Alicia Garcia Herrero and Jianwei Xu (Bruegel)
China and Russia are very important partners of the EU. Russia is one of the EU’s most important partners since the EU economy depends on the imports of certain goods, especially energy. China has the highest purchasing power parity. The Sino-Russian business cooperation has, however, recently changed its character. Bilateral relations, which used to be very complicated in the past, have recently been transformed into a close business cooperation. We can thus question if the deepening Sino-Russian business relationship can have a negative impact on the Union.
The strengthening of the cooperation between China and Russia can be linked to China’s membership in the World Trade Organization. Further economic convergence started occurring after 2014 when the West imposed sanctions on Russia over the annexation of the Crimea. Chinese imports to Russia increased from 2000 to 2014 by as much as 15 percent.
In the context of these developments, two important questions arise. Will the increasing Sino-Russian cooperation have an impact on the Union? If this were the case, then in what sectors of the EU economy? With regards to the EU products in the Chinese market, these only complement the Russian exports. Therefore, we do not hitherto need to be overall concerned that the Russian products will be able to fully replace the EU imports in the Chinese market. What can, however, turn out to be a problem is the possibility that Chinese exports will be increasingly replacing the EU exports in the Russian market.
A simulation of closer trade cooperation between Russia and China, which reduced import duties to zero, revealed that such a trade agreement would actually reduce EU exports to Russia in a significant way. It therefore seems that the deepening Sino-Russian economic relations could have a substantial impact on the Union in the future. Sectors that would be affected the most by the strengthening Sino-Russian economic ties are electronics, mechanical engineering, electronic equipment and machinery. Another export article ‘in jeopardy’ would be nuclear reactors.
What do the strengthening relations between Russia and China overall mean for the Union? The EU should maintain the trend of modernization of its industrial enterprises at the highest level so that it is capable of competing with China, which had until recently the fastest growing economy in the world. Moreover, it should also consider a possible scenario that it may lose some of its sales in the Russian market in the future.
(The study can be downloaded here:http://bruegel.org/2016/07/the-china-russia-trade-relationship-and-its-impact-on-europe/)