Effect of China’s Accession in the WTO to the EU and China Trade Relations

A Research Paper

Presented to the Faculty

Of the

International Studies Department

De La Salle University-Manila

In Partial Fulfillment

Of the Requirements for

Bachelor of Arts in International Studies major in European Studies

Term 1, AY 2012-2013

By:

Alvarez, Charlene

Palmones, Angela

Sta. Ana, Aleja Siena B.

August 2012

Table of Contents

Introduction

Background of Study……………………………………………………………………3

Statement of Problem……………………………………………………………………6

Hypothesis…………………………………………………………………………….....6

Variables…………………………………………………………………………………7

Scope and Limitations…………………………………………………………………...7

Review of Related Literature

Optimists: WTO has improved trade relations between the EU and China…………….9

Pessimists: Trade relations has deteriorated between the EU and China……………...11

Factors that would affect trade relations between the EU and China………………….13

Conclusion……………………………………………………………………………...17

Thereotical Framework

Theory…………………………………………………………………………………..17

Contending/ Alternative Theory………………………………………………………..21

Justification……………………………………………………………………………..22

Application……………………………………………………………………………...23

Operationalization………………………………………………………………………25

Conceptual Diagram…………………………………………………………………….27

Operational Diagram……………………………………………………………………28

Explanation……………………………………………………………………………...28

Methodology

Research Design………………………………………………………………………..29

Procedures………………………………………………………………………….......30

Bibliography……………………………………………………………………………………...32

2

I. Introduction

Background of the Study

The World Trade Organization (WTO) is the only international trading organization that deals

with trade relations between nations. Signed and negotiated by the world’s trading states, its focus is to

help the producer’s of goods, exporters, and importers to conduct their business easily and accurately. 1

The WTO aims to improve the welfare of the citizens of its member countries. The organization also

expands its scope to include trade negotiations within the service sector and intellectual property rights.2

WTO agreements have special provisions for developing countries. It helps to build their trading capacity

to handle problems and to utilize technical standards. On the other hand, the organization also maintains

regular negotiations with non-governmental organizations (NGOs), the media, and the general public on

different aspects of the WTO, aiming to enhance cooperation and increase awareness of WTO activities.3

As of May 2012, there are 155 members of WTO. Some major member-states that are included in

the WTO are the European Union (EU), United States, Japan, and China. One of the most popular

countries that recently joined the WTO is China. Its original application started during the time of General

Agreement on Tariffs and Trade (GATT) — the predecessor of the current WTO in 1986. The

negotiations on China’s accession have lasted for fourteen years, the longest process on record. Most of

the Chinese have stated that the long wait to the accession turned black to white. They have also accused

that the WTO members have tried to impose unacceptable conditions for their country. Many have

observed that the process of accession of China to become a member in WTO have been so slow. Most of

the researchers have presented that the slow pace should be blamed on economic events and historical

1 “The WTO,” World Trade Organization, <http://www.wto.org/english/thewto_e/thewto_e.htm> (21 August 2012).

2 Ibid.3 Ibid, 3.

3

events that happened during China’s application to membership. Major events include the end of the Cold

War, the crackdown in Tiananmen Square, and rapid growth in China.4

In the late 1980s, a twist of events has entered the scene unexpectedly. China became one of the

trading powers globally. Because of this, many western countries have come to witness China’s bid for

WTO membership as their hope and opportunity to draw out market access concessions from the country.

In 2001, China’s official accession to the WTO has been successful. With its accession, China is expected

to further expand its exports and gain more foreign capital. The country contributes to a new pattern of

international trade and capital flows. Many researchers have presented that China is considered to be one

of the important ingredients in the global economy. Over two decades ago, the country became a

significant player in the international trade of merchandise products.5 By the end of 1990s, China

becomes the ninth largest exporting country in the world. Its impact on industrial economies would be

very beneficial, as they can take advantage of the reduced tariffs for manufacturers and of the abolition of

non-tariff barriers in China.6

The impact of China’s WTO accession is not only important within the global economy. It also

takes an important role in the context of EU trade relations. One of the major reasons why China’s

accession paved way is because of the US- China agreement. The deal between them is concluded by

Charlene Barshefsky on November 25, 1999 in Beijing. It has been pushed through after the breakdown

of the agreement between President Bill Clinton and Premier Zhu.7 The US has gained important

concessions such as negotiated by one partner are automatically applicable to all other WTO partners.

The EU, on one hand, also has other interests to consider in other sectors to defend. They should help

4 Wang Yong, China’s Stakes in WTO Accession The Internal Decision-making process, ed. Heike Holbig and Robert Ash (London: RoutledgeCurzon, 2002), 21.

5 Margot Schuller, “The Impact of China’s WTO Accession on International Trade and Capital Flows,” in China’s Accession To the World Trade Organization National and International Perspectives, ed. Heike Holbig and Robert Ash (London: RoutledgeCurzon, 2002), 230.

6 Schuller, 246.7 Hans-Friedrich Beseler, The EU-China Negotiations Breaking the Deadlock, ed. Heike Holbig and Robert

Ash (London: RoutledgeCurzon, 2002), 5.

4

improve US-China negotiations in order to avoid the risk of the costs of the US concessions. This also has

become the reason why EU-China agreements suddenly emerged.

Before China’s application has been approved in the WTO, the EU has already favoured China’s

accession for two reasons. First, the EU is considered to be one of the strongest proponents of the

multilateral system of the WTO, and it wants to be strengthened by the help of China which is one of the

major players in the world. The system could hardly work if China is outside the scope of the WTO. With

the world’s major economic powers, they are able to abide by the rules, required under the mandatory

dispute settlement of the WTO. Second, China is in a sensitive phase of changing from a state trader to a

market economy. The EU should strengthen the liberal forces behind the present government for political

and humanitarian reasons.

Despite the motives of the EU with regards of China’s accession, some EU members present

some possible problems that EU will face. First, the EU market is already open and it is very willing to

open up further to the Chinese but the problem is it should have to be done in the condition of reciprocity

wherein the Chinese 1.2 billion customers market should be opened up too. Second, China should abide

by the rules of the WTO, if not, at least after reasonable change in periods, and their termination should

be determined clearly. Lastly, the danger of making a precedent, meaning China’s accession to the WTO

will not be the last one in the history of membership. Soon, other major players in the economy will join

like Russia.8

The implications of the EU and China’s economic relations are not only for the sake of the EU

but also for the Chinese people. The WTO accession will also open new opportunities for China. 9 There

will be an increase in foreign investment due to the opening of market. New management practices and

working methods will also increase. The allocation of resources would be improved that, in turn, would

also support growth in the country. These are some of the benefits that Chine could get from their

8 Beseler, 4.9 Beseler, 11.

5

relationship with the EU. According to the Development Research Centre (DRC), both imports from the

EU to China, as well as vice versa, will increase. However, China’s exports to the EU are more likely to

enhance the competition in the EU market of consumer goods, especially textiles. China’s increasing

share in the world textile market, production of textile and clothing in developed countries will have to

shrink further. Thus, the employment in these sectors in the EU will fall again.10

Indeed, China’s accession to the WTO is beneficial to the trade relationship of the EU because

there is easier access to China’s market; however, it also means that the competition within the EU will

affect EU-China trade relations contrary to its expectations.

Statement of the Problem

The purpose of this paper is to analyze and examine how the trade relationship between the EU

and China after China’s WTO accession in December 2001. Specifically, this paper aims to answer the

following questions:

1. What are the implications of China’s accession to the WTO on their relationship with the

EU?

2. Why is China considered to be an important factor in the global economy?

3. How will China’s trade relations with the EU be affected by the euro crisis?

Hypothesis

The implications of China’s accession to the WTO, with regards to its relationship with the EU

are as follows: China would loosen up its protectionist trade policies and it might open its markets in

order for the EU to access it for free. Within this case scenario, the EU is hoping that China would

continue to open its economy, followed by its 2001 accession to the WTO.11 As what Peter Mandelson,

former EU trade commissioner, stated in the launch of the 2006 Commission Paper on Trade and

10 Schuller, 239.11 John Fox and François Godement, A Power Audit of EU-China Relations (London, UK: European

Council on Foreign Relations, 2009), 20.

6

Investment with China, a stronger balance and reciprocity was needed to create access to China’s markets

and create fair trading conditions.12 If China opens its markets, it would learn to follow copyright laws

because of its reputation for violating intellectual property rights. In addition, China's cheap labor would

benefit the economies of other countries, specifically the EU, if all business firms relocate due to issues

regarding production costs. For instance, the UK, an EU member, views China as a great opportunity due

to its cheap labor and its market size.13 Besides that, other EU member countries might as well relocate

their business firms to China for good. Finally, with regards to the euro crisis, China would do everything

to make sure that its trade relations with EU remain unaffected if they both cooperate with one another in

resolving the crisis through summits and active economic forums.

Variables

The independent variables identified in the research are the trade policies of the EU and China,

the products traded between the EU and China, the rules and regulations from the WTO, and the ongoing

euro crisis. These independent variables will be the factors that will affect the dependent variable which is

the trade relationship between the EU and China. Thus, this research paper will examine the

aforementioned variables to be able to prove the hypotheses formulated by the research group.

Scope and Limitations

The research paper will explore the trade relationship of the EU and China after China’s

accession to the WTO. It will mostly focus on how trade between the EU and China changed and how the

rules of the WTO affected the trade policies of the EU towards China. The paper will explore how the EU

formulates trade policies that concerns China and if China’s trade relationship with the EU will be

affected by the euro crisis while considering WTO’s rules.

12 Fox and Godement, 47.13 Fox and Godement, 77.

7

The research paper will examine the EU-China trade relationship from China’s WTO accession in

2001 up to the present. This is to see if there are significant changes in trade between the two states and if

EU trade policies are changed to suit China’s market. This time frame will provide the researchers

sufficient data for the paper.

The researchers acknowledge that they are limited to the general view of the topic since there is

limited time. The paper cannot delve further into other sectors of the trade relations (i.e. textile,

telecommunications, manufacturing, etc.) since there will be an overload of data therefore the researchers

have to explore the topic on a general basis. The researchers also recognize that there are many cases

involving trade partnerships between the EU and China thus only famous cases will only be explored.

Since the researchers don’t live in neither the boundaries of the EU or China, they are limited to the

information provided in the university library and won’t be able to fully comprehend the effects of the

trade relations between the two entities.

The strengths of the research paper are that it will provide a general insight on the trade relations

between the EU and China and it is relevant to the present situation of the euro crisis. Moreover, the EU

and China are two of the powerful movers of the world and what they do affects the global market. On the

other hand, the weaknesses of the paper are that it won’t be able to focus on one sector of the trade

relations and there might be new information that could be not included in the paper.

II. Review of Related Literature

There are a lot to be considered on China’s entry to the World Trade Organization. In the first

part, it has been observed and focused that its accession would result to major advantages among the

WTO countries especially in European Union considering that they are in need of support because of their

on-going Euro crisis. As its entry has been finalized, there are some effects that could totally affect the

economy of other member states of the WTO, which have been discussed earlier. The impact of its

8

accession in the system also has positive and negative effects. Even if some countries will experience an

increase in competition with China’s current export markets, industrial countries would experience large

benefits on their economies. With China’s presence in the system, they can take advantage of the reduced

tariffs for producers and non-tariff barriers in China.14 Imports from the EU to China, as well as Chinese

exports to the EU will increase considerably. China’s entrance to the world economy would be very

advantageous to both China and EU, as being stated in their agreement. On the other hand, with China’s

presence in the EU market, competition would increase which could cause more conflict leading to more

cases in the WTO and the use of the WTO dispute settlement. Moreover, China has been inconsistent

with its behavior in the WTO. However, despite these problems, some scholars have proposed solutions

and ideas that could strengthen the EU and China trade relationship.

Optimists: WTO has improved trade relations between EU and China

Before China’s accession to the WTO, the European Union has already favored its entry for two

main purposes. First, the EU is being considered as one of the strongest proponents of the multilateral

trading system of the WTO. With China’s development as one of the majors players globally, the

organization will not work properly since the country is outside. China’s power is needed to strengthen

the system by joining the WTO. Also, it would be easier for other WTO members to control China under

the mandatory dispute settlement system of the WTO. Second, considering China is a state of transition

from a state trader to a market economy, WTO should strengthen the liberal forces behind the present

government for commercial, political, and also for humanitarian reasons.15 On the part of China, they

also considered very similar factors on entering the WTO. First, China does not have any choice at all. It

isolated itself for many years. Since globalization is a trend right now, the challenge for them is to open

up to the outside and to liberalize inside. Second, WTO accession is irreversible from internal to external

liberalization. An economic liberalization is importantly needed as the country will need to abide by the

liberal rules of the WTO. Third, WTO governs the majority of the major players in the system. It will

14 Schuller, 240.15 Ibid, 5.

9

continue to develop and grow. Surely, China would not let itself to be left behind. Lastly, the liberal rules

of WTO will serve as a shelter and protection for them against protectionist tendencies of its

competitors.16 These motives are being considered or being counted by both China and the EU. They both

emphasized their benefits with regards the accession of China to the WTO. The two will both have

advantage with each other.

With China’s entry to the system, there are new chances for them. First, China can avail itself of

the totality of liberalization measures accepted by the WTO. It is an end to all special restrictions against

the member countries’ exports. Second, quotas in the EU shoes, porcelain, and ceramic tableware would

be abolished and also all other quotas in other WTO countries. Third, anti-dumping legislation will have

to be revised by other WTO countries. Fourth, an increase of foreign investment in China will be

witnessed because of the opening of the Chinese market. Fifth, new management practices and working

methods will increasingly flow in the country. Lastly, allocation of resources would be improved which

will support economic growth in China.17 These are the opportunities that China determined before they

entered the WTO. They had predicted some of these up to this day.

The bilateral commercial relations between China and the EU are one of the elements why there

is progress in the development of their relationship. Zhang Zuqian emphasizes that the efforts made by

both China and the EU were important in establishing trade relations.18 Due to China’s accession in the

WTO in 2001, which was supported by the EU, he cited that there were improvements in investments

from the EU to China and vice versa, and the EU as a source of China’s imported technology. He

discussed how there is an impressive growth of investment from the EU. In present time, there are about

20,000 European-funded enterprises in China and European countries have set up local branches in

China.19 Investments from the EU have been of relatively high technology and capital-intensiveness.

16 Ibid, 5.17 Ibid, 5.18 Zhang Zuqian, “China’s commercial trade relations with Europe,” in China-Europe Relations, ed. Zhou

Hong, Eberhard Sandschneider and David Shambaugh (New York: Routledge, 2008), 232.19 Zuqian, 233.

10

Moreover, he noted that the EU is the key regional provider of governmental loans to China which

encourages the citizens and enterprises of the EU to expand commercial ties with China. On the other

hand, there is an increase of FDI from China to European countries. New EU members from Central and

Eastern Europe have become important destinations of Chinese FDIs.20 There are two reasons why

Chinese firms are interested in new EU members. First, Chinese investors will enjoy the same treatment

throughout the enlarged EU and second, the twelve new EU members are looking for investments from

China since their economies are behind those of the original members. Investing in these areas would help

Chinese brands to expand rapidly across Europe. He also mentions that the Europe is the major resource

of technology for China. Even Deng Xiaoping back in July 1983 realized the importance of Europe as a

source of technology innovations and that China should take advantage of it. This cooperation would help

further the China-EU trade and economic relations.21

Pessimists: Trade relations has deteriorated between the EU and China

China is one of the countries that benefits most from the liberalization of the world trading

system. From its role as a major recipient in foreign capital, in the midst of 1990s, it suddenly became the

second largest recipient of FDI surprisingly only behind to the United States.22 It is also considered as the

largest recipient of FDI in the developing countries. With its accession to the WTO, many had expected

that China will be able to further expand its exports and be able to acquire more foreign capital. Its

integration with different countries in the world has made it one of the biggest economies at present. In

2020, as the World Bank projected and presented, China’s share in global exports will increase up to

10%, higher than Japan but lower than the United States and the European Union.23 China’s further

integration with the world economy will have different effects on developed and developing states.

Despite these economic developments and great integration with other countries, it is clearly foreseen that

20 Zuqian, 234.21 Zuqian, 236.22 Schuller, 229.23 Ibid, 12.

11

its rapid integration would have a huge favourable effect on its side and a great impact on the

international trade.

As being recorded in 1999, one of China’s largest trading partners is the European Union.

Unfortunately, for the EU member-states, trading with China seems to be less significant. China’s share

of total EU imports accounts for 2.2 percent, on the other hand, exports to China are smaller, and getting

only 1.1% changes of the EU’s total exports.24 According to the WTO’s International Trade Statistics

2000, in 1999 the Chinese machinery and equipment market is the most significant export products for

developed countries like Japan, the United States, and especially for the EU. These developed countries

acquired no large changes in their market shares. It also stated that Germany, the second most important

export country, only got 17% share and the United States with 14%.25 Meanwhile, Italy and Hong Kong

suffered from a great loss of their shares in Chinese market. During this early period of integration before

China’s succession to the WTO, it was clearly seen that the impact of its international trade would be in

contrast to the strategies and plans that EU had implemented towards trade policies on China. In this data

that has been presented, China had experienced more benefits and improvement in exports than EU and

other developed countries.

Wang Zhi, in his study of impact of China’s WTO entry in international trade points out that the

structure of endowments in China and its major trading partners is the basic economic force that shapes

an impact to international trade.26 He also emphasizes that decreasing barriers on imports of labour-

intensive producers in WTO member countries, specifically on textiles and clothing, would make way for

China to further get its comparative advantage. While China is focusing on labour-intensive products that

lead to the increase of its exports, its demand for agricultural and capital- or technology-intensive

products would increase too. In the textile and clothing market of its largest trading partners like EU,

China would be able to increase its market share to a large extent. With its growing share globally in the

24 Schuller, 233.25 Ibid, 12.26 Schuller, 238.

12

textile market, the manufacturing of textile and clothing in developed countries will decrease further. 27

Employment in the textile and clothing industries in the EU, which had declined before, will fall again.

The impact of China’s entry to WTO can also be seen in the industrial sector. It would be very beneficial

to other countries because they can take advantage of the reduced tariffs and of elimination of non-tariff

barriers in China. In return, the effect is that their domestic business for labour-intensive manufacturing

would be a further challenged by exports coming from China.28

As of now, China’s largest export market is the European Union. On the other hand, the EU’s

fourth most significant destination of exports is China.29 China’s entry to the world economy must be

beneficial to both sides of China and Europe. Both of them complement each other but China has greater

advantage than Europe. EU exports are dependent on two main factors: China’s domestic demand and the

strategy of European firms investing in China30.

Factors that would affect trade relations between the EU and China

A factor that is important for the research paper is the making of trade policies of the EU towards

China. According to Franco Algieri, inside the Commission almost every DG is somehow linked to the

EU-China relations since there are a number of sector specific dialogues that have been developed and

new ones that are anticipated.31 He further recounts why this is important by discussing how the EU

supported China’s accession to the WTO. A Joint Committee was set up after the 1978 Framework

Agreement between the EU and China. This committee is comprised of representatives from both sides

and has three main functions – supervisory, examination and recommendation. The EU side is

27 Schuller, 239.28 Schuller, 247.29 Andreas Freytag, “That Chinese “juggernaut” – should Europe really worry about its trade deficit with

China?,” European Centre for International Political Economy, (2008).30 Francoise Lemoine and Deniz Unal-Kesenci, “The Impact of China’s WTO Accession on EU Trade,” in

China’s Accession To the World Trade Organization National and International Perspectives,ed. Heike Holbig and Robert Ash (London: RoutledgeCurzon, 2002), 268.

31 Franco Algieri, “It’s the system that matters: Institutionalization and making of EU policy toward China,” in China-Europe Relations, ed. Zhou Hong, Eberhard Sandschneider and David Shambaugh (New York: Routledge, 2008), 72.

13

represented by the European Commission and assisted by representatives of the member states. The

Council and the Commission were urged by the European Parliament to support China’s efforts to join

the WTO. This reflected the context of the EU’s market strategy.32 In the Euro-Chinese negotiations, the

Commission had to consider the overall interest of the community, interests of member states, concerned

industrial sectors and other interest groups as well as other negotiations of China with other states. Algieri

then concluded that through supranational cooperation states can reduce the costs of disruptive relations

with China.33 The European Parliament, the Council and the Commission are important institutions when

making trade policies and bilateral negotiations. Moreover, the agenda of China’s WTO accession

showed that member states have a stronger position together rather than negotiating on their own.34

Fredrik Erixon discussed in a paper about the EU-China trade relations during the Eurozone

Crisis. In this context, the EU is described as Sisyphus for its attempts to persuade China to open its

markets or else, it would cut its trade relations with the latter, similar to Sisyphus disappointment with the

boulder,’s failure to roll towards the top of the hill.35 China, on the other hand, is like Icarus. Icarus is a

mythological Greek character who failed on his ambition to fly due to his nearness to the sun; whereas

China, on the other hand, despite being progressive in economic terms, its foreign economic aspirations

are still hard to understand.36 This could be explained during the height of the economic crisis in the EU.

Usually, EU-China talks are not that energetic, and only a few would expect from them. This means that

the trade relations aren’t really that of an issue, as compared to the EU’s trade relations with other

countries besides China.37 In essence, prominent leaders like the German chancellor Angela Merkel would

be interested in meeting the Chinese leadership, but other European national leaders won’t even bother to

speak up for the EU,38 and this is evident when the European media barely bothered to cover the China-

32 Algieri, 73.33 Algieri, 79.34 Ibid, 15.35 Fredrik Erixon, When Icarus met Sisyphus: EU-China Relations During the Eurozone Crisis (GMF Paper Series,

April 2012), 2.36 Erixon, 3.37 Erixon, 1.38 Erixon, 2.

14

EU summit in Beijing. In addition, EU would approach China to solve the economic crisis, but nothing

happens. Instead, conflicts happen rather than cooperation.39 China would not even pay the debts of the

Eurozone members with a wrecked economy due to EU’s failure to boost China’s confidence as they

plead to contribute to the European Financial Stability Facility (EFSF).40

These conflicts may be caused by China’s lack of understanding of how the EU works. To make

it short, Beijing thinks that the EU is unpredictable. However, China should learn its lesson from Icarus

that, there is always a limitation to everything, even in the global marketplace.41

In a paper presented by Fredrik Erixon and Razeen Sally, both Directors of the ECIPE along with

Patrick Messerlin at the Oxford Conference on The Microeconomic Drivers of Growth in China

thoroughly examined China’s trade policy after its WTO accession as well as an assessment of the China-

EU trade relations. China’s trade policies have improved post-WTO accession. It has succeeded much

more than other developing countries in generating high rates of growth and translating this into

employment, reduction of poverty, and human-welfare improvement.42 In the WTO, China is an active

member state in dispute settlement and multilateral rule-enforcement, and is serious in implementing

WTO commitments. However, some WTO members such as the US and the EU have major complaints

against China for issues such as how many WTO commitments are not uniformly applied in China and

how China does not adhere to WTO transparency obligations.43 The paper also discussed the reforms

China has to take for its trade policies through, unilateral reforms, domestic reforms, WTO-plus reforms,

and preferential trade agreements (PTA). The second half of the paper talks about China-EU commercial

relations specifically about trade and FDI patterns, the EU’s trade deficit with China and the framework

for bilateral commercial relations. With regards to FDI patterns, China’s nine richest provinces are rich or

39 Ibid, 15.40 Ibid, 15.41 Erixon, 4.42 Fredrik Erixon, Patrick Messerlin, Razeen Sally, “China’s Trade Policy Post-WTO Accession: Focus on

EU-China relations” [Paper presented at Oxford conference on The Microeconomic Drivers of Growth in China], Papers by Fredrik Erixon, ECIPE, 4.

43 Erixon, Messerlin, and Sally, 6.

15

richer than fourteen EU member-states and accounts for 85-90 of per cent of China’s current external

trade and inward FDI which means that they are losing their comparative advantage based on low

wages.44 The authors also noted that the EU’s trade deficit with China should not be a cause for alarm

since EU’s trade deficit with the rest of the world has decreased.45 As for the framework for bilateral

commercial relations, they have explained that an EU-China PTA would cause more conflict between the

two parties. However, much would be gained if EU exporters and investors have a PTA with China but

that remains to be seen. Instead of a PTA, the authors advocated for a strengthened, more

institutionalized bilateral regulatory cooperation that would resolve issues through mutual advantage. 46

They also mentioned that the new EU-China High Level Trade and Economic Dialogue should be able to

resolve conflicts just like how the US-China SED did so.

Moreover, Jenny Clegg also considers how China has a reputation for offering cheap labor which

makes business firms from Japan, the USA, the EU and other developed countries to relocate due to the

cost of production issues.47 However, China is not only seen as a trade and economic competitor; it is also

viewed as a cheater.48 China is also notorious for counterfeiting products—yet there are two reasons why

this happens. First of all, most Chinese cannot afford genuine products,49 and the concept of IPR is poorly

developed in the Chinese culture.50

Despite the negativities against China’s notoriety for violating IPR, European fashion brands

were outsourcing to China in order for them to offer high-quality fashion items at a lower price.51 That is

because the cost of employment in China is smaller compared to Germany, France and Italy—and other

44 Erixon, Messerlin, and Sally, 20.45 Erixon, Messerlin, and Sally, 21.46 Erixon, Messerlin, and Sally, 34.47 Jenny Clegg, China's Global Strategy: Towards a Multipolar World (5th Avenue, New York, NY: Pluto

Press, 2009), 199.48 Clegg, 196.

49 Clegg, 213.50 Joachim Glaubitz, "The China Threat: A European Perspective," in The China Threat: Perceptions, Myths and Reality, ed. Herbert Yee and Ian Story (New York, NY: RoutledgeCurzon, 2004), 126.51 James Kynge, China Shakes the World: The Rise of a Hungry Nation (London, UK: Weidenfeld & Nicolson, 2006), 82.

16

EU member states of East Europe. Besides that, state expenditure in China is much smaller compared to

that of Western Europe.52

Conclusion

The research topic is relevant to the literature reviewed since it will further explore the aspects of

the EU-China trade relationship. China and the EU are among the top economic giants that affect the

world therefore making this study relevant to present time especially with the ongoing euro crisis. There

are few literature that discusses how China’s accession to the WTO affected trade relationship between

these two in terms of diplomatic interactions and especially in how it affected the formulation of trade

policies between the EU and China. Most of the literature reviewed showed statistical records and

interpretation of these records which are based on the trade activities between the EU and China while not

fully considering the WTO’s rules and regulations. Moreover, since the euro crisis is relatively new, there

is little literature that has fully explained or explores how the euro crisis will affect the EU-China trade

relationship while regarding the accession of China’s accession in the WTO.

III. Theoretical Framework

Theory

The ideology that most likely observes the implications of China’s accession to the WTO

in relation with the European Union’s trade policies and relations is neoliberalism in terms of

international political economy. The liberal perspective historical development starts from the

eighteenth century France, that goes through nineteenth century England and finally, to the world

of twentieth century. It has also developed in the United States and Western Europe. The

foundation of liberalism has begun by Adam Smith, the main proponent of this ideology. Smith

52 Kynge, 95.

17

has been known for his ideas of “invisible hand” and “laissez-faire” meaning “let be, let pass” or

in simpler way, “Hands off! Leave us alone!”53 In his works, he argues that a mercantilist state’s

principles are totally based on its national interest wherein it uses its state power to produce

wealth and more power to itself. For Smith, the individual freedom is the most important and

best alternative to be considered in the marketplace to replace the exploitive state power.54 The

main focus of liberal perspective is about human nature in a way that it’s peaceful and

cooperative but, at the same time, competitive in a constructive way.55 It also emphasizes the

abusive side of the state authority. The two natures of liberal idea, individual freedom and state

abuses, are very significant to the aspect of liberalism.56

As what have been stated above, neoliberalism is the ideology that covers the entire study

regarding the relationship between China and the EU. Neoliberalism has used by German scholar

Alexander Rustow at the Colloque Walter Lippmann in 1938.57 The concept of neoliberalism can

be defined as the priority of the price mechanism, the free enterprise, the system of competition

and a strong and impartial state.58 It has been also said that being neoliberal means “laissez-faire”

liberalism is not enough, a modern economic policy which promotes a strong role for the state

with respect to the market is important and needed.59 According to David Harvey, neoliberalism

is a theory of political practices that suggests human well-being can be best developed by

liberating individual entrepreneurial and skills within an institutional framework distinguished by

53 David N. Balaam and Michael Veseth, Introduction to International Political Economy (Upper Saddle River, New Jersey: Prentice Hall, 1993), 41.

54 Ibid., 18.55 Balaam and Veseth, 42.56 Ibid., 18.

57 Dieter Plehwe and Philip Mirowski, The Road From Mont Pelerin: The Making of the Neoliberal Thought Collective (Cambridge, Massachusettes: Harvard University Press, 2009), 12.

58 Plehwe and Mirowski, 13-14.59 Plehwe and Mirowski, 48.

18

strong private rights, free markets, and free trade.60 There are several roles that state should

exercise in order for the creation and preservation of practices that are appropriate on the

institutional framework. It should guarantee quality and integrity of money. It should also create

military, police, and legal structures and functions to protect private property rights and to

guarantee proper functioning of markets. During the 1970s, there has been a strong turn towards

neoliberalism. Deregulation, privatization, and withdrawal of the state from many areas of social

provision have been common.61 Almost all states, many of those states coming from the collapse

of the Soviet Union to old-style democracies and welfare states like, for example, New Zealand

and Sweden, have adapted some neoliberal theory and changed at least some policies and

practices accordingly.62 Even contemporary China has been said that the country is heading

towards the direction of this theory. In addition, the advocates of neoliberalism occupy positions

in academe, in media, in corporate boardrooms and financial institutions, in key state institutions,

and also in those international institutions such as the International Monetary Fund (IMF), the

World Bank, and the World Trade Organization (WTO) which is in charge with global finance

and trade.63

Another important figure to consider in the neoliberal perspective on international

political economy is David Ricardo. Getting from the pioneering ideas of Adam Smith,

according to what he has stated in his established work of Principles of political Economy and

Taxation, the comparative advantage provides a new basis for liberal trade theory and also a

cornerstone of the whole building of liberal economics.64 Ricardo’s law of comparative

60 David Harvey, A Brief History of Neoliberalism (Great Clarendon Street, Oxford: Oxford University Press, 2005), 11.

61 Harvey, 12.62 Ibid., 19.63 Ibid., 19.64 Gilpin, , 173.

19

advantage is one of the important assumptions of liberal international economics of today. Also,

in his law of comparative advantage he also emphasizes that it is the fundamental basis for free

trade that later on will be further discussed in relation to China’s accession to the WTO.

Various types of economic liberalism commit themselves to the market and the price

mechanism as the most efficient means for creating an organized domestic and international

economic relationship with other states. Liberalism can be clearly defined as the set of

assumptions for developing an organized and well-managed market economy in order to get a

maximum productivity, economic growth, and individual welfare.65 The basic argument of

liberalism is that the individual consumer, firm, or household is the basis of the society. It also

argues that an individual will always seek to get the objective until market equilibrium is reached

until the costs that are related to the objective are equal to the benefits.66 Liberalism assumes that

a market exists in a state wherein individuals have the complete information and selection of

beneficial course of action available for them. It also assumes that a market economy shows a

great power towards equilibrium and inherent stability. Another liberal assumption is that a basic

long-term harmony of interests determines the market competition of producers and buyers.

Individual consumption of self-interest in the market raises social well-being because it can

develop into maximization of productivity, and the arising economic growth will eventually

benefit all. Lastly, most liberal-economists believe in progress. They insist that the growth of the

economy is gradual and continuous. It proceeds along with the MIT standard equilibrium growth

curve.67 Liberals believe that the sources of peaceful relations among the states are trade and

economic intercourse wherein the benefits of trade and extensive interdependence among

different economies tend to promote cooperative relations.65 Gilpin, 28.66 Ibid., 20.67 Gilpin, 30.

20

Contending/ Alternative Theory

Economic liberalism, however, has its own criticisms. Its major criticism is how its basic

assumptions about the existence of rational economic actors and a competitive market are unrealistic.

Liberalism believes in the view that there are rational and equal individuals living in a world free from

political boundaries and social constraints.68 It is also limited to understanding the dynamics of society

thus it cannot effectively comprehend political economy. Marxists also criticizes how it does not concern

itself if there is equal contribution of wealth among societies and disregards the equity of the outcome of

economic activities. Another limitation is its assumption that exchange of goods is always free in a

competitive market between equals. Charles Lindblom argued that terms of an exchange are affected by

political factors such as coercion and bargaining power. Hence, it neglects to examine noneconomic

factors and effects of change on politics making it lack a true “political economy”.69

An alternative theory for this topic is the nationalist perspective of the international political

economy. It has other labels: mercantilism, statism, protectionism and recently, New Protectionism. The

main idea of economic nationalism is how economic activities serve the interests of state and has the goal

of state building. Nationalists think that the state is the primary actor and considers the role of economic

factors in international relations. They view the pursuit of power and wealth as two ideas that go

together.70 The primary objective of this perspective is industrialization because they associate this with

political power. It equates good industry with military power, economic self-sufficiency and political

autonomy. Mercantilists like Hamilton and List favored industry and manufacturing over agriculture

which emphasizes that there should be national self-sufficiency rather than economic interdependence.

Economic nationalism argues that competing states considers mutual gain to be of lesser importance than

relative gain. Nations try to change the rules or regimes governing international economic relations in

order to benefit themselves disproportionately with respect to other economic powers. 71 Even though

68 Gilpin, 44.69 Gilpin, 45.70 Gilpin, 32.71 Gilpin, 33.

21

states have formal commitments to international organizations like the WTO, many member states sought

to protect their economic security through nontariff barriers. This particular assumption somehow

explains how China and the EU manipulate the WTO rules to their advantage. They do so because of

national interests and want to control the economic relations between the two entities and safeguard their

own security as well which is in line with the nationalist perspective of protecting national economic

interests as the minimum essential to the security and survival of the state. Neomercantilism further

supports this because it argues that states are tempted to intervene and influence the development of other

nations to accumulate and maintain wealth and power.72 Thus, China’s accession in the WTO could be a

strategy to protect its industries and ensure its own security. Lastly, mercantilists believe that as long as

the states exist and have the political authority, the states are expected to give utmost priority to their own

national security, economic security, and independence.

Justification

Despite the criticisms against liberalism and alternative theories that could explain the research

topic, the researchers still chose to use economic neoliberalism. It is because the researchers believe that

China’s accession in the WTO is proof of China is opening its markets to the international market. Also,

the behavior of the EU and China when it comes to making trade policies will be affected by their

consideration of how their products would fare in the international market under the rules of the WTO.

Moreover, the researchers believe that the concept of neoliberalism would be able to examine the

manipulation of the WTO rules to maximize profit in the international economy especially trade relations

between the EU and China.

Application

China’s accession to the WTO opens a lot of opportunities for them economically. Among these

opportunities is China’s totality of liberalization measures accepted by the WTO in the area of customs

duties, quotas, non-tariff barriers, goods or services. This supports the hypothesis that China loosens up

72 Balaam and Veseth, 29.

22

its protectionist policies in order for the EU to access their markets for free. In addition, the quotas

existing in the EU for shoes, porcelain, and other products would be abolished and anti-dumping

legislation would be also removed by other WTO countries. Most importantly, there will be an increase in

foreign investment in China due to the opening of its market globally. It will be a more attractive business

location for other countries and China’s allocation of resources will definitely improve which will sustain

the economic growth in the country.73 It means that special restrictions against the member countries’

exports would be put to an end. On the other hand, China should be able to open up its market globally

following WTO commitments implemented to them. First, the overall average tariff for industrial goods

will decrease. Secondly, on the agricultural side, tariffs for pasta, butter, wine, and wheat will also go

down. Thirdly, on the service side, the right to distribute will now be opened at every level from whole

sale to retail.74 There are still a number of WTO commitments implemented to them. Thus, competition

will increase among them. China will be exposed to this kind of dilemma in a long period of time since

the time it got accepted in the WTO. Also, its market will be opened progressively in a long transition

periods. The country will have the time to adapt, to benefit from its normal comparative advantages, and

to reallocate its resources to labor intensive industries.75

It is clearly seen above that with China’s accession to the WTO, liberalization has been focused

by its negotiation with the system. It means that the economic perspective that they used in order to

maintain a good relationship with another is economic liberalism. With the idea of open market, barriers

like restrictions on certain products between others states and China are gone. Adam Smith states that

trade should be free and nations should focus more on the products that they are known for so that they

could be wealthier and be more powerful.76 Through applying the neoliberal perspective, China is one of

the countries that most benefitted from the liberalization of the world trading system with its lowest tariffs

for manufacturers.77 This explains that China’s cheap labor benefit the economies of other countries, such

73 Ibid., 5.74 Ibid., 5.75 Beseler, 13.76 Gilpin, 173.77 Ibid., 12.

23

as EU member states, just in case they are willing to relocate their business firms to China. With this,

China is really expected to further expand its economy in the WTO. Another thing to consider why

economic neoliberalism is the most appropriate ideology to consider in China’s emergence in the WTO is

that of its comparative advantage. David Ricardo has established that free trade’s fundamental basis is the

law of comparative advantage wherein he states that the flow of trade among countries is determined by

the relative costs of the goods produced. A state has an absolute advantage over other member-states in

manufacturing its specialized goods with the lowest comparative costs. While leaving the production of

other commodities to other states, it enables all countries to gain more from exchange.78 In case of the EU

and China trade relationship, both of them benefit but since the EU’s economy, as of now, is unstable,

more likely, China benefits more than the EU especially when it talks about the textile industry. China

dominates the whole economy in terms of textile and clothing industries. As what Wang Zhi argues, the

decreasing restrictions on imports of labor-intensive producers in WTO countries would allow China to

further realize its comparative advantage.79 Neoliberals do not emphasize that everyone will actually gain

from free trade, but at least not without adapting policies. It rather emphasizes that there are potential

gains. Neoliberal perspective also does not mean that everyone will have an equal gain even if the

member-states follow the official policies. Instead of this, it assures that everyone will gain in absolute

terms, though some will gain more than the others. The argument regarding on free trade is not focused

on the equity and equal distribution but on increased productivity and the maximizing of world wealth. 80

Compared with China’s trade relations among the WTO member-states, it is clearly been observed that

China gains more than the others, especially in the EU. This factor may help solve the EU crisis without

affecting their trade relations if they initiate to resolve the crisis through summits and economic forums.

Operationalization

78 Gilpin, 174.79 Schuller, 238.80 Gilpin, 179.

24

Concept Definition Operational DefinitionOpen market It is characterized by the absence of

tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or practices that interfere with the natural functioning of the free market.81 It increases the range of goods and services available to the customer.

This refers to China’s accession to the WTO which opens up China’s economy to international trade and lessens the barriers for trade partners such as the EU.

Law of Comparative Advantage The flow of trade among countries is determined by the relative costs of the goods produced. The international division of labor is based on comparative costs, and countries will tend to specialize in those commodities whose costs are comparatively lowest.82

This refers to the specialization of China in certain products such as the textile industry while the EU specializes in technology.

Deregulation Reduces the government’s role in trading regulations and allows the trading industry greater freedom in how it operates.

This refers to the WTO enforcing its rules and regulations to further open up the economy of China and give more freedom to industries to trade without the usual interference from the government.

Liberalization An end to all special restrictions against the member countries’ exports.83 For example, in the area of customs duties, quotas, non-tariff barriers, goods or services.

This refers to the compliance of China to the WTO rules after its accession to lessen its trade barriers.

International trade The economic interaction among different nations involving the exchange of goods and services, that is, exports and imports.84 It has beneficial effects on both the demand and the supply sides of the economy.

This refers to the trade relationship between the EU and China. This may also refer to increased FDI flow towards China.

Free Market Individuals are considered best equipped to make social choices.

This refers to states that are members of the WTO including the EU and China.

Nations Should specialize in what they do best so that they could become wealthy and powerful.

This refers to China and the EU member states that have their own

81 “Open Market,” Investopedia, <http://www.investopedia.com/terms/o/open-market.asp#ixzz21LaMbzAi> (22 July 2012).

82 Ibid., 25.83 Ibid., 5.

84“Economic Definition of international trade,” Economic Glossary, < http://glossary.econguru.com/economic-term/international+trade> (22 July 2012).

25

specialties when it comes to trade.

Absolute advantage An exporter with a given amount of measures being able to produce a greater output at less cost than any competitor.

This refers to how China is the 2nd largest trading partner for the EU and vice versa.

Strategic trade policy In a highly interdependent world economy composed of oligopolistic corporations and competitive states, it is possible, at least thereotically, for the latter to initiate policies from foreign to national corporations.

This refers to the trade policies made by the EU and China.

Economic activity It enhances the power and security of the state and its primary objective is to benefit individual customers.

This refers to the trade activities between the EU and China in terms of pursuing trade policies that would most benefit their own economy. This also refers to how cases of trade are brought before the WTO dispute settlement mechanism.

Diagram

a. Conceptual Diagram

26

b. Operational Diagram

27

LCA LCA

DeregulationLiberalization

Nation

Nation

Strategic Trade Policy

Strategic Trade Policy

International Trade

Free Market

Explanation

The free market is composed of all the states that are members of the WTO. The WTO serves as

the “invisible hand” which guides the free market. China, a nation, is then given WTO rules which

liberalize its economy further. China joins WTO in 2001 which makes it open its market to international

trade. The two entities – China and the EU which represents its member states establish an international

trade relationship. Each of them has their own LCA (law of comparative advantage). For the EU it is the

technology industry while for China it is the texture industry. Both China and the EU have strategic trade

policies which are the trade policies influenced by the WTO that governs their trade relationship.

IV. Methodology

28

Technology

Textile industr

y

The WTOWTO rules

China’s

accession to

the WTO in

2001The EU

China

Trade PoliciesTrade Policies

Trade relationship between the EU

and China

States that are members of

the WTO

Research Design

The paper is classified under basic research. It aims to know and observe if the current situation

of EU’s trade and policy relations with China could either be helpful or harmless on its part considering

its recent economic standing. To be able to accomplish this objective, the terms in International Political

Economy, specifically under the liberalism ideology, will be used in the study. The researchers will

analyze the trade relationship of China and the EU by applying concepts of trade relations and acquired

knowledge about the topic.

The study is in a descriptive method since the researchers are heavily dependent on existing and

present data. With the collected information and data, the researchers have been concluded three

hypotheses. These are: First, China would loosen up its protectionist trade policies and it might open its

markets in order for the EU to access it for free. Second, China's cheap labor would benefit the economies

of other countries, specifically the EU, if all business firms relocate due to issues regarding production

costs. Lastly, with regards to the euro crisis, China would do everything to make sure that its trade

relations with EU remain unaffected if they both cooperate with one another in resolving the crisis.

The study is also qualitative due to its nature that it requires sources that are not only related to

the research, but also to how it is analyzed. The researchers use the qualitative method because the data

gathered is used to examine how and why certain outcomes have resulted from China’s accession to the

WTO. The information acquired is also used to analyze how the trade relationship between China and the

EU have either improved or deteriorated.

On one hand, secondary analysis of data is used as a qualitative research instrument. Most of the

sources paraphrase what their references stated. They would mention the authors through citations, which

help prospective researchers to cite their sources. These sources are authored by different experts,

whether individual or a certain group, who specialize in the field of international economics, trade and

relations. The researchers use the secondary type of data since most of the sources are books and journal

29

articles. These sources summarize and further analyze their research on how different theories and facts

function in the real world. They interpret the primary sources’ thoughts and either paraphrase them or

quote them. Finally, the data sources used are social artifacts. The reason why these sources are used is to

collect and gather data in a sense that no interview or a survey was conducted.

The researchers have chosen to utilize such research methods because they find this the most

suitable for the research topic. This is done through the help of secondary sources, to analyze the facts

that is happening in the global economy—which is focused on China and the European Union,

specifically. The researchers used secondary sources due to limited time and resources therefore the

researchers relied on the information that are most accessible and easy to obtain.

Procedures

Most of the data gathered on the study are classified under the secondary type of data. The data

that are collected come from books in the DLSU Main library and from online journal articles which are

provided access to by the DLSU library online subscriptions. These data sources are considered to be

social artifacts since most of the information gathered are from secondary and tertiary sources. Since the

topic is about “Implications of China’s Accession to the WTO in relation with the EU’s trade policies and

trade relations,” it is impossible to conduct a survey with regards on this topic. Instead, gathering of

reliable and scholarly sources through maximum use of the DLSU library and through the internet are the

best option to support the hypotheses that are concluded in the study. Most of the data gathered revolve

around the implications of China’s emergence as one of the world’s biggest economy that largely come

from the book of Holbig and Ash’s “China’s Accession to the World Trade Organization,” focusing on

the negotiations among China, the EU, and the WTO. In the study, the main focus is on the European

Union’s perspective with regards of implementing policies and regulations to China, if the accession of

the China to the WTO can really affect positively or negatively for them. The books that also discuss the

trade policies between the EU and China are also used to examine how these policies affect the trade

30

relations between the two. The researchers also search for other scholarly sources that studied the trade

relations of the EU and China after China’s accession to the WTO since these would be most helpful in

analyzing if trade relations either improved or not. Examples are working papers and policy briefs from

the ECIPE particularly from the ECIPE president Fredrik Erixon. Moreover, the researchers focused on

acquiring data that are from accredited books and online databases.

The researchers chose to use data and information that are quite recent and have an extensive

view of topics that are related to the research topic. The data is then classified into three categories. These

three categories are the EU and China trade policies, the WTO membership of China affecting the global

economy, and sources that predict future China and EU trade relations. The data are then used

accordingly that best suits the research topic.

Bibliography

31

Algieri, Franco. “It’s the system that matters: institutionalization and making of EU policy toward

China.” In China-Europe Relations, ed. Zhou Hong, Eberhard Sanschneider and David

Shambaugh, 65-83. New York: Routledge, 2008.

Balaam, David N. and Michael Veseth. Introduction to International Political Economy. Upper Saddle

River, New Jersey: Prentice Hall, 1993.

Beseler, Hans-Friedrich. “The EU-China Negotiations Breaking the Deadlock.” In China’s Accession to

the World Trade Organization: National and International Perspectives, ed. Heike Holbig and

Robert Ash, 4. London: RoutledgeCurzon, 2002.

Clegg, Jenny. China's Global Strategy: Towards a Multipolar World. 5th Avenue, New York, NY: Pluto

Press, 2009.

“Economic Definition of international trade,” Economic Glossary, <

http://glossary.econguru.com/economic-term/international+trade> Accessed on 22 July 2012.

Erixon, Fredrik. “When Icarus met Sisyphus: EU-China Relations During the Eurozone Crisis.” GMF

Paper Series, April 2012, 1-4.

Erixon, Fredrik, Patrick Messerlin and Razeen Sally. “China’s Trade Policy Post-WTO Accession: Focus

on China-EU Relations.” [Paper presented at Oxford conference on The Microeconomic Drivers

of Growth in China]. Papers by Fredrik Erixon, ECIPE.

Fox, John, and François Godement. A Power Audit of EU-China Relations. London, UK: European

Council on Foreign Relations, 2009.

Freytag Andreas, “That Chinese “juggernaut”- should Europe really worry about its trade deficit with

China?” European Centre for International Political Economy, (2008).

Gilpin, Robert. The Political Economy of international Relations. Princeton, New Jersey: Princeton

University Press, 1987.

Glaubitz, Joachim. "The China Threat: A European Perspective." In The China Threat: Perceptions,

Myths and Reality, ed. Herbert Yee and Ian Story, New York, NY: Routledge Curzon, 2004.

32

Harvey, David. A Brief History of Neoliberalism. Great Clarendon Street, Oxford: Oxford University

Press, 2005.

Kynge, James. China Shakes the World: The Rise of a Hungry Nation. London, UK: Weidenfeld &

Nicolson, 2006.

Lemoine, Francoise and Deniz Unal-Kesenci. “The Impact of China’s WTO Accession on EU Trade.” In

China’s Accession To the World Trade Organization National and International Perspectives, ed.

Heike Holbig and Robert Ash, 268. London: RoutledgeCurzon, 2002.

“Open Market,” Investopedia, <http://www.investopedia.com/terms/o/open-market.asp#ixzz21LaMbzAi>

Accessed on 22 July 2012.

Plehwe, Dieter and Philip Mirowski. The Road From Mont Pelerin: The Making of the Neoliberal

Thought Collective. Cambridge, Massachusettes: Harvard University Press, 2009.

Schuller, Margot. “The Impact of China’s WTO Accession on International Trade and Capital Flows.” In

China’s Accession To the World Trade Organization National and International Perspectives, ed.

Heike Holbig and Robert Ash, London: RoutledgeCurzon, 2002.

“The WTO,” World Trade Organization, <http://www.wto.org/english/thewto_e/thewto_e.htm>

Accessed on 21 August 2012.

Yong, Wang. “China’s Stakes in WTO Accession: The Internal Decision-making process.” In China’s

Accession to the World Trade Organization: National and International Perspectives, ed. Heike

Holbif and Robert Ash, 21.London: RoutledgeCurzon, 2002.

Zuqian, Zhang. “China’s commercial relations with Europe.” In China-Europe Relations, ed. Zhou Hong,

Eberhard Sandschneider and David Shambaugh, 231-245. New York: Routledge, 2008.

33