Issue 47 - 2006

Issue 47 - 2006 spotlight image

Issue 47 April/May, 2006

A new European approach to China

External author(s): Mark Leonard

How to build a better EU foreign policy

By Charles Grant. External author(s): Mark Leonard
File Attachment
File thumbnail: 
Bulletin issue 47
Spotlight Image
Spotlight short title: 
Bulletin 47
Author information
External Author: 
Mark Leonard

A new European approach to China

A new European approach to China

Written by Mark Leonard, 03 April 2006

China's peaceful rise turns prickly

China's peaceful rise turns prickly

Written by Charles Grant, 22 January 2010

by Charles Grant

Have western attitudes to the rise of China been based on wishful thinking? China’s increasingly tough approach to diplomacy is leading governments in the US and in Europe to rethink their policies towards China. Western leaders are starting to question some of the optimistic assumptions on which those policies have been based.

Until very recently, many western bankers, business people and politicians were broadly optimistic about the rise of China. They assumed that as China became more developed it would become more western. As it integrated into the global economy its society would open up, it would play a constructive role in multilateral institutions, and it would help western governments sort out key foreign policy challenges. China’s leaders seemed to understand that their top priority – the economic development of their country – required friendly relations with other major powers, notably the US.

There has also been a pessimistic view of China’s rise, held by people in the US defence establishment, some right-wing think-tanks and the human rights lobbies. They have argued that as China develops it is becoming more assertive, less willing to compromise with the West, less welcoming to foreign investors and more repressive politically. Like other rising powers throughout history, the pessimists have thought, China would disrupt the international system. They have pointed to China’s soaring defence budget as support for their case.

Of course, both views have been based on truth. China is not a monolithic entity. Within the leadership, many institutions and personal and ideological factions compete for power. But until recently the optimists dominated western views of China. I was an optimist when, two years ago, I wrote (with Katinka Barysch) ‘Can Europe and China shape a new world order?’ (http://www.cer.org.uk/pdf/p_837.pdf). Our report argued that China was evolving into the “responsible global stakeholder” that Robert Zoellick had urged it to become when he was US deputy secretary of state.

Over the past year the optimists have found it increasingly difficult to sustain their view. There are still examples of China being helpful – for example, it has sent ships to catch pirates in the Indian Ocean, and engaged in G20 discussions – but overall it has become a much pricklier partner.

China’s foreign policy has become more assertive. Its claims to the Indian state of Arunachal Pradesh have become more vociferous. It is being less helpful to the West over the Iranian nuclear problem – and has become more hostile than Russia to further sanctions on Iran. Its treatment of the EU is sometimes contemptuous – it cancelled one summit and regularly punishes countries whose leaders meet the Dalai Lama in an official setting. Western governments have suffered increasingly powerful cyber-attacks that have been traced to mainland China.

China’s political system has become more repressive. Moves to introduce greater democracy into local government and the Communist Party have faltered. Dissidents are facing a tougher time. In December Liu Xiaobo was sentenced to 11 years in prison for organising a pro-democracy petition.

China’s economic policies have become more nationalist. Many foreign investors in China complain about exclusion from key markets and unofficial forms of discrimination. China’s manipulation of its currency downwards, driven by a mercantilist desire to boost exports and foreign currency reserves, exacerbates the problem of global economic imbalances and is fuelling protectionist sentiment in other countries.

Recent events have brought home to public opinion in the West how China is changing. At the Copenhagen climate change conference in December, China worked hard behind the scenes to scupper the kind of deal that western countries and many poor nations wanted (at one point it sent a deputy foreign minister to negotiate with Barack Obama). And this month Google has said that it may leave China because of cyber attacks on its business and increasingly stringent internet censorship.

If one talks to people in China about the troubled state of relations between China and the West, many of them are baffled. They know little of the incidents that have caused problems, which are unreported in the Chinese media. They say that most Chinese people are focused on domestic issues – such as jobs, pollution and soaring house prices – rather than foreign policy.

So the source of China’s tougher line seems to be the leadership, rather than pressure from the people. Three factors may explain why hard-liners are winning more arguments within the leadership.

• China’s economy has performed impressively during the global recession, growing by 9 per cent in 2009. Meanwhile the western economic model is viewed as discredited. China’s leaders would not be human if they did not feel a bit cocky – especially since they have been on the receiving end of patronising lectures from western leaders about the superiority of western capitalism. The emerging super-power feels it has the right to assert its own interests more forcefully.

• Yet China’s leaders feel insecure. The unrest in Tibet (in 2008) and Xinjiang (in 2009) caught them by surprise. Rapid economic growth and urbanisation are creating huge social tensions. Endemic corruption makes local party bureaucrats unpopular. The booming housing market – fuelled by the government selling land to property speculators – means that many young middle class people cannot afford to buy flats. Few Chinese people want western-style democracy, but the leaders know their legitimacy is built on thin foundations. Hence their reluctance to allow a more open society.

• The current leadership, led by Hu Jintao and Wen Xiabao, is due to hand over to the ‘fifth generation’ of leaders in 2012. There is much manoeuvring for position. The machinations within Zhongnanhai, where the top communists live and work, are impossible to decipher. But some key figures seem to be pushing a nationalist line in order to boost their support among party cadres. In China, as in most countries, nationalist policies can be popular.

American attitudes to China are palpably hardening. At some point this year the US may declare China to be a currency manipulator and then apply protectionist measures. The EU finds it very difficult to get tough with anyone. But European leaders are increasingly critical of China, at least in private. China’s leaders should not assume that European markets will remain open to them indefinitely.

China’s attitude to international relations is ultra-realist. It will take what it can get, while respecting power and facts. But China’s leaders may have miscalculated by underestimating the impact of their harder line on Washington and European capitals. How well-informed are the people in Jonghnanhai? Do they receive objective reports on how Chinese words and actions impact on western political systems? And do they care what western leaders think?

Undoubtedly, there are Chinese leaders who stand by the premise of the ‘peaceful rise’ slogan – that China’s economic development requires some modesty in international affairs and good relations with the West. When the most senior leaders see that their current approach may spur several powerful countries to work together to contain China, they may wish to modify their course. But if they maintain the hard line for a prolonged period, China’s relations with the West will become very tense. Free trade and the world economy may well suffer.

Charles Grant is director of the Centre for European Reform.

Comments

Added on 25 Mar 2010 at 13:14 by Anonymous

This paper has correctly identified the 'symptoms' but I would argue that the 'diagnosis' may not be correct. The problem is that in the West, most people look at the 'China' issue through the Western lens, and subsequently interpret the 'symptoms' accordingly. China, like any other country in the world, acts in its best interest but so far has not shown ambition to be another US. It is true that in Copenhagen, China (working with other major emerging economies) was blocking a deal devised by a handful of mainly developed countries that best suit their own interests, but did not address the issues of fairness, equity, responsibility, leading by example etc adequately as demanded by developing countries. Since Copenhagen, China has issued various statements explaining their position but I have not seen much of that reported in an unbiased way in the Western media. In relation to human rights, China has successfully pulled hundreds of millions of people out of poverty, hence protecting their social and economic rights. This aspect of human rights (which together with civil and political rights form the two main international human rights covenants) has very often been conveniently brushed aside by most developed countries to protect their economic competitiveness (farm subsidies is a good example), which is the currency of power in this globalised world. Sometimes paranoia and entrenched interests in the West are as bad as a centralised control of media in China.

Added on 03 Mar 2010 at 09:02 by Macko Usko

Bill Emmots bein replaced as the editor of the economist a few years back has led the coverage of china to be fairly sycophantic. It is pathetic to watch the economist trying to get readership by slowly becoming fox news especially on coverage of china

Added on 26 Jan 2010 at 06:46 by Anonymous

Your opinion won't be hard in China which is unfortunate, because centralized control of media can be very dangerous. What is Rupert Murdoch doing to deserve his US citizenship?

Added on 25 Jan 2010 at 23:20 by James Rogers

This is a very good and timely piece, although I would like to suggest that China’s sending of a small naval squadron into the Gulf of Aden has less to do with multilateralism (i.e. in this case, helping Europeans and Americans contain the pirate menace) and more to do with the strengthening and consolidation of its geopolitical presence in the Indian Ocean...

Added on 25 Jan 2010 at 13:10 by Denis MacShane MP

Charles Grant has written - not for the first time - a very timely and prescient essay. China has fused communist authoritarianism with capitalist development.
The old belief that market capitalism would inevitably lead to more freedom is now under question. Chinese nationalism helps shape unilateral nationalist responses with the US responding to China without reference to other democracies. The EU cannot find one voice. Japan is silent. Russia would like to have Chinese economic development and Chinese political authoritarianism as Moscow de-aligns itself from a European future.
All that is needed is a flash point - Uighurs, Taiwan, Indian frontiers, north Korea, oil fields in seas close to China - and China decides to use military force in a major way and faces a response. At that point the world starts to close markets and take other action.
As with Japan in the 1930s a cornered China that wants access to western markets but refuses the multilateral obligations of being part of an integrated global geo-eco-market-rule of law world system can be very dangerous.
Meanwhile there are 300 million Chinese over 60 without adequate incomes or social and health care cover. China is getting old and rich at the same time. But Chinese wealth is not being used to build more fairness or to bind in all Chinese. Is this sustainable indefinitely?
Do we have too many China boosters like Martin Jacques or Mark Leonard who are like those writing 'Japan as No 1' books three decades ago? We need more Bill Emmots who have sharper eyes and ears to explore what may be going awry in China.
Denis MacShane MP

Added on 22 Jan 2010 at 20:57 by Toronto Mortgage Broker

Ever time I think of China, I am reminded by an interview conducted by 60 minutes where they ask the current head of the CIA, "What keeps you up at night?" His response was not Bin Laden, it was China.

While the West is busy rebuilding itself, China will continue to become the next super power.

Now that keeps me up at night too.

CER/SWP/Brookings Daimler forum on 'World order and global issues'

CER/SWP/Brookings Daimler forum

CER/SWP/Brookings Daimler forum on 'World order and global issues'

19 November 2009

Speakers included: Carl Bildt, Ivo Daalder, Christoph Heusgen.

Location info

Stockholm

Roundtable on 'China and Europe'

Roundtable on 'China and Europe'

Roundtable on 'China and Europe'

14 October 2009

With Yang Jiemian, director of the Shanghai Institute of International Studies, Mei Zhaorong, director of the Institute of World Development under the State Council Development Research Centre, and former ambassador to Germany & Ma Zhengang, president of the China Institute of International Studies and former ambassador to the UK.

Location info

London

Roundtable on 'When China rules the world'

Roundtable on 'When China rules the world'

Roundtable on 'When China rules the world'

10 July 2009

With Martin Jacques, author of 'When China rules the world', Guardian columnist and a visiting fellow at the London School of Economics Asia Research Centre & Xinning Zong, senior research fellow at the United Nations University (UNU-CRIS), Bruges and Jean Monnet professor for European integration studies at Renmin University of China, Beijing.

Location info

London

Is China being beastly to foreign investors?

Is China being beastly to foreign investors?

Written by Charles Grant, 30 July 2010

by Charles Grant

When I visited China a year ago, I was struck by the strong feeling among many foreign firms there that the business environment was getting tougher. Western businessmen complained, in particular, about discrimination against foreigners. On a recent trip to China, I found a more nuanced situation. In some sectors, notably those where intellectual property (IP) is important, there are growing complaints of unfair treatment. But in other sectors foreign companies are making good money, without grumbling much.


Western business leaders are certainly complaining more loudly than they used to. In July, the Financial Times reported Jeffrey Immelt, the chairman of General Electric, as saying that he was “really worried about China. I am not sure that in the end they want any of us to win, or any of us to be successful.” A few days later Jürgen Hambrecht, the CEO of BASF, told Wen Jiabao, the Chinese prime minister, that foreign firms were being forced to transfer know-how to Chinese companies, in return for market access. Hambrecht told him that this did “not exactly correspond to our views of a partnership”. At the same meeting Peter Löscher, the CEO of Siemens, urged Wen to ensure that foreign firms could compete fairly for government procurement contracts. (Like a lot of western business leaders, Löscher had previously taken the Chinese government’s side, as when he criticised German Chancellor Angela Merkel for meeting the Dalai Lama.)

One government measure that has provoked foreign business leaders is the regulation on ‘indigenous innovation’ that was published last November. This would, if enforced, exclude foreign firms from public procurement contracts unless they agreed to hand over IP. The regulation seems to have been driven by the Chinese Communist Party’s belief that market forces alone will not provide a high-tech economy, and that the state therefore needs to get hold of and control advanced technologies. The EU, the US and many other governments lobbied strongly against the measure.

Whether this regulation will bite remains unclear. The government announced a delay in implementation and Chen Deming, the minister of commerce, said the regulation would not affect firms that could prove they added value in China. Some western business lobbies fear that, despite recent reassurances, the regulation will in the long run take effect. If it is enforced, firms like IBM and Microsoft are likely to cut back on R&D in China. On Capitol Hill, Microsoft is now taking a hard line on IP issues in China; until recently, it tended to sympathise with the Chinese point of view. China can no longer assume that US business leaders will, as a bloc, support its interests in Washington.

A similar shift is evident among some European companies. According to the head of one large German firm in China: “They assume their market is so big, that foreigners will stay, and put up with losing IP. That’s a miscalculation. Most foreign investors think IP is very important and that they have a duty not to hand it over.” He thinks that enforcement of the indigenous innovation regulation would dampen FDI in China. Big western manufacturers would not pull out but would source more components to countries such as Vietnam, Taiwan, Malaysia, Indonesia and Singapore. China’s free trade agreements with these countries now make it easier to supply Chinese factories from them.

Within the past two years, some high-tech foreign firms have had to pay higher rates of tax, while new restrictions on representative offices – each is allowed only three non-Chinese staff – are proving irksome. Foreign firms involved in making wind turbines, such as GE, Siemens and Vestas, are particularly annoyed that, as they see it, procurement rules have been skewed to exclude them from the Chinese market (the largest in the world), to the benefit of local firms.

Two-fifths of European businesses in China surveyed by the EU Chamber of Commerce in June 2010 expected the regulatory environment to worsen in the next two years. The same proportion described the discriminatory application of laws and regulations as a ‘significant’ obstacle. The EU Chamber concluded: “Optimism in the overall economic climate has been dampened dramatically by concerns about regulatory interference and unpredictability in the market.”

Some of the shifting balance of power between foreign investors and the Chinese authorities is the inevitable result of the country’s development. A lot of Chinese companies are now stronger and better-equipped to compete with European or American rivals. Twenty years ago the Chinese needed western capital, skills and technology. Now they need the technology, but they have less need of the skills, and plenty of their own capital.

Another issue for foreign investors is that costs are rising, in part due to labour unrest that has been prevalent in the Pearl River Delta area. The emergence of free trade unions is an important and positive step for the country’s future development, signalling the emergence of a civil society that is not controlled by government or party. But many foreign businesses see the new trade unions merely as a source of growing costs.

Mining companies, energy firms, banks and insurers, among others, still face restrictions on their activities in China. Many of them nevertheless make money. That is the case for Shell and BP, which are significant investors, often through joint ventures, but would like to engage in a wider range of activities than they currently do. In many other sectors, such as retailing, advertising, hotels, pharmaceuticals and cars, companies report they are doing well without too much government interference. For example Tesco finds it easier to open stores than two years ago, as central government permission is no longer required; but Tesco says that Chinese retailers face less hassle from red tape than do foreign ones. WPP is allowed to own 100 per cent of local advertising agencies and says that as a foreign firm it faces no discrimination – except that it pays more tax than local competitors. Car companies are doing particularly well: BMW has doubled sales in China over the past year, and Daimler is forming a joint venture to develop electric vehicles.

Since the spring, the government has made an effort to appear friendly to foreign firms: Premier Wen met foreign business leaders to listen to their complaints; several ministries opened their doors to foreign investors in China and asked how they could help; and in July the government appeared to accept a compromise in its dispute with Google, with the result that Chinese citizens can search uncensored via Hong Kong. Chinese analysts point out that many local authorities still compete for FDI and therefore offer special deals (for example, on tax and utilities) to foreign firms.

When China joined the World Trade Organisation in 2002, it failed to sign the agreement on public procurement that prevents discrimination against foreign firms. In July China made new proposals for acceding to this agreement – but western governments think them inadequate (for example, China is not offering to open up local government procurement). Also in July, Chen Deming wrote in the Financial Times that China is “ever more open to business”. He is right that most of the formal rules applying to foreign investors are less restrictive than they were ten years ago. According to his figures, global FDI fell by nearly 40 per cent in 2009, but only by 2.6 per cent in China.

My conclusion is that China still welcomes FDI, but that it is becoming more insistent on setting the terms. For example, it wants to choose the location for big foreign industrial investments – often in the underdeveloped west of the country, where a lot of foreign firms would rather not go. The Chinese government is probably right to calculate that, for all their grumbling, most foreign firms will stay; China is just too big a market to ignore. In any case, despite the difficulties, many foreign investors in China claim that they are managing to hang on to their IP.

China’s strategy is to exploit foreigners’ desire for access to its markets as a means of gaining their technology. From China’s point of view that is a reasonable policy. If a lot of foreign investors clubbed together to speak with one voice and make credible threats to China, they might persuade its leadership to re-examine that strategy. But neither the big foreign companies in China, nor the European and American governments, are likely to get significantly tougher with China. So do not expect much change in China’s policies towards foreign investors.

Charles Grant is director of the Centre for European Reform

Comments

Added on 19 Aug 2010 at 01:29 by Anonymous

This is old news, this is something that has ben unfolding sine around 2002-2003. Here you have a speach given by the former advisor under the Clinton administration Dr David Martin at a conference in Brussels at the time when american intersts wanted to impose software patents on us europeans:

http://wiki.ffii.org/Martin041109En<br />
He warned about exaktly this developent at this speach held 2004, and we will see more of it, and be at the loosing end until we in the west do something about our non-accountability of the patent establishment.

--steelneck

Added on 09 Aug 2010 at 13:03 by Anonymous

This timely article by Charles Grant needs to be read jointly with Paul Kennedy's World Today essay on the rise of Asia and how no country/region in history that gets so rich, so quick does so without becoming a military and usually expansionist power.
Can Europe create a common policy on how its firms operate in China? If every major EU CEO is obliged to say "Sorry old boy love to sign away IP rights but EU won't allow it" then the Chinese will have to choose between modernisation and stasis.

Industrial policy – back to the future?

Industrial policy – back to the future?

Industrial policy – back to the future?

Written by Simon Tilford, 01 June 2007

India's role in the new world order

India's role in the new world order

India's role in the new world order

Written by Charles Grant, 26 September 2008

Issue 60 - 2008

Issue 60 - 2008 spotlight image

Issue 60 June/July, 2008

Towards better days in EU-US relations

External author(s): Tomas Valasek
File Attachment
File thumbnail: 
Bulletin issue 60
Spotlight Image
Spotlight short title: 
Bulletin 60
Author information
Syndicate content