Trade with China. Triumph of hope over experience?

The British Brexit debate, and the aftermath of Trump’s election, are bringing out widely contrasting views of China as a business partner. Some are hopelessly naive.

British hope

One of the best arguments for Britain leaving the EU, on the face of it, was the prospect of Britain’s being better able to negotiate favourable trade terms with fast-growing nations outside Europe, which the EU appeared half-hearted about. Top of the list of countries Britain “ought”, according to Brexit supporters, to have deals with are China, India and the US.

The argument’s not completely straightforward: Britain has never been particularly keen on a free trade deal with China, because few British diplomats or businesses believe free trade is possible with China: the Chinese state interferes with so many things, any trade deal is liable to be terrifyingly unbalanced in China’s favour. Switzerland, for example, has what’s claimed to be a free trade deal with China – but since it was signed in 2013, British trade with China has grown faster than Swiss trade. Bizarrely, the phasing of the Swiss-China deal means Chinese exporters got free access to Switzerland almost immediately, while Swiss exporters will have to wait up to 15 years. And the deal doesn’t include cars or financial services – two things Britain is particularly keen to sell more of to China.

For most of the past decade, Britain’s preferred to go very gently with China, using its alliances with the US and EU to offer China incentives to free its market up, and to look for a free trade deal once convinced it saw signs of progress. Similar thinking about Vietnam meant the recently agreed EU-Vietnam FTA  allows full duty-free access for Vietnamese textiles and clothes only seven years after the deal starts to be implemented – and only if Vietnam carries out market reforms. Shortly before the Brexit vote, Britain began to warm towards faster deals with China, as the then Chancellor of the Exchequer began to believe attracting Chinese investment mattered more than ensuring British businesses could trade without restrictions.

Now Britain’s recently warmer relationship didn’t go down well with British voters. Canvassing to remain in the EU this year, I was frequently accused by many on both sides of naivety: all this free trade, people told me, risked giving China unrestricted access to our market while getting no meaningful access in return. Free trade with China would probably be highly unpopular with most of the British electorate.

This doesn’t matter to many Brexit fans though. At an industry meeting yesterday, I was told solemnly by one of them that Britain would have no difficulty at all negotiating a deal with China that overcame all China’s institutional hostility, and wouldn’t need Britain to concede any duty-free access to Chinese exporters.

Cobblers, in my view. None of the deals China has negotiated so far – with Australia, India, Korea, the ASEAN countries, Switzerland or anyone else – does anything of the sort.

American experience

Clearly, US voters aren’t happy with China. And on November 16, the US Congress published an extraordinarily gloomy assessment – originally written on October 9 – of its views about China’s real interest in greater foreign trade.

No-one doubts China’s sincerity about wanting to export more. Its governments’s interest in buying anything from foreigners isn’t very clear to the Congress researchers, though. They found that China:

  • pursues import substitution policies,
  • imposes forced technology transfers
  • engages in cyber-enabled theft of intellectual property
  • obstructs the free flow of information and commerce.
  • is becoming a less welcoming market for foreign investors with a host of restrictions and anticompetitive laws that proscribe foreign participation in broad swathes of the economy and promote domestic companies.
  • extensively subsidises favoured local companies and sectors,  putting international competitors wishing to export to China at a distinct disadvantage.

“It has become all too apparent,” the report states, “that the CCP [Chinese Communist Party] has no intention of opening up what it considers key sectors of its economy to significant U.S. or foreign competition and control.”

The commission describes America’s relationship with China as strained based on China’s “ongoing failure to uphold its World Trade Organization commitments, ineffective efforts to cut industrial overcapacity, and unfair treatment of US companies.”

American companies are finding it increasingly difficult to operate in China, the report notes, citing unclear laws and inconsistent regulatory enforcement, policies that favour domestic competitors, and industrial overcapacity. According to the American Chamber of Commerce in China’s 2016 Business Climate Survey, more than three-quarters of surveyed US companies reported that they felt foreign businesses are less welcome in China than in years past.

The report concludes that China’s leaders appear to “have decided the time has come for China to leave behind its long-held strategy, espoused by Deng Xiaoping, of ‘hide your strength, bide your time.’” Instead, it believes, “China is showing itself to the world now, and the outcome is not what many had hoped for 15 years ago when the country was welcomed into the WTO and the global economic system.

This all seems to add up to a trade offer many countries will find remarkably easy to refuse.

Is this just British parochialism?

This affects more than the British debate about Brexit.

With the Trump-induced collapse of the Trans Pacific Partnership, China’s politicians are reportedly keen to seize the initiative for controlling trade rules in the Asia-Pacific region. At present it is unclear what its timescalese are or what precisely this means:

  • Immediately after Donald Trump’s presidential victory, China’s Vice Commerce Minister Wang Shouwen said his country Wang said “We need to actively work for the establishment of  then Free Trade Area for Asia-Pacific (FTAAP)” adding that China remained hopeful that the Asia-Pacific Economic Cooperation Forum (APEC) group would complete a road map for establishing an FTAAP framework and “present operable suggestions and recommendations to the leaders at next year’s (November 2017) APEC summit”
  • At the same time China’s deputy international trade representative Zhang Xiangchen said “We…are continuously and positively advancing RCEP negotiations,” referring to the Regional Comprehensive Economic Partnership,  intended to group the 10 members of the Association of South East Asian Nations plus China, Japan, South Korea, India, Australia and New Zealand (but not the United States) into a common trade deal.

It is unclear whether China really does see RCEP and the FTAAP as real trading partnerships, or just meaningless treaties designed to embarrass the US. But Chiona clearly sees some mileage in using Trump’s victory to humiliate the US locally.