China

China’s Unfair Trade Practices And Why It’s Time The West Countered Them

800px-shanghai_pudong

Henrik Hansson Globaljuggler / Wikimedia Commons

The ideology of free trade rests on the assumption that it takes place between equal partners who abide by the same rules, and that it results in a win-win situation for all parties involved. Although this concept may be appealing in theory, in practice trade is far from the ideal which free-marketeers espouse.

Not only are the premises of free trade themselves highly contradictory. The principle that all countries will enforce the same rules, too, is wrong.

A survey conducted in 2011 by the European Union Chamber of Commerce in China (ECC) showed that a growing number of European companies operating in China felt that they were treated unfairly, with 43% of respondents saying that Beijing discriminated against foreign businesses. The ECC expressed concerns that China was violating free-trade pledges in order “to build up technology industries and global competitors.”

The ECC’s attempts to pressure China to open up its markets have failed. “European investment in China continues to be stymied by prohibitive state controls,” the European Chamber complained in 2016.

As Deutsche Welle reported, “[w]hile Chinese companies were able to engage in acquisitions such as Fosun International’s deal to purchase German bank Hauck & Aufhäuser in 2015 and Midea’s purchase of German manufacturer Kuka earlier this year, European firms continue to be prevented from acquiring such high-profile brands in China.”

On September 19, 2017, the ECC released its Position Paper 2017/2018, urging China once again to implement the market reforms Beijing has committed to. “In some areas foreign-invested enterprises (FIEs) are still only permitted to play a limited role in setting standards, or are barred altogether, and face difficulties fully taking part in preferential policies that support research and development,” the paper said, adding that “54% of European companies perceive they are treated less favorably compared to their Chinese counterparts.”

The ECC’s argument that trade liberalization is in China’s best interest is a self-defeating logic. It provides China with a useful narrative to access global markets, while it deprives other countries of the ability to regulate their economy and defend themselves against neo-mercantilist practices. It is the old tale of unfair trade that the world has witnessed since the 1970s. Regulation is viewed as “socialist”, or as “protectionism” that will inevitably lead to a trade war.

Yet it is China, Japan, South Korea, Singapore and other East Asian countries that have started trade wars through their neo-mercantilist practices. The United States and some European countries have simply either surrendered, or they have offset trade imbalances through their own government intervention.

For example, in 2008 Germany was hit hard by the global financial crisis and faced a recession. The government passed a comprehensive package of economic measures worth 50 billion euros. It invested €17,3 billion in infrastructure and renovation of government buildings; it lowered the basic tax rate (Eingangssteuersatz); it subsidized the automobile industry by providing €2,500 to people who scrapped a car that was at least 9 years old and purchased a new one (the goal being that of increasing car sales); it spent €450 million to fund exports through its Central Innovation Programme for Small and Medium-sized Enterprises; it bailed out companies that faced financial difficulties; it gave tax rebates to companies that did not lay off their workers, etc. Those measures were an example of Keynesianism, a strategy of government spending to sustain investment and consumption during a recession. It paid off and Germany quickly recovered from the 2008 crisis.

The “Nordic” economies (Denmark, Finland, Iceland, Norway and Sweden) are also characterized by a high level of government intervention. To name just one example,  Finland has been described as an “étatiste late industrialiser, in which the post-war period up to the mid-1980s was a phase of catching up and energetic mobilisation of resources” and in which the “policy regime relied on vigorous State intervention comparable to that of the Asian tiger regimes.” [1]

Some countries in Europe with a strong tradition of state intervention – sometimes dating back to the 18th century –  demonstrate that mixed market economies can succeed. But the adoption of neoliberal laissez-faire arguments by European countries have had long-term negative effects.

First of all, aggressive export policies by countries like Germany in reaction to Asian export capitalism are worsening rather than solving trade imbalances.

Second, the benefits of trade liberalization with China and other countries have failed to materialize for Europe and the US. In Germany, Europe’s economic powerhouse, 30 million people have now less purchasing power than 20 years ago, while 15.7% of the population live below the poverty line, more than 14.7% in 2005. And Germany has fared much better than many other European countries.

While the European Union has amassed a €180 billion trade deficit with the Asian giant and has been unable to increase its living standards substantially over the past two decades, China, by contrast, has lifted more than 800 million people out of poverty since 1978.

One cannot blame China for pursuing economic policies advantageous to itself. The real issue is that there is no such thing as a self-regulating trade system. The market is political, and denying it prevents a discussion about how to best regulate it. A global trade regime in which workers are exploited, dictatorships further their interests through economic growth, inequality rises, the middle class of many countries is threatened, a few corporations thrive while most citizens struggle to make ends meet, is not in the best interest of any country in the long term.

Imposing reciprocal restrictions on China is not a punitive measure or a declaration of trade war. It is a fundamental step towards reconsidering economic priorities, towards putting balanced trade, fairness, mutual benefit, growth and higher living standards for the majority on top of the political agenda.


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[1] Juhana Vartiainen: The Finnish Model of Economic And Social Policy, in: The Nordic Varieties of Capitalism, ed. Lars Mjoset, p. 53.

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