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1 Willem van Kemenade Website: THE EMERGING EU-CHINA-US GRAND TRIANGLE ? The Rise of China.

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Presentation on theme: "1 Willem van Kemenade Website: THE EMERGING EU-CHINA-US GRAND TRIANGLE ? The Rise of China."— Presentation transcript:

1 1 Willem van Kemenade Website: THE EMERGING EU-CHINA-US GRAND TRIANGLE ? The Rise of China and the Shifting Global Balance of Power Clingendael October 24, 2005

2 2 Contents Chinas domestic political, social and economic development The US-Japan-(Taiwan) Alliance The Trans-Atlantic Rift Chinas Global Scramble for Energy Americas Hard and Europes Soft Power M&A, Sanctions Free Trade vs. Protectionism

3 3 Hu Jintao (62), Closet Liberal or Hardliner ? Since take-over in , hope was high that Hu would introduce a new wave of political reforms. However, he has suppressed the debate at the national level and focussed on rural poverty, government austerity and anti-corruption. Worried by peoples power take-overs in Ukraine, Georgia and Kygyzstan and rebellion in Uzbekistan, there is a crackdown on Internet and (foreign) media, tighter police surveillance of activists and a clampdown on NGOs. As social unrest escalates, Hu wants to re-centralize state- and party-power so as to maintain stability and order, ahead of the 2008 Olympics. He reached out to liberals by rehabilitating Hu Yaobang and inviting Taiwans opposition-leaders for high level visits to Beijing. In foreign policy Hu stresses Peaceful Rise rebuking the US Neo-Cons and Japanese right-wing, who see China as a Threat.

4 4 The World Economy is booming in China Sixth largest economy, second in PPP; 4th trading power. 22 % of the worlds population; GDP of $ 1.55 trillion is 4 % of the world aggregate of $ 36 trillion. Per capita income 2004 $ 1.196,--. Black economy is at least another $ 100 bn. China is expected to match the US in coming decades as the locomotive of world economic growth. It now contributes 18 % to global growth. In 2003 China accounted for 60% of world trade growth China's economy has continued to depend too much on externals. About 45 % of China's growth derives from exports, and so the country's economic health is highly vulnerable to protectionist pressures from the US and Europe. "Exports are becoming a growth engine, but China will have to carefully deal with these external risks."

5 5 Chinas Global Technology Position Chinas role in the world economy is largely defined by its participation in global production networks, set up by others, the Multinational Corporations (MNCs). Their dominant role derives from their control over standards and intellectual property. The big question is whether manufacturing and trading giant China, will also become a technology giant. China now spends 1.4 % of GDP on R&D annually. The OECD average is 2.3 % 85 % of high tech exports are from foreign invested firms, which employ managerial skills and proprietary technologies of MNCs. China is in a patent trap, that requires it to pay substantial royalties to the patent owners out of the sales of its manufactures.

6 6 When will Chinas Economy be bigger than the USs ? In 2003 China's GDP was $1.41 trillion and America's was $11.26 trillion. At constant, average growth rates of 8 % for China and 2.5 % for the US, China would have a bigger economy in Current demographic forecasts suggest that China's population will peak around 2050 and then start to decline. Well before that, say 2030, it will be demographically one of the oldest countries in the world, with a very high retiree-to-worker ratio. Various imponderables – political crisis, effect of climate change, war, may lead to different outcomes.

7 7 Regional Relative Weight in the World Economy Europeans are recognizing that in terms of economic muscle and trading influence, the world is rapidly coalescing into three blocs: America, Greater Europe, and a China-centered Asia. East Asian countries, including China, account for 54 % of Japan's GDP. In comparison, Central Asian countries Kazakhstan, Kyrgyzstan, Tadjikistan, Uzbekistan, Turkmenistan, Afghanistan account for 5 % of Chinas GDP. Latin American countries account for 15 % of the United States' GDP. East Europe accounts for just 8 % of the EU's GDP.

8 From: Zbigniew Brzezinski, The Grand Chessboard: American Primacy and its Geostrategic Imperatives, Washington DC, 1997 China: A Regional Power with some Global Influence and the Ambition to become a Two-Ocean Country Gwadar

9 9 A China-Centred World

10 10 An America-centred World

11 11 A Europe-Centred World

12 12 Chinas Defense Budget At the opening of the annual session of the National Peoples Congress in March 2005, China announced to increase its national defense spending by 12.6 % to $ 29.9 bn. This latest rise comes after increases of 11.6 % in 2004, 9.6 % in 2003, 17.6 % in 2002 and regular double-digit increases in the decade before that. Some Western experts estimate that the real size of China's military spending is 3 to 5 times the official number, placing it third behind the United States and Russia. Chinas substantial arms purchases in Russia and Israel are not included. The combined defense budgets of EU members - $175 bn - exceed the military budgets of China, Japan, and Russia combined. The US' nearly $500 bn budget for the current fiscal year, exceeds the aggregate total of the rest of the world.

13 13 Is War over Taiwan likely ? Majorities in the US, Japan and Taiwan probably prefer the status quo of no independence, no reunification, no war, joint economic development and some integration. The US wants to maintain its dominance over both Japan as a satellite ally and Taiwan as an unrecognized protectorate, as the twin pillars of its military hegemony in Northeast Asia. On all sides there are vocal minorities and interest groups who think they will benefit from a war, which they reflexively assume, the US/Japan/Taiwan will win. One Japanese pro-Taiwan hardliner: In coming years, public opinion and the US Congress will be the dictator of the world, stronger than the president. No legal instruments mandate Japan to support the US in case of war.

14 14 Sino-Japanese Relations: Energy-rivalry, Military Conflict, Permanent Estrangement ? Tensions have escalated over gas reserves in the East China Sea. The JDA revised its strategy late 2004 on the assumption that these tensions could escalate into war. In February, the US and Japanese Foreign and Defense Ministers [2 + 2] declared the Taiwan Question a common strategic objective. And in April, Tokyo awarded two Japanese companies the right to drill for oil and gas near the Senkakus. Chinese citizens launched a global internet-campaign, opposing Japanese permanent membership of the UN Security Council while violent anti-Japanese demonstrations were staged in Chinese cities. On October 1, Japan proposed a "comprehensive and final solution" to the East-China Sea gas issue. China responded by offering talks on the UN Security Council issue on October 16. However, PM Koizumis visited the Yasukuni Shrine again on October 17, plunging bilateral relations in crisis again.

15 15 Japans Attempts to lead Asia stymied for decades by subservience to the US, Now by the Rise of China Japan has tried to break out of its satellite-relationship with the US several times, but each time external events and American pressure frustrated this. Koizumis announcement in 2002 that he would go to Pyongyang, just after Bush had branded it part of the axis of evil was the latest example. Then Japan tried détente with Russia: getting the Kurile islands back for a huge pay-out of $ 25 billion. Yeltsin wouldnt play ball. Then the first North-Korean nuclear crisis in pulled Japan back into the American orbit. Chinas firing of missiles close to Taiwan in further re-strengthened the US-Japan alliance. During the Asian Financial Crisis in 1997, the US, followed by China, torpedoed a Japanese plan to set up an Asian Monetary Fund that would help Asian countries not according to the IMF criteria of the Washington Consensus, but according to Asian Values with Japan in the lead.

16 16 The Coming East Asia Summit The East Asia Summit is scheduled for December 14 in Kuala Lumpur as a first step to establish an East Asian Community. Since China and Japan cannot lead because they dont accept each others leading role, ASEAN is in de drivers seat and will chair the Summit with the ASEAN – China, Japan, South Korea, plus India, New Zealand and Australia. Australia, one of the deputy sheriffs of the US has been trying to rally support for US participation, but there is a consensus to keep the US out. Koizumi is expected to move forward with constitutional revision, fully remilitarize Japan as the uninhibited global junior military ally of the US and be very lukewarm about Asian mulitlateralism. In the anti-China prism of the US and Japan, China is planning to use the EAC as an instrument to limit US influence in Asia by establishing its political, economic and military dominance in the region.

17 17 An East Asian Cold War Masashi Nishihara Senior figures in Japan openly express hope that China will disintegrate: If Taiwan is not integrated into China, that will be a great favor to our defense. We will definitely support US intervention to defend Taiwan ….. If we have to choose between the US and China, Japan will choose the US. Thats the worst situation to arise. Tensions will continue for some time. I cannot see even ten, twenty years from now, we will become good friends. We will have huge trade, summit meetings etc. but tension will continue. Like during the Cold War, the Soviet Union and the United States, two very different powerful empires. They could never get really close. But there was détente, disarmament, reduction of tensions etc. They managed to be able to coexist, without fighting. Maybe something like that can develop between China and Japan.

18 18 America yields to Chinese leadership on North-Korea After 13 months absence, North Korea returned to Beijing on July 27 for another round of negotiations about a possible end to its NWP. A meaningful step forward was taken when the US after years of public insults and threats, conveyed to Pyongyang that it recognized North Korea as a sovereign country and had no intention of invading it. By September, China intensified the pressure on the US to extend some trust to North Korea, backing Pyongyang's right to a peaceful nuclear energy programme once it dismantles its weapons and returns to the international nuclear non- proliferation treaty. Then on September 19, North-Korea agreed to give up all its NWPs in exchange for oil and food aid, a non-invasion pledge and diplomatic recognition by the US and Japan.

19 19 North-Korea: Background to the Six Party Talks Washington had become alarmed by the progress of South- Koreas Sunshine Policy with the North – linking North and South by big infrastructure-projects, setting up investment-zones in the North and even de-mining the Demilitarized Zone, which the US refused to approve. On top of this came a conciliatory approach towards Pyongyang of Americas most obedient ally, Japan. This had to be stopped. Not ready for a preemptive strike on North-Korea in the run-up of the Iraq War, Washington decided to cook intelligence and to mobilize a coalition against Pyongyang, the Six Party Talks not so much for negotiations as for a diplomatic tribunal to pressurize North-Korea and persuade the other participants to agree with Americas hardline and join Washington in imposing sanctions. Selig Harrison, Did North Korea cheat ? Foreign Affairs, January/February 2005

20 20 The Impact of 9-11 on Chinese and Central Asian Security The war on terror has loosened China's grip on the geostrategic zone to its west. China fears that the US will dominate the Eurasian heartland for the long haul. By uprooting Al-Qaeda in Afghanistan, the Bush Administration has also weakened China's influence in Pakistan and the Persian Gulf region. Presidents Putin and Hu Jintao have increasingly shown their dissatisfaction with the US military presence. Beijing saw Karshi-Khanabad, in Uzbekistan, and Manas, in Kyrgyzstan as US bases for the long term containment of China. After US protests against the Andizhan massacre in Summer, the Karimov regime ordered the US to leave its Uzbek base.

21 21 Sino-Russian Strategic Convergence during the 1990s Frustrated and humiliated by US-hyperpower, China and Russia together with Kazakhstan, Kyrgyzstan and Tadjikistan, set up the Shanghai Five in 1996 to jointly stabilize Central Asia. The Shanghai Cooperation Organization replaced the Shanghai Five June 15, Uzbekistan joined as a new member. The six signed the "Shanghai Treaty on Cracking Down on Terrorism, Separatism, and Extremism.. This multilateralism was unsettled by the US intervention in Afghanistan in late 2001, which Russia welcomed. China however, accused the US of using military action in Afghanistan to seize the chance to expand its military presence in Central Asia. in addition to the US-presence in Korea, Japan, Taiwan and in SE Asia. The Secretariat of the SCO is based in Beijing.

22 22 Chinas Global Scramble for Energy An unprecedented need for resources is now driving China's foreign policy. Twenty years ago, China was East Asia's largest oil exporter. Now it is the world's 2 nd largest importer. Last year, it accounted for 31 % of global growth in oil demand. But it still imports only 12 % of the energy it consumes, compared with 40 % for the US and 80 % for Japan. For every US $ worth of output, Chinese energy consumption is 4.3 times that of the US, 7.7 times of Germany and 11.5 time of Japan. Anticipating a military conflict with the US, China is considering to build pipelines to the Indian Ocean through Burma and/or to the Arabian Sea through Pakistan.

23 23West-Pipelineistan

24 24 East Pipelineistan

25 25 Iran and China: Two old Asian Empires Who dont accept orders from the US Iran alone already accounts for about 11 % of China's oil imports, and in October 2004, the state-controlled China Petroleum and Chemical Corporation, known as Sinopec, one of China's three major oil companies, signed an oil and natural gas agreement with Tehran that could be worth as much as $70 billion -- China's biggest energy deal yet with any OPEC producer. Beijing committed to develop the giant Yadavaran oil field and buy 250 million tons of liquefied natural gas over the next 30 years; Tehran agreed to export to China 150,000 barrels of oil per day, at market prices, for 25 years.

26 26 Australia has become Chinas Major Supplier of Iron Ore, Oil and Gas Despite Australias close military alliance with the US, China has become a larger trading partner than the US – iron, coal, gas. Starting in 2006, Australia has agreed to export to China, some $1 billion worth of LNG per year for 25 years. Such deals are enhancing China's soft power in Australia, perhaps to Washington's detriment. According to a poll taken last spring, 51 % of Australians surveyed believe that a free-trade agreement with China would be good for Australia (only 34 % think well of the existing U.S.- Australian free-trade pact). And 72 % agreed with Australian Foreign Minister Alexander Downer when he said last year that Washington should not automatically assume that Australia would help it defend Taiwan against a Chinese military attack.

27 27 China in Rivalry with the US for Canadas Alberta Tar Sands Energy diplomacy has also prompted China to seek access to the massive tar sands of Alberta. Since late 2004, Beijing and Ottawa have concluded a series of agreements for developing Canada's natural gas sector, its vast oil sands deposits, and its uranium sector. Last April, PetroChina and the Canadian giant Enbridge signed a MoU to build a $ 2 bn pipeline that would carry oil to the Canadian west coast for shipment to Asia. Without Chinese investment, the fields would remain undeveloped. The deal could create tensions between the US and China, as well as the US and Canada, particularly since VP Cheney's 2001 energy policy report stressed the importance of the tar sands to U.S. energy security.

28 28 Latin America: Chinas New Oil Frontier in the USs Backyard Beijing is strengthening ties with the temperamental Venezuelan president, Hugo Chávez: "We have been producing and exporting oil for more than 100 years, but these have been 100 years of domination by the United States. Now we are free, and place this oil at the disposal of the great Chinese fatherland." President Hu toured the region in November 2004, during which he announced $20 bn in new investments for oil and gas exploration and other projects. Brazil's trade minister visited Beijing 9 times in Brazil and Argentina granted China "market economy status. However, Brazil failed to persuade China to voluntarily curtail its exports of textiles and shoes. Trade between China and Latin America has quintupled since 1999, reaching almost $ 40 bn by the end of last year.

29 29 China Dominant Foreign Oil Power in Sudan China's crude oil imports are expected to reach a record 110 million tonnes this year, 21 % more than last year. Half of Chinas oil imports are from the ME, half from Africa. It is Chinas strategic policy to get oil from anywhere, particularly there where the US is not in control. In 1997 US sanctions banned US oil-companies from Sudan. CNPC poured hundreds of millions in Sudans oil industry, took a 40 % stake in Sudans Greater Nile, constructed oil fields, a refinery and pipelines. Sudan, formerly an oil-importer now earns $ 2 bn on exports. From Sudan, China plans to expand to Nigeria through Chad.

30 30 Shift in Global Strategic Culture Several developments are changing the psychology of global strategic relations: The decline in American power and prestige as a result of: –The bungling of the war in Iraq; –The bungling of aid and rescue during Hurricane Katrina; –The inability of the US to impose its will on Iran; –US failure with North-Korea and the indispensability of China to solve the North-Korea problem. The Rise of China and the emergence of a comprehensive strategic partnership with the EU has made the US realise that it cannot exert too much influence over the future of China. The vehement row over the lifting of the arms embargo has led to tentative trans-Atlantic steps how to jointly deal with China, the most momentous question of our time

31 31 Trans-Atlantic Rift over China China expressed its desire for a strategic partnership with the EU in its first EU-policy paper in October 2003, when anger over the war in Iraq had just reached its peak in Beijing and several European capitals. One of Chinas demands was the lifting of the EU arms embargo, imposed after the bloody repression of The EU linked the lifting to improvement of the Human Rights situation in China but during 2005 it became evident that American opposition and threats were the main reasons for EU wavering. The US views China as its main future adversary, whereas Europe sees China as an emerging pole, that together with a more cohesive future European Union will give shape to a multipolar world, to replace a US-dominated unipolar world.

32 32 Escalation of trans-Atlantic rift over the Lifting of the Arms Embargo during 2005 US rhetoric: Immoral Europeans making fast bucks by selling arms to Communists to better kill Americans, defending Taiwanese democracy. The issue had become entangled in how the hardline China- bashers in Congress perceive China. The House of Representatives on July 14 rejected the East Asia Security Act giving the president the authority to bring sanctions against European companies that would sell arms to China. The US arms industry had strongly lobbied against the legislation, because more export controls would result in unspecified American job-losses. EU businessmen didnt expect that lifting the embargo would result in quick, big arms deals but would facilitate other high profile deals such as the Airbus A 380.

33 33 Why Different European and American Approaches towards China ? Unlike the US, Europe doesnt have military alliances, troops and navies in East Asia - Japan, S.Korea, Taiwan (?) European involvements are mainly trade, investment and soft power. The US Right is obsessed by the determination to remain the pre-eminent military power and will not tolerate any challenger anywhere in the world throughout the 21 st century (see: Project for the New American Century). It is European policy to socialize China into the international institutional order by offering it the full range of assistance and collaborative programs. American policy is ambivalent. Trade and investment are huge but aid programmes are mostly carried out by private foundations. Government policy frequently shifts from engagement to confrontation and v.v.

34 34 Rumsfeld to China for first time: Non-Euphoric Encounter Secretary of Defense Rumsfeld, the most outspoken anti- China hardliner has visited China last week. China has actively sought the visit by Rumsfeld for four years. The Chinese military wanted this visit far more than the American military and Rumsfeld's reluctance to go to China was legendary. Rumsfeld asked to visit the underground military facility in Beijing known as the Western Hills Command Center, but the Chinese refused. Instead they allowed him to visit the Second Artillery, Chinas missile forces. In a speech at the Central Party School, Rumsfeld warned against Chinas emerging threat to its neighbors and domestically against restrictions on freedom of speech.

35 35 Solanas hardly veiled Criticism of the US Multilateralism and respect for international law are fundamental tenets of the EU's foreign policy. And I know the same is true for China. Together we need convince our other partners to put these principles at the centre of their foreign policy too. (Speech at CEIBS, Shanghai, ). Asked to compare Chinas relations with the US and the EU, a senior FM official said: Our relations with the US are candid, cooperative and constructive. Our relations with the EU are comprehensive, strategic – i.e. longterm, beyond ideology and not disturbed by minor issues – and a partnership, i.e. equality.

36 36 US: Security Threat First ~ Business Second Public discourse in the US concerning China invariably refers to its rise and is dominated by analysis of Chinas increasing hard power, the growth in Chinese military power and its effect on U.S. national security interests in East Asia, both with respect to Taiwan and more generally. Notwithstanding popular discontent over the loss of U.S. manufacturing jobs as a result of outsourcing to China, even Chinas substantial economic prowess and trade surplus with the United States take a backseat in these debates to the national security implications of Chinas rise.

37 37 Europe focuses on the Non-Traditional Security Threat of China The strategic partnership between the EU and China, agreed to in 2003, reflects the European view that China has become a key player on the types of soft security issues that Europe considers significant. The EU believes that the main threats to its security are of the transnational variety: terrorism, illegal immigration, international crime, contagious diseases, energy, environment, and problems related to poor governance. The EU views China as one of the major powers that will shape the effective handling of these problems.

38 38 Americans use the Megaphone, Europeans the Telephone The United States is holding China to a higher standard than others, because China is a divisive partisan issue in US domestic politics. Its size, its impact on other major economies and the world at large are perceived as a potential threat in the U.S., more than in any other Western nation. The United States has confronted China on the issues of Intellectual Property Rights and distribution- and trade rights this year and the Europeans and Japanese have reluctantly supported this approach. Europeans accord priority to negotiating because they cannot impose their will on others anymore. The US has the sanctions approach – Section 301. As former European Trade Commissioner Pascal Lamy observed last year, Americans like to use a megaphone, we Europeans prefer the telephone.

39 39 EU-China: More than Trade The EU has already become China's leading trade partner, and China is the second-largest destination in the world for EU exports. The summit in Beijing in September bolstered an ever- deepening set of EU-China relations that includes work on a new and wide-ranging Framework Agreement to further formalize political relations; strengthened scientific and technology cooperation; collaboration on labor, tourism and migration issues; and a specific effort aimed at climate change and energy supply security. EU-China cooperation on space is already far along, as China is a major partner in the development and deployment of the Galileo navigation system.

40 40 Ninety Percent of the EU-China Relationship is Economic China is now the EU's second-largest trading partner after the United States. In 2004, EU-China trade grew to 126 bn, or $ 163 bn, a 22 % increase from the year before. But trade between the two has been far from untroubled. Much of it is Chinese exports flowing to Europe, to the point that in 2004 the EU's trade deficit with Beijing ballooned to 78 billion. The EU has complained to China about inadequate protection of copyrights and patents, barriers to agricultural imports and services such as banking, and China's booming garment exports. European officials in Beijing stressed that the Union is generally satisfied with the progress of China's economic reforms and hopes to resolve disputes through negotiation.

41 41 Europes Focus: Improve the Governance, the Legal System, the Business Culture of China Europe views Chinas rise in terms of its domestic transitions, i.e. a multiple transition from state socialism toward a market economy, a more open society, and a more representative and accountable government. Unlike analysts in the US, who focus on Chinas external posture, European analysts focus on Chinas internal scene and want to assist China in managing its transition and reforms. Europe does not want China to become a failed state. Unlike the US, Europe is more willing to accept China as it is. Accordingly, the EU believes that it has a great deal to offer.This is the case not only because of western Europes own long experience with social democracy and the welfare state but also the ongoing East- European states experience as transitional economies and polities that have emerged from a similar period of state socialism.

42 42 Opposition against Lenovos acquisition of IBMs PC division for phoney security reasons The U.S.-China Economic and Security Review Commission wanted to derail the deal under the pretext that Chinese computer experts could conduct espionage from IBM facilities. Another complaint was that technologies that Lenovo acquired could have a "dual use" and enhance Chinas military. However, the PC business has become a low-margin commodity business, based on costs and efficient assembly and distribution more than on new technology. IBM sold this unit in part to focus its resources on higher-margin consulting and software. By making Lenovo the world's third-largest computer maker, the $1.3 billion sale would draw China more tightly into global economic interdependence and raise the price of any Beijing aggression. A computer maker dependent on foreign markets will not want its country invading Taiwan.

43 43 CNOOCs Failed Bid for Unocal China National Offshore Oil Corp (CNOOC) made a $ 18.5 bn bid this summer for a small US oil company Unocal, while Chevron made a rival bid of $ 16.8 bn. Anti-China hysteria in Congress poisoned and killed the deal: China is pursuing a national strategy of domination of the energy markets and strategic dominance of the western Pacific. For China the deal was a diversion away from buying massive amounts of depreciating dollars. (At present $ 230 bn). The great paradox: The US strongly criticizes China for having oil-dealings with rogue states. This time China wanted an M&A deal in a stable country. China craves global integration but was rejected just for reasons of hypocrisy and paranoia..

44 44 Some Major Sino-European M&A and Major Chinese Contracts in Europe In November 2003, Thomson and Chinese firm TCL merged their TV and DVD manufacturing to create the world biggest TV maker.The Chinese group will own 67 % of the venture, to be called TCL-Thomson. The JV will have factories in China, Vietnam, Germany, Thailand, Poland and Mexico. Huawei is now the world's second-largest supplier, after Alcatel of advanced digital-subscriber lines, the primary conduit for the world's broadband connections. Last year, Huawei won contracts in France, Spain, Germany, Holland and Portugal. Haier, Chinas largest household-appliances manufacturer has factories in Slovenia and Italy. After an on and off M&A and rescue process with the Shanghai Automobile Industry Corporation, SAICs rival Nanjing Automotive Group has agreed to buy parts of Rover and set up a new company with British entrepreneurs.

45 45 Punishment of Foreign Companies by the US; Europe more willing to transfer Technology The United States penalized eight Chinese companies, including some of the country's biggest military contractors, for supplying missile technology to Iran. ( >Taiwan) The arms transfers to Iran, a more practical problem, illustrate the widening European-American divide on strategic thinking about China, with Europe less inclined to impose restraints on China than the United States. The Australian company BHP Biliton is licensed to use the American geological survey technology Falcon since 1999 to detect underground deposits of minerals from aluminum to zinc. In April 2005, the Pentagon told BHP it will not be allowed to use the system in China. The disclosure came as the US was seeking to prevent Europe from lifting the arms embargo against China.

46 46 Galileo The EU on July 28 signed contracts with a group of Chinese companies to develop a range of commercial applications for Europe's planned Galileo satellite navigation system. The announcement is likely to ruffle feathers at the U.S. Defense Department, which controls the rival Global Positioning System, a system it is racing to upgrade. Beijing has contributed $ 230 m to develop Galileo but has also put pressure on the EU to gain access to Galileo's sensitive military data and technologies. After a difficult discussion with the US, the EU has declined that request.

47 47 The Textile War: EU Compromise The EU and China signed a deal on 5 September that will permit the release of nearly 80 million pieces of imported Chinese clothing that have been impounded at EU borders, thus ending an episode in what the British press has dubbed the "bra wars." It thus effectively amends the terms of the 10 June agreement that limited ten types of Chinese textiles exports to the EU to annual increases of no more than 8 to 12.5 percent over the next three years. China agreed to let half of this increase be counted against the import quotas for 2006, while the EU agreed to allow the rest to be imported over and above the previously agreed quantities.

48 48 EU and US in full agreement that China does not deserve Market Economy Status Now The EU has been a stringent enforcer of Chinas obligations and has been particularly tough-minded against Beijings demands that China be granted market-economy status (MES), which would effectively eliminate antidumping tariffs. In 2004 an EU internal study concluded that China still fell far short on four of five criteria necessary to achieve MES status. Over the past year, Beijing has exerted considerable pressure on Brussels to grant MES and relax its antidumping penalties, but thus far the EU has not succumbed to this pressure. For its part, the U.S. Department of Commerce is also bringing an increasing number of antidumping cases against Chinese firms. In both cases, this trend reflects not only unfair Chinese trade practices, but also the ballooning trade deficits that the EU and United States have with China.

49 49 Triangular Manoeuvres China and Europe have had a series of disputes over trade and MES status as well as disagreements over human rights. Europe has concerns about Chinas proliferation practices, as well as the arms embargo. More recently, Chinas Europe specialists have begun to criticize the motives underlying EU programs to promote civil society in China as an ideological ruse to Westernize and divide China (Xi-hua, fen-hua). The EU and the United States sometimes side with each other, China and the EU sometimes find themselves in agreement, the United States and China sometimes work well together, and sometimes the interests and policies of all three intersect, while each side simultaneously has disputes with the other two. What has not occurred, to date, is a situation where U.S. and Chinese perspectives converge against European interests.

50 50 Peter Mandelson on Globalization, Free Trade and Protectionism Europe has to develop a much more sophisticated response to the challenge of globalisation. Let me suggest four principles for action: –First, Europe has to attract talent from all over the world. –Second, we should launch a drive to promote inward investment and industrial collaboration. –Third, Europe should pursue a policy of openness to the world. –Fourth, we need more explicit policies in Europe to address the problems of the losers from globalisation and tackle the new inequalities that globalisation brings. Mandelson is already under pressure to take anti-dumping measures against Chinese shoes, whose imports are devastating the Italian footwear sector. Yesterday textiles, today footwear, tomorrow what ? Consumer electronics ? Cars ? Where will it go and when will it end ? We are at the beginning of the China story, not the end.

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