Editor s Introduction

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2 Editor s Introduction After China joined the World Trade Organisation in 2001, it formalised its relationship with the EU in 2003 by issuing an EU Policy Paper which was the first of its kind. It outlined the China-EU partnership in three parts; Part One: Status and Role of the European Union Part Two: China s EU Policy Part Three: Strengthen China-EU Cooperation in All Fields Premier Wen Jiabao and European Commission Chairman Romano Prodi launched the new decade of Sino-European collaborations. Every year, a China-EU Summit has taken place concentrating on the three pillars of political, economic and people-to-people exchanges with the view to forging and growing the China-EU Comprehensive Strategic Partnership. Subsequently, China has become the EU's second largest trading partner while the EU has been China's top trading partner. Annual trade volume between the two has exceeded US$550 billion and there have been over 5 million visits between the two sides each year. With trends like this, the Chinese government reassessed the relationship and in 2014 issued further guidelines with the paper Deepen the China-EU Comprehensive Strategic Partnership for Mutual Benefit and Win-win Cooperation. Despite these affirmative gestures of cooperation, the EU has still denied China Market Economy (ME) status and to date there is still no bilateral free trade agreement between China and the EU. It is on the backdrop of the China-EU Strategic Partnership that Dr. Reilly s paper examines the competition between some European states seeking competitive advantage when trading with China. Dr. Reilly does raise the spectre of political engagement being used as leverage and addresses some of the frictions, challenges and threats to this relationship. The paper gives examples of some European states trying to gain advantages in bilateral trade and attempts to assess if these achieve the results intended. Even though EU guidelines are in place for areas such as human rights or the independence of Tibet, the paper makes the argument that economic priorities of individual states often supersedes stated guidelines. Dr. Reilly points out that China has taken limited retaliatory measures where it has disagreed with the actions of some European states. The paper concludes that China s economic strategy has achieved success in the short term which can be attested to its trade balance over the past decade. Of all 28 European states, only Germany has a trade surplus with China. The thrust of Dr. Reilly s argument is that it is the EU states themselves, in their quest for competitive advantage, who undermine EU solidarity and common positions but without any obvious benefits. As a consequence, the Chinese appear able to play EU member states off against one another successfully to achieve their own objectives. European states are beginning to see the folly of their own strategy and it appears the states are changing their approach. Jim Coke (Guest Editor) PhD Candidate jim.coke@kcl.ac.uk Lau China Institute King s College London Strand London WC2R 1LS

3 Competitive Nationalism And The EU s China Strategy Dr Michael Reilly Visiting Fellow, Institute of European and American Studies, Academia Sinica, Taiwan.

4 Introduction Commercial rivalry between European countries for trade in East Asia has long been a fact of life and remains so to this day. Portugal established a colony at Macao and a settlement at Nagasaki in the 15 th century while the Dutch, Spanish and Portuguese all briefly vied to control Taiwan in the 16 th. In days gone by the competition often involved open warfare. Today, Europe s relations with the countries of East Asia more usually involve political engagement in the form of strategic dialogue or partnership and other agreements. As in the 19 th century and earlier, however, the real driving force behind this is commercial opportunities for European businesses. Nowhere is this more apparent than in the EU s relations with China. In recent years this competition for business has seen the German Chancellor publicly differ with the European Commission over trade policy towards China and the UK ignore the objections of its long-time ally the United States, to become the first western country to apply to join China s new multilateral development bank, the Asian Infrastructure Investment Bank, or AIIB (Financial Times, 2015). Human rights, once central to the EU s values and objectives appear to have taken a back seat. In 2014 George Osborne, the UK s Chancellor of the Exchequer (Finance Minister), visited Xinjiang province just after a Chinese court had sentenced Uighur academic Ilham Tohti to life imprisonment on the charge of promoting separatism. Although Osborne claimed he had raised concerns about human rights in private, the clear inference drawn was that the UK government condoned the sentence handed down to Tohti, especially as there was no obvious policy reason for Osborne to have visited Xinjiang at all (Reilly, 2015). The following year President Xi Jinping of China made a state visit to the United Kingdom. The visit was acclaimed by both sides as signalling a golden era in bilateral relations but led one think tank to observe that in recent years: Economic interests and the wish for Chinese investment came at the expense of other foreign policy items, and EU member states fought for Chinese attention and funds, showing little restraint in their public statements and bilateral initiatives (ECFR.EU, 2016). But does political engagement like this achieve the results intended? Or is such behaviour of primary benefit to China rather than EU countries themselves, and in their desire to win lucrative business deals do they risk undermining wider EU policy objectives with little or no compensating long-term benefit for themselves? Media reports of perishable imported goods rotting in Chinese warehouses while awaiting customs clearance following a bilateral dispute can be cited to support arguments that a publicly critical attitude in dealing with China is likely to be counter-productive. Much better, so the same arguments go, is to deal with disputes in private so as not to lose business to competitors. Chinese statements and announcements help generate suitable headlines to add weight to such concerns. But do strong public rhetoric, or occasional token measures, actually translate into real commercial setbacks? By analysing the bilateral trade performance of the main EU economies with China this paper seeks to show that on the contrary, there is very little evidence of political disputes with China, even major ones, having anything more than a temporary impact on normal trade patterns and that even this is unusual. By behaving in the way they do, European politicians are therefore undermining EU strategy but without securing any meaningful compensating national gains. The ultimate beneficiary of this behaviour is China, not the individual country concerned.

5 The EU and China a relationship lacking strategic content? The EU-China relationship is of major importance to both sides. China is the EU s second largest trading partner after the US and the EU is China s largest export market. In recognition of this and seeking to develop it further, the two sides have agreed a 2020 Vision in which they pledge to enhance further their trade and investment relationship towards 2020 in a spirit of mutual benefit by promoting open, transparent markets and a level-playing field (European Commission, 2016). Together with a separate set of guidelines on the EU s policy in East Asia, these are intended to set the overall framework within which EU member states pursue their own relations with China. The background to the guidelines is of particular relevance to the wider argument for they were originally drawn up after an attempt by leading member states to seek commercial advantages and favours from China almost prompted a crisis in both EU-US and EU-Japan relations. In 2005 Germany and France took the lead in pushing for the EU to lift its Arms Embargo against China. Like the similar one of the US, this had been introduced following the crushing of the Tiananmen Square protests in The move, which was most probably driven by a desire to win more business for French and German companies, sparked alarm in the US, Japan and elsewhere before it was dropped following heavy pressure and increasingly stern warnings from Washington. That matters reached this stage was widely seen as a reflection of the EU s lack of any strategic interest in or understanding of North East Asia, its member states seeing the region only through the prism of commercial opportunity. In the aftermath and in an attempt to try to avoid any such repeat, the EU agreed the common guidelines for its member states, designed to provide a broad orientation for the EU s approach to East Asia, across the full range of its activities. (Council of the European Union, 2012) Even so, there are those who argue that the handling of issue has left a residue of mistrust about European behaviour in Washington to this day. But the EU-China relationship is not without friction. In areas such as human rights and the rule of law it has been described as famously testy and difficult, even while the EU is frequently perceived to be slower and more circumspect than the US in expressing concerns about Chinese behaviour (Brown, 2015). The common guidelines were meant to address this by setting a publicly agreed framework for the EU s member states in their policies in East Asia. But the behaviour of Germany and the UK, as well as that of others, suggests that member states pay lip service at best to the guidelines and that whatever the EU s formal position, the driving force for all of them in their bilateral dealings with China is the winning of business. Critics worry that undue focus on the business relationship will make traction on other issues such as human rights or security even harder, as China tries to play individual EU member states off against one another, to weaken the impact of the collective dialogue and strengthen its own position. Defenders of the business first approach argue that China has a fundamentally different political structure to Europe and that the very different role of the state there in managing not just the economy but much of the commercial structure therein, makes such engagement an essential aspect of winning business.

6 EU commercial rivalry and the case of Taiwan After three decades of double-digit growth in China, it is easy now to forget that at the turn of the century its bilateral trade with EU countries was modest by today s standards and that for many, Taiwan was actually a more important commercial partner. The efforts of European politicians to help their companies win contracts there forms both an interesting case study on its own and a precedent for more recent behaviour in respect of China. Following the UN vote to transfer recognition of China from Chiang Kai-shek s government in Taipei to the PRC in 1971, most western European countries closed all forms of government offices in Taiwan. Francoise Mengin has shown how subsequent competition between them to win large contracts there in the 1990s led them initially to engage at a hitherto unprecedented political level, with the opening of quasi-non-governmental trade offices, staffed in practice by diplomats, and numerous Cabinet level Ministerial visits. She concluded however that the main beneficiary of this competition was Taiwan itself, rather than the individual countries or their companies: At the beginning of the 1990s, Taipei s government has been capable of strengthening [its] external relations by establishing the island as an essential market for western key national industries the overbidding attitude among European countries has been at the core of this process (Mengin, 2002) (emphasis added). For the Europeans, success when it came was not without cost. In 1991, France won a contract to supply 6 Lafayette class frigates to the Republic of China Navy in Taiwan, followed by an order from the air force the following year for 60 Mirage jet fighters. China reacted by closing the French consulate and trade office in Guangzhou and excluding French companies from bidding for some high-profile contracts, including in connection with the Guangzhou metro system. As part of the price for resolving the conflict, France issued a communique in which it recognised the PRC as the sole legal government of China, taken to include Taiwan, something it had not previously done. China had reacted similarly after the Netherlands supplied two submarines to Taiwan in 1981, downgrading diplomatic relations for three years and excluding Shell from bidding for some exploration licences (Mengin, 2002). But Mengin also showed that despite heavy political lobbying and some high profile successes, European companies often failed to win contracts more widely in Taiwan because they had failed to develop the close private relationships that were essential to success. The changing nature of Chinese imports Since the 1990s China has continued to grow strongly and its bilateral trade with individual EU countries now far exceeds that of most of them with Taiwan, fuelling the already mentioned competition for business. High level visits routinely see major contracts announced or signed while government leaders appear increasingly wary of offending China, lest they damage business prospects by doing so. So it seems appropriate to ask whether lessons have been learnt from the experience of the 1990s or whether history may be repeating itself. Is there clear evidence that political engagement and lobbying helps build business relationships and trade with China? Short term variations in trade figures in the aftermath of high level engagement, positive or negative, might be expected. But what of the longer-term impact? Do China s import figures show any

7 discernible shift in preference to or away from EU countries as a result of their policies towards it? Is there any indication of a long-term shift in business to or away from a particular country or group of countries that can be attributed to political relations with that country? And conversely, does taking a more critical stance vis a vis China have any long term negative impact on business? By today s levels, the bilateral trade of most EU member states with China before 2000 was relatively small, with much of it concentrated on major infrastructure development projects. In constant prices expressed in US dollars, China s imports from the EU in 2000 were more than three times higher than they had been a decade earlier. In 2004 the dollar value of its imports just from the UK was greater than it had been from the entire EU twenty years earlier, and in 2000 the value of those from Germany was greater than those from the whole of the EU in 1990 (International Monetary Fund. Statistics Dept, 2006). So in the 1990s, success or failure in winning a single contract might have a relatively large impact on the bilateral trade figures and this is reflected in significant annual variations in China s imports from any one country during the decade. By contrast, over the 15 years from , as China s economy has continued to grow strongly so it has also become broader in its composition, with a much greater variety of imports in consequence. These now include far more consumer goods, components, machinery and agricultural produce than twenty years ago. China also joined the WTO in December 2001, following which overt trade discrimination against any other WTO member should have become harder. The trend of China s import figures over this period should therefore give a reasonable indication of the impact, if any, on bilateral trade of the political relations between China and that country. Given the fears that are regularly expressed about the risk of political differences leading to a loss of lucrative business, one might reasonably assume that serious Chinese displeasure would show up in lower import figures for that particular country, or at a minimum imports from that country would grow more slowly than those from competitor nations (Bloomberg, 2012). Similarly, given the arguments in favour of high level political engagement, one should expect to see this resulting in the country concerned outperforming its competitors in terms of the growth of its trade. There are two important caveats to this. First, the precise composition of China s imports from different countries will vary, so not all countries are directly comparable. One would not expect to see the same trend between the figures for an exporter of natural resources such as iron ore, oil or gas and one of manufactured goods. So it would be hard to draw meaningful comparisons between Saudi Arabia s or Australia s export performance and that of Germany, for example. Secondly, as China s economy grew more diversified one would expect to see greater diversification in the sources of imports and type of imports. As an example, the rise of China s electronics industry has meant an increase in the import of components to be used in finished goods assembled or manufactured in China for subsequent export. Neither of these caveats apply in the case of the EU countries. The main European economies are broadly similar in structure, exporting overwhelmingly manufactured goods, especially machinery, transport equipment, notably automotive products and pharmaceuticals, just the sorts of areas in which one would expect to see Chinese imports growing rapidly in line with its economy. (A partial exception is the UK, for which financial services is a major export). Indeed, this similarity accounts for much of the competition between them to win business deals in China. But the structural similarity of their exports also means it should be easier to identify any trends or clear divergences in terms of Chinese orders from one or other that may be attributable to political factors. The sources of China s imports In 2000, China s top five sources of imports were, in descending order, Japan, the EU, Taiwan, the Republic of Korea and the US. In 2015 these remained the top five but the order had

8 changed. The EU was now the first, followed by Korea, the United States and Taiwan, with Japan now only the fifth source (International Monetary Fund. Statistics Dept, 2006). 1 Over this period the types of exports from the EU, US and Japan were broadly similar: manufactured goods, often competing with one another, for example machine tools, aircraft or automobiles. The cases of Korea and Taiwan are somewhat different. Korea and China only established diplomatic relations in 1992 and much early trade growth came from a conscious effort on the part of both countries to lessen their respective dependence on Japan. For most of the period Taiwan was the largest investor in China (a not insignificant element of it in partnership with Japanese companies) and a high proportion of Taiwan s exports to China were and remain components being shipped to Taiwanese owned factories for incorporation into finished goods for subsequent export. These have formed a steadily growing proportion of all Taiwan s exports to China over time, currently accounting for around 60% of the total. (Electronic equipment and components also account for around 40% of Korea s exports to China). It is far from irrelevant to the wider argument however that the relative decline in Taiwan s position came despite a major improvement in cross-straits relations after 2008 and the signing of a number of bilateral agreements intended to improve co-operation and remove barriers to trade. Chart 1. China s Imports from Japan, USA and the EU, Source: IMF, Direction of Trade Statistics, retrieved 16 May 2016 Chart 1 shows how China s imports from the EU, Japan and the US grew over this period. The EU saw the value of its imports into China increase more than six-fold over the 15 year period. Taken 1 IMF: Direction of Trade Statistics. WTO statistics give a slightly different picture. Most notably for 2014 (the most recently available WTO figures) these show Japan as still the third largest source of merchandise imports for China, followed by the USA and Taiwan. WTO figures for market shares are also somewhat smaller 12.4% for the EU in 2014, for example

9 on its own, this would seem to vindicate arguments in favour of political engagement. But the US, which has consistently taken a more critical stance towards China, saw a similar increase while the relative consistency of performance of the EU, US and Japan until 2010 is also apparent. Japan s relatively poor performance since then has gone hand in hand with a deterioration in bilateral relations with China over the Diaoyutai/Senkaku islands east of Taiwan. This seems to support those who advocate avoiding raising contentious issues with China, lest it affect business. But this is a very specific bilateral dispute over territorial claims, an issue that does not arise in the EU s dealings with China. It also needs to be seen in the context of Japan s overall exports, which fell markedly over the same period. From a peak of $110.53bn in 2008, for example, its exports to the EU had fallen to $66bn in 2015, less in dollar terms than the value of its exports to the EU in Between 1997 and 2015 its overall share of world trade in goods almost halved, from 6.7% to 3.83% (International Monetary Fund. Statistics Dept, 2006). Setting aside the case of Japan however, despite the growth in import values the total share of the Chinese market taken by both the EU and US actually declined slightly over the period in question. For the US, it dropped from 9.94% in 2000 to 9.04% in 2015, while for the EU its share of the Chinese market dropped from 13.70% in 2000 to 13.05% in This is to be expected as China s economy grew, arguably it is surprising that the fall in share for each was not greater. In 1990, for example, the EU had taken more than 18% of China s imports while the US share has dropped steadily from 14.78% in In other words, as China s economy has grown bigger and more diverse, so its import patterns have grown more stable. (Despite the improvement in political relations, Taiwan shared with Japan a more marked fall in market share from 11.32% in 2000 to 9.02% in 2015 and throughout the period its exports to China were growing more slowly than those from the rest of the world generally). Chinese reaction to European defence sales to Taiwan in the 1990s has already been mentioned. The US continues with such sales, mandated to do so by Congress under the Taiwan Relations Act. During this period the US announced a number of such agreements, the biggest in 2001 but with others in 2008 and Chinese reactions were predictably negative and publicly strident. Bilateral military co-operation was suspended after each agreement was announced and China s representatives warned that it would not do business with companies involved in the arms sales. Despite the angry rhetoric, the figures show that there was no discernible impact on US imports into China. Anecdotal evidence from US defence companies with commercial business interests in China also suggests that any sanctions were purely token and had no material bearing on their ability to pursue business opportunities in China. Indeed, while economic retaliation was reportedly considered in 1992 following the sale of F-16 fighters, it was apparently judged too risky so not pursued, a policy that appears to have held since (US Taiwan Business Council & Project 2049 Institute, 2012). 2 Chinese displeasure and its impact on trade Europeans are likely to argue that the US is a special case and that China would react much more strongly to any repeat attempts by them to sell weapons to Taiwan. Past Chinese reaction 2 MFA spokesman Hong Lei, as quoted in Wall Street Journal, 17 December 2015; interviews in Beijing with a Boeing employee (July 2010) and former Raytheon employee (March 2011). Based on SIPRI s ranking of the largest US defence companies, at least 5 of the top 7 Lockheed Martin, Boeing, Raytheon, L3 and United Technologies - are all actively engaged in non-defence business in China

10 does appear to have been effective in deterring EU member states from considering any further defence sales to Taiwan although France and the Netherlands both continue to benefit from orders for spare parts and upgrades for the equipment sold in the past. But there are other areas too where China might be expected to object to EU policy or behaviour. These are laid out in its 2014 policy framework paper on relations with the EU. In it, in addition to relations with Taiwan, China calls on the EU to properly handle Tibet-related issues, including not allowing leaders of the Dalai group to visit the EU or member states and to stop using individual [human rights] cases to interfere in China s judicial sovereignty and internal affairs. (Xinhuanet, 2014) As with arms sales to Taiwan, one would therefore expect China to object strongly to EU behaviour which does not accord with this position and indeed this has frequently been the case. Two examples occurred at the very start of the period, in The first and potentially much more significant was when France agreed to supply an observation satellite Rocsat 2 to Taiwan. China argued that the technology was dual purpose, suitable for military as well as civilian use and put pressure on France not to go ahead with the deal. A German company, Dasa, had first been selected as supplier but reportedly pulled out following similar pressure. After France went ahead anyway, China retaliated by delaying the finalising of a number of large contracts and excluding the French oil company Total from bidding for a tanker terminal project in Shenzhen (Mengin, 2002). The second example from later the same year also involved relations with Taiwan but not this time arms sales, when the UK allowed former Taiwanese President Lee Teng-hui to pay a private visit, despite Chinese objections. In retaliation China cancelled a planned visit to Beijing by a UK Treasury minister. Several EU heads of state or government met the Dalai Lama at least once in this period despite Chinese opposition. Chancellor Angela Merkel of Germany was the first to do so, in September China protested vigorously and cancelled a planned meeting of Justice Ministers of the two countries. Chancellor Merkel was also the first EU leader to announce she would not attend the opening of the Olympic Games in Beijing in August 2008 because of concerns over China s Tibet policy. In May 2008 Gordon Brown of the UK met the Dalai Lama, then in December the same year President Nicolas Sarkozy of France, Polish Prime Minister Donald Tusk and EU Commission President Barroso all met him in the margins of an EU meeting in Poland. Again there was a vocal Chinese reaction and a planned Summit with the EU was cancelled in protest. Finally in 2012 the UK Prime Minister, then David Cameron, again met the Dalai Lama. This time the Chinese political reaction was arguably stronger, with all meetings between Chinese ministers and their British counterparts cancelled for more than a year. This was the last meeting any EU leader has had with the Dalai Lama to date. David Cameron had also been rebuked publicly by the then Chinese Premier Wen Jiabao in 2011 for the manner in which he had raised human rights issues during bilateral meetings (Financial Times, 2011). These instances apart, the second half of the fifteen year period has been notable more for uncritical engagement, with high level visits in each direction focussing on trade and investment, sensitive topics like human rights reportedly discussed in private and no further high level meetings with the Dalai Lama. Again the lead on this approach appears to have come from Chancellor Merkel, who paid 7 official visits to China between 2005 and July 2014, more than any other EU government leader. She was usually accompanied by large business delegations and headlines about major contract successes for German companies. Perhaps most notably, during the second of her two visits in 2012, China signed an agreement to buy 50 Airbus aircraft, reportedly worth up to $4bn. This came after the head of Airbus had raised concerns earlier in the year that a disagreement between the EU and China over the former s emissions trading scheme for airlines had put up to $12bn of potential new orders at risk (Reuters, 2012). Since then, the UK in particular appears to have been eager to play catch-up, PM Cameron s visit to China in 2013 preceding

11 President Xi Jinping s state visit to the UK in 2015, with frequent other bilateral ministerial visits too. In broad terms therefore, the period appears to have seen a progressive reduction in EU countries taking action that might incur Chinese displeasure and a corresponding steady increase in high level bilateral contacts, in which contentious issues are only touched on in passing, if at all. As already noted, the EU s share of China s imports remained broadly stable throughout the period, their value rising in line with the overall growth of China s imports, so overall trade does not appear to have been influenced by bilateral relations. If we break down China s imports from the EU by individual member state, we find that they were dominated throughout the period by the EU s four largest economies: France, Germany, Italy and the United Kingdom. Collectively these four countries share of total imports from the EU into China has stayed fairly constant over time: in 1990 they accounted for 72.48% of all China s imports from the EU and in %. In between, they dipped to 68.23% in As Chart 2 shows, however, most of this was due to a pronounced steady rise in German exports, both the growth and market share of which far exceeded that of the other three countries. In contrast, the respective shares of EU exports taken by France, Italy and the United Kingdom all declined slightly over time. Chart 2. China s imports from France, Germany, Italy and the UK, Source: IMF, Direction of Trade Statistics, retrieved 16 May 2016 If we then compare the import figures with instances of Chinese displeasure, the only occasion on which there may have been an apparent correlation between a political argument and trade relations was in 2009, following President Sarkozy s meeting with the Dalai Lama, when France s exports to China fell. But this was also a time of global recession following the international financial crisis. China s overall imports in 2009 were over $100 billion less than they had been the previous year and as we see in Chart 2, Italy, Germany and the United Kingdom also saw their exports to China

12 decline, albeit to a lesser extent. By contrast, despite the angry public reaction following the sale of the Rocsat 2 satellite to Taiwan in 2000, China s imports from France increased from US$3.78bn in 1999 to US$3.95bn in 2000 and $4.23bn in The rate of growth also started to pick up thereafter. Similarly, despite the row with the UK in 2012 after the Prime Minister s meeting with the Dalai Lama, the trend of Chinese purchases from the UK continued unchecked; indeed in 2012 it actually bought more from the UK than from Italy for the first time since So too with Germany, where frosty relations in 2007 and 2008 had no visible impact on trade, if anything the rate of growth of imports from Germany picked up slightly. In short, there is no clear evidence in the case of the EU that Chinese political displeasure adversely affects trade, other than through possible targeted token measures such as the exclusion of companies from bidding for certain big-ticket projects. Even in these cases, it can only be a matter of conjecture as to whether the companies concerned would have won the contracts even in the absence of political disputes and the specific recorded instances all pre-date China s accession to the WTO. The obvious counter argument is that avoidance of criticism on its own is not sufficient; high level political engagement with China is necessary, not simply to avoid losing business but to seek advantages for the country concerned, to try to win deals or contracts that in the eyes of the politicians involved and their lobbyists might otherwise go to another country. Here too, however, the evidence is at best inconclusive. Maybe Chancellor Merkel s visits in 2012 helped restore the growth path of imports from Germany after a dip in 2011, and maybe they were a factor in the marked rise in imports from Germany in But the trend of German trade performance with China was already well established before she paid her first visit in Neither that visit, nor her next in 2007, appear to have had any impact on the longer term pattern which has been apparent from before So too in the case of the UK, the Prime Minister and Chancellor of Exchequer might argue that their proactive engagement with China since the 2012 row contributed to the above trend growth in But imports from France also grew during this period, while none of the major EU countries escaped the impact of the overall drop in Chinese imports the following year. Furthermore, although the German figures were continuing to grow in absolute terms, and notwithstanding the visits of Chancellor Merkel, Germany s share of Chinese imports from the EU declined, from 44.15% in 2010 to 41.85% in 2015, the 2.3% fall almost exactly matching the UK s 2.32% increase in market share over the same period. Of the four main EU economies, the one with the lowest political profile in terms of relations with China was Italy, no doubt reflecting domestic pre-occupations. Yet until 2012 China was importing more from Italy than from the UK. More recently, the Italian government has been willing to see Italian companies compete for and win defence related contracts in Taiwan, so far without provoking an adverse reaction from Beijing (Reuters, 2014). This suggests therefore that not only is the potential adverse impact of any disagreement with China often over-stated and usually confined to political gestures but also that any positive impact of attempts actively to seek China s support is likely to be small. Evidence can certainly be cited in favour of the counter argument, notably the marked decline in Chinese imports from Japan since While this did coincide with a marked deterioration in bilateral relations, however, wider economic circumstances surrounding Japan were also undoubtedly a factor, reflected in the relative stagnation of EU trade with Japan, especially the decline in Japanese exports and Japan s falling share of world trade generally. As also noted above, against this is the relative decline in Chinese

13 imports from Taiwan despite a much warmer political atmosphere between the two sides of the Taiwan Straits. There have been other well publicised cases of China retaliating against countries over political differences. In 2010, after the award of the Nobel Peace Prize to dissident Liu Xiaobo, China vented its displeasure against Norway by suspending negotiations on a bilateral Free Trade Agreement. Norwegian passport holders were also excluded from short term visa free privileges introduced for most European visitors in Although media reports spoke of an immediate significant fall in Norwegian imports into China in 2011 however, the IMF statistics record these as being at a then record high, falling in 2012, as did those from some other countries, only to rebound strongly to a new record by 2014 (Financial Times, 2012; International Monetary Fund. Statistics Dept, 2006). Similarly, any dip in imports from France and the UK that might be attributed to the 2008 meetings with the Dalai Lama can only have been very short term as from 2009 imports from both France and the UK quickly resumed their previous growth patterns. Conclusion From China s perspective the strategy may be considered a success. Occasional token acts to demonstrate displeasure, accompanied by hints or threats of more severe action have ensured that for the most part EU countries do not challenge its policies and behaviour on anything more than a token basis. EU governments have gone along with this approach for commercial reasons but they are likely to secure at best only a short term advantage, while allowing China and Chinese companies to play one state off against another to China s own ultimate benefit, undermining both the credibility of the EU and possible longer-term strategic benefits by doing so. It is possible that EU governments are finally becoming more alive to the implications of their policy and that this beggar-my-neighbour approach may be changing. In a review of the EU s China strategy on 18 July 2016, the Council of the European Union affirmed its expectation that relations with China should be truly reciprocal and underlined that the promotion of human rights and the rule of law are a core part of its engagement. Very soon afterwards, Theresa May, the new UK Prime Minister following the outcome of the referendum on EU membership of 23 June, called for a review of the Hinkley Point nuclear power plant project, a flagship of her predecessor s engagement with China and a move that prompted the Chinese ambassador to warn publicly that the bilateral relationship was at a crucial historical juncture (Council of the European Union, 2016; Financial Times, 2016). But a cynical reaction to the Council s conclusions would be that this was simply business as usual collectively EU member states adopt a firm stance, only for individual members to then undermine it in their efforts to seek national advantage. This is far from being a comprehensive study. Ideally a longer time frame should be analysed although as already noted the issue has only risen to prominence in recent years in line with the growth in the Chinese economy. It also examines trade in goods only, not in services. Nor does it consider investment flows, an issue of especial interest to EU political leaders in recent years as they try to deal with the aftermath of the global financial crisis. Overseas Foreign Direct Investment from China has increased rapidly in recent years, from just $48bn in 2011 to $188bn in 2015, so the desire of government leaders to entice it to their countries is perhaps understandable (Le Corre & Sepulchre, 2016; OECD, 2017). But if the competition for business orders is any guide, here too EU member states risk simply competing against one another for the same stock of funds.

14 Yet for as long as China s growth depends even in part on exports and access to advanced technology, Europe will be indispensable to China, as a market for one and a source of the other. This should give the EU leverage, with strength coming from joint decisions and actions. Instead the Chinese appear able to play EU member states off against one another successfully to achieve their own objectives. In consequence, and as in the case of Taiwan in the 1990s, political relations with China are dictated not by the outcome of deliberate policies and consultation but by competition between EU member states for shares of the China market, shares however that are decided primarily by business need and have little or nothing to do with political preference (Mengin, 2002).

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16 Reilly, M. (2015, September 25). Why did George Osborne visit Xinjiang? Retrieved May 20, 2016, from China Policy Institute: Reuters. (2012, August 30). China buys 50 Airbus jets during Merkel visit. Retrieved February 2017, from Reuters. (2014, October 31). Taiwan shipbuilder, Lockheed Martin to build minesweepers for navy. Retrieved February 2017, from Reuters: US Taiwan Business Council, & Project 2049 Institute. (2012). Chinese Reactions to Taiwan Arms Sales. Retrieved February 2017, from Xinhuanet. (2014, April 2). New China-EU partnerships focus on peace, growth, reform, civilization. Retrieved February 2017, from Xinhuanet:

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