Foreign Trade as a Tool to Strengthen the EU's Competitiveness Against China (A Case of the Service Sector)

Abstract

The paper analyses some aspects of EU-China trade relations. Correlation analysis was applied to quantify the extent of the influence of the foreign trade with China on the overall foreign trade of the five members of the EU that have the largest foreign trade with China. Given the ongoing trade deficits of the EU with China, we decided to apply the Trade Complementarity Index (TCI) to determine the extent of their trade complementarity. Our initial hypothesis that the economies are highly complementary was rejected. We thus decided to apply the TCI to the EU's trade relations with the US. For the US, the TCI confirmed the existence of high trade complementarity. This implies that the EU can strengthen its negotiating power with China by increasing its trade diversification. These conclusions were also supported by our econometric model. A thorough analysis of EU-China trade relations also revealed the growth potential of the trade in services, which is gaining its momentum given the turbulences in global trade. The paper suggests that the EU needs to strengthen its trade relations with its "natural trade partners" instead of concentrating on China. The paper's focus on trade in services is a major contribution as it has so far been neglected in the economic literature.

The position of China in trade in services within the European Union

“…Research on the topic undertaken by Tang et al (2014) found that China's comparative advantage in services lies in tasks requiring relatively low levels of skill, knowledge, and productivity. Similar results were obtained by Baláž et al (2020), who also observed that China's competitiveness of selected sectors derives from a lower level of sophistication. On the other hand, Kung et al (2016) analysed China's comparative advantage in trade in services taking into consideration twelve main types of services and found that China is considerably less competitive in trade in services than other countries in the study.…”

“…As China's trade in services has developed, trade relations between China and the European Union have become more extensive over the years. This growth creates some concerns, however, Baláž, et al (2020) argue that the intensity of trade in services with China remains at a relatively low level. As Holslag (2017) noted, China's share in trade in services markets is growing spectacularly in countries situated along the New Silk Road and is becoming a major challenge and threat to European countries.…”

“…Recently, the positive approach to the BRI and having China as a partner were expressed by Hoekman and Puccio (2019), stating that the EU has much to gain from the effective implementation of the initiative in terms of potential synergies in the sphere of the EU development cooperation. This approach is shared by Baláž, et al (2020), who perceived relatively low global competitiveness of the Chinese service sector as an opportunity for European businesses.…”

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“…V. Ružeková, Z. Kittová and D. Steinhauser [2020] used this model to quantify and qualify the impact of the institutional environment on the export performance of a country. On the basis of this model, P. Baláž, M. Královičová and D. Steinhauser [2020] assessed the growth potential of trade in services between the EU and China.…”

China's Belt & Road Initiative in the EU: perceptions, differences and influence on the example of Germany and Italy

“…But De Jonquières (2016) warns that the EU should see the BRI not as some giant leap forward -as the Chinese side often portrays -but as a series of small steps aimed at fostering steadily closer engagement with China. Baláž, Královičová, and Steinhauser (2020) claimed that it will be crucial for the future of the EU to find a way to cooperate effectively with China so that it is a mutually beneficial cooperation, which will bring prosperity to both trade partners. On the other hand, Casarini (2016) talks about major political challenge for the EU.…”