European Union Economy: Issues and Policies - Term Paper Example

 CHINA DEVELOPMENT: A THREAT TO EU China’s Development: A Threat to EU “Is the further emergence of global competitors (e.g. India or China) going to threaten the economic competitiveness of the EU?" Introduction 35 years ago, the Chinese leader Deng Xiaoping remarked that “to get rich is glorious.” This slogan marked an important phase in Chinese history, when it opened up to the world and ushered in one of the fastest growth rates to become a great economy in the human history (Foster, 2012). Over a short time, China’s economy has grown from being smaller than Italy’s economy, to be the second largest economy globally. China currently takes pride in having more than one million US $ millionaires. By the year 2022, when the current generation of leaders hands over power to a new generation, China is expected to fiercely challenge United States for the top most position as the leading global economy. China has completely changed and redefined many business aspects in the global market. The Chinese cheap labor market has done greatly in challenging the west in a wide range of products from mops, mobile phones, or clothing and textile markets. China is currently the single largest investor in Africa; China is doing much to shift the continent away from the grip of EU and US for the first time in two centuries (Foster, 2012). Moreover, China is the single largest holder of US government debt, which is a real threat stick to hold, but a good bet also. India is another Asian giant with an economic developed that has ushered in a new era that offers fierce competition to US and EU on the global trade. The two countries are homogenous and take pride in having a large labor base that is much cheaper compared to the western countries. The cheap labor has been an asset in their rapid development. The two countries hold a third of the global population alone, a good asset that has transformed globalisation through trade and development policies, motivated by innovation, cheap labour and other factors of production that have defined the global trade today (Nesta Company, 2006). Therefore, the emergence of China and India as new Asian superpowers has critically threatened the European Union as the largest policy makers globally, with their massive impact on changing the global trade dynamics creating ripples in EU, and other leading markets such as US. Globalisation Potential in India and China A report from the US national Academies of Science titled Rising Above the Gathering Storm remarked that at the cost of a single engineer or chemist in the US, the same company can adequately hire more than four chemists in China, and five engineers in India, implying that the US is rapidly losing its privileged position as the leading science hub (Nesta, Company, 2006). Tony Blair and Gordon Brown, two former UK prime ministers in most of their key speeches on globalization remarked that China and India in 2005 alone produced more than 125,000 computer science graduates, implying the great potential held by the two countries in technology, an important element in steering globalisation (Nesta Group, 2006). Currently, global policy makers are getting used to the idea that China is the leading manufacturing hub, while India acts as the center of back office services. The rapid development in China and India has a remarkable impact in the European Union labour market. Europe is defined as a master of its own fate in lagging behind its development progress, which it should have attained, but is limited by differences among the 27 EU actors significantly delaying the overall regional development (Watt 2006, 540). The emergence of China and India would require such actors to alter their policies accordingly, in embracing the resulting changes in the global market influenced by China and India. This has opened more opportunities for EU inform of new markets in China and India, as well as creating a new threat posed by the rapidly growing economies, which has seen more factors of production relocating to these economies, away from the EU and US traditional markets (Watt 2006, 540). The increasing downward pressure on labour sector in EU is forcing redesigning of policies in European countries, where workers have to accept massive radical changes in their social and welfare systems, to keep up with increasing challenge posed by the new global actors, to avoid losing relevancy in the global market. The relocation of production to lower wage markets in addition to heightened competition in trade between China and EU is the largest threat to EU labor market, which has threatened pay and working structures as provided in EU countries China’s Increased FDIs China is currently attracting massive amounts of FDIs, which have driven the country towards redefining the global market, and threatening to overthrow EU as the largest trading power. By 2005 China overtook Japan to become third placed behind EU and US as the largest trading power, contributing about 10% of the total world exports and 8% of global imports (Watt 2006, 546). Chart of China’s total exports by business sectors in 2007 (Starmass International, 2013). Chart of Export trend of China state owned and foreign investments for the year 2001-2011 (Starmus International, 2013) One major factor that has redefined China’s growth as the above two graphs indicate is the growing number of exports that surpass the country’s imports, and increasing FDIs to China from all over the globe. According to Dullien (2005, 128), inward FDI accounted for about 6% of China’s GDP in the 1990s, has been about 4% since 2000, and currently contributes a significant but not very large share of private investors at about 8%, while foreign firms in China contributed to more than half of the country’s exports. The huge number of foreign companies establishing FDIs in China from the Asian market particularly Japan and Malaysia, from the Euro zone, and America has unsettled the competitiveness of EU as the most lucrative hub for investments (Dullien 2005, 128). This has critically threatened the EU attractiveness in the global market. The increasing foreign FDIs in China have been responsible for increasing pool of managerial and technical skills that has been the core behind increased productivity in the country. By 2004, China’s FDI unsettled the global market amounting to US $ 60 billion, overtaking the US as the largest destination of FDI since 2002, and where most of EU’s FDIs are based; towards the end of 2006, China’s external reserves were recorded at US $853.7 billion overtaking Japan as the global largest holder of foreign exchange reserves (Kui 2007, 11). Such magnitude of FDIs, and huge foreign exchange deposits in China stirred the global market, with China becoming a new engine of growth globally, which posed a greater threat to the EU market, one of the largest markets with a large share in the global economy. China’s competitive advantages is improved by the fact that many Chinese owned multinationals operating in Europe acquire and maintain the European standards of operations, to gain the high level of managerial expertise from the EU, and ensure leveraging of European expertise. This makes many companies in China to tap expertise from the EU market, and import such expertise home to improve the managerial skills in local firms, an element that is in high demand in the rapid growing economy (Txabarriaga, 2010). The acquired managerial skills in accordance to EU standard coupled with technical expertise and cheaper factors of production, offer cutthroat competition to European firms. Exports and Imports (Source: Txabarriaga, 2010) China is the second largest source of imports for the EU after the US, and is very close to the US share of imports. The EU-China trade is expected to grow significantly with time, with China‘s share of EU-25 increasing by a 5% profits in imports and 2p.p for exports between the years 2000 and 2005(Watt 2006, 553). From the year 2003, the import growth of EU outpaced its exports by a large margin increasing the deficit by almost a half. The Current Chinese competiveness that has challenged EU market has been attributed to the dollar weaknesses. Most EU countries peg their exchange rate against the dollar, with China having a more floating exchange rate that has remained stable not mc uh affected by the current global crisis compared to the effect of the dollar on EU(Watt 2006, 553). This sustained economic development in China despite the challenges faced by the dollar over the last few years. The linearization of the textile industry in 2005 has also greatly impacted on the rapid Chinese developed that has contributed to more exports to EU than imports, leaving a favorable surplus that creates an advantage for China (Watt 2006, 553). The 2005 abolishment of Chinese textile Quotas by the US and EU marked the beginning of a fierce competitive market that threatens EU textile markets, considering that textile and clothing are laborer intensive products. This concern is amplified as China through its textile industry had actually seriously hurt similar industries in Asian markets such as in Malaysia and Thailand since 1994, (Jansen 2001, 221). With such fears being live in many EU members due to the large labor base available in China, and the low costs of production that China enjoys makes its products more competitive in prices compared to EU textile products, a potential threat to EU market. Chart of China’s top 10 trading partners in 2007 (Source Starmass, 2013) Trade and Restrictions The uneasiness that has developed in several markets due to Chinese products is observed in the various restrictions imposed on China’s products. Due to the high level of exports from China to EU, there is a growing conflict that makes many EU members uneasy regarding restriction of vehicle imports from EU to China, a dispute that has been referred to WTO for arbitration (Zhixiong, 2008, 44). China has imposed a restriction that if imported vehicle spare are 60% of a vehicle’s parts, the spares are considered to be a full vehicle import, and are charged a 25%, which is a tariff charged for full vehicle imports, instead of a 10% tariff charged to spare part imports (Zhixiong, 2008, 44). This policy does not go well with EU members, and is seen as a deliberate means by China to impose restrictions on EU imports and unhealthy trade move, considering the level of exports from China to EU. EU perceives this as being against the General Agreements non Tariffs and Trade (GATT) of 1994, and has caused ripples in the EU market as a wrong trade restriction. The threat of China in US and EU markets can be perceived from the numerous restrictions imposed on certain Chinese products. EU and US negotiated with China over Chinese exports restrictions on the bases of fair trade in the clothing and textile products in 2005 (Brown & Crowley 2010, 1356). According to data from WTO, at least 10 WTO members initiated varies investigations under the China safeguard policy, implemented between 2002 and 2009, with more than six countries imposing barriers on various products such as porcelain riles, tiles, textual and clothing (Brown & Crowley 2010, 1356). These restrictions though based on defects and negligence of Chinese manufacturers, were mainly used to regulate Chinese exports that had increased tremendously to threaten local industries. An example of such is the clothing and textile industry that unsettled man markets. The EU purposely used its stringent measures to enforce antidumping and discriminatory import restrictions. The result was trade deflection of Chinese products to third world and developing countries (Brown &Crowley 2010, 1358). The antidumping restrictions were particularly applied to China’s exports more than any other country in history, in what was perceived to be limiting the politically sensitive products from these markets. The restrictions and antidumping restriction however worked in favor of China, revealing renewed ability of China to deflect its trade patterns to new markets, threatening EU markets even more. The emergence of China in Africa has actually complicated the equation in a market that was purely controlled by EU and the US. Threat of China in Africa One of the areas that EU faces serious threat from China is in China’s relations with African countries, which is currently expanding rapidly and edging away EU interests in the region. Emergence of China in Africa has complicated the tussle between US and EU, two forces that compete for a stake in African affairs; the dynamics are gradually changing towards preference of China in the equation (Cambell 2008, 89). German Chancellor Angela Merkel has over the time called for action, arguing that Europe cannot leave their commitment for Africa to the People’s Republic of China, in a new relation that has created panic among EU players (Huliaras 2012, 426). The equation is complicated by the fat that while EU policy towards Africa is complex and involving several relations. China has reversed this equation and has entered the region with monolithic policies, attracting more African countries that feel EU policies are stringent and difficult to meet (Huliaras 2012, 426). Among all other global markets, the EU has systematically and consistently formulated an all-inclusive regional policy towards Africa. All documents and policies that regulate EU-Africa relations such as the Cotonou Agreements and the Joint strategy of 2007, Africa and EU are portrayed as unitary actors that have made solid agreements to foster integration bringing together the 27 EU members, and the 28 African countries in a strategic partnership agreement (Huliaras 2012, 426). This is because the 27 EU members act as a single actor to define the depth and scope of any agenda, and come together to negotiate with “Africa.” The two regions foster a solid relationship that makes all states to follow the guidelines, with press reports and academic articles on EU-Africa relations reporting on coherence of the EU- Africa strategic partnership. For example, as Holland (2008, 349) explains, EU is by far the largest donor to Africa, collectively providing more than 60% of development aid to Africa, while the EU countries in most cases act on their capacity as single countries. The EU behaves as the 28th state, conducting its own aid policies ratchets than performing the role of donor coordination with the EU members (Hettne et al 2008, 45). This is in addition to constant efforts by EU countries in playing humanitarian role and peace keeping missions in certain African countries that are immersed in conflicts. These dynamics portray a highly solid framework between the African countries and EU than in any region. A Chart of Africa trade with China, EU and US (Source: Wang and Bio- Tchane, 2008) China in this equation has entered to destabilize a sold relationship that exists between EU and African countries, explaining the uneasiness and threat that China-African relation poses to EU. With the rapid growth in China, the country required infinite amounts of raw materials, while at the same time looking for a potential market for the its exponentially growing industries, with Africa offering the best option for both options. As the chart above shows, between 2001 and 2006, Africa’s exports and imports to and from China grew by 40% and 35% respectively, with an increase of about $55 billion from $ 10 billion. This made China the third largest trading partner after US, and EU (Wang and Bio- Tchane, 2008). China has not only entered in Africa as a trade partner, but also as a formidable donor , taking the role of EU ,which offers a serious threat to EU-African relations (Huliaras 2012, 429). In the recent past, the Chinese leadership, mainly aimed at seeking natural resources in Africa have promoted various African-China summits and endless official visits by Chinese high ranking officials bringing along very generous development aids and encouraging their state enterprises to heavily invest in Africa, in a move that is seen to compete effectively with EU investments in Africa (Huliaras 2012, 430). The relationship is further complicated by the fact that despite the continued China’s courtship in Africa, Africa has highly embraced China, and has liberalized their markets to care for new business opportunities. This move has made it easy for numerous Chinese firms to base their operations in Africa over the recent past, bringing along Chinese products to the untapped African market. Many Chinese who arrive in Africa on tourists passports have ovals illegally settled mostly in South Africa, establishing numerous retail and hotel businesses in Africa (Mung, 2008, 98). African governments have also encouraged this trend by going slow on such investors due to their input to their economies, a move that has led to mass movement of Chinese mid and low level investors to Africa to initiate retail businesses that can be handled adequately by the locals (Huliaras 2012, 430). This makes China’s approach to Africa not as a unitary actor with a master plan for geopolitical expansion an approach usually used by EU, but is driven by increasing cooperate interests that in most cases has resulted in conflict and tensions between corporate interests and the country’s national objectives (Gill and Reilly 2007, 49). Beijing’s- Africa policy cannot therefore be considered to be a central state apparatus (Fiott, 2010, 1). It is a fragmented entry into Africa, and a monolithic process that has made it easy for Chinese interests to spread in Africa. The rapid spread is coupled by generous development packages to appease African governments, which has managed to shift some African governments away from the complicated EU-African policies, towards China. This stands as the single most threat that has unraveled EU, with some European countries refocusing on their policies to Africa to compete with the threat of China taking most of their interests they currently control in Africa. Therefore, China’s development has posed a huge threat towards EU-Africa policies, which has over the time remained compact and unchallenged. China has of late outpaced Japan and EU to be the second largest economy globally and the third largest market after EU. The rapid growth in China is mostly driven by increased FDIs, and low factors of production that make China more competitive for investments. These factors have resulted in rapid growth China’s economy over the last two decades, with China’s exports to EU being more than double its imports, and strong textile and other manufacturing industries that compete effectively with EU industries. The development of China as a more lucrative market compared to EU is a potential threat to EU market, with EU facing an emergency need to address their labour terms to avoid being unattractive to investors compared to China. The huge exports from China to EU have resulted in efforts to put in place quotas for China’s imports in EU in protecting their domestic market. All the same, the biggest threat of China to EU is the China’s current rapid expansion to Africa, a region that has over the time enjoyed compact relations with EU, which is gradually shifting towards China. This is driven by attractive policies of China to Africa in addition to decent development packages that China offers African countries in exchange for ready market for her burgeoning industrial products. These are cheaper products suitable for third world countries compared to the more expensive European products. Therefore, China’s development has ritually posed an immense threat to EU and its interests in EU, Asia and in Africa, forcing EU to change its policies and approaches in these markets. References List Bhattacharya, A., Swati G., and Jansen W., 2001. 'Has the Emergence of China Hurt Asian Exports?'. Applied Economics Letters 8: 217-221 Bown C P & Crowley M. A., 2010. China’s export growth and the China safeguard: threats to the world trading system? 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Implications of Increasing Europe’s Trade with China, TCworld http://82.165.192.89/initial/index.php?id=135 [Accessed 8th May, 2013] Wang J. Y., & Tchane B.A., 2008. Africa’s Burgeoning Ties with China, Finance and Development- International Monetary Fund 45(1),  http://www.imf.org/external/pubs/ft/fandd/2008/03/wang.htm [Accessed 8th May, 2013] Zhixiong H., 2010., EU-China Trade Disputes in the WTO: Looking Back to Look Forward, Yearbook of Polish European Studies, 13 http://www.ce.uw.edu.pl/pliki/pw/y13_huang.pdf [Accessed 8th May, 2013] Read More