Saturday, December 12, 2009

The Chinese job sucking machine?

This is no call for protectionism, but only an advocacy for a level playing field. It can no longer be denied that China's, recession-neutral, break-neck paced export-driven growth policies is causing considerable and ever increasing collateral damage on other developing countries and on the world economy at large. The time has surely come to address the challenge posed by these "beggar-thy-neighbour" policies squarely, failing which acrimonious international trade disputes are inevitable.

It is by now widely acknowledged that China's gargantuan appetite with accumulating savings and dollar reserves unleashed highly destabilizing macroeconomic imbalances in the global economy, which manifested in the sub-prime mortgage bubble and the subsequent economic recession. A determined focus on export promotion, preference for savings over consumption among Chinese, and an obsession with accumulating forex reserves have been responsible for this strategy.

The Chinese government's single minded obsession with an export-driven growth strategy has generated massive distortions domestically, which confers substantial unfair advantages for Chinese exporters over their competing developing country counterparts. Chinese firms enjoy numerous direct and indirect subsidies and supports that are not enjoyed by their competitors in other developing nations. For a start, the policy of keeping the renminbi tagged to a declining dollar means that its currency depreciates against the floating (partial and full) currencies of other emerging economies, thereby making Chinese exports more competitive.

The massive domestic savings glut and the limited depth and breadth of Chinese financial markets hepls government keep deposit rates artificially low which in turn means that its private companies can access capital at very cheap rates. The large over-capacity in many core sectors like steel, cement, aluminium etc and in many manufacturing industries mean that producers are able to effectively dump their products at prices that cannot be matched by their global competitors. The cost of other essential inputs like power, water etc are much lower than elsewhere.

The obsession with export promotion also means numerous tax concessions that too confer greater pricing flexibility. All this in addition to other direct production and export subsidies, including that from the $560 bn fiscal stimulus. Further, other indirect supports like keeping wages low and ease of land acquisition for setting up production facilities also means that Chinese corporates can focus their expenditures on issues directly related to production. In any case, the huge economies scale of Chinese manufacturing production already provides considerable pricing advantages in all sectors.

As the Times reports, the chorus against China's trade policy is mounting. The APEC has called for "market-oriented exchange rates" and atleast some members of the ASEAN are considering a review of tariff reductions agreed under the free-trade pact with China. India has filed a number of unfair trade practices compalint against China with the WTO. A spiral of competitive devaluations with very adverse consequences is a real possibility. This graphic captures the trend with the example of trade in nails.

As I have blogged earlier, it may be time to call the Chinese bluff with its cosmetic infrastructure investments in Africa and elsewhere and forge common front with other major emerging economies like Indonesia and multilateral platforms like ASEAN to confront the unfair export subsidies, direct and indirect, enjoyed by Chinese companies that make them competitive at the expense of their developign country partners. In the absence of immediate action, the voice from the giant Chinese manufacturing machine will grow louder as it sucks more and more jobs out from other emerging economies.

Update 1
And now comes more direct "job sucking", as Chinese contractors insist on carrying construction workers from China for their external projects. From January to October 2009, Chinese companies completed $58 billion of projects, a 33% increase over the same period in 2008, and from Angola to Uzbekistan, Iran to Indonesia, some 740,000 Chinese workers were abroad at the end of 2008, with 58% sent out last year alone, according to the Chinese Ministry of Commerce.

Update 2
Paul Krugman estimates the negative shock of Chinese beggar-thy-neighbour policy to be 1.4% of world GDP, and causing 1.5 million jobs in America.

Update 3
Arvind Subramanian echoes much the same arguments calling for a broader global coalition to oppose China's weak renminbi policy that adversely affecting poorer countries - "mercantilist trade policy whose costs are mainly borne by other developing and emerging market countries".

Update 4
Dani Rodrik estimates that China’s undervaluation has boosted its long-run growth rate by more than 2% by allowing greater output of tradable goods.

Update 5 (27/3/2010)
Paul Krugman has emerged as the premier critic of Chinese weak yuan policy. See this, this, this, this, and this.

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