Economic Relations between the EU and China: Evolution of an Exclusive Partnership?

In order to improve national welfare, China in the 1950s joined the "socialist camp". It tried to rely on its own resources and management concepts in the 1960s and 1970s, and finally began to integrate into the market-led world economy in the 1980s. The last development approach has proved to be the most successful, at least according to "market economy" criteria.

China has never defined national welfare solely in terms of the well-being of its people. It has always defined it in terms of the country's aim to be amongst the most powerful nations of the world. Attempts to reach this goal with the help of the Soviet Union were abandoned when it became obvious that this economic development formula would result in preserving China's status as a developing nation, behind the Soviet Union. Then, when two decades of concentrating on its own strengths rendered China an outsider unable to benefit from the dynamics of its neighbours, the government changed its development strategy again. From the 1980s, economic relations with market economies such as Japan, the European Union, and the United States have been fully used to catch-up economically and improve its international position.

Since nations can benefit from others' progress, economic development is not usually a zero-sum-game. However, the advance of China, a veteran of great-power games, is affecting the ranking of world powers. Japan's outstanding role in East Asia is beginning to fade and China may soon overtake the US.¹ As China's progress is occurring with increasing military might and territorial, historical and political disputes, many observers in the US and Japan are sceptical of China's "peaceful rise". The EU however seems to be less worried by it and is inclined to cooperate in all areas with China in order to generate mutual economic and political benefits. It is generally believed that China's increasing economic integration into the world economy will make any military conflict too costly for the government. Thus it is considered unlikely that China would ever launch an attack anywhere.

The focus of this paper is EU-China economic relations. Despite the fact it does not always speak with a single voice and important issues are left to the member states, the "EU" here is generally treated as entity. The first section of this article provides a general account of EU-China investment and trade relations then looks into the question of whether or not EU investment, due to its specific patterns could provide China with particular benefits which might increase China's interests in intensifying its relations with the EU. The second section looks into recent trade issues between the EU and China against the background of the increasing EU investment in China and China's rather sensitive relations with other important partners. The handling of these issues by the two partners may indicate the emergence of a specific or even exclusive partnership between the EU and China.

Patterns of EU Investment in China

The EU, which is the largest point of origin for foreign direct investment (FDI) in the world, has been a significant source of FDI for China. European firms have given China high priority as an investment destination and have led the way in creating some of the largest joint venture projects, such as the giant Volkswagen project in Shanghai.

However, EU investment has not outperformed the investment of other important partners. At the end of 2003, the EU's total FDI amounted to USD 37.9 billion compared to USD 44.1 billion from the US and USD 41.4 billion from Japan. As shown in Figure 1, the EU's share of total FDI was 7.6 per cent — below the corresponding shares of the US (8.8 per cent) and Japan (8.3 per cent).

These shares, as is well...