China turning protectionist?

The oddest aspect of the current fracas about protectionism in China is that such a move would lack any compelling reason. Look at the evidence.

China got WTO membership in 2001 and posted a sound track record by completing most of its trade-related institutional formalities. The US China Business Council (USCBC) admits that freely and regards China?s WTO entry as being of vital importance to America. Membership, after all, led to China?s tariffs being reduced, the elimination of licences and quotas, and even the opening up of the service sector. In fact, China quickly completed most of the formalities related to the membership.

The current concern, therefore, of outsiders is about the fate of institutional convergence and of a further opening up. The focus, especially, is on the task of amending domestic jurisprudence in China to make it fully WTO-compatible. There, the main facets are the application?to foreign enterprises too?of the principle of national treatment. That includes the enforcement of intellectual property rights (IPRs) and the working out of the economy?s regulatory processes.

Indeed, highlighting trade openness and the essential need to import fit into the picture. That had especially applied to the need to source external intermediates and capital goods right from the start, in 2001. And, by 2005, China?s imports of the latter had already started to account for 50% of total Asia-Pacific imports. Those mainly included capital goods, and China?s exports too were simultaneously driven up the value-addition ladder.

About the only shortfall that has been noted by the ESCAP, in its ?Economic and Social Survey of Asia and the Pacific, 2007?, is that China might be getting increasingly proficient in assembly-related enterprise?but it has yet to sufficiently deepen its technological base so as to manufacture technology-intensive intermediates. So there can be no rationale for decelerating, or protecting the economy against, imports unless it is done in anticipation of a ?forced? revaluation of the renminbi.

Revaluation will be good as it will cheapen the production process even further, and introduce greater competition into the economy. Whether cheaper imports should be countervailed by greater tariff or non-tariff protection then becomes a policy choice about which the US and China can bargain. Renminbi depreciation too has its uses. But while it would provide a ?natural? protective shield, it would also be hard to justify in the face of a $1.4 trillion balance-of-payments surplus. The best that the Chinese can do would be to let matters alone and float the renminbi. The record, anyway, establishes that China has had few difficulties about importing or exporting after WTO entry.

Secondly, the economy?s forex reserves have already crossed the one-trillion dollar mark. China recently announced a global trade surplus of $185.7 billion through the third quarter of 2007, a sum that is convincingly higher than the $177.5 billion surplus recorded for 2006 as a whole. Exports totaled $878.2 billion through September 2007, or 27.1% over the identical interval in 2006. Even imports, at $692.6 billion, were up by 19.1%. Surpluses such as these have left China with reserves in excess of $1.4 trillion.

Now, in fact, China can officially claim to see annual imports reaching $1 trillion by 2010. That is what a senior official said recently. The ministry of commerce spokesman Wang Xinpei said China?s annual imports could top the $1 trillion mark in three years, adding that China ?does not seek a large trade surplus?. In 2006, China?s imports reached $791 billion, rising 20% from a year earlier, while its trade surplus surged 74% to $177.5 billion. In the first five months of 2007, China?s trade surplus has climbed 84% to $85.7 billion. Over the same five-month period, imports totalled $357.8 billion, rising 19% from a year earlier.

But there have been problems too. As is its wont, the foreign exchange surplus has been feeding into the economy, raising liquidity, accelerating inflation and afflicting food prices the most. The worry, therefore, for quite some time, has been about excessive, and uncontrolled, money supply growth. Left to run its own course, such a thing could well ignite sympathetic asset-based conflagrations in stock and real-estate, prices. Indeed, some observers of the China scene are even relieved at the US?s recent recession and its ?sub-prime loan? crisis. And rightly so. They see the deceleration as moderating the US demand for Chinese goods and services?lessening, in turn, China?s risk of a subsequent slow-down.

In fact, the thing that would make eminent sense at this stage would be for Beijing to remove the remaining obstacles that halter imports into China from other countries. That would yield good dividends when its economy responds. It would actually enable the country to put a bottom to some US economic sectors. That could forestall further slowdowns. That such a development is well within the realm of the possible can be seen from the fact that US exports to China had risen by all of 32% in 2006. That had been the highest such export increase from the US to any destination.

This dynamic is most likely to be either sustained or intensified as Beijing accesses ever higher income levels, ascends the value chain. As a matter of fact, the US even ran a service-sector trade surplus of $3.3 billion vis-?-vis China in 2006. The only corrective that will be administered by the current US downturn is that its imports from China may take a temporary hit. Taken in toto, though, US imports from China still far exceed its exports to China, and America?s bilateral trade deficit stood at $57 billion in the first quarter of 2007.

But, not only would exports to China partly solve the US problem, it would also cast a damper on inflation within China itself. On the other hand, should prices be left to rise unchecked then a double-whammy could result. For example, manufacturing prices have already started their ascent some time back. More than a third of all factories had complained of input price hikes in August 2007, while ex-factory prices were up for the seventeenth month.

Finally, what Beijing has in fact been doing for quite a while now is to fight overheating. It has taken several steps to retard export growth?amongst which had been a June 2007 repeal of value-added tax (VAT) rebates in excess of goods numbering 2,000 in type. Figures released by China?s government even claimed that there had been a consequent decline in exports over the first three quarters: indeed, they were 2.1 percentage points lower than in the first eight months?something which had narrowed the monthly surplus.

But the USCBC demurs. Its own calculations show that matters were undisturbed: the year-to-date surplus was 5% above the full 2006 surplus, and almost 70% in excess of the third-quarter 2006 surplus. Clearly the official VAT rebates, plus none of the other related measures, succeeded in reversing the trend. Even the product-quality concerns relating to producers like Mattel seem to haave had no effect on the surplus.