China and India: implications for the EU economy

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This paper provides background information on the likely challenges the rise of China and India will pose for the economy of the EU. The purpose is mainly descriptive, namely to spell out what kind of trading partner China and India will represent for the EU in the foreseeable future. A first observation is that India is several times smaller than China in economic terms. Moreover, because its investment rates in both human and physical capital are much lower than in China, its growth potential is likely to remain more limited.
China’s export structure has already become rather similar to that of the EU and this ‘convergence’ is likely to result in the rapid accumulation of human and physical capital. If current trends continue, the Chinese economy is likely to have a capital/labour ratio similar to that of the EU. In terms of human capital, China has already caught up considerably, but further progress will be slowed down by its stable demographics and the still low enrolment ratio in tertiary education. In both areas India will lag China by several decades. The rapid accumulation of capital suggests that the emergence of China will put adjustment pressures mainly on capital-intensive industries, not the traditional sectors, such as textiles. Another source of friction that is likely to emerge derives from the abundance of coal in China, resulting in a relatively carbon- and energy-intensive economy.