China’s economic model: the antithesis of free trade

So how long can Western nations (including Australia) afford to accept the rise of authoritarian China, despite the US and EU still representing about 49 per cent of global GDP in 2010 (IMF)? Perhaps not long. While certain Australian commentators jump for joy at record commodity prices, a more protectionist response stance towards China is already emerging elsewhere.  

In June 2011, the European Union (following the US lead last year) imposed anti-subsidy tariffs against China for the first time on the imports of paper with levies as high as 12 percent, and five-year levies up to 35 percent to fight below-cost (or dumped) imports of Chinese paper. This followed Chinese coated fine paper increasing its share of the EU market from 1 to 4 percent between 2006 and 2009. Europe already had imposed anti-dumping duties on many Chinese goods ranging from chemicals and steel pipes to bicycles and ironing boards.

It is simply not enough to argue that Western nations should merely seek to work with China ‘on a broad range of issues’ that can help to further open up China “and steer its social and economic development in a direction that’s desirable for both sides.”

China will long make decisions that serve its national interest with little regard to Western hopes and ideals. On August 4, Zhou Xiaochuan, President of the People’s Bank of China, noted that China’s central bank will continue to diversify its foreign currency investments and strengthen risk management in response to the US increase of debt ceiling. Further, it was announced that aircraft manufacturing was now a State strategic industry, thus obtaining long-term and stable support in the fields of legislation, industrial policy, and financial input.

On September 14, China’s Premier Wen Jiabo stated that developed nations should cut deficits and create jobs rather than relying on China to bail out the world economy. While he indicated that China can offer ‘a helping hand’ through investment, Wen made a number of requests that included: The EU and US opening their markets to Chinese companies; that the US maintains fiscal and financial stability given that China held $3.2 trillion of foreign exchange reserves; and that China be given full market economy status before the 2016 deadline set by the WTO, an aspect that would help Chinese exporters defend themselves against investigations that they are selling goods at below cost.

Based on present policy trends, China’s growing prowess has no bounds. How can Western societies compete? While even the US spent 16.2 percent of GDP in 2007 on public social expenditure, China invested just 5.2 percent of its GDP in 2008.  

The truth is that China’s government can do just about anything in terms of policy and resource direction. In January 2011, it promoted a pilot program to allow residents of Wenzhou, where many of China’s rich live, to invest directly overseas (up to $200 million a year), although investment in a single project could not exceed $3 million. However, residents were not permitted to invest in overseas property or equities markets under the trial.

While China has long ceased to be the cheapest place to manufacture in many sectors as labour costs have risen 20 percent in the past 10 years, the Chinese government is still committed to attracting foreign investment by constantly upgrading its infrastructure to improve logistics and extending Special Economic Zones.

In July 2011, it was reported that US businesses were now looking to China’s western hinterlands as a future source of growth and profits, with Ford, Wal-Mart and other companies planning major investment and expansions in cities such as Wuhan, Chengdu and Chongqing. With Beijing promoting western China as a place to invest given its vast natural resources, huge population centres and a growing network of gleaming new airports and highways are emerging. Ford (with its local joint venture partner) has already built two plants in Chongqing with plans for three more.

For now, Western nations remain economically powerful. While China has hintedthat it will slowly diversify away from US assets, it has nowhere to go given that “gold, the Euro, Japanese bonds and other options don’t have the liquidity of Treasury markets and are still riskier than dollar assets.”

In June 2011, the Asia Competitiveness Institute also found that US economic growth was still most important to economic growth in the region (except Taiwan and Hong Kong). For every percentage point increase of US economic growth, Singapore’s economy grew by 1.006 percent compared to 0.748 in response to Chinese growth (a figure similar to Europe).

However, US influence on Singapore had waned from 1.377 percentage point in the 1980s, while China’s influence had increased dramatically from 0.165 percentage a decade ago.