China trade: Damned and damned
By John Mulcahy
Forty years ago, US president Richard Nixon said that his country could take little comfort from the fact that China and the Soviet Union were in dispute. "They are simply arguing about what kind of shovel they should use to dig the grave of the United States."
The world is a different place in 2003. There is no Soviet Union, Richard Nixon is a footnote to history and China's embrace of the markets since the 1970s has ensured that it does not qualify as an "evil empire" or an element of any "axis of evil". But storm clouds there are, as the US and Europe fret about China's continuing economic success.
With China's exports to the US this year set to top 2002's US$125 billion, there is a feeling that it may be too late to invoke an Augustinian prayer. "Lord, make them successful, but not yet," is a belated plea. A recent report by US investment bank Goldman Sachs projects China as the world's biggest economy by 2050, eclipsing the US, Japan and Europe. While the prospect of a transformed leader group in the global economy is by no means contingent on the decline of the US, there is no doubt that the dynamics of continued exponential growth in the Chinese economy is producing a far less benign response to Beijing's strategy than has been the case for many years.
It is apparent to everyone but those in deep denial that China has graduated to an elevated stature in the global economic race. China's average annual economic growth over the past decade has been in excess of 9 percent, while auto sales have increased 14 times over the same period, and living space per capita has doubled, an extraordinary statistic considering the population is 1.3 billion, or 20 percent of the world's total population.
A fascinating study by Daiwa Institute of Research economist Xiao Min Jie traces the success of China's economic story over the past two decades in virtually every sector, and compares it to the reconstruction and subsequent growth of Japan from 1960 to 1980. In virtually every sector of economic activity the growth in output and demand is exponential, not least in the wealth of the people, as per capita income in the urban area has risen from 1,510 yuan in 1990 to 7,703 in 2002, while rural income has risen from 686 yuan to 2,476 yuan over the same period.
The conundrum for the industrialized West is that even as it wishes to curb China's infuriating ability to supply ever-cheaper imports, it is at least as eager to participate in the phenomenal domestic market. China already boasts 200 million mobile telephone subscribers, and growth has not peaked, while the auto market is expected to grow from 1 million to 10 million by 2010.
The "China factor" is evident in most commodity markets, with China accounting for 95 percent of the growth in world steel demand since 2000, 99 percent of growth in nickel demand and 100 percent of the growth in copper demand over the past three years. A poor soybean crop in China is currently creating a boom in soybean prices, while China demand is seen to be underpinning global prices of coking coal and iron ore.
Despite the risks in alienating a huge country with a booming domestic economy, the outlook is for increased trade tensions. As momentum builds towards next year's US presidential elections there is a sense that China's characteristic foot-dragging on compliance with the terms of its acceptance into the World Trade Organization (WTO) will no longer be tolerated. China will continue dragging its feet, in full knowledge that its poorly capitalized and uncompetitive banks would be no match for the Citibanks, HSBCs and Deutsche Banks of the world.
But it is evident that China's perceived delinquency in meeting its market-opening commitments under the WTO will not be endured indefinitely. One strand of the tougher US stance on China has been the concerted pressure from US Treasury Secretary John Snow, and more recently by President George W Bush, on China to float the yuan.
It is not that China has discovered economic nirvana. Its policies have produced a degree of social instability that would terrify a democratic government. The inherent inequity between urban and rural development, which threatens to re-ignite peasant discontent; between the rich coastal provinces and the poor interior regions; and the vast and growing body of unemployed workers, millions of whom were made redundant as a consequence of reforming state-owned enterprises, are all powder kegs for the new Beijing leadership.
Even the dogged adherence to the fixed exchange rate has domestic reverberations. As Nomura notes in its latest Strategy Quarterly, "China suffers from an embarrassment of foreign currency inflows from export receipts, FDI [foreign direct investment] and portfolio flows, as well as a return of flight capital on expectations of a revaluation of the currency."
By using monetary policy tools to combat inflation - the People's Bank of China has raised the reserve requirements for banks and deposit-taking institutions - "the central bank is signaling the [yuan] rate is unlikely to be changed much in the short term," Nomura's strategists say.
It is true that these issues amount to a series of "quality" problems to struggling developing countries in Africa, South America or Eastern Europe, but they are real for China, which is struggling to balance runaway economic growth with rising wealth expectations among its vast population. Chinese economists and officials argue that it simply cannot tolerate systemic upheaval in its banking sector, and that they will tough out demands for accelerated reform and market opening.
In the final analysis it is improbable that the US and Europe will strain their trade relationship with China to the breaking point, given the prospects for the economy. As the Bank Credit Analyst notes: "Historically, China's boom periods end in busts because of inflation and credit crunches. This time around, the lack of inflation is remarkable. It suggests that China's economy has hit the steepest part of its development curve, where productivity gains soar as the economy hits critical mass. Wealth creation in this environment will be staggering."
It is this last comment, "staggering wealth creation" that would give China's policymakers far more latitude than might be true if the potential of its market were not so attractive. It is clear that the US and Europe want a piece of the action within China as a quid pro quo for the massive shipments of Chinese goods making their way to Western consumers.
During Bush's recent trip to Asia, US Trade Representative Robert Zoellick broadened the US position, stating that "the United States' market should remain open, but the only way that we can maintain open markets is if American exporters have an opportunity to export [to China]." Expanding on the trade theme, a high-level US trade delegation has been visiting Beijing, including Commerce Secretary Don Evans and Undersecretary of Commerce Grant Aldonas.
This delegation is presenting a clear case that patience with China over the WTO issue has been exhausted. In a statement before the trade team left the US Aldonas said: "There's a point at which the bill becomes due and that point is now."
It appears that the US is focusing on a range of Chinese violations or non-compliance with WTO requirements, including intellectual property breaches and a refusal to loosen controls on agricultural imports. The US is also complaining that China is blocking access to industries such as telecommunications and banking.
The US is seeking support from one of the other big beasts in the global economic jungle, the European Union, to drive home its tough stance towards China. Washington is pushing an open door, as the EU Chamber of Commerce in China recently published a document claiming that China is failing to make good on WTO commitments in a range of sectors, including automobile manufacturing and construction.
The real question is whether the US and the EU seriously want to take China on, given the sheer pace of growth in the huge country, and the consequences of a bloody trade war. Washington's new-found aggression on China's trade imbalance is not finding universal support among its own corporate citizens, as companies such as General Motors, General Electric, Microsoft, Dell, Coca-Cola and others are eager to expand their already-considerable footprint within China, and the last thing they want is to be caught in the whiplash of Chinese retaliation for US trade sanctions.
The volume of demand for trade action against China has been rising in the US Congress, and in the tense atmosphere of a presidential election runup the pressure is likely to be sustained. Throughout the years of annul renewals of Most Favored Nation (MFN) status China has become accustomed to hard-nosed trade bargaining with the West, and it is likely that concessions will be made in due course to silence the barking dogs in Congress.
China's Premier Wen Jiabao is due to visit the US soon, and it is likely he will be armed with an impressive shopping list, enough to silence some of the more vocal critics. With foreign currency reserves of more than $350 billion, Wen will have plenty to spend.
One thing is sure, whatever the outcome of the current debate over currency and trade, tension between the US, Europe and Japan, on the one hand, and China, on the other hand, will not go away for the foreseeable future. China is the usurper on the stage of global economic giants, and it can only meet its own target of quadrupling its economy by 2020 if it continues to use its elbows. China has already become a market rivaling the US to a host of Asian exporting countries, including Taiwan, Indonesia and even Japan. The complex mix of pressures resulting from its increasing importance as a customer and as a supplier will keep China in the focus for all trading nations.
For the US, and for the big industrialized nations generally, the question will be which element of the Chinese proverb they wish to fulfill: "Enemies and lovers are destined to meet." The answer will never be simple, as the next year will illustrate.
John Mulcahy has been covering Asia for 20 years, as a journalist with the South China Morning Post and Far Eastern Economic Review and as equity research head at Vickers da Costa, Peregrine and UBS.
(Copyright 2003 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.) atimes.com |
