A summit dominated by trade could get frosty

On November 28th the tenth EU-China summit will take place in Beijing. No prizes for guessing what will top the agenda—trade, of course. In recent months the international media spotlight has fallen mostly on the rising temperatures between China and the US. But now, Sino-EU trade tensions could also heat up. Peter Mandelson, the EU’s trade commissioner, in mid-October fired off a letter to Jose Manuel Barroso, the European Commission’s president, describing the bilateral relationship as “deeply unequal”. Flanking the summit meeting will be a visit from representatives of the euro zone economies to discuss the value of the renminbi, with the management of the new Chinese sovereign wealth fund as a possible secondary focus. Then there is the parallel summit of some 500 EU and Chinese business leaders to discuss co-operation in areas such as sustainable development and intellectual property.

Sino-EU economic relations are booming. China’s economy is growing so fast that it now dwarfs those of many individual EU member states. Bilateral trade grew by 21% year on year in 2006 to more than €250bn (US$368bn), while EU investment in China reached more than €3.7bn last year. Over that same period growth in exports from China to the EU outpaced those to the US, highlighting China’s shift in focus to Europe as its primary export destination.

Rising US protectionism
The rising profile of the EU in China’s export picture is in part due to a worsening trade climate in the US. Scares in North America about the safety of made-in-China goods from toys to toothpaste have severely affected consumer perception. As the 2008 election campaigns gain momentum, protectionist pressures on US candidates will also likely rise. Hillary Clinton, a leading Democratic candidate, has promised to review trade agreements every five years and amend them where necessary—an apparent break from the pro-trade policies that characterised her husband’s presidency. While leading Republican candidates have so far promised not to heed the “siren song” of protectionism, as John McCain put it, the vote-attracting allure of economic nationalism will be difficult to ignore in a tight race. Several anti-China trade bills are currently snaking through both the Senate and the House of Representatives.

With such clouds hanging over Sino-US economic relations, the EU has a chance to shift the limelight to its own burgeoning links with China. But pursuing its crowded agenda to satisfaction will not be all smooth sailing.

On merchandise trade, freer imports of Chinese textiles remain a key issue. The EU will soon lift an annual cap that it had imposed on imported Chinese textiles since 2005. Following a recent agreement between the European Commission and the Chinese commerce ministry, the cap will be replaced by a textile-import monitoring system which will be put in place for 2008. But a European Commission study put the cost of Chinese barriers against EU goods at about €20bn annually, or roughly 30% of its exports to China. The EU has also asked China for concrete steps on protection of intellectual property and copyrights. If China does not play its part in providing reciprocal openness for EU goods and investment, an EU spokesman implies that a different, presumably more confrontational, approach might follow.

Meanwhile, euro zone finance ministers suggest that the undervaluation of the renminbi against the euro rather than the euro-US dollar or euro-yen rates is their biggest concern. In a statement following a meeting on October 8th, they said, “in emerging economies with large and growing current-account surpluses, especially China, it is desirable that their effective exchange rates move so that necessary adjustments will occur.” Jean-Claude Juncker, the prime minister of Luxembourg and president of the euro zone group, has promised to make the case for a stronger renminbi before the year-end.

As for Beijing’s newly launched sovereign wealth fund, China Investment Corp (CIC), there is growing unease among EU member states about how the fund will operate. Germany has proposed that the EU introduce a vetting procedure for foreign takeovers, modelled on that of the Committee on Foreign Investment in the US. France goes a step further, advocating a classification system to identify strategic sectors that would be potentially off limits to foreign takeovers. Joaquin Almunia, the EU’s economic and monetary affairs commissioner, has also suggested that in cases where funds not operating transparently sought to invest in strategic sectors, EU authorities could step in. The big unknown surrounding the new Chinese fund is whether its investment will be driven by politics, high returns or both. The euro zone representatives’ visit will not miss the opportunity to request assurances from the Chinese side on how CIC will operate.

So will the EU-China summit be a success? That, of course, depends on how participants define success, but EU negotiators probably will return home with minor results at best. Aside from the expected resistance from the Chinese side, EU negotiators have a number of self-imposed obstacles to overcome. For starters, the institutional complexity of the EU makes it difficult for the group to speak with one voice. The member states do not always agree. France and Germany are squabbling on the right way to handle monetary policy—a disagreement which has consequences for the EU’s approach to managing the euro–renminbi exchange rate. There is also policy disagreement among the EU’s various institutions, including the European Council, European Commission and European Parliament. Just within the European Commission, its various departments recently found themselves in a public brouhaha over whether to scrap anti-dumping duties on energy-efficient light bulbs imported from China.

As a further illustration, consider that at the summit the European side will be represented variously by Jose Socrates, the president of the European Council and prime minister of Portugal, Jose Manuel Barroso, the president of the European Commission, and Mr Mandelson. What is more, the euro zone representatives will not speak on behalf of opt-outs like the UK, while Nicolas Sarkozy, the French president, will supposedly make his own trip to Beijing shortly before the EU-China summit.

With all these motley visitors, the Chinese side might be forgiven for wondering with whom to negotiate. Indeed, the absence of a central authority means the EU lacks the ability to trade off among different dossiers. A single supreme negotiator could envisage deals such as a softer EU stance on textiles in exchange for bolder Chinese moves on monetary policy or export subsidies. But with responsibility for these dossiers divided between various EU institutions, such deals are difficult to pull off.

Fickle priorities
Linked to the institutional-complexity issue are the EU’s fickle priorities. Its Council presidencies representing member states rotate every six months, and at each summit Chinese leaders are faced with a new representative. In 2006 the Finnish prime minister focused on innovation as the key to EU-China economic relations. But in 2007 under the Portuguese presidency, the EU business leaders’ focus has shifted to sustainable development.

The EU’s approach to China’s human rights issues presents a final, more intangible barrier to further development of bilateral relations. A meeting in September between Angela Merkel, chancellor of Germany, and Tibet’s exiled leader, the Dalai Lama, raised hackles in China. The People’s Daily said the encounter had “seriously harmed relations between Beijing and Berlin”. Indeed, as long as EU leaders are willing to anger Chinese counterparts on such high-visibility issues where little progress is likely, they will not get far either in their lobbying for incremental improvements in key aspects of the bilateral business and economic relationship.