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China’s economic model: the antithesis of free trade

By Chris Lewis - posted Friday, 23 September 2011


There should be greater concern in Australia at the rise of authoritarian China, a nation whose policies remain distant from principles associated with political and economic liberalism. This is despite Australia enjoying an $A11 billion trade surplus with China in 2010-11.

From a Western perspective, and one that offers general support to the ideal of freer trade (within reason), it is simply laughable that The Australian’s economic editor Michael Stutchbury could downplay concern about China’s protectionist tendencies simply because Australia is getting 3,4, 5 times higher prices for our coal and iron ore.  

Despite China reducing average tariff protection from over 40 to 9.6 percent between 1993 and 2007, The Economist demonstrates how the Chinese government involves itself in key industry sectors. There are the large companies deemed critical to the functioning of the economy, such as ICBC (banking), China Mobile (telecoms), and China National Petroleum Corp (oil and gas).

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These companies generally have a minority of their equity sold to the public (typically no more than 30 per cent), receive subsidised loans from state-controlled banks, are given land cheaply, usually enjoy a sheltered monopoly or oligopoly, and have management largely influenced by the ministries. Such companies enjoy commercial and regulatory privileges that crowd out private alternatives.

In regard to joint ventures with private (often foreign) companies, such as Shanghai Volkswagen and Xian-Janssen (biomedical), Western companies run the risk of eventually being pushed aside once the Chinese have acquired the knowledge. For example, Shanghai Automotive Industry Corporation gained majority control of General Motors by the end of 2009.

Companies in industries designated as ‘strategic,’ notably anything to do with energy, medical equipment, drugs and technology, also benefit from protection against foreign encroachment, research-and-development subsidies, and subsidised purchases from state customers.

Foreign internet companies have also faced enormous impediments with Baidu, China’s leading internet-search company, profiting ‘from being a conduit for pirated Western entertainment.’ Alibaba, a facilitator of e-commerce, has used Chinese ownership laws to take a large slice of Yahoo!’s valuable stake in its electronic-payment company, Alipay.

China is also making considerable effort to shape international trade regimes according to its interests. While China dispatched a small army of trade lawyers to get to grips with the WTO’s legal framework to combat anti-dumping procedures (sometimes successfully), Beijing still opposes international rules that would liberalise its services sector and government procurement.

With such extensive government help, China has increased its global GDP share from 4 to 9.3 percent between 2000 and 2010, while its proportion of global merchandise exports reached 10.4 percent in 2010.

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There are also many non-economic reasons to be concerned about China.

With the 2010 Nobel Peace Prize awarded to a Chinese dissident, Chinese influence meant that 20 countries declined an invitation to send their ambassador to the ceremony in Oslo. Chinese arms sales in the Middle East have been a threat to Western interests given that missile sales were transferred to terrorist organizations in Iraq and Afghanistan. China seeks to penetrate US government agencies, and has launched cyber security attacks against US agencies and contractors.

China’s aerospace industry provides missile technologies and equipment to rogue regimes such as Iran and North Korea. China often does not use its influence to bring about peaceful resolutions, as illustrated by multiple crises in Sudan, a country that receives considerable arms supplies from China. And China’s own harsh treatment of domestic dissent includes a crackdown of underground Christianity and the imprisonment of hundreds of Tibetan prisoners of conscience (including many monks or nuns).

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About the Author

Chris Lewis 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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