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Letter from Europe

In Search of Leverage With China

BERLIN — Karel De Gucht is not shy about speaking out about Europe’s tetchy relations with China.

As the E.U. trade commissioner, one of his aims is to create a level playing field for European companies investing in the world’s fastest-growing large economy, a goal that seems ever more urgent given Europe’s current financial woes.

Mr. De Gucht has power and leverage. He does not need agreement from all 27 member states to push through measures. But with the European Union now seeking help from China to deal with the bloc’s debt crisis, Europe’s economic and political credibility is at stake.

On Nov. 29, euro zone finance ministers are to meet in Brussels to discuss how they can woo the Chinese state to become a major investor in the European Financial Stability Facility, the Union’s rescue fund for the Euro.

Analysts fear that cash-strapped European governments will all too easily lose sight of their own interests, from defending human rights to protecting their own businesses. Already, they say, China has used a skillful policy of well-judged loans and investments to win several national governments within the European Union over to its side.

“Europe’s ambitious agenda with China could be undermined by the euro crisis,” said Mathieu Duchâtel, a foreign policy expert in Beijing for the Stockholm International Peace Research Institute. “China is sure to ask the E.U. to end its arms embargo and for the E.U. to grant China market economy status.”

The European Union has maintained an arms embargo on China since 1989, after security forces killed pro-democracy activists during the Tiananmen Square demonstrations.

That has not prevented China from producing modern weapons systems, buying arms elsewhere and building up a formidable military with both. Still, a lifting of the E.U. embargo would have a major symbolic value for China.

François Godement, a China expert at the European Council on Foreign Relations and a professor at the Sciences Po Center for Asia and the Pacific in Paris, fears that the issue of human rights will be downplayed as China establishes a bigger economic foothold in Europe. Interests, he says, will take precedence over values as China pursues a different approach with each E.U. member state.

“China’s bilateral approach to each member state and the pull of short-term national interests is leading to a fragmentation of E.U.-China policy,” Mr. Godement said. This was clear when the Chinese prime minister, Wen Jiabao, visited Hungary in June and announced a special €1 billion credit facility for joint ventures between Hungarian and Chinese companies.

Prime Minister Viktor Orban of Hungary, who was then the acting president of the European Union, never mentioned human rights to Mr. Wen. Mr. Orban had refused in 2010 to meet the Dalai Lama, the spiritual leader of Tibet, just as China was increasing its investments in Hungary.

Business issues may, over time, prove to be just as important in Europe’s relationship with China as values.

Trade in goods and services between the European Union and China is flourishing. It amounted to €435 billion in 2010, according to the European Commission.

“Europe has become the largest market for Chinese exports and China is the second-largest export market for the E.U,” Mr. De Gucht said at a recent form of European and Chinese policy makers. But the playing ground is not level, he added.

The business climate in China “gets worse,” Mr. De Gucht told his audience: investments in some sectors were closed or restricted to foreign companies; intellectual property was inadequately protected; the Chinese procurement market was closed or lacked transparency.

In contrast, Chinese companies investing in Europe often enjoy Chinese state subsidies while taking advantage of Europe’s open economy and transparent procurement rules, according to the Federation of German Industries. This allows Chinese companies to undercut their European competitors. Mr. De Gucht said he wanted “reciprocity.”

This is where the issue about granting China the status of a market economy comes in. As a member of the World Trade Organization, China will be automatically granted market economy status in 2016. But until then, the European Union can impose anti-dumping measures against Chinese imports more easily.

Despite the importance of balancing this burgeoning trade with Mr. De Gucht’s forceful words, the European Union has so far been unable to devise a long-term strategy for China or agree on the terms in which it conducts business and promotes its values.

Mr. De Gucht’s staff, for example, is trying to devise new procurement and investment rules on the basis of reciprocity with non-E.U countries. But analysts say that China will do everything in its power to play member states against one another in order to derail such legislation.

Mr. Godemont said China’s help to individual countries in Europe’s periphery, those particularly hard hit by the euro crisis, pays off in that kind of situation. Beijing’s investments in Portugal, Italy, Greece and Spain already amount to 30 percent of its investments in Europe, according to Mr. Godement. Another 10 percent goes to Central and Eastern Europe.

Yet Europe has some cards to play, too.

China depends on Europe for trade, technology and a place to lodge part of its huge foreign currency reserves of $3.2 trillion, the world’s largest.

“China wants basically two things when it comes to Europe,” said Song Xinning, director of the Center for European Studies at Renmin University of China, in Beijing.

“China wants a stable exporting market for its goods,” he said. “That is very important for us. If anything goes wrong, it will hurt China.”

And China needs a place to diversify its reserves, Mr. Song said.

“Twenty-five percent of China’s reserves are in euros,” he said. “We want to guarantee the security of the Chinese investment.”

If that is the case, then, as a senior E.U. official speaking on condition of anonymity said, “The E.U. has some leverage with China.”

But will it be prepared to use such leverage now that Europe is in such need of a Chinese money infusion? In the medium term, analysts say, China’s help may come at a very steep price if Europe sells out on its values or prolongs rules that blatantly disadvantage its own companies.

A version of this article appears in print on   in The International Herald Tribune. Order Reprints | Today’s Paper | Subscribe

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