EU-China relations after the leadership change (Originally published 16/11/12)

EU leaders bade a fond farewell to Chinese Premier Wen Jiabao at the EU-China summit in Brussels on September 20. The outgoing Chinese leader, who invested much time and effort in building strong ties with Europe, certainly deserved the effusive send-off. Will China’s new leaders be equally keen on the EU?The good news is that Wen’s successor Li Keqiang is no stranger to Europe. In meetings and speeches during a tour of European capitals in May this year, Li repeatedly underlined his interest in Europe as “a strategic partner that deserves our confidence”.“China firmly supports Europe both in words and in deeds in its efforts to overcome the current crisis,” Li wrote in an article in the Financial Times newspaper. “When “designed in Europe” is combined with “made in China” and when European technologies are applied to the Chinese market, there will be amazing results,” Li insisted.The words may be encouraging but for China’s new leaders, building stronger relations with Europe may have to wait. Domestic priorities will dominate the immediate agenda of both Li and Xi Jinping who replaces President Hu Jintao.China today is the second largest economy in the world. Over the last three decades, China’s rise, its success in delivering growth and development to millions of poor people and its increased confidence in global affairs has mesmerised a watching world.The future is more uncertain, however. Given the immense challenges facing them, China’s new leaders arelikely to spend their time, energy and money on addressing internalchallenges and meeting public expectations.Questions likely to dominate their agenda include meeting the aspirations of China’s growing middle class, responding to public pressure as regards quality-of-life improvements such as a cleaner environment, higher food-safety standards, water security, and social protection. China will need outside help is in meeting the diverse demands of the country’s “urban billion”.China also faces the problems of rising inequality between the rich and poor, corruption at all levels of society and anger over a lack of services like health care.To meet the aspirations of its people – and especially its growing middle class – China needs continued growth. The World Bank says without change, annual growth could sink to 5 percent by 2015 — dangerously low by Chinese standards. China's economy grew at a 7.4 percent annual rate in the third quarter—the slowest since the first quarter of 2009.The world will be watching carefully to see how committed the new leaders are to rebalancing China’s economy so that there is a much-needed shift from exports and labour-intensive manufacturing to growth based on domestic demand and innovation.However, China's new leadership will also have to contend with an increasingly fraught relationship with the US and its Asian neighbours.The Obama Administration has been bringing more cases against China through the WTO, charging China with unfair trade practices.In Asia, there's a growing level of concern about China's rise and its increased assertiveness in defending territorial claims in the South and East China Seas.In comparison, relations with Europe are much less problematic. Trade and investment ties are growing. As both the Eurozone and the Chinese economies slow down, both sides are more aware than ever of their economic interdependence.China looks to the EU for markets, investments and technology. Chinese companies are also increasingly eying the Europe as an investment destination.Chinese annual FDI flows to Europe tripled from €2.3 billion in 2009 and 2010 to almost €7.4 billion in 2011. However, the absolute FDI values remain very small compared to Europe’s total inward FDI and to China’s total outward FDI stock.During his visit to Europe, Li pointed out that China has aided the Eurozone economies over the past two years by importing more goods, investing and buying bonds.Launching an EU-China urbanisation partnership, Li underlined that urbanisation had the most potential to expand China's domestic consumption, a major goal of China's 12th Five-Year Plan (2011-2015).Discussions on energy were also started, illustrating both sides’ readiness to start working together on practical questions.The challenge for both sides is to make this new, positive trend in relations sustainable. EU-China ties are not always easy. Long-standing irritants include the EU’s resistance to ending an arms embargo against Beijing and failure to give the country market-economy status.Europe meanwhile wants better access to China’s markets, improved protection of intellectual property rights and an end to investment barriers.The launch by the EU of an investigation into alleged state subsidies for Chinese solar panel manufacturers risks intensifying the conflict over the multi-billion dollar solar power equipment market that is straining trade ties.The EU Commission is already investigating allegations of Chinese manufacturers "dumping" solar panels in overseas markets. This follows a US decision to impose duties on Chinese solar power products.The Chinese government meanwhile has lodged a complaint with the World Trade Organisation accusingItaly and Greece of illegally favouring domestic solar panel producers in promoting new solar power installations and warning it could put tariffs on EU exports of the raw material polysilicon.Such trade friction does not necessarily have to sour the overall EU-China relationship provided both sides can reinforce their ties in other areas of common interest and concern.In addition to the urbanisation partnership, China and Europe face common challenges in sectors such as environment, food, water and energy security and promoting economic growth.Like the rest of the world, however, Europe will also be watching to see if a country that has helped millions to climb out of poverty is now ready to open the doors to political reform and transformation.