European Union and China Drifting Apart

While the buzz from Beijing about the visit of the President of the European Union, Jose Manuel Barroso of Portugal, appears to presage a closer embrace between Europe and China, the fact is that the European Union and China are drifting apart.

After years of intensive attempts to reach out to China, the EU feels irritated by Chinese refusal to concede on currency and trade matters, complicating relations between the two and bringing on a worrying period in terms of economic and political relations.

While the world has focused on China’s gaping trade deficit with the United States, Europe has run up a huge deficit. Europe today is China’s biggest trade partner, importing €192 billion in goods in 2006 compared to €63 billion in exports to China, resulting in a €128 billion deficit in 2007, with the deficit growing more than €15 million every hour. The EU's trade gap with China reached €170 billion in 2007, nearly 30 percent higher than 2006.

Now Europe is making clear to the Chinese that there has to be a fundamental change. In a speech in Beijing several months ago, Barroso said that ''the considerable and growing trade deficit is adding to EU citizens’ anxiety about globalisation and is growing in political importance."

Indeed, there is a risk that the economic emergence of China is regarded by Europeans as a threat. The European Union is uncomfortable with China's growing diplomatic assertiveness. While partially adapting to western criticism, it continues relentlessly to open doors, in Africa and elsewhere, seeking natural resources and to alter the balance of power.

The European Union does not intend to turn away from dialogue between the two economies. Nonetheless, the message carried by the Europeans to Beijing is that the EU wants China to further open its economy to European businesses. The biggest problems remain the lack of transparency in Chinese regulations and the lack of protection against violations of intellectual property rights and accusations that the Chinese are not forcefully combating the widespread counterfeiting and export of fake goods.

The root of the European trade deficit lies in China's policy of holding the yuan broadly stable against a basket of currencies, which they contend has resulted in a vast undervaluation against the euro of 20 to 25 percent. European politicians and business leaders have called on China to allow the currency to appreciate more rapidly but China appears unlikely to budge, fearing that a rapidly fluctuating currency would cause unemployment and market instability.

The yuan has been allowed to float up gradually against the dollar over the last two years, but the euro has risen as well. The Chinese government says it won’t be pushed into faster currency reform. A European study estimates the loss to European companies because of restricted access to the Chinese market will be about €20 billion.

This is a contentious issue. The Europeans accuse China of using unfair and disruptive trade practices such as dumping goods on European markets at below production prices and exporting subsidized goods. European complaints to the WTO are expected to follow. But in European eyes it appears that the Chinese leadership is not especially impressed by the political anger coming from the west.

Officially Barosso was in Beijing to hear that China intends to deal with the problems but in reality few expect action to follow their statements. Conversely, the Chinese object to European access limitations to the export of sensitive technology and demand that those limitations should be lifted.

Lately the Chinese list of ''strategic economic sectors'' has been expanded in which foreign investment is officially ''unwanted''. To this list was the whole sector of raw materials added.

The European Union expects the Chinese government to lift restrictions against European firms investing in China, including mandatory transfers of technology and enforced joint ventures. There are few world markets that grow every year at more than 1 percent, and China is dramatically one of them.

The Europeans hope that the Chinese government will realize that it is in China's interest to avoid a confrontational European China policy. The worsening of the European-China relations is also linked to the end of the honeymoon period in relations in which the Germans and France have remained the principal parties in relations between Europe and China. With the Chinese economy growing rapidly, China feels that the market is attractive to the outside world and therefore is trying to promote the local economy.

A more self-confident Europe will have to demonstrate a more aggresive way of dealing with China if it wants its China policy to be credible and will have to determine in what direction this relationship should take. Both China and the European Union need to keep a cool head and try to find a way to bridge their expectations gap.

Israel Rafalovich, is a journalist and analyst based in The Hague, The Netherlands, he covers Europe and the European institutions in Brussels and writes a weekly column on international relations.