China Misusing Trade Relationship with US and Europe?

By: Hari Sud
Novermber 27, 2005
Views expressed here are author’s own and not of this website. Full disclaimer is at the bottom.

Feedback

US and Europe are the main profitable markets for goods and services for all the developing countries including China and India. The developed countries are benevolent enough to allow low technology, low valued and high labor contents goods into their countries with minimal taxes. In return, they keep a control over financials, high tech items and research & development. This serves their purpose as well and helps the developing world into prosperity. For the last 25 years this mutual appreciation for each other’s strengths and weaknesses has been the corner stone of prosperity in China’s coastal region and in India’s BPO & IT services exports. Initially, this arrangement appeared reasonable, as cheap goods were made available to the Western consumers and the West exported machinery and technology in return. Underneath this brave world, there is a whole lot new story. The accusing finger is pointed at China. The latter exports more to the Europe & US than it imports. This imbalance over years has grown so large that Western economies are chafing under the massive current account deficit. West started to take notice of this situation about 10 years back, but did nothing. Reasons: Chinese sweetened the arrangement by leaving most of the monies earned by exports, behind in the US and European banks. Now this situation has not helped as much it was expected, hence the West is positioning itself to deal with this Chinese trade menace. Recent case in point is the Chinese appetite to dominate the newly opened textile markets in the West. The latter had to do something to curb Chinese appetite. First they forced China to revalue its currency (summer of 2005) and later they held up at ports and warehouses, massive Chinese textile exports. Protracted negotiations with the Chinese resulted in rolling back a bit. Had the Chinese succeeded, many countries in South and South East Asia would be biting dust in the face of Chinese exports. In addition local manufacturers in the West who only manufacture specialized textiles products would have been driven out of business. Hence a major political decision was taken by the European Union (EU) and the US to get tough.

Why China Dominates the West’s Department Store Shelves?

The West is a consumer society. It consumes more than 50% of the World’s output. It has only 15% of the World’s population. Rest of the world sells to the West, whatever they can make in order to procure critically needed items from them. Most developing countries export less and import more. This has resulted in poor getting poorer with no chance of recovery in the near future. There is an exception to this rule i.e. China. It has dominated the expanding export trade in the last 20 years, with newer factories making cheaper goods and with greater penetration of the consumer goods market. The arrangement between the West and the Chinese is very simple. The West supplies the technology & money and Chinese return the favor with cheap manufactured goods. These products are now a staple for the Western consumer. Disappearance of these goods from the stores could result in a consumer backlash. In addition, these goods are preferred in comparison to the locally made products, because these are cheap. Frequent breakdowns are unimportant, as even after re-purchase, one is financially ahead. In this way the consumer is happy. Corporate world is happy because they rake in big profits. This has resulted in Chinese exports zooming to $600 Billion in 2004 from a minuscule $22 Billion in 1980. No other country in the world has had that kind of success. The flip side of this issue is that China has about $150 Billion trade surplus with the US and a similar amount with the EU. This trade surplus has been around for the last 20 years. Initially it was small hence the West ignored as other political advantages outweighed the disadvantages. Only now the disadvantages of trade deficit have come to be recognized. Hence the West is acting.

China’s miracle has been hailed in the West. Economist.com regards it as the miracle of the last one hundred years. In their high praise, they miss the most important point i.e. this miracle in China is made in USA. Without massive monetary aid, in form of FDI and opening up of their markets to the Chinese goods, it would not have been possible to earn a penny let alone billions of dollars. Today, West’s investment in China exceed $560 Billion. This investment builds factories and infrastructure. Chinese supply the labor. These together have created a win-win situation for the Chinese. No other country has been able to duplicate this formula. Indonesia tried it from 1990 to 1998 and bankrupted itself. Other counties in the region have shied away from it. They are not sure whether the West will be as benevolent to them as they are to the Chinese.

Why Chinese Goods are so cheap?

Some of the reasons given for low cost of Chinese products have been well detailed in last five years. First and foremost is the self-imposed Chinese government direction to the companies to operate on low margin. This prevents companies from making money but gives them the advantage to capture a larger market share with low prices. Also, every product exported is a copy of something, which is already in existence in the West, hence once again Chinese avoid costs on product innovation, customer research and making and re-making it until you get it right. The product copy is a direct result of the absence of Intellectual Property Rights (IPR) regulations. Top it all; they have a very subservient labor. It does not ask for too much and it does not go on strike. If businesses were to pay for any of the above and also pay for the money they invest, the price structure of the exported goods will be different. These advantages have made Chinese manufactured goods very cheap. Also the West has put no quotas or restrictions on imports. No dumping laws have been successfully applied and the currency advantages, which China enjoys, are all made in heaven trade benefits for them. China is successfully exploiting them all.

All the above has very short life cycle. Soon the Chinese populace will become shareholders in enterprises and demand return on investment. IPR will be forced down the Chinese throat or import duties will be applied on goods copied without paying royalty. And, a very aggressive military posture by the Chinese could make the West to turn off the money tap. All the foregoing will force the Chinese exports to a more earthly level in next five years or so.

What did the West do during the Recent Bra-War?

January 1, 2005 the global textile quota regime ended. Demise of this system is expected to permit the low cost countries to export textiles to the best of their ability and price. Chinese were waiting in the wings to take advantage of this situation. In the past five years they had invested a portion of the FDI to this affect. As the new-year dawned the Chinese factories were going full speed ahead to dump as much product in the West as possible. The West had fully understood the Chinese game plan and prepared well. As much as $70 million worth of Chinese textiles were held up at the EU ports and warehouses, pending full discussion with the Chinese. Media called it by its acronym - “Bra War”. By June this year, the Chinese relented and a settlement was reached. It limited the growth of Chinese imports to 10% of the previous year until 2008. After that the agreement will be re-negotiated. Had the EU not done what it did, the Chinese textiles would have overwhelmed the EU producers. This would have thrown, thousands out of work. EU had the World Trade Organization ruling on its side. The latter limits textile exports to rise only 7.5%, provided it does not disrupts the local markets. By getting additional 2.5% increase over and above the limit, the Chinese got a good deal. But it also cut the Chinese ambitions to more reasonable level.

Negotiations with US dragged on for months. US were in no mood to hurt the local textiles producers, to favor the Chinese. Hence they prevented Chinese from dumping any textiles into the US. They imposed import restrictions. Finally an agreement was reached on November 8. It is similar to the EU deal. It limits the import of 30 Chinese textile items. Part of the reason to hasten this agreement was to pave the way for US President Bush’s visit to China (following the APEC meeting). It is a far cry from what the Chinese wanted. It gives the Chinese about 10% export increase as compared to 30%, the Chinese wanted. Chinese lobbyists in US were taken by a surprise. They had not expected such a climb down by China. There are other concessions included in the agreement. These include further opening of the Chinese market to the US goods. The West has termed the above as a major climb down by the Chinese in last 15 years.

Rising Raw material Costs & Under Priced Goods from China

A serious economic sputtering in the Chinese economy is about to occur. Driver for this situation is the rising raw material costs. To grab additional market share, the Chinese have priced their products low. These prices have been constant for the past three years. On the other hand, the costs of raw materials, which go into these products, have risen 22%. The latter is a tremendous increase. Any country in this dilemma will face serious economic consequences. Yet the Chinese have uttered not a word about looming bankruptcies of their producers and exporters. They have been compensating the latter with cash subsidies. This fact is coming to light in the West, now. Cash subsidies, will soon result in either dumping charges in the US and EU or import duties applied on certain goods. A China watcher, Donald Cox in his recent TV interview, highlighted this fact. His contention was that either the Chinese products very soon will be pricey or an import duties arbitrarily applied, will soon hurt the business.

Does the above make Chinese Unfair Traders?

The above is very true. Chinese have not lived up to any of the fair trade practices which are a norm elsewhere. They cannot be trusted. They buy less and sell more. They unfairly price their currency and their products. To strike an economic advantage they will even stab their best friend (Soviet Union) in the back, which they did in 1973, during President Nixon’s visit to China. Wherever they see an opening they flood the market with cheap goods. In return they buy next to nothing from others. American pre-occupation of being a sole super power from 1991 onwards and their pre-occupation with Middle East Wars was the opening Chinese were looking for. They flooded US with everything from dollar store items to stocking Wal-Mart and other store shelves with every day usage goods. Had the “Bra-War” confrontation not happened, in five years all the textiles available in the West would have been made in China?

What does Chinese buy in return from the West?

It buys very little. If they buy anything, it is dual technology items. The West is leery to export these items. They fear it may strengthen its military machine. The latter may be used to challenge the West in any future confrontation over Taiwan or anywhere in South East Asia. This danger has limited the West from exporting big-ticket civilian use nuclear power plants, military hardware and other infrastructure items. Dilemma for the western governments is not, what to export to China but how to limit the growing consumer goods appetite of the Western consumers for everything made in China. It is not an easy task, since the Western consumer has started to appreciate inexpensive Chinese products. Still a start has to be made. It can begin by limiting the FDI to China. Additional steps include complete adherence to the Intellectual property Rights and complete examination of cash subsidies offered to the Chinese producers. While these could limit growth of Chinese market influence, other players in South and South East Asia are to be encouraged to step into the void? The latter is very easy to manage. It is simply limiting the FDI to China and sending the balance to cash strapped and low labor cost countries elsewhere in the region.

In the end, Chinese have gained at the expense of the Western economies and other possible trade partners in Asia. It is the unbalanced trade, which is making China prosperous. First time in 25 years the West acted in unison and curtailed the Chinese textile ambitions. This method has to be extended to many other sectors, until the Chinese buy as much as much as they sell.

Hari Sud

Send your views to author

Do you wish to reach our readers? submit your guest column

Copyright and Disclaimer:
The views expressed in this article are the author's own and not of this website. The author is solely responsible for the contents of this article. This website does not represent or endorse the accuracy, completeness or reliability of any opinion, statement, appeal, advice or any other information in the article. Our readers are free to forward this page URL to anyone. This column may NOT be transmitted or distributed by others in any manner whatsoever (other than forwarding or weblisting page URL) without the prior permission from us and the author.

Previous by:
Hari Sud

Pak Policy in Peril after the Quake Novermber 09, 2005

Euro: Reference for World Monetary Transa... November 04, 2005

Are We Getting an Accurate Picture of China? October 22, 2005

Auto Parts Export Potential from India October 15, 2005

India as Petroleum Products Export Hub October 11, 2005

Pak Dream of Oil & Gas Cross Road Dashed September 12, 2005

London Bombings:US Shivers but Recovers August 06, 2005

R&D to Give India Edge in IT, Pharma, BPO February 26, 2005

Welcome Condi Rice, Bye Colin Powell February 15, 2005

FDI, The Life Blood of Future Progress February 10, 2005

Folding Up Pakistan and Balkanizing It January 23, 2005