Rogue Nation

China's Worst Trade Abuses Are Hidden
By Christopher Balding

China is nothing if not creative in protecting its local industries. 

Although it has liberalized its economy in recent years, it has also erected a sophisticated set of barriers to safeguard companies it views as national champions. 

Increasingly, this is a counterproductive approach.
The usual method of assessing protectionism is to look at metrics such as tariff rates. 

And by that measure, China remains one of the least open major economies: According to the World Trade Organization, it maintains an average most-favored nation tariff of 9.6 percent on imports, compared with 5.3 percent in the European Union and 3.5 percent in the U.S.
But tariffs only tell part of the story. 

China has also become adept in using non-tariff barriers to prop up favored companies. 

The European Union Chamber of Commerce in Beijing recently identified a raft of such measures China was using to protect manufacturers, including subsidizing local businesses and forcing foreign firms to turn over technology to Chinese partners.
When China recently announced that it was granting a subsidiary of U.S.-based asset manager BlackRock Inc. an additional investment quota, it touted the deal as a major liberalization in a sector almost entirely closed to foreign firms. 

In fact, it only accentuated the barriers that still exist: Even now, China limits the number of branches financial companies can open and imposes ownership restrictions to protect state-owned banks.
Such measures can border on the absurd. 

A recent administrative order barring foreign children's books -- including beloved titles such as "Guess How Much I Love You" and the Peppa Pig series -- constitutes a non-tariff barrier to trade in intellectual property. 

Foreign firms have even been prohibited from selling products made in China to Chinese consumers, for fear they'll take market share from domestic competitors.
Getting China to address these barriers is a challenge, as a recent report from the U.S. Trade Representative's office shows. 

WTO rules require countries to report industrial subsidies. 

But the report testily notes that "the United States has now counter notified over 400 Chinese subsidy measures," while China "has included in its subsidy notifications only a small number of programs." 

Making matters worse, "China has refused to engage in bilateral technical discussions to address this issue."
In other words, not only is China failing to disclose measures that may violate WTO requirements, it is refusing to even discuss them.
Perhaps the worst part is that these barriers don't really work. 

Protectionism hurts Chinese consumers and retards the very enterprise the government wants to promote. 

Chinese consumers stock up on Japanese toilets and European luxury goods partly because they're cheaper than buying at home in a protected market. 

The price of milk powder in Hong Kong is roughly half that in my neighborhood megamart in Shenzhen, where corner convenience stores do a bustling business in gray-market goods from across the border. 

This differential stems mainly from trade restrictions that drive up the cost of imported products and allow local firms to charge noncompetitive prices.
Dismantling this complex and multilayered system of protections will be a huge undertaking. Although lowering tariffs would be a good start, more fundamentally, the government needs to stop using hidden administrative means to protect local companies, reduce its vast subsidies and allow foreign firms to operate on a level playing field.
That may sound unrealistic. 

But doing so would stimulate competition, innovation and entrepreneurial activity, while giving consumers more choices and cheaper products. 

It would also help Chinese companies take advantage of cutting-edge technology and new investment from overseas. 

Delaying such reforms will only hurt consumers, anger trade partners and sustain noncompetitive businesses.
In short, China needs to ask a simple question: Who really benefits from all these barriers?

China Just Handed Trump A Really Good Reason To Retaliate

By Gordon G. Chang

Saturday, Miao Wei, the head of the powerful Ministry of Industry and Information Technology, tried to reassure the international community that Beijing’s Made in China 2025 plan will not discriminate against foreign companies. 

Minister Miao was responding to sharp criticisms contained in a report issued Tuesday by the European Union Chamber of Commerce in China.
Last month, Beijing issued implementing guidelines for the plan. 

The guidelines were the product of more than 20 State Council units led by Miao’s ministry.
Every nation tries to help its domestic businesses, but China’s plan, introduced in March 2015 by Li Keqiang, steps over the line in aiding Chinese companies.
The plan, sometimes abbreviated to CM2025, is a $300 billion initiative to make China nearly self-sufficient in 10 industries, including aircraft, robots, electric cars, and computer chips. 

Beijing has set out specific targets for market shares by industry.
The plan aims for near self-sufficiency in components by 2020 and materials five years later.
In short, Beijing wants Chinese industries to possess 80% of China’s home market in the targeted sectors.
To get there, CM2025 calls for jumbo-sized, low-interest loans from state investment funds and development banks, aid for the purchase of foreign competitors, and research subsidies.
As the European Union Chamber of Commerce in China noted in its report, “the 2025 project is in fact a large-scale import substitution plan aimed at nationalizing key industries, or at least severely curtailing the position of foreign business in them, both as suppliers of key components and finished goods.”
A German think tank, the Mercator Institute for China Studies, put it this way: Beijing is planning to build a “small vanguard” of “front-runners” that “are likely to dominate their sectors on the Chinese market and become fierce competitors in international markets.”
The U.S. Chamber of Commerce is expected to issue a report along the same lines shortly.
It is in this context that Miao mounted Beijing’s defense. 

He made many points Saturday but stumbled when trying to defend the plan’s targets for market share of Chinese brands. 

They were only forecasts, the minister maintained. 

As he said, “When we were drawing up the plan, we did not deliberately pursue these targets.”
Miao’s comment was not credible. 

The plan is a compilation of tactics Beijing has used in the past to disadvantage foreign companies. 

It comes in the midst of a concerted effort to cripple foreign competitors in China. 

And does he really think Beijing is going to spend tens of billions of dollars over the course of years to aid foreigners?
Beijing has had great success with its various industrial policies, but this plan is unlikely to succeed, and not only because its targets are “lofty,” as Sara Hsu of the State University of New York at New Paltz described them on this site.
First, CM2025 is afflicted by the same flaw that undermines all politically directed efforts. Governments are not good at picking winners and losers in broad-based, multi-year initiatives.
Yes, Beijing has had success with a few enterprises, the most notable being the nominally private Huawei Technologies. 

To replicate that favorable result across ten industries, however, is extremely unlikely, beyond the capabilities of any government.
China’s officials in 2025 may be able to point to some dominate Chinese companies in the ten sectors, but they will have no good answer to this question, posed by Professor Hsu: “Is this program better than allowing foreign companies to compete, forcing Chinese companies to innovate?”
A state-dominated system almost always opts for state-led solutions. 

Chinese leaders may say they are in favor of globalization, as Xi Jinping famously did at Davos this year, but they implement localist solutions whenever possible.
This is not to say localism cannot work, especially in the short run. 

Mao Zedong, after all, had a booming economy in the first years of his rule.
Yet those types of solutions do not produce good results over time. 

The Chinese economy under Mao collapsed less than a decade after he assumed power. 

The economy today may be on the same course. 

China, after the relative openness of the “reform and opening up” period started by Deng Xiaoping, appears to be regressing fast, moving toward more state control and turning inward under Mao-admiring Xi Jinping. 

Mao admirers, among other things, make poor economic planners.
Second, Xi’s predatory policies, theoretically, would make sense in the long run if foreigners cooperated by not protesting trade violations, easily surrendering technology, continually pouring in money for no return.
But they are no longer doing that. 

Last year, foreign direct investment into China fell in dollar terms. 

And it will continue to fall as China’s growth slows, as Beijing imposes stricter controls on outbound transfers, as Xi continues to target foreign companies in China.
China’s economy needs infusions of cash and technology, and his CM2025 plan will restrict the flow as foreign companies decide to invest elsewhere. 

As the European Union Chamber of Commerce in China report notes, the discrimination inherent in Made in China 2025 limits the ability of foreign business “to contribute to the country’s innovation ecosystem.”
Third, countries will protect themselves from China’s new industrial plan. 

Whatever one may think of CM2025, this is a particularly bad time to have to defend it.
As the Financial Times reports, Peter Navarro, the head of the newly created National Trade Council, and senior adviser Steve Bannon are beginning to win “a civil war” in the White House over trade policy.
If they can keep President Trump’s ear, the U.S. will act decisively against Beijing’s increasingly brazen protectionism. 

After all, Navarro, in his address before the National Association for Business Economics this month, said trade deficits are a matter of national security and identified China as responsible for about half of America’s.
Navarro has a point. 

Among the American companies that are thought to be at special risk because of CM2025 are Boeing, General Electric, and Intel.
Trump was elected to protect Boeing, General Electric, and Intel—and their American-based workers—from Chinese trade practices. 

Minister Miao has just handed him a reason to hit China hard.

EU Business Chiefs Attack China Industrial Policy

European Union Chamber of Commerce in China warns foreigners of dangers dealing with protectionist economy.
By Josh Lowe

A report by EU business leaders based in Beijing, released Tuesday, warns of the dangers of trading with China, which it describes as remaining highly protectionist.
The report, published by the European Union Chamber of Commerce in China, criticises China’s industrial policy, referred to as China Manufacturing 2025.
“It seems that the Chinese Government is determined to maintain a prominent role in guiding the economy,” the report states, adding that policy measures it is using to do so are “highly problematic.”
In a warning to foreign businesses, which it says should be treated equally under Chinese law, the report says that “Chinese policies will further skew the competitive landscape in favour of domestic companies.”
The report found that Chinese government contracts are “largely closed to foreign suppliers,” while deals that force foreigners to give up advanced technology are an “increasing requirement” for access to Chinese markets.
Substantial local and central government subsidies are available for favored companies in priority industries, the report says.
Commitments made by Xi Jinping in Davos in January to treat foreign companies more equally and boost foreign investment were welcome, the report said. 

But, it warned: “In the interests of mutual benefit, and to ensure that China reaches its full technological potential, the European Chamber hopes that China follows through on these commitments.”

Protectionism in China is growing, German ambassador says

By Leslie Shaffer

Level playing field for foreign companies needed: German ambassador

China's leaders may be touting efforts to offer foreign investors a level playing field, but on the ground, protectionism appears to be growing, Germany's ambassador to China told CNBC.
"It doesn't matter which trading partner you talk to – be it the Japanese or the U.S. or neighboring countries or European countries. They all feel the same, that there's a growing protectionism here," Michael Clauss, the German ambassador to China, told CNBC's "Squawk Box" on Monday.
He noted that the protectionist concerns related to German investments within China.
"The service sector is basically off limits. Many companies that would like to produce here in China and build a factory and start producing are forced into going in a joint venture," he noted.
"It's also frequently they're asked to transfer technology, which is against the rules of the WTO. And the tendency seems to be growing. That's the complaint we get from German businesspeople."
But Clauss pointed to signs that Chinese rhetoric on trade and investment has been changing.
"At the same time, we are here now getting different signals, like the whole speech of Xi Jinping or yesterday's presentation by Li Keqiang saying that they were in favor of free trade, saying that they would go for a level playing field," Clauss added.
"They've been saying all the right things and now we just hope that they will walk the talk."
Over the weekend, Li Keqiang pledged to oppose protectionism and continue to liberalize trade.
That echoed comments from Xi Jinping in a speech at the World Economic Forum in Davos in January, which defended globalization and free trade and argued in favor of a level playing field.
Those remarks came after U.S. President Donald Trump vowed during his campaign to label the country a currency manipulator for the purposes of a competitive trade advantage on his first day in office and threatened to impose a tariff of as much as 45 percent on China's exports to the U.S.
More recently, Trump's administration and the Republican Congress have been considering imposing a border tax on imports into the U.S.
"What I can see here from Beijing is the Chinese side believes there will be more trade frictions, maybe even a trade war, which would be a problem for China," he said.
"I don't think it will be a major problem for German companies here in China since those that produce here in China, produce and manufacture almost exclusively for the Chinese market and not for exports abroad."
Data last month showed that China had become Germany's largest trading partner for the first time in 2016, media reports said, with trade volume between the two rising 4 percent to around 170 billion euros.
That displaced the U.S. from first place to third, but left France as No.2, reports said.

Expert: Trump must be firm, strong in China dealings

Chinese companies can own companies outright in the United States, but that's not the case for U.S. companies in China
By Eric D. Lawrence

An expert on China's impact on the U.S. auto industry might agree with President Donald Trump's strong stance on dealing with China, at least when it comes to trade.
Michael Dunne, author of "American Wheels, Chinese Roads," offers some advice for Trump:
"Be very strong and very firm," Dunne said today during an Automotive Press Association luncheon at the Detroit Athletic Club. 

The "Chinese respect when you are strong and firm."
Dunne said reciprocity should be the rule in negotiating trade deals.
"We should have equal access in each market. Today that's not the case," Dunne said, describing the differences U.S. and Chinese companies face in the other country's markets.

Chinese companies can own companies outright in the U.S., but that's not the case for U.S. companies in China. 

Among the hurdles for American companies in China is the requirement that they form a joint venture with a Chinese company, and the U.S. companies are not allowed to own more than 50% of the new entity.
Such requirements along with extra costs associated with exporting to China are unique and should not be accepted, Dunne said, noting that if China doesn't open its market to the U.S., then the U.S. should impose similar joint-venture requirements on Chinese companies.
“India doesn’t have it, Russia doesn’t have it, no other country has it," he said. 
“We should be able to control our own destiny in China with our business."
Not all differences, however, relate to trade deals.
Dunne said Chinese businesspeople like to ease into business discussions because they want to feel comfortable with potential partners.
He said he had once been given advice to take Chinese business people to a nice dinner on the first day of a multiday business trip here. 

By the second day, business could be discussed, but plowing immediately into business discussions was not advised.
Dunne described how China's dealings with foreign companies had changed over the years, from one in which foreign companies had advantages early on to today, in which the Chinese have the advantages at home.
The goal of the country's political leadership had been to build a huge home market and protect it.
As China's annual vehicle sales have grown from 2 million in 2000 to 27.5 million in 2016, imports represent less than 4% of that total.
By 2020, Dunne said, there would be more cars in China than in the U.S.
"What's sold in China is built in China," Dunne said.
As these changes have occurred, China's investments in the U.S. have grown dramatically as well. Dunne said that from 2010-16, Chinese entities had invested $5 billion in the Midwest supplier base. He noted that the Chinese already have a presence here, referencing Beijing West Industries, which, according to Crain's Detroit Business, acquired Delphi's global brake and suspension business in 2009.
The company is currently involved in vehicle testing in Milford.
In California, where Dunne lives, six companies with Chinese connections have located, with ambitions to build high-end, electric and autonomous vehicles.
He noted that Faraday Future, which is based in Gardena, is connected to a Chinese billionaire who runs the "Netflix of China."
The company says it has created the world's quickest electric car.
And further disruption is coming through the production of cars being built in China for shipment back to the U.S.
The Free Press had previously reported on plans to sell Buick's Chinese-made Envision crossover in the U.S.
Nothing about that vehicle suggests it was built in China, Dunne noted.

American Chamber of Commerce in China: "Chinese protectionism fuelling foreign business pessimism"

More companies are slowing investments and deprioritising China as an investment destination due to slowing growth and increased concerns over barriers to market entry, the regulatory environment, and rising costs

By Michael Martina

BEIJING -- More than 80 percent of members of a U.S. business lobby in China say foreign companies are less welcome than in the past, a survey released on Wednesday showed, with most saying they have little confidence in China's vows to open its markets.
The American Chamber of Commerce in China's annual survey reinforces growing pessimism in the foreign business community, as it grapples with a slowing Chinese economy and complains of increasing protectionism.
The chamber's report comes a day after  Xi Jinping gave a speech at the World Economic Forum (WEF) championing open markets, and Beijing unveiled proposals to reduce restrictions on foreign investment in China.
Business circles are particularly concerned over the future of U.S.-China commercial ties as President Donald Trump prepares to take office, having pledged to brand China a currency manipulator and threatened to impose tariffs on its goods.
"More companies are slowing investments and deprioritising China as an investment destination due to slowing growth and increased concerns over barriers to market entry, the regulatory environment, and rising costs," the chamber said.
If China took action, including removing "discriminatory barriers" to foreign-invested companies and investment restrictions, the chamber's members would "significantly increase investment", it said.
The share of companies that identified China as a top three global investment priority dropped to 56 percent this year, compared with a peak of 78 percent in 2012, the chamber said, calling it a record low.
Eighty-one percent of the 462 companies included in the survey, among them U.S. and multinational firms, said foreign business was less welcome in China than in the past, up from 77 percent in 2016.
Foreign businesses in China, as well as foreign governments, have long complained about a lack of market access in China and restrictive policies that run counter to its pledges to free up markets.
Though Eleven's speech at the WEF in Davos painted a picture of China as a "wide open" economy, more than 60 percent of the chamber's members had "little or no confidence that the government is committed to opening China's markets further in the next three years".
Respondents estimated on average that China's economic growth for 2017 would be 6.1 percent, below what sources have told Reuters would be a government target of around 6.5 percent.
The survey, with responses compiled both during and after Trump's November election victory, showed 72 percent of members felt that positive U.S.-China relations were "critical" to business, but only 17 percent thought they would improve in 2017.
Chamber chairman William Zarit said some of its members would go to Washington in early February, months ahead of an annual lobbying trip, to engage with the Trump administration.
"We certainly are not going there to lecture the administration, but we are there to share our ideas on ... a more constructive path forward," Zarit said at a briefing on the survey.
China has warned that it will be tough for its foreign trade to improve this year, especially if a Trump administration and other political changes limit export growth.