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China - playing by the rules?

By Chris Lewis - posted Thursday, 11 February 2010


No wonder China has the spare cash to build impressive infrastructure, such as high-speed trains connecting China’s major cities, while also finding enough resources to fund corrupt governments and poor societies to boost Chinese influence and acquire more raw materials.

So how long are we (Westerners) going to merely accept our relative demise to an authoritarian nation with little regard for political freedom?

Not for much longer I hope.

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As Paul Krugman recently argued, China is indeed utilising a combination of capital controls and intervention to achieve greater economic performance at the expense of the US. While its trade surplus was temporarily depressed by the world trade collapse, he pointed to Blanchard and Milesi-Feretti (of the IMF) projecting that China will achieve a current account surplus of 0.9 per cent of gross world product for 2010-2014. Krugman predicted that this would come at the expense of another 1.4 million US jobs ("Macroeconomic effects of Chinese mercantilism", New York Times, December 31, 2009).

Two years earlier (February 7, 2008), Professor Peter Navarro told the US-China Economic and Security Review Commission that China has a clear historical pattern of strategically deploying its excess foreign reserves to achieve other economic goals other than to maximise its financial return. This is illustrated by China using vast sums of export dollars by issuing bonds to Chinese citizens at high interest rates. China’s central bank then buys US bonds at substantially lower interest rates to boost its exports and create jobs by keeping its yuan pegged and undervalued to the US dollar.

Nevarro also pointed to the Chinese government’s “wide range of WTO violations, including the widespread use of export subsidies and import barriers; rampant counterfeiting and piracy that provide Chinese manufacturers with real cost advantages; and lax health and safety regulations far below international norms that likewise provide production cost advantages”.

More recently, China’s $585 billion stimulus program discriminated against foreign companies bidding on government projects such as the $2 billion of new spending to be spent on its state-owned railway system with the high-speed line from Beijing to Shanghai not allowed to use foreign technology. Further, China in April 2009 also passed a law that bans foreign companies from delivering express mail inside China, despite FedEX (US) and DHL Worldwide Express (Germany) lobbying for years. There was also China’s delayed issuing of third-generation (3G) wireless licenses which has now resulted in Chinese firms moving far ahead of foreign rivals in terms of winning contracts.

So what can the West do?

According to Syetarn Hansakul (Deutsche Bank Research), there is little chance of a full-scale trade war between the US and China. Though it was inevitable that China would retaliate against the US decision to impose emergency tariffs on Chinese-made tyres, Hansakul believed that commonsense would prevail as both sides will realise the expensive cost of a full-blown trade war given that it ran the risk of spreading to other sectors with severe repercussions for global trade, which was projected to contract by around 10 per cent in 2009.

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But I am not sure about how long much more trade conflict can be avoided as US democratic politics and its foreign policy will be influenced by what happens in its economy. If China continues to gain at the US’s expense then a backlash against the Chinese government will occur.

Unequal economic development may be accelerating between China and the West. While Barclays Capital estimated in late 2009 that China’s manufacturing output rose more than 30 per cent since January 2008, it declined 10 per cent in Japan, Europe and the US. In January 2010, it was also noted that unemployment again increased in 39 US states in December, that many cities already had a 30 per cent poverty rate, and that a record 40 million Americans are living on food stamps (Bill Bonner, The Daily Reckoning, Australia, January 27, 2010). It remains to be seen what will happen in Europe given its own financial problems.

There is already considerable sentiment in the US for a more aggressive approach, given one estimate that the true US unemployment rate was now 17.5 per cent and that 2.3 million US manufacturing jobs were lost between 2001 and 2007 to the US-China trade deficit (Thomas J. Gibson, “US needs to challenge China’s protectionist policies”, The American Iron and Steel Institute, November 21, 2009).

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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