It's time to fix things, not to get fixated

Updated: 2012-09-07 10:24

By Jonathan Holslag (China Daily)

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It's time to fix things, not to get fixated

Finger pointing fails to deal with the real problems with China-EU trade ties

Many people in China are upset with Europe. Diplomats and company bosses lament that the continent's financial crisis has hit Chinese exports and that European investors are being obstinate. They also say Europe is becoming protectionist, making it impossible for Chinese companies to become active in the European market, and does not appreciate that Beijing wants to lend a helping hand. This frustration is becoming so widespread now that it poses a challenge to the already troubled Sino-European partnership: not only because it is largely disproportionate, but also because it distracts attention from a much greater task: correcting two twisted development models.

First of all, the slowdown that China is now going through is not made in Europe. Take exports. How many times have I read that Chinese firms have been severely hit by less demand in the European Union? The truth is that exports of goods and services have rebounded quickly and are now 30 billion euros higher than before the crisis.

China's trade surplus is back to pre-crisis levels as well, reaching 130 billion euros in the last four quarters. European investments in China have not dried up either. In the first quarter, European direct investments reached 6 billion euros, compared with 800 million euros in Chinese investments in Europe. The euro crisis may hurt manufacturers' confidence, but apart from a dip in 2009, trade with Europe has been remarkably resilient.

Nor is there much reason to accuse the European Union of protectionism. Compared with the United States, India, and several other developing countries, temporary trade barriers that specifically target China are sparse. In fact, we only have one such safeguard. If China is concerned about protectionism, it should be concerned about other emerging markets, which have become much more eager to curb Chinese imports.

It is true that the European Commission has become more straightforward in its demands, but it has been very reluctant to impose sanctions. Take the recent anti-dumping investigation against Chinese telecom companies. But apart from an investigation, nothing has happened, and the European Commission clearly wants to find a way out through negotiations.

In all, there is reason to be optimistic. While China has maintained its trade surplus, European companies have been transferring back larger investment incomes and China has gradually become more important as a market for European exporters.

So, much ado about nothing? Not quite. There is a risk of deteriorating trade relations, even a trade war, if we do not find a way out of two unsustainable development models.

If the eurozone continues to rely on external debt to finance its consumption, it will continue to replace competitive industries that are needed to generate trade income by new credit bubbles in the public sector, real estate, and banking.

Since the beginning of the crisis, the selling of government bonds abroad has contributed almost 2 percent to the eurozone's GDP. Drawing in money by selling bonds keeps the euro overvalued, discourages saving and makes it impossible for companies to compete. This is especially the case in weak member states. Governments may consider debt as a way of smoothing the required adjustments, but that essentially postpones the required corrections and burdens the next generation with an even greater challenge.

Postponing tough adjustments is also what China does, but in the other direction. Measures to trim excessive investments have been largely cosmetic. Money supply and new loans have continued to soar and driven up investment in fixed assets to 66 percent of China's GDP in the first two quarters of this year, a record.

As a result, overcapacity has become more pressing, profit margins have shrunk, and Chinese industries have become even more dependent on exports.

So the fact that China's growth is threatened has more to do with returns on investment dropping, rather than that other countries importing fewer Chinese goods. Therefore it is misplaced for Chinese commentators to criticize Europe for a lack of reform, as China itself has as yet failed to demonstrate that it can make its growth more sustainable.

We can go on accusing each other of being laggards, but that will not stabilize Sino-European economic relations. If we truly care about a solid economic partnership, we need to recognize that this is a common responsibility, show more political courage in implementing domestic reforms, and communicate honestly about how we seek to pursue those adjustments.

Indeed, it would help to enhance the high-level economic dialogue. To be sure, thorny trade matters need to be considered and discussed, but working groups of academics and officials could critically explore solutions for imbalances and develop a road map for reform. If we fail in our rebalancing exercise, more economic turmoil lies ahead. Trade wars will then become inevitable.

The author is a postdoctoral fellow at the Brussels Institute of Contemporary China Studies and teaches history of international politics at the Free University Brussels. The views do not necessarily reflect those of China Daily.

(China Daily 09/07/2012 page8)