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China trade threat to european union

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EU spells out trade threat from China
By Ambrose Evans-Pritchard in Brussels (Filed: 30/11/2004)

China's lightning advance into the production of cars, computers and high-tech industry poses a serious threat to Europe's economic base, according to a report by the European Commission.

Guenther Verheugen, the new enterprise and industry commissioner, said the EU must improve to avoid quick relegation down the world's economic league as Asia storms ahead on every front.

Once despised as low-cost producer of shoddy textiles and toys, China is now starting to match western technology, but at a far lower cost.

"China's active industrial policy is turning the country into a low-cost competitor in high-skill industries," said the EU's Competitiveness Report 2004.

"The growth of Chinese brand-name producers exploiting these advantages will become a major challenge to established multinationals and brand owners affecting to a large extent well-positioned EU-15 companies," the report said.

One of the most vulnerable targets is the German car industry, which is already in dire straits.

Illustrating the sharp deterioration, the EU's trade surplus with China has gone from surplus in 1995 to a 10,373billion deficit in 2002. China is now Europe's second biggest trade partner after the US.

The deficit is expected to be much higher in 2004 as the euro reaches historic highs against the Chinese yuan. The yuan is pegged artifically to the dollar. The effect is to give Chinese exporters a massive competitive boost against European firms, a situation that is unlikely to be tolerated much longer as economic growth stalls in the Germany and Italy.

The Commission blamed much of Europe's sluggish performance on suffocating red tape. It said the EU could raise overall GDP by 12pc through adopting an American-style "regulatory burden". So far, the East Europeans have also been hit hardest by China, as they tend to compete in the same sectors. The Hungarian electronics industry has lost market share steadily to Asian importers.

The 354-page report, mostly devoted to warning about the growing Asian threat, contends that China has harnessed all its energies on conquering high-tech markets, creating "national champions" - with protected home markets and cheap labour - designed to punch at global level.

"China's industrial policy has selectively attracted foreign direct investment in technology intensive industries in order to benefit from foreign technology and organisational know-how," said the report. Mr Verheugen said Europe needed to respond by spending far more money on research and development.

In a chapter on public sector employees, the report said Britain is acquiring a top-heavy structure with 18.8pc of the workforce now employed by the Government, compared with 11.1pc for Germany and 11pc for Holland. Only part of this is accounted for by the National Health Service.

Britain took 36pc of GDP in tax in 2002, compared with 40pc for Germany and 42pc for Italy.

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