KA-76-06-463-EN-C China, the EU and the World: Growing in Harmony? China, the EU and the World: Growing in Harmony? China, the EU and the World: ISBN 92-79-03556-8 EUROPEAN COMMISSION 01_2006_4142_cover_EN.indd 1 25-09-2007 9:01:48 How to obtain EU publications Cover photo: Filip Devroe of Sanderus Antiquariaat. Map by Ortelius Our priced publications are available from EU Bookshop (http://bookshop.europa.eu), where you can place an order with the sales agent of your choice. The Publications Office has a worldwide network of sales agents. You can obtain their contact details by sending a fax to (352) 29 29-42758. Europe Direct is a service to help you find answers to your questions about the European Union Freephone number (*): 00 800 6 7 8 9 10 11 (*) Certain mobile telephone operators do not allow access to 00 800 numbers or these calls may be billed. More information on the European Union is available on the Internet (http://europa.eu). Cataloguing data can be found at the end of this publication. Luxembourg: Office for Official Publications of the European Communities, 2007 ISBN 92-79-03556-8 © European Communities, 2007 Reproduction is authorised provided the source is acknowledged. Printed in Italy PRINTED ON WHITE CHLORINE-FREE PAPER 01_2006_4142_cover_EN.indd 2 25-09-2007 9:01:49 EUROPEAN COMMISSION Bureau of European Policy Advisers CHINA, THE EU AND THE WORLD: GROWING IN HARMONY? ₼⦌ , 㶶䥮₝₥䟛: ⦷✛废₼␀⚛♠⻤ by Frederic Lerais Mattias Levin Myriam Sochacki ° Reinhilde Veugelers °° ° Responsible for the political part ([email protected]); °° Responsible for the economic part ([email protected]) July 2006 01_2006_4142_txt_EN.indd 1 12-07-2007 10:43:02 DISCLAIMER The Bureau of European Policy Advisers (BEPA) is a department of the European Commission, reporting. directly to the President. It provides advice to the President and the Commissioners and formulates recommendations on issues regarding the policy of the EU. BEPA focuses on issues of a strategic or structural nature and concentrates on the earlier stages of the policy development cycle and the development of policy options for consideration by the President and the Commissioners. BEPA runs three external expert groups advising the President of the European Commission. One is the Group of Economic Policy Analysis (GEPA), a body made up of top European economists. The European Commission – under the responsibility of the Commission departments for Trade and External Relations – is in the process of reviewing its policy strategy as regards China. A request was made for BEPA to write a report (i) reviewing where China stands on its development path, (ii) assessing what challenges it is facing, and (iii) analysing what this implies for Europe and its policy stance. Subsequent to that request BEPA organised a GEPA meeting on China in December. This report is a follow-up to that meeting and provides a background for reviewing the EU’s China strategy. In drafting the report, the authors have benefited from prior research and work carried out by other Commission departments, notably Economic and Financial Affairs, Enterprise and Industry, Environment, Trade, and External Relations. Specific reports and notes by these services have been used as references throughout the report. The policy conclusions of the report were discussed with members of the President’s Office, the External Relations and Trade departments. The authors also benefited from comments by GEPA members and BEPA colleagues. Any remaining errors are the responsibility of the authors. The opinions expressed in this paper are solely those of its authors and do not necessarily reflect the views of the European Commission. ii 01_2006_4142_txt_EN.indd 2 12-07-2007 10:43:03 Abstract During the last decade, China has become a major global economic and political player. China’s economic development has been extraordinary; with average annual GDP growth rates close to 10%, it has become the third largest exporter globally. Nevertheless, the GDP per capita numbers underline how far China’s standard of living is still lagging behind and how far distant the goal of a “well-off society”, emphasising a more social and environmentally friendly path to development, still is. In line with China’s economic rise, the country has come to occupy a prominent place on the EU policy agenda. China is now the EU’s second most important trading partner, after the US, while the EU has become China’s top trading partner. This report will first analyse what forces have been driving China’s current development. The second part will try to identify how China will evolve in the future and what challenges to its long-term sustainable development it is facing. The final part analyses the impact of China’s current and future development for the EU and its policy stance. It concludes with recommendations for an EU policy on China. iii 01_2006_4142_txt_EN.indd 3 12-07-2007 10:43:03 PREFACE In the course of the last decade, China has become a major global economic and political player. This development has been triggered primarily by the economic policy changes launched in the late 1970s, gradually opening up the economy to the forces of global markets. This process has been unquestionably positive for Chinese citizens, who are leaving behind decades of poverty. Since the start of the reforms, national income (GDP) has grown at an average annual rate close to 10%. China has accordingly closed a substantial part of the gap with the developed world. In 2004, China is the third biggest economy in terms of GDP (adjusted to differences in purchasing power) after the US and the EU and way above Japan and India and a major trader on world markets. Nevertheless, it still has a long way to go. Despite the specific sectoral segments in which China is competing on a global scale, the economy as a whole is still struggling with underdevelopment and poverty, especially in the western provinces. Working to close the remaining gap will require that China, while opting for a more social and environmental friendly, “harmonious” path to development, be nonetheless able to maintain the dynamics of its recent growth performance. But beyond the internal challenges, China’s rise raises important questions for the international community. Over the last decades and under unchanging single-party rule, China has evolved from a revolutionary state to a relatively status quo state and from diplomatic isolation to an impressive expansion of its diplomatic commitments. Along the road China has developed at least a dual identity, with regular real tensions between the two identities; one is the sovereign nation, aiming to establish a “rich state and strong army” so as not to be humiliated again, and the other is the self-proclaimed “responsible major power”, whose integration in the international community is quite remarkable having regard to the country’s level of development. China has indeed claimed a prominent place on the global agenda and more specifically on the EU’s policy agenda. The debates around the arms embargo and textiles imports in 2005 illustrate how important China has become for Europe, both as an economic and as a geopolitical player. China is now the EU’s second most important trading partner, after the US, while the EU has become China’s top trading partner. In drafting this report, the authors set out to answer three questions: (i) Where does China stand on its development path? (ii) What challenges is it facing? (iii) What does China’s rise imply for the world in general and the EU and its policy stance in particular? Given the extent to which politics and economics are increasingly indivisible, the report will both consider the economic as well as the political dimension of China’s development. Accordingly, Part I of this report analyses where China is today. It analyses China’s political system and the sources of its current economic growth. It continues with an analysis of China’s position in the world economy and its evolving foreign policy. Part II reviews a number of the significant challenges to its long-term sustainable development, including challenges to the macro- economic policy framework, the financial and production system, public finances, innovative capacity, labour markets, social cohesion, environment and the political and legal system. Finally, after taking an in-depth look at the strengths and weaknesses of the Chinese development process, Part III analyses the impact of China’s continued rise for the EU. Starting off with an analysis of the economic impact on the EU, it continues with a description of the EU’s current policy vis-à-vis China, concluding with recommendations for a future EU China policy. The result is, unsurprisingly, a lengthy report. A few remarks to assist the intrepid reader: the Key Questions and Policy Recommendations of this report are summarised in the box on the iv 01_2006_4142_txt_EN.indd 4 12-07-2007 10:43:03 following three pages. The more detailed findings of the three parts of the report underpinning our Key Policy Conclusions are found in the Executive Summary. For readers interested only in specific issues, the Table of Content lists the different chapters of each part. Furthermore, each of the Three Parts is preceded by a short summary providing the gist of the argument and an outline clearly indicating the focus of each chapter. The authors, Brussels, July 2006 v 01_2006_4142_txt_EN.indd 5 12-07-2007 10:43:03 Table of contents PREFACE...............................................................................................................................................................