Subsidies and Trade Liberalization

From February 26th through the 27th I attended a symposium at the University of Texas in Austin, TX on China’s Emergence: Effects on Trade, Investment, and Regulatory Law.

Here are some thoughts on the more notable issues raised at the symposium:

Trade Imbalances, Subsidies, and the Market Distortion of Prices

Scott McBride of the US Dept. of Commerce, speaking as a private citizen, discussed countervaling duties, world poverty, and market distortions (my terms, not his) that contribute to inflate the real prices of goods. This particular point was only a small portion of his talk on the “US Government’s Recent Responses to China’s Enforcement Problems and Countervailable Programs.”

McBride claimed that one reason for American subsidization of farmers in the cotton industry is in order to combat cheap Chinese cotton. However, although US subsidies are aimed at protecting American farmers from subsidized Chinese cotton imports, the subsidies also hurt the four major C-4 African cotton manufacturing countries (Mali, Benin, Chad, Burkina Faso). These African countries lack the resources to subsidize their crops, or to increase their crops’ efficiency. Although African cotton would be relatively competitive in a trade-barrier-less world, it cannot hope to contend with cotton-subsidizing American policies, and a China that supports its cotton industry and has a relatively weak currency. He went on to state that the US’s position is generally that it will not drop its subsidies until China drops its support for its domestic cotton industry.

Extra research by China Comment revealed that the United States is also bargaining for enhanced market access to developing countries’ markets before it will significantly drop its cotton subsidies (AllAfrica, October 2008).

According to a source cited in a CRS report (Congressional Research Services), “cotton producers in developing countries (not just Africa) face annual losses of about $9.5 billion as a result of subsidies… the United States provides the largest amount of subsidies to its cotton producers, which it estimated at $2.3 billion in 2001/2002. Other countries’ subsidies in 2001/02 included China ($1.2 billion), European Union (EU) countries Greece and Spain ($716 million), Turkey ($59 million), Brazil ($50 million), and Egypt ($29 million).” (CRS). “Washington has paid out $2 billion (1 billion pounds) to $4 billion a year in subsidies in recent years to the 25,000 U.S. cotton farmers who export 80 percent of their output and account for 40 percent of cotton traded internationally around the world.” (Reuters; July 24, 2008 / See Also The Guardian; July 2003)

The Point:

(1) American subsidy policies that are aimed to combat unfair trade advantages gained by one country often have a double-effect that causes repercussions in (arguably innocent) third-party countries. (This is something to keep in mind when well-meaning NGOs suggest sending aid to Africa. Sometimes, the better policy may be to drop trade barriers first. Still, the African countries often wish to keep their own restrictive trade barriers.)

(2) The more America or China subsidizes their agricultural industries, the more other countries begin to subsidize their agricultural industries. These subsidy policies lead to a market-distorting situation similar to that suffered by the debt-fueled American mortgage-industry boom. Ultimately, the policy benefits no one except subsidy-receiving farmers. Meanwhile, national debts rise to unsustainable proportions.

In the interests of increased efficiency, China Comment supports trade liberalization and progress such as that imagined by the WTO’s heretofore disappointing Doha round. (A full discussion of exactly what details of trade liberalization would be fairest is far beyond the scope of this article. Even full-time economists and government negotiators have difficulty getting their minds around all the nuances of the Doha round in order to craft a compromise. Perhaps that is why Doha has been so much of a disappointment.)

(Part II will include commentary on presentations from Raj Bhala (Law Professor at the University of Kansas), and John Greenwald (International Trade Lawyer).

Sudan and China (Guest)

 by: Danny J. (Guest Contributor)

The following piece does not necessarily reflect the views of chinacomment. However, it is interesting, so I hope you will find it enjoyable. Once again, I thank Danny very much for his contribution.

Last month, Sudan’s President Omar al-Bashir was recommended to be arrested by Luis Moreno-Ocampo, a prosecutor for the International Criminal Court (ICC). Days before the actual announcement, China’s UN ambassador expressed concern, arguing Bashir’s indictment could hurt possibilities for peace in Darfur, a western region of Sudan. Sudan’s UN ambassador responded similarly, saying the arrest would lead to ‘grave consequences’. ICC judges are not expected to make a ruling on Bashir’s arrest until October or November, so it is not an imminent threat. (Note: There are currently no Darfur peace processes on the table.) 

Sudan and China have a fairly good relationship, but during much of Sudan’s North-South civil war, Sudan and China only had limited ties. 

Even after al-Bashir came to power in a June 30, 1989 coup, Sudan’s primary business during its Civil War period was with Western countries. It was not until the late 90’s and early 2000’s that American and European companies, for the most part, pulled out due to domestic human rights lobbying and Sudan’s internal unrest. Talisman Oil, a Canadian Company completely left Sudan in early 2004 following several pipeline bombings – it was one of, if not the last remaining Western oil interests in Sudan. 

As the West was pulling out, China dedicated more and more to Sudan, and Africa. Currently, China has large investments in Sudan, both commercially and politically. Regarding Oil, China is ‘leading developer of reserves in Sudan,’ and currently takes between 40 to 80 percent of its production, or about six percent of China’s total oil imports.

 

The Indictment and China’s Policies

 Once al-Bashir’s indictment was officially announced, the Sudanese UN ambassador is said to have sought help with Security Council members China and Russia. By July 13, both UNSC members informally pledged support to Sudan’s government. As of July 31, China urged the UN to suspend the indictment of Bashir.

 The African Union, Arab League, Non-Aligned Movement, and the Organization of Islamic Conference have all called for invoking ‘Article 16,’ a measure that allows the UNSC to suspend the ICC proceedings for 12 months, renewable indefinitely. The US, on the other hand, is firmly against freezing the indictment.

 Even with an arrest warrant, it is unlikely that Bashir would be easy to get, considering that two other arrest warrants were issued last year, and both targets still remain at large. Yet, the warrant on al-Bashir may result in positive action toward resolution of the Sudanese situation. ‘Western diplomats say Mr. Bashir could escape indictment if he ended what they see as impunity for two men the ICC charged last year over Darfur.’ This presents a way out for Bashir, but should he do so, the move would probably be viewed as bargaining sovereignty for safety.

 So, why do Russia and China support Bashir and Sudan? The main reason is Sovereignty. Internationally, China acts in a ‘treat others how you would like to be treated’ sort of way. It has done this in two ways over the years.

 First, imagine what China would do if a high ranking Party member were indicted by the ICC. A member would more than likely never get to that point, since China possesses a UNSC veto, but in the current situation, China can even avoid the potentially embarrassing situation of having to cast a UNSC veto. In this way, the Party solidifies the power it holds over its people, ensuring that there can be no one above the state, in much the same way the USA’s refusal to join the ICC protects its sovereignty. The state has the last word.

 A second example of this type of action regards how China previously addressed Sudan’s problems in Darfur and the civil war in the South as issues Sudan must deal with alone. Think of southern Sudan and Darfur as provinces in China like Xinjiang, Tibet, or Taiwan. China occasionally has problems with these regions. If secession by these regions were to happen to China, it would want support for its policy of ‘unifying’ itself. Therefore, China argues that Sudan’s internal ‘territorial problems’ should be ‘solved internally.’

 

 Military Aid to Sudan? (Where Exactly is it Coming From?)

 For a time, this meant even militarily helping Sudan. The BBC reported that ‘Dong Feng Military Trucks,’ ‘Chinese anti-aircraft guns,’ and ‘Fantan fighter jets’ have been sold or given to Sudan by China, in possible violation of a UN arms embargo. The BBC believes that some equipment arrived before, and some after the embargo, and that the Chinese are training Sudanese to pilot the jets (yet another breach of the sanctions).

 China maintains it does not sell weapons to countries on the ‘embargo list.’ However, a new report was just released naming China as the top violator of the Sudan embargo.

 One problem with this report was that it just names ‘China’, not differentiating whether the actor violating the embargo is official government policy, the military acting of its own accord without the Center noticing, or the embargo is being broken by smuggling of Chinese Arms.

 It is possible the Chinese government (like other weapon-producing countries) sold the Sudanese government arms legally before the embargo, then other sales were made after the embargo (with or without official permission) by people and groups with access to the equipment.

 

 Chinese Peacekeepers … Demonstrate Beijing is Honoring its Commitments

 Still, China has helped make some positive action in the last two years. Last year, China began pestering Bashir into accepting UN troops and other decrees to prevent further problems in Darfur. The UN peacekeeping troops are foundering, but not because of China. It is because other countries fail to send the number of troops they pledged. (The current number of peacekeepers is around 9,100, with a pledged total of 26,000.)

 China has sent most, if not all, of the troops it committed. Considering how understaffed the peacekeeping force currently is, China’s fulfillment of its promises is more than many other countries can say.

 

 Concluding Remarks

 As with everything, the relationship between Sudan and China is complicated. For both countries, the positives are great: Beijing gets more oil and another African supporter of ‘One China’; Khartoum gets money, at least some of which goes into modernizing the city and to a much lesser extent the country.

 Unfortunately, weapons sales also play a part in the relationship, whether official or unofficial. This has helped exacerbate the conflict in Sudan (to be honest, even without Chinese arms, Sudan still would have gotten guns and Darfur would still be a problem) and made China lose some international face.

 Sure, China dragged its feet in the beginning of the UN peacekeeping process, but that is the general nature of Chinese foreign policy: wait until you have to act, then act. In this case China balanced and preached noninterference, but changed position and acted when negative international PR threatened China’s face/image.

 Still, it is important to commend the Chinese for convincing Bashir to allow peacekeeping troops, and for sending many troops themselves. There have been successes and failures, but China’s interaction with Sudan demonstrates how China is beginning to accept international responsibilities while maintaining dialogue, economic relations and involvement with its Sudanese friends.

Guest Contributor Danny J. has a BS in Political Science and International Studies with a focus on China and its politics. He lived a year in China and visited places, from Urumqi to Beijing to Yunnan, to list only a few.

(Note: Chinacomment is currently on vacation and without constant access to computer until the beginning of September; however, updates will continue at the pace of 1-3 a week since Chinacomment does have a sizable backlog of relevant material to post.

Also: Happy 08-08-08 08:08!)

China and South Africa

China’s total direct investment stock in Africa accounted for only 1% of global foreign direct investment in Africa, as of 2007 according to the US Department of State (Keep in mind though, as an earlier article stated, this number probably does not include Hong Kong assets invested in Africa- the US Government needs to get on the ball about that).  But by other measures, China-Africa cooperation is increasing exponentially.

Bilateral trade between China and Africa rose from $10 billion in 2000 to $70 billion in 2007, making China Africa’s second largest trading partner after the United States. This rise in influence has led to a spate of articles in recent years focusing on China’s interest in Africa. The topic is broad, and would require pages upon pages to properly evaluate.

However, one particularly intriguing aspect of Chinese involvement in Africa that can be focused on are their relations with South Africa- one of Africa’s leading states. In recent years China has benefitted from resource agreements with South Africa and the number of Chinese living in South Africa has risen almost exponentially. So here I examine to what extent China is benefitting from South Africa, and vice versa.

China-South Africa Trade Ties

“Trade between SA and China stood at $9.9bn last year [2006], which represented a 36% increase on the previous year,” according to a Chinese trade minister quoted on AllAfrica.com. In 2007, trade between the two rose to over $11.2 billion.

“South African imports of Chinese products [were] valued at $7.5 billion (R49.1 bn) and South Africa exports to China valued at $3.64 billion (R23.7 bn) in 2007,” according to the Jamestown Foundation.

South Africa “has become China’s main trading partner in Africa over the past few years — its trade with China accounts for more than 5% of total Sino-African trade — and ranked 21st on the list of the Asian giant’s trading partners worldwide.”

Chinese in South Africa

In June, South Africa put its Chinese citizens on an equal footing with its black and Indians by classifying Chinese as “black people,” according to the BBC. This classification allows “ethnic Chinese [to] benefit from government policies aimed at ending white domination in the private sector.” According to Sky Canaves of the WSJ China Journal, however, this will only directly benefit the 10,000-12,000 Chinese who were citizens of South Africa in 1994, and their descendants. If this is true, the declaration will not directly benefit the Chinese who are foreign investors in South Africa, merely the residents.

According to the Jamestown Foundation, South Africa has nearly 300,000 Chinese living there as of 2007. This implies an exceedingly huge post-1994 immigration of at least temporary Chinese to the country.

Chinese Investments in South Africa & South African Investments in China

China’s investments in South Africa are mainly centered around acquisition of resources. Even the ballyhooed purchase of a stake in a South African bank had some link to resource-driven investment.

In November 2007, ICBC Bank of China agreed to purchase a 20% stake in South Africa’s Standard Bank Group. The stake is valued at $5.6 billion and is one of the largest foreign acquisitions ever made by a Chinese company. As a result of the purchase, according to the Economist “ICBC will get access to Standard Bank’s extensive banking network in 18 countries across the continent—not to mention its expertise in commodities.”

According to Keith Campbell of Mining Weekly, “the Chinese companies involved in South African mining are Sinosteel, East Asia Metals Investment (a subsidiary of Sinosteel), Jiuquan Iron & Steel (Jisco), Minmetals and Zijin Mining.” In African nations, China only has more companies (6) active in the Congo. These companies in South Africa account for millions in investment.

According to the World Bank book Africa’s Silk Road, South Africa is the leading African exporter to China of Iron ore  (94.03%), Diamonds (99.27%), Iron or steel coils (100%), Platinum (100%), Aluminum and alloys (99.8%), Acrylic alcohols (100%), Ferro-alloys (99.99%), Copper ores and concentrates (40.67%– Tanzania accounts for 39.74%), and Aluminum and Aluminum alloys (100%). South Africa is second in provision of Copper and copper alloys at (29.25% to Zambia’s 48.36%).  (Percentages in the paragraph were listed as a percent of total African trade to China compared to other African countries’ trade between 2002-2004.)

In February, Sinosteel invested an additional $440 million in investment in its South African Joint venture, Sinosteel South Africa Chromium Industry Co., Ltd. (founded 1996) in which it owns a 60% equity stake.

Sinosteel also has a 50-50% joint venture with Samancor established in 2006 and called Tubaste Chrome. At the time, the JV was valued at $230-million. The JV produces 280,000 to 300,000 tons of chrome a year.

Sinosteel’s subsidiary “East Asia Metals owns 60% of Asa Metals, the other 40% being held by Limpopo Economic Development Enterprise.”

China additionally entered into an agreement with Sasol, the world’s largest maker of coal to oil, to build a coal-to-oil plant. It should be completed by 2014 and produce 80,000 barrels a day.

The investments of the other companies are more thoroughly discussed HERE. In general, it appears that Chinese investments into South Africa are accelerating, but still represent only a small part of China’s foreign investment, and a small percentage South Africa’s foreign market. (40% of trade and billions in investment is accounted for by the EU-which, by use of a crude currency calculation came out to $38 billion US in two-way trade; calculated from a stated $300 billion Rand). This would make China’s two-way trade account for just under 10% of total SA foreign trade.

In 2006, South African companies made over $200 million in investments in China, according to the Jamestown Foundation. According to China Daily, the amount was $700 million. Leading investor companies included SAB-Miller, Sasol, Anglo-American, and Kumba Resources.

Diplomacy

Both China and South Africa have urged restraint in involvement in Zimbabwe’s electoral chaos, and in dealing with Sudan. This conjunction of aligned views on the international system and beliefs about the supremacy of state sovereignty can bring the two countries closer together. Chris Alden, writing for the Jamestown Foundation, discussed this fact.

Challenges

* The high rate of crime in South Africa can deter many Chinese investors, as both the Jamestown Foundation and a Chinese official, Zhou Yabin, can attest. People’s Daily had a February 2006 article on the rising crime against Chinese nationals.

Crime in South Africa took at least 14 Chinese lives in 2006. In December 2006, overseas Chinese “established a special fund designed to protect their security in the country… The fund will be used to award police, detectives and informers, who make contributions in solving cases.”

* The Jamestown Foundation also believes that if Jacob Zuma eventually succeeds President Thabo Mbeki in South Africa, that China relations might degrade. Zuma is said to listen closely to labor unions which tend to oppose immigrant China labor and China-run businesses. That being said, Zuma is reaching out to China, in June visiting the country. And Zuma has previous experience with China, co-chairing at least one bilateral commission with China’s top leaders in 2004. Concerning Zuma’s apparent interest in China, and China’s willingness to at times cater to the South Africans (Such as when China imposed voluntary textile export restraints) it appears that unless there is massive anti-Chinese backlash among South Africa’s citizenry, Chinese investments will continue to benefit SA, and SA resources will continue to benefit China.

* Other challenges are a possible trade protectionist backlash that could manifest against the Chinese. Planning for a South Africa-China Free-Trade pact agreement might fall through, or indeed it could become too successful and China-South Africa trade might become too unbalanced and threaten South Africa’s indigenous manufacturing industries, textiles, and communications technology.

Conclusion

It appears China-South Africa ties can continue to accelerate, especially given Beijing’s penchant for investing abroad in resources. But it bears remembering that they will have to compete with the US and the EU, which is currently a larger player in South Africa’s economic policy.

* China Daily’s timeline of China-South Africa relations 1998-2003.

* Chris Alden’s excellent article on China-South Africa relations.

China’s Soft Power

I just found an intriguing report, put out by the United States government in April 2008, and available at the Federation of American Scientists’ website detailing China’s Foreign Policy and ‘’Soft Power’’ In South America, Asia, and Africa. The article is available at: http://www.fas.org/irp/congress/2008_rpt/crs-china.pdf

It makes several startling conclusions contrary to mainstream fears of China’s increasing soft power and influence in the developing world, including:

* “China has attempted to exploit its ‘‘no strings attached’’ foreign aid stance and its ability to deploy state-owned assets to reap softpower advantages. But CRS finds that China’s success has been mixed and its influence remains modest. Contrary to some projections of China’s ability to displace American influence through the use of soft power, the CRS report indicates that China must grapple with many limitations on its influence” (viii).

Is this wishful thinking on the part of the American defense and diplomatic establishment?

Britain’s The Economist partially concurs with the US government report, arguing that “concerns about the dire consequences of China’s quest for natural resources are overblown.” Also, it calls attention to assertiveness on the part of resource-owners in Gabon, Peru, and the Philippines where Chinese corporations were kept out of national parks and other companies were investigated for corruption– hardly the actions of countries coddling China or intimidated by its might.

Meanwhile, oil extraction agreements signed with African countries keep on coming with a June 5th $5 billion oil extraction deal in Niger.

* “And CRS found that China’s cumulative stock of foreign direct investment (FDI) worldwide amounted to just $73.3 billion at the end of 2006—0.58% of global FDI” (viii).

That is surprising. I will have to look into how they calculated the FDI.

* It also calls attention to blowback against the Chinese, particularly in Zambia.

I intend to pour through the report over the next few days and I’ll post more in-depth comments and analysis. For now, I thought you’d enjoy seeing the report and welcome any comments.