Commerce: Tempestuous trade winds

Posted on May 28, 2012

European Commission President Jose Manuel Barroso (R) gestures as he speaks to reporters as Chinese Premier Wen Jiabao (L) looks on during a press conference at the Great Hall of the People in Beijing on February 14, 2012. Chinese and EU leaders met for a major summit set to be dominated by Europe's debt crisis, as an increasingly worried Beijing considers coming to the rescue of the embattled continent.©AFP

Fright and flight: Wen Jiabao, Chinese premier, and José Manuel Barroso, European Commission president, at this year’s Beijing summit

In February, the EU’s two most senior officials arrived at a Beijing summit with an expensive favour from their host in mind: tens of billions of euros to help douse the flames of the continent’s debt crisis.

But even as José Manuel Barroso and Herman Van Rompuy, the respective presidents of the European Commission and the European Council, were trying to charm Chinese premier, Wen Jiabao, bureaucrats back in Brussels were plotting something completely different. They were gathering evidence for an unprecedented trade case that some observers believe could dramatically escalate tensions with China.

    EU and China charts ThumbnailClick to enlarge

    It centres on allegations that Beijing illegally subsidised its fast-growing telecommunications equipment companies, including Huawei Technologies and ZTE, helping them grow at lightning speed to snatch business from western rivals such as Nokia and Alcatel.

    The case is a departure from the EU’s focus on low-end goods such as textiles and ceramics, and targets conspicuous high-tech businesses. If it were to go forward, it would also mark the first time the EU has opened a trade investigation on its own initiative, and not at the behest of a European company. The Chinese, says Jonathan Holslag of the Brussels Institute of Contemporary China Studies, would “view this as a declaration of war”.

    Brussels’ conflicting impulses illustrate the growing conundrum posed by China for crisis-hit Europe. On the one hand, the EU has been forced to go cap in hand to Beijing to help with its debt crisis.

    At the same time, European manufacturers – and some politicians – are increasingly demanding that China be confronted over trade practices they believe are contributing to the bloc’s double-digit unemployment rate and putting entire industries at risk.

    “The economic crisis is making a lot of member states concerned about protecting their remaining industries and that is making China look more like a competitor to them than an economic partner,” Mr Holslag says.

    That change in perception is underscored by the EU’s trade deficit with China, which more than tripled to €168bn between 2000 and 2010. European companies have also become increasingly alarmed as Chinese rivals bite into higher-value industries.

    “We are facing several issues with China, and we are not giving strong enough answers,” says Daniel Caspary, a German member of the European parliament’s trade committee, which has gained new authority over EU trade policy. “We missed lots of opportunities during the last 20 or 25 years when China was opening to set up red lines, and now it’s becoming more difficult every day.”

    There are signs Brussels has begun to heed that call. In recent months, Karel De Gucht, the EU’s blunt-speaking trade commissioner, has confronted China at the World Trade Organisation, accusing it of hoarding the rare earth minerals that are vital for making smartphones and other high-tech goods.

    EU-China disputes: The complexity of complaining

    After months of behind-the-scenes lobbying, SolarWorld, the German manufacturer of solar panels, says the European solar industry is now backing a trade complaint it is determined to launch against its Chinese competitors.

    SolarWorld has already prevailed in the US with a similar complaint that accused the Chinese of benefiting from illegal government subsidies to undercut domestic manufacturers and gobble up the market.

    But support for SolarWorld is hardly universal. The legion of smaller companies that install panels on rooftops and buildings are balking, worried that the imposition of tariffs by the EU would only push up the cost of their products and hurt business. Companies that supply equipment to Chinese companies that manufacture the panels are also concerned.

    Together they have formed the Alliance for Affordable Solar Energy, a coalition that has managed to delay – if not derail – SolarWorld’s plans.

    The industry’s divisions are a reminder of the complexities of mounting trade complaints in a globalised age in which supply chains are flung around the world.

    While SolarWorld points to a recent rash of bankruptcies among fellow European manufacturers undercut on pricing by the Chinese, such as Germany’s Q-Cells, Afase has argued that its constituents account for the majority of the European solar industry’s 300,000 jobs.

    Adding to the complexity for EU policy makers are the bloc’s environmental goals. The EU has made a commitment to derive at least 20 per cent of its electricity from renewable sources of energy, such as wind and solar power, by 2020 – a goal that might prove easier to achieve with cheap imports.

    Milan Nitzschke, a SolarWorld vice-president, warns that European consumers will pay a higher price in the long run if the Chinese take over the market and then push up prices. “It’s a threat to the complete European industry,” he says. “It is only beginning with solar energy. The rest of the renewable energy industry will be next.”

    The commissioner has also accused China of illegally subsidising businesses and has proposed new legislation that would allow retaliation against governments that do not open their public procurement to European companies. A case against China’s manufacturers of solar panels appears imminent.

    “What we are seeing is much tougher rhetoric and a much greater desire from some European industries to take action,” acknowledges one EU official. “In most cases, China is their most dangerous competitor.”

    Chinese companies, such as Huawei and ZTE, deny accusations they are breaking trade rules, saying they are simply more agile than competitors. They argue the disputed subsidies are akin to the ones the EU lavishes on its own companies.

    The timing of the dispute has proved awkward. While Mr De Gucht was gathering evidence, the EU was seeking to dispatch a technical team to Beijing with a portfolio of government bonds the Chinese might consider purchasing, according to Chinese officials.

    The EU has also sought to enlist China in a campaign to increase the International Monetary Fund’s capital base by €700bn, which would give it more firepower to battle the crisis. Those tasks have become more urgent as the crisis has flared anew, leading to fears that the brush fires in Greece could spread to Spain and Italy.

    Looming over the negotiations – even when it was not explicitly mentioned – has been China’s persistent pursuit of an EU trade concession it has long coveted: market-economy status. Such a designation would make it far more difficult for European companies to lodge successful complaints against Chinese rivals.

    Under the terms of its WTO accession agreement, China is expected to receive market-economy status automatically in 2016. Still, even if only for symbolic reasons, the wait has rankled in Beijing and some EU officials late last year believed they might secure financial support as a quid pro quo for granting the concession early.

    But both sides have since cooled on the idea. In spite of Mr Wen’s occasional public pronouncements, Japan – not China – has emerged as a far bigger buyer of European government bonds, according to several EU officials. Japan has also come through with a $60bn pledge to the IMF.

    Chinese officials were apparently fearful of the public outrage if they were seen using hard-won savings to prop up the wealthy nations of Europe. As Wu Hailong, the new Chinese ambassador to Brussels, told reporters in March: “Many of the richest countries [in the world] are in Europe. So in the end, I think Europe has the resources to properly resolve the debt crisis.”

    For Europeans, the allure of a quick rescue has run into the political reality of having to secure approval from member states and the European parliament. “It would be political suicide,” says one diplomat. “Who could be seen selling a policy for a pile of money?”

    Beneath the politics, EU-China trade remains robust. It is set to surpass €500bn this year – a record high – with the bloc now ranking as China’s largest trading partner. That, in itself, provides a rationale for the two sides to repair any holes in the relationship, according to Fredrik Erixon of the European Centre for International Political Economy, a Brussels think-tank.

    But Mr Erixon also points to a host of daily frustrations on both sides. “Co-operation on trade and investment is fraught with misunderstanding, offended egos, discontent and anger,” he says. “In some quarters, frustration is reaching boiling point.”

    Further straining the relationship has been the EU’s controversial policy of forcing all airlines to pay for greenhouse gas emissions on flights to and from Europe. The US, Russia and India have all objected to what they consider an extraterritorial tax grab. But China has gone further by ordering its carriers not to comply and threatening to cancel more than $14bn in aircraft orders from Airbus, the European aerospace company.

    Such hostility is a far cry from the optimism that prevailed when Britain’s Peter Mandelson served as EU trade commissioner from 2004 to 2008 – the prosperous years before the debt crisis.

    Under Mr Mandelson, Brussels and Beijing waged a notable war over textiles that threatened to deprive millions of European women of bras. Yet the EU operated under the assumption in those years that China would gradually reciprocate its own liberalisation.

    Instead, European executives bemoan continuing restrictions. One particular source of irritation is the requirement that makers of wind turbines and other innovative products transfer valuable technology to local joint-venture partners. Companies that were once seen as pioneers in promising industries, such as Denmark’s Vestas, had to cut European jobs because of Chinese competition.

    At the same time, Chinese companies have begun to draw attention by purchasing small and medium-sized German companies whose talents and technologies may help their new owners move into more specialised manufacturing. Recent targets include construction group Putzmeister Holding and auto-parts company Kiekert.

    “In the long term, China’s influence in Europe will not be from any help they gave in the eurozone crisis. It’s going to come from buying companies here with world-class technology,” a western diplomat says.

    Mr De Gucht is credited with opening Belgium’s trade policies when he served as the country’s foreign minister. But he has taken a colder view of China in his current post. “He’s a free-trader at heart, but he feels cheated by the Chinese,” explains Mr Holslag.

    Under Mr De Gucht, the EU has imposed its first anti-subsidy duties against China for supplying below-market loans and property to a big producer of glossy paper. In practice, the penalties for subsidy cases are no more onerous than those for the far more prevalent and easier to prove offence of dumping.

    But by targeting state subsidies – the economic arrangement at the centre of almost all state-owned or controlled Chinese companies – Mr De Gucht is going after the heart of the Chinese system that has boosted the country’s exporters. One De Gucht aide last year likened the paper case to “launching a torpedo against the mother ship”.

    So far the torpedo has proved a damp squib, with observers arguing that Europe has not gained any leverage to press its demands.

    Working against Mr De Gucht is the EU’s unwieldy nature. Its 27 leaders demand tough action on China during private meetings in Brussels but tend to embrace Beijing on state visits, appealing for big contracts and investments, diplomats say.

    To Brussels’ irritation, Beijing has encouraged this by routinely circumventing the commission to deal directly with national capitals.

    Europe’s corporate sector has also been fickle. Companies have besieged Mr De Gucht with complaints about their treatment in China but almost never go public – let alone put their name to formal complaints – for fear of being locked out of China’s market.

    Mr De Gucht has seized on the notion of a case initiated by Brussels as a way to shield companies.

    But the EU’s defence comes when Europe’s standing in the world has been brought low by its inability to get its own fiscal house in order. Chinese officials do not seem to be trembling.

    “The problem more or less rests with Europe itself,” responds a Chinese diplomat. “I don’t think it’s fair to look at China as a scapegoat.”

    Additional reporting by Kathrin Hille

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