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Economix Blog: The Limits of China’s Market Model

March 27, 2013 by Leave a Comment

James McGregor, author of Cathy McGregor James McGregor, author of “No Ancient Wisdom, No Followers.”

Book Chat

Talking with authors about their work.

In his book “No Ancient Wisdom, No Followers,” the author James McGregor delivers a sharp critique of China’s recent development path, and what he calls “authoritarian capitalism.”

In Mr. McGregor’s China, the government plays too large a role in the economy, and big state-owned entities dominate because of government subsidies and preferential treatment. Private entrepreneurs and multinational corporations are at a distinct disadvantage, one that he argues is likely to damage China’s prospects in the long run. With China determined to create its own global brands, he says, the government is putting rules and regulations in place that seem increasingly protectionist.

A former reporter for The Wall Street Journal who has spent more than 20 years in China, Mr. McGregor now works as a senior counselor for APCO Worldwide, a global communications consultancy. His book, in paperback and e-book format, was published late last year. He talked about it in an e-mail interview, which has been edited for style.

How did you come to write this book?

My interest in this book was fueled by the 10th anniversary of China’s joining the World Trade Organization and seeing China heading in a much different direction than had been anticipated. Instead of pursuing further market reforms and expanding the role of private enterprise, China had turned back to state-owned enterprise and begun strong-arming multinationals to hand over their most advanced technology to their state-owned business partners. I wanted to dig deeper into this situation while stepping back to look at the overall picture of where China had come from and where the country is headed as a political-economic entity.

One interesting aspect of your book is the description of how huge, powerful state-owned companies in China benefit from state subsidies, low-interest loans and favorable policies that help them maintain dominance, and yet don’t really result in capable, well-managed and innovative companies. Doesn’t this mean that China won’t be able to compete in the global marketplace over the long run and that multinationals — operating more on their wits — will always be able to beat out the Chinese competitors, in the global marketplace, at least?

In the long run the United States doesn’t need to worry about Chinese state enterprise taking over the world. They are simply too political and inefficient. But as these state-owned enterprises go out into the world fueled by huge subsidies and favorable policies, they will be able to destroy quite a few good companies that are simply efficient businesses. Look at what we’ve seen with solar and wind companies in the United States and Europe already.

If the situation is so troubling, why do global brands seem to be scrambling to get into China or expand their presence here?

It is a different story for different sectors. Technology and advanced industrial companies are having an ever more difficult in China. China’s long-term goal is to learn from them, and then replace them with Chinese technology created by absorbing and re-innovating. But many retailers and consumer goods companies are doing well. China needs to expand consumption to reduce dependence on exports and government infrastructure spending for growth. Getting good quality products at reasonable prices to Chinese consumers through efficient retailers helps with the party’s economic and social stability goals. When your business is in China’s interest, your business can do well.

Apple sold more than $20 billion worth of goods in China during the last year. Starbucks, General Motors, Coca-Cola and General Electric seem to be thriving in China. Is your argument that these are exceptions, or that many of the multinationals would be doing far better were it not for China’s restrictive trade and investment policies?

Manufacturing for export by foreign companies in China is quite open. But penetrating the domestic market is a challenge. If China had more open trade and investment policies, United States exports to China would skyrocket as Chinese people trust the quality of American goods. American manufacturers would quickly expand their operations in China for products to be sold in China. No doubt about that.

If the Chinese government forces global companies into unfair joint ventures and even allows such vast intellectual-property theft, why do the multinationals put up with that?

Simple answer: growth. China has been the only significant global growth market since the global financial crisis. The country is spending trillions of dollars on infrastructure, including bullet trains, subway systems, nuclear power plants, airports, seaports, refineries, electric grid — the list goes on and on. If you are in the business of transportation, power generation, aviation, telecommunications, computing or logistics, among others, if you don’t make it in China you won’t make it anywhere.

What are some of the solutions? What can United States or global companies do to improve the situation in China, or could the United States government be doing more?

The answer is to vigorously enforce World Trade Organization rules and hold China to the bilateral agreements it has made. At this point China is winning through intimidation on the trade front. Countries and companies that threaten to file W.T.O. cases are quietly informed that the retribution will be fierce. At the same time, we should welcome Chinese investment in the United States and push for reciprocal treatment. China has the upper hand because of the fiscal irresponsibility of American politicians. The best thing the United States can do to deal with China is get our own house in order.

Westerners doing business in China are often advised not to engage in public fights with the Chinese authorities; that negotiating quietly, behind closed doors, is the better option. Is that still the case, or is your book suggesting that bolder, more confrontational tactics are necessary?

Companies that individually and publicly take on China face the wrath of China Inc. But those who band together behind trade associations and government forums stand a better chance. It is always better to try to work out things behind closed doors. But only if China is willing to listen. Today, that is often not the case. The global financial crisis caused a significant shift in thinking by many in the government. For many years, foreign companies that invested in China were looked at as friends who were helping China. There are many in China now who believe that the foreigners need China more than China needs the foreigners. So they often don’t feel a need to engage even behind closed doors.

Article source: http://economix.blogs.nytimes.com/2013/03/27/the-limits-of-chinas-market-model/?partner=rss&emc=rss

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Investment Into China Declined During 2012

January 16, 2013 by Leave a Comment

BEIJING — China’s foreign investment inflows fell last year for the first time since the global financial crisis, government data showed Wednesday, slipping 4 percent as a troubled world economy reduced investors’ enthusiasm for deals in emerging markets.

But the nation, with the world’s second-largest economy, after that of the United States, still drew $111.7 billion in foreign direct investment in 2012 after a record $116 billion in 2011 and maintaining the country as one of the top destinations for corporate expansion.

Foreign investment is an important gauge of the health of the global economy and of demand for the output of China’s huge manufacturing sector — though such investment is a small contributor to China’s overall capital flows when compared with exports, which were worth about $2 trillion in 2012.

Analysts said cooling growth in China’s foreign direct investment, or F.D.I., did not suggest that investors’ confidence in the country was waning. Rather, it shows China needs another catalyst to drive inflows after the increase from joining the World Trade Organization hit a natural plateau.

“We will see F.D.I. bouncing around $110 billion to $120 billion for some years,” said Tim Condon, an economist with ING in Singapore. “Hopefully, the current administration is going to intensify reform efforts, such as opening of the capital account. That could be momentous, in terms of attracting more F.D.I.”

A new government led by Xi Jinping, the incoming president, is set to take over in March, and investors are hoping that Beijing will pursue changes it had delayed, including the relaxing of capital account controls, to drive China into the next stage of growth.

Analysts forecast that data to be released on Friday would show China’s annual economic growth had rebounded to 7.8 percent in the fourth quarter of 2012 from 7.4 percent in the third — the weakest pace of expansion since the depths of the financial crisis in early 2009.

In December, F.D.I. in China fell 4.5 percent from a year earlier to $11.7 billion, the Commerce Ministry said at a briefing Wednesday.

China joined the W.T.O. in 2001, and foreign direct investment inflows have more than doubled since. Figures from the Organization for Economic Cooperation and Development show China now takes turns with the United States as the world’s top F.D.I. destination, with the United States pulling ahead of China by a slim margin in 2011.

Shen Danyang, a spokesman from the Commerce Ministry, acknowledged that China had to try harder to attract foreign investors, without elaborating. But he stressed that foreign funds were not leaving in a big way.

“It is true that some manufacturing companies are moving out of China,” Mr. Shen said. “But one point I want to remind you is that, so far, there is no big-scale pullout of foreign investment.”

Data showed European and Asian firms had cut their Chinese investment the most, even though Asian firms remained by far the biggest foreign investors in China.

Inflows from the European Union dropped 3.8 percent in 2012 from a year earlier to $6.1 billion, while F.D.I. from the top 10 Asian economies — including Hong Kong, Japan and Singapore — fell 4.8 percent last year to $95.7 billion.

That contrasted with investment from the United States, which rose 4.5 percent on the year to $3.1 billion.

Article source: http://www.nytimes.com/2013/01/17/business/global/investment-into-china-declined-during-2012.html?partner=rss&emc=rss

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W.T.O. Grants Russia Membership

December 16, 2011 by Leave a Comment

GENEVA — Global trade ministers on Friday approved Russia’s bid to join the World Trade Organization, giving Prime Minister Vladimir V. Putin a victory on the international stage at a time of rising domestic opposition to his hold on power.

The Nigerian trade minister, Olusegun Olutoyin Aganga, struck a gavel to announce that the W.T.O. trade ministers’ meeting here had accepted the bid. Because the organization operates by consensus, Russia had to first reach bilateral agreements with 57 of its current 153 members to secure their support.

“This result of long and complex negotiation is favorable both for Russia and for all our future partners,” President Dmitri A. Medvedev said in a statement read to the conference by the first deputy prime minister, Igor I. Shuvalov. He called on world leaders to continue working for freer and fairer trade, adding: “Russia is ready to contribute as much as possible into this work.”

The W.T.O. sets the rules governing global commerce and provides a forum for resolving disputes. Membership ends the anomaly of having Russia, a leading oil and natural gas exporter as well as a permanent member of the United Nations Security Council, outside the world trade system. Russia, with a population of 140 million, is the last major world economy to join the organization. The W.T.O. says that with Russia’s accession, more than 97 percent of all world trade will take place among member countries. It had been about 95 percent.

Pascal Lamy, the W.T.O. director general, said that the agreement would “cement the integration of Russia into the world economy” and that it “affixes the W.T.O. quality label to the Russian Federation.” Likening Russia’s long journey to membership to a marathon, he also warned that “once you cross the finish line, attention immediately changes to the future, to implementation.”

Mr. Putin can point to joining the W.T.O. as a sign that Russia is taking a bigger role on the global stage, even as his government confronts signs of burgeoning political discontent in the country’s large cities. During an interview, Andrei A. Slepnev, the Russian official who oversaw the negotiations, credited Mr. Putin and Mr. Medvedev for getting the deal done, and noted that Mr. Putin had referred to it Thursday as “a victory for Russia.”

In seeking membership, Moscow has had to bring its laws into conformity with W.T.O. rules, but it stands to gain as much as one percentage point in annual economic growth, according to some estimates. Membership is also expected to shine light on the regulations and corruption that dog the Russian economy.

Other W.T.O. members will benefit from a near-term reduction in tariffs on their exports once the lower house of Parliament, the Duma, ratifies the deal.

But businesses in the United States will remain captive for now to the Jackson-Vanik amendment, a relic of Cold War politics, under which U.S. trade with what was then the Soviet Union was tied to the Kremlin’s willingness to allow Jewish emigration.

On Thursday, the administration of President Barack Obama filed a letter with the W.T.O. saying it could not offer so-called permanent normal trade relations with Russia; Moscow in turn said it would not extend such treatment to the United States. America has issued similar letters in the case of other nations, including Romania and Vietnam, only to have Congress give its approval to improved relations weeks later.

The Obama administration has called for the repeal of Jackson-Vanik, saying trade with Russia would have a positive effect on its human rights record. The law is in conflict with U.S. international obligations, as W.T.O. rules require that nations extend most-favored nation status to all members. Asked if he thought the amendment would prove a lasting impediment to U.S.-Russian trade relations, Ron Kirk, the U.S. trade representative, said, “We hope not.”

Mr. Slepnev said the Jackson-Vanik obstacle was “a technical question. We believe the American administration will work out an agreement with Congress in the next half-year.”

Article source: http://feeds.nytimes.com/click.phdo?i=93146e1d2ae8a4edd744bab40c4820b6

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U.S. Says Some Chinese Subsidies Violate Trade Rules

October 6, 2011 by Leave a Comment

WASHINGTON — Under pressure from Congress to do more to confront China on economic issues, the Obama administration has notified the World Trade Organization of nearly 200 Chinese subsidy programs, saying many of them may violate free trade rules.

Ron Kirk, the United States trade representative, said in a statement on Thursday that many of the subsidies had been identified as part of a yearlong American investigation of how the Chinese government helped bankroll the rapid growth of its clean energy industries. In solar and wind power, in particular, American companies have had trouble keeping up with Chinese competitors.

The action by Mr. Kirk’s office comes as the Senate is considering a bill challenging China’s manipulation of its currency as a trade tool. The Chinese government strongly condemned that bill, and House Republicans and the White House have also expressed reservations.

But with the trade representative’s long list of ways that China subsidizes its domestic industries, the Obama administration was now taking a more head-on approach to Chinese trade. Whether or not any of those subsidies violate international trade rules, the American trade office says China is already out of bounds by not having reported them to the W.T.O.

The W.T.O. requires member countries to disclose details of their subsidies every two years. But China has disclosed its subsidies only once since it joined the W.T.O. in 2001.

The goal of requiring the reports was to help other countries study the subsidies and determine whether any of them violated trade rules that prohibit using government money either to help companies buy market share in other countries or to discourage imports.

The only time China filed a report was in 2006, and it was a short list that included only subsidies at the national level — not China’s numerous provincial or municipal subsidies.

Notifying the W.T.O. about China’s undisclosed subsidies would not set off any automatic moves to consider sanctions. In fact, China already agreed in recent years to repeal or let lapse about half of the subsidies on the administration’s list in efforts to resolve parts of other trade disputes.

And in the past, members of Congress who demand tougher trade action against China have shown little interest in technical moves like the one taken by the trade representative Thursday.

Of the subsidies still in place, half have been identified as part of a yearlong American investigation into how the Chinese government has helped bankroll the rapid growth of its clean energy industries.

The rest represent a grab bag of miscellaneous policies, including a national exemption from certain stamp taxes and the provision of low-cost land to businesses in China’s Anhui province. The American filing with the W.T.O. said that many of these were “actionable” as violations of free trade rules.

But it is the clean energy subsidies that might be most significant. Through various types of support, China has helped transform its wind turbine and solar panel manufacturers from also-rans into the world’s dominant producers in just five years. The American solar panel industry has been crumbling in the face of plunging prices forced by Chinese exports, with three companies — Solyndra, Evergreeen Solar and SpectraWatt — filing for bankruptcy in August alone.

Solyndra’s collapse has generated its own controversy within the United States, with critics saying the Obama administration made a bad bet in providing $527 million in federal loan guarantees to the company.

One of the largest non-Chinese survivors in the solar industry, SolarWorld, blamed Chinese subsidies in part for the closing last week of a 186-employee factory in Camarillo, Calif.

“Pervasive and all-encompassing Chinese subsidies are decimating our industry,” said Ben Santarris, a spokesman for SolarWorld, which is based in Germany but has more than 1,100 employees in the United States, even after the Camarillo factory closing. SolarWorld has been holding discussions with American officials, trade lawyers and competitors on how to respond to the Chinese subsidies, Mr. Santarris said. Commerce ministry officials in China have repeatedly denied that the country’s subsidies for clean energy industries violated W.T.O. rules. The commerce ministry was closed this week for national holidays.

In examining China’s clean energy subsidies over the last year, the Obama administration has already filed one complaint to the W.T.O. That filing involved a subsidy by Beijing of $6.7 million to $22.5 million for each wind turbine manufacturer that used parts made in China instead of imported parts. China responded by agreeing last June to revoke the subsidy.

But wind industry analysts have described that subsidy as only one of many, and not especially vital to the Chinese industry’s financial strength.

Article source: http://www.nytimes.com/2011/10/07/business/us-says-some-chinese-subsidies-violate-trade-rules.html?partner=rss&emc=rss

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