EU-China trade and its effect on the EU economy

Abstract

The rise of China as a global economic power from 1978, was initiated with the Xiaoping administration adopting economic reforms to transform China’s economy. Amongst policies pursued was to open China after decades of isolation and establish relations with the Western bloc after the Sino-Soviet split. The diplomatic relations with the EC were established in 1975, evolving to economic cooperation in 1978, that assisted China in renovating its economy. The relations during the Cold War were important for both China and the EU, with member states such as the UK still present in China with British Hong Kong. Yet relations worsened with the Tiananmen massacre, only for relations to normalise during the 1990s. Whereupon China’s economic growth reached new heights, attracted investments, and become competitive in the global supply chains. China’s accession to the WTO established a new epoch for the Sino-European relations to develop in. This study takes a further look at the economic effects of the EU-China trade exchange on the EU’s economy, primarily on the labour market and consumption. To conduct this research, a multimethod was utilized. The labour market effects researched are the employment effects of the most exposed sector of the China Shock – the manufacturing industry - which were analysed with the use of the import penetration ratio of Chinese manufacturing goods and manufacturing employment in twenty-six EU member states for 2005-2015. The findings show that the trade-induced shock is asymmetric throughout the EU. The research pursued to identify which states were most exposed to the China Shock and which member states were capable to mitigate this shock, reviewing country specific conditions, such as wage-levels, industrial relations, and endowment policies of EU states. This was accompanied by the analysis of the productivity effects, which have remained constant, with the EU holding an advantage on factor productivity, as China endures low productive rates. Simultaneously, this expanded trade has allowed for consumer benefits through cheap Chinese imports, increasing both consumption possibilities and the purchasing power of European consumers. The results suggest that the EU-China trade relations have evolved throughout the years in a globalised world, causing socioeconomic concerns. The benefits from trade need to be strengthened with distributive social safety-nets, to compensate the losers from trade shocks, as this is causing economic and political stress, providing rhetoric to anti-globalisation populists which are appealing to those left in a vulnerable position, which can be a detriment to all.