Emergence of Global Competitors a Threat to the Economic Competitiveness of the EU

Introduction/Background

The European Union (EU) is currently the largest exporter and second-largest importer of goods after the United States in the global market. However, this region has recently lost significant market share to emerging economies such as Brazil, Russia, Chin and India (Amiti & Freund, 2010, p. 1). China, in particular, has gained significant influence and has emerged as the greatest challenge to EU’s economic competitiveness in the global arena. Since 1970s, China has developed policies and embraced reforms that have aided in boosting domestic economy in a way that no one could have imagined. Chinese export-oriented policies have steered this country to penetrate into major markets, both in developed and underdeveloped nations over the last few decades (Amiti & Freund, 2010, p. 1). Of greater concern, EU has recorded an ever-increasing deficit in its trade with China all along, since establishment of trade relations in 1970s. According to Amiti & Freund (2010, p. 1) this deficit has increased tremendously over the last one decade. In this regard, Chinese economic rise can be perceived as a major challenge and a threat to economic competitiveness of EU in the global arena. This calls for specific policy responses among the EU members. This policy paper is addressed to the European Commission Board and it examines the extent to which China has threatened economic competitiveness of EU in the global market.

Global Trade in Goods

As mentioned earlier, EU is the largest exporter of goods in the global market. In 2010, extra EU exports were approximately 16% of total global exports while total imports amounted to 17.5 percent (Grinberg et al, 2011 p. 2). Chinese exports have grown rapidly over the last two decades, ranking advanced second in 2010 (14.1 percent excluding Hong Kong), overtaking Japan and US (Grinberg et al, 2011 p. 2). In terms of imports, China has overtaken Japan to rank third after the EU and the US.

Figure 1: 2010 Export Statistics in the Global Market

Source: Grinberg et al (2011 p. 4)

Table 1: 2010 Export and Import Statistics in the Global Market

Source: Grinberg et al (2011 p. 6)

Table 2: Global Trend in imports and Exports

Source: Grinberg et al (2011 p. 7)

As , Grinberg et al (2011 p. 7) explains, there has been non-proportionate growth in rates of exports and imports among the major players in the international trade over the last two decades, leading to reallocation of market shares from developed to the emerging economies such as China, India, Brazil and Russia. Table 2 indicates that market shares for established economies such as the EU and the US have been declining over the years 2001 to 2011 while those for emerging economies such as China have been increasing. Notably, the share of the global exports for the EU has declined from 19 percent in 1995 to 16 percent in 2011. On the other hand, the share of Chinese exports in the global market has risen from 4 percent in 1995 to 14 percent in 2011. Clearly, the decline in market shares for EU’s exports coincides with the emergence of new players such as China in the global market. To understand the source of threat by China, it will be prudent to look at history of Chinese economic policies development and economic growth over last few decades.

Trend in growth and development in China

Before 1970, China engaged in gigantic planning and large-scale public investment which gave a head start to industrialization and economic development in the country. According to Saha (2006, p. 172), there were large-scale and small-scale state-owned enterprises which were managed and controlled by the central authority as well as small enterprises that were privately-owned in this country. Together, they helped to create a strong base for industrial growth and economic development. This country recorded average annual growth of 5.4% and 11.2% respectively during 1960-70. However, China financed its poor closed economy by taxing agriculture, both directly and indirectly. Chinese government, for instance, controlled the movement of agricultural products, ensured that they were sold at low prices in urban areas and restricted exports in order to support industrialization. Though industrial sector received much protection from external protection, agricultural sector continued to deteriorate due to coercion and lack of attention. However, the ill effects of this command-and-control economy became evident in China during the same period (Saha, 2006, p. 173). This transformed into high levels of inefficiency, distorted incentives, lack of employment security in both agricultural and industrial sector, deficiency in food production and lack of market system.

According to Srivastava (2005, p. 48), China responded by creating free labour markets and various market-oriented incentives from 1978. These moves, among others, helped to attract foreign investors. Foreign investors brought with them new technology, which was necessary for industrialization entrepreneurship. According to Srivastava (2005, p. 48), flexibility also allowed the foreign investors to cut input costs by attracting cheap labour with freedom to hire and fire. This enabled the investors to employ workers on a large-scale to increase productivity and to realize a lot of profits. Therefore, industrialization and economic growth and development in china have largely been driven by availability of semi-skilled workers as well as favourable climate for investment that has attracted a steady flow of foreign investors. One of the disadvantages of incentives and flexibility is that they tend to widen income differentials (Srivastava, 2005. p. 49). As noted earlier, reforms removed distributive mechanisms that guided employment contracts. As a result, employees, especially in private firms suffered from discrimination and exploitation. In spite of this, overall production increased manifold.

According to Srivastava (2005. p. 49), China came up with market-oriented reforms in 1978 which helped in opening up domestic economy to the global market. Chinese government came up with a policy to support export-oriented Foreign Direct Investments (FDI) from more advanced nations such as US and Japan, mainly in the fields of electrical machinery and apparatus and clothing and textiles. In the initial steps, China established Special Economic Zones’ (SEZs) to attract export-oriented FDI from Taiwan and Hong Kong. They were guaranteed low wage costs, tariff exemptions, tax privileges and modern infrastructure. Additionally Chinese government came up with a ‘joint venture policy’ which led to creation of a ‘market for technology’ strategy. Foreign investors were required to transfer advanced technology to their Chinese counterparts, in exchange for access to the Chinese market. This helped to speed up industrial development in this country (Srivastava, 2005. p. 49).

In the early 1990s, China extended the SEZs to other parts of the world and reduced tariff and non-tariff barriers on investment goods and intermediate inputs (Sundar, 2007, p. 75). Consequently, China became one of the most attractive markets for FDI globally after US and trade started to expand at a higher rate than the domestic GDP growth rate. The Chinese currency was devalued by local monetary authorities to support exports and was made convertible on current accounts. The Asian Financial and Economic crises that intensified in 1997/1998 helped to raise the role played by China in the global arena. During that period, Chinese monetary authorities decided to peg the Yuan to the US dollar, rather than allow it to follow the massive devaluations of currencies in other countries in the region (Wang & Gang, 2009, p. 11). This strengthened role of China, both in the Asian Region and globally, as a ‘growth pole.’ This had also positive impact on China’s relations with other nations in the world.

In 2002, the Chinese government added a new dimension to the country’s growth model by allowing and promoting foreign direct investments by Chinese enterprises. The ‘go abroad policy’ aimed at acquiring technology, securing resources, gaining access to lucrative markets and distributional networks, making effective use of foreign exchange reserves and bargaining for reduction in trade restrictions against Chinese enterprises. According to Angresano (2009, p. 3), the Chinese government initiated a project to generate 40 to 50 big transactional companies operating in the global market. So far, Chinese investors have established numerous spectacular investments in various parts of the world with a prime objective to acquire raw materials and to seek market for outputs. In some cases, Chinese enterprises acquired European Companies as part of their expansion strategy.

China joined World Trade Organization (WTO) in 2003 and reduced many trade restrictions to comply with WTO rules. As Wang and Gang (2009, p. 11) explains, this entry led to the expansion of both Chinese exports and imports, but exports increase much faster. Wang and Gang (2009, p. 11) note that China started recording massive trade surpluses while trading partners such as EU and US started recording deficits. In 2005, Chinese monetary authorities decided to loosen the dollar peg of the local currency and allowed daily fluctuations by +/- 0.3% against other currencies such as Euro and Yen. In 2006, the Euro strengthened against the dollar, making the Chinese exports cheaper and the European exports more expensive in the global market. As a result, the market demand for Chinese goods increased in various parts of the world, replacing European goods. This explains the fact that economic competitiveness of China has been rising while that of European Union has been declining.

Social-Cultural Factors

According to Bloom (2011), the rate of growth in Chinese economy has partly been driven by the social-cultural attributes of the population in this country, which aid in opening new economic opportunities. To start with, China is the most populous nation in the world with approximately 1.325 billion people (White & Subedi, 2010, p. 11). Arguably, the good demographic ration of this nation provides good opportunities for investment. Though China has a low percentage of young people, it has recently recorded a rapid increase in immigrants, most of whom are young people. Besides the rapid growth of Indian and Chinese economies, this factor has been critical in driving the formation of the expanding middle class, leading to the current rapid increase in consumer spending in domestic markets in this country. According to White & Subedi (2010, p. 13), it is projected that the already rapidly increasing middle class in China will lead to further increase in consumer spending over the next 20 years.

Apart from that, education has been a key for social mobility in China. Basu (2010, p. 7) notes that China has taken important steps to reduce existing gaps in education successes between the urban and rural areas by improving the quality of education in rural areas and increasing participation of rural students in higher education. Though there are still inequalities in income distribution between different regions as well as urban and rural areas, the rate of decrease of this gap has been impressive in this country. Evidenced by the rapid increase in the middle class population, the disparity in purchasing power among families is declining (Urban, 2008, p. 3). This has also been a factor in raising consumer in China.

Economic growth of China has also been driven by unique features of Chinese people and their attitude towards work. According to White and Subedi (2010, p. 15), Chinese people work extremely hard, for long hours at stretch, they value their work, they dedicate themselves to their work and their productivity is extremely high. According to White and Subedi, (2010, p. 15), Chinese employees are very innovative and versatile. They value new knowledge and like to learn from their mistakes. This uniqueness of Chinese population has been a major driver to expansion of Chinese economy in both local and international market. Importantly, cost of labour in China cheap compared to developed countries such as the EU countries. Management of Chinese enterprises is also carried out in such a way that it translates to the lowest costs possible. This also translates to lower-priced outputs for Chinese industries compared to European Nations (Häuslein, 2010, p. 3). This explains the fact that China and other emerging economies have comparative advantages in trade in labour intensive industries compared to the EU.

China-EU relationship

According to Grinberg et al (2011, p. 38), trade relations between EU and China have been characterized by dynamism. Since China established trade relations with EU in 1978, trade volume has increased 30-fold to around €428.7 bn in 2011. Today, China ranks second in trade with the EU after the US. The most salient aspect is that EU has accumulated trade deficit in trade with China for that last 20 years. In fact, EU has been recording its largest trade deficit with China lately, which amounted to €156.3 bn in 2011. Though the EU has been leading in exports, these figures have raised alarm in European countries. Apart from this, Grinberg et al (2011, p. 38) explain that the presence of differing foreign policies among EU members has weakened the ability of EU to approach China. The economic prowess of China has influenced EU members in such a way that each of them aims to pursue own unique strategy of rapprochement with this country, even if the strategy may be against the interests of the other members of the EU. According to Grinberg et al (2011, p. 38), China is aware of these differences and has been exploiting them to own advantage. China enjoys the fact that the 27 EU members tend to play against one another and end up lowering trade restrictions. The EU members can be categorized into two based on their economic might: industrialists such as Germany and United Kingdom and non-industrialists such as Greece.

The industrialists have economic might to stand against China in both economic and political issues while non-industrialists are weaker. Germany is currently the largest trading partner with China among the EU members, but conducts Chinese policy pragmatically. According to Grinberg et al (2011, p. 38), its policies aim at imposing anti-dumping measures and pressing China to adhere to sector-specific demands in order to protect local industry from subsidized, low-cost Chinese goods. It does not impede EU-level of negotiations and hardly encourages them. On the other hand, non-industrialists can be said to be the greatest losers in the trade relationship between EU and China. Unlike industrialists such as Germany, their economies are not complementary with Chinese, but are competitive. Consequently, they sometimes come up with measures that aim at undermining entry capability of Chinese in Europe. Sometimes, they realize the Chinese investment in their countries would lead to commercial benefits and hence, encourage good political relations with China. In such cases, they hardly challenge Chinese policies (Grinberg et al, 2011, p. 39).

Impact of the Recent Global financial crisis

The recent global financial crisis started in 2007 and was intensified by the collapse of US Lehman Brothers in September 2008. As a result, confidence in the world economy collapsed and the global financial markets became dysfunctional. The EU is one of the regions that were hard hit by the crisis. As a result, non-industrialists in this region became vulnerable; making the differences among EU members in regard to Chinese policies more pronounced. China took advantage of the situation by providing various opportunities for indebted countries such as Greece. One of the fundamental opportunities is a line of credit that was availed to these countries without any kind of conditionality (European Commission, 2010, p. 267). Secondly, China started offering job opportunities for in countries where levels of unemployment had risen to historical levels (Singh, 2011, p. 1). Generally, lack of coherent foreign policy among the European nations has eroded the bargaining power of the European block in dealing with China, as well as the foundations of integration among the members. Apart from the European region, China has recently become an important donor in African and Latin American nations, eroding the dominance of European nations from those regions.

Conclusion

In conclusion, the EU is currently the leading exporter and importer in the world. However, its market share has been declining over time with that of emerging economies such as China increasing. In fact, EU has been losing market share to the emerging economies such as China, both in the local and in the global market. Most importantly, the EU has been recording trade deficits with China and this explains the fact that China has emerged as a serious challenge to economic competitiveness of EU in the global market. The economic prowess of China can be attributed to effective policies and reforms laid by Chinese government since late 1970s that support productivity and penetration of Chinese goods into the global market. The social-cultural attributes of Chinese population have also contributed to economic progress of China. Chinese enterprises sell their products at cheaper prices in the global market, making them more competitive to products of their counterparts in Europe. Though China has maintained goo relations with EU for a long time, Chinese foreign policies have been viewed as a threat to economic integration of the EU members. This situation has been aggravated by the recent financial and economic crisis. Generally, the emergence of China in the global market and other developing economies is a threat to economic competitiveness of EU in the global arena, which calls for policy interventions among EU members.

Policy recommendations

One good response to the low-cost goods produced by Chinese enterprises is to integrate the Chinese into production chain by European producers. For instance, the Chinese enterprises could be integrated in the trade as suppliers since they produce low-cost components and raw materials. The EU should come up with policies that will help to solve existing internal crisis. The members should come up and agree to a common foreign policy that will boost their bargaining power individually and collectively when dealing with emerging economies such as China. The European Commission needs to come up with a competition policy to protect vulnerable members from adverse effects Chinese low-priced goods in their local markets. Also, the EU should push for a farer trade with China and protect weaker members from the possible trend of social dumping. It is recommended for the EU members to invest more in research and development in order to enhance innovation of products that can compete with the low-priced Chinese products in the global market. Finally, the EU should assess the opportunities that are available in trade with China and take advantage of them. As noted, China has rapidly increasing middle-class that demand for European goods and services. Therefore, EU should asses the possibility of expanding sales to Chinese market.

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