All at sea

Beijing’s decision in June to reintroduce gradual exchange rate reform by removing the US dollar peg was generally welcomed in Europe. Reducing the EU’s trade deficit with China has become a key measure of success for Brussels in managing its relationship with Beijing. For some Europeans the renminbi is a critical part of the problem.

Those Europeans are in a minority, however. It is generally accepted that currency valuations are one small part of a complex set of factors that create the imbalances between the EU and China – and that renminbi revaluation would not have a significant effect on these imbalances.

As a result, the renminbi has not been the political lightning rod in Europe that it is the US, and the EU has preferred to focus its attention on other areas, such as market access in China.

The new European Commission which came into office earlier this year was keen to engage positively with Beijing, with Trade Commissioner Karel De Gucht calling for new thinking on the economic relationship between the two sides. In reality, tensions simmer below the surface concerning issues that have been on the table for years, with little signs of substantial progress in the offing.

Export bright spot

Paradoxically, in contrast to the views held by most Europeans, trade with China is a bright spot in what is otherwise a gloomy picture for the EU. In 2009, exports to China grew by 4.1% when those to every other major market fell substantially. Imports from China fell by 13.4%, resulting in a significant decline in the deficit to US$169 billion from US$215 billion the previous year.

Furthermore, according to EU trade statistics, in the first four months of 2010 exports to China have increased by 42.4% year-on-year. Given the low base point created by the fall in exports in early 2009, this might not seem extraordinary. More remarkable is that exports in the first four months of 2010 were 30.3% above their pre-crisis levels for the same period in 2008.

And while EU imports from China recovered from the depths of 2009, they are only marginally higher than pre-crisis levels.

That the EU appears to be doing very well in China, and is probably on course for another significant reduction in its deficit, has not yet penetrated into policy thinking in Brussels. It is true that the benefits are not spread evenly. Not surprisingly, Germany has been doing very well. Its exports to China rose by 54.8% in the first four months of the year, but other major nations such as France and Italy did not perform nearly as strongly.

Apart from the weakness of the euro in recent months, the statistics indicate that the EU is benefiting from strong growth in China, especially in capital investment. Most market watchers expect the mainland economy to continue its rapid expansion, which will continue to pull in imports from Europe. Meanwhile, with prospects of growth in the European economy meager at best given the Greek sovereign debt problem and the policy responses in the EU, imports from China are unlikely to recover the rapid expansion of the pre-crisis years.

Slow on the uptake

Taken together, these statistics offer a stark portrait of how the trading dynamic between the EU and China has changed. Yet, as the internal and external rebalancing forced by the crisis continues, there is little evidence to suggest that either side has begun to come to terms with where this may be leading their relationship.

Engulfed in crisis, Europe will once more be focused on its own internal problems. In this respect, despite the good intentions that motivated De Gucht’s call for new thinking on the EU-China economic relationship, words are unlikely to crystallize into concrete policies. The string of trade defense measures adopted by Brussels – anti-dumping duties remain in place for Chinese-made shoes, new tariffs have been introduced in recent months chiefly targeting metal pipes and rods, and various investigations into other products are underway – would not be described as progressive.

The EU continues to pressure China on its usual list of demands, and Beijing responds in kind. Rather than new thinking, the signs are that there will only be more old thinking, unless both sides recognize the world has changed, and attempt to break the deadlock of the past.