By Philip Sutter, GTM Governance, Global
Global business experts are aware of China’s historical impact on trade, especially its comeback over the past thirty years. In the coming decades, China will continue to emerge. Given all the talk in the media about international trade, it’s a good time to review the trade-related issues that confront China, and how China may present opportunities and challenges to global traders in the coming years.
By the numbers alone, China is formidable. Its population is nearly 1.4 billion. China’s economic growth outpaces the rest of the world at 6.7%. The gross domestic product (GDP) is $10.9 trillion trailing only the U.S. at $17.9 trillion. Its economy is almost as large as that of all of Europe. By 2030, China’s economy is forecasted to be number one, a position it previously held in 1820.1
China’s gains have been led by being an export-based economy providing low-cost, labor-intensive manufactured goods. China’s economy is reaching a maturation point where it must continue to evolve, not as much by investment, but by innovation as other modern economies do.
A non-market economy
Looking back, post-World War II China was a very insular communist economic regime. In the mid-1980s, China’s “Open Door Policy” permitted some foreign investment. It also let China take steps to moderate the state-control, move toward a market economy and allow some private ownership. However, turmoil prevailed through these years exemplified by the deadly crackdown on the Tiananmen Square protests in 1989.
Since then, a major change that led China into the world economic fraternity was its accession to the World Trade Organization (WTO) in December of 2001. Still, China’s status in the WTO remains controversial. For example, there are 38 WTO dispute cases open against China over such matters as the violation of intellectual property rights, discriminatory quotas, unfair government subsidies, export duties on raw materials, and restrictive regulations.
One of the biggest issues with China that keeps it from equal footing with other WTO member countries is over its designation as a non-market economy (NME). It is so designated, because the economy is principally state-run and directed by China’s communist party rather than by market forces. As an NME, the U.S. and other WTO countries may adjust anti-dumping and countervailing duties on Chinese imports to account for market costs.2 The U.S. has 116 anti-dumping and 41 countervailing duty cases open against China. The cases involve a variety of raw materials and manufactured products such as chemicals, steel, aluminum, paper, etc.
Having been a member of the WTO for more than fifteen years, China is initiating a WTO dispute to eliminate the NME label.3 However, according to the U.S. Department of Commerce, several issues will vie against China in this quest, including: its currency manipulation policies, labor bargaining rights, limitations on foreign investment, government ownership of production, centralized price fixing, and lack of transparent trading policies.4 China has some leverage with the U.S. as it is a holder of about $1.1 trillion of U.S. debt. Selling off this debt could adversely affect U.S. economic growth.5
During its economic assent, China was frequently cited for using forced labor via the “Laogai” System (re-education through labor) camps in mines, factories, and farms to produce consumer and manufactured goods. In 2013, China pledged to abolish this practice, however, human rights groups maintain it still persists.6 The Trade Facilitation and Trade Enforcement Act of 2015 now gives U.S. Customs and Border Protection (CBP) greater power to exclude these goods from U.S. importation. CBP uses forced labor lists published by the U.S. Department of Labor to issue withhold release orders to detain the goods. If found to be in violation, the goods are subject to seizure.7
Free trade: ASEAN and RCEP
China signed a free trade agreement with the ten country Association of Southeast Asia Nations (ASEAN) that came into force on January 1, 2010. It is the largest global free trade agreement in terms of population, and third largest in GDP moving China ahead of the U.S. in ASEAN trade. At present, China is seeking to expand this agreement with the ASEAN to include the other five large Asian countries (Japan, India, Korea, Australia, and New Zealand) by negotiating the Regional Comprehensive Economic Partnership (RCEP). If successful, the RCEP will represent an unprecedented global trading bloc and bring China on par both economically and politically with these other nations. It will ensure that China continues to counter the U.S. in Asian trade leadership.8 There’s a strong push to get RCEP signed in 2017.
Big plans, and considerable tension
Harkening back to ancient times, China is in the midst of funding a massive infrastructure project called Silk Road. The original Silk Road began around 200 BCE as the trading routes to support the silk commerce from China to the Mediterranean Sea. It played a major role in the development of those regions. The modern Silk Road also known as “One Belt One Road” is an improvement venture for connectivity between China, Eurasia, Africa, and Oceania. It encompasses about sixty countries and investment of up to $8 trillion for both roads, high speed rail, sea ports, and other infrastructure.
Adding to the mix is China’s intention to expand its geopolitical influence in the Asia-Pacific region. This presents itself in the matter of Taiwan and the South China Sea, both are potential military flash points that threaten trade and security in the region.
Tension has existed between China and Taiwan since the Chinese democratic government fled the mainland to Taiwan during the Chinese communist revolution of 1949. The “1992 Consensus” between the two concluded that there is only “One China”, however, the disagreement prevails as to how it should be governed. Over 60% of the population identifies solely as Taiwanese. China meanwhile continues to resist any notion of a separate Taiwan.9
Governance over islands in the South China Sea known, as the Spratlys, has been long disputed by neighboring countries. Philippines, Taiwan, Malaysia, and Brunei lay claim to some portion of the area versus the feared Chinese hegemony.10 In recent years, China has demonstrated the Spratlys’ strategic military value with a large naval presence. China is resisting negotiations with the others who are seeking to use ASEAN to broker a resolution.11
Of greater concern to the West and its neighbors is China’s military relationship with so-called rogue nations. In November of 2016, China signed a Military Cooperation Agreement with Iran to include joint exercises and training. In the past China has supplied Iran with missiles and other hardware.12 China has also supplied military aid to Syria13 and Venezuela14. Meanwhile, North Korea sees China as its closest neighbor, ally, and largest trading partner. China has taken no action to deter North Korea’s nuclear and ballistic missile tests.15
Risk and reward abound for international trading firms and countries when it comes to positioning China into their trade strategies. A successful plan must account for, and take advantage of, the opportunity to deal with one of the worlds’ largest and growing economies while recognizing the potential for adverse and volatile change either from within or outside of China.