China Comment

Energy, Environment, and Economy

China’s International Leadership

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:

Raj Bhala, a professor of law at the University of Kansas and a graduate of Harvard Law, Oxford, and the London School of Economics, spoke about China and the Doha trade round. He suggested that China’s actions at the WTO’s Doha round discussions demonstrate that China’s claims to be a global player in the highest echelon of nations are premature.

Bhala argued that China’s failure to take leadership to promote the common good with a compromise solution for the Doha round is a worrisome indicator for the future of the agreement. Without the leadership and investment of time and effort by one of the world’s most populous and economically involved countries, it may be impossible for Doha to become satisfactorily resolved.

Some tangential issues raised by Prof. Bhala’s talk were:

(Note: Professor Bhala merely raised the topics; the below research and musings are solely the work of China Comment’s point of view that has been shaped by a synthesis of Bhala’s lecture and other sources.)

1) China’s Leadership in International Forums, or lack thereof

China has sent peacekeepers to the Caribbean and to Sudan (and accounts for 2,200 of the over 115,000 UN peacekeepers); and recently it has wielded its UN Security Council veto more forcefully, but China still appears to ascribe to the policy of waiting and seeing how circumstances develop before taking a firm stand on an issue.

For long, China would not wield a UN veto, instead abstaining when it disagreed with a policy. (China has only used its veto around six times in the past thirty years.) But recently, China vetoed resolutions attempting to levy sanctions on Zimbabwe in 2008 and Myanmar in 2007.

Although China’s comments about abandoning the dollar as the world’s standard trading currency surprisingly seemed to indicate a more assertive country, any comments that the Yuan will in the near term present a significant threat to the Dollar as a reserve currency are likely idle speculations, not the least because the RMB still trades in a managed band and is not fully convertible. There does not seem to be enough being done by the Chinese, other than a few meetings with Brazilian dignitaries to suggest that the proposal has merit and is being advanced for any reason other than to distract from US policies pushing for Chinese currency revaluation– although China Comment will follow the situation. (A measured and detailed discussion of the merits of Zhou Xiaochuan’s plan is presented by Pieter Bottellier which reveals that the suggestion is FAR more nuanced than a mere call for the RMB to supplant the dollar. Jeffrey Sachs sees some merit in Zhou’s plans, as do others. Brad Setser at CFR has a good round-up of all the important people’s views on the subject.)

China also failed to take leadership on agricultural trade issues during the Doha round. It could be argued that China used India’s objections to the Doha trade rounds in 2008 as diplomatic cover to likewise reject the deal in order to avoid being criticized too harshly for their demurral.  (See some collected views from major newspapers on who caused Doha to fail, HERE and HERE). [Note: The topic of China’s actions in Doha is far too expansive to discuss here. Likewise, the topic of China’s leadership in agricultural trade is beyond the scope of this digression.]

Gao Guangsheng, Director General of the National Coordination Committee on Climate Change, did posit an interesting argument about how the world could help decrease China’s pollution. He suggested that the developed countries pay China 1% of their GDP, about $350 billion in 2008 (Because, in past eras, developed countries were allowed to pollute as much as they wanted). It is a little difficult to take Gao’s environmental-hostage-taking demands seriously.

China Comment suggests that as China becomes more confident in its economy vis-a-vis America, it will increasingly throw its heft behind solutions and ideas. But before it can do this, it will have to become an international financier and investor. China has already begun to travel down that road, with an April 2009 annoucement that it would create a $10 billion investment cooperation fund, and offer $15 billion in credit to its Southeast Asian neighbors to promote infrastructure development (also “the trade value between the ASEAN and China increased from 59.6 billion US dollars in 2003 to 171.1 billion US dollars in 2007, growing at an annual rate of 30 percent”). Additionally, China made a May 2009 agreement to lend $10 billion to Petrobras, and has entered into assorted lending contributions to African countries, from Zambia to Mozambique (for a Hydroelectric dam).

Still, China has some way to go to compare its giving to the billions that the United States and Japan and the EU donate to the UN (US donated 22% of the UN’s budget. China paid 2.03%.), the IMF (China contributes 3.72%, the United States contributes 17.09%), and other organizations and countries. With China’s billions in reserves, however, the country is flush with enough cash ($1.95 trillion in forex reserves; and over 1,000 tons of gold) that strategically spent, can make a huge difference.

2) China’s International Diplomatic Style (Its “Grand Strategy”)

China’s putative international diplomatic style is to exert a large amount of “soft power,” to not “ruffle feathers,” and to pursue a policy of peaceful development. (China Daily, December 2005) China also expresses a support for multilateralism, which is a bit strange given that China also demands to resolve natural resource disputes bilaterally rather than multilaterally, specifically in regards to the Spratly dispute (Valencia, Mark J., Jon M. Van Dyke, Noel A. Ludwig, Sharing the Resources of the South China Sea, 1997. 118.)

To this end, China has made investments in Africa and in 2007 conducted $50 billion of bilateral trade with sub-saharan Africa (up from $10 billion in 2000). (Rotberg, Robert I. China Into Africa, 2008, page 3).

China’s policy of peaceful development, however, is sometimes looked on negatively by other countries as the Chinese can be seen as global free riders, who do not assume their international obligations, who contribute too few soldiers to UN peacekeeping missions, who contribute too little money to international lending institutions, who pollute the environment, and who have for long done too little to rein in their troublesome neighbors- like North Korea.

China has attempted to involve itself in multilateral institutions for discussion in both the economic realm (ASEAN) and the security realm (the SCO) in order to gain influence in a non-threatening fashion while working with regional allies.

– This topic certainly merits more in-depth study and research in a future article.

3) China’s Ultimate View of the International Trading System

– What are China’s long term goals? Its suggestion that the dollar be replaced as a global reserve currency may indicate a desire for China to assume economic leadership, but when will that be feasible? And what sort of leadership will China take? Will they be promoters of free trade- China has signed many bilateral free trade agreements (See China Comment’s Article), or will they be less ideological, and more realist in their plans- not pushing any philosophical strategy save that of friendship with China?


China does not seem to have yet taken leadership in inventing a workable global trade structure, one that is harmonious for all, or even one that is China-centric. When will the confidence to create and propose such a system come? Reflecting on China’s financial philosophy, and comparing that to the invention of Western financial philosophy- it seems that ideas for world financial structure are implemented only in times of great crisis or upheaval; Post Cold War-WTO, Post WWII-Bretton Woods (which had concepts germinated during the Great Depression and WWII), Great Depression Keynesianism (which had concepts germinated after World War I and in the early years of the Great Depression), and that the ideas which eventually shape the system originate from the “great power” at the time.

It could be a chicken and the egg problem of whether economic leadership causes a country to become a great power or if only great powers can take economic leadership, but even if China has decided to avoid its chance to grab world economic leadership during the current crisis as Prof. Bhala indicates, I believe that China and its academics are consolidating ideas and preparing themselves for the next worldwide military crisis, or are awaiting the next cyclical economic crisis (c. ~2012-2015) to grab its next opportunity. And when that opportunity arises, much of the thoughts germinated by Chinese academics during this current crisis may very well become world policy.

Note: It would be useful to conduct a literature review of Chinese academic writings on world financial markets. Since time for that project currently eludes me, I will point a link here to Michael Pettis’ wonderful site on China’s Financial Markets. The Jamestown Foundation may also occasionally have some information on what China’s academics are currently thinking.

1 June, 2009 Posted by | China Economy | , , , , , , | 1 Comment

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).

2 March, 2009 Posted by | China and Africa, China Economy | , , , , , , | Leave a comment