Towards constructive engagement

Within two years after the Tiananmen massacre all the sanctions imposed on

China had been abandoned, the only exception being the arms embargo. The

end of the Cold War, the revival of reforms in China, and the growing economic

interaction between the EU and China induced a development of the relation.

The prominence of some member states’ economic interests towards China

Starting from the early 1990s, the Commission began to work on the two

increasingly pressing issues in the EU’s relations with China, which had begun

to bedevil officials and member states alike: the EU’s lesser position in the

Chinese market vis-à-vis the United States and other Asian countries17 and the

widening trade deficit between the EU and China.18

Starting already from October 1991, the Joint Committee, established by the

1985 Cooperation Agreement, resumed its work. High on the agenda was the

establishment of a working group which would be responsible for studying the

growing trade imbalances between the two entities and proposing adjustments.

Although no punitive measures were contemplated, it soon emerged that

Europeans attributed such a state of affairs to the over-protectionist Chinese

market and the unfair government subsidies for export.

As the EU was losing economic opportunities in China, and in order to

enhance the EU’s presence in the country, the Commission little by little began

to appreciate the importance of integrating China within the international

trading system. This aimed at reducing the advantages acquired by the US and

China’s Asian partners through their prolonged interactions with the country

and creating a level playing field.

Accordingly, in the first part of the 1990s, the Commission signalled a new

supportive attitude towards China’s entry into the GATT/WTO. As far back as

1992, European leaders and Commission officials began to talk about using

transitional periods to smooth China’s accession. Although at an early stage

these proposals were not met with favour by Washington, they nonetheless

marked the inception of a more flexible European approach towards China and

17

For example in 1993 European investments ranked only fifth behind Hong Kong, Taiwan, the US and Japan.

18

Markus Taube, ‘Economic Relations Between the PRC and the States of Europe’, in The China Quarterly, Special Issue, Europe and China, 2002.

eventually represented the biggest contribution of the EU to China’s entry into

the WTO.19

The necessity to integrate China was justified by the rising fears of some

member states for their increasing trade deficits with China and their complaints

about the unfairness of the Chinese business environment. The role of the

Commission was to promote at EU level the positions of some EU member

states, i.e. those which had more economic relations with China, in particular

Germany, France and Italy. Similarly, and with hindsight, it is possible to argue

that, before that was even the case, the Commission began to present China as a

growing economic power, a menace to the EU’s market but also an opportunity

for European businesses (see Tables 1 and 2).

Table 1: The EEC/EU trade with China (1980-2008)

Years Export to China from the EU China share in the EU’s export Imports from China China share in the EU’s import Balance 1980 1.70 0.80% 1.9 0.70% -0.20 1985 6.50 1.70% 3.8 1% 2.70 1990 5.30 1.30% 10.6 2.30% -5.30 1995 14.70 2.60% 26.3 4.80% -11.60 2000 25.50 2.70% 70.3 6.80% -44.80 2005 51.80 4.84% 158 13.40% -106.20 2008 71.50 5.65% 228.7 16.10% -157.20

Sources: Eurostat, External and Intra-EU Trade 1958-2006, 2006 and Eurostat, External and Intra-EU Trade Monthly Statistics, Issue No. 4/2008. Own calculations. ECU/Euro billion.

Table 2: The EEC/EU FDI to China (1985-2008)

Years Total FDI EU share of China FDI

1985 165.33 8.45% 1990 159.78 4.58% 1995 2,131.31 5.68% 2000 4,479.46 11.00% 2005 7,440.00 10.28% 2008* 12,120.00 9.00%

* For the year 2008 the data also include FDI in Hong Kong. Source: National Bureau of Statistics, various years. Own calculations. US$ million.

19

In fact, a different story, which was willingly underplayed by Commission

officials, explains the commercial and investment issues raised by some

member states. First the deficit figures were not shocking, in particular if

compared to the trade deficits of other partners of China. Klaus Rupprecht goes

so far as to suggest that in Europe the “trade deficit with China has never led to

political problems, due to the fact that trade with China makes up only a

relatively small percentage of the overall EU trade”.20 Second, the deterioration

of the terms of trade for the EU was closely linked to the delocalisation of

European firms in China. Third, China’s prominence in the GSP also played an

important role. According to Rupprecht’s calculation “the value of imports to

the EU member countries that fell under the GSP scheme in 1995 amounted to

53.6 per cent of the total EU imports from China”.21

Important historical reasons explain the European delay in investing in

China. In particular, the developments in Europe after the fall of the Berlin

Wall, which included the speeding up of the process of European integration,

the German reunification as well as the new possibility to access Eastern

European markets. These all absorbed substantial amounts of capital and

management capacity that otherwise might have been allocated to ventures in

China.

Therefore it can be maintained that the Commission’s rhetoric and actions

were mostly supporting the stances of China’s major partners in the EU rather

than a shared European interest. In particular the story that has been described

above can easily be interpreted as a story mainly concerning Germany, France,

the UK, Italy and the Netherlands. The Nordic member states as well as Ireland

20

Klaus Rupprecht, ‘European and American Approaches Towards China as an Emerging Power’, China Aktuell, 2001, pp. 170-171.

21

and Spain only developed significant economic interests towards China in the

late 1990s. Similarly, not all the member states had worrying levels of trade

deficit with China.

While stressing the economic dimension in order to please the most powerful

member states and simultaneously increasing its powers, the Commission

sidelined human rights concerns, embarking on a rhetoric which premised the

development of human rights as a result of the economic improvements. From

the very start the Commission’s narrowly focused economic approach

encountered some resistance from the European Parliament, which asserted a

more principled position on China in line with its growing involvement in

human rights and democracy. Commissioners were often called to answer

Parliamentary questions on China and the whole Commission was sometimes

criticised by the Parliament for its “soft” approach, which paid little attention to

human rights and democratic concerns.22