Thursday, September 30, 2010

China & US clash over currency issues

Yesterday the US House of Representatives backed legislation could pave the way for trade sanctions on China. The Democrat-backed bill passed by 348 to 79, and targets countries that hold down the value of their currencies. The story featured highly on Bloomberg and financial channels but most news organisations were yesterday focused on other things. The plight of Labour MP David Miliband, following his failure to secure the party leadership over his brother that dominated the schedule. A possible terror threat and a virus threat also topped the news agenda along with Bill Clinton's visit to Northern Ireland and a national strike in Spain which culminated in clashes with police.

However the importance of the United States move cannot be underestimated. The US accuses China of keeping its currency artificially low against the dollar in order to give its exports an unfair price advantage. China has begun recording increasingly larger trade surpluses again since the global recession ended last year.The US has similarly slipped back into trade deficits, despite weak growth and unemployment reaching nearly 10%.

"We cannot rely on the Chinese government to voluntarily do the right thing," a Republican sponsor of the bill, Tim Murphy said. "The expiration date for appeasement has long since passed." But the bill is not universally popular in the US and has been opposed by the US Chamber of Commerce, among others, who say it will do more harm than good to job creation and growth. Needless to say it is unpopular amongst Chinese politicians too. China has criticised any move by the US to impose increased tariffs calling it protectionist [CNN / BBC].

The World Trade Organisation this week lifted a ban on Chinese poultry exports to the US which it said was inconsistent with WTO rules. Yao Jian, spokesman of China's Ministry of Commerce (MOC), said that Chinese poultry products were safe and called for the US to conduct fair assessments and tests on the meat. The spokesman insisted that China has always maintained that WTO members should conscientiously abide by WTO rules and fight trade protectionism [CRI / WSJ].

But such claims are disputed by many observers even amongst those who oppose the bill. In addition many fear the legislation, if made law, will only make things worse and not resolve issues concerning China's currency. A former US trade representative, professor University of Maryland and strategic advisor to Mayor Brown, Susan Schwab, says the bill is "not the way to go about solving it" and that there could be a "boomerang effect". Speaking to Bloomberg she said that the bill also detracts from other issues the US has with China such as intellectual property rights, indigenous innovation and market access. There is a very real issue of China keeping the Renminbi low, Schwab says, but it could escalate tensions [Video].

Such tensions have already been raised with China issuing strong statements following the vote. "Using the yuan exchange rate issue to execute protectionism toward China will only severely damage China-U.S. trade and economic ties," Chinese Foreign Ministry spokeswoman Jiang Yu said. However she did not reveal what action China might take if increased tariffs were imposed. Meanwhile the passing of the bill has already had an effect with the yuan weakening against the dollar on Wednesday.

China may point the finger at the US and shout about protectionism, but China is one of the most protectionist major economies around, so argues Joerg Wuttke, the head of the European Chamber of Commerce in China. "There's a lot of rhetoric about protectionism from the Chinese at the moment because they are very very afraid. But they have very little leverage when it comes to talking about trade. From our perspective they buy very little from Europe," he said. 

No European company has ever been allowed to buy a major Chinese company, and a $2.5 billion (£1.75 billion) bid by Coca Cola for Huiyuan, the Chinese juice maker, was stalled by Beijing. In 2006, Chinese trade barriers cost European companies £19 billion of lost business. "German companies have tried to buy steel mills and ball-bearing factories but have failed. I hope the situation changes, but there are lots of national interests in China and I cannot see any signals of change yet," Wuttke says [Telegraph / Straits Times].

A walk around department stores and supermarkets in China reveals the clear battle faced by foreign countries. Most items on the shelves are domestically produced and where imported products are available they are very expensive. New Zealand butter is twice the price than that seen on British supermarket shelves despite having travelled less than a quarter the distance. Where foreign brands are cheaper, it is because they are manufactured within China under licence. Marlboro cigarettes, Coca Cola and McDonalds are all relatively inexpensive, but these are exceptions to the rule. And even McDonalds are forced to use Australian beef due to US beef import bans.

Meanwhile in western stores Chinese made products fill the shelves. Most clothing, toys and many electronic goods bear the made in China label, and are comparatively inexpensive. But cheap imports has come at a cost to western manufacturing and resulted in high unemployment []. 

The WTO requires countries to declare all national, state and local subsidies every two years, so that if one country's exports surge suspiciously, other countries' trade officials can easily check to see if that product is being subsidised. However, China has virtually ignored the requirement since joining the WTO. This is in direct contrast to China's insistence that WTO members should conscientiously abide by WTO rules and fight trade protectionism as iterated by China's Ministry of Commerce (MOC) spokeswoman Yao Jian this week [NYT].

Another issue which is also cited as creating unfair competition is China's stance on Internet censorship. Speaking at the tail-end of a five-day trip to China in May, European Commission Vice President Neelie Kroes linked the matter to achieving a competitive environment for European companies and raised the censorship issue in a meeting with Chinese Vice Premier Zhang Dejiang in Beijing. "It is one of those issues that needs to be tackled within the WTO," she told reporters in Shanghai. "I am pushing wherever I can just to get European enterprises on a level playing field in China and the other way around."

China's government strictly monitors Internet content within the country and information deemed sensitive by the ruling Communist Party is blocked. United States Trade Representative Ron Kirk said in March that the administration of President Barack Obama was weighing the merits of taking China's censorship of Google to the WTO as an unfair barrier to trade. It is something that tech companies would welcome. Using censorship "in a manner that favours domestic Internet companies goes against basic international trade principles," Google's Nicole Wong told lawmakers earlier this year [China Digital Times / Business Week / Reuters].

Google is losing out from advertising revenue from YouTube and other services in China because the video hosting site is blocked. Yet Youku operates without hindrance, though of course it self-censors content. Facebook, Twitter and other social networking sites also suffer from similar restrictions, while domestic services operate even if in a somewhat restricted manner. As well as potential advertising revenue being lost by these websites, it poses issues for companies entering China. Video hosting on a company website has to be redesigned for the Chinese market. Information feeds using Twitter and Facebook will not penetrate the Chinese market and different strategies would need to be employed. This all comes at extra cost. For large companies, this is not a major hurdle. But for smaller firms it can be daunting. In the west a company can easily set up a website using the free tools that Google and others make available. Many may not even realise their site is unavailable in China. For example when Google's website hosting service Googlepages moved to Google Sites, few users would have realised their pages would have become inaccessible in mainland China. Google's tools are available in many languages, making it easy to set up. Even where these tools are available in China, the user can only navigate in the Chinese language. This makes it doubly difficult for smaller business initiatives.

Take which is powered by Google Sites and specialises in business development in the North American market. It is also attempting to make inroads into China. But as Daniel Pilon explains, his company has also come up against the great firewall of China. "My clients in China cannot access the site even if they enter the URL," he says. "So, if I want to have my site visible in China I will have to move away from Google and do it with another software such as Intuit!" The Intuit hosted pages are currently accessible in China, but after a month's free trial it costs $4.99 per month. A small cost perhaps, but there is no guarantee that the service, like so many others, would not become blocked by Chinese censors in the future.

China joined the WTO in November 2001 and some members did voice fears about Beijing's ability to stand by its pledges. But US Trade Representative Robert Zoellick addressed the plenary session before the vote saying, "Their participation in the WTO will be a boost for us and them." Chinese officials also dismissed such concerns. "China's market is open to the outside. As long as the market is open to the outside, the more economic growth we have and the better for the world," Beijing's top trade negotiator Long Yongtu told reporters [CNN].

But China can often be seen flouting its obligations. In 2007 China stopped granting permission for American films to be shown in its cinemas in an apparent trade dispute with the United

States, according to several Hollywood executives and United States government officials [NYT]. China has repeatedly promised to co-operate in the global fight against counterfeit goods, in response to a highly critical ruling from the World Trade Organization. But intellectual property rights are still widely flouted and ignored. Whether its the famous Silk Market in Beijing which sells a wide range of fake goods or DVD stores selling counterfeit films, authorities rarely act. And some businesses are far from hidden. In Kunming in China's southern Yunnan province a shop openly sells counterfeit DVDs. Complete box sets of Star Trek containing 48 discs and bringing together 7 series of the popular science fiction TV show may be bought for as little as $40, a fifth the price of a legitimate copy. Latest Hollywood films are also on sale for a little over a dollar. The shop is far from unusual, but for the fact it is located directly next door to a police station. 

In the coming days China celebrates 61 years since the founding of modern China. However the strike across China's bows from the US House of Representatives may dampen the festivities, at least amongst those in China's politburo. China often talks of creating a harmonious society, a reason often cited as to why the Internet is so tightly controlled, filtering out undesirable content such as pornography, violence and dissent. 

According to the People's Daily, the mouthpiece of the Chinese Communist Party, the main characteristics of a harmonious society will put people first and make all social activities beneficial to people's subsistence, enjoyment and development. "In a harmonious society, the political environment is stable, the economy is prosperous, people live in peace and work in comfort and social welfare improves." The question is whether such goals come at the cost of creating a less than harmonious world.

tvnewswatch, London, UK

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