Why the US and EU are demanding that China open up its markets
Happenings in China always make the headlines around the globe. Two recent events, one in the political arena and the other in the economic policy domain, will have profound, long-term impacts not only in China but also geopolitically. The first event happened in Beijing. President Xi Jinping secured a lifetime job by having the National People's Congress endorse his desire to continue ruling beyond the two-term limit set by the Constitution. The Congress thus waved him in to rule as the "President for Life", a rare event in the 21st century. The second event happened a few months prior to that, in November last year, when the United States formally informed the World Trade Organization (WTO) office in Geneva that it opposes granting China market economy status, and the implication of the US stance could be significant.
China is the world's second largest economy. During the 2016 presidential elections, candidate Donald Trump promised to bring China to play by the book. The US government as well as the European Union have for a long time drawn global attention to China's trade and regulatory practices. China often sells products overseas at a price that is below the cost of production, which could be counted as a generous move. However, the practice, known as "dumping", has led many countries to cry foul, and has driven some industries in the US and EU out of business. A few years ago, EU imposed tariffs on solar panels and steel imports from China, but the US was reluctant for a while hoping to leverage China's influence with North Korea. It now needs to be seen whether the recently announced tariffs on US imports of steel and aluminium will be followed by a period of cooling off or further escalation of tension.
EU had already imposed import duties of between 13.2 percent and 73.7 percent on steel imports from China. Some pro-EU politicians in the UK blamed the Brexit vote on Britain's inability to impose tariffs on Chinese steel products in order to save British jobs in the steel industry. When EU finally imposed a tariff in October 2016, it was considered by some in Britain as "too little, too late".
Thus, in 2018, China's growth engine—based on trade, regulatory controls, and "China First" approach—faces some strong headwinds, and these are coming not only from EU and US, but also from its trading partners in Asia and Africa. In another development, last week the Bank of International Settlement (BIS) warned that "financial bust may be looming" in China given the slow progress in reducing its debt to GDP ratio.
China-watchers note that China is in a state of transition. But, not always in a good way. "The partially institutionalised political norms of China's reform era are buckling. Beijing is steadily sliding away from collective authoritarian rule by Chinese Communist Party (CCP) elite towards a more personalised variant wielded by President Xi Jinping alone," notes one analyst. China also saw its growth rate drop to 6.5 percent. Its provincial governors last year admitted that they had "manipulated data" frequently in the past. The local leaders were given GDP growth targets, and this led to a situation where some of the provinces were fabricating economic growth numbers to comply with the central authorities. There is scepticism now among China-watchers about whether China can sustain the earlier-seen growth momentum.
On the positive side, President Xi Jinping's return for his bid to consolidate power has offered to shake up the state apparatus, and the patronage system by tackling corruption, bureaucratic inertia, and risky lending practices; he has indicated in the past that he intends to revamp the bloated state sector and open its markets wider for foreign capital. Mao Shengyong, a government spokesperson, said that China would work with the US on nurturing global economic growth and addressing trade disputes. "The trade imbalances between China and the US are a result of market competition."
Even before it countered China with a tit-for-tat round of tariffs, the western world has been very wary of China. Financial Times (FT) of London ran a story critical of China's economic policy entitled "China's protectionism comes home to roost" on January 3, 2018. FT warned China about its protectionist policy and singled out the information technology and finance sectors, and sharply criticised the country for creating the "great firewall of China" which constitutes the world's biggest non-tariff trade barrier.
According to an Organisation for Economic Co-operation and Development report measuring foreign investment restrictiveness, China ranked as the second most closed economy out of 58 surveyed and is significantly behind other major emerging economies: Brazil, India, Mexico, and South Africa.
Similarly, a survey conducted by the American Chamber of Commerce in China, in partnership with Bain & Company, reported that eight in 10 foreign companies feel less welcome than in the past, and more than 60 percent have little or no confidence that China is committed to opening its markets further in the next three years. "Globalization doesn't just mean exporting and buying up foreign assets, but also making sure that Chinese workers, private companies, farmers and consumers benefit from dynamic, open markets for goods and services," said William Zarit, Chairman of the American Chamber of Commerce in China.
David Dollar, a Brookings Institution senior fellow and former US Treasury emissary to China from 2009 to 2013, says Beijing is partially opening manufacturing, but car manufacturers such as Ford and General Motors have to operate through "awkward" 50-50 joint ventures with local partners. "Most of the modern services sectors such as finance, telecommunications, media, and logistics are almost completely closed to foreign investment," Dollar says, adding the US needs to play "responsible hardball" against China.
In the past, US tech companies have spent billions of dollars trying to break into the Chinese consumer market, but have been blocked, forced into joint ventures, faced censorship, or ordered to transfer secret technology to China. Now the US has started to push back, warning countries of the developing world to "carefully consider the terms of those agreements (with China) and not forfeit their sovereignty," the former US Secretary of State Rex Tillerson said. African business leaders are also being critical of Chinese practices.
Finally, China has not been successful in persuading either the US or the EU that it is, in fact, a "market economy", doing almost nothing to ensure EU or US companies actually gain market access to China without endless conditions and habitual delays. "China continually promises open market access for EU and US exporters, but then frustrates them in practice, demands investment takes place through joint ventures, often with SOEs, and routinely insists upon technology transfer," according to an article by Dr Douglas Bullock in Forbes magazine.
China promised to be a market economy in 15 years in the WTO accession agreement. Under US law, a country is considered a non-market economy (NME) if the administering authority determines that the foreign country's economy does not operate on market principles of cost or pricing structures, so that sales in the foreign country do not reflect the fair value of the merchandise. If WTO adjudicates in favour of the US, the outcome could spell disaster for some of China's exports.
Dr Abdullah Shibli is an economist and a Senior Research Fellow at the International Sustainable Development Institute (ISDI), a think tank based in Boston, USA.
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