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China, decrying protectionism, is itself vulnerable
February 25, 2009 / 6:14 PM / 9 years ago

China, decrying protectionism, is itself vulnerable

By Jason Subler - Analysis

BEIJING (Reuters) - China might not have engaged in the kind of overt protectionism of the “Buy American” program recently, but it has enough barriers to free trade and investment in place to leave itself open to such charges down the road.

Beijing has pulled out all the stops in recent weeks to pillory the United States for the local content requirement of its stimulus package, with commentaries in state media calling protectionism a “poison” and a parade of officials pledging China’s commitment to free and open trade.

That may have helped reassure China’s trading partners that it is not planning to throw up fresh tariff barriers or otherwise block imports, but its own web of often opaque and subtle blocks on foreigners’ participation in the economy hardly leaves it beyond reproach, analysts say.

Thus, while Beijing may be enjoying something of a hiatus from criticism over everything from its lax protection of intellectual property rights to the value of its currency, it can probably count on fresh attacks if it does not address the fundamental question of imbalances and ensuing trade surpluses.

“China doesn’t have many tools to encourage its consumers to buy more to absorb the contraction abroad. That will lead to a transition period which is going to be very difficult, and that, I‘m afraid, will be plagued by protectionism against it,” said Joerg Wuttke, president of the European Union Chamber of Commerce in China.

“They don’t have the moral high ground, that’s for sure.”

First, take government procurement.

Despite Beijing’s vows that it will not implement “Buy Chinese” provisions as part of its 4 trillion yuan ($585 billion) stimulus package to stave off a deeper economic downturn, it already has a strong local content policy for many products, Western business groups and diplomats say.

Those restrictions are not always explicit, as in the case of “Buy American.”

But in practice, the overall effect of its often obtuse bidding processes, technical standards and other regulations is that foreigners are regularly at a disadvantage when bidding for government contracts or tenders.

“The reason that China doesn’t have the option of imposing ‘Buy China’ rules is that it already has them in place,” said Arthur Kroeber of the Beijing research firm Dragonomics.


The EU Chamber cites the example of a Western company whose joint venture (JV) bid for the right to run a network of petrol stations in one city but saw the tender handed to a state-owned competitor that it said had offered a much less attractive bid.

Provincial officials also routinely favor companies from their own tax bases, a trend that appears to have picked up in recent months as local governments look to prop up their own economies.

Beyond government procurement, Beijing maintains strict controls over foreign firms’ participation in the economy, barring them from strategic sectors such as some areas of resource extraction and restricting them in many others.

For instance, foreign auto makers may only produce via JVs, and may have a maximum of four JVs in the country -- two for passenger cars and two for commercial vehicles.

Onerous technology transfer requirements in sectors such as trains, together with evidence Chinese firms are not keeping the technology in the country as agreed but are exporting it to places such as Africa, are another deterrent, business groups say.

“We just want to have a decent chance, level playing conditions in order to bid for projects,” Wuttke said.


So what can Beijing expect?

Western companies have long been pushing for greater access in a range of sectors, from insurance to logistics. Stagnating growth in their home markets could give them, and politicians back home, an incentive to step up those efforts.

“One area we think is particularly important is service market access. For the U.S. in particular it’s an area of strength ... and yet it’s a relatively closed sector here,” said Robert Poole, vice president for the China operations of the U.S.-China Business Council.

While Beijing has avoided antagonistic policies like those of India, which has temporarily banned imports of Chinese toys and said it would slap safeguard duties on Chinese aluminum imports, some of its own steps could hand ammunition to critics abroad.

Its stimulus spending has focused mainly on boosting domestic demand through infrastructure and other investments. However, authorities have also increased export tax rebates for products ranging from textiles to machinery as part of plans to support nearly a dozen important industries.

That kind of overt support for exports, at a time when the U.S. trade deficit with China hit a record $266.3 billion in 2008, could grate on critics abroad and potentially bring its currency policy back into closer focus.

“The yuan is an issue, and then the export tax rebates,” said Sherman Chan, an economist with Moody’s in Sydney.

Beijing has kept the yuan in a tight range of around 6.84 per dollar over the last seven months, having let it rise 19 percent since revaluation in 2005.

“People think that the yuan has been artificially kept at a very low rate in order to sustain China’s export competitiveness,” she said.


Beijing’s susceptibility to charges of subsidizing its industry may explain in part why it has gone on the offensive, including by sending a buying mission to Europe on Tuesday.

But such efforts, which some analysts see as little more than public relations exercises, are unlikely to do much to stave off future complaints, potentially ranging from anti-dumping investigations to cases at the World Trade Organization (WTO).

BusinessEurope, a lobby group, said China’s curbs on raw materials exports may violate WTO rules.

At the root of the problem is the overcapacity China has built up in many industries as part of its investment- and export-led growth model, and whether it can boost domestic spending and reduce excess capacity quickly enough to close the gap now that overseas demand is plummeting.

While some of the specific industry support plans, notably that for autos, focus on consolidation, there is evidence that some heavy industrial companies are receiving special injections of loans to keep them afloat, said Kroeber of Dragonomics.

“That does mean that (they) are sustaining excess capacity and increasing the likelihood that China will continue to export steel and all of this stuff,” Kroeber said.

“So that is a problem,” he said.

Editing by Neil Fullick

Our Standards:The Thomson Reuters Trust Principles.
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