Comparison between the European Union and China in terms of International Trade - Case Study Example

Comparative study on Europe and China

Table of Contents

Executive Summary3

Introduction4

Growth Targets of theEuropean Union5

Growth targets of China7

Comparison between the European Union and China in terms of International Trade8

Convergence theory of Economic Growth10

Conclusion12

• Executive Summary

Growth and development has been the prime concern of the economies to achieve higher standard of living. Globalisation has eliminated the barriers to international trade and opened the opportunities for economies to explore the untouched corners of the world market. The economy of Europe has been expanding its market since the age of Industrial Revolution. On the other hand, China has opened its gates for international trade after 2001, when it became a member of the WTO. China is one of the largest trade partners of the European Union. Majority of the import that Europe does is from China. There are certain common goals, which are shared between both the economies in order to achieve sustainable development. The European Union has helped the Chinese economy in transforming its economy to a more liberalised one, and the agreement between them brightens the future prospect of international trade between the European Union and the Chinese economy.

• Introduction

The economies have grown many folds as an effect of globalisation. Trade barriers were the most important feature of developing economies and these restricted trade policies were supported by the infant industry argument. Europe was one of the first economies to enter into the expansion of market through colonisation but with the passage of time, colonies became independent and the European Union undertook many economic shocks to acquire its previous status. Now the state relies on the constitutional monarchy which supports the international trade to bring its economic growth.

China has shifted from a centralised socialist economy to market based economy, in order to achieve rapid economic growth and development in the social, cultural and economic dimensions. China has experienced an average of 10% GDP growth, which is by far the fastest sustained economic growth achieved by any major economy in history. Among its major successes, shifting of 800 million people out of poverty became a milestone in its journey towards sustainable economic growth. China has risen to the position of second largest economy and an influential global market player.

China and European Union share common goals regarding the adoption of greener technology, improving the existing level of technology and further investment in research and development. China is one of the most important trade partners of EU and also wishes to further penetrate into the Chinese market with more vigour and efficiency by entering into more liberalised international trade.

This paper compares the growth targets of European Union with that of China, highlighting each economy’s strengths and weaknesses and tries to find answer to the question-

Can China transform into a more liberalised economy and continue its growth to achieve the same status as the European Union?

• Growth Targets of theEuropean Union
• Employment- 75% of the workforce belonging to the age group of 20-64 years should be employed in the production process. In 2008, 70.3% was the employment rate in the European Union for the said age group but in the later years, there was a steady decline in the rate of employment, primarily due to economic crisis in the labour market, and in 2009, the rate fell to 69.0% and remained low till 2014, after which there was a rise in the employment rate.
• Research and development- European Union has planned to invest 3% of its GDP in the research and development sector of the economy. In 2008, the R and D investment as a percentage of GDP was increased slightly to 1.85%, and further it increased to 2.03% in the year 2014. The stringent global competition calls for newer products and the use of latest technologies in the production process to retain each economy’s market share which resulted in the requirement of greater investment in the research and development sector both, public and private.
• Climatic change and energy sustainability-the economy has targeted to lower its Greenhouse gas emissions and the benchmark has been selected as 20% (or maximum of 30%) lower than the 1990 standard. In 2013, the level of emission of greenhouse gases was 19.8% lower than its 1990 level. The greatest achievement in this respect was in the year 2009, when in a single year the emissions reduced by 6.55 due to lower productivity in the economy owing to the crisis in 2008 affecting all the sectors like, industry, transport, energy. Again in the year 2010-2011, due to mild winter conditions, energy demand was low contributing to further reduction in the emission levels (Menegaki, 2011).

In case of energy consumption, the economy wishes to obtain 20% of total energy required from renewable resources and make the production 20% more efficient. Starting from 2008, the percentage share of renewable energy in the gross final energy production has increased from 10.5% to 15%, in 2013. Solid biofuels’ consumption was the highest among all other renewable resources. Since 2000, the contribution of Hydro power has been steadily declining unlike the use of Solar and wind energy, whose popularity has been increasing due to lower cost and other support from government schemes (Klessmann, et al., 2011).

• Education- the rates of early school dropouts should be below 10% and for the population belonging to 30-34 years of age, a minimum of 40% should complete the third level of education. Early school dropouts are considered to be those who have done at most lower secondary level of education and are not continuing further studies or any training. The value stood at 11.2% in 2014 compared with 14.6% in 2008 (European Commission, 2016).
• Poverty and social exclusion- European Union has aimed to lift at least 20million people who are currently below the poverty line and are socially excluded. The number of people at the risk of poverty and social exclusion has increased from 116million in 2008 to 121million in 2014. The main reason behind such a drastic increase in the concerned negative indicator was the economic crisis in 2008 followed by recessions in the successive years.
• Growth targets of China

The Chinese government has already changed it course to promote innovation which finds its evidence in the ‘Make in China 2025’ programme. This programme aims at maintaining a medium to high level growth and increase competitiveness of the manufacturing sector facing challenges in rising labour cost, decreasing export, environmental degradation, fall in investment (The Diplomat, 2015). The upgradation of technology is scheduled to serve as a tool of increasing the productivity and profitability of the goods and services. The highly skilled labour will find work and a corresponding wage with respect to its potential, which will strengthen the consumer base of the economy.

The next objective of the Chinese economy is to lower the pollution and emission standard. The government has devised a real-time online environmental monitoring system, which will require the factories to report its emission and wastage level on an hourly basis. Regulation will be placed on water management to secure the scarce resource. Further, in the green development objective, the use of renewable energy resources is finding a prominent place serving the twin purpose of reducing the cost and pollution emission. (Wang, et al., 2011).

The growth in economic activity needs the coordination at the sectoral level. The regular use of internet in the business processes aims at attaining innovation and co-ordination in the primary, secondary and tertiary sectors. The government aims to provide increased social insurance and will also cover 50% of the critical illness cost (The World Bank, 2016).

Reforms in the financial and capital markets are to be made in order to improve the capital account convertibility; and to join the IMF basket of reserve currencies. China has made significant changes like removal of the deposit interest rate ceiling, introduction of deposit insurance and opening of capital account for the companies and banks to raise funds in the Shanghai Free Trade Zone demonstrating the beginning of trade liberalisation in China (Holz, 2008).

• Comparison between the European Union and China in terms of International Trade

The international trade between China and the European Union has dramatically increased over the years, making China the biggest source of import and fastest growing market for exports. The daily trade amounts to over €1 billion a day (European Commission, 2016). Industrial and consumer goods have the largest share in the total amount import of the European Union resulting in trade deficit with China. The total amount of investment in China by the European Union only accounts to 2-3% whereas Chinese investment is slowly rising (Felbermayr, 2015).

Figure 1: Trade statistics between EU and China

(Source: European Commission, 2016)

The acceptance of trade reforms by China in 2001, changed the bilateral trade scenario but some grey areas still remain like – lack of transparency, discrimination of industrial and non-tariff measures against foreign companies in China, increasing control of the government in industrial sector, greater market share by the state owned enterprise, unequal access to cheap labour and subsidies offered by the Chinese government and intellectual property rights are less protected in China.

Figure 2: Trade balance between EU and China

(Source: European Commission, 2016)

• Convergence theory of Economic Growth

Convergence theory or “Catch up effect” shows that the developing countries can grow at a faster rate than the developed nations, and finally converge with the growth rate of developed countries. Diminishing returns to the capital for developing countries are not as high as the developed nations enabling them to grow at a higher rate. Developing countries can follow the processes of developed countries like adaptation of advanced technologies, free market structure and trade liberalisation to achieve faster growth, but in order to meet with growth rates, developing countries will need capital infusion.

China has relaxed most of the trade barriers and has started its journey towards trade liberalisation. This can bring a desired change in the GDP per capita, so that in the future it can converge with that of the European Union.

Figure 3: GDP per capita of China

(Source: Trading Economics, 2016a)

Figure 4: GDP per capita of European Union

(Source: Trading Economics, 2016b)

• Conclusion

The objectives of skill development and adoption of greener technologies in production process is common to both the countries. The launch of negotiation between the two economies on a bilateral investment agreement has marked the era of transparent and more liberalised trade. The EU-China 2020 Strategic Agenda for Cooperation further marks the importance of the agreement. The European economy is greatly involved with Chinese economy in supporting the latter’s initiative of trade reforms and sustainable development, and also offers further investment in small and marginal enterprises of China. It is possible for Chinese economy to further adapt to more liberalised economy finally catching up with the status of European economy.

Reference list

European Commission, 2016. Trade. [online]. Available at: < http://ec.europa.eu/trade/policy/countries-and-regions/countries/china/ > [Accessed 2 May 2016].

Felbermayr, G., Heid, B., Larch, M. and Yalcin, E., 2015. Macroeconomic potentials of transatlantic free trade: a high resolution perspective for Europe and the world. Economic Policy, 30(83), pp.491-537.

Holz, C.A., 2008. China’s economic growth 1978–2025: what we know today about China’s economic growth tomorrow. World Development,36(10), pp.1665-1691.

Klessmann, C., Held, A., Rathmann, M. and Ragwitz, M., 2011. Status and perspectives of renewable energy policy and deployment in the European Union—What is needed to reach the 2020 targets?. Energy policy, 39(12), pp.7637-7657.

Menegaki, A.N., 2011. Growth and renewable energy in Europe: A random effect model with evidence for neutrality hypothesis. Energy Economics, 33(2), pp.257-263.

The Diplomat, 2015. China’s Next Five-Year Plan: Realistic Objectives? [online]. Available at: < http://thediplomat.com/2015/11/chinas-next-five-year-plan-realistic-objectives/ > [Accessed 2 May 2016].

The World Bank, 2016. Overview China. [online]. Available at: < http://www.worldbank.org/en/country/china/overview > [Accessed 2 May 2016].

Trading Economics, 2016a. China GDP per capita. [online]. Available at: < http://www.tradingeconomics.com/china/gdp-per-capita > [Accessed 4 May 2016].

Trading Economics, 2016b. European Union GDP per capita. [online]. Available at: < http://www.tradingeconomics.com/european-union/gdp-per-capita > [Accessed 4 May 2016].

Wang, R., Liu, W., Xiao, L., Liu, J. and Kao, W., 2011. Path towards achieving of China's 2020 carbon emission reduction target—a discussion of low-carbon energy policies at province level. Energy Policy,39(5), pp.2740-2747.