Transcript CHINA’S EMERGING LEADERSHIP ROLE IN ASIA

Willem van Kemenade
Website: www.willemvk.org
E-mail: [email protected]
THE EU-CHINA-US
GRAND TRIANGLE
How to balance Strategic Rivalries and
Commercial Interests
Vlerick Leuven Gent
Management School
October 17, 2005
1
Contents
China’s domestic political, social and
economic development
 The Trans-Atlantic Rift
 America’s Hard and Europe’s Soft
Power
 M&A, Sanctions
 Free Trade vs. Protectionism

2
Hu Jintao (61), the smiling
Closet Hardliner
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Since take-over in 2002-2003, hope was high that Hu would
introduce a new wave of political reforms. However, he has
suppressed the debate at the national level and revealed himself
as a stern leader, focussing on rural poverty, government
austerity and anti-corruption.
Worried by people’s power take-overs in Ukraine, Georgia and
Kygyzstan and rebellion in Uzbekistan, there is a crackdown on
dissent: arrest of writers and journalists, tougher controls on the
Internet and foreign media, tighter police surveillance of activists, a
clampdown on NGO’s.
As state control over the economy declines and the private sector
expands, Hu want to re-centralize state- and party-power so as to
maintain stability and order.
In foreign policy Hu stresses “Peaceful Rise” rebuking the US
Neo-Cons and Japanese right-wing, who see China as a “Threat”.
3
The World’s 15 Largest Economies
2002-2003
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
United States
Japan
Germany
United Kingdom
France
China
Italy
Canada
Mexico
Spain
Brazil
India
South-Korea
Netherlands
Australia
GDP*
10.065
4.141
1.846
1.424
1.310
1.159
1.089
694
618
582
502
477
422
380
369
Population
285
127
82
59
59
1.272
58
31
99
41
172
1.032
47
16
19
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
United States
Japan
Germany **
United Kingdom
France **
China
Italy **
Canada
Spain **
Mexico
India
South-Korea
Brazil
Netherlands **
Australia
Source: World Bank Atlasses, 2003-2004
The Economist, Pocket World in Figures 2005
GDP* Population
10.383
288
3.993
127
2.108
82
1.566
60
1.521
60
1.266
1.294
1.258
57
714
31
694
40
637
102
510
1.041
476
47
452
175
444
16
409
19
* Billion US$
** Billion €
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The World Economy is
booming in China
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Sixth largest economy, second in PPP; 4th trading power.
22 % of the world’s population; GDP of $ 1.55 trillion is 4 % of the
world aggregate of $ 36 trillion. Per capita income 2004 $ 1.196,--.
China is expected to match the US in coming decades as the
“locomotive of world economic growth”. It now contributes 18 %
to global growth. In 2003 China accounted for 60% of world trade
growth
"China's economy has continued to depend too much on externals," .
About 45 % of China's growth derives from exports, and so the
country's economic health is highly vulnerable to protectionist
pressures from the US and Europe.
"Exports are becoming a growth engine, but China will have to
carefully deal with these external risks."
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The Yuan: From Dollar
Peg to A Managed
Floating Exchange Rate
Regime
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After a long campaign of pressure and threats from the US,
China, on July 21 revalued its currency by 2.1 % and re-pegged
it from the dollar to a trade-weighted currency basket of dollar,
euro, yen and won. Yuan is permitted to fluctuate 0.3% daily,
which in theory allows the yuan to creep up, however, central
bank intervention makes a dramatic appreciation unlikely.

The US had demanded at least 10 % but welcomed this as a
“good first step”. China has categorically stated that there won’t
be any more adjustments.

A substantial revaluation would heighten the risk of a massive
exodus from real estate, as speculators look to cash in, pushing
the shaky banking sector into a tailspin. Huge amounts of
property would hit the market and real estate prices would go
into a tailspin.
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Foreign
Investment
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China attracted a record $60.6 billion in actual FDI in
2004 as major overseas retailers, auto makers and other
manufacturers ramped up spending.
Foreign investment during the first half of 2005 fell 3.2 % as
falling prices and rising costs prompted global manufacturers to cool
expansion in the world's fastest-growing major economy.
China still attracted more than five times as much foreign investment
as Southeast Asia last year and almost 14 times more than India,
according to Asian Development Bank figures.
The top 10 places of origin: Hong Kong, British Virgin Islands,
Bermuda, Japan, S.-Korea, US, Taiwan, Singapore and Germany.
FDI numbers are problematic, since no one really knows the extent of
round-tripping (i.e. Chinese money leaving the country and then reentering via Hong Kong, BVI as fake or pseudo-investment in order
to exploit tax advantages for foreign-invested enterprises).
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Trade Growth:
2004 Volume exceeded $ 1.1
trillion, but 2005 some slowdown
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Price hikes in raw materials and energy have made
exports more expensive. During first half 2005, exports
still grew by 32.7 % to $ 342 bn but import growth plunged
to 14% to $ 302 bn.
China's fastest export growth has been in metals from the
smelters that Chinese investors eagerly financed in recent
years: Steel exports grew by 208 % in value in the first
five months of this year, while aluminum exports grew 64
%, according to Chinese customs statistics.
China consumes a third of growth in global oil
demand, imports half the world’s demand for cement,
a third of steel, a third of copper and a quarter of
aluminum.
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Some Slowdown in Foreign Trade Growth
700
45
40
600
35
500
30
400
25
300
20
Exports b$
Imports b$
Growth %
15
200
10
100
5
0
0
* First Half
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*
Chinese exports doubled in just over five years. In contrast it
took British exports 12 years to double in the 1840s, Germany
ten years in the 1960s and Japan seven years in the 1980s.
Source: Mofcom
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When will China’s Economy
be bigger than the US’s ?
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In 2003 China's GDP was $1.41 trillion and America's
was $11.26 trillion. At constant, average growth rates of
8 % for China and 2.5 % for the US, China would have
a bigger economy in 2043.
Current demographic forecasts suggest that China's
population will peak around 2050 and then start to
decline. Well before that, say 2030, it will be
demographically one of the oldest countries in the
world, with a very high retiree-to-worker ratio.
Various imponderables – political crisis, effect of climate
change, war, may lead to different outcomes.
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Regional Relative Weight in the
World Economy
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Europeans are recognizing that in terms of economic
muscle and trading influence, the world is rapidly
coalescing into three blocs: America, Greater Europe,
and a China-centered Asia.
East Asian countries, including China, account
for 54 % of Japan's GDP.
In comparison, Central Asian countries Kazakhstan,
Kyrgyzstan, Tadjikistan, Uzbekistan, Turkmenistan,
Afghanistan account for 5 % of China’s GDP.
Latin American countries account for 15 % of the
United States' GDP.
East Europe accounts for just 8 % of the EU's GDP.
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China: A Regional Power with some Global Influence
and the Ambition to become a Two-Ocean Country
Gwadar
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A China-Centred World
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A Europe-Centred World
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Trans-Atlantic Rift
over China
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China expressed its desire for a “strategic partnership” with the
EU in its first EU-policy paper in October 2003, when anger over
the war in Iraq had just reached its peak in Beijing and several
European capitals.
One of China’s demands was the lifting of the EU arms embargo,
imposed after the bloody repression of 1989.
The EU linked the lifting to improvement of the Human Rights
situation in China but during 2005 it became evident that American
opposition and threats were the main reasons for EU wavering.
The US views China as its main future adversary, whereas
Europe sees China as an emerging pole, that together with a
more cohesive future European Union will give shape to a
multipolar world, to replace a US-dominated unipolar world.
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Escalation of trans-Atlantic rift
over the Lifting of the Arms
Embargo during 2005
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US rhetoric: “Immoral Europeans making fast bucks by
selling arms to Communists to better kill Americans,
defending Taiwanese democracy”.
The issue had become entangled in how the hardline Chinabashers in Congress perceive China.
The House of Representatives on July 14 rejected the “East
Asia Security Act” giving the president the authority to bring
sanctions against European companies that would sell arms to
China.
The US arms industry had strongly lobbied against the
legislation, because more export controls would result in
unspecified American job-losses.
EU businessmen didn’t expect that lifting the embargo would
result in quick, big arms deals but would facilitate other high
profile deals such as the Airbus A 380.
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Shift in Global Strategic Culture
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Several developments are changing the psychology of global
strategic relations:
The decline in American power and prestige as a result of:
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The bungling of the war in Iraq;
The bungling of aid and rescue during Hurricane Katrina;
The inability of the US to impose its will on Iran;
US failure with North-Korea and the indispensability of China to
solve the North-Korea problem.
The Rise of China and the emergence of a “comprehensive
strategic partnership” with the EU has made the US realise
that it cannot exert too much influence over the future of China.
The vehement row over the lifting of the arms embargo has led
to tentative trans-Atlantic steps how to jointly deal with China,
the most momentous question of our time
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Why Different European and American
Approaches towards China ?
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Unlike the US, Europe doesn’t have military alliances, troops
and navies in East Asia - Japan, S.Korea, Taiwan (?) European
involvements are mainly trade, investment and soft power.
The US Right is obsessed by the determination to remain the
pre-eminent military power and will not tolerate any challenger
anywhere in the world throughout the 21st century (see: Project
for the New American Century).
It is European policy to “socialize” China into the international
institutional order by offering it the full range of assistance and
collaborative programs.
American policy is ambivalent. Trade and investment are huge
but aid programmes are mostly carried out by private
foundations.
Government policy frequently shifts from engagement to
confrontation and v.v.
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Rumsfeld to China for first time:
“Non-Euphoric Encounter”
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Secretary of Defense Rumsfeld, the most outspoken anti-China
hardliner will visit China this week.
China has actively sought the visit by Rumsfeld for four years.
"The Chinese military wants this visit far more than the American
military. Rumsfeld's reluctance to go to China is legendary," said
one expert.
Rumsfeld asked to visit the underground military facility in
Beijing known as the Western Hills Command Center, but the
Chinese refused. Instead they will allow him to visit the
“Second Artillery”, China’s missile forces.
"Secretary Rumsfeld goes there with the intention of
having some positive outcome," a spokesman said. "I don't think
there's any particular breakthrough that we expect. Just his
presence and a serious dialogue is worthwhile."
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Solana’s hardly veiled Criticism of the US
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“Multilateralism and respect for international law are
fundamental tenets of the EU's foreign policy. And I
know the same is true for China. Together we need
convince our other partners to put these
principles at the centre of their foreign policy
too.” (Speech at CEIBS, Shanghai, 6-9-’05).
Asked to compare China’s relations with the US and
the EU, a senior FM official said: “Our relations with
the US are candid, cooperative and constructive. Our
relations with the EU are comprehensive,
strategic – i.e. longterm, beyond ideology and not
disturbed by minor issues – and a partnership,
i.e. equality”.
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US: Security Threat First ~
Business Second
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Public discourse in the US concerning China
invariably refers to its rise and is dominated by
analysis of China’s increasing hard power, the
growth in Chinese military power and its effect on U.S.
national security interests in East Asia, both with
respect to Taiwan and more generally.
Notwithstanding popular discontent over the loss of
U.S. manufacturing jobs as a result of outsourcing to
China, even China’s substantial economic prowess
and trade surplus with the United States take a
backseat in these debates to the national security
implications of China’s rise.
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Europe focuses on the
“Non-Traditional” Security
Threat of China
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The strategic partnership between the EU and China,
agreed to in 2003, reflects the European view that
China has become a key player on the types of soft
security issues that Europe considers significant.
The EU believes that the main threats to its security
are of the transnational variety: illegal immigration,
international crime, contagious diseases, energy,
environment, and problems related to poor
governance.
The EU views China as one of the major powers that
will shape the outcome of these problems.
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Americans use the
Megaphone, Europeans
the Telephone
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The United States is holding China to a higher standard than
others, because China is a divisive partisan issue in US
domestic politics.
Its size, its impact on other major economies and the world at
large are perceived as a potential threat in the U.S., more than in
any other Western nation.
Indications are that the United States is prepared to confront
China on the issues of Intellectual Property Rights and
distribution- and trade rights this year and that the Europeans
and Japanese will reluctantly support this approach.
Europeans accord priority to negotiating because they cannot
impose their will on others anymore. The US has the sanctions
approach – Section 301. As former European Trade
Commissioner Pascal Lamy observed last year, Americans like
to use a megaphone, we Europeans prefer the telephone.
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EU-China: More than Trade
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The EU has already become China's leading trade partner, and
China is the second-largest destination in the world for EU
exports. But these statistics obscure the scope and depth of the
EU-China dialogue.
The summit in Beijing in September bolstered an everdeepening set of EU-China relations that includes work on a
new and wide-ranging Framework Agreement to further
formalize political relations; strengthened scientific and
technology cooperation; collaboration on labor, tourism and
migration issues; and a specific effort aimed at climate change
and energy supply security.
EU-China cooperation on space is already far along, as China is
a major partner in the development and deployment of the
Galileo navigation system.
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Ninety Percent of the EU-China
Relationship is Economic
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China is now the EU's second-largest trading partner after the
United States.
In 2004, EU-China trade grew to € 126 bn, or $ 163 bn, a 22 %
increase from the year before. But trade between the two has
been far from untroubled. Much of it is Chinese exports flowing
to Europe, to the point that in 2004 the EU's trade deficit with
Beijing ballooned to € 78 billion.
The EU has complained to China about inadequate protection of
copyrights and patents, barriers to agricultural imports and
services such as banking, and China's booming garment
exports. European officials in Beijing stressed that the Union is
generally satisfied with the progress of China's economic
reforms and hopes to resolve disputes through negotiation.
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Europe’s Focus: Improve the Governance, the
Legal System, the Business Culture of China
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Europe views China’s rise in terms of its domestic transitions, i.e.
a multiple transition from state socialism toward a market
economy, a more open society, and a more representative and
accountable government.
Unlike analysts in the US, who focus on China’s external posture,
European analysts focus on China’s internal scene and want to
assist China in managing its transition and reforms.
Europe does not want China to become a failed state. Unlike the
US, Europe is more willing to accept China as it is.
Accordingly, the EU believes that it has a great deal to offer.This is
the case not only because of western Europe’s own long
experience with social democracy and the welfare state but also
the ongoing East- European states’ experience as transitional
economies and polities that have emerged from a similar period of
state socialism.
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Opposition against Lenovo’s
acquisition of IBM’s PC
division for “phoney security
reasons”
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The U.S.-China Economic and Security Review Commission
wanted to derail the deal under the pretext that Chinese
computer experts could conduct espionage from IBM facilities.
Another complaint was that technologies that Lenovo acquired
could have a "dual use" and enhance China’s military.
However, the PC business has become a low-margin
commodity business, based on costs and efficient assembly
and distribution more than on new technology. IBM sold this unit
in part to focus its resources on higher-margin consulting and
software.
By making Lenovo the world's third-largest computer maker, the
$1.3 billion sale would draw China more tightly into global
economic interdependence and raise the price of any Beijing
aggression. A computer maker dependent on foreign
markets will not want its country invading Taiwan.
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CNOOC’s Failed Bid for Unocal
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China National Offshore Oil Corp (CNOOC) made a $ 18.5 bn
bid this summer for a small US oil company Unocal, while
Chevron made a rival bid of $ 16.8 bn.
Anti-China hysteria in Congress poisoned and killed the deal:
“China is pursuing a national strategy of domination of the
energy markets and strategic dominance of the western
Pacific.”
For China the deal was a diversion away from buying massive
amounts of depreciating dollars. (At present $ 230 bn).
The great paradox: The US strongly criticizes China for
having oil-dealings with rogue states. This time China
wanted an M&A deal in a “stable” country.
China craves global integration but was rejected just for reasons
of hypocrisy and paranoia. .
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Some Major Sino-European M&A and
Major Chinese Contracts in Europe
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In November 2003, Thomson and Chinese firm TCL merged their TV
and DVD manufacturing to create the world biggest TV maker.The
Chinese group will own 67 % of the venture, to be called TCLThomson, with the remainder held by the French group. The JV will
have factories in China, Vietnam, Germany, Thailand, Poland and
Mexico.
Huawei is now the world's second-largest supplier, after Alcatel of
advanced digital-subscriber lines, the primary conduit for the world's
broadband connections. Last year, Huawei won contracts in France,
Spain, Germany, Holland and Portugal.
Haier, China’s largest household-appliances manufacturer has factories
in Slovenia and Italy.
After an on and off M&A and rescue process with the Shanghai
Automobile Industry Corporation SAIC’s rival Nanjing Automotive
Group has agreed to buy other parts of Rover and set up a new
company with British entrepreneurs.
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Punishment of Foreign Companies by the US;
Europe more willing to transfer Technology
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The United States penalized eight Chinese companies,
including some of the country's biggest military contractors, for
supplying missile technology to Iran. ( >Taiwan)
The arms transfers to Iran, a more practical problem, illustrate
the widening European-American divide on strategic thinking
about China, with Europe less inclined to impose restraints on
China than the United States.
The Australian company BHP Biliton is licensed to use the
American geological survey technology “Falcon” since 1999 to
detect underground deposits of minerals from aluminum to zinc.
In April 2005, the Pentagon told BHP it will not be allowed to use
the system in China.
The disclosure came as the US was seeking to prevent Europe
from lifting the arms embargo against China.
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Galileo
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The EU on July 28 signed contracts with a group of
Chinese companies to develop a range of commercial
applications for Europe's planned Galileo satellite
navigation system.
The announcement is likely to ruffle feathers at the U.S.
Defense Department, which controls the rival Global
Positioning System, a system it is racing to upgrade.
Beijing has contributed $ 230 m to develop Galileo but
has also put pressure on the EU to gain access to
Galileo's sensitive military data and technologies.
After a difficult discussion with the US, the EU has
declined that request.
31
Drop of Chinese Students in
US Benefitting Europe
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EU officials also estimate that as many as 100,000
Chinese students were registered in European
universities and technical colleges during the 20032004 academic year, with perhaps half in the United
Kingdom alone.
This number considerably exceeds the approximately
60,000 Chinese students registered in the United
States. Because strict US government visa
restrictions are expected to cause an estimated drop
of at least 100,000 foreign students on American
campuses in 2004–2005, many of these, including
Chinese, will go to Europe instead.
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Europe and China both refuse to
play by “Sarbanes-Oxley” Rules
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Last year, the EU invited China to participate in three way talks with the
US to find alternatives for the Sarbanes Oxley Act. Foreign companies
listed in the US would be submitted to the same stringent accounditing
and auditing laws as all American companies.
EU top-officials said it was “simply unrealistic, impossible” to enforce
the rules on overseas firms. No early agreement was reached and
many European companies de-listed from the NYSE to avoid the very
high cost of meeting Sarbanes Oxley requirements..
In 2005 China Construction Bank (CCB) and Bank of China would list in
Hong Kong and New York. The two banks are expected to raise
between $ 4 billion and $ 10 billion each in what should be two of the
largest IPO’s in the world for this year.
However, afflicted by frequent fraud scandals, things did not play out
according to plan. CCB made it known that it considered shunning New
York and listing its shares only in Hong Kong, because of the high cost
and strict requirements of US corporate governance rules, as stipulated
in the tough Sarbanes-Oxley Act.
33
The Textile War:
EU Compromise
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The EU and China signed a deal on 5 September that
will permit the release of nearly 80 million pieces of
imported Chinese clothing that have been impounded
at EU borders, thus ending an episode in what the
British press has dubbed the "bra wars."
It thus effectively amends the terms of the 10 June
agreement that limited ten types of Chinese textiles
exports to the EU to annual increases of no more than
8 to 12.5 percent over the next three years.
China agreed to let half of this increase be counted
against the import quotas for 2006, while the EU
agreed to allow the rest to be imported over and
above the previously agreed quantities.
34
The Textile War:
US Unilateral Reimposition
of Quotas
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A third round of negotiations collapsed on October 1. "We will be
meeting with the Chinese again next month. "But the US will
have no hesitation in walking away from a bad deal“, chief
negotiator David Spooner said.
On September 1, after a previous round failed, the US
Committee for the Implementation of Textile Agreements (CITA),
a government body, imposed limits on imports of bras and
synthetic filament fabrics, using the textile-specific safeguard
clause from China's WTO accession agreement that allows WTO
Members to restrict Chinese textile exports to an increase of 7.5
percent per year.
China wants an annual growth rate of 20 %
The demand for new quotas is strong among textile
organizations and the authorities consider them favorably.
35
EU and US in full agreement
that China does not deserve
Market Economy Status Now
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The EU has been a stringent enforcer of China’s obligations and
has been particularly tough-minded against Beijing’s demands
that China be granted market-economy status (MES), which
would effectively eliminate antidumping tariffs.
In 2004 an EU internal study concluded that China still fell far
short on four of five criteria necessary to achieve MES status.
Over the past year, Beijing has exerted considerable pressure on
Brussels to grant MES and relax its antidumping penalties, but
thus far the EU has not succumbed to this pressure.
For its part, the U.S. Department of Commerce is also bringing
an increasing number of antidumping cases against Chinese
firms. In both cases, this trend reflects not only unfair Chinese
trade practices, but also the ballooning trade deficits that the EU
and United States have with China.
36
Triangular Manoeuvres
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China and Europe have had a series of disputes over trade and
MES status as well as disagreements over human rights.
Europe has concerns about China’s proliferation practices, as
well as the arms embargo.
More recently, China’s Europe specialists have begun to criticize
the motives underlying EU programs to promote civil society in
China as an ideological ruse to “Westernize and divide China”
(Xi-hua, fen-hua).
The EU and the United States sometimes side with each other,
China and the EU sometimes find themselves in agreement, the
United States and China sometimes work well together, and
sometimes the interests and policies of all three intersect, while
each side simultaneously has disputes with the other two.
What has not occurred, to date, is a situation where U.S.
and Chinese perspectives converge against European
interests.
37
Peter Mandelson on
Globalization, Free Trade
and Protectionism

Europe has to develop a much more sophisticated response to
the challenge of globalisation. Let me suggest four principles for
action:
– First, Europe has to attract talent from all over the world.
– Second, we should launch a drive to promote inward investment and
industrial collaboration.
– Third, Europe should pursue a policy of openness to the world.
– Fourth, we need more explicit policies in Europe to address the problems of
the ‘losers’ from globalisation and tackle the new inequalities that
globalisation brings.
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Mandelson is already under pressure to take anti-dumping
measures against Chinese shoes, whose imports are
devastating the Italian footwear sector.
“Yesterday textiles, today footwear, tomorrow what ? Consumer
electronics ? Cars ? Where will it go and when will it end ? We
are at the beginning of the China story, not the end.”
38