Dan Steinbock

Much to lose, everything to gain

By Dan Steinbock (China Daily)
Updated: 2010-07-08 08:03
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In the past few days, the United States and the European Union have imposed importation restrictions on three kinds of Chinese products. How will Europe's turmoil affect EU-China relations? Will it result in increasing cooperation or protectionism?

Sino-US trading relationship is bilateral. So is the Sino-EU trading relationship - well, theoretically.

At the aggregate level, the EU economy is larger than that of the US. But the EU comprises 27 economies. Most are members of the eurozone, but some are not. Although the euro countries have a common monetary policy, the EU lacks a common fiscal policy.

If you can imagine most of China's provinces with a common monetary policy, but many without a shared currency and all without a common fiscal policy, then you can get an idea of the EU's dilemma.

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The EU is China's largest trade partner, with China being the EU's second largest partner. Apart from regular political, trade and economic meetings, there are more than 24 sectoral dialogues and agreements between the two sides, ranging from environmental protection and industrial policy to education and culture.

But Chinese-EU trade is based on bilateral trading relations. And not all EU economies play an equal role in the bilateral trade. For all practical purposes, five countries - Germany, the Netherlands, the UK, France and Italy that account for almost 70 percent of the EU-China trade - drive China's economic ties with Europe.

The pivotal player in the EU-China trade is Germany. Almost a third of China's EU-trade is trade with Germany, which is the core economy of the EU. As Germany goes, so goes Europe.

When German Chancellor Angela Merkel's Christian Democratic Union supported the Greek bailout package, her approval ratings plunged. Politically, Merkel's center-right coalition is becoming increasingly vulnerable. On the other hand, a resurgence of the Social Democratic Party would only reinforce the strong legacy of economic cooperation between Germany and China.

Along with the Nordic countries, the Netherlands is one of Europe's few budget surplus countries. It is also China's second biggest EU trade partner. Although the economic turmoil led to a new Dutch government recently, political shifts are not expected to result in trading shifts.

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