The EU and China: Talking past each other

Did anybody notice the recent EU-China summit that took place at the end of November in Nanjing? No? The media seemed more concerned with the nominations at the Commission and EU Council. Yet the summit was seen as important enough to warrant Jose Manuel Barroso, along with Sweden's prime minister Fredrik Reinfeldt and foreign minister Carl Bildt, making the trip to see Premier Wen Jiabao.

The three certainly made impressive use of their time, bringing out a joint statement of 2782 words despite the summit lasting only an hour and forty-five minutes. What followed was less satisfying, however. While Mr Barroso cancelled a press conference, Premier Wen held forth publicly about how China refused to talk about currency issues, particularly with countries that contemplated protectionist measures. Any positive results that might have been buried in the joint statement (and there were some: talk about more political dialogue; joint efforts on proliferation; a commitment by China to ratify the ICCPR (the UN covenant on civil and political rights) "as soon as possible") paled in front of this visible disagreement, on the issue at the heart of EU-China relations: economic interests.

So was this another sign of European weakness, or are we seeing a pattern, with China toughing it out and hammering its way through international dialogues? The answer lies perhaps more with the latter explanation than with the former.

True, this EU-China summit happened at an inauspicious juncture. We have barely digested the ratification, at last, of the Lisbon Treaty. The new Commission is hardly in place, the new EU president and High Representative are not yet in place, while the previous is departing - in general, China prefers to make gifts to partners with which it is going to have a long relationship. Evidently, China will require proof that the new institutional set-up is resilient and somewhat dynamic before it grants full attention to Team Europe.

But the situation is perhaps the sign of a larger malaise.  Chinese leaders say they pay a lot of attention to Europe. And indeed they should, since in recent years the EU has become as important as the US as an export market. The EU provides development aid, funds training and studies about Europe, and is a key supplier of science and technology. Much of this also comes without the strategic implications that come with Sino-American relations.

But as successful as China seems to be in pushing through the global economic downturn, it is defensive and even apprehensive about two issues: monetary re-evaluation and any measure that would result in limits to China's exports.

As much as they worry about the safety of their immense dollar holdings, China's leaders feel they have a handle on the situation with the United States. Interdependence, and what some call the spectre of mutually assured destruction in case of a strong monetary and trade rift between the two countries, have led to a quiet understanding - often at the expense of third countries.

China's stand on monetary and trade issues is to do as little as possible, and to move as late as possible, in order to preserve China's very competitive position. Even the talk about shared monetary responsibilities through the internationalisation of the renminbi rests on a misunderstanding. China is currently raising the role of its currency in trade linked transactions, and getting close neighbours and partners to use it more often. That's a self-centred move, which does not imply any decisive role as a reserve currency in the prevailing international system.  

Unavoidably, a serious debate and search for convergence with the European Union would wreck this delicate balance, where China feeds the Fed (in itself a useful role) but gets back benefits in terms of trade advantages. Just as unavoidably, China's focus on short term interests will create an impossible situation, where its partners have a choice between protectionism and bankruptcy. The argument does not apply to the US, whose insolvency is prevented by Chinese surpluses, but it does apply to Europe, which uses up domestic savings and central bank borrowing to pay for the consequences of an absurdly high currency. 

Foreign policy and economic choices are inextricably linked together where China is concerned. The European Union will need to work collectively to demonstrate its capacity in  both areas. While China cries wolf over insignificant anti-dumping decisions, the EU is behaving as a rational, moderate but unimaginative actor. It could put much more pressure on China if it became serious about a carbon border tax. And it could bring some positive enticement into the bargain if it chose to open a new round of mutual investment talks - one where welcoming Chinese investment in some sectors of the European economy was balanced with major changes on China's domestic front: finance, services, public procurement, IPR protection all beckon.

The alternative is very high risk:  a shouting match about market access restrictions in China and anti-dumping by Europe, a Chinese trade policy based on currency manipulation until China's partners - other than the U.S., silenced by the enormity of its China-held debt - rebel. That would not be a pretty sight, and Messrs. Barroso and Reinfeldt were probably right to tread softly, and not use a public boom box.  Nonetheless, the EU will need to demonstrate that it means business, and that it has a pretty open choice of policies at its disposal in the near future.

François Godement, ECFR and Asia Centre at Sciences Po