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Regressive EU Policies
Refusal to grant China market economy status puts the EU at a crossroads
By Mei Xinyu | NO. 23 JUNE 9, 2016

People hoping Greece to stay in the eurozone gathered in front the Greek Parliament on June 15, 2015 (XINHUA)

The European Parliament's recent refusal to grant market economy status (MES) to China is not merely a rise in trade protectionism, but also an exemplar for economic, social and institutional regression. This is being reflected by a diminishing entrepreneurial spirit, a lack in self-improvement momentum, and constraints imposed through interest groups in the EU.

Europe, the cradle of the industrial revolution, once represented the most advanced civilization in the world. In contrast, it's now reduced to a bloc of countries in which social and economic vitality is being eroded. The EU has raised an alarm for China, a country which has made remarkable social and economic progress. China is now hoping to avoid the middle-income trap while realizing sustainable development and maintaining its growth momentum.

First of all, it should be made clear that the European Parliament resolution is not aimed at setting a new trade barrier for China—its objective is to preserve an existing one.

Despite that, it's unnecessary for China to be too anxious about the resolution. Since the pronouncement is not legally binding, European authorities can choose to acknowledge it, but can ultimately ignore it too. Trade protectionism in Europe couldn't block China from growing into the largest trade nation in the past decade, nor would it have a notable impact on China's economic growth.

Limited returns

The European Parliament resolution will also do no good to its own economy. Instead, it will only serve to stoke trade protectionism and aggravate the business environment in Europe.

Some countries have adopted protective measures to foster the development of their industries under certain circumstances throughout history. However, the industries that the European Parliament intends to protect this time are not pioneers in their fields or particularly hi-tech—they are businesses centered on traditional areas such as steel. These troubled sectors are struggling, not because their foundations are weak, but because they are being manipulated by interest groups. These organizations do not focus on enhancing efficiency, but attempt to let downstream industries and final consumers pay for their lackluster efforts.

Such protectionist behavior will only bring about extra costs rather than provide a promising future for Europe. What the EU needs to do is to shake off the constraints set up by interest groups and strive to generate new vigor.

When comparing the EU's economic decline against the world economy and the economic growth of different member nations, one can easily witness the effect of the shackles imposed by protectionist coalitions on the EU's economy. As a whole, the eurozone, which is widely denounced for its trade protectionist inclinations, lags behind the United States and other developed nations in terms of economic growth.

Before the eruption of the sub-prime mortgage crisis in 2008, developed economies registered a real GDP growth rate of 2.8 percent from 1998 to 2007 on average. Among them, the United States grew at 3 percent, while the eurozone saw a growth of 2.4 percent. In the aftermath of the sub-prime mortgage and sovereign debt crises, the eurozone has experienced a more severe economic decline and a more fragile recovery than the United States and the rest of the developed world (see the chart).

A drop in status

Weak growth will definitely lead to a descent in status in the world's economic system. The euro was formally launched on January 1, 1999. At that time, its 11 member nations accounted for 15.8 percent of the world economy, while China accounted for 11.2 percent. The eurozone later recruited Greece, Slovenia, Malta, Cyprus, Slovakia, Estonia, Latvia and Lithuania in succession, and its size expanded from 11 to 19 countries. Despite its enlargement, in 2015, the eurozone's proportion in the world economy dropped to 11.9 percent, while China's climbed to 17.1 percent, according to the IMF's World Economic Outlook report.

The negative effect of trade protectionism can be clearly demonstrated through the performances of different groups in the EU. Among the EU members, Britain, Holland and Belgium, which advocate the recognition of China's MES, are free-trade proponents, with their economic growth surpassing the average eurozone level for many years.

On the other hand, those who object to giving China MES are represented by France, Italy and Spain, which are trade protectionists whose economic performances have lagged behind for a number of years. While the EU's economy has begun to recover during the past two years, France registered growth figures ranging from 0.2 percent to 1.1 percent in 2014 and 2015, respectively, still lower than the eurozone's overall level. Italy's yearly growth has always been lower than the eurozone's. Italy and Spain were unable to refinance their government debt or to bail out their over-indebted banks on their own during the debt crisis. Spain has also suffered an unemployment rate as high as 25 percent since 2012.

The worst by-product of long-term economic prosperity is the expansion of interest groups, which depress innovation and undermine growth. Wars have even been waged in the past to get rid of these coalitions. A nation's sustained rise depends on whether it can carry out reforms resolutely and break up interest groups in peace.

During the Great Depression, it was Roosevelt's New Deal that solved major problems and ensured that the United States' rise would not be staunched by the crisis. As a result, the United States eventually became the champion of the capitalist world after World War II.

Now, the European Parliament has succumbed to interest groups. The Nuit Debout (Rise up at Night) movement has swept across France to protest against labor reforms. It is clear these over-conservative decisions and behavior don't bode well for Europe's social and economic development.

The author is an op-ed contributor to Beijing Review and a researcher with the Chinese Academy of International Trade and Economic Cooperation

Copyedited by Bryan Michael Galvan

Comments to yushujun@bjreview.com 

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