EU and emerging economies

China, India and Russia

What are emerging/transitional economies?

• Moving from closed to open economy

• Perhaps from state to market economy

• Developing key market economy institutions

• Likely to be undergoing economic reform

• Increasing investment and above average growth

Russia

Evolution of EU-Russian relations

• 1991: EU delegation set up in Moscow• 1997: Partnership and Co-operation Agreement

(PCA) in force• 1999: EU Strategy Paper on Russia• 2000: framework for Energy Dialogue• 2001 High Level Group on Common European

Economic Space• → 2004: EU-Russia WTO negotiations • 2006: renegotiation of PCA?

EU merchandise trade with Russia

-60

-40

-20

0

20

40

60

80

100

120

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

€bn

Exports Imports Balance

Source: Eurostat

Russia’s trade - 2004

EU Others Belarus Ukraine

Japan US China

EU Others Belarus Ukraine

Japan US China

EXPORTS IMPORTS

Source: Eurostat and Russia’s State Statistics Service

• EU = Russia’s main trade partner – by a long way (over 50% trade)

• Russia = EU’s 4th major trading partner – but only 6.3% trade – EU a much more diverse and mature trade

structure

EU Imports from Russia

0

10

20

30

40

50

2000 2002 2004

Agriculture Energy Machinery

Transport equip Automotive prod. Chemicals

Textiles and clothing

€bn

Source; Eurostat

EU Exports to Russia

0

2

4

6

8

10

12

14

16

18

2000 2002 2004

Agriculture Energy Machinery

Transport equip Chemicals Textiles and clothing

€bn

Source; Eurostat

Key relationship

• Proximity

• Post-Cold War era

• Strategic issues – e.g. energy

• Political problems– Chechnya– Kaliningrad

Location of Kaliningrad

• PCA = legal foundation of EU-Russia– Covers many areas:

• political dialogue, trade, business and investment, financial and legislative co-operation, science and technology, education, energy, environment, transport, culture, etc

– Institutional framework

Four Common Spaces

1. Common European Economic Space– Greater compatibility between EU and Russia– Ultimate aim – integrated market– Regulatory convergence?

• Areas targeted: standards, technical regulations, customs, financial services, accounting, transport, procurement, telecommunications, competition, agriculture

– Russian sensitivities– More developed than traditional agreements

2. Common Space on Freedom, Security and Justice

– Human rights, organised crime, terrorism

3. Common Space on External Security– Conflict prevention, international bodies

4. Common Space on Research, Education and Culture

Key issues

• TACIS – aid programme

• Energy

• Environment

• Nuclear energy

• Further development of four spaces

• Relations between EU members and Russia

• NOTE: EU’s links with Russia more formally and extensively expressed than with other emerging economies at this stage.

• A reflection of more urgent strategic focus

CHINA

Evolution of formal EU-China links

• 1975: – formal EU-China relations begin following normalisation of US-China

• 1979: Commission President Roy Jenkins → China

• 1980s: broadening of bilateral co-operation, e.g.– scientific co-operation, business management

training, rural development– 1985 Trade and Economic Co-operation Agreement

• 1988: EU delegation opens in China• 1989: Tianamen – relations frozen and sanctions

• By 1992:relations normalised - arms embargo remains.

• 1995: 1st European Commission strategy paper on EU-Chinese relations

• 1998 First EU-China summit• 2000: EU-China conclude bilateral negotiations

on China’s WTO accession• 2001: European Commission strategy paper on

EU-China• 2003: 1st Chinese policy paper regarding the EU• 2004: EU becomes biggest trading partner of

China and China, the EU’s 2nd biggest• Late 2005 – 8th EU-China summit

EU merchandise trade with China

-150

-100

-50

0

50

100

150

200

2000 2001 2002 2003 2004 2005

€bn

Imports Exports Balance

Source: Eurostat

Average growth imports – 16.9% p.a.Average growth exports – 14.3% p.a.

Top 10 EU exporters to China - 2004

0

5

10

15

20

25

Germ

any

France

Italy UK

Belgiu

m

Nether

lands

Sweden

Finla

nd

Austri

a

Spain

€ b

n

Source: Eurostat

Top 10 EU importers from China - 2004

0

5

10

15

20

25

30

35

Germ

any

UK

Nether

lands Ita

ly

France

Spain

Belgiu

m

Hungar

y

Sweden

Polan

d

€ b

n

Source: Eurostat

EU trade by product with China - 2004

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Exports Imports

Food and drink Raw materials Energy

Chemicals Machinery and vehicles Other manufactures

Others

0

20

40

60

80

100

120

140

Exports Imports

Food and drink Raw materials Energy

Chemicals Machinery and vehicles Other manufactures

Others

€bn

Source: Eurostat

Why does China matter to Europe?

• Growing importance – 2004 European Council discuss China twice as often

in 2003

• Rapid economic development– Large private sector– Biggest telecommunication market/largest steel

consumer– 2nd largest energy consumer behind US– Generally becoming more competitive

• ‘Superpower of mass consumption’ – cannot afford to ignore it

• Investment: – 2000 onwards - $4.2 bn U FDI to China on

average p.a.– Stocks of EU FDI – over $35 bn

• Corporate Europe needs Chinese doors open– NL Phillips – one fifth of employees in China– 2004: Nokia, Siemens, Eriksson establish

research centres in China– Join forces with Chinese players

Arms embargo

• France and Germany want to lift, because:– Confrontational rather than co-opertive– Economic interests generally– Helps weapons producers in UK and France– Germany wants support from China to help it

become member of UN Security Council– Helps multpolarity

• EU bowed to US pressure – does not affect relations

What does China want from Europe?

• Wants polycentric rather than unipolar world order (like Chirac)

• Access to Europe’s markets

• ‘The common ground between China and the EU far outweighs their disagreements’

China’s EU Policy Paper

• Political, economic and cultural objectives

China’s political objectives

• Strengthen high-level visits and political dialogue• ‘Strictly abide by the one-China principle’• Encourage Hong Kong and Macao’s cooperation

with EU• ‘Promote the EU’s understanding of Tibet’• ‘Continue the human rights dialogue’• Strengthen international cooperation• Enhance mutual understanding between

Chinese and European legislative organs• Increase political exchanges between political

parties and the EU

China’s economic objectives

• Economic co-operation and trade, e.g.– Ease restrictions on high tech exports– Reduce and abolish anti-dumping policies– Compensation for any losses from enlargement– Boost EU-China coordination in WTO negotiations– Strengthen dialogue on investment– More EU development aid – e.g. environment, HRD – Greater cooperation – quality supervision, inspection,

quarantine – for health, security, safety etc and rapidly address issues affecting market access

• Financial cooperation– Market access banks, insurance, etc

• Agricultural cooperation• Environmental co-operation• IT cooperation

– EU participation in China’s IT promotion– Information Socity– IP rights and technical standards

• Energy cooperation• Transport cooperation – especially

maritime and civil aviation

Education, Science-Technology, Culture, Health, etc

• Co-operation in science and technology

• Cultural exchange

• Cooperation in education

• Cooperation in health and medical care

• Press exchange

• Personnel exchange

Sectoral dialogues

• Not headline grabbing but important – cover over 20 areas. Examples:– Competition law – many exchanges at expert

level – draft similar to EU model– Internal market – like EU, China wishes to end

market fragmentation – free movement of people, goods, services, procurement

– Regional policies and other income re-distribution mechanisms

Areas of trade tension

• EU – largest trade deficit with any partner– Reflects market obstacles?

• EU wishes to remove obstacles to trade (price controls, standards, etc)

• Obstacles to investment – geographical restrictions, joint venture requirements, discriminatory licensing procedures, closure of sectors to foreigners)

Bra Wars

• 1.1.05 – end of global textile and clothing quotas – end of 30 years of protection in US, Canadian and European markets

→ big surge in Chinese clothing exports to EU (sales of some items – up by 500%) & complaints of injury from European producers

→ June 2005 agreement – quotas on 10 items until 2008. EU within its rights as par of rules governing China’s WTO accession– Pullovers, men’s trousers, blouses, T-Shirts, dresses,

bras, flax yarns, cotton fabrics, bed linen and table and kitchen linen

• Quotas quickly breached – by early August 75 mn items stuck in warehouses

• 5 September deal to release goods– All goods to be released but half to count

against 2006 quota– China agreed not to export any more

pullovers, trousers and bras in 2005

Interested parties

• Consumers – clothing prices fhave fallen 40% in last 8 years

• Retailers rely heavily on China– produces about ¼ of world’s clothing– Fashions from catwalk to clothes rail in 304 weeks– ‘People want cheap goods and Italy does not make

them. Protectionism does not work.’

Stuart Rose, Chief Executive of Marks and Spencer

• Manufacturers pressurised their governments (France, Spain, Italy, Greece, Portugal, Lithuania)

• Germany, Denmark, Netherlands, Finland and Sweden argued against protection

• Pre-quotas:– losers from import surge not European

producers but traditional EU suppliers – Pakistan, Indonesia, Thailand, Philippines, Taiwan, etc – exports to EU fell 10-60% in H105

• Post quotas– Retailers unable to buy from China looked to

other low cost producers – Turkey, Roamnia, Bangladesh, Sri Lanka

• Dispute over narrow range of products – big rise in volume, smaller increase in value – implies prices falls

• Dispute affected many producers outside Europe and China

• Will problem re-emerge?

Shoe wars?

• 2006 Mandelson introduced anti-dumping duties on footwear import from China and Vietnam f

• Opposition from some member states – e.g. Sweden wants consumers’ interests to be considered.

• Many European companies sub-contract in China• Encourage Chinese companies to compete on

more than just price? Brands, etc

Nature of and dangers to relationship

• Non-strategic competitors – geopolitics• Common ground outweighs areas of agreement• Disagreements hurt both sides – e.g. textiles• Relationship affected by US (e.g. arms

embargo) – influence could decrease• China’s links with EU weaker than those with US

and Japan (4,600 Japanese jvs in Shanghai alone)

Challenges to relationship

• Europe – intergovernmental vs supranational

• EU and its members both have relations with China

• Increasing competitive challenge throughout most sectors, including high tech.

The Future

• More trade disputes?

• Greater formalisation of EU-China links – – 8th EU-China Summit agrees to negotiate new

China-EU Framework Agreement – to ‘reflect the full breadth and depth of the strategic partnership between China and the EU’

– Compare to Russian PCA

India

Emergence of India

• Overshadowed by China – increasingly recognised as awakening sleeping giant

• Trend growth of 7-8% - aiming higher• 1991 - economic reforms began in earnest –

some current problems• Integrating with world economy as never before

but– Tariffs remain high– Indian goods account for 0.8% world exports

(compared to 6.4%) for China – need further infrastructural and regulatory reform

• IT driver – but not without problems

Evolution of formal EU-India links

• 1963: India establishes diplomatic relations with EEC• 1971: EEC GSP scheme – includes India• 1981: EEC-India 5 year Commercial and Economic

Cooperation Agreement• 1983: EC delegation established in India• 1996: Commission Communication – EU-India Enhanced

Partnership• 2000: first ever EU-India Summit• 2005: 6th EU-India summit issue Joint Action Plan setting

out steps needed to transform bilateral ties to strategic relationship

• India accounts for 2% of EU imports and exports

• Trade in manufactured goods dominates both ways

• EU is India’s largest trading partner and its main source of FDI

• India = EU’s 12th trading partner and accounts for 1.7% trade

• 1991-2002 – EU share in FDI approvals around 25%

EU merchandise trade with India

-4

0

4

8

12

16

20

24

2000 2001 2002 2003 2004 2005

€bn

Imports Exports Balance

Source: Eurostat

Average growth exports – 5.7% p.a.Average growth imports – 6.1% p.a.

EU trade by product with India - 2004

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Exports Imports

Food and drink Raw materials Energy

Chemicals Machinery and vehicles Other manufactures

Source: Eurostat

0

2

4

6

8

10

12

14

16

18

20

Exports Imports

Food and drink Raw materials Energy

Chemicals Machinery and vehicles Other manufactures

€bn

Main EU traders with India – 2004 (€bn)

0

1

2

3

4

5

Belgium UK Germany France Italy

Exports

0

1

2

3

4

UK Germany Belgium Italy France

Imports

Source: Eurostat

India – FDI by source (Jan 2002-Oct 2005)

3%

3%

4%6%

11%

25%

48%

US UK Germany Japan S. Korea France Other

Source: FT – 26.01.06

• 35% FDI in ICT• 13% in electronics• 12% in business and financial services• 8% heavy industry

Joint Action Plan

• Mechanisms for relationship• Political dialogue and cooperation• Culture• Policy dialogue and cooperation• Development of trade and investment

– Establish High Level Trade Group to consider ways to deepen relationship, including possible launch of bilateral talks on broad-based trade and investment

• India – less developed framework than Russia or China – but one for the future