26/11/2004
Commission report highlights changing competition from China

The European Commission has published its 2004 European Competitiveness Report. The European Competitiveness Report is an annual publication that covers topical issues for Europe’s competitiveness. The 2004 Report focuses on three themes: China, the automotive industry, and the role of government policies in influencing competitiveness. The analysis of government policies includes specific studies of research policy and of efficiency concerns in healthcare provision.

Günter Verheugen, Commission Vice President, noted: “The Report points to the need to enhance competitiveness and innovation in the EU to respond to the challenge of countries such as China, which is turning itself into a low-cost competitor in high-skill industries. One of the priorities of this Commission will be to face this challenge in the framework of the Lisbon agenda.”

The competitive challenge of China

The analysis of China in the Report concentrates on recent changes in China’s trade with the EU, as well as the role of industrial policy and foreign investment in forging structural change.

Import competition from China used to focus on labour-intensive goods and low-skill industries. At present, China’s active industrial policy is turning the country into a low-cost competitor in high-skill industries.

Owing to China’s gradual opening to the international economy, exports from China have grown by more than ten per cent per year since the second half of the 1990s. Today, China is the fourth largest exporter of merchandise goods in the world; in 2003, exports accounted for 31 per cent of China’s GDP. For the EU, China is the second largest trading partner after the US. The manufacturing trade balance of the EU-15 with China moved from surplus in 1995 into a deficit of € 10,373 million in 2002.

China’s industrial policy has selectively attracted foreign direct investment (FDI) in technology intensive industries in order to benefit from foreign technology and organisational know how. At the same time, Chinese authorities have actively promoted domestic companies (‘national champions’) which are regarded as having the potential to compete in world markets. These have contributed to the rapid upgrading of China’s industrial structures.

Foreign direct investment flows into China soared from a very modest level in the early 1990s to reach USD 52,700 million in 2002. This is almost twice the level of FDI inflows into Central and Eastern Europe and 15 times more than the FDI inflows into India. The largest investors into China are the overseas Chinese community in Hong Kong and Taiwan. Some ten per cent all FDI flows into China come from the EU-25. Early European FDI into China was primarily motivated by the low costs and went into exporting industries. Currently, an increasing share of FDI is motivated by the desire to produce for the growing Chinese market.

In the production of information technology goods – telecommunication equipment and computers – foreign invested enterprises account for 60-70 per cent of output. These two industries are among the top three exporters into the EU and have increased their exports at annual rates of some 20-30 per cent. The overall share of high-skill industries in China’s manufacturing exports to the EU-15 has already risen above 20 per cent, which is twice as high as the share of high-skill industries in the exports of the ten new EU Member States to EU-15.

The rapid growth of skill-intensive imports from China represents a challenge to the EU, for which China traditionally was a supplier of low-skill goods. Continued efforts in innovation and productivity growth are needed to maintain EU competitiveness. At the same time, the high growth of the Chinese market – GDP has grown at an annual average rate of nine per cent in the past 25 years – and market-oriented reforms, including the accession to the WTO in 2001, have opened major trade and investment opportunities to European companies.

The Report contains industry-specific analyses of China’s competitiveness in telecommunications, textiles, engineering and chemicals.

The European Competitiveness Report 2004 can be downloaded from:

http://europa.eu.int/comm/enterprise/enterprise_policy/