Chinese-EU Bilateral Trade ( 2007-2011 ) . “ Competition & the Exchange of Technology ”

Eurostat sources document that Chinese bilateral trade with the European Union (EU) has quadrupled since the year 2000. While China has become the centre of attention for its trade expansion in numerous consumer and manufactured goods. A further feature concerns its trade in products more purposely suited to industrial production, transport and which contain medium and higher shares of technology. < is work fi nds that the export of these commodities to the EU has increased rapidly as a share of total exports between 2007 and 2011, while the EU share has in fact declined. < e structure and type products exchanged from this sector is categorized by the United Nations under the heading of “Machinery & Transport Equipment” and play a large role in determining the extent and nature of a country’s integration into global supply and production networks. < is paper questions the latter in respect of Chinese bilateral trade co-operation with the European Union.


INTRODUCTION
Since the year 2000 Chinese-EU bilateral trade has quadrupled, but over this period of time this has also resulted in the EU recording its largest bilateral trade defi cit.China's trade surplus with the EU can in part be attributed to the growing share of machinery and transport equipment in the country's total exports, which has increased considerably since 2007.e EU meanwhile has observed a fall in the share of these items in its exports to China, which raises the question as to the very nature of the co-operation between the two partners in the exchange of these products and the conditions surrounding them.
As graph 1 shows, Chinese exports of machinery and transport equipment to the EU accounted for 33% of its total exports in 2007, but by 2011 had increased to almost 51%.Over the same time period, however, the share of EU machinery and transport equipment in Chinese imports had fallen from 15.1% (2007) to 10.7% in 2011.It should be highlighted here that the value of Chinese exports of machinery and transport equipment to the EU totaled 149 billion Euros in 2011, while its imports were recorded at 145.6 billion -suggesting, a marginal trade defi cit for the EU in this sector in its exchanges with China.An interesting consideration concerns the fact that, while export-import volumes were similar in 2011, the recession did not appear to have had a signifi cant impact on European demand for Chinese products.Hence, EU imports of machinery & transport goods grew on average by 23.7% from 2007. is further raises questions as to the type and purpose of the products being exported to the EU, which is possibly refl ective of relative price diff erentials as well as the role of Chinese industry on the supply side (supplies of components, accessories and/or products assembled and re-exported).At the same time, while China's imports of machinery and transport equipment from the EU grew (in value terms) on average by 8.9% from 107 to 145.6 billion Euros, graph 1 shows that their share in total exports actually fell between 2007 and 2011 to 10.7%.
To be able to uncover the nature of the bilateral trade relationship in these types of products, this work needs to determine the volume and structure of the commodities traded with a view to revealing their share, sectors of convergence and potential areas of competition.Part one of this research introduces the theoretical side and this involves the application of the Grubel-Lloyd Index, whose results will reveal the degree of "convergence" between industries via the measurement of "intra-industry trade".e Grubel-Lloyd Index shall be applied to commodities falling under the United Nations heading of "Machinery & Transport Equipment" (SITC 7, Standard International Trade Classifi cation (Group 7)).Part two this work will provide an empirical evaluation.e work fi nds that both trading partners are becoming increasingly integrated via the trade of similar products (intra-industry trade), refl ecting convergence and the presence of foreign direct investment.e results further show the presence of traded commodities in diff erent goods, which indicate comparative advantage and specialisation.ese initial fi ndings occur in the background of the de-

THE GRUBELLLOYD INDEX & CONVERGENCE
Intra-industry trade is the exchange of goods between countries from broadly the same industries, whereas inter-industry trade represents the exchange of diff erent goods (Grubel & Lloyd, 1975).erefore, the measurement of trade fl ows between two countries reveals both the nature of trade conducted between them (inter/intra) and to what extent countries are similar in their factor endowments.For example, if trade is revealed to be more inter-industry in nature (index value < 50), then this would suggest a diff erence between the two countries factor endowments and could imply that one country may have a comparative advantage in the production of some commodity, refl ecting specialisation.is would be consistent with Ricardian and Neo-classical schools of thought.In contrast, intra-industry trade (index value > 50), occurs as a result of two countries being similar in their factor endowments and is more characteristic of the exchange of goods that takes place, for example, among advanced EU countries where it has become the dominant form of trade (Hoekman & Djankov, 1997).e eff ects of regional integration as well as the wider process of globalisation has led to production plants becoming endowed with similar, but varying levels of technology over time -a process of vertical integration.is determines capital-labour ratios and, likewise, income (Aturupane et al., 1999).e necessity of investment in raising productivity and output therefore emphasises the role of income as one of the key determinants driving intra-industry trade (Balassa, 1986).e Grubel-Lloyd index (GL-1), fi rst introduced in 1975, was later included in a textbook publication by Mikić (1998). is particular version of the index contains a weight of 0.5 to adjust for the eventuality of trade imbalances (surplus/defi cit) and does so by upwardly or downwardly adjusting the end value according to the degree of imbalance.In the absence of this weight (see GL-1), it could occur that the performance of a particular industry could well be over or under estimated.e model as introduced by Mikić and applied in this work, can also be re-written as shown in GL-2.
In compiling the statistical information for this analysis, two select years have been chosen for the measurement of Chinese-EU trade fl ows: 2007 and 2011, thus allowing convergence as well as any signifi cant change in industrial output to be measured over time.e data applied in this analysis is the United Nations, disaggregated 3-digit SITC (standard international trade classifi cation), supplied by Eurostat, consistent with the WTO and focuses on the Standard International Trade Category of "machinery and transport equipment" (SITC 7).e following table provides the results calculated for Chinese-EU bilateral trade in the exchange of machinery and transport equipment for 2011.As can be identifi ed, sector SITC 7 can be sub-divided into ten core industrial, trade sectors at the initial, two-digit level (70, 71 etc).ese sectors will be later expanded to reveal the exchange of traded commodities at the more disaggregated, 3-digit level.For reference, the codes shown in the fi rst column of table one are defi ned below the table.In 2011, table one shows that more than 80% of Chinese, SITC 7 imports (column 2) from the EU were made up of offi ce machines (75), telecommunications equipment (76) and electrical machinery (77).

United Nations Commodity Groups
e application of the Grubel-Lloyd Index revealed that the highest degree of Convergence (intra-industry trade) could be found in the exchange of electrical machinery and parts ( 77). e exchange of the latter commodities also accounted for the highest share of imports from this sector (28%).Chinese exports to the EU meanwhile were more dominant in the supply of road vehicles ( 78). e degree of convergence (16.2) suggests trade in diff erent goods (inter-industry trade) and signs of comparative advantage.Chinese exports of industrial machinery and parts (74) ranked second, representing 16.2% of the outfl ows from the SITC 7 group.e degree of convergence of these commodities was recorded as the highest with a level of intra-industry trade at more than 66. is suggests trade in similar goods, though the lower level of imports from the EU in these commodities indicates a process of vertical-integration, the presence of assembly operations as well as the supply of component parts from Chinese soil (see Dean, Fung, Wang & Zhi, 2008). is would be consistent with the industrial development path followed by the former socialist countries of Europe and their integration into regional supply and production networks during their own earlier transition periods (Clowes & Choroś-Mrozowska, 2010) and also Brenton and di Mauro (1998). is goes hand-in-hand with the comparatively lower input costs to production, namely labour .

EMPIRICAL SUPPORT & EVALUATION
In evaluating the supply of commodities at the more disaggregated 3-digit level, this section will fi rst deal with the EU exports to China for the years 2007 and 2011.Graph two shows that four key industrial sectors can be observed, which together accounted for 89% of the commodities exported from this sector.
ese are labeled on the right-hand side of the graph.e four sectors can be sub-divided according to levels of convergence and technology.e export of electrical machinery (77) and industrial machinery (74) are more recognizably integrated with Chinese industries on account of their IIT values, which are both above 60 and suggest a fairly high degree of integration and co-operation between their respective industries.ese are products endowed with low and lowto-medium levels of technology.In contrast, telecommunications equipment ( 76) and ( 75) offi ce machines (computers and data processing equipment) are less high highly integrated, but together account for 51% of the exports from the overall sector.e lower degree of convergence (IIT) indicates comparative advantage and the supply of products embodied with more medium and medium-to-high levels of technology.e key diff erence separating industries (77 and 74) and (75 and 76) concerns the skill-levels employed to produce the commodities exported and re-imported.e former involves the supply of whole products as well as the supply of components for assembly operations on Chinese soil. is may involve the engagement of foreign investors at the initial stage, setup, recruitment and training (Dunning, 1993), while the latter refers to the actual supply of fi nished products -consistent, with the EU's comparative advantage.
EU investments in China are consistent with this and are geared towards more market-and effi ciencyseeking forms of investment (Liu & Daly, 2011).ese complimentary forms of investment target China's sizeable labour market, while at the same time drawing on the relatively lower costs of production for export output -a signifi cant factor in Chinese outfl ows (see Weishi, Awakuse & Yuan, 2008).e following graph (3) depicts the supply of Chinese exports to the EU for the same years, revealing that four, key industrial groups also dominate supply side operations.e four key areas of Chinese export specialisation (see graph 3) accounted for 74% of its own supply of machinery and transport equipment to the EU. e export of electrical machinery (77) and industrial machinery (74) is consistent with the EU side in convergence terms and the degree of integration.e actual volume of these commodities exported however is lower at 14% and 16%, respectively as a share of the products exported from this sector. is lends weight to the process of vertical integration and the role of Chinese industry on the supply side, which refl ects the comparatively lower input costs to production and the labour-side advantage.is is supported by Zhao (2004), who indicates that manufacturing industry in these fi elds of production is the main supplier of employment growth.It also refl ects the role and impact of FDI in industrial output in the country (Zhao, Z., & Zhang, K. (2010).At the same time the export of machinery specialised for particular industries (72), reveals a low degree of convergence (IIT = 26.15)and accounts for 12% of the sector. is may indicate an initial comparative advantage.In contrast, the supply of road vehicles (78) accounts for 32% alone and is accompanied by a low degree of convergence (IIT = 16.3).is is supported not only via the supply of components and accessories to the EU, but also some of the widely known, take-over activities pursued by China in recent times, such as, to name a few, Volvo of Sweden as well as investment in other EU sectors (Hanemann & Rosen, 2012).e above graph refl ects not only the increasing capability of China's expansion into European supply and production networks, but it also represents its key and growing areas of importance in terms of industrial specialisation and areas of interest, both at home and abroad.
In comparison to the former Socialist countries of Central & Eastern Europe, which relied heavily on the strong support of foreign investment in their own countries at the start of transition, China is also much more comparatively active on supply of investment globally.

CONCLUSION
In compiling the statistical information for this analysis, two select years were chosen to measure Chinese-EU trade fl ows: 2007 and 2011, thus allowing convergence as well as any signifi cant change in industrial output and likewise exports to be measured over a longer period of time.e data used in this analysis was the 3-digit SITC (standard international trade classifi cation), supplied by Eurostat and the WTO.
e analyses provided in this work revealed relatively high degrees of industrial convergence between China and the EU, confi rmed by levels of intra-industry trade exceeding 50.At the same time sectors exhibiting low convergence are indicative of comparative advantage and industrial specialisation.An important support element connected with these two distinct paths pursued by both trading partners concerns the role of foreign direct investment, which given the geographical distance between them is a key factor driving trade and industrial expansion.Chinese overseas, foreign direct investment in the EU has increased from 20 operations from ten years ago to 573 in recent times.Geographically, China concentrates its interests mainly on the troika of the United Kingdom, France and Germany.e structure of this investment has transitioned to a broader range of industries, especially capital supply (services), manufacturing and takeover processes in the transport (car) sector, telecommunications as well as the country's interests in some of Europe's cinema and media chains.e motives are expansionary and partially facilitated by the country's undervalued exchange rate, but also its position in Luxembourg, which provides visa access and a strong gateway to the region.Friction on the EU side, however, tied with unfavorable exchange rates and the foreign debt crisis has resulted in a slowdown in EU imports as shown in graph one, but also the slowing of EU investment outfl ows to China, respectively.is is occurring during a period as China moves higher up in the value chain, signaling growing competition, but also at a time in which the country's domestic, ongoing, restrictive practices towards potential investors, though expanding from the EU side, represents an area for further research.