One of the main drivers of Sino-European cooperation has been the prospect of a mutually beneficial division of labour. In the best classic liberalist tradition, it was the Chinese government that nurtured a sense of economic harmony. This paper shows that a mutually beneficial partnership has not emerged. Departing from a detailed six-digit commodity export dataset, it demonstrates that the division of labour has blurred. Furthermore, Europe's growing deficits on the current account balance were not offset by inflows on the financial account. All these are symptomatic for the twin distortions that have developed in China and Europe, twin distortions that now require difficult twin adjustments. However, while both sides preach the need for rebalancing, they tend to persist in unsustainable policies, which will still most likely lead to panic and protectionism. In that regard, the Sino-European relations reveal compellingly that politically induced imbalances cause havoc in international trade relations, even if there were no initial intentions to harm other countries' economic interests, and that the optimist narratives of harmony of economic interests cannot be trusted, as long as they are not matched by free markets.
Journal of World Trade