China Trades Fairly vs. Broken China

♠ Posted by Emmanuel in , at 7/14/2007 12:19:00 AM
I've previously described Chinese Minister of Commerce Bo Xilai as having the most difficult Communist Party job of appeasing China's trade partners as its trade surplus grows by leaps and bounds. Well, poor Bo Xilai (who I once called "Comedy Guy" for his tendency to make pronouncements that are so clearly at variance with trade realities) has been trotted out again to appease China's trade partners--especially the US and EU--who have become more wary of China's trade practices and are keen on imposing all sorts of "protectionist" measures against it. Unfortunately, his most recent regurgitation of the Party line is unlikely to appease any of them From Reuters:
China trades fairly with the rest of the world and is pursuing a balance in its external trade, Commerce Minister Bo Xilai said on Friday.

He said that rather than pursuing big trade surpluses with other countries Beijing is trying to narrow its trade surplus [that's a good one--where's the evidence, though?]

China is under strong pressure from Washington and Brussels to cut its trade surplus, which rose 74 percent last year to a record $177.5 billion and has climbed more than 80 percent in the first six months of 2007 from the same period a year earlier.

"Yes, indeed the trade surplus is here in China, but the real profits and benefits are actually in Europe and the United States," Bo told reporters in Malaysia's administrative capital of Putrajaya after witnessing a loan signing for a Malaysian bridge project.

He said Chinese exporters only make small profits as their products, though of good quality, are inexpensive.

"China has always continued fair business with the rest of the world," Bo said.

"The Chinese government does not pursue any big trade surpluses with other countries. What the Chinese government is pursuing is a balance in our external trade."

China has cut export tax rebates and raised export taxes for high-polluting and energy-intensive products in an effort to trim the trade surplus.

On June 1, Beijing began imposing taxes of between 5 and 10 percent on exports of more than 80 types of steel products.

Next, this article in the current issue of BusinessWeek focuses on the challenges facing China that are generally well-known: independent-minded local governments addled to growth at any cost, environmental woes, rampant piracy, poor corporate governance, dubious product safety, and widespread stock speculation. This article ties into the first one by describing how a system built around export-led development is beginning to cause serious sociopolitical strains at home. It all begins with the Communist Party apparatus...

When the bureaucratic machinery of China rolls into action, it is a sight to behold. A mayor announces a plan to reclaim hundreds of acres from the sea and build a massive industrial complex. A few years later, busy factories and roads stretch as far as the eye can see, families are living in thousands of new apartments, and 10,000 workers have launched Phase Two.

This is the side of China that awes the outside world. The mainland's extraordinary ability to mobilize people and capital to accomplish daunting feats in record time is the reason it has averaged annual growth of 9.5% for three decades. It is why China is an export juggernaut in everything from T-shirts to TVs, has the world's fastest-growing consumer market, and has amassed enough wealth to snap up South American mineral reserves, IBM's (IBM) PC division, and a big stake in private-equity firm Blackstone Group. Will Beijing complete all of the stadiums, expressways, and hotels in time for the 2008 Summer Olympics? Count on it. It's also a decent bet China will achieve its goal of winning the most gold medals.

Why, then, is it so hard for this same government to crack down on exporters of dangerously tainted seafood, toothpaste, and medicine, despite years of warnings by local and foreign experts? The relentless headlines about unsafe products from China reveal a scary truth: Probe even a little into the Chinese economic miracle and glaring administrative failures abound. Product safety is just one aspect of Beijing's inability to enforce needed regulation in everything from manufacturing and the environment to copyrights and the capital markets.

The same Communist Party apparatus so proficient at censoring the Internet can't keep peddlers in the heart of Beijing from selling knockoff Callaway golf clubs and fake iPods, despite solemn promises to Washington since the early 1990s about enforcing intellectual property rights. Shanghai's stock exchange may be one of the world's hottest and may boast a state-of-the-art paperless trading system. But it was a casino when it opened in 1990 with eight listings, and after years of flaccid regulation it's an even bigger casino with 1,118. Beijing proclaims all sorts of green initiatives, yet heavily polluting new factories and coal power plants keep going up. The party has talked for decades about building a social safety net, yet as the working population ages the government isn't investing nearly enough to head off looming crises in health care, education, and pensions. China spends more than Japan on research and development, according to the Organization for Economic Cooperation & Development (OECD), but its record of innovation is underwhelming.

China observers dismiss these flaws as the growing pains of a nation making a breathtakingly fast transition from a command economy to a free market. But now it's becoming clearer that these and other structural problems aren't being addressed. The same policies that have been so successful at boosting the gross domestic product by developing new export industries and public works projects, it turns out, undermine initiatives that might move China's economy to a higher level. In its pursuit of growth at all costs, China skimped on investments needed to provide basic affordable health care and the regulatory machinery that can enforce environmental, safety, and corporate governance regulations nationwide. Solving these shortcomings will require a massive shift of the resources that are now being plowed into capital projects. While Beijing would like to cool the economy, however, it is wary of doing anything that would slow the high growth needed to generate jobs for the millions of youth pouring into the workforce each year, especially with a pivotal leadership conference scheduled this fall. "China's economic development model was based on the simple concept of expansion of production," says economist Chen Xiushan of People's University in Beijing. "This model has reached a critical point."

A more intractable problem is China's power structure itself. Although Beijing holds a monopoly on politics, local Communist Party officials enjoy wide latitude over social and economic affairs. They also have huge professional and financial incentives to spur GDP growth, which they often do by ignoring regulations or lavishing companies with perks. As a result, China has built a bureaucratic machine that at times seems almost impervious to reform. Even if Beijing has the best intentions of fixing problems such as undrinkable water and unbreathable air, it is often thwarted by hundreds of thousands of party officials with vested interests in the current system.

Beijing knows it must change course. China's $1.2 trillion in foreign reserves—the most ever amassed by any country—and soaring trade surplus may seem like signs of strength, but they're actually evidence of an overreliance on exports, weak domestic consumption, and a primitive financial system. And a dearth of social services makes a widening income gap between urban and rural areas politically explosive. Conjuring ancient Confucianism, President Hu Jintao harps repeatedly on the need to attain a "harmonious society," implying that China today is anything but. In March, Premier Wen Jiabao labeled the economy "unstable, unbalanced, uncoordinated, and unsustainable."