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How China’s New Silk Road Threatens European Trade

By Jonathan Holslag, Vrije Universiteit Brussel

Abstract

For all the promises of mutually beneficial cooperation, Chinese policy documents about the New Silk Road, also called ‘One Belt, One Road’, mostly testify to a strong ambition to unlock foreign markets and support domestic firms in taking on foreign competitors. This confirms China’s shift from defensive mercantilism, which aims to protect the home market, towards offensive mercantilism, which seeks to gain market shares abroad. In a context of global economic stagnation, this comes as a major challenge to Europe. As China’s market share grows spectacularly in countries along the New Silk Road, key European member states have both lost market shares and even seen their exports shrink in absolute terms.

Consequences for Europe

If the New Silk Road has one important new ambition, then it is the desire to integrate all China’s previous trade initiatives in order to make its trade policy more efficient and prevent different actors from undermining each other when they go abroad. The New Silk Road confirms China’s focus on access to raw materials and on exports. Given the weakness of its domestic demand, it wants to continue to export labour-intensive manufactured goods, but it now also wants to expand its market share in high-end manufactured goods and different services. The foreign exchange reserves resulting from China’s trade surplus need to be invested in a way that gives China more influence on the international market. The papers relating to the New Silk Road also reveal that the government anticipates that if its domestic economy becomes stronger, consumer demand picks up and companies become more competitive, it wants an orderly outsourcing of manufacturing activities. Labour-intensive factories must be replaced by capital-intensive high-tech producers and the labour-intensive manufacturing that is relocated to other countries must become part of Chinese production chains. In other words, China wants to have a Chinese alternative to today’s multinationals. The New Silk Road, finally, shows that the Chinese government wants to set the terms of trade and determine technical standards to the benefit of its companies.

This all adds up to a very ambitious offensive mercantilist strategy. China understands that its economy remains vulnerable, but it is confident that it can manage this, not by closing its door to the international market, but by manipulating openness. China’s offensive mercantilism is about promoting free trade, while national companies still benefit from staggering amounts of credit and different forms of trade support. It is about making partner countries more connected to the Chinese economy than to competing economies, like the United States, the European Union and Japan. Such competitive connectivity involves new networks of communication, transportation, but also harmonisation of rules and standards. China’s offensive mercantilism seeks to promote a form of economic harmony that is in fact an economic hierarchy. While partner countries can gain from exporting raw materials, tourist services and, in the longer-term, labour-intensive goods, China wants to dominate new strategic industries with high value-added.

This strategy is a tremendous challenge for Europe. China’s new push for trade comes at a moment when economic growth along the New Silk Road is stalled. Between 2008 and 2014, the imports of European goods and services of countries along the New Silk Road only grew by two percent annually, compared to 19 percent annual growth between 2000 and 2008. Between 2008 and 2014, Europe’s exports to Silk Road countries decreased by USD 25 billion, whereas China’s exports grew by USD 250 billion. So, even in absolute terms, Europe lost significantly. In relative terms, Europe’s market share decreased from 38 to 30 percent; while China’s market share increased from 9 to 16 percent. Disaggregating this trade, Europe’s loss of market share was the most dramatic in high-tech goods. In this sector, its market share dropped from 62 to 30 percent, whereas China’s market share increased from 15 to 26 percent. All major EU member states have suffered from this evolution. Between 2008 and 2014, France, Germany and Italy saw their exports to Silk Road countries decrease in absolute terms, -12, -6 and -9 percent respectively. All five countries also saw their market shares decrease.

For trade in services, it is impossible to calculate precise patterns, as comparable data are not available. China consistently reports contracted projects, mostly in construction, engineering, power and telecommunications. The European Union reports exports of services, which is a much broader category, and detailed service exports for a select number of countries. Between 2008 and 2014, China’s turnover of contracted projects along the New Silk Road almost doubled from USD 30 billion to USD 57 billion. For the countries with detailed figures available, China appears to have gained a larger market share. For trade in both goods and services, these losses were incurred in only the first three years after the launching of the New Silk Road. In other words, this is just the beginning. If the New Silk Road proves successful, trade losses will become far larger.

Besides the commercial losses, the New Silk Road also undermines Europe’s political influence. If the internal weakening of the European Union has already damaged Europe’s position, China’s economic charm offensive will complicate the situation even more. As the New Silk Road destroys Europe’s external market, it decreases the prospects for recovery in the eurozone. If some relatively weak members of the eurozone are hoping that their export competitiveness can be increased by social and fiscal sacrifices, China’s offensive mercantilism, its generous use of credit and massive export support make that less likely. The failure of these countries to expand their exports could exacerbate tensions between the members of the eurozone, making it more difficult for centre parties to resist Euroscepticism, and thus indirectly contributing to the further fragmentation of the European Union.

Internal cohesion is also weakening because China actively exploits the divisions between the member states and the short-sightedness of their leaders. This is taking place in different ways. First, China mollifies member states’ leaders by buying government bonds. Apart from Germany, this has usually been in small quantities. Externalising public debt relieves some of the economic difficulties in the short term, but it is no solution in the long-run. Second, China presents its exports of cheap goods and services as an opportunity for the leaders of member states to prop up the purchasing power of their citizens. This is, again, true in the short term, but in the longer run, artificially cheap imports damage European companies and, hence, diminish the prospects for sustainable recovery. Third, China uses the New Silk Road to curry favour with domestic interest groups in member states, like port companies, retailers, financial institutions and transportation firms. Those sectors, as a result, lobby for good relations with China and against a tougher trade policy. Yet, however large these sectors might be, they are hardly helpful in reducing the current account deficit of their country and building a competitive industrial base. All these temptations distract government leaders from the one and only important measure of a favourable economic partnership, that is, balanced trade on the current account.

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