tariff barriers in china are indeed estimated to result in a loss of european exports estimated at 20 billion euro, or 30 % of total trade. 1 another likely reason relates to the exchange rate between the euro and the chinese renminbi. while the bilateral exchange rate is only one factor affecting the growing trade deficit, it is difficult to argue that it has had a negligible impact over the years 2002 - 07 : in that period, the chinese trade surplus with the euro area almost tripled while the chinese renminbi depreciated vis - a - vis the euro by a cumulative 30 %. in 2008, however, the renminbi has so far appreciated against the euro by 9. 4 %, a welcome development for the balancing of our trade relationship. iii. global economic challenges, structural reforms and monetary policy responses more generally, the observed “ asymmetries ” characterising the eu - china economic relationship reflect to a large extent differences in the structure and functioning of markets in the two areas as well as differences in the economic and monetary policies pursued. the latter are partly a consequence of differences in domestic economic circumstances and of differences in the policy responses to the global economic challenges. at the present juncture, china and europe face three main common challenges, albeit to varying degrees : first, a marked slowdown of the global economy and a deteriorating economic outlook ; second, persistently high inflation over a prolonged period of time, as a result of past increases in oil and food prices as well as of rising underlying domestic inflationary pressures ; and, third, continuing tensions in global financial markets that have intensified in recent months. the magnitude and nature of the economic challenges being faced domestically varies across countries and economic areas. in advanced industrial economies, including the euro area economy, the deceleration of economic growth has turned out to be more marked and abrupt than previously expected. at the same time, the pace of economic activity in many emerging market economies has so far remained relatively strong, although it is moderating. nevertheless, the further weakening of economic activity in most advanced industrial economies is progressively having spill - over effects, through trade and financial markets, on emerging market economies. the hypothesis of decoupling of the growth performance of advanced and emerging economies is increasingly being tested across the globe. the see european commission ( 2007 ), “ future opportunities and challenges in eu - china trade and investment relations 2006 - 2010 ”. notable exception is china which continues to experience robust growth, only moderately lower than

noticeably over the past decade. in particular, the united states has had two recessions – one in 2001 and the current one – which have had a relatively muted impact on australia. there are no doubt many factors that have contributed to this. one of them is that the growing trade linkages between australia and china are increasingly pulling the australian economy away from the united states towards china. china is our largest export market, and australia is the largest supplier of bulk commodities to china, so our economies are becoming very intertwined. various people, including glenn stevens and phil lowe from the reserve bank and ken henry from the treasury, have recently spoken about the implications of this for the australian economy in the medium term. this topic is also attracting considerable attention in the media. three themes emerge when people look at these issues. the first is that australia will most likely face an extended period of prosperity in the years ahead. some of this will come about through strong real economic growth, due, for example, to increased investment and higher export volumes. some of it could also come via high commodity prices. if, as has occurred over the past five years, the supply chain involved in the production of resources in australia ( and elsewhere ) struggles to keep up with rising chinese demand, commodity prices will remain high. the fact that commodity prices are still at a level that is historically high, despite the severity of the global recession, indicates that the demand / supply balance in commodity markets remains fairly tight. it could tighten further as the global economic recovery gets under way. a second theme is that this prosperity could put strains on the economy, and not all sectors may share in it. it is possible, for example, that some sectors of the economy will suffer as labour and capital are competed away by the faster - growing sectors. in general, workers are likely to be in short supply, leading to strong demand for skilled migrants and therefore fast population growth. this, in turn, will have flowon effects for housing markets. investment, which is already high by the standards of developed economies, will need to rise further. a large part of this is likely to be imported. similarly, the financing of this investment will most likely require increased capital inflow. we could therefore see a widening in the current account deficit, possibly to higher levels than previously experienced, matched by increased capital inflow. the third theme is that the forces affecting the economy could pose a number of policy challenges. glenn stevens dealt with these at some length in his