Vietnam Addresses Trade Deficit with China

Bilateral trade between China and Vietnam has seen exponential growth in recent years following the establishment of the ASEAN-China Free Trade Area. In 2001, trade between the two countries stood at $3 billion but has since climbed to $40 billion by 2012, expanding over 1,200 percent.

While both countries have benefited from this meteoric rise in bilateral trade, in recent months Vietnamese leaders have sought to address the trade deficit that exists with China.

During the first two quarters of 2013, Vietnam’s trade deficit with China reached $11.4 billion dollars, with exports worth $6 billion and imports totaling $17.4 billion.

In order to increase Vietnam’s exporting power to China, the government has ratified new addendums to liberalize the country’s Law on Investment aimed at boosting foreign direct investment into several sectors, including oil refining, iron and steel, cement and construction materials. It is hoped that the increased flow of foreign capital will allow Vietnam to boost the value of its exported goods by climbing the value added chain. Read more “Vietnam Addresses Trade Deficit with China”

India, United States Want to Quadruple Trade: Biden

American vice president Joe Biden gives a speech on board the USS Freedom in Singapore, July 27
American vice president Joe Biden gives a speech on board the USS Freedom in Singapore, July 27 (USN/Karolina A. Oseguera)

American vice president Joe Biden, the first to visit India in three decades, spoke of the two countries’ mutual desire to quadruple bilateral trade at a speech given in Delhi last week.

“Our bilateral trade has increased fivefold to $100 billion over the past thirteen years. We see tremendous opportunities (in India) and there is no reason that if our two countries make the right choices, trade cannot grow fivefold or more,” Biden said.

However, he acknowledged a lot needed to be done to remove trade barriers and that India needed to address its “inconsistent” tax system and barriers to market access. Read more “India, United States Want to Quadruple Trade: Biden”

China’s Trade Figures for June Appear “Grim”

China’s customs spokesman Zheng Yuesheng has described the recently released June trade figures as “grim” as the nation surprised analysts by posting a significant decline in trade. Economists had been expecting exports to increase by 4 percent and imports to rise by 8 percent yet the figures showed a year on year decrease of 3.1 percent and .7 percent respectively.

“China faces relatively stern challenges in trade. Exports in the third quarter look grim,” commented Zheng. Read more “China’s Trade Figures for June Appear “Grim””

China, Taiwan Ink Service Trade Agreement

The Bund of Shanghai, China, May 1, 2009
The Bund of Shanghai, China, May 1, 2009 (Flickr/IceNineJon)

Trade relations between China and Taiwan received a substantial boost last month with the signing of a bilateral Service Trade Agreement.

The agreement, which will grant access to a large number of service sector businesses for cross-Strait transactions, was signed between China’s Association of Relations Across the Taiwan Straits (ARATS) and Taiwan’s Straits Exchange Foundation (SEF) during negotiations held in Shanghai this month.

The Service Trade Agreement will expand the role of the 2010 Economic Cooperation Framework Agreement (ECFA), which was the first significant step towards trade liberalization following five decades of strained trade relations between China and Taiwan. Read more “China, Taiwan Ink Service Trade Agreement”

China, India Vie for Myanmar’s Energy Resources

The competitive relationship between China and India has become a defining feature of the strategic environment across emerging Asia. While both nations are currently not in direct conflict, there are several areas that hold strategic interest which could potentially act as the stage for a clash between the two nations. Their current rivalry in Myanmar is one such area.

It is China and India’s incessant need for alternative sources of energy that is the main focal point of their rivalry within Myanmar. As China and India are increasingly forced to rely on the global oil market to meet their energy demands, they are more susceptible to supply disruptions and price fluctuations. Rapid growth rates in both countries have grown in tandem with increased demand for energy. By 2020, it is estimated that China and India combined will account for roughly one third of the world’s gross domestic product and, as such, will require vast amounts of energy to fuel their economies. Read more “China, India Vie for Myanmar’s Energy Resources”

India Poised to Be China’s New Engine for Growth

View of the presidential palace in New Delhi, India, March 26
View of the presidential palace in New Delhi, India, March 26 (Wikimedia Commons)

Quite possibly the most senseless foreign policy position China has taken over the years has been its stance toward Japan. With diplomacy concentrating on World War II issues that most of the world has now moved on from, sovereignty disputes over close to worthless islands and a rise of Chinese nationalism fueled by state propaganda, China has succeeded in alienating what remains one of the world’s largest economic powers as well as a major historic foreign investor in China and a close regional neighbor.

While Japanese investment will remain in China, the fallout from the Chinese government fueled drop off in Japanese sales to China has made the Japanese business community now feel unwelcome in the country. Consequently, future Japanese investment is looking for more sustainable, and friendly, investment relations across the rest of Asia.

A look at the emerging markets across Asia sees Japanese motorbikes and cars on the streets of Hanoi, Ho Chi Minh City, Rangoon, Jakarta, Delhi and Sri Lanka. Successful joint ventures across the region have made Japanese auto companies a dominant force throughout Asia and beyond. Even in the United States and Europe, some of the most popular brands include Toyota, Honda, Nissan, Suzuki and Mazda.

China, meanwhile, is now stuck trying to foist unwanted Volvo sedans on a domestic population that does not want to buy them and is not seeing much overseas demand for its domestic auto brands. No one wants an FAW truck except for a handful of nations in Africa and Latin America. Losing the support of the Japanese investment community was the wrong diplomatic step to take and China will pay in terms of lost opportunities to partner with Japanese manufacturers globally for this misguided approach for years to come.

In short, the lesson is this: you cannot continually beat up on one of your largest trading partners and one of the world’s largest economies without something giving way at some point. It has, and Japan, at least within the business investment community, now regards China as “unfriendly.”

This is relevant to Chinese premier Li Keqiang’s visit to India on Monday, as China three weeks ago invaded parts of Ladakh — Indian held territory in the far west near the border with Pakistan.

A three week standoff over arguments concerning the “Line of Control” ended with the Chinese leaving; a curious incident that suggests all may not be entirely satisfactory in relations between China’s military and its diplomatic and commercial ministries. It has gone unnoticed by many whose traditional view of India is that it remains poverty stricken and poor. In actuality, the country has recently overtaken Germany and Japan in terms of gross domestic product in purchasing power parity terms and sits below only the United States, the European Union and China (according to the CIA World Factbook).

China, for once, cannot afford to upset both Japan and India. Li’s visit, then, takes on some significance for Sino-Indian bilateral relations. It also comes at an interesting time in terms of their population demographics.

China is losing the worker demographic dividend — an advantage it has held over India for the past two decades. Twenty years ago, the average age of a Chinese worker was 23. Now that age is 37 and a 37 year-old worker requires assets and they expect the Chinese government to help them acquire these.

The difference between a 23 year-old worker and a 37 year-old worker is that the latter is likely married, has a child, two sets of parents, a mortgage, a car and probably wants to take his family on overseas vacations. Couple that with the child’s education — possibly with the hope of an overseas university degree — plus planning for retirement and aging inlaws and the implications become clear.

Chinese consumers are becoming more demanding at an accelerating rate as well; China is one of the world’s fastest aging nations with some 250 million — nearly 20 percent of the population — reaching retirement age by 2020. This places domestic stresses on the Chinese government which needs to keep its own population satisfied in the face of growing demand for better consumer products and services. It was feasible for China itself to satisfy that demand twenty years ago but those days are gone. China’s workers are retiring at an increasing rate and the nation is simply running out of the workers it needs to satisfy its own consumer demand.

This is why India has suddenly become such an important strategic partner for China. The average age of an Indian worker today is just 23 — the same as China’s in 1992. India is inheriting the Chinese worker dividend and China needs to put India to work just to satisfy its own domestic consumer needs.

In fact, the institutional infrastructure to put this into place has already begun. China and India are both part of the Regional Comprehensive Economic Partnership Agreement (RCEP) which includes the ASEAN trade bloc of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam in addition to Australia, New Zealand, Japan and South Korea.

The RCEP does away with tariffs on thousands of products right across this region, meaning it will be possible (should your product qualify) to manufacture in India, where wages and land costs are far lower, and export to the China market duty free. Add in the bonus domestic consumer market of India itself plus that of the other RCEP nations and a meeting of minds over China’s huge consumer market — with the middle class expected to reach six hundred million by 2020 — and India’s development of a huge, young and inexpensive labor pool starts to become extremely valuable to the Chinese government.

Li Keqiang’s first goal will be to secure Indian commitments to invest in China but this may not necessarily be in the traditional sense. It may well mean by encouraging more Indian manufacturers to partner with Chinese manufacturers — in India — to then service Chinese consumer demands. I predict a huge growth in Indian-Sino joint ventures over the next few years.

In doing so, China cannot afford to mess around with India any further with border disputes as it has done with Japan in the past. In fact, China may even be prepared to back down from its long-term policy of noncommitment to any border disputes and actually decide it is in its better interests to keep India happy and drop claims on Arunachal Pradesh and other areas. China pushed Japan too far over historical war issues and disputed territories and losing the foreign investment largesse of a major investor in China was a huge mistake.

As India takes on the mantle of “world’s third largest national economy” and China runs out of workforce to supply its own consumer base, dynamic trade and diplomatic relations with Delhi are not an opportunity that Beijing can now afford to mess up or miss out on.

This article by Chris Devonshire-Ellis originally appeared at Asia Briefing, May 17, 2013.

India-EU Free Trade “Early Harvest” Deal Looks Possible

View of the presidential palace in New Delhi, India, March 26
View of the presidential palace in New Delhi, India, March 26 (Wikimedia Commons)

Hopes are rising that the proposed India-European Union Free Trade Agreement may finally be signed off next month after five years of talks. With the chief negotiators of both sides due to meet in two weeks’ time in Brussels, both parties have stated that they are keen to get the agreement in place at a joint ministerial meeting planned in June.

Both sides need some fast and good news. The European Union has been mired in economic problems and has several member states facing elections in September and the Indian government needs a political and economic flag to wrap itself in during its own elections due next year. Another window for reaching consensus may not come around again for some time.

The negotiations thus far have floundered on a number of pressing issues: the EU wants India to cut tariffs for the auto sector and insurance while India wants easier EU visa processing for professionals in its service industry and the granting of “data secure” status.

Two of the issues are complex. A change in raising the foreign investment ceiling in India’s insurance sector beyond the current 49 percent limit will require legislation while the EU is unhappy with the strength of India’s data protection laws. The easier granting of visas to Indian nationals is also problematic for the EU as it grapples with high unemployment rates.

Being recognized as “data secure” is crucial for India, as according to the Indian government it will ensure meaningful access in cross border supply. Currently, however, India is not deemed to offer adequate data protection. The EU’s Data Protection Directive permits personal data to be transferred to third party countries outside the EU if they have been determined as “data secure.”

European industry representatives worry that as India expands its share of the European outsourcing market, which already stands at 30 percent of India’s $100 billion IT and business process outsourcing industry, personal data may be compromised.

These issue notwithstanding, EU-India trade in goods has been trending upward.

There remains good chances that an “early harvest” agreement could still be reached, with the trade agreement signed off but leaving room for later adjustment in key sectors.

India had previously undergone strenuous trade negotiations with both Malaysia and Thailand, with parties stuck on certain issues. Under the so-called “early harvest” approach, however, they were able to sign off on the bulk of the trade issues leaving work for the more contentious points later.

A nine page qualitative analysis of the proposed EU-India Free Trade Agreement as written by the University of Sussex and sponsored by the European Commission may be downloaded here (PDF).

This story first appeared at Asia Briefing, May 3, 2013.

China’s Investment in Europe Continues to Rise

The Bund of Shanghai, China, May 1, 2009
The Bund of Shanghai, China, May 1, 2009 (Flickr/IceNineJon)

Chinese companies increased their investments in Europe by as much as 21 percent in 2012, solidifying its position as the main destination of Chinese Outward Foreign Investment (ODI). In total, Europe was the recipient of $12.6 billion of Chinese investment last year which now represents approximately 33 percent of all Chinese ODI. Read more “China’s Investment in Europe Continues to Rise”

India, Vietnam Emerging as China Alternatives

At the turn of the twenty-first century, there were two main schools of commercial thought with regards to China. The most popular was that China represented a massive market to sell to with roughly 1.3 billion potential consumers. The second was that China had a young, available and inexpensive workforce that was relatively skilled and disciplined. While the latter has proven the dominant economic driver for the past two decades, China’s one-child policy (implemented nationwide in 1982) has meant that the nation’s supply of cheap labor has been drying up — and is now doing so at an increasingly rapid rate.

China today is one of the fastest aging populations in the world — a fact that has not gone unnoticed by the central government. Wary of inheriting a huge population of aged but poor citizens, it has been state policy over the past few years to get more money into the pockets of Chinese nationals and to implement what by global standards is a relatively expensive, contribution based state insurance scheme.

These policies have had the effect of increasing minimum wages across the country by an average of 12.6 percent each year from 2008-2012, with this impacting vertically upon more senior level employees. It is hard to justify to senior staff that lower level employees have increases of 12.6 percent when senior employees cannot. The effect, therefore, of raising the minimum wage has been a massive wholesale increase in salaries across businesses based in China at all levels.

When you combine these base salary increases with every employer’s mandatory social insurance and housing fund contributions at roughly 35-45 percent on top of salaries for each employee, these costs begin to add up fast.

Even relocating a factory into the relatively inexpensive inland regions of China is proving a false economy — firstly because increased infrastructure and transportation costs eat into most of the savings and secondly because these areas too are experiencing large increases in wage overheads.

While all of this is good news for businesses wishing to sell to China, it is becoming increasingly difficult for export driven businesses to justify a China presence — unless at least part of that production is destined for the domestic market.

Yet even here, competition is just around the corner.

Competition for this type of export manufacturing business model is appearing right around the corner as China’s free-trade agreement with ASEAN kicks in come 2015. This means that factories based in Southeast Asian countries, such as Vietnam, can soon sell products duty free to the Chinese consumer market. When one then factors in Vietnam’s lower wages and land use costs, the implications are clear.

Vietnam has even gone to the extent of directly targeting China as a key competitor for manufacturing based, export driven foreign direct investment. It has recently passed legislation dropping its corporate income tax level to two points below that of China beginning January 1, 2014 and, like China did twenty years ago, has introduced sweeping investment reforms and numerous new export processing and manufacturing free-trade zones along its eastern coast.

Consultants still selling the China story will suggest Vietnam’s infrastructure is not up to par but that too is rapidly changing with the Vietnamese government introducing massive construction projects and road, rail and port development schemes. A drive from the airports in Hanoi and Ho Chi Minh City into their respective downtown areas will provide a visual snapshot of the large-scale infrastructure development now taking place in the country. It is prudent to recall that not so long ago, China used to look like one big construction site as well.

There are also other drivers at work here. An increasingly wary United States is becoming concerned with placing all of its purchasing needs into a single China basket; a feeling shared by many of China’s neighbors. Alarm bells went off globally when China suddenly cut supplies of rare earth minerals to Japan after a political spat and concerns over China’s tendency to use trade ties to strong arm other countries into bending to its wishes is also having an effect. Hedging the China risk is now influencing the spread of global manufacturing across Asia.

India, meanwhile, also represents an attractive alternative to today’s China as it actually bears a strong resemblance to China twenty years ago — with its massive consumer market and an abundant, young and inexpensive workforce.

Overall, operational costs in India remain far lower than China and like Vietnam, any executive arriving at the new international airports in Delhi or Mumbai, or taking a trip along the highway into either city center, cannot fail to be impressed by the scale of development — construction sites and cranes are everywhere as the country rapidly upgrades its infrastructure.

The east Indian port city of Chennai is a classic example. While the media focuses on Delhi and Mumbai, Chennai is home to the third largest expatriate population in India. It is also a manufacturing home for multinational corporations, including Nokia, BMW, Siemens, Dell, Motorola and Foxconn among many others, while it hosts the Asian headquarters and back office operations for many global financial institutions.

There’s also the matter of India’s own middle class which is currently about the same size as China’s at 250 million — making it a rising star as a combined base for export manufacturing and domestic sales. India is now one of the few countries where both cheap labor and a large, wealthy consumer class go hand in hand.

In short, investors that are able to look beyond India’s perennial issues — such as its inadequate (but rapidly improving) infrastructure and a large, loud democratic government that at times is slow to put forward necessary reforms — should be able to add value to their global operations by investing in India.

The reasons for these developments are clear. As China’s working population ages and becomes more expensive, alternative Asia beckons. Vietnam in particular is leading the new Asian wave of investment for export driven manufacturing while India now offers not just export manufacturing opportunities, but also, like China, the ability to sell to an increasingly wealthy middle-class population.

China’s continuing evolution can perhaps best be explained in a recalibration of the popular opinion at the turn of the century that the 2000s will belong to China, much like the 1800s were dominated by the British Empire and the 1900s saw America’s rise to prominence.

No, the twenty-first century will more aptly be headlined as “Asia’s century,” and although China will very much be a part of that, other countries in the region will be too.

For those businesses that are involved in export driven manufacturing, it is the Asian connection that now counts. This is the chief reason why China’s role within global trade and the development of emerging Asia should now be reassessed in order to better absorb the ongoing financial battle between production costs and the demands of the global end user.

This article by Chris Devonshire-Ellis originally appeared at Asia Briefing, March 26, 2013.

Obama Addresses Pressing Issues at East Asia Summit

President Barack Obama, flanked by Prime Ministers Yoshihiko Noda of Japan and Wen Jiabao of China, attends the East Asia Summit in Phnom Penh, Cambodia, November 20
President Barack Obama, flanked by Prime Ministers Yoshihiko Noda of Japan and Wen Jiabao of China, attends the East Asia Summit in Phnom Penh, Cambodia, November 20 (State Department/William Ng)

Recently reelected American president Barack Obama met this week with some of Asia’s top leaders at the seventh East Asia Summit in Phnom Penh, Cambodia, as part of a broader regional tour. The president used the opportunity to promote American economic interests and tackle vital regional issues.

Prior to the summit, Obama sought to address the ongoing maritime territorial disputes plaguing Asia, meeting with leaders from China and Japan. The focus of the talks concerned the conflict between the two countries over the uninhabited islands that the Japanese government purchased from a private owner. Known as Diaoyu in China and Senkaku in Japan, the islands have caused a rupture between the world’s second- and third largest economies, resulting in mounting political tension, massive anti-Japan protests and a slowdown in bilateral trade.

Japan has noted the grave security issue that the conflict poses, announcing an expansion of American-Japanese military operations. In a meeting with Japanese prime minister Yoshihiko Noda, Obama emphasized the longstanding alliance between the United States and Japan, labeling it a “cornerstone” of East Asian security. Ensuring to appeal to the other side however, he also stressed the importance of stable Sino-American political and economic relations. In a meeting with Chinese premier Wen Jiabao, Obama stated that “as the two largest economies in the world, we have a special responsibility to lead the way in ensuring sustained and balanced growth.”

Nonetheless, Obama’s potential impact seems limited. China has insisted that this conflict, along with its other maritime disputes in the region, should not be discussed at the summit, stating that it would rather deal with these issues on a bilateral basis. Moreover, the Asian countries involved in these disputes have expressed an unwillingness to engage in heated discourse over disputes, given China’s powerful geopolitical position and their dependence on trade with the economic giant.

At the summit itself, President Obama promoted free economic exchange between Asian nations and the United States. This involved a discussion of the Trans Pacific Partnership (TPP), an evolving free-trade agreement involving various countries in the region including Vietnam, Malaysia and Singapore. While the TPP would certainly be constructive in promoting exports and job growth in all nations involved, this is far from the main purpose of the agreement. Considering that the United States already has free-trade agreements with the more economically developed TPP countries, such as Singapore, and that the trade benefits received from the less developed countries would be relatively marginal, an ulterior motive is clearly visible.

The greatest benefit the United States would gain from the TPP is an invasion of China’s economic turf. If signed, the agreement could pose a great challenge to Chinese regional hegemony, forcing it to compete with an unprecedented level of American influence. Facing wavering levels of regional clout, China might be compelled to further open up its economy to foreign direct investment, allowing rapid expansion of the already massive Sino-American trade relationship.

Following the East Asia Summit, Obama will conclude his East Asia trip, which included a stop in Thailand, a longtime American ally, and a historic visit to the formerly isolated and newly developing nation of Burma. The impact of his visit is yet to be seen.

This article by Daniel Fleishman originally appeared at 2point6billion.com, November 21, 2012.