The Great Trade Wall of China

Foreign companies continue to struggle with protectionist measures in China.

China may be far from a communist country economically; the party does maintain ultimate authority over economic planning and policy. The Middle Kingdom has opened its borders to international investment and trade, but foreign companies continue to struggle with tariffs, burdensome regulations and corruption.

After liberalizing its trade policy, China stopped short of becoming a true market economy by freeing its domestic market from complicated rules and regulations that are often arbitrarily imposed on businesses. Since the judicial system is so weak, companies have to resort to arbitration. Intellectual property rights are not enforced effectively while corruption is widespread in government procurement, construction and banking.

Protectionism is most conspicuous in the realm of investment where foreigners must face a lack of regulatory transparency and cope with inconsistently enforced laws and government controls. While recent measures have aimed to improve the status of foreign investment, the Chinese legal system still cannot guarantee the sanctity of contracts while capital account transactions are tightly regulated.

At the same time, domestic industries and manufacturers with allies in the Communist Party manage to avoid scrutiny and interference. “What we see is an attempt by the Chinese government to develop its own national champion companies,” said Christian Murck, president of the American Chamber of Commerce in China, on France 24’s Beyond Business program last month.

China is already losing its cheap labor advantage to nearby Indonesia and Vietnam while Southeast Asian economies, particularly Malaysia and Thailand, are investing in high tech industries. It is this sector that the Chinese seek to protect most, said Olivier Marc, CEO of Euro China Capital, on the same program. “The rules have changed according to specific interest by the Chinese in high value added sectors.”

Aside from legal measures and plain bureaucratic obstructionism, China’s stimulus package, enacted in the wake of the financial recession, immensely profited domestic industries at the expense of foreign competitors.

China’s stimulus included nearly $600 billion worth of investment — almost ten times the size of President Barack Obama’s in terms of national income. A third was provided by the government. More than $400 billion had to be raised by the private sector.

According to Premier Wen Jiabao, the stimulus had helped maintain the “momentum” of Chinese growth and “avoid major fluctuations in the process of China’s modernization because of severe external shock.”

The high degree of economic intervention is designed to perpetuate China’s stellar growth rate which is practically the only viable source of political legitimization its ruling Communist Party has. As the country’s middle class is burgeoning and asserting itself politically, the establishment will be hard pressed to continue to quell dissent with economic successes alone. Protectionism, moreover, affects Chinese businesses with global aspirations as well.

Another threat to the current system of cronyism stems from the huge income divide between China’s prosperous eastern seaboard and its agrarian hinterland where hundreds of millions of people remain impoverished.

During the most recent National People’s Congress in Beijing, the party planned to enhance internal demand by decreasing China’s dependence on exports and boosting income growth and consumption at home.

In order to diversify the economy and finance increased welfare spending for the poor, the state will likely have to cut subsidies and subsidized loans to companies, real estate developers and other vested interests with friends in the party. As major changes in political leadership are expected next year though, it may prove difficult for the ruling generation to implement such reforms.