Language learning | English » Tóth Viktor László - Commerce between the EU and China

http://www.doksihu Budapesti Gazdasági Főiskola KÜLKERESKEDELMI FŐISKOLAI KAR Gazdasági Idegen Nyelvi Levelező Szak Felsőfokú Szakképzés Commerce between the EU and China Készítette: Tóth Viktor László BUDAPEST, 2005. 04 10 3 http://www.doksihu TABLE OF CONTENTS I. INTRODUCTION 4 II. ABOUT THE EU AND CHINA IN GENERAL 5 1. THE EUROPEAN UNION 5 1.1 Background 5 1.2 Economic overview 5 1.3 Foreign trade 6 1.4 The EU's China policy 7 2. CHINA 7 2.1 The past 7 2.2 Modernizing the economy 8 2.3 Economic overview 10 2.4 An influential trading nation 11 2.5 Foreign trade 11 III. TRADE AGREEMENTS 12 1. REVIEW OF BILATERAL RELATIONS 12 2. ECONOMIC AND TRADE RELATIONS 13 2.1 WTO 15 IV. EXPORTS, IMPORTS AND INVESTMENTS 17 1. EXPORT, IMPORT FIGURES 17 2. BUSINESS IN THE INDUSTRIAL SECTORS 20 2.1 Car industry 24 2.2 Energy 25 2.3 Telecommunications, IT 26 3. AN EXAMPLE OF A NEW EU MEMBER STATE: HUNGARIAN-CHINESE TRADE 27 4. EUROPEAN INVESTMENT

OUTLOOKS IN CHINA 28 V. DELICATE ISSUES 29 1.ARMS TRADE (DEFENCE INDUSTRY) 29 2. SHADOW ECONOMY, FAKE TRADE 32 3. ENVIRONMENTAL ISSUES 33 VI. CONCLUSION 33 VII. BIBLIOGRAPHY 35 VIII. ANNEXES 38 4 http://www.doksihu I. INTRODUCTION China has only recently started to receive public attention, and yet now hardly a day passes without some new headlines of it in the news. Ever improving economic indicators, further liberalisation of its commerce, import quotas imposed on its textile items by the European Union and its weapons trade are some of the issues that formulate our view on this country, besides the immense size of its population and the fact that it’s one of the few communist countries that exist today. But from a commercial point of view, what makes China so interesting is that it offers outstanding trading opportunities, as a huge and quickly developing market, which has just recently been integrated in the global economy. Its economy is remarkably successful, which

allowed it to rise up from among the poorer countries becoming the second largest economy in the world in 2003, with a GDP of about €5300 billion (US$6,449 billion). Its gross domestic product has grown by an average of 9.5% in the last 15 years, it has known successful trade and diplomatic relations with all developed economies, and became a member of the World Trade Organisation (WTO) on 11th December 2001. The European Union, the world’s second largest economy if we consider it as a whole, with a total GDP of €10,209 billion in 2004, noticed these changes and gave sound economic support for the People’s Republic of China, in view of profitable trade deals and successful cooperation on the international scene. Although the two parties had few things in common besides decades of struggle for development within their own borders, they became one of the most important trading partners by 2004 and are heading towards of increased exchanges and cooperation. This is what caught my

attention and made me chose to develop this topic in further detail. Before entering into the details, I would like to say that China’s figures should always be treated with caution. When I was examining contradictory trade and economic figures; I tried to apply those, which were calculated by European institutions. It should also be noted, that Taiwan, a former part of China, is not officially recognised as a free state and that Hong Kong, since 29th June 1997, and Macao, since 20th December 1999, are specially administrated regions. In the following lines, I will concentrate only on the People’s Republic of China. 5 http://www.doksihu II. ABOUT THE EU AND CHINA IN GENERAL 1. The European Union 1.1 Background The evolution of the European Union (EU) from a regional economic agreement among six neighbouring states in 1951 to today's supranational organization of 25 countries across the European continent stands as an unprecedented phenomenon in history. The EU is a

common market and to some extent a monetary union, which means that it represents a high level of integration, surpassing the simpler characteristics of a preferential zone, a free-trade association such as ASEAN, NAFTA, or Mercosur, or that of a customs union. In the future, many of its nation-like characteristics, like the common currency, are likely to be expanded. The 1986 Single European Act initiated the program of creating a truly common market by the end of 1992, which was in that year officially achieved by signing the Treaty of Maastricht. This treaty created the European Union, making goods, labour, capital and services flow freely among the member states, and laid the basis for further forms of cooperation in Foreign and Security Policy, in Justice and Home Affairs, and in the creation of an economic and monetary union - including a common currency. 1.2 Economic overview The EU aims to bolster Europe's trade position and its political and economic power. It attempts

to lower trade barriers both among its member states and with major trading partners, adopt a common currency in most member states, and move towards a convergence of living standards. The EU accounts for 18% of world trade and more then a quarter of global GDP. 1 The creation of the European single market has greatly increased the EU's overall competitiveness and prestige in the world market. The Economic and Monetary Union (EMU) introduced the euro as the common currency on 1st January 1999, which became the unit of exchange for all of the EU states except for Great Britain, Sweden, and Denmark. Banknotes and coins were first introduced in 2002 in the 12 euro-zone countries. The 10 new countries will have to join 1 EuroBiz Magazine, journal of the European Union Chamber of Commerce in China, East Meets East, May 2004 6 http://www.doksihu the EMU when they meet its fiscal and monetary criteria. To create a favourable and predictable trade-environment, the members of the

monetary union are obliged to prevent their national budgets from running more than a 3% deficit, not to have public debt over 60% of the GDP and respect the price level, interest rate, and currency rate criteria. However, the union has considerable structural problems in its economy, such as high unemployment, high tax, and excessive debt, compared to its global competitors. The 10 central and eastern European countries are, in general, less advanced technologically and economically than the existing 15, which explains the great differences in per capita income from around €8300 (US$10,000) in the new member states to €23300 (US$28,000) in Western-Europe. Because of this, and rigid national point of views, the European Community faces difficulties in implementing and enforcing common economic policies. 1.3 Foreign trade With respect to trade, all imports amounted to €989.5 billion in the EU-15 countries in 2003. The main import commodities were machinery, vehicles, aircraft,

plastics, crude oil, chemicals, textiles, metals, food-ingredients and clothing. EU-15 exports were of €977.9 billion in that same year, and were dominated by machinery, motor vehicles, aircraft, plastics, pharmaceuticals and other chemicals, fuels, iron and steel, nonferrous metals, wood pulp and paper products, textiles, meat, dairy products, fish and alcoholic drinks 2. EU exports and imports EU exports (Value, Bn EU imports (Value, Bn 1980 212.1 - 1990 355.2 - 1999 2000 2001 2002 760.2 9420 9853 9972 779.8 1,0334 1,0280 9892 2003 977.9 989.5 Source: External and intra-European Trade, Statistical Yearbook, Data 1958-2003 The EC average level of customs duty protection amounts to around 4% on industrial goods and tariffs are also among the lowest in the world. 2 L’Union Européenne en Fiches, Le commerce extérieur, l’Europe et le Monde, p190-214 CIA – The World Factbook 2004 : EU 7 http://www.doksihu Moreover, imports from many of the EU's suppliers of

industrial products enter the Community at preferential rates under the terms of bilateral agreements, the Generalised System of Preference (GSP) or tariff suspension regimes, for instance steel imports from Mediterranean countries. Major exports 2003 Machinery and transport Mineral fuels, lubricants Manufactured goods, Chemicals Food and live animal Inedible crude materials Commodity, transactions Beverages, tobacco Oils, fats, waxes TOTAL % of Major imports 2003 350587 Machinery, transport 180960 Chemicals 261085 Manufactured goods, 86207 Food and live animal 52003 Mineral fuels, lubricants 42435 Commodity, transactions 29846 Inedible crude materials 5661 Beverages, tobacco 3635 Oils, fats, waxes 1027893 TOTAL % of 435782 151778 237139 33521 27753 22615 16682 14803 2367 942440 Source: http://trade-info.ceceuint/doclib/docs/2005/march/tradoc 113366pdf 1.4 The EU’s China Policy: China and the EU are important actors on the international stage and share interests in promoting

common economic development. With regards to economic tendencies, it is an appropriate period of time for the development of trade and bilateral relations between the two. The European Union’s policy on China can be summed up as follows: • to further support bilateral relations by political dialogues and China’s economic and political participation on a global scale to encourage its integration into the world economy • to support the process of economic and social reform (protection of intellectual property rights etc) • to aim at the liberalization of trade and investment flows, like the removal of barriers (price controls, discriminatory registration requirements, arbitrary sanitary standards) and the removal of obstacles to investment (geographical restrictions, joint venture requirements, discriminatory licensing procedures, enclosure of certain sectors to foreigners) in order to improve the business environment • to help China's transition into an open society

respectful of human rights and the law 8 http://www.doksihu Source: Joint Press Statement of the Fifth EU-China Summit, http://www.chinaembassy-orgbe 2. China 2.1 The Past The world's fourth largest (after Russia, Canada, and the US) and most populated country (1,298,847,624 – estimate for 2004) has a controversial history. After World War II, the communists under the leadership of Mao Zedong established an autocratic socialist system that, while ensuring China's sovereignty, imposed strict controls over everyday life and cost the lives of tens of millions of people. Almost all of China's private or individually-owned farms were collectivized into large communes and private ownership was nearly extinguished, foreign firms were nearly non-existent. A large share of the country's economic output was arranged and controlled by the government, which set production goals and controlled prices. By 1978, 70% of the GDP came from the state sector. A major goal was

to make China's economy self-sufficient Price and production controls caused widespread deformations in the economy. 2.2 Modernizing the economy In late 1978, the Chinese leadership began moving the economy to a more marketorientated system. The new state secretary Deng Xiaoping and other leaders focused consciously on creating a long-term plan to restructure and revitalize the economy. The strategy was (and still is) the following: it gradually released more and more products out of the country and accepted more and more money, but only loosened human rights regulations of those segments of the population who were vital for the lifting of economic growth. This is also a good argument for the special status of Hong Kong and Macao as “specially administrated regions”: they add a great deal to the Chinese economy by functioning along capitalist rules. In order not to cause ambiguity in the knowledge of the public, the government controlled the free flow of information. Over

the years, a solvent demand has slowly evolved, living standards have improved dramatically and the room for personal choice has expanded. India, a country often referred to as a trade competitor to China, was on the same economic level in the 1970s, but is today only half as developed in many respects as China. 3 3 The Economist, India v China, 21st -27th June 2003, p12 9 http://www.doksihu Being the biggest developing country in the world, China has rich human resources and an enormous market. There is today a tendency of capital flow from the wealthier eastern parts, like the Pearl River Delta on the South, toward the western borders, which will revive interior markets. This is happening without any centrally ordered instructions, which is a sign of further liberalization, since the capital is “stepping out” from the specially treated economic zones. I have collected the main phases of the development of the economy in the following list: • 1978: Deng Xiaoping launches

China's Open Door Policy. First reforms take place in agriculture. Only 12 trading companies are entitled to engage in foreign trade. • 1980: China becomes a member of the IMF. • 1986: China applies to join the GATT, the predecessor of the WTO. • 1989: Work in the GATT Working Group is suspended for two years following the incident at Tienanmen square. • 1997: China agrees to phase out its trading monopoly and to grant full trading rights to all Chinese and foreign individuals and companies upon WTO accession. • 1997: Restructuring of the state enterprise sector, including elements of privatisation. (The sector employs well over 120 million people and accounts for 30% of GDP) • 19 May 2000: China concludes bilateral market access agreement with the EU. • June 2000: WTO Working Party resumes its work of drafting China's socalled Protocol of accession and Working Party report, which is finished in September 2001. • 11 December 2001: China becomes the 143rd

Member of the WTO. • December 2005: China will host the WTO ministerial meeting in Hong Kong. source: http://europa.euint/comm/trade/issues/bilateral/countries/china/chrhtm Understandably, individual property played a key role in the development and thus the influence of non state-run organizations and individual citizens steadily increased. The authorities have switched to a system of household and village responsibility in agriculture in place of the old collectivisation that permitted a wide variety of smallscale enterprises in services and light manufacturing, such as the family run getihu. 4 About 2000 “special economic zones” were created to ease the administration of the foreign investors. The promising outlooks attracted more and more foreign private capital. The result has been clear: GDP growth of China from 1960 to 2004 and estimate value for 2005 4 The Economist, China - The bulldozing of Silk Alley, 15th -21st January 2005, p51 10 http://www.doksihu Source:

China Statistical Yearbook, The Economist, National Assembly of Realtor The country has known the fastest process of urbanisation in the world, the volume of the economy has tripled in the last 10 years, output had quadrupled by 2000, involving the doubling of raw material and energy consumption, and China stands as the 2nd largest economy in the world since 2003 after the US or 3rd, if we take the EU as a whole. In 2004, the US’ GDP was around $11,000 billion (€9,160 billion) and the EU25’s roughly $11,050 billion (€9,583 billion) Foreign investments amounted to €50 billion in that year. 5 2.3 Economic overview Half of China’s GDP comes from the permitted privately-owned sector and foreign investment remains a strong element in the remarkable economic growth. Exports accounted for 30% of the GDP according to the official rate, which means that growth is not entirely dependent on exports. Foreign investment banks using their own measures put growth at 11-12 per cent for

2004 because of the unreliability of local figures. 6 However, the country is still poor in per capita terms with a GDP/head indicator standing at about €4160 (US$5000), placing China 122nd in the world. Economic data on China: Main indicators of the Chinese 2000 2001 5 Manager magazin, A Sárkány nyomában – Kína, January 2005, p20 6 Financial Times, China warns against renminbi revaluation, 14th March 2005 11 2002 2003 http://www.doksihu GDP per head ($ at PPP) GDP (% real change pa) Budget balance (% of GDP) Consumer prices (% change pa; av) Public debt (% of GDP) Labour costs per hour (USD) Recorded unemployment (%) Foreign-exchange reserves (mUS$) 3,980 4,340 4,720 5,180 8.00 7.50 8.00 9.10 -3.62 -2.97 -2.96 -2.50 0.35 0.73 -0.77 1.17 30.40 30.60 31.10 29.60 0.59 0.69 0.80 0.92 8.20 9.30 9.75 10.10 168,278 215,605 291,128 401,036 Source: Country Forecast, The Economist Newspaper Group Ltd. The economy often has experienced the negative sides of its hybrid

system of strong political controls and growing market influences, like bureaucracy, lassitude, growing income disparities and rising unemployment. The government has struggled to sustain adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; to reduce corruption and other economic crimes; and to keep afloat the large state-owned enterprises, many of which had been shielded from competition by subsidies and had been running out of resources to pay full wages and pensions. From 80 to 120 million surplus rural workers are today in the villages and the cities, many living from part-time, low-paying jobs 7. 2.4 An influential trading nation China now emerges as a major world trading nation engaging extensively in world commerce, and an economic power in its own sense, since it makes its presence felt every second. For example the Chinese central bank, which raised interest rates for the first time in nine

years in October 2004 because of fears of overheating the economy, is also responsible for the recent falling of the dollar. Having seen that the dollar is not gaining value after the re-election of George W. Bush, it started to sell its savings in American state bonds, before they start to suffer a loss. This move increased the dollar supply on the market, decreasing the value of the American currency. High oil prices are also influenced by the Chinese economy. Being afraid of a quick rise in unemployment, the government keeps alive such state firms, which use old fashioned technology and consume a lot of energy. As a result, the country must use four times as many raw materials and energy sources to reach a growth of US$10,000 in their GDP than the United States and eleven times more than Japan 8. In 2004, oil imports were of 7 CIA, The World Factbook 2004, China 8 Manager magazin, A Sárkány nyomában-Kína, January 2005 12 http://www.doksihu 120 million tons of crude, which

can hardly keep pace with the appetite of the economy. Consequently, oil prices have reached record highs in recent days, due mainly to the massive demand from China. Saving measures were introduced to continue developing at the same rate. 2.5 Foreign trade 30 years ago, foreign trade was generally limited to obtaining only those goods that could not be made or found in China from only a handful of countries that the government allowed to participate in its commerce. But today, Chinese products are everywhere, due to the gradual intensification of both imports and exports. The main exported commodities are machinery and equipment, textiles and clothing, electrical apparels, and footwear. Most of the imported goods are machinery and equipment, mineral fuels, plastics, iron and steel and chemicals. Chinese exports and imports (in euros) Chinese exports (billion euro) Chinese imports (billion euro) Balance 1999 2000 2001 2002 2003 179.199 264847 292205 337461 379567 137.167 220484

241420 272113 321317 +42.032 +44362 +50785 +65347 +58249 Source: http://trade-info.ceceuint/doclib/docs/2005/march/tradoc 113366pdf Major exported and imported items of the country were as follows: Major traded goods Major exports 2003 % of Major imports 2003 Office machines & data14.3 Electrical machinery Apparel & clothing 11.9 Crude oil & fuels Telecommunications 10.3 Office machines & data Electrical machinery 9.7 Machinery for particular Source: Country Forecast, The Economist Newspaper Group Ltd. % of 19.3 6.5 5.9 5.1 Main trading partners Leading markets 2003 US Hong Kong ASEAN EU % of 21.1 17.4 17.1 16.5 Leading suppliers 2003 Japan EU ASEAN Taiwan 13 % of 18.0 12.9 11.5 12.0 http://www.doksihu Source: Country Forecast, The Economist Newspaper Group Ltd. III. TRADE AGREEMENTS 1. Review of bilateral relations The first step between China and the European Union to reach agreements on trade was to establish official relations, which took place on 6th

May 1975. On 1st November 1983, China established official relations with the European Coal and Steel Community and the European Atomic Energy Community as well. The delegation of the European Community to China was established in May 1988. Since 1994, when China and the EU established the mechanism of political consultations and dialogues, relations between China and the EU and its member states have developed fast. Both sides have maintained frequent contacts and held many meetings. In December 1995, the EU passed the Long Term Policy for Europe-China Relations and a year later, the European Commission put forward the EU's New Strategy Towards China. An important step was taken on 2nd April 1998, when the First China-EU Summit Meeting was held in London whereby leaders of the EU and China met. They issued a joint statement that laid out their consensus on establishing a 21st-century-orientated and constructive China-Europe partnership with long-term stability and holding

official meetings annually. On 29th June 1998, the Council of Foreign Ministers reviewed and passed a new policy document towards China called Building a Comprehensive Partnership with China, which upgrades the EU's relations with China to an important level equal to the EU's relations with the United States, Japan and Russia. It calls for the strengthening of political dialogues, exchanges and cooperation in economy and trade, and supports China's entry into the World Trade Organization (WTO). On the issue of human rights, the EU has decided not to propose or sponsor draft resolutions against China for two years consecutively. It shows a very forgiving approach, meaning that China is an important partner of the EU. 14 http://www.doksihu 2. Economic and trade relations China-EU economic cooperation and trade have been developing rapidly along with diplomatic relations, thanks to which countless agreements have been signed between them. Their enumeration would only

give a long list, so only the main agreements will be looked at. The most important legal framework for the relations remains the 1985 “Agreement on Trade and Economic Cooperation”, where it was decided that the China-EU Joint Economic and Trade Committee will meet at ministerial levels at irregular intervals. This agreement, which replaced an earlier version from 1978, covers economic and trade relations, as well as the EU-China co-operation program. The privileged areas of cooperation were economy & trade, science & technology and energy. About eleven agreements have been signed since 1990, covering most trading and cooperation fields, including the areas of aviation, automobile industry, environment, agriculture, training and education, science, technology, telecommunication, transport and energy, which is a key point on the agenda. On 5th March 1999, during the third China-EU conference on energy cooperation, China and the EU signed the joint statement to strengthen

cooperation in that field. Another agreement covering cooperation in nuclear energy is expected to be concluded soon. In fear of dumping, low prices and cheap quality, Chinese exports in general often encounter trade barriers, which is also true for its commerce with the EU. To ease these barriers, the European Union has amended some parts of its anti-dumping regulations in the late 90s. An important agreement dealing with customs cooperation to prevent piracy and forgery was signed on 6th May 2004. On 27th April of 1998, the EU's meeting of foreign ministers in Luxembourg decided to remove China from the list of "non-market economies". The first time that a Chinese enterprise won "market economy" status in anti-dumping cases in Europe was on 19th April 1999, when the European Commission decided to grant "market economy" status to Yunnan Malong Chemical Construction Material Co. Ltd in the case of yellow phosphorus. 9 Although the company won this

status only by winning the anti-dumping case, the EU did not want to do a favour to the whole of China that would result in 9 from New China News Agency, AS1-CHINA-EU-STATUS, Heinrich Hein Universitat Düsseldorf, http://www.phil-fakuni-duesseldorfde/oasien/china/service/bbc/010220txt 15 http://www.doksihu losing many tools to combat against excess Chinese imports, and therefore resorted to make this special decision. The entry into force in May 2004 of a major agreement granting Authorised Destination Status enables Chinese tourists to benefit from facilitated procedures to visit Europe that probably will have a great effect on the European tourism industry. New dialogues in the fields of intellectual property rights (IPR), competition policy, enterprise policy, textiles, and environment have also been initiated recently, and will be completed by new initiatives on macroeconomic and financial issues, sanitary standards or human resource development. Projects are set up for

solving specific tasks, like the agreement on EU assistance in dairy projects, the project of buffalo stocks improvements and the EU’s Galileo satellite navigation program, which was launched on 30th October 2003. All of these projects are going on at present. 2.1 WTO In order to accede, China has committed to undertake important reforms, which should facilitate business dealings. It promised to take steps to remove trade barriers and open its markets to foreign companies from the first day of accession in virtually every product sector and for a wide range of services. Supporting these steps, China has also committed to eliminate or significantly reduce restrictions on the rights of foreign companies to import and export goods and to distribute goods within China, and also to rectify numerous trade-handicapping industrial and agricultural policies. The EU was a strong supporter of China's accession to the World Trade Organisation (WTO), taking the view that a WTO without

China was not truly universal. For China, formal accession symbolised the crowning point of its integration into the global economic order. The bilateral EU-China agreement on WTO signed in Beijing on 19th May 2000 was an essential milestone in China's accession process. WTO members formally approved an agreement on the terms of accession on 10th November 2001 at the conference in Doha, Qatar. One day later, China signed the agreement and deposited its instrument of ratification with the Director-General. China became the 143rd member of the WTO on 11th December 2001. China is on its way to fulfil the rest of its commitments towards the EU and the other members. It has delivered legislation in line with expectations, most visibly on tariffs Duties and other non-tariff barriers are being reduced and much legislation has been 16 http://www.doksihu brought into line and investment flows into China remain high. The commitments are detailed in the WTO accession documents called

Working Party Report and Protocol of accession. The commitments regarding the reduction of tariffs are contained in the tariffs schedule, a part of which is inserted in the annexes). The EU has already put in place several projects aimed at helping China meet its WTO obligations. A major EU-China Cooperation Programme was launched on 1st February 2004, following a pilot programme that ended in December 2003. With funding of €15 million from the EU side and €5 million from the Chinese side, this new five-year WTO programme is the biggest of its kind in China. It is expected to yield expert analysis, impact studies, the development of possible solutions to specific questions or problems, facilitating dialogue, training sessions, policy advice and research, leading to trade-related capacity building. 10 The new WTO Integration Program will focus on core elements of China's integration into the world trading system. It will consist of six components: Customs and import/export

regulatory system; Agriculture and Agro-food; Technical barriers to trade/Sanitary and Phytosanitary Measures; Services; Legislative and legal aspects of domestic implementation, IPR enforcement; and Policy development, co-operation and transparency. 11 But there is a lot more that should be done, and over time, members of the EU business community might become increasingly sceptical about the true extent of China's commitment to the WTO. A number of non-tariff barriers are still in place, like discriminatory registration requirements, arbitrary sanitary standards and the high financial thresholds for foreigners to enter in insurance and banking activities. Greater transparency within the legal system, implementation, and drafting of legislation is needed to reduce these trade barriers. In particular, there are significant concerns about the enforcement of IPR, which is becoming a major issue affecting several sectors of the European business community. The lack of IPR enforcement

presents a serious threat to the growth of the Chinese marketplace. Overall, the commitments made by China to the WTO will secure improved access for EU firms to China's market, if fulfilled. Import tariffs will be sharply and permanently reduced. Investments by EU companies in China will take place in a more attractive 10 Homepage of the Delegation of the European Commission to China, Chronology of EU-China relations, 11 http://europa.euint/comm/trade/issues/bilateral/countries/china/index enhtm 17 http://www.doksihu and predictable business environment. Finally, it will open up whole services sectors to foreign companies, such as insurance and telecommunications, which have so far been restricted, if not completely closed. It will also support and accelerate China's own process of economic reform and development. Up to this day, the EU has not granted the “market economy status” for China, which it requested after its WTO accession. It has successfully won over

New Zealand, Singapore and Malaysia, but has so far failed to persuade the EU that its economy has been sufficiently set loose from state interference. 12 Further market liberalization and improvement is still required. The monitoring of China's WTO compliance and lobbying for removing the persistent market access obstacles will be a priority for the EU in the coming years. IV. EXPORTS, IMPORTS AND INVESTMENTS 1. Export, import figures China became the EU's second largest non-European trading partner in 2003, after the United States. EU-US trade amounted to €391355 billion in 2004, which shows that it will remain to be the number one trading partner for the coming years. The two-way EU-China trade has increased more than forty-fold since 1978 and reached €122.083 billion in 2003 and €147.6 billion in 2004 Due to the difference of data that is available, it is not entirely sure, whether the EU or Japan is the largest trading partner of China, but the two countries are

head-to-head and they both bypass the USA. According to the 18th March 2005 publication of Asia Times Online, Hong Kong, China’s first trading partner is the EU, the 2nd largest is the United States, with a trade value of €135.68 billion, and the 3rd is Japan with €13424 billion Official European data still holds that the first is Japan and the EU is the second, but taking tendencies into consideration, the EU will probably become the largest in the coming months. EU exports to China and other comparative data (value billion €/ECU) 12 BBC News, Business, EU ’to deny China market status’, 28th June 2004, 18 http://www.doksihu Exp. to China % Ramk Rank of the USA 1980 1.96 0.9 22 1 1990 5.3 1.4 6 1 1999 2000 2001 2002 2003 19.4 255 301 342 402 2.5 2.7 3.0 3.4 4.1 2 2 1 1 2004 48.0 2 1 Exp. to Hong Kong % Rank 1.1 1.0 19 6.6 1.8 10 15.7 2.1 - 20.5 2.2 - 21.5 2.2 - 19.9 2.0 12 18.0 1.8 12 - Exp. to Taiwan % Rank 0.9 0.4 37 4.9 1.3 18 11.8 1.6 - 14.9 1.6

- 13.3 1.3 - 11.7 1.2 23 10.8 1.1 24 - Source: External and intra-European Union trade, Statistical Yearbook In 2003, Chinese exports to the ten new members were relatively low, amounting to just over €7.6 billion compared to €60 billion for the established 15 members It may actually be small, but it is growing fast, tripling in value since 1998. The expectation is that this figure will grow dramatically from now onwards. The European Union is the largest provider of advanced technology and equipment to China. There were nearly 2,000 technology import projects from the EU to China with a total amount of more than €2.6 billion by contract last year EU imports from China and other comparative data (value billion €/ECU) Imp. from China % Ramk Rank of the USA 1980 2.1 0.7 25 1 1990 10.6 2.6 14 1 1999 2000 2001 2002 49.7 703 759 819 6.3 6.8 7.3 8.3 5 1 2003 95.5 9.6 3 1 Imp. from Hong % Rank 4.0 1.4 15 5.9 1.4 16 10.7 1.4 - 11.6 1.1 - 10.3 1.0 - 9.7 1.0 - 9.4 0.9

29 Imp. from Taiwan % Rank 2.1 0.7 11 9.1 2.2 9 20.0 2.6 - 26.7 2.6 - 24.2 2.4 - 21.1 2.1 12 20.3 2.0 12 2004 126.7 - Source: External and intra-European Union trade, Statistical Yearbook By the end of 1998, there had been 8,564 technology transfers from the EU to China, with a total contractual value of €37.93 billion and accounting for 451% of the total value in the corresponding period. By the end of 1998, EU member states and official financial institutions had provided China, on accumulative basis, with €12.731 billion in 19 http://www.doksihu contractual government loan, about 36.2% of the total amount of loans extended to China by foreign governments and official financial institutions.13 The EU is also an important foreign investor in China, although it fell back from previous years ranking as the fourth foreign direct investor. Some ten per cent of all the FDI flows into China come from the EU-25. Early European FDI into China was primarily motivated by the

low costs and went into exporting industries, but an increasing share of FDI is currently motivated by the desire to produce for the growing Chinese market. China is now one of the largest countries in the world in terms of FDI inflow with US$53.5 billion (€428 billion) in 2004 Contracted foreign investment targeting manufacturing rose only 36.2 percent The data corroborates what the OECD and other groups have found in changing FDI trends, namely that investors are targeting services to capture opportunities generated by China's fast-growing middle-class consumer market. According to 2005 data of the Ministry of Commerce of China, foreign multinationals invested €440 billion setting up half a million enterprises in the last 20 years. Overall, manufacturing still accounts for 728 percent of foreign investment over two decades, but that share would decrease as financial services companies invest more as restrictions are lifted. 14 The two sides enjoy a high degree of

complementarities in economic, trade, scientific and technological fields. China is the main beneficiary of the EU's Generalised System of Preferences (GSP) scheme, under which the EU grants autonomous trade preferences to imports from developing countries, with a share of more than 30% of all preferential imports under GSP. It also benefits from the EU’s single market in foreign trade It is much more convenient for China to trade with applying the unified standards and tariffs, especially after China's accession to the WTO. By the end of June 1999, there were 9,738 projects involving EU investment, with a contractual value of €31.81 billion and €15.82 billion actually paid in From January to June 1999 alone, EU countries had directly invested in a total of 408 projects, with a contractual value of €1.517 billion and €1.38 billion paid in15 These figures have risen since then According to the EU embassy in Beijing, there are about 25 development projects with a

total amount of €250 million (US$307 million) operated by the EU in China in 2004. The two partners began to cooperate in the agricultural field since the beginning of 13 China-EU Relations, homepage of the Mission of the People’s Republic of China to the European Communities 14 EuroBiz Magazine, journal of the European Union Chamber of Commerce in China, Briefs, January 2005 15 China-EU Relations, homepage of the Mission of the People’s Republic of China to the European Communities 20 http://www.doksihu 1980s, and have yielded positive results. Since 1983, China and the European Commission have constantly expanded their cooperation in development assistance in areas such as personnel training, economic restructuring, commercial cooperation, environmental protection, agriculture and poverty alleviation, etc. Up till 2000, 19 projects have been completed which involved €146 million and 18 projects are under way which involves €124 million. China welcomes more EU

development aid, especially in such fields as environmental protection, poverty-alleviation, public health and hygiene and education. It also welcomes a stronger and more active role of the EU in human resource development, in particular, personnel training for China's central and western regions and build-up of China's capacity of participating in a multilateral trading regime. 16 The Chinese industry, especially the light manufacturing industry is in an exceptionally lucky situation, which attracts many investors from the EU. Due to the cheap workforce: a workers payment for an hour is around $1. (For the same type of work in Mexico, it is $2-2.5, and $15 in the US) There are two facts that ensure the low salary levels: a large number of the population is ready to fill new workplaces in the “new modern” cities, and the artificially undervalued exchange rate that was fixed at 8.27 yuan per dollar ten years ago, ensuring extra benefits. Therefore there is hardly anyone

who can compete with the industry’s products in price, yet quality concerns remain in place, thanks to the smaller level of technology involved in the process of production than in the West. 2. Business in the industrial sectors Whereas the governments are responsible for creating the framework of trade, the actual commerce between the EU and China is done through the European and Chinese companies. Due to the single market system, import and export activities of an enterprise with China that is registered in one of the EU member states is considered as an EU export or import. European companies are rivals in the trade with China, trying to grab the most market share in the world’s most promising emerging economy. According to 2003 data, Chinese companies across all industries had about €7.2 billion invested in offshore businesses. Most of them are owned by the state or function in the 16 China Daily, EU-China trade to benefit both, 9th October 2004 21 http://www.doksihu

form of JV-s, or joint-ventures. The state has shares or owns entirely around 178 staterun companies In the process of market liberalization, the JV form of foreign investment was the first to be permitted, but later on, the European and other corporations could organise their operations in industrial parks and the free-economic zones. As data was gathered for this chapter, I made a note of the most important Chinese firms that are involved in international trade operations. Many of these are joint ventures and most have had transactions with EU firms. List of the largest Chinese companies: York and Hong Kong-listed 1. BOE Technology Group China Mobile, (hardware, microchips, LCD 11. China Netcom screens, digital machinery) 12. China Petrochemical 2. Baosteel (China’s biggest steelmaker) Development Corp 3. China Airlines Ltd 13. PetroChina (an oil giant) 4. China Electronics Corporation 14. China National Petroleum Corp Holdings Company Ltd (the parent company of New

5. China Gas Holdings LTD York and Hong Kong-listed 6. China General Plastics Corp PetroChina Co) 7. China Haidian Holdings Ltd 15. China Resources Logic LTD 8. China International Marine 16. China Resources Peoples Containers Group Co Ltd Telephone Co Ltd 17. Shenhua Group (China’s top 9. China Life, listed in Now York coal producer) and Hong Kong, accounts for half of domestic insuraces, $55 billion total assets 10. China Mobile Communications Corp., parent company of New Banks: 1. Industrial & Commercial Bank of China (ICBC) 2. Agricultural Bank of China (ABC) 22 http://www.doksihu 3. China Construction Bank (CCB) 4. Bank of China (BOC) Source: The Wall Street Journal Europe, EuroBiz, The Economist, Financial Times, The EU has one of the world's largest and technologically most advanced industries. The main branches are iron and steel, aluminium, petroleum, coal, cement, chemicals, pharmaceuticals, automobiles, aircraft, railroad equipment,

shipbuilding, electrical power equipment, machine tools, electronics, telecommunications equipment, fishing, food processing, furniture, paper, textiles and clothing and tourism industries. Some of the largest EU companies that are involved in operations in China are listed below. List of the largest European companies: 15. Fiat (China) Business Co, Ltd 16. French Federation of Perfumery 1. Air France 2. Airbus China Limited & Cosmetic Industry (China 3. Alcatel China Investment Co, Office) 17. Hilton Ltd. 18. Heineken Trading (Shanghai) 4. AstraZeneca Pharmaceutical Co Co. Ltd Ltd. 5. Avon Products (China) Co, Ltd 19. KLM Royal Dutch Airlines 6. BASF (China) Company 20. KPMG 21. L'OREAL (China) Limited 7. Bayer Healthcare Company Ltd 22. LG PHILIPS 8. BMW AG Beijing 23. Lufthansa German Airlines 24. Nokia (China) Investment Co Representative Office Ltd 9. BP (China) Holding Ltd 10. Carrefour (French supermarket) 25. Nivea Shanghai Co, Ltd 11. Deutsche

Bank Group 26. Philip Morris (China) 12. Deutsche Telekom Management Co. Ltd 27. Philips China Investment Co, 13. Ericsson (China) Co Ltd Ltd. 14. Ferrari Maserati Cars 28. PricewaterhouseCoopers China International Trading (SH) Co., Limited Ltd. 23 http://www.doksihu 29. Procter & Gamble ( China ) Ltd 36. The Economist (news agency) 30. PSA PEUGEOT CITROEN 37. Vodafone Beijing 31. Renault Beijing Office Representative Office 32. Reuters (news agency) 38. Volkswagen (China) Investment 33. Rolls-Royce International Ltd- Company Limited China 39. Volvo Car Corporation BJ Rep 34. Shell Companies in China Office (subsidiary of Royal/Dutch Shell 40. Wella Cosmetics (China) Co, Group) Ltd. 35. Siemens Business Communication Systems Ltd Banks, insurance companies: 1. ABN AMRO Bank 2. AEGON-CNOOC Life Insurance Company Limited 3. Allianz Dazhong Life Insurance Company Ltd 4. BNP Paribas (China) Ltd (The International Bank of Paris) 5. Fortis Bank SA/NV 6.

Lloyd's Beijing Representative Office Source: European Union Chamber of Commerce in China, The Wall Street Journal Europe, EuroBiz, Iron and steel, coal, machine building, armaments, textiles and apparel, petroleum, cement, chemical fertilizers, footwear, toys, food processing, automobiles, consumer electronics and telecommunications are the most important industries of China. Agriculture and industry have posted major gains especially in coastal areas near Hong Kong, opposite Taiwan, and in Shanghai, where foreign investment has helped spur output of both domestic and export goods. Nevertheless, analysts say that the growing shortages of electric power and raw materials will hold back the expansion of industrial output in the coming years. In China, much of manufacturing output has been produced by “collective” enterprises under the control of local governments in the past, particularly the township and village enterprises. Increasingly, output by private entrepreneurs or

foreign investors became 24 http://www.doksihu significant. These functioned in wholly owned enterprises or in joint ventures with Chinese interests. By 2002 the share of state-owned and state-holding enterprises in gross industrial output value had shrunk to 41%. These, controlled by economic ministries in Beijing, represented only 16% of industrial output. The share of tertiary industry in total output increased from around 21% of GDP in 1979 to over 30% ten years later. The relative share of the services sector has since remained steady, and the continued shrinkage in the contribution of agriculture has been reflected in a larger share for the industrial sector, which in 2002 accounted for around 51.1% of GDP a) EU25 merchandise trade with China by product (2004, value million €) Exports to China Machinery, transport equipment Manufactured goods and articles (e.g: textiles) Chemicals Inedible crude materials Food and alive animals Mineral fuels, lubricants and materials

Commodity, transactions Beverages and tobacco Animal and vegetable oils, fats and waxes TOTAL % Share of Imports total EU from Exports China % 30373 63.2 7.0 60686 Share of total EU imports 47.9 17.3 8393 17.5 7.0 55623 43.9 40 4350 2148 9.1 4.5 2.9 12.9 3921 1754 3.1 1.4 4.5 4.1 480 1.0 1.4 1692 1.3 3.3 104 0.2 0.4 1173 0.9 0.6 363 0.8 1.6 241 0.2 0.8 137 0.3 0.9 61 - 1.1 16 - 0.7 22 - 0.6 48039 100 5.0 126 737 100 12.3 Source: http://trade-info.ceceuint/doclib/docs/2005/march/tradoc 113366pdf There are two difficult and sensitive areas in the EU-China economic relations: trade deficits for the EU and technology barriers in China. Whereas the EU enjoyed a trade surplus with China at the beginning of the 1980s, the trade relations are now marked by 25 http://www.doksihu a sizeable and widening EU deficit, which is accompanied by the euro appreciation since 2001. The EU trade deficit to China was as big as €47.4 billion

(US$583 billion) in 2002, and it was around €64 billion in 2003. This represents the EU's biggest bilateral trade deficit, which the EU attributes to the obstacles in market access in China, such as the restraints on technology transfers. Agricultural products Energy Non-agro-raw material Office/telecomm. equip. Power/nonelectr. mach Transport equip. Chemicals Textiles and clothing Iron and steel TOTAL Exports % Rank in Share Imports to European of total from China trade EU China Exports 1216 2.5 9 2.08 2803 % Share Rank in of total European EU trade imports 2.2 3.54 4 104 529 0.2 1.1 24 1 0.37 0.40 1173 73 0.9 0.1 0.65 0.03 20 13 4380 9.1 5 5.43 40049 31.6 27.78 1 15179 31.6 2 10.15 6507 5.1 9.93 4 6933 14.4 4350 9.1 514 1.1 5 6 17 4.40 2.87 1.51 2613 3921 15996 2.1 3.1 12.6 2.67 4.55 22.99 5 5 1 1243 2.6 48039 100 2 7.52 622 0.5 4.99 126 737 1233 4.80 100 7 b) EU25 merchandise trade with China by product (2004, value million €) Source:

http://trade-info.ceceuint/doclib/docs/2005/march/tradoc 113366pdf The EU, among other countries, is particularly concerned about trading with China. Massive imports of goods are already arriving from the East-Asian country, let it be in the form of clothing, sports equipment, machines or even fake items. But while the “Made in China” tag swamps Europe, which looks enviously to China's booming economy, the rising Chinese middle class big spenders are seeking out luxury brands made in Europe. Perfumes from France, watches from Switzerland, fashion from Italy: many seem undeterred by the high prices abroad and unconvinced by the low prices at home. They 26 http://www.doksihu are, increasingly learning the worth of high quality and are quick to adopt it, maybe even get used to it. In the following paragraphs, the conditions and important developments of the main industrial sectors that represent a potential growth area for European firms will be discussed, mentioning at

places known international companies that operate in China: 2.1 Car industry The Chinese automobile market has been one of the classical investment sectors and the best source of profits for EU firms in recent years. It is estimated that at the end of the year 2002 about 60 percent of the car industry's FDI in China was made by European manufacturers, like Peugeot, Renault or Scania. In 2004, Volkswagen was the automotive-market leader, together with General Motors. With a 65 percent stake, the Japanese Honda says it is the first foreign company to own a controlling share of an auto-manufacturing venture in China. It exports to Europe and other parts of Asia. But outlooks are not promising for the coming months. Total vehicle shipments from manufacturers to dealers in China slowed by 10 percent in January and February 2005, compared with the same two months last year. A series of trends show that sales and profits of European manufacturers might be seriously hurt. Sales of

large cars are falling, mainly because of government restrictions on corporate and government purchases of fleets, but also because of higher gasoline prices. Profits lowered in 2004 for the 2nd consecutive year. The precise extent of the setback is still unknown because of difficulties in obtaining accurate sales data in China. DaimlerChrysler, another European manufacturer confirmed that they had sharply cut back car shipments to dealers to reduce inventories of unsold vehicles. 17 Peugeot, one of the first to enter the Chinese market, announced it was cutting its prices in an effort to boost flagging sales. It operates as a JV between China's Dongfeng Motor and France's PSA Peugeot Citroen. 2.2 Energy The association, of which the nation's three state-controlled oil companies, as well as more than 300 other companies are members, is pushing for greater participation of 17 Western carmakers struggle in China; The New York Times, 1st April 2005 27

http://www.doksihu private firms in the oil and petrochemical sector. The central government is officially encouraging private investment in the oil and gas industry, which has already been a promising investment area. But China is not doing it only from its own will On the one hand, overall energy supplies cannot keep pace with the inefficient consumption of the numerous factories that are out of date and the fast growing economy that is therefore suffering from power shortage. It will probably be relieved by 2006, as more power plants are expected to come on stream. 18 On the other hand, China has an increasing oil and petrochemical trade deficit, prompting greater urgency to conserve and find replacement fuel. This signals a lucrative market for EU firms that are either suppliers of crude oil, diesel and fuel, or offering and investigating alternative energy sources, like wind- and hydroelectric energy. For the companies, efficient usage of energy should be a priority. British

Petrol is also present on the market, but Royal Dutch/Shell is the largest European oil-company in China. It recently signed a contract with coal giant firms to get to work on a preliminary study, which will enable China in its plan to turn coal into diesel fuel. The 10-year project will cost as much as €8 billion China has the world's third-largest proved coal reserves with 12 percent of the world's total. The nation's reliance on foreign oil has risen to 41 per cent from 35 per cent in 2003. Predictions are that the reliance is expected to surpass 50 per cent by 2010 making up 1% of world petrochemicals demand, when imports are estimated to reach 200 million tonnes. By 2020 China will be consuming 16% of the world's energy 19 The government introduced saving measures, such as the fuel consumption of cars weighing 1 ton, which cannot exceed 8.9 litres per 100 kilometres The limit will be lowered to 8.1 litres by 2008, which already has manifested its negative

effects in the car industry. 2.3 Telecommunications, IT China has benefited from a huge expansion in computer internet use, not too many years after the boom in the developed world. In telecoms, the European companies are key players on the Chinese market, especially for mobile phones. The names of 18 Expansion rush gets part of blame for China's power problems (SCMP) 19 Pressure grows to conserve energy; SCMP, 14th March 2005, The European Union Chamber of Commerce in China 28 http://www.doksihu multinational companies like Nokia, Ericsson or the telecoms company Vodafone can be mentioned here, which are involved in operations in China. According to 2004 statistics, China ranks number one in the world for the number of fixed-line and mobile phone users, showing that the potential of the sector is immense. The number of Chinese mobile phone subscribers topped 320 million in October 2004, a growth of 55.081 million in the first 10 months of the same year, official’s

statistics showed. Nationwide, there are 248 mobile phones per 100 people, compared with 49 per 100 in the US, 64 in Japan and 83 in the UK, according to the latest data available. Meanwhile the number of text messages sent continued to soar, standing at 176 billion for the first 10 months, signalling a rise of 62 percent year-on-year. Growth in fixed line subscribers continued to trail mobiles slightly, standing at 310 million by October 2004, which works out to 24.5 fixed-line subscribers for every 100 people in China 20 The same positive prospects apply for the Internet. In 2001, business volume in the country's Internet industry totalled 7 billion yuan (€ 676 million) including Internet services, on-line advertising and e-shopping. China had 5435 million Internet users at the end of September 2002 21, which increased to 94 million in 2004 22out of the total population of 1.3 billion Due to low salaries, one cannot expect a boom here, but outlooks are promising from every

point of view in the long term. 3. An example of a new EU member state: Hungarian-Chinese trade Hungary is hoping to capitalize on the country's status as China's biggest trading partner among the new EU members. Last year, total trade turnover between the two stood at €2.83 billion, the vast majority of which (just over €25 billion) was accounted for Chinese exports. Over the last five years, Hungary’s trade with China has tripled and it is expected to grow even more rapidly. The Bank of China's decision in 2003 to establish its Eastern European HQ in Budapest might be a sign showing that other Chinese businesses will follow the bank's lead. The enlargement is changing China's view on Hungary, which it now regards as an integrated part of Europe. Also playing a role in the strengthening ties and understanding are the countries’ experiences about transforming a state-run economy to 20 EuroBiz Magazine, journal of the European Union Chamber of

Commerce in China, Briefs - Telecoms, Jan. 2005 21 Xinhua News Agency, China’s Internet Users Top 54 million, 28th November 2002 22 Xinhua News Agency, Parliament urged to enact law to protect minors, 13th March 2005 29 http://www.doksihu one governed by the principles of the market. The transition can be a difficult process and China has been looking closely at the experience of other economies like Hungary. Hungary was one of the first and most successful at privatizing the state owned sector in the 1990s. As a result there has been an exchange of views and experiences between Chinese and Hungarian officials for several years. On the macroeconomic and regulatory side, there has been a lively dialogue with ideas exchanged on privatization, health care reforms and social security among others. This suggests that China would like to avoid the negative effects of a market-oriented economy and investigate the extent to which it can apply free-market elements in its economy. On

the other hand however, China, who is more and more familiar with the capitalist elements integrated into its economy, might one day walk on the trail Hungary has chosen (which is considered to be successful) and become a fully market-oriented state, giving up its previous ideologies. Another boost to trade links is the agreement between Hungary's Malév airline and China's Hainan Airlines to begin direct code share flights between Beijing and Budapest in late-2004. The route is the first and, to date, only direct air link established between China and any of the ten new member states. 23 Perhaps the biggest hope for Hungary is to capture a slice of China's expanding overseas tourism. The ten new EU member states automatically gained "Approved Destination Status” for Chinese tourists, under an umbrella agreement between Beijing and the EU. Fuelled by its rapidly growing middle class, the annual number of outbound travellers from China has already surpassed that of

Japan, making the Chinese overseas tourism market increasingly lucrative. With their costs of living far lower than in Western Europe, Hungary will be keen to market itself as a European destination within reach of the Chinese pocket. 4. European investment outlooks in China The future of EU-China trade and investments looks bright for the European companies. Domestic and international services are increasingly available for private use. Today, companies can invest under the Qualified Foreign Institutional Investor scheme (QFII), which is limited to €660 millions, but Beijing is considering lifting this regulation. The unevenly distributed domestic system serves principal cities, industrial centres, and 23 EuroBiz Magazine, journal of the European Union Chamber of Commerce in China, East Meets East, May 2004 30 http://www.doksihu many towns, so extension to the west, to rural areas and smaller cities is to be considered. Key growth sectors for the future are: petrochemicals and

energy, automotive, and telecommunications. The corporate income tax is theoretically 33%. In practice, a raft of preferential policies reduces the tax paid by foreign investors. A 15% rate is applied in special economic zones, and a 24% reduced rate applies in 14 coastal open cities. The preferential policies for foreign enterprises will be phased out and replaced by a single tax rate for both domestic and foreign companies. 24 Tax breaks will still be offered for investment in the west and north-east and in high-technology industries. When China entered the WTO, it has committed itself to open up the market to foreign banks within five years, so banking authorities have only two and a half years left to upgrade their banking system to international standards. The China Banking Regulatory Commission (CBRC) is well aware of what has to be done and is taking the necessary measures. European banks can be quite optimistic about this, since many obstacles foreign banks encounter will soon

be removed. China has limited access to foreign banks by putting in place barriers like excessively high capital requirements. Last year, there was a first reduction of 100 million yuan (abbreviated as RMB), or €9.68 million, and other reductions are expected based on a comparison with what's being done in other places like the EU. The areas in banking with the most potential are Consumer Banking, Investment Banking, Fund Management and Banking Insurance 25. Some experts say that the whole interior market will only be freed of government restrictions on product, workforce and capital movement by 2030. V. DELICATE ISSUES So far, I have been describing the positive sides of the EU-China trade, talking about general business matters concerning consumer and industrial commodity exchanges. But along these, other types of trading forms exist which are either less publicly discussed or illegal and should therefore be stopped. In my opinion, only the two together can give a whole

picture about the subject of this dissertation. 24 The Economist Newspaper Group Ltd, Country Briefings: China 25 The Wall Street Journal Europe, Investors Stay Wary of Chinese Stocks, 8th March 2005, p.M1 31 http://www.doksihu 1. Arms trade (defence industry) Large European countries, including France and Britain, have resumed arms sales to China at an increased pace. In a one year period, European arms sales to China doubled to approximately €400 million, despite the arms embargo that has been in place since the Tienanmen square incident on 3rd June 1989. These countries are pushing the European Union to consider lifting the arms embargo against China, which would be part of a “strategic partnership” that the EU proclaimed at its summit meeting with China on 8th December 2004. At the summit in The Hague, Chinese Prime Minister Wen Jiabao urged the scrapping of the embargo, calling it “a relic of the Cold War” and saying it was inconsistent with the state of EU-China

relations. 26 However, the lifting implies complications because of two reasons. First, the decision would be against US security interests as well as those of Japan and Taiwan and second, China is creating a law that will authorise armed intervention in case if Taiwan were to declare itself independent. It might seem that the question is a choice between policies that promote the development of democracy in China or policies that support lucrative commercial contracts. But the EU takes both stances, arguing that China is already becoming a more open society and the shipments within the weapons trade will not include potentially harmful items, which could be used to deter and/or oppress pro-democracy movements, parties and the alike. Arms & ammunitions trade statistics (in euros) Year 1996 1997 1998 1999 2000 2001 2002 2003 Imports to EU15 Exports from EU15 from China to China 4,264,310 1,858,530 4,869,930 575,770 2,045,230 505,270 2,681,390 875,070 2,330,340 1,419,170 4,178,720

1,389,330 5,252,430 3,407,640 6,868,430 3,635,950 Source: DG Trade, European Commission, Statistical Tradeflow Database 26 The Wall Street Journal Europe, US Clouds EU’s China-Arms Plans 22nd March 2005, p.A2 32 http://www.doksihu The EU is elaborating a restricting code of conduct about the weapons exportation that would replace the terms of the embargo, giving enough guarantees for the rest of the world not to worry. The European countries have been evading their own arms embargo, so the new code of conduct for arms sales might bring accurate and compliable regulations. Under the planned EU policy, European weapons technology, hi-tech military know-how and firepower will flow to China at increasing levels and pace, much of it unlicensed or subject to “open” licenses which go mainly unreported. 27 The United States, who has played the role of peacekeeper in the Asian-Pacific region, is keeping a close eye on the developments. Of course, it doesn’t want the embargo to be

lifted, due to three factors. The first is that it is thought to be too dangerous The lifting might increase the likelihood that Beijing will acquire growing confidence in resolving the status of Taiwan with the use of force. If China went to war with Taiwan, the US would have to get involved, but who of course would not want to be faced with a well-equipped army. The second is that with a strengthened military build-up, China could take control of the region from the US. And the last one is that even if the lifting will not have serious consequences, only the EU would benefit from the defence market of China, leaving out the US. In fact, there are many ordinary Chinese people who remain in prison 25 years later for activities related to the Tiananmen protests. If they were asked, their opinion would probably be the clearest on this issue. Before taking a clear stance on this matter, one has to know that China is involved in a number of international disputes with most of its

neighbours. Whether it is the EU or any other nation that gives dangerous tools to China, the move is equal to strengthening its assertiveness of putting a faster end to these types of problems. To better examine the EU-Chinese arms trade issue, here are some of the disputes China is involved in, taken from a CIA database: 1. involved in complex dispute with Malaysia, Philippines, Taiwan, Vietnam, and possibly Brunei over the Spratly Islands; 2. most of the rugged, militarized boundary with India is in dispute, including Kashmir, the world’s most militarized territory. 27 The Wall Street Journal Europe, China’s Favorite Arms Dealers, 23rd February 2005, p.A6 33 http://www.doksihu 3. China and Taiwan continue to assert their claims to the Japanese-administered Senkaku Islands (Diaoyu Tai) with increased media coverage and protest actions; 4. certain islands in Yalu and Tumen rivers are in an uncontested dispute with North Korea and a section of boundary around Mount Paektu is

indefinite 5. China and Russia in 2004 resolved their last border dispute over islands in the Amur and Argun Rivers, but details on demarcation have not yet been worked-out; 6. boundary delimitation agreements signed in 2002 with Tajikistan but demarcation has not commenced; 7. agreements with Vietnam demarcating maritime boundaries and fisheries cooperation in the Gulf of Tonkin were ratified, and demarcation of the land boundary continues; 8. involved in dispute with Burma and Thailand over environmental and energy issues 2. Shadow economy, fake trade The high number of Chinese immigrants in Europe are also messengers of the real economic state of China. Many of them fled after the Tienanmen square massacre and set up their own businesses in the grey economy. Although they are successful at selling their articles, even the customs officials are not entirely sure how these get into Europe. To the greatest anger of famous and established brands, these articles are very often forgeries

of products ranging from clothing to perfumes and electronics, damaging authentic producers’ positions. At the same time, a growing number of Chinese concerns are investing heavily in research and development (R&D) in an effort to become global brands. The last thing they need is massive copies from counterfeiters Some industries in China, such as software, publishing, music, and film, are so decimated by counterfeiters that they have no choice but to take action if they want to see any profits at all. According to the American magazine BusinessWeek, popular Chinese films often have illegal copies being hawked on the street before the movies hit the big screen. 28 Foreign and Chinese investors alike should get together and step up the pressure on Beijing to sort out solutions for this problem or it will continue damaging the nation's competitiveness. The lost profits to the faked goods mean less return for 28 By Fighting Fakes, China Wins, Too; BusinessWeek, 31st January

2005 34 http://www.doksihu national firms, less capital to reinvest, to take on new staff, to increase salaries, thus to grow the business. Illegal drugs trafficking should also worry Europe. China is a major shipment point for heroin produced in the Golden Triangle of Myanmar (Burma), Thailand and Laos, and the world's largest natural source of ephedrine, from which methamphetamine is derived. It is also a source country for chemical precursors The punishment for illegal trafficking in China goes as far as executions: at least 100 people are reported to have been executed for drug trafficking in 1999. 29 China made "major achievements" in drug control in 2004 with more cases solved and suspects arrested than in 2003, resulting in a large increase in the street price of narcotics, according to the commission. In 2004, 108 tons of heroin were seized, more than 3 million pills of ecstasy, 2.7 tons of methamphetamine, and 160 tons of chemicals for drug manufacture.

China had about 791,000 drug addicts at the end of 2004, of which nearly 86 percent are addicted to heroin. 30 3. Environmental issues A side effect of the development of China is the deterioration of its environment. China's economic growth is outpacing environmental protection efforts and drenching the country in out of control acid rain. The loss of agricultural land to soil erosion and desertification has been one-fifth of the total since 1949 and economic development is going to further intensify that. The State Environmental Protection Administration says that nationwide, acid rain cost the Chinese economy 110 billion yuan (€ 10.64 billion) a year, equivalent to nearly 3 percent of the country's gross domestic product. The two main sources of acid rain are China's growing number of cars, and the rapidly increasing consumption of cheap, abundant coal, which fires three quarters of the country's power plants. Another long-term threat to growth is air

pollution. Beijing says it will intensify efforts to stimulate growth through spending on infrastructure, such as water supply and power grids, and poverty relief and through rural tax reform. But this is not enough Since the loosened and attractive regulations were among the reasons for firms from the EU to start trading with or in China, they should now pay increasing attention to their activity 29 30 BBC, China's drugs boom, 6th June, 2000 www.chinaviewcn 2005-04-05 35 http://www.doksihu to be environment friendly besides only concentrating on profits if they want to think in long term and promote their quality standards. VI. CONCLUSION In my opinion, there is an interesting but logical mutual dependence between the economies of the EU and China. There are two parties in this game, which have the common interest of solving their economic and social problems and see the solution in mutual cooperation. One of the parties is the EU, but within that, I would like to

distinguish between the EU15, which is struggling with its sluggish economic growth and high unemployment, and the 10 new member states, which are lively and are slowly catching up with their developed neighbours in living standards. The new members include in their number some economic dynamos, which could be strengthened by trading with such a resourceful trading partner like China, helping to fuel a continued growth. In 2003 the Baltic state of Lithuania for example saw its economy expand by just short of 9 percent, a rate of growth that the rest of the European countries haven’t seen for a long time. However, the 10 countries are considered poor at present and have the common aim to loosen the gap between them and their western neighbours. There are also problems that concern the EU as a whole. Scientific data shows that the economic consequence of today’s demographic development is that the increase in retired people will require more pensions, and there will be fewer actives

who produce and who actually support the pension system. To reassure today’s prosperity and economic stability, Europe should attain a fertility rate of 3.8% (3 or 4 children per family), or postpone retirement to the age of 73 to assure productivity, or make an appeal to no less than 188 million immigrants from anywhere in the world, 30 million between 2000 and 2020 according to a 400 page study entitled the “World trade of the 21st century” of a French institution (Institut Francais des Relations Internationales, Ifi), in spite of the benefits of EU enlargement. 31 These matters have already been discussed in the different national governments like the German, French, British or Italian, but no long-term decisions have been made. And when it came to changing the pension scheme, the workers went on strike. 31 Le Monde, Edition:17th January 2005, La réforme des retraites, casse-tête d’une Europe vieillissante 36 http://www.doksihu As for China, the third party, it has

fast developing regions on the coast and is “wealthy” as a whole, but if we take into consideration its population and continental regions, we are truly faced with a poor, emerging country with many areas that necessitate improvement. China’s declared aim is to emerge from poverty and become a true power, to which it needs close trading partners. If it succeeds, the Big China region (China, Hong Kong, Macao and Taiwan) will be the number one player in world economy by 2050, according to the analysis “World trade of the 21st century”. China could be the true winner, accounting for 24% of the global economy by 2050. 32 According to the laws of economy, it was a logical outcome that the interests of the EU on the one hand and China on the other, met, and resulted in facts such as them becoming major trading partners. The solution for solving the economic problems and with it the social problems of both camps, and their desire to be recognised as a superpower could be achieved in

intensifying trade and investment, using the abundant opportunities there are in Central and Eastern Europe and in China. For the EU, the stake is even more significant, since it must prevent the negative outcomes of today’s demographic, social and economic tendencies. By reviving Western-Europe’s economy, I think that those tendencies could be stopped or at least slowed. The main goal now for the EU should be to profit the most from the Chinese growth, by first becoming the most important investor in key growth fields. Corporations from the EU should keep a stable position in branches like energy, financing, transportation, automotive industry, IT and telecommunications. As gargantuan manufacturing plants move east, Europe will need to rediscover its niche where flexibility will be needed. Taking forecasts into consideration, the EU’s economy in my opinion cannot afford to lose out from the coming growth in these fields. As long as the two sides handle relations from a strategic

and long-term point of view, their economies should thrive, and China's progress will only offer more opportunities for economic co-operation. While a century ago, Western-Europe was the hub of superpowers that kept the whole world under their influence, this role is now lost and will be completely out of reach if today’s Europe is carried only by current evolutions and doesn’t make efforts and take advantage of the opportunities offered by the commerce between the EU and China. 32 Institut Francais des Relations Internationales, World trade of the 21st century 37 http://www.doksihu VII. BIBLIOGRAPHY [1] - CIA–The World Factbook 2004, http://www.ciagov/cia/publications/factbook/ [2] - China; The Statesman’s Year-Book 1996-1997, p345-356 [3] - A sárkány nyomában; Manager magazine, January 2005, p.20-23 [4] - Kínát nem lehet megállítani; Világgazdaság, 26th January 2005, p.2 [5] - Italy Joins Countries Asking EU For Quotas on Chinese Textiles; The

Wall Street Journal Europe, 8th March 2005, p.A2 [6] - Investors Stay Wary of Chinese Stocks; The Wall Street Journal Europe, 8th March 2005, p.M1 [7] - Chinese Regulators Weigh Caps On Executive Compensation; The Wall Street Journal Europe, 8th March 2005, p.A2 [8] - China’s Favorite Arms Dealers; The Wall Street Journal Europe, 23rd February 2005, p.A6 [9] - US Clouds EU’s China-Arms Plans; The Wall Street Journal Europe, 22nd March 2005, p.A2 [10] - UK Export Restrictions Hamper China Trade; The Wall Street Journal Europe, 23rd February 2005, p.A2 [11] - China: To slow or Not to Slow?; The Wall Street Journal Europe, January 2005 [12] - Boeing Makes Asia Top Priority In Airbus Battle; The Wall Street Journal, 4th February 2005 [13] - India v China; The Economist, 21st - 27th June 2003, p.12 [14] - Emerging-market indicators: Oil reserves; The Economist, 21st - 27th June 2003, p.98 [15] - The Economist, China - The bulldozing of Silk Alley, 15th - 21st January 2005, p.51

[16] - Country Briefings: China; The Economist Newspaper Group Ltd http://www.economistcom/countries/China/ [17] - UBS asks China to increase quotas, Financial Times, 13th March 2005 [18] - China warns against renminbi revaluation, Financial Times, 14th March 2005 [19] - Western carmakers struggle in China; The New York Times, 1st April 2005 [20] - EU ’to deny China market status’; BBC News, Business, 28th June 2004 [21] - China’s Internet Users Top 54 million; Xinhua News Agency, 28th November 2002 38 http://www.doksihu [22] - Parliament urged to enact law to protect minors; Xinhua News Agency, 13th March 2005 [23] - EU-China trade to benefit both; China Daily, 9th October 2004 [24] - Kína lesz a világ vezető gazdasági hatalma?; www.eurohu, 16th May 2003 [25] - Overview of China’s economic reforms and WTO negotiations; http://europa.euint/comm/trade/issues/bilateral/countries/china/chrhtm [26] - Agreement on Trade and Economic Cooperation between the European

Economic Community and the People's Republic of China (1985) [27] - China Statistical Yearbook 2004 [28] - http://www.china-windowcom/china market/china real estate/china-realestate-market--2shtml - China real estate market – Economic development; National Assembly of Realtors (American based real-estate association), 20th August 2004 [29] - EU-China Relations, http://europa.euint/comm/trade/issues/bilateral/countries/china [30] - Market Access Database, DG Trade, European Commission, http://mkaccdb.euint/ [31] - Prodi on Europ-China Trade and Economic Relations; EuroBiz Magazine (Journal of the European Union Chamber of Commerce in China), May 2004 [32] - East Meets East; EuroBiz Magazine (Journal of the European Union Chamber of Commerce in China), May 2004 [33] - Q&A - Serge Janssens de Varebeke (Chief Representative of Fortis Bank Beijing Representative Office); EuroBiz Magazine (Journal of the European Union Chamber of Commerce in China), May 2004 [34] - As

Europe's media exalt China's boom, it's also time to take stock, writes Cornelia Reiwald; EuroBiz Magazine (Journal of the European Union Chamber of Commerce in China), January 2005. [35] - http://trade-info.ceceuint/doclib/docs/2005/march/tradoc 113366pdf; detailed EU-China trade statistics [36] - Embassy of the People’s Republic of China in the Republic of Hungary http://www.chinaembassyhu/ [37] - China-EU Relations, homepage of the Mission of the People’s Republic of China to the European Communities http://www.chinataiwanorg/web/webportal/W5042136/A5046302html 39 http://www.doksihu [38] - Delegation of the European Commission to China, Chronology of EU-China relations, http://www.delchnceceuint/en/eu and china/Milestoneshtm [39] - Histoire-Le monde de 1939 á nos jours, collection J. Marseille, édition Nathan [40] - Ici, Carrefour signifie bonheur et prospérité, Figaro Entreprises, 27th January 2004 (French financial newspaper) [41] - La réforme des

retraites, casse-tête d’une Europe vieillissante; Le Monde, 17th January 2005 [42] - Jean François Malterre, Christian Pradeau: L’Union Européenne en Fiches, third edition, p36-44, p84-132, p190-214 [43] - Pressure grows to conserve energy; SCMP, 14th March 2005, The European Union Chamber of Commerce in China [44] - By Fighting Fakes, China Wins, Too; BusinessWeek, 31st January 2005 VIII. ANNEXES 1. China fact sheet Official name: President of the PRC: Prime Minister: Legislative board: Population: Unemployment: Surface area: Arable land: GDP: People’s Republic of China (PRC, Zhonghua Renmin Gonghe Guo) HU Jintao (since 15 March 2003) WEN Jiabao (since 16 March 2003) National People's Congress or Quanguo Renmin Daibiao Dahui (2,985 seats) 1,298,847,624 ( 22% of the world population) (EU: 380.6 million) urban: 37.7% rural: 62.3% growth rate: 0.57% (2004 est) 0-14 years: 22.3% 15-64 years: 70.3% 65 years and over: 7.5% median age: 31.8 years infant mortality: 25.28

deaths/1,000 live net migration: -0.4 migrant(s)/1,000 population (2004 est.) Literacy rate: 90.9% 10.1% (2003 est) (EU: around 9%) 9.6 million sq km (6% of the world) (EU: 3.3 million sq km) 15.4% % (around 7% of the world arable $6.449 trillion (2003 est) 40 http://www.doksihu GDP growth: GDP/capita (purchasing power parity) GDP/capita (market exchange rate) Public debt: Composition of the economy (2003): Household consumption (1998): Inflation : Currency: Exchange rates (1US$=) : Reserves (foreign and gold): Export partners: Import partners: Motorways: Airports: 9.5% (2004) US$ 5,225 (2003)(EU: US$25,700 in 2004) US$1,118 (2003) 30.1% of GDP (2003) (EU: 63,8% in 2004) agriculture: 14.8% industry and construction: 52.9% services: 32.3% lowest 10% of population: 2.4% highest 10% of population: 30.4% 1.2% (2003 est) Ren Min Bi (RMB) also called: Yuan 8.2783 (1999), 82785 (2000), 82771 (2001), 8.277 (2002), 8277 (2003), US$412.7 billion (2003), US$610 billion US 21.1%, Hong Kong

174%, Japan 13 6% South Korea 4 6% Germany 4% Japan 18%, Taiwan 11.9%, South Korea 10.4%, US 82%, Germany 59% (2003) 1,402,698 km 507 Sources: World Bank, Chinese data, CIA World Fact book, The Economist Newspaper Group Ltd. 2. Part of the WTO tariffs schedule of China 41 http://www.doksihu Source: http://europa.euint/comm/trade/issues/bilateral/countries/china/index enhtm 42