Wednesday, March 17, 2010

China's Economic Nationalism?

Today's Wall Street Journal expresses shock that China is resorting to economic nationalism, which is supposed to be the exclusive right of the U.S. After all, China's economy seems to be performing better than the U.S. -- at least until a possible real estate bubble bursts. In addition, China does seem to be reining in its expansionary monetary policy, something the U.S. did not do as its bubble grew. Anyway, here are my extracts from the relevant articles:

Browne, Andrew and Jason Dean. 2010. "Business Sours on China: Foreign Executives Say Beijing Creates Fresh Barriers; Broadsides, Patent Rules." Wall Street Journal (17 March): p. A 1.
Foreign businesses say their relationship with China is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals.

Interviews with executives, lawyers, and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business -- epitomized by the changes it made to join the World Trade Organization in 2001 -- and tilting toward promoting dominant state companies.

In the latest broadside against foreigners, authorities in a wealthy province near Shanghai Tuesday assailed the quality of luxury clothing brands from the West, including Hermès, Tommy Hilfiger and Versace.

Technology executives say they are highly concerned about government procurement rules issued late last year that would favor local suppliers who have "indigenous innovation." The rules, if implemented, could limit foreign access to tens of billions of dollars in contracts for computers, telecommunications gear, office equipment and other goods.

Patent rules imposed Feb. 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices.

Executives in several industries say the liberalization spurred by China's WTO entry is stalling. Foreign makers of wind turbines and solar panels say they are being shut out of big renewable-energy projects. Regulatory barriers effectively cap participation in insurance: Foreign companies had just 4.7% of China's life-insurance market as of June, and 1% of its property and casualty market, according to PricewaterhouseCoopers.

Canaves, Sky. 2010. "China Slams Luxury Goods' Quality." Wall Street Journal (17 March): p. B. 2.
In a statement posted on its Web site, the Zhejiang Administration of Industry and Commerce said that "International designer clothes, blindly worshipped by Chinese consumers and enjoying 'super national treatment' in the country, have once again proven unsuitable for China".

According to the Zhejiang notice, 48 out of 85 samples of imported clothing from 30 international brands failed to meet Chinese product quality standards. The brands also included Versace, Dolce & Gabbana and Zara. The authorities say that they have impounded all of the clothes with the same model numbers as the samples that failed to meet the standards, but the rest of the companies' products aren't affected. It was unclear if any fines would be levied. The harsh tone of the attack appeared to be out of proportion to the actual infractions: half of the complaints were over usage labels, including laundry instructions that failed to meet Chinese requirements. Nevertheless, the statement was carried widely by China's official media. While the immediate financial impact of the sanctions against the luxury brands is likely to be limited, the negative publicity could be damaging. Foreign brands sell at a huge premium to local brands, justified in part by the perception of quality.


Barkley Rosser said...


Well, there is a disturbing piece of news in this, the effort to block imports. China is already running a huge trade surplus that is being accused of disrupting the world economy, with none other than Paul Krugman demanding that the US violate its treaty obligations by arbitrarily imposing a 25% tariff on Chinese imports in order to get them to revalue their currency upwards. So, this stuff just aggravates what appears to be a rising conflict. I, for one, am not keen on a Cold War II with China.

BTW, it should be noted that the yuan/rmb has risen in value against the dollar by over 20% since 2005. Furthermore, my bet is that if this piece of nonsense were implemented, rather than caving, the Chinese would go back to buying lots of US bonds, which are plentifully available, thereby devaluing the yuan/rmb back to where it was in 2005 or so.

Jack said...

"According to the Zhejiang notice, 48 out of 85 samples of imported clothing from 30 international brands failed to meet Chinese product quality standards."

I'm curious to know where they were able to find such clothing that had not been manufactured in China. Checking through the labels at my local dept stores it seems unlikely that one can still buy any Euro manufactured clothing,
and cdertainly none in the USA. Leather goods seem not to be available from any where but China, with some little supply coming in from India.

john c. halasz said...

Barkley Rosser:

Though pressure on already tight export-manufacturing SME margins might tempt the Chinese, (since it's actually the platforming MNCs that reap the lion's share of the gains), to devalue the RMB, just why would they want to accumulate still more U.S. bonds, which involves eventually realizing still more capital losses? Seems the Chinese are in as much of a pickle as we are. The RMB does need to appreciate vs. $ and RoW, though it should be gradual, to permit mutual re-adjustment and not a sudden leap of +25%, since these are long-run processes of import/export penetration and production supply organization. I'd start a ppp tariff at 5% and add on 5% every 6 months, if the Chinese fail to respond, (though similar tariffs should apply to other currency manipulators, in East Asia or elsewhere).

TheTrucker said...

john c. halasz said...

Something very intelligent. Import duties should be applied slowly and increased slowly. But I will add that the proceeds of the tax should be held in a trust account for providing quarterly economic stimulus checks to the American people. That trust account can also be the recipient of the funds from the Cantwell-Collins carbon tax/permits.

The tax and rebate system is designed to dodge the "taxes are burned in a furnace" morons, and to allow the market to work out the micro econ stuff.