China’s economic model: the antithesis of free trade

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).

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.

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).

So how long can Western nations (including Australia) afford to accept the rise of authoritarian China, despite the US and EU still representing about 49 per cent of global GDP in 2010 (IMF)? Perhaps not long. While certain Australian commentators jump for joy at record commodity prices, a more protectionist response stance towards China is already emerging elsewhere.  

In June 2011, the European Union (following the US lead last year) imposed anti-subsidy tariffs against China for the first time on the imports of paper with levies as high as 12 percent, and five-year levies up to 35 percent to fight below-cost (or dumped) imports of Chinese paper. This followed Chinese coated fine paper increasing its share of the EU market from 1 to 4 percent between 2006 and 2009. Europe already had imposed anti-dumping duties on many Chinese goods ranging from chemicals and steel pipes to bicycles and ironing boards.

It is simply not enough to argue that Western nations should merely seek to work with China ‘on a broad range of issues’ that can help to further open up China “and steer its social and economic development in a direction that’s desirable for both sides.”

China will long make decisions that serve its national interest with little regard to Western hopes and ideals. On August 4, Zhou Xiaochuan, President of the People’s Bank of China, noted that China’s central bank will continue to diversify its foreign currency investments and strengthen risk management in response to the US increase of debt ceiling. Further, it was announced that aircraft manufacturing was now a State strategic industry, thus obtaining long-term and stable support in the fields of legislation, industrial policy, and financial input.

On September 14, China’s Premier Wen Jiabo stated that developed nations should cut deficits and create jobs rather than relying on China to bail out the world economy. While he indicated that China can offer ‘a helping hand’ through investment, Wen made a number of requests that included: The EU and US opening their markets to Chinese companies; that the US maintains fiscal and financial stability given that China held $3.2 trillion of foreign exchange reserves; and that China be given full market economy status before the 2016 deadline set by the WTO, an aspect that would help Chinese exporters defend themselves against investigations that they are selling goods at below cost.

Based on present policy trends, China’s growing prowess has no bounds. How can Western societies compete? While even the US spent 16.2 percent of GDP in 2007 on public social expenditure, China invested just 5.2 percent of its GDP in 2008.  

The truth is that China’s government can do just about anything in terms of policy and resource direction. In January 2011, it promoted a pilot program to allow residents of Wenzhou, where many of China’s rich live, to invest directly overseas (up to $200 million a year), although investment in a single project could not exceed $3 million. However, residents were not permitted to invest in overseas property or equities markets under the trial.

While China has long ceased to be the cheapest place to manufacture in many sectors as labour costs have risen 20 percent in the past 10 years, the Chinese government is still committed to attracting foreign investment by constantly upgrading its infrastructure to improve logistics and extending Special Economic Zones.

In July 2011, it was reported that US businesses were now looking to China’s western hinterlands as a future source of growth and profits, with Ford, Wal-Mart and other companies planning major investment and expansions in cities such as Wuhan, Chengdu and Chongqing. With Beijing promoting western China as a place to invest given its vast natural resources, huge population centres and a growing network of gleaming new airports and highways are emerging. Ford (with its local joint venture partner) has already built two plants in Chongqing with plans for three more.

For now, Western nations remain economically powerful. While China has hintedthat it will slowly diversify away from US assets, it has nowhere to go given that “gold, the Euro, Japanese bonds and other options don’t have the liquidity of Treasury markets and are still riskier than dollar assets.”

In June 2011, the Asia Competitiveness Institute also found that US economic growth was still most important to economic growth in the region (except Taiwan and Hong Kong). For every percentage point increase of US economic growth, Singapore’s economy grew by 1.006 percent compared to 0.748 in response to Chinese growth (a figure similar to Europe).

However, US influence on Singapore had waned from 1.377 percentage point in the 1980s, while China’s influence had increased dramatically from 0.165 percentage a decade ago.

Western societies have a choice. They can simply pursue more of the same policy trends and allow the growing influence of China to continue with all of its political and economic repercussions, or they can do something about it (notwithstanding our own problems with unsustainable levels of public and/or private debt).   

Even Australia, perhaps benefiting most from China, has to ask whether it is prepared to further reduce the diversity of its economy by relying even more on an authoritarian and mercantile nation, which barely improved its corruption perception score from 3.1 to 3.5 (10 being perfect) between 2000 and 2010, according to Transparency International.  

We know that China’s rise can have an enormous impact on other nations in terms of their development. A 2011 Asia Competitiveness Institute report indicates that Indonesia had been on a path of rapid industrialisation in the 1980s and early 1990s, yet the export share of goods such as textiles and footwear declined from 58.3 to 40.5 percent between 2000 and 2010 after being 4 percent in 1980. This was because non-oil primary exports such as copper, timber and coffee almost doubled from 15.8 percent in 2000 to 29.1 percent in 2010 as Indonesia focused on exporting the raw materials China needed.

In my opinion, it is a mistake to imply that all is okay, just because Australia now receives record prices for its commodities. Quite simply, the evidence suggests that Western nations cannot allow mercantile China to maintain its various protectionist measures forever as the authoritarian nation does what it takes to sustain and/or expand its economic and political might around the world.