TCS Daily


China's Trade Dilemma

By Rowan Callick - September 13, 2006 12:00 AM

China wants to wear the white hat in global affairs. It is already trying on the hat for size, and feels that it fits.

It has watched the USA don the black hat -- in the views of the opinion leaders in most of Europe and the developing world -- and has consequently started to act in a solicitous rather than censorious way towards the Americans, hoping to look like the wise uncle.

This recipe is being pursued, too, in the currently chaotic world of trade.

China talks the talk in a way calculated to win it the respect of all sides, while pursuing its interests rigorously. Or that's the theory. But in reality, and despite its diplomatic vitality, it may be trying to juggle too much at once.

In the world of international diplomacy, while constantly deploying rhetoric to back multilateralism, it also frequently throws wrenches in the global gears in order to protect the fast growing number of developing world dictatorships whose resources it has tied up.

And in trade, the picture is hardly any clearer. Beijing seems to agree with every important visitor and with every host of a visit by one of its own leaders.

Early in September US Trade Representative Susan Schwab came to Beijing, and after buttering up her hosts by saying "there are few trade relationships more important that that between our two countries," she added that in the World Trade Organization's faltering Doha Round, China appeared to be tolerating countries with different trade interests taking the lead -- in the G20 and G33 developing country blocs, for instance.

She asked if it is really in China's best interest "to have these other countries appearing to speak for China?" For instance, is it ideal "for India and Brazil to be articulating your position? Surely, now is the time for China to play a greater role commensurate with its status as the third largest trading nation."

Commerce Minister Bo Xilai told a foreign business audience in Beijing early in September: "The opening up of China is a sustained process. We have the courage to jump into the sea and river of free competition." However, "older athletes are now getting a bit afraid and falling on the bank of protectionism."

At the same time, Premier Wen Jiabao was telling WTO Director General Pascal Lamy, also in Beijing, that "developed countries should take the lead in making substantial concessions on such key issues as reducing agricultural subsidies and tariffs" where "China has fewer problems than others."

But after Wen urged Lamy to produce an "early resumption" of the Doha talks, the WTO chief warned China in turn that "free trade agreements, whether bilateral or regional, cannot in my view replace the WTO. These may serve China's geopolitical interests or short term commercial interests, but not China's systemic interests in the long run."

China actually feels it's doing pretty well on the trade front, despite the squeezing of its manufacturer's margins in some sectors. Its trade surplus tripled last year to $US 102 billion.

It promotes itself as a link between developed and developing countries, but quietly congratulates itself on avoiding the awkward choices that such a role ultimately prescribes -- leaving India and Brazil on that particular front line.

Zheng Zhihai, secretary general of the China Society for WTO Studies, told Reuters that a final Doha failure "won't have much direct effect on China. We're already the world's number three trade power, and trade in the first half kept growing."

Beijing has indeed met Doha's likely demise with a shrug.

For a country whose government's legitimacy depends crucially on continued rapid growth, and whose growth appears to depend crucially on trade, which now occupies 70 per cent of gross domestic product, this may seem a strange response.

One reason is that trade, under the Hu Jintao leadership team, has lost its gloss. The angst aroused from the USA and European Union over claimed "unfair competition" from China is irritating to the government, especially since about 60 per cent of exports are produced by foreign or partly foreign-owned companies.

The overheating of the economy is being blamed substantially on excessive foreign inputs, which though investment has long been courted by China, is now seen as driving growth beyond acceptable safety limits -- by 10.9 per cent in the first half of the year.

And much of that investment is going to the export sector, attracted by the need to keep cutting costs -- easiest done by employing low wage Chinese workers.

China acceded to the WTO under the previous leadership team of Jiang Zemin and Zhu Rongji, in December 2001. In December, it will complete its accession obligations -- viewed by some in the current administration as onerous.

At the death in Geneva, the six parties that attempted to concoct a last minute cure were the US, the EU, Japan, Australia, Brazil and India. No China.

Trade remains an animating force in the country. But it no longer tops government priorities, and this is being sensed down through the vast administrative edifice.

Susan Schwab said developing countries were in part reluctant to open their markets for fear China, itself still treated as a developing nation at the WTO, would crowd them out.

She is probably right, certainly from a psychological perspective. But Asian Development Bank research claims that full global liberalization would add just 0.2 per cent a year to China's GDP by 2025.

China's government is convinced that where it really needs trade openings, it can engineer them bilaterally -- especially, right now, with Asian, African and Latin American countries where it also seeks secure access to supplies of energy and other resources.

China is being courted by much of the world as a preferential trading partner. It has already signed deals of sorts with Chile, the ten member Association of South East Asian Nations (ASEAN), Thailand (restricted essentially to agriculture), and with Hong Kong and Macau (but these have been FTA Lite deals).

It is talking with Australia, New Zealand, Singapore, South Africa and the countries of the Gulf Cooperation Council, which provide more than 40 per cent of China's oil, and is exploring the possibility of deals with Japan, South Korea and India.

China's neighbors send it the components they make for assembly, and most of the resulting products are then exported. It has thus become the hub of East Asia's economy. If China can cut special deals with these partners, it expects to end up ahead of the game.

Japan's belated answer is to press harder for a free trade area that covers all the countries of the East Asia Summit -- a process that began at the end of 2005: Australia, China, India, Japan, New Zealand, South Korea and ASEAN.

The prospect of such a vast trade bloc emerging, would certainly make the North American Free Trade Agreement countries and the EU sit up.

And China would naturally play a leading part in such a group -- in Japan's absence, clearly the leading part. But the presence of its chief political competitor Japan -- whose economy China would also see itself emulating in the not too distant future -- would be seen by Beijing as muddying the water.

China is reluctant to give the USA any encouragement on the trade front either. A recent "China Daily" commentary by trade academic Miao Yingchun of Wuhan University complained that America is stepping up its cooperation with leading trading partners, especially the EU and Japan, on their stances towards China.

He wrote: "US trade policy is interfering more deeply into China's internal affairs... Transformational diplomacy is actually enhanced interference... supporting internal reform."

Shocking. For people like Miao, all trade reform appears to equate to unacceptable political pressure.

China is not too fussed either way. A Lazarus-like Doha resurrection would help to lever open some new markets. Final burial would leave it free to cherry-pick the fresh preferential deals it wants, and diplomatically filibuster the rest.

The Beijing hierarchy, especially determined to insulate the country's fraught farmers from further cause for resentment -- and, in places, riot -- will take a lot of convincing to open up agricultural markets any wider. And it wants to keep the other "strategic" sectors, including banking, in state hands.

The trade debate inside China is not over. But progress anywhere, and especially there these days, is harder to come by.

Rowan Callick is the Beijing based China Correspondent of The Australian newspaper.

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