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China, the fragile 21st century mercantilist state

By Arthur Thomas - posted Wednesday, 3 February 2010


Mercantilism: "The economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism."

Trade imbalance is crucial to the survival of a mercantilist state and directly responsible for the national welfare and key to national policy. The tools for a successful mercantilist state include:

  • currency manipulation;
  • selective and non reciprocal trade barriers and tariffs on imports;
  • lack of reciprocity in bilateral investment;
  • illegal, unacceptable and/or unfair trade practices on foreign direct investment;
  • unfair conditions on foreign investment involved crucial technology;
  • barriers to foreign participation in domestic projects or trade;
  • government subsidies for export manufacturers;
  • export price fixing;
  • illegal/unacceptable trade practices including piracy of intellectual property;
  • opaque national accounting to conceal fault lines in the economy;
  • media control to direct and manipulate the flow of information to maintain confidence in the government; and
  • media control and manipulation to distort and/or conceal economic fault lines in the economy, civil unrest, human rights.
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To be a successful 20th century mercantilist state, China secured representation in world trade and financial institutions including the United Nations with the full support of developed nations. China gained international recognition and a major support base of compliant developing and developed nations.

China is the modern world's most successful mercantilist state. Its policies have developed China into a global industrial, economic and military power and in so doing, reportedly accumulated the largest foreign exchange reserves in history.

China claims its cheap goods drive the world's consumer economies, and while that may be, a mercantilist nation generates its trade surpluses and foreign exchange reserves at the expense of its trading partners’ own exports, trade imbalances and employment opportunities.

When operating in a co-operative global trade community, mercantilist policies are self-destructive, and can create division and friction between the state and its trading partners. Successful mercantilist economies require compliant trading partners, and their continuing annual increase in demand for its goods.

China's poor track record in data reliability and lack of transparency to date raises a red flag for analysts assessing China's reports of rapid economic growth in the post GFC economy. As the effects of the global financial crisis and rising unemployment continue into 2010, plus China's destructive role in Copenhagen, the patience of the importing nations upon which China is reliant, is wearing thin.

There is evidence from within China to indicate rapidly growing fault lines that are appearing through the smoke and mirrors of the state media image of China and its economy.

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The role of the media

Control of the media and information develops a population reliant on the only source of information available; the state media. That information is only what the government wants the population to know, and includes continuous doses of propaganda to feed nationalist fervour.

To maintain confidence in the CCP in times of uncertainty, state media rolls out an effective series of articles and "official statistics" that dispute any "wild, ill founded, or scandalous claims" by enemies of the state, or jealous parties. The CCP is never at fault

Predictability and the media

Beijing's command economy philosophy, total media control, and rule by military might, are key elements in both domestic and international politics. "Do and believe what Beijing tells you, and we will get along fine."

Questioning CCP edicts is unthinkable and severely punished in China. Defiance in many instances can bring a death sentence.

Deeply ingrained in the CCP psyche, is the socialist command economy philosophy and absolute power over the people.

For ages, China has been a land of mystery. Understanding the "inscrutable and unpredictable Chinese," was a highly complex challenge. It is in fact, just the opposite. China is predictable, and since pre 1949, China's communist party, using state controlled media and official statements, has unintentionally provided clues to problems and impending actions. From the billboard and propaganda blasted from community loudspeakers of the pre "opening up" era, the CCP's vast propaganda machine has provided these clues.

These ranged from the occupation of Inner Mongolia, intervention in North Korea, the two invasion stages of Tibet, the first Taiwan straits crisis, invasion of northeast and northwest India, sorties into disputed areas of the USSR, invasion of Vietnam, the crackdowns in Tibet and Xinjiang, as well as the efforts to claim offshore oil and gas resources, and disruption to unity in several Himalayan and Indian ethnic regions and China's goals in the 21st century.

The 21st century media content of state and local media articles, and political statements still unintentionally signal Beijing's concern, fault lines and intentions to those analysts with a sound knowledge of CCP psyche and the teachings of Sun Tzu when translated into today's national and international economics and politics. Beijing firmly believes truth can worsen civil unrest in times of uncertainty.

The importance of making face (mianzi) and losing face (diu lian)

The CCP is paranoid about any event that may result in loss of face that could affect the confidence of the Chinese people in the government. To shield the CCP from loss of face, Beijing relies on total media and military control. The pursuit and significance of mianzi therefore prevents free and open public discussion, and media reporting on matters that may expose weakness and/or possible vulnerability in any government policy or project.

The CCP claims that loss of face, can materialise from truth, and total control and repression of media freedom ensures that diu lian is kept in its box.

Diu lian times four in 12 months

Beijing's paranoia over diu lian rocketed following four serious hits in only 12 months.

Hit 1
Despite considerable media exposure of Beijing's direct involvement in commercial iron ore pricing negotiations, foreign private mining corporations had the audacity to reject Beijing's intervention, demands, threats and grandstanding.

Beijing's strategy failed miserably and Chinese mills had to cut production or buy 2009 ore on the higher priced spot market. Chinese steel companies also ignored Beijing's demands to negotiate through the Beijing run China Iron and Steel Corporation and negotiated purchases on the spot market.

To make face, Beijing responded with predictable childish petulance, arresting four of Rio's senior staff on trumped up charges of stealing state secrets of China's already well documented and fully understood steel industry.

Facing the prospect of further diu lian, Beijing is likely to oppose participation in the approaching 2010 iron ore price negotiations.

Hit 2
At China's Inaugural World Media Summit in October 2009, Hu Jintao announced the US$6.6 billion initiative to merge Xinhua, People's Daily and CCTV into a Chinese style CNN to become a respected 24/7 multi-lingual global media giant. The summit earned the title of the Media Olympics.

This unprecedented investment to raise China's global profile only exposed the paranoia over China's plummeting international image and urgent need for mianzi. It failed miserably, and China's credibility went out the window by first banning discussion on freedom of information at the summit, and then announcing Li Changchun, head of China's propaganda and media control network, would run the network.

Despite his host's directive, AAPs Clive Marshal responsibly made his position clear with "There must be no compromise on the quality of news and no censorship of the news". Rupert Murdoch objected to the "lack of intellectual property protection domestically" and commented on the actions of "content kleptomaniacs".

Beijing tasted bitter diu lian once again. No offer was forthcoming to host a second World Media Summit.

Hit 3
China failed to demonstrate its influence and ability to secure exemptions and major financial benefits for China and its developing nations' client states at the Copenhagen Summit. China's actions merely worsened the plight of many developing nations who had supported China, especially those most in danger of inundation.

Hit 4
Google signalled its intention to withdraw from China, and report on China's cyber attack on Google's source code and Gmail accounts. Google's legal officer released the following:

"We have taken the unusual step of sharing information about these attacks with a broad audience, not just because of the security and human rights implications of what we have unearthed, but also because this information goes to the heart of a much bigger global debate about freedom of speech."

The Great Firewall of China blocked the report from electronic media networks as well as China's print, TV and radio networks. So far, Beijing's response comprised media reports claiming that Google was miffed that it could not compete with Baidu on China's vast internet market.

Google was not the only target.

Yahoo and a number of prominent multinational corporations, as well as several foreign governments' offices and defence departments, also came under attack.

Beijing's intensifying efforts indicate serious concerns that the matter may get out of hand and beyond its control, especially in the UN and the WTO.

The Google incident is another indication that Beijing has taken a step too far.

The wheels are falling off

Beijing fails to comprehend that ongoing success of mercantilist philosophy in a global economy becomes increasingly reliant on the patience, co-operation and consumer demand of its trading partners.

The Google saga merely exposed rising resentment of many of China's trading partners against Beijing's arrogant policies, blatant cyber attacks, and ongoing IT piracy. This is now spreading into the global institutions. There is growing evidence that China's trading partners are at the point where they consider enough is enough.

While Google was about freedom and security of the internet, other factors are coalescing against China's one-sided policies.

India's revolt

To increase security following the Mumbai terrorist attacks in 2009, India banned importation, sale and use of Chinese cell phones that lacked ID codes, drawing a furious response and trade sanction threats from Beijing.

Despite China's much trumpeted policy of non-interference in other nation's affairs, China repeatedly interferes in India's domestic affairs. Beijing blatantly violated India's sovereignty by issuing loose-leaf visas for Jammu-Kashmir residents.

Chinese troops regularly cross the two Lines of Actual Control and have destroyed Indian property. China however, continues with major infrastructure and military installations development along the entire China-India border. Beijing even attempted to block an Asian Development Bank loan for urgently needed infrastructure in India's Arunachal Pradesh.

India has had enough and recently handed a diplomatic note to China protesting against China's trade policies. But India is not the only one growing tired of China's antics.

China's client states rebel

The China ASEAN Free Trade Agreement is under threat. Thailand, Indonesia, Vietnam, and Malaysia are complaining, seeking delays, and amendments. Constant procrastination and China's poor record in trade relations compliance has created widespread distrust in China's reliability to abide by rules.

Japan is now taking a firm stand against China's territorial activities in the East China Sea. Vietnam and Japan are also objecting to China’s claims to oil reserves within their territorial waters as well as in disputed waters.

Vietnam lodged complaints of unskilled Chinese migrant labour displacing locals from major Chinese "aid" projects. "Thousands" of Chinese migrant workers are reportedly staying illegally and working in the rising number of new China towns that spring up around new China invested projects.

Developing countries around the world are discovering that China's aid and investment comes at a price to local industry, employment, resources and future economic welfare. "Anti China incidents" are increasing in several regions across Africa, southwest Asia, central Asia and northern Asia.

Enough is enough

Developing nations are not the only ones who have had enough of China's arrogant attitudes. The EU is starting to respond to China's mercantilist policies of currency manipulation, trade imbalance, piracy, investment constraints, tactics, pollution and human rights abuse. China's demolition of Copenhagen appears to have been the tipping point for developed nations' tolerance of China.

Any sign of growing weakness in China's economy will have a negative effect on China's relations with developing nations whose economies, and regime survival, are reliant on China's influential industrial, economic and military power to deflect UN sanctions and intervention.

China's rate of economic growth, civil unrest containment, and survival of the CCP itself, are reliant on China remaining a mercantilist state. The CCP arrogance, intolerance, and greed however, have constructed a fragile China house of cards that is now facing the strengthening winds of change.

Time to pause

The world acknowledges climate change as the most serious potential threat to the global economy, survival of many nations and life on planet earth itself.

China is the world's biggest polluter and greenhouse gas (GHG) emitter, and to achieve its annual rate of growth, pollution and GHG emissions will escalate at a rate that will reverse any benefits from sacrifices by other nations to reduce global warming.

The hard question

China's planned growth is unsustainable in terms of escalating pollution, and the continuing impact on public health across China as well as demands on water, and arable land. At the expense of downstream nations, China continues with plans to harvest the Himalayan water tower to sustain China and its people. Water alone however, will not suffice.

China is adamant that an 8 per cent minimal annual growth is critical to producing the cheap goods for the global consumer economies and claims that any slowdown in China's economy will affect global and individual national economies. Beijing conveniently overlooks the fact that its economy and exports are reliant on the goodwill and co-operation of the global community, plus the need for shared response and sacrifice.

It comes down to which nations will continue to increase demand for China's cheap consumer goods, knowing full well that such demand will substantially increase water consumption, total pollution levels and increasing emissions of GHGs and undermine their own sacrifices to halt global warming.

Successful or not, there can be no satisfaction in knowing China's own people will become the first large scale casualties of China's unsustainable plans and policies.

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About the Author

Arthur Thomas is retired. He has extensive experience in the old Soviet, the new Russia, China, Central Asia and South East Asia.

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