OK, so the title of this post may be exaggerated--but not by much, you'll be surprised to note. The original title of the Financial Times article I draw from is "China says it is powerless over surplus" [good grief!] Now, a bit on the actors here. Bo Xilai has perhaps the most difficult job in the world--Chinese minister of commerce at a time when China's surging deficits are giving rise to protectionist sentiment in the US and, increasingly, the EU. (As an aside, did you know that Bo Xilai's son attends the exclusive boy's school Harrow? It caused a small brouhaha as Mr. Xilai's official salary is small by Western standards.) Meanwhile, Bo Xilai's counterpart in a recent China-EU discussion over trade matters was none other than New Labour stalwart Peter Mandelson, who's currently the EU trade commissioner. They previously became more, er, intimate with each other while resolving the infamous "bra wars" of 2005. As I pointed out earlier, the sticking points over their current discussions were no different from those between the US and EU--burgeoning trade imbalances, piracy, market access, and currency undervaluation. These discussions were contentious:China said on Tuesday it could do little to curb its fast-growing trade surplus with the European Union as the two sides traded accusations after "frank" talks in Brussels on Tuesday.
Peter Mandelson, the EU trade commissioner, and Bo Xilai, the Chinese commerce minister, held an annual meeting in Brussels as China's trade surplus hit record levels.
The EU's trade deficit with China is expected to balloon to €170bn ($227bn, £115bn) by the end of the year on Brussels' figures, up from €128bn last year. While Mr Mandelson said that was unsustainable, Mr Bo characterised it as "complementary and balanced".
He said China was processing goods that previously had been exported to the EU directly from other Asian countries, since the latter had offshored final production to the lower-cost country. The rest of the rise came from Europe having abandoned most low-skilled manufacturing. [See Brad Setser for apposite caveats on this point.]
He did pledge, however, to try to boost imports, citing recent deals to buy Airbus aircraft and nuclear power technology.
Mr Bo accused his British counterpart of "extremist language" after he termed various aspects of China's trade policy "illogical", "indefensible" and "unacceptable" at a Brussels news conference after talks.
Mr Mandelson said China was doing nothing to rein in rampant counterfeiting that was costing European business hundreds of millions of euros and used "indefensible barriers" such as strict licensing laws, discriminatory rules, and laws forcing foreign companies to create joint ventures with local partners.
However, Mr Bo said that China was as open to EU service providers as the EU was to Chinese ones.
At his own news conference he hit back, calling the refusal of the EU to grant China market economy status "illogical". The ranking is a technical measure but Beijing sees it as a matter of pride.
Neither the EU nor the US has accorded Beijing this status, though 56 World Trade Organisation members have. It would make it harder to bring trade disputes to the WTO.
Mr Mandelson said China had fulfilled one of five criteria. He said market economy status would be granted as soon as the others were met.
Despite the rhetoric, the two sides did agree to put forward at the EU-China summit in November a "realistic, practical proposal" to dismantle trade barriers and curb the EU's growing deficit with China.
They would also discuss rising steel exports to the EU. Mr Mandelson said China was possibly dumping steel and he would invoke protection measures if the talks failed. Mr Bo suggested they could follow the blueprint of the successful 2005 voluntary textile agreement. That agreed rising quotas that will expire at the end of the year. The EU is not seeking to extend them.
The two sides are also examining how to ensure royalty payments for European companies that had transferred technology to China. The US recently won such a deal for Microsoft, the software maker.
Mr Mandelson said he failed to understand "the continued operation of very large fake and counterfeit markets without any interference by the Chinese government". However, Mr Bo said China had taken huge steps to curtail piracy, not least because its own companies suffered...
In October, the European Commission maintained that the EU and China had benefited mutually from the latter's economic rise. Unlike the US, the EU has favoured dialogue rather than trade dispute cases to deal with China.
However, Peter Mandelson now says the relationship is at a crossroads as China's trade surplus with Europe expands from €128bn in 2006 to an estimated €170bn ($227bn) this year.
He wants greater access for European companies to China and a crackdown on piracy - threatening extra tariffs or import quotas if not. He also wants the renminbi pegged to a basket of currencies.
