The Blog of Changes - Duncan Freeman

There are sharp contradictions in the fundamentals of the EU in its relationship with China. As usual in the EU, Germany is at the heart of the question. The weight of Germany in the EU’s relationship with China far outweighs that of other member states. This has major implications for EU policy on China. Just as German economic domination of the EU, or at least Eurozone, economy gives it the strongest voice in dealing with the Europe’s internal crisis, so Germany will expect to be primus inter pares in dealing with China. German policy will based on completely different interests compared to other member states and the EU institutions.

That Germany is China’s new best friend in the EU was demonstrated clearly in DG Trade’s dispute with Beijing over solar panels. By voting against and very publically opposing the attempt by DG Trade to press for anti-dumping duties on solar products from China, Germany showed clearly where its economic priorities lie. Even if manufacturing photovoltaic panels in the EU is almost entirely a German industry, Berlin was not about to allow the action by DG Trade to undermine Germany’s wider interests that go far beyond one sector.

Any discussion of the economic relationship between Europe and China in collective terms of the EU obscures far more than it reveals. The EU does not have an economic relationship with China, its member states and companies do. And as Germany now dominates the internal EU economy, so it dominates to an even greater extent the economic relationship between the EU and China. The following charts make this clear.

Chart 1: Germany’s Trade with China (Euro millions) Source: Eurostat

The EU member states in aggregate have a trade deficit with China, which, even though it has stablised or declined in recent years, continues to define most European views of the economic relationship. Germany, by contrast, in the last two years has had a trade surplus with China, which reached €5.5 billion in 2012. The main reason for this has been the rapid increase in German exports to China. But more recently it has also been helped by a slowdown in the growth of German imports from China. No other EU member state comes close to matching this performance.

The second chart shows how EU trade with China is in reality to a large extent actually German trade with China. According to Eurostat statistics, in 2012 Germany accounted for 46% of EU exports to China, a figure that is probably an underestimate. This share of exports to China has grown considerably in recent years, rising from 37% in 2000

Chart 2: Share of EU Exports to China 2012 Source: Eurostat

At the same time, China has become more important to Germany than to the rest of the EU. In 2001 China accounted for 3.5% of total exports from the EU to the rest of the world and by 2012 the figure had risen to 8.5%. China’s share of Germany’s exports has risen from 5% in 2001 to 12.4% in 2012.

Germany also dominates the much less important, but nevertheless expanding, investment relationship with China. According to Eurostat figures, Germany accounted for 38.1% of EU direct investment in mainland China.

Chart 3: Share of EU Stock of Direct Investment in China 2011 Source: Eurostat

Germany thus stands far above the other member states not only in the size and relative importance of its economic relationship, but also, at least as measured by the crude index of the trade balance, in its ability to profit from the relationship. As with its position in the EU’s domestic economy, this gives Germany a preeminent position and a set of interests that set it apart from other member states and the also EU institutions. It would be naïve to believe that all EU member states seek the greater common good. As the euro crisis has shown, Germany seeks to advance the European interest only in as far that its leaders believe the general interest matches its own. The solar panel case shows that Germany will continue to ensure that its interests in the China relationship are protected within the EU framework.

These charts reveal a key underlying dynamic of the EU-China relationship that is not likely to change significantly any time soon. One of the main causes of Germany’s predominance in the Eurozone is also a major factor in its leading position in China. In the same way as Germany’s role as the “powerhouse” of the Eurozone is based on the inherently unsustainable flaws of the euro, so is it role in the economic relationship with China. Germany, will not lose its position as China’s dominant trading and investment partner in the EU soon, and certainly not until the Eurozone crisis is truly resolved, which remains years away. Until then, Germany will lead the way in China.

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