THE EU-CHINA COOPERATION IN SUSTAINABLE DEVELOPMENT

Supervisor: Frederic Bouder Coordinator: Patrick Bijsmans

Andr Feldhof ID 502243 Pigeonhole 155 Date: 17-06-10 Paper Dossier II Version: Final Draft

Table of Contents

Introduction 1. Theoretical framework 1.1 Sustainable Development 1.2 Externalities The reason for EU action 1.3. Reconciling environmental and economic sustainability 2. Bilateral programs with China in environmental sustainability 2.1 Chinas environmental challenges 2.2 Chinese environmental policies 2.3 European involvement in Chinese environmental sustainability 2.4 Bilateral EU-China projects: Two case studies 2.5 Evidence from the case studies 3. Trade Liberalization and Environmental Sustainability: The Partnership and Cooperation Agreement (PCA) 3.1 The pollution-haven theory revisited 3.2 Reasons for negotiating the Partnership and Cooperation Agreement 3.3 Trade liberalization and the environment in China 3.4 Trade liberalization through the Partnership and Cooperation Agreement Conclusion References

p. 2 p. 3 p. 3 p. 4 p. 5 p. 7 p. 7 p. 8 p. 10 p. 12 p. 15 p. 17 p. 17 p. 18 p. 20 p. 22 p. 23 p. 25

Introduction Many international commentators have seen the Climate Change Conference in Copenhagen in December 2009 as a failure of the international community to find an agreement on CO2 reductions (cf. Lynas, 2009). Even though negotiators reached a so-called Copenhagen Agreement, experts believe that it is not enough to give a sustainable future to the world. Sustainable development is a matter of global concern (OECD, 2001, p. 11). Environmental damage or poverty-induced migration flows do not make halt at national borders. Hence, it is common to talk about environmental damage in terms of negative externalities (discussed below). Citizens all over the world bear the cost of pollution, but regulations can only be implemented on a national level. This makes it necessary for the global community to work together and to find common agreements. Yet, the international system is often described like a system of anarchy (Hyde-Price, 2006, p. 220) where national interests predominate. As a result, it depends on skillful negotiators to reach an agreement in which all states can assert their interests. Journalists, policy-makers and scholars have cited the national interests of China as a particular reason for the failure of the conference. As a fast industrializing country, China aims to drive forward industrial development and growth of its economy, potentially to the detriment of its own environment. In opposition to China, the European Union acted as the most fervent supporter of sustainable environmental development and pushed for ambitious emission reductions. However, it was remarkably unsuccessful in convincing China of stronger environmental commitments in Copenhagen (cf. Lynas, 2009). In addition to multilateral negotiations in the UN or the WTO, China and the EU maintain a long diplomatic relationship with cooperation in several fields, including sustainable development. Since the EU was unsuccessful in influencing China in multilateral negotiations, this paper will answer the question how successfully the EU has promoted sustainable development through the bilateral EUChina relationship. To do so, the paper takes a twofold view at EU contributions in China, offering an insight into bilateral capacity-building programs as well as the positive impact of increased EU-China trade upon the Chinese environment. The paper is consequently divided into three parts. The first part presents the concept of 3

sustainable development and discusses the theoretical outline of the paper. The second part focuses on the enforcement of sustainable development in China, highlights the Chinese efforts and shortcomings, presents the EU interests and uses a case study in the region of Liaoning to show in how far these interests have been met. The third part focuses on the Partnership and Cooperation Agreement currently negotiated between the EU and China, and shows in how far trade liberalization between the EU and China can benefit the Chinese environment. In following, the author will give a conclusion to these points.

1. Theoretical framework 1.1 Sustainable Development The term sustainable development has gained particular importance during the last four and particularly in the last two decades (OECD, 2001, p. 11). While there are different definitions of the concept, the most common one from 1989 defines it as development that meets the needs of the present without compromising the ability of future generations to meet their own needs (OECD, 2001, p. 38). According to the OECD (2001), there are three different dimensions to sustainable development, namely economic, environmental and social sustainability (p. 36). The first, economic sustainability, is concerned with strong and durable economic growth as well as financial stability and low inflation (ibid.). Hence, measures that provide a good investment climate for companies can be considered economically sustainable. The second dimension, environmental sustainability, mainly focuses on the maintenance and resilience of biological and physical systems and the preservation of a healthy environment (ibid.). In practice, environmental policies restrict polluting companies, control the level of water pollution in lakes and rivers and ensure that other policies take the environment into consideration. The third dimension, social sustainability, finally emphasizes the importance of high employment, social security and democratic participation of the people (ibid.). As state-owned enterprises (SOEs) still play an important role in the Chinese economy and much employment directly depends on the state, social sustainability places high pressure upon policy-makers. It must be noted that the three fields of sustainable development are closely intertwined; 4

changes to economic sustainability will also have an impact upon environmental and social sustainability. In consequence, sustainable development requires a balancing between all fields to minimize the negative effect that a policy in one of them may have upon the others. Although this paper attempts to strike a balance between all three fields, it will maintain a deliberate focus on environmental sustainability. 1.2 Externalities The reason for EU action Environmental sustainability is a pressing issue for the EU because the EU is directly concerned by pollution in China. This not only applies to CO2 emissions but also regards pollution in a more general sense. Most scholars frame cross-border environmental degradation as an externality, a cost experienced by a party that is external to the decision about how much of a good to produce or consume (Dytianquin, 2008). In other words, neither a polluting company nor the final consumer of the good bear the cost of pollution. Instead, the atmosphere, trees, lakes and rivers of the polluting country and other countries absorb pollution, which leads to a degradation of the environment in other countries. Hence, the cost for abatement falls upon the other state or upon private donors. To make a polluting firm responsible, Pigou (2009) has proposed that the externality be included into the production process. He suggests imposing a tax upon the polluting enterprise which reflects the exact cost that the enterprise imposes upon the society a so-called Pigouvian tax (Pigou in Dytianquin, 2009). Pigous idea is enshrined in an international principle of sustainable development, the polluter-pays principle, which was formally agreed upon in the Rio Declaration at the Sustainable Development Summit in Rio de Janeiro in 1992 (Rio Declaration, Principle 16, 1992). The EU subsequently implemented it through the European Emission Trading Scheme (ETS) which created a market for emission rights (Euractiv, 2010). This allows the European Union to subject pollution to a market mechanism, which ensures that economic growth is not suppressed and thereby reconciles economic and environmental sustainability. It follows from the theory of externalities, that abatement in the EU itself is not sufficient. The EU also needs to persuade other global actors in particular China to give greater importance to environmental sustainability. It is remarkable that the Chinese State Council already adopted the polluter-pays principle in 1979 and 5

installed a pollution levy system in 1982 (Liu, 2009, p. 48f); however, it will be shown in the second chapter that there is a wide gap between policy-making and enforcement in China. To alleviate externalities in an anarchic system, the EU needs resources which allow it to apply pressure to other states. This paper argues that the EU uses soft power to attain more sustainable environmental development in China. Soft power is generally defined as the opposite of military power. Nye (2004) argues that soft power uses positive incentives (carrot) rather than negative incentives (stick) (p. 5). It is not associated with repression but seen as a co-optive power which lures others to cooperate on grounds of the attractiveness of norms, values, political choices, or economic stability (ibid.). Freeman and Holslag (2009) add that the EU considers the combat against climate change . . . as a source of soft power (p. 7). It follows from these two views that, instead of threatening China with military violence or an embargo, the EU can use superior technology and superior business practices as a carrot (SIA, 2008, p. 35, Shin, 2004, p. 280). 1.3. Reconciling environmental and economic sustainability To measure the effectiveness of EU input, this paper uses two theories concerned with the decoupling of environmental and economic sustainability. Many scholars accept there is a trade-off between environmental protection and economic development, Figure 1: Environmental Kuznets curve. (Source: Bouder, 2008, p. 4)

meaning that they exclude each other (OECD, 2001, p. 14, Dean, 2002, Liu, 2009). The environmental Kuznets curve (EKC) offers a first explanation to this question (Figure 1). According to the curve, environmental degradation initially increases as an economy develops and gives work to more and more citizens (Bouder, 2008, p. 4). However, as the economy develops beyond a certain amount of GDP/capita, it will 6

change from an industrial to a service economy, meaning a reduction in polluting activities which entails a reduction of environmental degradation. Moreover, after the citizens have reached a particular level of per capita income, they come to value environmental sustainability more than they did before, act upon their opinion and force policy-makers to change the situation (Yandle, Vijayaraghavan, Bhattarei, 2002, p. 4). The EKC hypothesis therefore suggests that pressure by civil society is an important factor in changing pollution behavior of enterprises. A stakeholder wishing to reduce emissions should use the media to raise awareness among the population. Another way to speak about decoupling is in terms of the pollution-haven theory (Bouder, 2008, Liu, 2009). The theory is based on the Heckscher-Ohlin (HO) trade theory which, applied to the environment, states that a country with abundant environmental resources expects a relatively environmentally intensively produced commodity (Liu, 2009, p. 7). In other words, a country with a high capacity of CO2 absorption regardless whether this is actual absorption capacity of the environment or the legal allowance of emissions will attract polluting enterprises more than other countries. It can be argued that a global division of labor takes place: While industrialized societies move towards low-pollution, high-income service economies through the EKC hypothesis, less industrialized countries fill the gap and become industrialized themselves. Yet, their growth can only occur if it is based on low wages and little environmental restriction. Hence, the pollution-haven theory also points a critical finger to the European Union: While China has become a manufacturing hub for Europe, the less acknowledged aspect is that Europe has exported its energy demand and pollution to China (Crossick, 2008, p. 24). In return, evidence for the pollution-haven hypothesis places pressure upon the EU to improve the Chinese environment. This theory will be further extended in the third chapter. Drawing upon the insights thus presented, the following chapter investigates the contribution of the EU in enforcement of environmental protection. The third chapter highlights in how far the EU can bring about environmental sustainability through the negotiations of the Partnership and Cooperation Agreement (PCA).

2. Bilateral programs with China in environmental sustainability 2.1 Chinas environmental challenges Before talking about EU contributions in China to reduce externalities, it is important to define the problems that press upon China. The Middle Kingdom is not only faced with environmental issues but also with significant social and economic challenges. It is home to 22% of the worlds population but has only 7% of the worlds arable land at its disposition (Rogers, Srinivasan, 2008, p. 53). Due to large-scale migration, the metropoles on the Eastern coast in particular undergo massive population pressure. Hald (2009) has found that the
population density in the vicinity of Chenghuang Temple in downtown Shanghai is 80,000 persons per square kilometer, while some parts of urban Tianjin densities are over 50,000 to 60,000 persons per square kilometer . . . For comparison, the population density of urban New York City and Tokyo in the late 90s was 9,109 and 15,600 persons per square kilometer, respectively (p. 24).

Migrants from the rural areas in Western and Central China are looking for work in the metropoles, putting the central government and local governments under pressure to provide them with employment. Buijs (2009) asserts that the Chinese government derives a large part of its legitimacy from its capacity to provide jobs; consequently, it prioritizes economic sustainability over environmental sustainability (p. 49). Nonetheless, environmental problems in China are severe. A city infrastructure built for private automobiles (Hald, 2009, p. 26) and sheer population intensity lead to massive air pollution in the mega-cities on the Eastern coast. As a result, the average Chinese city experiences pollution levels amounting to double or even triple the level of larger European capitals (SIA, 2008, p. 87). A Chinese participant in a lecture on China at the London School of Economics (LSE) stressed that if you go to Beijing, you see the clogged traffic. You cant move, and its very painful. If I were still in Beijing, my eyes would be very painful (Fu Ying, 2009). Nonetheless, Jahiel (1998) holds that the worst pollution occurs in the industrial sector outside the metropoles, adding that this sector is the fastest growing and the most difficult to regulate (p. 783). Another important environmental challenge that shall be mentioned is water scarcity, which will increase in many parts of Northwest China according to Freeman

and Holslag (2009, p. 9, cf. Crossick, 2008, p. 16). This is connected to the pollution of many lakes and river basins (Rooij, 2006, p. 1ff, SEPA, 2005) which could provide drinking water to the population. Indeed, the National Eleventh Five Year Plan of the Peoples Republic of China (2007) acknowledges that 26% of Chinese water fails to meet Grade V national surface water quality standard; 62% could not meet Grade III water quality standard1 (p. 2). 2.2 Chinese environmental policies The government aims to tackle the shortcomings of environmental protection through a range of strict regulations. While other developing countries like India long focused exclusively on economic growth, leaving aside sustainable development (Kjellen, 2008, p. 10), Chinese policy-makers already formulated a national policy on environmental protection in the 1970s (Wang, Morgan, Cashmore, 2003, p. 544). Since then, the State Council and regional lawmakers have issued more than 2000 laws in the area of environmental protection (SIA, 2008, p. 95). The 2002 Cleaner Production Law, the 2005 Renewable Energy Law, the 2008 Energy Conservation Law and the 2008 Circular Economy Promotion Law on recycling have become important milestones of environmental progress in China (Freeman, Holslag, 2009, p. 14). Most importantly, the National Eleventh Five-Year Plan arguably the most important document of economic planning in China for the first time set an ambitious agenda for the reduction of greenhouse gases and the improvement of water resources (ibid.). In very clear language, the documents states the deficiencies of sustainable development and names specific targets such as a reduction of 20% in energy consumption between 2005 and 2010 (Eleventh Five-Year Plan, 2007, p. 5). It stresses the importance of market mechanisms in environmental policy as well as its adherence to the polluter-pays principle (p. 3) and is remarkably open towards the restriction of economic growth in some regards: China will put more efforts in the supervision and control of enterprise's pollution in rural areas and ban the movement of industrial solid waste, hazardous waste, urban garbage and other pollutants into
The Chinese grade III means that water can be used for drinking, fishing and swimming, while everything worse than grade V means that the water is essentially useless (WorldBank, 2006, p. 8). It has to be noted that Chinese water standards are by far more lenient than European water standards. In Europe, grade III water would not even be open for fishing, leave alone swimming or drinking (ibid.).
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countryside (p. 11). Two further noteworthy aspects stressed in the document are the necessity of good environmental protection institutions provided by the state (p. 15) and the growing importance of civil society in uncovering and combating pollution (pp. 1, 3, 26). However, Chinas willingness to promote sustainable development through environmental laws is in a sharp contrast to its implementation in practice, which Tong (2007) describes as largely ineffective (p. 100, cf. Hald, 2009, Rooij, 2006, Wang, Morgan, Cashmore, 2003, Jahiel, 1998, Defraigne in Crossick, 2008, p. 162). Hald (2009) asserts that the transition towards a market-based economy in China brings about a loss of control for the progressive central bureaucracy in Beijing (p. 31). Thus, cities enjoy wide discretion in passing legislation, planning and designing transportation systems and decisions regarding the development of local business (ibid.). It has been mentioned above that many local and regional governments derive legitimacy from their capacity to provide employment and hence prioritize economic development over environmental protection. Tong (2007) proves this in a quantitative study. In a survey among Chinese bureaucrats and business managers on different hierarchy levels, he found out that most respondents listed environmental degradation as the most serious contemporary problem in China, even in comparison with providing employment and controlling population growth (p. 109). However, when asked to make a list of policy priorities including science and technological progress, economic development, social equality, population control and environmental protection, all respondents ranked technological progress highest, followed by economic development, with environmental protection coming in the fourth place (p. 114). Thus, although the political and economic elites perceive the danger of environmental degradation, they are not prepared to give its removal the highest policy priority. In addition, scholars assert that the institutional structure and the legal system are not developed enough to enforce environmental protection in the same way as in Europe. Firstly, Wang, Morgan and Cashmore (2003) highlight that China does not have a tradition of enforcing environmental regulation through Courts (p. 560). This leads to a situation in which the the choice of enforcement action has more to do with the particular case at hand than the strict compliance with environmental rules (SIA, 2008, p. 93). In practice, it often happens that fees for non-compliance are negotiated between the Environmental Protection Bureau (EPB) and the polluting 10

enterprise (ibid.). Secondly, EPBs are often restricted in exercising their watchdog function. Many scholars (Wang, Morgan, Cashmore, 2003, p. 547f, Ma, Ortolano in Harrington, 2001, Rooij, 2006, p. 264, Jahiel, 1998, p. 759) see it as a significant problem that EPBs are financed by local or regional governments, rather than the Ministry of Environmental Protection (MEP, formerly SEPA). Given that many local and regional governments are skeptical towards environmental protection, EPBs often have to behave very carefully so as to retain their funding (Ma, Ortolano in Harrington, 2001, p. 398). Many EPBs are also significantly underfunded and understaffed for the work that they need to do. Rooij (2006) has observed this in the municipality of Kunming:
The Kunming municipal EPB headquarters is located in one of the citys drabbest areas in a run-down building that badly needs a paint job. Most offices lack computers, and the computers available are old. In stark contrast, the municipal SLBs staff is happy in its recently novated building. Marble floors welcome visitors on the ground floor, and luxurious and spacious offices are found on the floors above. All rooms visited had the newest computers and shining comfortable furniture (p. 276f).

The same accounts for the national MEP. While the National Environmental Protection Agency in the US, a country with a similar amount of land, employs 17,000 full time employees, the Chinese counterpart had only about 200 employees, potentially increasing them to 400 by 2008 (SIA, 2008, p. 97). It appears, therefore, that China does not have the institutional structure to cope with environmental problems on its own. 2.3 European involvement in Chinese environmental sustainability As a result of Chinese enforcement problems, policy-makers expect help from more advanced economies in the world such as the EU. In Chinas first EU Policy Paper (2003), policy-makers put it rather blunt: China welcomes more EU development aid, especially in such fields as the environmental protection, poverty-alleviation, public health and hygiene and education. China also welcomes a stronger and more active role of the EU in human resources development, in particular, personnel training (Chinas EU Policy Paper, 2003, p. 7). In practice, the Chinese government and the Chinese economy have been very eager to obtain European technologies, be it through official cooperation in capacity-building, through cooperation between 11

Chinese and European enterprises requiring technology transfer to the Chinese firm (SIA, 2008, p. 35, Liu, 2009, p. 72) or through theft of European patents such as car models (Landler, 2007) or capital goods (Bialdiga, 2008, Crossick, 2008, p. 165). Although the Agenda 21, which was signed along the Rio Declaration in 1992, effectively demands transfer of environmental technology from developed to developing countries (SIA, 2008, p. 31), European companies are afraid to disclose their expertise to Chinese enterprises due to weak enforcement of intellectual protection rights (IPR) in China (p. 79). Some have even resorted to calculating the cost of IPR infringement and adding it to the regular price (p. 31). Stronger EU input appears crucial for regulating this field. While the EU is in principle willing to help, it also has a number of interests in China. It has been mentioned above that the EU sees the fight for sustainable development as a source of civilian power (Freeman, Holslag, 2009, p. 7, Crossick, 2008, p. 18). European technology and business practices are a powerful carrot from which the EU can derive soft power and international recognition. Meanwhile, the EU asserts that it has major economic and political interests in supporting Chinas sustainable development and successful transition to a stable, prosperous and open country (European Commission, 2006a, p. 4). A sustainable and prosperous China will provide a bigger market for European goods and it will reduce global externalities of industrial production. Hence, in its strategy towards China, the Commission places the principle of sustainable development directly after the support for Chinas reform process in those areas covered by sectoral dialogues (European Commission, 2006a, p. 4). Sectoral dialogues also include the policy fields of environment and energy and, most prominently, a high-level dialogue on climate change (Snyder, 2009, p. 556). They are implemented through bilateral working groups with Chinese government officials and representatives of the European Commission (ibid.). Bilateral projects are another component through which the EU can promote sustainable development in China. However, acknowledging the limits of its resources, the Commission (2006a) suggests a strong focus on flagship projects and multiplier effects in order to translate EU experience to China (p. 4). It sees capacitybuilding and policy interventions at the appropriate level as the right means to achieve policy development (ibid.). Following the logic of soft power, the Commission attempts to make the Chinese government emulate its enforcement 12

practices. The Commission holds that it is rather successful, asserting that the Chinese government has a manifest interest in exploring EU practices and experiences . . . including the use of regulatory and economic instruments in environmental policy and public participation in policymaking and implementation (p. 16, cf. SIA, 2008, p. 27). 2.4 Bilateral EU-China projects: Two case studies The success can be found in various projects in sustainable development, two of which shall be presented more in detail. In the EU-China Energy and Environment Programme (EEP), the EU aimed at reducing the energy intensity of highly polluting industries in China through capacity-building (European Commission, 2009b, p. 14). As a part of the project, it organized training on correct benchmarking for Chinese enterprises (Benchmarking Report, 2009, p. III, 5)2. In a first stage of the project, the project team conducted pilot studies in the important industrial sectors iron and steel, chemical, building materials, non-ferrous metals and textile (Benchmarking Report, 2009, p. 8). It selected representative enterprises in these industries, analyzed their energy consumption and compared the findings with international benchmark values to draw policy recommendations (p. 10). Subsequently, it invited representatives of energy saving organizations and employees of industrial enterprises with a high energy consumption for different workshops (p. 24, 28). At these workshops, best practices were discussed, compared and underfed with European expertise (p. 28ff). The authors of the Benchmarking Report emphasize that the EU project is a first initiative with the aim to spark further capacity-building projects: Because this is a train the trainer type of project, trainees who have received the training this time, can be the trainer next time (p. 22). They further hope that five pilot projects and nine demonstration projects will be launched as a result of the first training (p. 23). The example of the benchmarking training highlights the importance that the EU gives to flagship projects. According to Hardacre (2010), the EU is very willing to provide capacity-building because an administrative training comes at a low cost in
Benchmarking means defining common patterns, standards or best practices in an industry or across industries by which enterprises can compare one another (Spendolini, 1992, p. 3f). The goal of finding benchmarks is for an enterprise to compare its own practice to that of the best-performing enterprise and to emulate its technique as much as possible (p. 4).
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terms of finance and technology, while it can entail a large multiplier effect in China. It meets the interests of the EU and contributes to low-cost environmental sustainability while it does not compromise economic sustainability. However, it must also be acknowledged that a veritable spread of best practices across industries remains dependent on many different factors (and actors) and is subject to many opposing interests. The second project took an even larger role as a prestigious flagship project for the EU. In the EU Liaoning Integrated Environment Programme (LIEP), conducted between 1999 and 2004, the EU aimed to help the province reduce pollution, modernize its economy, and eventually facilitate European firms to invest into the province (Shin, 2004, p. 283). It pursued its aims inter alia by establishing a mass media public awareness campaign (European Commission, 2009b, p. 10). Since the EKC theory holds that when most aspects of the environment are defined as property, the community moves rapidly in the race to improve environmental life (Yandle, Vijayaraghavan, Bhattarei, 2002, p. 4), it can be argued that giving a sense of responsibility to civil society and media increases pressure on policy-makers to protect the environment, and thereby gives evidence for the EKC hypothesis. This is particularly relevant since Liaoning is one of those regions in China that is fast industrializing but where regulation of pollution is difficult: The Liao River, for example, is one of the most polluted rivers in China (Li et al., 2009, p. 147). In order to raise environmental awareness among the people of Liaoning, the EU took a threefold approach. It targeted public and private policy-makers, institutions of public education and the media. For cadres in enterprises and government, LIEP organized workshops on European environmental policy and management, environmental communication strategy and sustainable development theory (Gaokui, 2002). It also organized a visit to different European countries for cadres to give them an insight into European environmental policy-making (Ma, 2006). Overall, 550 public and private decision-makers were trained until 2003 (China Environment, 2003). In the field of public education institutions, the EU undertook a broad training program for teachers and students. Thus, the project leaders of LIEP developed environmental education teaching material and reference books for primary schools, secondary schools and universities (Gaokui, 2002). While EU experts were asked to participate in the creation of green schools and green community activities (China 14

Environment, 2003), they also developed an international seminar on environmental education at the local university to explore how to create a green college (Gaokui, 2002). Most importantly, however, the EU attempted to achieve a multiplier effect through programs for teachers. 1,500 teachers from Liaoning province participated in environmental trainings (China Environment, 2003) and an environmental education specialist library was established with help of the EU (SEPA, 2002). The third part of the awareness campaign targeted the media in Liaoning province. Under the guidance of LIEP, several local media such as Liaoning TV, the Liaoning Education TV Station, the newspaper Liaoning Daily and five other media were educated in environmental journalism, established a closer cooperation among one another and installed regular programs on environment (SEPA, 2002). Thus, Liaoning TV opened up a weekly show called Green Home which informs citizens about environmental protection in their households (Gaokui, 2002). The Liaoning Daily and the Liaoning Economic Daily News opened up a weekly environmental column and several other broadcast media took environmental issues into their news coverage (ibid.). Finally, around 30 journalists participated in training programs until 2003 (China Environment, 2003). The results of LIEP can be seen through a quantitative study of environmental awareness in Liaoning province in 2009 (Li et al., 2009). According to the survey, 43.7% of all respondents consider the environment excellent or relatively good, while 43.5% believe it is fair (p. 146). However, this does not necessarily mean that citizens are aware of environmental problems. Despite these positive figures, 63.8% of all respondents perceive that there is a lack of public awareness of environmental protection3. This lack of awareness can also been seen in the survey results. It has been mentioned that the Liao River is one of the worst polluted in China. Yet,
46.3% of staff and 40.8% of students wished to use [environmental] funding for planting trees and reforestation, but 39.4% of residents wished to use the funding for garbage disposal. Fewer people (19.9% and 20.0%, respectively) chose wastewater treatment and air pollution control as the first target. This suggests that people want to have visual proof of the improvement in surrounding environmental factors (ibid.).

The fact that citizens want to have visual proof of improvement testifies or a willingness of civil society to hold policy-makers to account. On the other hand, it
Studies by the China Environment Culture Promotion Association (CECPA) have come to the same conclusion (CECPA in SIA, 2008, p. 98).
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shows that the public cannot fulfill the role of a watchdog, since it does not precisely know how to weigh the gravity of environmental pollution (p. 147). While citizens acknowledge that they are not sufficiently informed, there is a vague belief that more should be done: 50.3% of the respondents believe that policy-makers are not doing enough for environmental protection and 55.4% see a lack of environmental awareness with enterprises (ibid.). It appears that citizens expect their policy-makers to be the drivers of environmental protection rather than becoming drivers themselves. Yet, it has been highlighted above that attitudes and actions of policymakers may often diverge considerably. 2.5 Evidence from the case studies The look at Liaoning province shows that the EUs efforts in building a civil society are a first step towards environmental improvement, but they cannot be considered sufficient to hold policy-makers to account (cf. Shin, 2004, p. 277f). Although citizens take a distinct interest in the environment and appear demanding towards their government, the case facts do not show enough evidence to argue for the environment as a property, and thereby, the EKC hypothesis. However, these findings neglect the impact of greater openness to trade in Liaoning province, which will be dealt with in the third chapter. Looking at both case studies, the EU approach can be best described as handing the tools to Chinese policy-makers and civil society, rather than applying the tools. Although it is impossible to induce general theories about the efficiency of EU help in China from these two case studies, it is clear that the investment in flagship projects and train-the-trainer initiatives do not impose serious conditionality upon China. Although the Chinese government has clearly stated a need for capacity-building in its EU Policy Paper, it does not appear that the EU can build up soft power and impact enforcement of norms with capacity-building alone. It therefore does not appear that a reduction of a pollution haven or the EKC hypothesis can be achieved through government programs alone4.
As a sidenote, the EU faces institutional problems in its approach to China. Germany, for example, spends four times more than the European Commission on bilateral programs with China (Snyder, 2008, p. 956). While the Commission undertook 19 bilateral projects in environment and energy until 2008, Germany conducted 44, France 7 and Italy conducted 11 projects (p. 955). This dichotomy
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Having discussed EU initiatives in the framework of bilateral projects, this paper turns to the EU contribution to environmental sustainability in China through trade liberalization in the next chapter. It is investigated in how far the EU can apply conditionality towards China in the negotiations of the Partnership and Cooperation Agreement (PCA).

3. Trade Liberalization and Environmental Sustainability: The Partnership and Cooperation Agreement (PCA) 3.1 The pollution-haven theory revisited The PCA will be analyzed with help of the EKC and the pollution-haven theory. However, the pollution-haven theory has to be extended in order to fit the scenario of trade liberalization. It has been mentioned above that this theory results from the global division of labor: As industrialized societies become services economies, developing countries see a possibility to fill the emerging gap in industrial production, based on low labor cost and little environmental regulation. However, scholars are divided when it comes to the impact of trade liberalization between developed and developing countries upon the environment in the latter. Some scholars assert that trade liberalization supports the pollution-haven hypothesis (Xing and Kolstad, 2002, Cole, 2004), but there is also evidence for the assumption that it minimizes the pollution-haven hypothesis (Eskeland and Harrison, 2003, Neumater, 2001). Grossman and Krueger have divided the impact of trade liberalization on the environment into three components, which will be closely followed in this paper (Grossman and Kruger in Liu, 2009, p. 23). The first is a so-called scale effect, describing the negative effects of rapidly increasing industrial activity without technological progress and economies of scale (p. 8). This will lead to overexploitation of resources, notably the environment. According to Crossick (2008), the average energy use intensity in China is much higher than in most EU countries, due to outdated production equipment and mismanagement of energy use
cannot be investigated more closely in this paper, but it may prove an interesting starting point for further research.

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(p. 28). Hence, the scale effect normally carries negative implications for the environment. The second effect is the technique effect which describes an improvement of the environment through better technology (Liu, 2009, p. 8). This effect is normally positive. The third component is the composition effect which can be either positive or negative (p. 17). It refers to the factors influencing the production process of an enterprise (ibid.). Thus, it can refer to other enterprises in the region, the attitude and income level of the local population or the behavior of the local Environmental Protection Bureau (EPB). The composition of these factors determines whether the impact upon the environment is positive or negative. Following Dean (2002), the EKC hypothesis and the pollution-haven theory are closely intertwined. Accordingly, the inverted-U hypothesis states that at low levels of income, the scale effect outweighs the composition and technique effects (p. 820). It follows from this observation that an improvement can be achieved via technology spread and capacitybuilding, but also via income growth. 3.2 Reasons for negotiating the Partnership and Cooperation Agreement The negotiations with China for the PCA were launched in September 2006, in order to adapt the legal basis of EU-China partnership, the 1985 EC-China Trade and Cooperation Agreement, to the evolution of EU-China relations (Messerlin, Wang, 2008, p. 15). Negotiations of a Partnership and Cooperation Agreement with a third country fall under the field of EU Trade Policy and are governed by 218 TFEU. Accordingly, the European Commission conducts the PCA negotiations after the Council has formally authorized their opening. Hardacre (2010) holds that an economic agreement with a third country always consists of three different pillars, namely a trade pillar, a political pillar and an aid pillar (p. 11). Only when all three pillars have been negotiated successfully can the Council endorse the agreement. The PCA is still negotiated at the time of writing and in Hardacres (2010) view, the European Commission faces a difficult trade-off between the political pillar and the trade pillar. Thus, the Chinese government is not prepared to make concessions in political matters such as human rights, considering any mention of this topic an intrusion into its domestic politics (n.p.). Meanwhile, the fiercest European critic of China, the European Parliament, calls on the Commission to insist on the strengthening of the Human Rights Clause in negotiations with China (European 18

Parliament, 2009, p. 3) and threatens to block the agreement if human rights are not considered in the agreement (Hardacre, 2010). This paper is concerned with the provisions for sustainable development instead of human rights; nevertheless, it has to be acknowledged that the PCA may fail if the political pillar is not sufficiently covered. With regard to sustainable development, the European Parliament (2009) wishes for the Commission to promote trade in environmentally friendly goods and services . . . and to encourage the development of industry that contributes to a reduction in carbon emissions (p. 5). It particularly demands a more liberalized Chinese market in the field of renewable energy (ibid.) and a proper and agreed level of enforcement of intellectual property rights (p. 4). The Commission itself has duly taken an assertive stance with a view to reduce tariff and non-tariff barriers for European investment and European products, to impose market instruments upon China and to subject technology transfer to clear property rights (Knig, 2010, p. 5). The stakes for reaching an agreement are high. Both the Commission and the European Parliament are aware that China is the EUs second largest trade partner in the world, accounting for 11,4% of the EUs overall trade with the rest of the world (European Commission, 2009c, p. 5). Without inexpensive manufacturing of clothes and other goods in China, the EU would see a surge in its consumer prices and would certainly incur greater unemployment (cf. Crossick, 2008, p. 24). Likewise, a greater liberalization of the Chinese market would give the EU more opportunities for trade. But also for China the stakes are high. The EU takes the largest share of its global imports from China (European Commission, 2009c, p. 5). When it comes to trade, it can provide a powerful carrot to China in terms of European technology and business practices. In 2006, the EU was the largest technology exporter to China with a contracted value of US$ 7.54 billion (SIA, 2008, p. 35). Most of this technology refers to Environmental Goods and Services (EGS), in which the European Union holds a strong worldwide comparative advantage (ibid.). In addition to its carrot, the EU also has a stick. Despite Chinas WTO accession, the EU has not given China market economy status (MES) yet, which firstly allows it to impose anti-dumping duties on China and secondly has high political salience (Crossick, 2008, p. 171f, Messerlin, Wang, 2008, p. 14). In consequence, the European Union has economic and political means to push for tariff reductions. However, the

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academic community views the impact of tariff cuts on the Chinese environment in different ways. 3.3 Trade liberalization and the environment in China Some scholars see the maintenance of high tariffs as the best way to improve the environment. Hence, Messerlin and Wang (2008) argue for the protection of Chinese industries to raise GDP/capita by suggesting that already without tariff cuts the
richest provinces are fast losing their initial comparative advantages based on low wages. Hence, their competitive pressures on the EU economies will more rarely be based on price competition, but rather increasingly on the quality and the variety of their products (p. 7).

In their view, reducing tariffs would hinder the growth and product quality of products from the rich provinces. Meanwhile, under high tariffs, poor regions remain protected, retain their comparative advantage based on wages and can better develop their economy. In line with this argumentation, Messerlin and Wang (2008) also speak out against heavy protection of intellectual property rights (IPRs), stating that a stronger IPR regime would exclude Chinese producers from entering the market(s) in question, and . . . raise the price(s) paid by Chinese consumers (p. 16). For them, the preservation of regular tariffs and low IPR bears the perspective of increasing income and bringing about more demand in environmental sustainability (EKC hypothesis). It could be argued, however, that this supports the pollution-haven hypothesis, since local governments of the rich provinces can gain their comparative advantage back through less stringent environmental enforcement. In addition, poorer regions do not face any market pressure to develop cleaner production. Thus, to the author it appears highly doubtful whether the technique and composition effects resulting from higher income and better access to intellectual property would outweigh the scale effect resulting from unsustainable growth of protected industries. In an investigation linking trade liberalization to the environment, Dean (2002) has separated these three effects. She conducted an econometric analysis using a World Bank dataset between 1987 and 1995 (p. 827f), during which China lowered its average tariff rate from 39.5% to 34.3% (p. 831). Dean (2002) found out in keeping with the pollution-haven theory that China has a comparative advantage in pollution-intensive goods, and thus, increased openness directly aggravates 20

environmental damage (p. 823). In her view, better terms of trade following market liberalization imports into China become cheaper while export prices remain constant cause emission growth due to a scale effect (p. 840). Viewed in isolation, these findings would argue for the maintenance of high tariffs from an environmental point of view. However, Dean (2002) also proves that trade liberalization triggers gives access to cheaper goods and triggers a positive technique effect through higher income. In her view, high income generates more demand for a clean environment that, in turn, generates more demand for cleaner technologies (Shin, 2004, p. 266). It should be noted that Deans technique effect goes beyond the EKC hypothesis in the sense that purchasing power forces an improvement of technology, while the EKC hypothesis asserts that citizens develop the means and courage to influence policymaking. Dean (2002) concludes that the beneficial effects of trade liberalization may have outweighed the detrimental effects during the period of 1992-95 (p. 841). Shin (2004) provides another view in favor of trade liberalization. He conducted a case study of two cities, Dalian and Shenyang in the province Liaoning, in which GDP, share of industry and number of industrial enterprises were almost identical (Table 1, p. 272, Table 2, p. 274, Table 3, p. 276). In contrast to these similarities, he found that the statistics of wastewater and air pollution treatment were strikingly different, all being largely in favor of Dalian. Shin (2004) traced this back to the openness to trade in the coastal city Dalian. He holds that a composition effect could not be proven in either of the two cities (p. 272); yet, its openness to trade gave Dalian a large technique effect:
Exposed to the international market and international practice of environmental protection much earlier than Shenyang, Dalian has benefited from foreign firms in terms of environmental awareness, learning from the advanced environmental practice, environmental technology transfer, and foreign investment in environmental industries. Furthermore, Dalian could initiate new market-incentive policy instruments . . . earlier than Shenyang, because of foreign influence (p. 280).

Not only did this subject domestic industries to market pressure, it also put local policy-makers under pressure and gave them the financial resources to strengthen environmental institutions (p. 263). Where Shenyang devoted less than 1% of local government revenue and 300 enforcement agents to environmental protection in 2001 (p. 281, 283), Dalian was able to invest 2.05% of revenue and maintain 800 enforcement agents (p. 283). It has to be mentioned that this degree of environmental 21

protection is largely due to foreign technology and practices rather than higher income: (H)igh income and its consequences . . . by themselves do not really change the environmental quality. This is proven by the fact that Shenyangs environmental quality today is far behind the average with similar levels of income (p. 291). Yet, for Shin (2004) it is also clear that free trade in turn requires a deliberate investment in strong environmental institutions. He holds that the city government and foreign firms in Dalian have concluded an informal agreement ensuring economic benefits to the foreign firms as long as they respect environmental criteria (p. 287). This can only endure if the Environmental Protection Bureau (EBP) can make it clear that the cost of non-compliance for foreign enterprises is high (p. 290). 3.4 Trade liberalization through the Partnership and Cooperation Agreement It is apparent from these two case studies that European technology can provide a significant positive impact upon the Chinese environment. The World Bank has calculated that China currently spends 7.7% of its GDP for environmental damage, meaning that it offsets large parts of Chinas economic growth (Crossick, 2008, p. 161). Stronger involvement of European enterprises in the Chinese market and a resulting technique effect could certainly reduce this figure. To quantify the potential social, economic and environmental impact of lower tariffs in China, the European Commission asked a pair of consultants to conduct a Sustainability Impact Assessment (SIA) in various industrial sectors in China. Using a partial equilibrium model, they calculated nine different scenarios: a reduction of tariff barriers by 0%, 25% or 75%, combined with the reduction of non-tariff barriers by 0%, 25% or 75% and other factors (SIA, 2008, p. 9). Most of them entail a growth of European exports to China while they see Chinese production shrink, especially in the sectors of EGS and machines. In the most ambitious scenario, machinery imports from Europe grow by 44% while EGS imports grow by 61%, depending on the subsector (Van der Geest, 2008, p. 4, 6). Meanwhile, Chinese production could decline by up to 0.9% and 3.5% respectively (ibid.). Following the consultants, growing imports from Europe and declining production in China could significantly improve the Chinese environment. Van der Geest (2008) asserts that the import of energy efficient European goods, depending on the scenario, would have wide ranging environmental benefits in China (p. 6, cf. 22

SIA, 2008, p. 14). Likewise, lower production in China would entail a positive composition effect and an improvement of public health (p. 4, 6). On the negative side, however, a decline of Chinese production would also lead to more unemployment, which reduces GDP (p. 4, SIA, 2008, p. 78). The report does not quantify the different effects in the same sense as Dean (2002), Shin (2004) and Liu (2009) have divided them. Yet, the consultants come to the conclusion that most of the scenarios, except a complete refusal of tariff reductions and the most extreme reduction, suggest that emissions per unit of Chinese GDP will fall (SIA, 2008, p. 51). It is clear for Van der Geest (2008), however, that a tariff reduction alone cannot lead to environmental improvement (p. 5). Instead, tariff reductions have to be accompanied by capacity-building measures such as best practices, an improvement of the enforcement system and an adherence to IPR and international environmental quality standards throughout China (p. 7). In these regards, the European Union should do all it can to support the Chinese government.

Conclusion It has been shown that bilateral capacity-building projects between the EU and China are efficient but they do not allow the EU to impose any conditionality upon China. Hence, the EU does not have a proof that participants of a flagship project will spread their knowledge to other companies or industries. In addition, it has become apparent that a civil society in China is still under construction; EU efforts in providing a mass awareness campaign in Liaoning have certainly been helpful but civil society is still little informed about environmental problems. The society still expects policy-makers to be the drivers of environmental sustainability. Trade liberalization between the EU and China can effectively bring more environmental sustainability to China. However, in many scenarios more environmental sustainability impacts negatively upon economic and social sustainability. Thus, an increase in EU exports of environmental goods to China would improve consumer health and the environment, but it would also reduce economic activity in industrial sectors by up to 3.5%, thereby sending Chinese workers into unemployment and taking away legitimacy of local and regional governments. 23

In consequence, it can be said that neither capacity-building programs nor market liberalization can improve the Chinese environment on their own. Both aspects are crucial for a sustainable future in China, and yet they only become truly efficient when both come together and are accompanied by further job market programs. Chinas policy-makers have been very progressive with regard to sustainable development, but the enforcement structure of the Chinese state is not sufficiently developed to safeguard this progress. Further EU involvement in training activities appears crucial. Likewise, reinforced opportunities for trade of EGS, joint ventures and European investment in China seem to have a lot of potential. Going beyond these findings, it seems necessary to find a more intelligent connection between economic opportunities and environmental enforcement than currently displayed in China. The results that Shin (2004) found in the city of Dalian suggest that it is possible to achieve economic sustainability and environmental sustainability at the same time. Hence, the local government and foreign producers went into a public-private partnership, stating that enterprises could expect favorable conditions as long as they respected environmental obligations. The investment in a strong Environmental Protection Bureau (EPB) ensured that foreign producers obeyed the rules, while their practices and technologies could help to reduce externalities for all citizens. Rather than a trade-off between growth and environmental protection, this presented the opportunity of environmental protection through economic openness. This paper suggests that economic openness shifts responsibility from policymakers, which have been considered the drivers of environmental improvement, to enterprises. As long as environmental property rights are clearly assigned and can be enforced through strong institutions, enterprises need not compromise their economic growth due to the fact that they respect environmental standards. Instead, a market mechanism like the EUs Emissions Trading Scheme (ETS) in which pollution rights can be traded like a good, complemented by a sharing of best practices, appears to offer a possibility for decoupling. Although it can certainly be doubted if the idea will ever be realized, the authors of the Sustainability Impact Assessment (SIA) have duly recommended to the Commission to (c)onsider developing a joint approach to including China in the EUs Emissions Trading Scheme, with special provisions for each partys emissions in the production of goods supplied to the other (p. 103).

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Annex Game theory analysis: It goes beyond the scope of this paper to discuss the merit of multilateral environment negotiations, but their effectiveness can be easily explained by using game theory. Thus, in Figure 1 the game tree is displayed, using the model of China and other countries. Game theory is based on the interdependency of decisions that the parties to an agreement take in the negotiations; the decision of the partners will determine ones own outcome. It will be assumed for the sake of simplicity that all other countries in the negotiations wish to regulate and to reduce their emission output. The EU, for example, has already agreed on a reduction of greenhouse gases by 20% until 2020, taking the levels of 2005 as a base level (Euractiv, 2007). Based on these prior decisions, China has the choice of regulating its emissions or allowing its industries to continue polluting the environment. If it decided to regulate, this would impose costs on the Chinese state (following the public goods theory) or Chinese enterprises (following an internalization through a Pigouvian tax or the Coase theorem).
regulating

Other Countries: Pay and Benefit; China: Pay and Benefit

regulating

China: regulating or not regulating?

not regulating

Other countries: Pay without Benefit; China: Benefit without paying

Other countries: regulating or not regulating?

not regulating

regulating

China: regulating or not regulating?

not regulating

Other countries: Benefit without paying; China: Pay without Benefit Other countries: No Benefit, no Pay; China: No Benefit, no Pay

Figure 1: Game tree (Feldhof, adapted from OSullivan, 2006, p. 331) If China decides not to regulate, however, it will reap the benefits of less pollution in the other countries, while it does not incur private costs for its own society or enterprises (although this idea neglects the social cost of Chinese pollution upon the Chinese society). In contrast to the general conclusion arising from the game tree, namely that mutual regulation yields a long-term advantage to all parties (cf. OSullivan, 2006, p. 333), it can then be argued that China would benefit most if it opted for the dominant strategy and further allowed its industries to pollute. This holds particularly true if China should prioritize short-term economic development in the present over long-term sustainability for future generations.

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