Chinese Trade

Trade Deficits, State Subsidies and the Rise of China

Rich Marino

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138488625
• eBook ISBN: 9781351039802
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

There's no question, compared to the advanced economies China's economic growth rates have been spectacular, but in most instances the economic analysts tend to forget that a large part of China's growth has been dictated by government industrial subsidies. How did China go from a bit player overnight to the largest exporter in the world in capital-intensive industries?

This book shows that government subsidies play a big part in China's success. Government subsidies include those to basic industries: energy (coal, electricity, natural gas and heavy oil), steel, glass, paper, auto parts, solar and more. A lot has been written about China's trade practices with the West, but none of this work addresses the real unsustainable dilemma. Much of the current literature discusses the problems but doesn't explain the root cause of China's lopsided trade practices with the West or explain in detail how China finances its government subsidies, with nothing written that explains that China's subsidized exports to the United States and European Union are basically self-funded by its enormous trade surplus with the West. A trade surplus represents a net inflow of domestic currency from foreign markets and is the opposite of a trade deficit, which would represent a net outflow. Moreover, this is the only book that describes China's current trade practices with the West as a zero sum game at the expense of the West.

This book provides two solutions to this endless quagmire: an increase in Western exports to China so that China and the West have more of an equal trade balance, or a very steep reduction of China's exports to the West.

Part I

United States, the European Union and China

1 Introduction

This introductory discussion will first analyze China’s current and forecasted growth rates and from there it will compare this data to the current and future growth rates of the United States (US) and the European Union (EU). According to the World Bank’s Global Economic Prospects released June 2017 (pp. 4–11), China’s GDP growth estimate for 2015 was 6.9 percent followed by its 2016 growth rate estimate of 6.7 percent. Moreover, the World Bank’s report shows China’s GDP projection for 2017 is 6.5 percent. Furthermore, the report breaks down countries either by region or income. Accordingly, the US and the EU are classified under “high income” nations.

By comparison, the United States GDP growth rate for 2015 was 2.6 percent followed by its 2016 US GDP growth estimate of a paltry 1.6 percent. Moreover, the US 2017 growth projection currently stands at 2.1 percent. In terms of the Eurozone, the Euro Area GDP growth rate for 2015 was 2.0 percent compared with a 2016 growth estimate of 1.8 percent followed by the Eurozone GDP growth projection for 2017 at 1.7 percent. For clarity purposes, the lapse time for the 2016 growth estimate percentage to become the “actual” growth percentage is 12 to 18 months from the end of the calendar year allowing for revisions (World Bank 2016, pp. 4–9).

The definition of GDP (Gross Domestic Product) is the total monetary value of all finished goods and services produced within a country’s borders in a specific time period. Normally, GDP is calculated on an annual basis. It includes all of the private and public consumption, government outlays, investments and exports minus imports or GDP = C + G + I + (exports-imports) negative exports equal a trade deficit. After examining the above definition, an argument may surface that supports the statement that when the US and the EU import finished goods that result in trade deficits, they have inadvertently encountered a reduction in their national economies (trade deficits = a reduction in GDP).

According to the US Census Bureau in 2017, US exports to China amounted to roughly $117 billion and US imports from China in 2017 totaled approximately $462 billion giving China a trade surplus with the United States of around $345 billion. Moreover, according to the European Commission in 2017, the European Union’s trade deficit with China has been increasing precipitously from around 55 billion euros in 2007 to approximately to 180 billion euros in 2017.

In support of the global economy, it should also be noted that one of the primary functions of corporate management is to enhance shareholder value of the corporation. In order to do that, these companies require new revenue streams and usually new revenue streams are the result of new markets. To that end, multinational corporations are constantly in search of new revenue streams irrespective of their home country’s trade balance. Obviously, these data points as well as a whole host of others relative to China’s trade surplus with the US and Europe will be discussed at great length in the succeeding chapters. It should also be noted that for the book’s purposes the European Union (EU) and Europe are one and the same. However, the EU and the Eurozone are not the same.

The Eurozone is part of the EU and it represents 19 countries that use the euro as a common currency. The remaining nine countries in the EU use their respective sovereign currencies. It should also be noted that for the book’s purposes the yuan (Y) and the renminbi (RMB) are one and the same.

During the Chinese president’s trip to Europe in March 2014, he proposed a deep and comprehensive Free Trade Agreement (FTA). This was a significant departure from the external trade policy normally followed by the People’s Republic of China. In the past, China had always favored trade agreements with emerging market economies in Asia or with countries in Africa or Latin America. At the time, Beijing’s overture towards the EU had likely been triggered by the opening of negotiations on the more recent controversial Trans-Pacific Partnership (TPP), which was promoted aggressively by the Obama Administration, but one of the first actions by the new Trump Administration was to withdraw the United States from the TPP. Despite this, Beijing considers the TPP an impediment and a threat to its regional dominance. Moreover, it’s very important to note that in 2014 the initial EU reactions to the Chinese Free Trade Agreement (FTA) proposal were only lukewarm at best.

In a concerted effort to evaluate President Xi’s FTA proposal, in April 2016 the EU commissioned a study by the Centre for European Policy Studies entitled Tomorrow’s Silk Road: Assessing an EU-China Free Trade Agreement:

This study deals with three principal aspects: (1) the “why” of the FTA, (2) the “how” to incorporate a broad spectrum of trade policy areas usually found in “deep and comprehensive” FTAs and (3) the stylized “economic impact” based on a cutting-edge application of CGE modelling together with the newest GTAP database for such a demanding exercise.

(Pelkmans and Francois et al. 2016)

Moreover, prior to the 2016 US-China Strategic and Economic Dialogue, the Obama Administration stated publicly that China’s government was responsible for a massive breach of personnel records of as many as 22 million federal employees and contractors. In an effort to advance the already sarcastic discourse, then Vice President Joseph Biden made the case that:

any country that relies on unhealthy practices to undermine healthy competition with others ultimately limits itself because nations that use cyber technology as an economic weapon for theft of intellectual property are sacrificing tomorrow’s long term gain for a short term gain today.

(US Department of the Treasury 2016)

For the most part, China was able to use its entry into the World Trade Organization (WTO) to gain EU market access without really having to reciprocate with EU companies. EU companies are still barred from many important government procurement contracts and they suffer a number of barriers to entry into China through national treatment protocols and other impediments, but more difficult than this is the unexpected fragmentation of the Chinese market (Kerry 2014). Due to the government’s role in Chinese state-owned enterprises, the EU has denied China Market Economy Status (MES), which has evolved into a major sticking point between the two (EU trade-defense law). The EU makes the argument that China’s state-owned enterprises are unfairly subsidized by the Chinese government and these state-owned companies have easy access to capital, which puts its EU competition at a distinct disadvantage.

In October 2016 the European Union established new trade rules in an effort to curb low-priced Chinese imports. This was the 18-month culmination of wrangling between the EU and Beijing over its EU-China trading relationship (dumping). Beginning in early 2016, the European Commission held public discussions generating in excess of 5,000 opinions on how to handle trade complaints against China. On October 3, 2016 the European Commission, member states and EU lawmakers held a joint news conference outlining their recommendations. In order to determine the imposition of import tariffs, the EU decided to treat all WTO members equally regardless of “market economy status” which China lacks.¹ Their joint resolution stated unequivocally that “dumping” occurs when export prices fall below domestic prices, but the EU may make an exception for cases of “significant market distortions” such as excessive state intervention, which will probably cover a number of Chinese companies.

Until this announcement, China had been treated as a special “non-market” case, which involved a very complex procedure of evaluating Chinese export prices in a third country like the US to determine if Chinese exports to the EU were artificially cheap:

The European Commission, supported by the EU’s 28 member states, believed the rules for China needed to be changed. This meant finding a balance between adhering to WTO rules and protecting EU companies threatened by dumping. “I am convinced we have met these two targets,” said Bernard Lange, head of the EU Parliament’s trade committee after the deal. Lange also hailed the new possibility of investigations into social and environmental dumping.

(European Commission Press Release 2016)

Within the same time frame, the US Commerce Department also released a report that stated it had made its affirmative final determination that imported tires from China were sold in the United States at dumping margins ranging from 14.35 percent to 87.99 percent (US Department of Commerce 2016). Moreover, the Department concluded that the Chinese tire manufacturers and the Chinese tire exporters received Chinese government industrial subsidies ranging from 20.73 percent to 100.77 percent.

This latest round of tire dumping was brought to the attention of the US Department of Commerce by two US labor organizations: the United Steelworkers and the AFL-CIO. The Chinese Ministry of Commerce voiced strong opposition to such a decision and they’re making the case that the entire investigation is against the rules of the World Trade Organization and United States laws. In terms of dollar value, the imported Chinese tires under investigation amounted to roughly $2.3 billion in 2015–2016.

On August 30, 2016 the US Commerce Department announced that it would set final dumping margins on imported light truck tires and imported passenger vehicle tires manufactured in China. This was the first time the Commerce Department had showed signs that it may impose punitive duties on these types of products. The final determination rests with the US International Trade Commission (ITC). If the ITC rules that the dispute is affirmative, then the punitive duties will take effect, but if the ITC issues a negative ruling, the entire investigations will be terminated. February 23, 2017 is the date scheduled for the Commission’s final ruling. On February 22, 2017 the US International Trade Commission (USITC) made its final determination in its anti-dumping and countervailing duty investigation...

Table of contents

• Cover Page
• Chinese Trade
• Routledge Studies in the Modern World Economy
• Title Page
• Copyright
• Contents
• Acknowledgements
• Part I United States, the European Union and China
• Part II Spectacular Growth and the Chinese Economy
• Part III Foreign Direct Investment
• Part IV Trade balances
• Part V Conclusions
• Index