still sell roughly as much to Denmark and Dubai as they sell to China. On the other hand, China is now Britain’s 5th most important source of imports, with the result that the bilateral trade deficit reached €24 billion in 2006, a third of the UK’s total trade deficit with non-EU countries. Services, where UK companies are world leaders, account for only a tiny fraction of Chinese imports because domestic markets remain heavily protected. A recent survey showed that while globally almost half of company bosses see China as the biggest business opportunity, in the UK the share is only 37 per cent.
Perhaps most worrying for the Chinese is the shifting mood in Berlin, however. Germany alone accounts for around 40 per cent of all EU exports to China, not least because Germany specialises in exactly the kind of machine tools that China needs to build up its industrial sector. Since 2000, Germany’s exports to China have risen threefold. Since the German economy is much more dependent on exports than those of other big EU countries, it has had a strong interest in keeping economic relations with China smooth.

In recent years, however, the rising euro has made German goods expensive outside the eurozone. And German, like other western companies, have suffered from China’s very cavalier attitude towards patents and trade marks. In 2006, German machinery exports to China actually fell. Germany’s trade deficit with China has more than doubled since 2000, to €16 billion in 2006, and it keeps growing. Perhaps unsurprisingly, the share of Germans who see China as an economic threat has jumped by 17 percentage points in just two years, to 55 per cent in 2007 – the biggest public opinion turnaround in any big OECD country.

German awareness of China as a competitor, not only a promising market, will rise further as Chinese industry moves up the value chain. Chinese car output, for example, is growing by 40 per cent a year. Although Chinese cars have a long way to go before they can compete with Volkswagen or BMW, the fact that China now produces more of them than Germany has fuelled some disquiet. As has the fact that China has dethroned Germany as the world’s biggest exporter.

At the same time as economic ties are souring, Germany and China have fallen out politically. The Chinese were very upset when Angela Merkel received the Dalai Lama in her Chancellor’s office in September 2007. Merkel initially said she’d expect Beijing to calm down quickly. It did not. Finance Minister Peer Steinbrueck had to cancel a planned trip to Beijing because his counterpart was no longer available. Chinese state-owned companies pulled out of a China-German trade fare. Scheduled dialogues on human rights, the rule of law and foreign policy co-operation were called off.

At the EU summit, Premier Wen Jiabao said that Germany could still be a partner and a friend – provided that Merkel acknowledged publicly that she had made a mistake by seeing the Dalai Lama. The Chancellor is also under growing pressure from German business groups and her SPD partners in the grand coalition. But she is unlikely to budge. In a speech to parliamentarians at home, she insisted that “human rights and the defence of economic interests are two sides of the same coin”.

While they have put relations with Germany on ice, the Chinese have reached out to France. Nicolas Sarkozy grasped the opportunity at a bilateral summit in Beijing on November 25th. As is customary, he came with a group of French business leaders, who signed deals worth around €20 billion (although such ‘summit deals’ have a habit of falling apart afterwards). However, Sarkozy is unlikely to be as friendly to the Chinese as his famously Sinophile predecessor, Jacques Chirac. While he promised strong ties, Sarkozy also admonished Beijing for its currency policy and warned that Europe may slap ‘carbon tariffs’ on Chinese goods unless the Beijing contributed to a post-Kyoto agreement.

Europe will not make a full turn towards protectionism. But there clearly is growing potential for economic friction with China. Beijing’s usual conciliatory language – promising gradual change and open dialogue – may no longer be enough. It may have to offer concrete action on currency policy and economic opening if it wants to win its European friends back.

Katinka Barysch is deputy director of the Centre for European Reform.


Anonymous said...

"because of Chinese red tape, trademark violations and unfair subsidies". So, the Chinese steal things, they are bad people because they steal things. Who says that, MPAA and RIAA? That is a funny position, and i guess it is couched in the "you do not respect intellectual property". - As if something immaterial that we cannot either see or touch could be property...

I would rather say that we have a problem with our non-accountability of the patent establishment, not bad people who steal things. That is the elephant in the room no one is willing to talk about, and it has consequences.

What financial and economic risks do we have by intellectual property systems that have long been out of sync with the actual intent of the law. What was the intent? Anyone remember? We also need to remember a distinction in this context. It is the distinction between invention, innovation and incremental change. Over the last 2 decades we have entirely blurred those lines.

The patent system was a social contract, the monopoly right was saying to society that it was economically viable to change the dynamics of fair and free markets, in consideration.. in consideration for a disclosure of something that ultimately advances the cause of science, technology or industry. Today the system is not a social contract in exchange for whatsoever. Go ahead, read _any_ recent granted patent. In practice we have created such a great obfuscation around what we think we are doing and what we think our competitors are doing, that we have mutually assured destruction if anyone ever peel back the layers of the patents to actually sort out who is doing what. That is the elephant.

What if the patents that are being asserted to be stolen or copied or infringed are not actually worth the paper they are printed on, and what if the Chinese using their sovereign rights to actually challenge those patents? Who wins? David Martin, a specialist in assesing patent portfolio values and technology transfers, also an advisor under the Clinton admin., held a speech in Brussels back in 2004 explaining the economic consequence of this and our connections with China: Real economic consequences of the non-accountability of the patent establishment.

In the earliest days, patents where a way for the King to reward his supporters and friends, and often to enrich his own coffers. Today we are back to something like that, though the modern insiders are not the friends of the monarch, but patent lawyers, insurance companies, and other assorted purveyors of overhead draining any small company to its death. They will come out very nicely under this scheme, on both sides of the fence, with the future development as a looser either way. Laura Creighton explained this very well in a speech in Brussels 2003 on the subject of software patents.

If we are not willing to confront the integrity problem, which says that we are incentivised to issue garbage, and the sovereign immunity from accountability that exists in our patent system, then we are just rearranging deck chairs on the titanic.


Anonymous said...

I do agree with Katinka's assessment of the current state of EU-China relations. As David Shambaugh has put it, the 'honeymoon' phase may well be over. Perhaps both sides, to a certain point, underestimated their differences, and only now came to realise it to a full extent. That was most visible on the difficulties experienced with the approval of the last Summit's Joint Declaration. I do believe that Europe had to change its tone in order to gain some concessions from the Chinese. Let's see if that works out.