China – giant with attitude

Since China joined the World Trade Organisation (WTO) in December 2001 the European Union has been following a softly- softly approach to trade relations with this self-proclaimed, "peacefully rising" Asian giant.

Post-WTO membership, the European Union's trade deficit with the new industrial workshop of the world doubled from €54 billion to €106bn in 2002-05. There are also continu-ing tensions, over textiles and shoes for example, which have led the EU to protect its domestic markets from some imports.

But what would be the point, EU officials have wondered, of striking too confrontational a pose on trade disputes with the notoriously hyper-sensitive Chinese government when the United States could be relied upon to play the role of 'bad cop' with its emerging geopolitical rival? Better for the EU to profit, both diplomatically and commercially, from taking a more conciliatory approach to trade policy and give China time to implement its WTO commitments.

But in recent months behind the scenes at the Commission's trade department, DG Trade, a rethink has been underway. And in Brussels last week, at a Commissionsponsored conference entitled 'EU Trade and Investment in China', the gloves came off.

Privately, Commission officials reject the idea that the EU is now going to take a more aggressive line on trade. One remarked that he preferred the word "robust". But several China experts attending the meeting pointed out that the EU is now working more closely with the US on several trade disputes with China and said there was no mistaking the change of tone from the EU side.

It was not just that with Yu Guangzhou, China's forceful vice-minister for commerce, seated just a few feet away from him, Trade Commissioner Peter Mandelson delivered, in public, a blunt warning to China about Europe's businesses meeting a "Chinese Wall rather than an open door" to the Middle Kingdom.

DG Trade also released a glossy, densely researched, 78-page report which sets out in detail some of the formal and informal trade barriers that EU companies are facing as they seek entry into Chinese markets. It explicitly accuses China of illegitimate and nationalistic industrial policies, particularly in relation to intellectual property protection, some of which appear to breach its WTO commitments. On China's promises to open up its telecommunications sector to investment by EU companies, for example, it says: "To date none of these [WTO] commitments have [sic] been fully implemented."

Mandelson also lined up some very prominent EU business leaders to ram home the message. Caio Koch-Weser, former deputy finance minister of Germany and the current vice chairman of Deutsche Bank, for example, told Yu to his face why, in China's own interests, he needed to oversee the removal of restrictions on foreign bank operations. Mandelson even authorised a senior DG Trade official, to give, in the afternoon when Yu had departed, a downbeat assessment of recent trade negotiations with China and, in relation to EU negotiating strategies, to pose the key question on EU-China trade policy: "Do we have the right approach politically, do we need to be more aggressive like the US?"

Just as pointed was another EU official, Franz Jessen, deputy head of the EU's delegation in Beijing. He noted that when it agreed to the conditions attached to WTO membership, which it did partly to legitimise vital domestic reforms, China did not sign up to a continuing programme of liberalisation beyond the WTO commitments it made. "We still have to see where the train will go. I am optimistic. But there was no commitment from the Chinese side," he said. Jessen also pointed out that China was a very complex country. It may be centralised, but provincial authorities often have more real power when it comes to making decisions on access for foreign companies. He also hinted strongly that the EU has got to do more to get its own act together (see box).

So what lies behind the change of tone? Partly, it is the sheer pace of the deterioration in the trade balance and the evidence that, as China becomes more competitive over a wider range of increasingly sophisticated products, the deficit could continue to increase.

As Mandelson himself pointed out, Europe's citizens face a painful adjustment to globalisation.

But he warned of "a major political problem" if businesses felt their rights were flouted in China or if EU citizens were left with the feeling that Chinese goods were flooding in to the EU - jeopardising their jobs - while EU exports to China were being unfairly blocked.

This could foster protectionist sentiment in the EU. But - no less significantly now that China is itself looking to invest, as well as export, overseas - China will run the risk of seeing the protectionist mood which has blocked it from making some direct investments in the US replicated in the EU.

There is a broader dimension too. The EU is losing patience with China's decision not to play an active role in the WTO Doha trade negotiations. It has sat on the sidelines saying that a high level of engagement should not be expected from a new WTO member and argued that it has already, in its membership negotiations, made all concessions that could reasonably be expected.

The EU view is that the world economy, and China's role in it, has changed dramatically since 2001.

The time has come for China to recognise that, if it wants to be a global player politically, to continue to be invited to attend sessions of the Group of Seven advanced economies, to participate in top-level talks about the world economy, and to see its weight in international fora such as the International Monetary Fund increased, it needs to start behaving more responsibly.

It needs to recognise that as one of the world's biggest trading nations, if it does not curb its protectionist reflexes at home, it will trigger a protectionist backlash around the world which, looking at the experience of the 1930s, will damage the whole world.

A multi-billion euro relationship...only ten EU trade experts in China

Of the 100 staff working in the European Commission's delegation in Beijing 50 are dealing with development issues but only ten are trade specialists according to Franz Jessen, the deputy head of the Beijing office.

Hans-Friedrich Beseler, the now retired EU official who led the Commission's WTO membership negotiations with China, points out that in a country in which provincial administrations are increasingly important, the EU has no representation, never mind trade specialists, elsewhere in the country, not even in the industrial and financial capital of Shanghai, a place where the US mission has 100 diplomats. Beseler says it is high time for the Commission to re-examine its personnel policies in the country.

What will not be said in public is that the current focus on Beijing might be justified if China were a country which had strong, politically independent, national administrative structures, and in which the rule of law was well entrenched. But it is in fact a huge country in which corruption is rampant and political influence can make or break a deal. Businesses find it hard to crack the Chinese market and need local EU support to help them do it.

Some are even wondering whether, in order to try to get round the problem the EU should begin to work more closely

with the diplomatic missions of EU member states, many of whom do have representative offices elsewhere in China.

Since China joined the World Trade Organisation (WTO) in December 2001 the European Union has been following a softly- softly approach to trade relations with this self-proclaimed, "peacefully rising" Asian giant.