[OUTLOOK]EU’s wake-up call for China

Normally, Chinese trade disputes involve only the United States, which runs a gargantuan, and rising, deficit in its economic intercourse with Beijing: $162 billion.
Now there is a new twist to the story, for suddenly China has to fend off an even fiercer adversary: the European Union.
In late May, the EU took the unprecedented step of cutting off trade talks with China and taking its complaint to the World Trade Organization.
“We are going ahead with formal consultations,” announced the European Commission’s trade spokeswoman, Claude Veron-Reville.
Ominously she added: “We made it clear to the Chinese that time is pressing.” Observers here are certain that quotas on T-shirts and linen cloth will be reintroduced.
T-shirts and linens don’t look like a big thing when you run, as the EU does, a hundred-billion-dollar deficit with China. But as is usual in trade disputes, big issues lurk behind small items.
Since 2003, the export gap between the EU and China has risen by 42 percent. There are two causes for this unhappy development. One, the more short-term reason, is the abolition of old textile quotas on January 1, 2005, which has sent Chinese exports surging. The more long-term reason, which is giving both the Europeans and Americans an ever more painful headache, is the pegging of the Chinese yuan to the American dollar.
Since 2000, the dollar has lost about 40 percent against the euro. Theoretically, the dollar should have become a lot cheaper against the yuan, too, which, also theoretically, should have reduced American demand for Chinese goods, while increasing Chinese demand for “Made in U.S.A.” stuff, and thus narrowing the trade deficit.
Given what economists call a “predatory exchange rate policy” on the part of Beijing, this was not allowed to happen. As the dollar fell, so did the yuan; hence no change in relative prices, hence the growing trade gap in favor of China.
Worse, suddenly the Europeans began to feel the pain, too. As the yuan dropped along with the dollar, making Chinese exports even cheaper, the trade deficit between China and the EU literally exploded, doubling since 2002.
Now, 10 or 20 years ago, this might not have mattered as much. But then, the EU faced not 10, but 5-percent unemployment.
Also, it did not have to deal with Poland, the Czech Republic, Hungary et al, which became EU members last year. “New Europe” is “China next door.”
The Polish border, for instance, is just 80 kilometers from Berlin. Wages in “New Europe” are one-sixth of German ones, and productivity is almost as high, and so jobs have been moving to the East. Porsche now builds its Cayenne SUV in Bratislava, Slovakia.
In other words, the EU, which has been stagnating almost as long as Japan, is being squeezed from two sides: from real China and “China next door.” The EU also faces a series of shaky referendums on its new constitution.
So the rupture of trade talks with Europe was certainly done with a view of influencing the French referendum on the EU constitution on May 29 and the Dutch referendum on June 1. But the French still voted no, and so did the Dutch.
However, the issue goes deeper than European domestic politics. It is a wake-up call for China, the world’s most powerful engine of growth, which is not allowing the rest to share in its miraculous expansion.
China’s trade strategy of artificially depressed exchange rates and barriers to imports recalls what Japan, South Korea, Taiwan and Germany did for many decades (and some of them are still doing so today). The strategy is export-led growth at the cost of domestic consumption and at the cost of seriously imbalanced trade. Every job gained in Asia means a job lost in Europe or America.
Now, for small developing countries this may be an acceptable approach. But China is a giant and now a member of the WTO. It wants to get into the G-8, the club of the industrialized nations. It also wants to advance into the club of the great powers. These ambitions require a more responsible policy, one that pays more attention to the needs and interests of others.
The wake-up call now comes not only from the United States, which announced similar quotas, though on a smaller scale, but also from the European Union. One should think that this is not a cause for loud Chinese protests, let alone retaliation, but for Chinese wisdom.
Beijing may be able to browbeat Japan, but it should not take on both the EU and the United States, its two largest trading partners. Thus it is time for China to present itself as a good citizen to the rest of the world. How? Very easy: Unpeg the yuan from the dollar and let it rise to equilibrium levels. Europe and the United States will be very appreciative.

* The writer is the publisher-editor of Die Zeit.

by Josef Joffe