Why China Has Reason to be Anxious

Even if China has now the world’s second largest economy which continues to grow almost unhampered by the global downturn, the country’s leadership has reason to be anxious about the future. With labor costs on the rise while several hundreds of millions of Chinese remain impoverished, it is imperative that they simultaneously ensure cheap exports and invest in the development of a modern services-based economy. In sheer numbers, no nation in history has ever faced a challenge as daunting as China’s.

For years, China was booming. Companies outsourced manufacturing to China because labor was cheap and the undervalued renminbi made exports even cheaper. But during the past ten years, wages have tripled while the pattern of demand in the West often makes it more attractive for companies to relocate production closer to home. European multinationals are setting up shop in Central Europe and Turkey while Mexico and other countries in Latin America are more practical bases of production from the American perspective than East Asia.

There is competition from other parts of the region as well. Wages in Indonesia and Vietnam remain low while countries as Malaysia and Thailand are rapidly catching up compared with Japan, Singapore and South Korea where labor costs are high but so are education standards and productivity rates.

Southeast Asia is attractive because of its relatively lax regulatory regimes moreover. Obtaining a business license in China can be an arduous process. Legal protection is scarce but corruption rampant. Brand names, copyrights, patents, trademarks and trade secrets are routinely stolen while investment is many sectors of the economy is either restricted or prohibited altogether. In the ASEAN countries, business freedom is generally greater while foreign companies and investment are welcomed.

As though the necessity of reform in this area weren’t intimidating enough for a country that has so accustomed to state control, China’s demographic clock is ticking like no other nation’s in history. “Already losing its cheap labor advantage right now, China is set to stockpile elders from here on out at a pace never before witnessed,” observed Thomas Barnett at World Politics Review last month. By the middle of this century, more than four hundred million Chinese are expected to have retired — more than America’s total projected population by that time. “That should explain what’s driving China’s seemingly selfish economic strategy,” according to Barnett.

But in addition, China is now expected to cover the spendthrift West’s need to boost exports while also serving as income elevating engine for the rest of the world’s developing economies — largely through the Middle Kingdom’s ravenous resource demands.

The United States have been urging Beijing to appreciate its currency and submit to a rebalancing of world trade in order to boost the competitiveness of American exporters at the expense of the Chinese. Barnett warns that China interprets this as “nothing less than an attempt to destroy the ruling Communist Party’s primary source of political legitimacy — namely, China’s ongoing per capita income expansion.” China won’t move on currency as long as it has millions living in poverty and many millions more whose livelihoods depend on exports to the West.

In the last three decades, as China carefully liberalized its market, it has always professed a “peaceful rise” on the world stage. But China is a great power now, one that has to transform into a mature, industrial economy — in just one generation. Its strategy, like any other nation’s, is grounded in self preservation and this will become increasingly evident as China scrambles for resources and investment overseas. The Chinese century has only just begun.

United States, Korea Finalize Trade Deal

South Korea and the United States finalized a free-trade agreement over the weekend which the White House hopes will boost American exports by some $11 billion and sustain at least 70,000 jobs at home. That makes the pact the largest of its kind since the North American Free Trade Agreement with Canada and Mexico came into force in 1994.

In Seoul last month President Barack Obama had to postpone the signing of a trade deal with Korea. In a statement released Saturday, the president explained that he had directed American negotiators “to achieve the best deal for American workers and companies,” particularly with regard to car exports and beef.

Instead of cutting a 2.5 percent tariff on Korean car imports, the United States will lift the tax over the next five years. A 25 percent tariff on trucks will be phased out during the next decade. South Korea’s tariff on American trucks has to be eliminated immediately however. Under the agreement, American automakers are each allowed to export up to 25,000 cars to Korea annually.

Korea’s existing tariffs on agricultural imports are exceptionally high at 54 percent. As the new trade agreement eliminates or reduces import levies, the American Farm Bureau Federation estimates that farmers’ and ranchers’ exports to Korea will increase by as much as $1.8 billion every year thanks to expected increases in sales of major grain, oilseed, fiber, fruit, vegetable, and livestock products. Koreans bought $3.9 billion worth of agricultural products in 2009 and are America’s fourth largest beef importers.

Last month’s economic summit of Pacific countries in Japan attested a commitment to free trade and according to the president, the new trade deal not only “deepens the strong alliance between the United States and the Republic of Korea” at a time of considerable upheaval on the peninsula; it also “reinforces American leadership in the Asia Pacific.”

South Korea is already America’s eight largest trading partner. Last year the United States imported $11 billion more worth in goods from Korea than they exported though — an imbalance that the free-trade pact seeks to remedy. The American trade surplus to South Korea was $7.1 billion in 2008.

Business leaders as well as seniors Republicans have welcomed the trade agreement which is subject to congressional approval.

India’s Ascendance in the Commonwealth

As the world watched with keen interest, India organized the nineteenth Commonwealth Games in New Delhi last month. The event was accompanied with the usual chaos but affirmed that India has rapidly ascended on the world stage — something that was rightly acknowledged by American president Barack Obama during his trip to India last week.

India’s ascendance in world affairs coincides with the slow and steady decline of so-called “Western power”. At least one can safely say that Europe is on the decline whereas the United States are trying to maintain hegemony in an Asian twenty-first century. In fact, Canada’s Hamilton lost out to India’s New Delhi in hosting the Commonwealth Games this year because of the financial maneuvering the latter could boast.

India definitely considers the year 2010 as a watershed for major reasons. It is important to note that the leaders of all five permanent members of the United Nations Security Council have visited India recently. This emphasized the growing importance of New Delhi in world affairs.

Also, in a historic coincidence the year 1510 was when the Portuguese sailor Vasco da Gama landed in the state of Goa setting the stage for the colonial onset from European powers as the Dutch, Portuguese, the French and English in India. Before attaining independence in 1947, India had been under British imperial rule for over a hundred and fifty years.

Indian policymakers have shrewdly understood the legacy left over by the colonial British. In the immediate years after winning independence, they employed a clever and subtle diplomacy much like the United States did during its formative years. It initiated the Non-Aligned Movement, courted the Soviet Union to use its Security Council veto on Kashmir (in fact India’s economy was largely planned like Russia’s with the planning commission still prevalent), it got weapons from the Americans to fight China, talked about “Atoms for Peace” while using the Canadian aided nuclear power reactor for the Smiling Buddha nuclear test of 1974 and it didn’t hesitate to jump on the bandwagon of the Commonwealth of Nations.

Though India’s ascendance in world affairs is largely because of its English-speaking population, its more forward looking strategists understand that the country needs to reach out to continue to rise as a global power. President Obama’s support for permanent Security Council membership for India was a welcome gesture therefore. Incidentally, India became a nonpermanent member of the Council this year.

By gaining such accolades and attention around the world, India has decided to exploit its colonial roots and reach out to other countries that used to be part of the British Empire. Though the Commonwealth was founded in 1931 for different political reasons, its first modern day objectives were formulated in the 1971 Singapore Declaration, which committed the organization to world peace and the promotion of representative democracy and individual liberty.

The above lofty idealistic principles are easily recognizable in India’s democratic growth as a republican nations for the since time since 1947. This was aptly said by President Obama in his speech to the Indian parliament and he called for greater Indian role in fostering democracy around the world.

In fact, India has started with the Commonwealth. Its reasons are twofold: the first being geopolitical; the second, economical.

Though ceremonially, Queen Elizabeth II is the head of the Commonwealth of Nations, it will only be a matter of time before New Delhi starts wielding more power in the organization. Its high position in the Commonwealth is buttressed by its position in the Commonwealth Secretariat. The current head of the Secretariat is Kamalesh Sharma, the first Indian to hold the position. His election came briefly after Pakistan’s second suspension from the Councils of the Commonwealth in November 2007 after then President Pervez Musharraf imposed emergency in the country.

India understands that it will face stiff competition from China in regions as Africa, Latin America and South Pacific. To compete effectively, India needs allies and these Commonwealth nations scattered around the world will serve as excellent launch pads to open up markets and spread influence.

The South Pacific Islands are a case in point. There are twelve countries in the region and India needs their support in the United Nations General Assembly to secure a seat as a permanent member of the Security Council. To that end, India had extended its “Look East” policy to the South Pacific Islands through two means. First, by joining the Pacific Islands Forum and second, by renewing old contacts among the Commonwealth nations, it has started to have more bearing on the region, taking up the issue of Fiji’s military rule in international bodies as the United Nations to keep Fiji out of the Commonwealth Nations Council. This was very much evident in the Pacific Islands Forum meeting held in August of this year at Vanuatu, a tiny Pacific island. India achieved its goals there by courting larger countries in the area, including Australia and New Zealand.

Meanwhile, India has been generous in extending aid to Haiti where tens of thousands were killed in a devastating earthquake this year. India’s then external affairs minister, Dr Shashi Tharoor went to Haiti to oversee the relief work. This gesture had gone well with other tiny islands in the West Indies where India has a diaspora connection.

India would also strengthen its relations among the Commonwealth nations by holding the annual Pravasi Bharatiya Divas which is aimed at connecting the influential Indian diasporas around the world. India has in fact established a Ministry of Overseas Indian Affairs, aimed at keeping an eye on the needs of India’s booming economies abroad. The annual Confederation of Indian Industry taps into this need.

In conclusion, it seems history has come full circle since the “half naked fakir” came knocking the doors of the British Empire for dominion status on the way to independence to a situation when the newly-elected British prime minister David Cameron came to India this support to promote closer business ties. India is no more a crown in the jewel of British colonial power. In fact, one may argue that India is now the Raj of the Commonwealth.

Pacific Leaders Promise to Boost Free Trade

The leaders of the world’s three largest economies agreed on Saturday to continue to push for free trade. In Yokohama at the Asia Pacific Economic Cooperation forum, China, Japan and the United States apparently put aside their differences to warn against the dangers of protectionism.

President Hu Jintao vowed to keep China’s markets open and reiterated Friday’s G20 pledge to try to balance world trade. In Seoul, South Korea this week, the leaders of the world’s twenty largest economies agreed that major trade imbalances pose a threat to their recovery but they failed to reach an agreement on how to address the issue. Surplus economies as China and Germany were particularly hesitant to submit to an accord that might have forced them to change policy.

In the wake of the crisis, several industrialized countries, including France and the United States have promoted domestic industries considerably, bailing out automakers and, in the case of France, conditioning such a bailout on a promise not to outsource jobs. China stimulated its economy with a package nearly ten times the size of President Obama’s in terms of national income. Of the nearly $600 billion worth of investment, only a third was provided by the government however. More than $400 billion had to be raised by the private sector.

Along with stimulus measures which have failed to avert high unemployment and low investment rates, calls to “buy American” and criticism of allegedly “unfair” competition from China are heard ever louder in the United States despite President Barack Obama’s assurance that free trade will “create American jobs.” His administration’s failure to conclude the Korea-United States Free Trade Agreement in Seoul this week is not an encouraging sign however.

Obama also failed to persuade the Chinese to appreciate their currency to make American exports more competitive. The United States complain that China’s currency manipulation is largely response for its $227 billion trade surplus with the United States. Despite promises to gradually let the renminbi gain in value, China is unlikely to move on currency significantly, afraid that a sudden increase in the yuan‘s value would damage Chinese industries.

For the time being, the Chinese have reason to point at the United States’ own expansionary monetary policy instead as an attempt to drive down the exchange rate of the dollar and help American exporters. President Hu didn’t, publicly, but urged the international community to “oppose protectionism in all manifestations.”

On the sidelines of the APEC summit, the Chinese president held a brief bilateral meeting with his Japanese host, Prime Minister Naoto Kan who also met with President Dmitri Medvedev of Russia in private. Tokyo has been at odds with both Beijing and Moscow in recent months after a Chinese trawler collided with two Japanese coast guard vessels near disputed islands east of Taiwan and because of the Russian president’s visit to another disputed island chain north of Hokkaidō.

With Japan’s economy lingering in recession, Kan’s promise to further liberalize trade, over heavy protests from farmers who fear the loss of subsidies and protective tariffs, was notable. “We have to grow with the fast developing economies of the Asia Pacific,” he stressed. The prime minister previously announced tax relief for Japanese business in order to help his country recover.

Cameron Promoting Trade with China

While American president Barack Obama called for closer business ties in India this weekend, Prime Minister David Cameron visits China, leading a huge trade delegation in order to boost economic ties between the two countries.

Cameron is accompanied by his chancellor, George Osborne along with some fifty leaders in British business and education as part of a two day trip to China.

Writing in The Wall Street Journal, the prime minister praised China for its remarkable economic growth in recent years. Now the second largest economy in the world, “a strong relationship with China is plainly in Britain’s national interests,” he professed.

There is a strong strategic fit between our economies. China is a key export market for Britain. And as China rebalances its economy and its growing middle-class demand new and ever more high value goods, brands and services, so British companies have much to offer.

More than forty specifics agreements on trade as well as cultural and education initiatives are expected to be signed between Britain and China while Cameron is in the country. Deals already agreed include £750 million for Rolls-Royce to supply and service jet engines for China Eastern Airlines and the construction of fifty new English-language schools by Pearson. But it is “the breadth of sectors and the range of companies involved that is most promising of all,” according to Cameron. “Many small- and medium-size enterprises from Britain will be expanding into China in areas such as low carbon growth, urban design and information and communication technology.”

There is more to economic cooperation than bilateral trade however. “Both Britain and China have a huge stake in expanding global trade.” On the eve of the G20 summit in Seoul, South Korea later this week, Cameron promised to try to advance the World Trade Organization’s Doha trade round “that has frankly gone on for far too long. Next year has to see the deal done, and that means action now.”

Future world free-trade agreements are currently behind held up by opposition from many developing countries which complain that through subsidies, the West is protecting its markets against agricultural exports from the rest of the world.

The prime minister’s visit is also a chance to reaffirm political cooperation between China and the United Kingdom. “As China’s star rises in the world, so does its stake in global stability,” according to Cameron, “in the political stability necessary to keep trade routes open and energy supplies flowing. That is an interest we share.”

China, Taiwan to Sign Free Trade Accord

China and Taiwan are expected to agree to a preliminary free-trade agreement later this month in a effort to normalize relations across the Strait after more than six decades of bickering and mistrust.

According to The Economist, the proposed Economic Cooperation Framework Agreement (ECFA) calls for cuts on 539 categories of Taiwanese exports to China over the next two years with scope for more to follow. The paper describes the agreement as “the cornerstone of the China-friendly policies of Taiwan’s president, Ma Ying-jeou.” Critics allege that the president’s foreign policy is geared toward ultimate reunification with the mainland.

Following Ma’s election in May 2008, relations with China rapidly improved. His government allowed regular charter flights to take place between the two countries to bring in Chinese tourists and it eased restrictions on cross-Strait investments.

Taiwan is hoping that the ECFA deal will herald its future inclusion in international free-trade arrangements; something China has so far opposed and prevented.

Last January Beijing initiated a free-trade accord with the member states of ASEAN; the Taiwanese exports included in the ECFA are from some of the industries most threatened by that agreement. The Taiwanese government is likely to try to reach similar arrangements with nearby Southeast Asian countries in an effort that will boost the economic integration of the region and decrease the likelihood of future conflict.

The opposition has reason to be suspicious though. While Taiwanese negotiators did not get everything they asked for, “the terms of the deal still seem remarkably sweet for Taiwan,” according to The Economist.

The 539 categories of Taiwanese exports are worth $13.8 billion, while Taiwan in turn will reduce tariffs for only 267 categories of Chinese exports, worth $2.9 billion. What is more, China has gone beyond its World Trade Organization requirements by dropping tariffs on various Taiwanese agricultural and fishing products, and Chinese negotiators said they would never push Taiwan to return the favor.

“China’s largesse is clearly political.” Beijing prefers Ma’s moderate Kuomintang over the more independence leaning Democratic Progressive Party while it has to cope with an Asian naval race and mounting tension in the region. As Robert Kaplan wrote in April, China feels “boxed in,” particularly from the sea, where it faces a chain of nations from South Korea to Japan to the Philippines to Indonesia and Australia, with implicit backing from across the Pacific, which are watching China’s rise with skepticism — indeed, sometimes outright fear.

In order to address that perceived threat from the high seas, Beijing is preparing to envelop Taiwan “not just militarily but economically and socially,” according to Kaplan.

Amid high unemployment figures, Ma’s popularity is slumping however. “Economic success has not trickled down to many Taiwanese,” knows The Economist, “and for them the ECFA is an abstract idea of frighteningly radical engagement with China.” Ma will have to prove to his voters that the China deal will benefit Taiwan directly before the presidential elections in 2012.

China and ASEAN Become Free Trade Block

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

A free-trade agreement between China and the ten member states of the Association of Southeast Asian Nations (ASEAN) has come into effect last January 1, liberalizing trade and investment in an economic zone that is home to almost two billion people.

After the European Union and NAFTA, this new free-trade area is the third largest in the world and perhaps the most significant today for many of the countries involved, China foremost among them, are carrying the rest of the industrialized world out of the economic recession that has plagued it throughout the past year or so. Read more “China and ASEAN Become Free Trade Block”

Labor Laws Hindering India’s Growth

“Deadly labor wars hinder India’s rise,” wrote The Wall Street Journal last month. In spite of Prime Minister Manmohan Singh’s efforts to reform India along free-market lines, the country’s long history with socialism continues to keep it from truly embracing capitalism.

Battle lines are being drawn in labor actions across India. Factory managers, amid the global economic downturn, want to pare labor costs and remove defiant workers. Unions are attempting to stop them, with slowdowns and strikes that have led at times to bloodshed.

Workers are so passionate because they feel that India’s newfound prosperity has hardly made their lives any better. Companies blame union leaders for enflaming such discontent for political reasons while decade-old labor codes are in desperate need of reform. “We can’t be a capitalist country that has socialist labor laws,” says the president of the Automotive Component Manufacturers Association of India.

India’s economy has experienced a steady 8% growth rate during the past several years. Its middle class had widened and its domestic consumer base, in both cities and the countryside, has grown with it. But the country’s manufacturing sector, after producing an impressive growth rate of 7 percent until last year now feels the effects of the global turndown and must make some unpopular cutbacks. “The unrest serves as a reminder that India has far to go before it stands alongside the world’s other economic powerhouses,” according to the Journal.

Thomas Barnett shares this sentiments and adds that that other rising power, China, has very much the same problem, “for all the same reasons plus the added burden of heavy corruption.” No matter how fast both countries have grown over the last decade, they still have to do away with the remnants of socialism to clear the path to becoming economic giants.