Opening up, China’s reaction to Trump’s Tariffs

Huang Qifu, Deputy Director of China's 12th National People's Congress Financial and Economic Committee and former Mayor of Chongqing, is widely recognized as one of the top government officials that has a deep understanding of the operation of market economy. Chongqing is one of the four Chinese municipalities that directly reports to the central government with a population over 30 million.

Atranscription of Huang's recent speech is spreading widely in the Chinese social media. It is a long speech with some of the standpoints very novel and bold.

Huang started with a description of the new characteristics of the international trade. He pointed out that intermediate goods and raw materials became the heavyweight contributing to 70% of the international trade by value last year. In contrast the share of finished products by value in the international trade was 70% in the 1980s.

The underlining factor to this change is that products are no longer produced in one country and sold to other countries. Instead, products are assembled with the parts and components made by hundreds of suppliers in dozens of countries.

To coordinate this highly internationalized production chain, or value chain, gives rise to the service industries whose share in the value of international trade has increased from a very low level to 30 percent at present.

These servicing industries such as logistic, finance, insurance, legal and arbitrary, accounting, auditing and etc are mainly developing in free-port cities such as Singaporeand Hong Kong where internationalized rule of law is standard and tax rate is low, around 12.5% to 15%.

Huang emphases that the benchmark for nations to be successful in the contemporary international trade should be:

First, be able to foster giant corporations that are in control of advanced technology, manufacturing of key components and establishment of standards which are key junctions in the contemporary international trade

Second, be able to develop hub cities capable of accommodating the service industries related to international trade.

Huang admitted that except for a few, such as Huawei, the majority of Chinese enterprises only take subordinate role in the value chain dominated by major multinationals. And a great deal of the transactions related to the Chinese international trade is settled in cities outside of mainland China.

Huang's suggestion to improve China's stature in the international trade is to further open its market to the world.

In Huang's opinion the convergence of the world economy is accelerating. The EU and Japan have finalized negotiations on EU-Japan Economic Partnership Agreement (EPA). Developments have been made on the negotiation for the free trade agreement between the US and EU. Japan and Australia have led to rebirth of TTP. These free trade agreements in combination with NAFTA account for 54% of the global trade.

Chinacan not ignore this trend. If China does not get involved; it effectively means removal of China's benefits of being admitted to WTO. On the contrary, by adding the Chinese economy, which is 16% of the world economy, to those free trade agreements, it will lead to formation of a new international free-trade mechanism covering 70-80% of the world economy. To China this is equivalent to being admitted into WTO second time.

Huang believed that it is of China's interest to lift tariffs, remove entry barriers to the Chinese market and to reduce subsidies to domestic corporations. Implementation of these so called "three zeros" which are zero tariffs, zero entry barriers and zero subsidies should ensure China's seamless connectionswith the world. Improved business environment and sheer market size would attract more multinationals to place their headquarters and R&D facilities in China. The enhanced competition would forge Chinese corporations of international competitiveness. Chinese cities will gain advantages in accommodating the service industries related to international trade in finance, logistic, settlement of transactions, legal services and etc.

Another direction of Huang's standpoints is that insufficient supply of the agricultural and mineral products makes China's reduction of trade barriers sensible.

Chinahas one-fifth of the world population but only 9% of the world's arable land. The arable land per capita in China is 40% of the world average. China's freshwater reserve only accounts for 6% of the global freshwater resources. Freshwater per capita in China is only 24% of the world's average.

Chinacurrently has 2 billion mu (15mu equal to 1hectare) of arable land. Apart from 1.2 billion mu allocated to grain production and 600 million mu allocated to vegetables and fruits; there are only 200 million mu left for feed production which is by far insufficient.

Chinaneeds to produce 700 million tons of steel a year which requires importation of 350 billion tons of iron ore. China's domestic production of oil can only meet one third of its demand with 400 million tons of crude oil imported annually. China's actually demand for LNG is at least 300 billion cubic meters a year. At present the supply is 200 billion cubit meters with half of it imported. Being a country of huge demand for imported products ranging from agricultural, energy and to raw materials, China has no reason to fear for major reduction in tariffs.

In addition, reduction of tariffs will contribute to reduction of the trade imbalance. The prices for many imported products sold in China are significantly more expensive than that in international markets because of tariffs. Every year Chinese tourists bring back goods valued at $150 billion USD from all over the world. If China to adopt zero tariffs on these products, the purchase by Chinese tourists overseas could be converted from abroad to domestic markets which would create jobs and revenue locally. Also China could cut its trade surplus by 150 billion USD a year.

Huang's argument is definitely his personal interpretation of China's role in the international trade. Nevertheless it indicates that pro free trade has its voice at the top level of the government. However such a position will be met with oppositions. One of the sticking points will be the way in building Chinese industries of international competitiveness. Huang believes in a level playing ground; others might prefer a heavy handed government coordination and investment.

Fundamentally if adoption of the international rule of law would be in conflict with the ruling of the communist party is the challenge or question unanswered.

However China has been testing free trade policies vigorously in recent years. The Waigaoqiao Free Trade Zone in Shanghai has already carried 1/4 of China's international trade. China is aiming to basically complete its free-port system (free-trade) in Hainan, an island province adjacent to Guangdong and Hong Kong by 2025. Having successfully completed the first China International Import Expo last year, China decides to make it an annual event and the second Import Expo is on its way in Shanghai this year.

Increasingly China sees its huge market as a strategic advantage in planning and implementing its trade and foreign policy. The tariffs imposed by the Trump administration would stimulate China to ramp up its bet on the Belt & Road initiatives and further open its market to other nations.