EU, China have much to lose if trade war breaks out: Analysts

BRUSSELS (AFP) - The latest tit-for-tat EU-China trade disputes could signal worse to come but both sides have a lot to lose if things get out of hand and harm the much-needed economic growth they seek, analysts said.

In May alone, the two have locked horns over solar panels, steel tubes and telecoms equipment, sparking fears of a trade war between two of the world's biggest trading partners.

Analysts said the increase in tensions could simply reflect the fact that both are feeling the pressure from a sharp economic slowdown.

China grew at its slowest pace in 13 years in 2012 while the EU economy, sapped by the debt crisis and soaring unemployment, is mired in a record-long recession.

"I think the fact that the EU is in a negative growth spiral cannot be divorced from their trade actions with China," said Sergio Marchi, head of the Marchi Group management consultancy and former Canadian International Trade Minister and ambassador to the World Trade Organization.

EU political leaders "at this time of job losses and economic hardship want to demonstrate to their constituents that they are tough in the face of any challenges from China," Mr Marchi said.

But the danger is that they go too far.

"The EU must be careful in not overplaying its hand. China understands politics but they don't like being put on the public spot, especially if it runs the risk of losing face publicly.

"If they decide to fight back, then the EU might be facing a lose-lose scenario," Mr Marchi added.

Zhang Hanlin, professor at the University of International Business and Economics in Beijing, said the main loser in any trade war would "certainly be the EU, EU consumers and EU industry, not China.

"The EU is recovering and definitely needs the support of the global market because the EU, like China, is an economy that depends a lot on foreign demand," Mr Zhang said.

The stakes are enormous. EU exports to China totalled US$212 billion (S$267 billion) last year, with imports US$334 billion, making theirs one of the biggest trading relationships in the world.

Analyst said the risks are even greater with a new political leadership in Beijing which may be more sensitive to slights.

So far, their response has been firm but guarded.

China "does not want ... a trade war," Chinese commerce ministry spokesman Shen Danyang said this week after the EU threatened an anti-subsidy probe into telecoms imports.

"We hope the EU will not take actions that do no good to either side."

Brussels was careful too in announcing the telecoms probe, highlighting it as a "decision in principle" taken pending "negotiations towards an amicable solution with the Chinese authorities." - Don't give 'trade spats ... more importance than they are due' - The EU is not blind to other Chinese sensitivities.

For example, Beijing has expressed concerns over what it sees as US efforts to contain its power in Asia and the Pacific as President Barack Obama 'pivots' back to the region.

It has also noted EU-US plans for what could be the biggest Free Trade Agreement in the world.

An EU official said that during last month's visit to China by EU foreign affairs head Catherine Ashton, Chinese officials had "mentioned again" the possibility of Brussels and Beijing concluding an FTA.

While the EU feels an investment protection accord would be best at this stage, the official said the EU had reassured Beijing a US accord was "not aimed at closing the transatlantic relationship" but rather at opening it up, including to China.

"Europe is poised to launch this process as soon as China is ready and we look forward to working with the new Chinese government to reach a deal," EU trade spokesman John Clancy said on Friday of the investment accord.

"This would be a first step - when we see progress in these talks with China (we could) also envisage to consider an FTA," Clancy added.

At the same time as there have been disputes, there have also been agreements.

Earlier this month, for example, the European Commission approved a US$900-million tie-up between Sweden's Volvo Trucks and China's Dongfeng Motor which will create the world's biggest lorry maker ahead of Germany's Daimler.

"I would not give the current trade spats ... more importance than they are due," said European Liberal Democrat lawmaker Sir Graham Watson.

"Dumping investigations are the normal currency of international trade ... during the last Commission, it was all about shoes and bras," Mr Watson said.

"The Brussels-Beijing relationship will go on as before."

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