Außenhandelspolitik, EU-Staaten, China, Indien, Foreign trade policy, EU countries, India

Peter Mandelson

English

Research Papers in Economics

CESifo Forum 1/2007 3
Focus
EUROPE’S TRADE POLICY
WITH INDIA AND CHINA
PETER MANDELSON* 
E
urope’s political contact with the civilizations of
India and China began with trade. Dutch mer-
chants opened up trade with the coastal Indian states
and then China, and the trade that followed fed a
growing European fascination with Asian cultures
and aesthetics. From India, European merchants
brought textiles, ivory and wooden furniture. From
the Middle Kingdom, the blue and white porcelain
so ubiquitous in seventeenth century Europe that it
became known – and is still known – simply as
China. Four hundred years ago India and China
accounted for half of the world’s economic output.
They remained the two largest economies in the
world until the nineteenth century.
From an historical perspective, the economic rise of
India and China looks more like the reassertion of
an older and deeper economic order briefly inter-
rupted by the colonial period, Cold War and eco-
nomic autarky in the twentieth century. From the
perspective of a human lifetime – which is the only
perspective that matters in politics – it is neverthe-
less part of a seismic shift in the global economic
architecture and one that will have profound politi-
cal consequences. We live in an economically multi-
polar world and global politics will soon reflect this
much more explicitly.
China’s manufacturing economy and – to a much
lesser extent – India’s services economy are already
driving deep and painful economic change in
Europe. As the two most salient parts of a rapidly
changing global economy, Europe’s political re-
sponse to the rise of China and India is likely to be
emblematic of its response to globalization itself.
Alongside the successful completion of the Doha
Round and the maintenance of the WTO system,the
effective integration of China and India into the
global trading system and the establishment of reci-
procal access to their growing markets for EU
exporters is a key dimension of EU trade policy.
China and India are of course different. They have
different traditions and political systems. They are
following their own paths to development, at their
own pace and based on their own distinct economic
models.And the EU’s policies towards them must be
distinct. But these emerging giants represent a third
of humanity and their reintegration into the global
economy will have huge implications.The EU needs
a coherent strategy for responding.What follows is a
brief assessment of what I regard as the key political
challenges posed by that policy.
EU-China trade relations
China’s rise has exerted serious pressure on many
European industries, especially in labour intensive
manufacturing.This is a painful adjustment for many
and it is generating significant political pressures.
China is forcing European companies to compete
harder both for their own markets and for export
markets.To a much greater extent than India, whose
8 percent growth is built largely on growing domes-
tic demand, the Chinese focus on export-led growth
has meant a much more assertive posture in
European and global markets.India’s trade accounts
for 1 percent of all trade in goods while China’s is
closer to 8 percent. The increase in China’s trade in
2004 alone was greater than India’s total foreign
trade. China has just become Europe’s largest
import partner and runs a sizeable trade surplus with
Europe.
The large increase in manufactured exports to
Europe from China is chiefly a result of a wider
restructuring of export markets in Asia as a whole,
either through relocation to China from other parts
of Asia or exploitation of China’s role as an entre-
pot. EU imports from Asia have remained stable at
20 to 25 percent of import trade over the last decade.
But these nuances are not reflected in the popular
CHINA AND INDIA
* EU Trade Commissioner.European assessment of China’s strength and com-
petitive challenge. There is a political perception in
many parts of Europe that China has grown at
Europe’s expense.
Nevertheless, on balance the EU benefits much
more economically from China’s openness and eco-
nomic strength than it suffers from the increased
competition in some sectors. By 2010 the Chinese
middle class will number 150 million and its market
for high value goods will be worth more than a tril-
lion euros a year.Its markets for key EU exports will
be concomitantly large: by 2010 it will be the biggest
consumer of wine globally;its market for green tech-
nology will be worth 100 billion euros a year and its
market for business services 500 billion euros.1
European companies have played a significant part
in the flow of capital into Chinese production that
has resulted in more than half of Chinese export
capacity being capitalized by non-Chinese compa-
nies. Chinese supply chains allow EU companies to
remain competitive by relocating labour intensive
production out of Europe while keeping manage-
ment, design and retail in Europe. The OECD has
estimated that cheap goods and inputs from China
help depress inflation by 0.2 percent for 2001 to
2005,with a consequent beneficial decline of interest
rates. A Dutch study suggested that the average
European family saves about 300 euros a year
through cheaper Chinese goods; a benefit that is
largely skewed towards Europe’s poorest con-
sumers. Politicians that advocate large tariff increas-
es for legitimately traded Chinese imports usually
ignore the fact that such tariffs would be socially
regressive,impacting chiefly on poorer consumers of
Chinese-produced clothes, shoes and toys.
These existing and potential benefits are seriously
qualified by continued problems with access to the
Chinese markets both for exports and investment.
This is expressed at the simplest level by the fact that
for every four containers leaving Shenzhen in China
for Europe, three are still returning empty.
It is true that China is already far ahead of almost all
other emerging economies in opening its market to
trade, chiefly through the heavy pressure on
Chinese tariffs exerted by the WTO accession
process in 2001.China’s average tariff of 8.8 percent
for industrial products is the lowest among the
emerging economies, although serious tariff peaks
remain in key industrial goods like automobiles,tex-
tiles and shoes. Moreover, it is not unreasonable to
argue that China’s extraordinary export capacity
and the fact that it will be the largest exporter in the
world by 2010 mean that its political benchmark is
not to be found in the developing world.The EU has
engaged the WTO’s dispute settlement machinery
in testing China’s continued practice of applying tar-
iffs for whole vehicles to imports of vehicle parts – a
practice it explicitly committed to ending on WTO
accession.
These unfulfilled commitments extend into the ser-
vices and investment sectors. China committed to a
limited opening of its telecoms sector when it joined
the WTO in 2001, but despite having subsequently
allocated 16,000 telecoms licenses, only five have
been granted to foreign providers. EU companies
are still prevented from freely choosing joint venture
partners and are often subject to enforced technolo-
gy transfers through obligatory joint ventures and
local content requirements. In investment, China
maintains ownership and capital caps of between
20 to 25 percent on foreign investment in the bank-
ing sector. Branches of foreign banks in China are
subject to discriminatory capitalization require-
ments relative to local banks. There remains a huge
array of non-tariff and regulatory barriers to the
Chinese market for EU exporters.
Agreements on patents,data exclusivity and intellec-
tual property rights are also still poorly enforced in
China, with serious costs for EU companies operat-
ing in the Chinese market. A recent EU study cited
an estimate by EU manufacturing industry in China
that intellectual property fraud costs EU businesses
in China 20 percent of their revenues.
The Chinese government is increasingly recognising
the extent to which poor protection of intellectual
property is affecting China’s own innovation culture
– the Chinese film and music industry,for example,is
being seriously undermined by local piracy. China’s
manufacturing sector remains heavily characterised
by low levels of value-added production and this is
unlikely to change unless Chinese companies have
the confidence to invest creative capital. In 2006
China overtook Germany to become the world’s
fifth biggest filer for patents, but there exists a seri-
ous imbalance between legal security and effective
CESifo Forum 1/2007 4
Focus
1 A recent study commissioned by the European Commission set
out the benefits on a sector-by-sector basis. For details see
http://ec.europa.eu/trade/issues/bilateral/countries/china/pr190207
_en.htmCESifo Forum 1/2007 5
Focus
access to enforcement for foreign and domestic com-
panies.This will remain a key focus of EU trade pol-
icy in China.
There are other structural trade barrier issues that
Europe will continue to urge China to address. The
focus on export-led growth rather than domestic
consumer demand, and high levels of precautionary
saving by Chinese consumers restrains the necessary
development of a growing consumer economy and
acts as a brake and barrier to others’ exports to
China which would re-balance trade. China’s bank-
ing system and financial infrastructure is bending
under the strain of rapid development and needs
urgent reform.
State intervention in the manufacturing sector in
China also remains a persistent problem and this has
resulted in a growing number of anti-dumping cases
against China. Many of these have touched on con-
sumer durables such as leather shoes and have thus
been politically highly sensitive. China’s perennial
complaints about such trade defence action are
disingenuous given the level of state intervention in
China and the degree of restraint shown by the
European Union.They also tend to obscure both the
fact that trade defence measures apply to less than
2 percent of all EU-China trade and that China is
also a big user of anti-dumping.
Europe and China are now in the initial stages of
negotiating a new trade and investment agreement
that will start to address some of these issues. But it
seems undeniable that market access in China will
remain a key challenge and a key focus of resources
for EU trade policy for the foreseeable future.
It is also likely to remain the EU’s most heavily
politicized trade relationship. The perception that
China and Europe do not trade on genuinely recip-
rocal terms encourages a protectionist response that
will only be deflected by more concerted efforts
from China to trade fairly and meet its market access
obligations. A large and resentful constituency in
Europe that has been at the sharp edge of China’s
exploitation of its comparative advantages in low-
cost manufacturing has little patience with economic
arguments for the overall economic benefits of
openness to China. China is deeply dependent on
market access to developed economies, but some-
times appears to be willing to call the bluff of those
who argue that that access will ultimately depend on
greater reciprocity.That may be a strategic misread-
ing of the strength of protectionist sentiment in
Europe and the United States.
Obviously, Europe has its own responsibilities.
Europe has no interest in challenging the exercise of
legitimate comparative advantage in labour or pro-
duction costs. Europe for its part must commit to
helping China assume full market economy status
and offering open and fair access to China’s exports,
and it must adjust to the tough Chinese competitive
challenge. We cannot demand openness from China
from behind barriers of our own.
EU-India trade relations
The Indian market has similar potential for Europe,
qualified in the same way by serious obstacles to
market access. India’s growing middle class and
booming services sector are obvious assets for EU
exports and EU capital.
India invokes none of the anxiety that China does
for the simple reason that it remains a small exporter
to Europe. Much of its economic impact on Europe
has been at the politically less visible level of the ser-
vices sector. This seems likely to change as India’s
massive capacity and competitiveness in services –
described in books like Thomas Friedman’s and
Clyde Prestowitz’s – is brought to bear on the IT and
IT support sector in Europe and the US.India is also
an increasingly active investor in Europe.Since 2000,
Indian companies have invested more than $10 bil-
lion in Europe – a fivefold increase in the last
decade. Indian firms like Infosys, TCS, HCL, Wipro
and Birlasoft have all made impressive inroads into
the EU market, of which the Mittal Steel bid for
Arcelor was only the most dramatic example – not
least because of the unjustifiable defensiveness it
provoked in Europe.
Yet this data is chiefly striking in the extent to which
it suggests untapped potential. India still accounts
for only 1.5 percent of world services trade and
1 percent of global merchandise trade despite the
fact that Indians make up one sixth of the world’s
population.
Europe’s exports to India are hardly negligible but
they account for less than 2 percent of our goods
trade and less than 2 percent of EU outward FDI
flows, which is totally out of proportion to India’s
population and the size of its market. In 2003,European FDI into India’s was just under 4 billion
euros whilst China’s was 47 billion euros. 1 percent
of global foreign investment goes to India and
15 percent to China.
India’s historically high tariffs have been coming
down through unilateral reform. Its average applied
industrial tariff of around 15 percent is exceptional
for an emerging economy, but it is still twice that of
China and average bound tariff rates are twice as
high.Border protection is sometimes discriminatory,
an issue the EU has recently raised in its WTO con-
sultations over Indian duties on EU wines and spir-
its, which at 500 percent are some of the highest in
the world.
The days of the “licence raj” are certainly over. But
India often remains a difficult place for EU compa-
nies to invest and trade. It still takes 89 days on
average to start a business in India,more than twice
the time in China. Resolving insolvency takes on
average ten years in India,four times the equivalent
time in China.The IMF’s trade restrictiveness index
gives India a score of 8 – where 10 is the most
restrictive – and China 5. European companies
complain of highly restrictive red tape and discrim-
inatory regulation.
The decision to launch an FTA between the EU and
India will help reduce many of these barriers. India
has an active interest in encouraging European
investment that can be an important source of capi-
tal for India, not least for the infrastructure work
that the Indian government has made a central
strand of improving its competitiveness.The aim is to
liberalize not just goods and services trade, but to
remove non-tariff barriers and establish new rules
on issues such as investment,competition and public
procurement. That means going beyond WTO rules
into areas of mutual interest not yet ready for multi-
lateral agreement at the WTO.
Systemic aspects 
These bilateral aspects of Europe’s trade policy with
China and India are only part of the wider political
challenge of integrating China and India into the
global trading system. China will soon be the largest
exporter in the WTO, and ultimately the largest
economy in the global trading system. India will not
be far behind. The idea that the rules-based WTO
system can function effectively without these two
huge powers at its heart is fanciful.Their joint lead-
ership and example both among emerging eco-
nomies and developing countries will be decisive in
reassuring the developing world that the multilater-
al trading system and progressive trade liberalization
can reflect their interests.
Equally important will be the acceptance by both
China and India that their growing power creates a
growing obligation to open their markets,not least to
other developing countries. South-south trade
remains the most heavily obstructed trade in the
global economy.With tariffs at historically low levels
in the developed world, the future of tariff liberal-
ization lies largely in the developing world.
Behind the anxiety of many developing countries in
Asia, Africa and Latin America to commit to trade
liberalization is fear of the export power of China in
particular. Because the growing markets of China
and India are as attractive to the manufacturers of
the developing world as they are to those of Europe
– even more so for the low cost manufactures pur-
chased by China and India’s growing cohort of mid-
dle and low income consumers – improved market
access is the only way to balance that fear.
A successful conclusion to the Doha Round would
be a powerful signal and an important step in this
respect. Not only would it cement the principle of
reciprocal liberalization for the emerging economies
but it would open the markets of these economies
further to the developing world. If Doha fails, a sim-
ilar opportunity is not likely to recur in the foresee-
able future.
Conclusion 
It’s easy to forget from a detached or analytical
position that the impact of the economic rise of
China and India is as much a political issue as an
economic one. Assuming that we are able to dis-
mantle barriers to access in China and India, both
bilaterally and through the multilateral system,
Europe stands to gain hugely from the economic
strength of both – as a source of cheap inputs, as a
market for exports and as a destination and source
of investment in liquidity-rich global capital mar-
kets. But both are exploiting comparative advan-
tages in the global economy that are – or are likely
to – exert serious pressure on some sectors of the
European economy.
CESifo Forum 1/2007 6
FocusCESifo Forum 1/2007 7
Focus
Convincing our own constituencies that the wider
benefits of this economic pressure outweigh the
costs in isolated sectors is part of Europe’s wider
challenges of adaptation to a globalized economy. It
means a concerted public policy response in Europe
to address the needs of those faced with the impact
of economic change and adaptation. But it also
requires the clear demonstration of reciprocity from
India and China. EU trade policy is the means both
of delivering that reciprocity and securing the
European openness that legitimizes the demands we
make of others.
Obviously, Europe’s relations with both China and
India go much beyond trade.China and India will be
central to the global response to climate change.
They will be central to the geopolitics of energy sup-
ply.They are both nuclear powers in neighborhoods
with potential for instability. Yet ordinary Euro-
peans’ first confrontation with India and China is
likely to be as economic powers, changing the shape
of our economic world. That fact alone means that
the management of trade politics will be at the cen-
tre of our relationship.

Europe’s trade policy with India and China

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Europe’s trade policy with India and China

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