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(Pro): China Economy Advantage

China needs to be able to sell excess good to stop an economic slide

New York Times, July 26, 2019, https://www.nytimes.com/2019/07/26/business/china-trade-war-us-rcep.html, China Needs New Places to Sell Its Mountain of Stuff

BEIJING — China has too many factories making too many goods. Thanks to its punishing trade war with the United States, its biggest overseas customer isn’t buying like before. So China is seeking new customers. They could prove to be a hard sell. China this week formally restarted its efforts to create a free-trade zone across the Asia-Pacific region, with an unlikely goal of striking a deal by November. If successful, the pact could eventually open markets from Australia to India. Beijing is also trying to keep alive long-shot, three-way talks that would lower trade barriers among China, Japan and South Korea. More broadly, it is unilaterally reducing its own tariffs on a broad range of goods from all over the world, even as it puts higher retaliatory tariffs on American-made goods. At stake is the health of the Chinese economy. Last week China reported that its growth slowed to its most sluggish pace in nearly three decades, in part because the trade war with the Trump administration has begun to hit its crucial export sector. Global companies are now looking to shift work to other countries to avoid what could be a protracted trade war. With no end in immediate sight, China needs new markets for what it makes. “It’s hard to replace the U.S., but you have to try, you have to diversify,” said Chen Dingding, a professor of international relations at Jinan University in Guangzhou, China. “We don’t want to rely on the U.S. market forever, even though it’s important.” But trade pacts are difficult to strike, and China’s potential free-trade partners have plenty of reasons to be worried. No country can absorb the sheer volume of what China sells to American customers. China’s regional neighbors compete against it in a number of industries. And China continues to maintain high tariffs and other barriers to protect its own industries — barriers that would have to drop if other countries were to sign on. The economic clash between the United States and China has thrown the world trade system out of balance. China runs an annual surplus in manufactured goods trade of almost $1 trillion, meaning that is how much more it sells to the world than it buys each year. Nearly half of that surplus comes from trade with the United States. China’s overall exports to the United States slumped 8.5 percent in the first half of this year. China’s exports to the rest of the world have risen only 2.1 percent. As Beijing’s trade war with Washington drags into its second year, the question now is who might buy China’s extra factory goods if the United States does not. Already, the country is plagued with excess capacity for making cars, steel and other staples of global trade. More factory slowdowns and shutdown could lead to job losses and further drag down economic growth. Faced with further potential economic pain, Beijing is looking to open up other markets. The centerpiece of its efforts is a push this summer to negotiate an Asian free trade pact called the Regional Comprehensive Economic Partnership, or R.C.E.P. The partnership would encompass the 10 countries of the Association of Southeast Asian Nations plus Australia, China, India, Japan, New Zealand and South Korea. Midlevel and senior trade officials from across the region began meeting this week in Zhengzhou, China. Their ministers are then scheduled to join them in Beijing on Aug. 2 and 3. The goal is to outline a deal that Asian leaders might then work out at a summit meeting in Bangkok in November. “We are continuing talking on this, and we hope we can accelerate the speed so that it can be concluded within this year,” said Wu Jianghao, the director general of the department of Asian affairs at the Chinese Foreign Ministry. China’s leaders have talked since 2012 about the possibility of such a regional partnership, in response to President Barack Obama’s plans for a multination trade deal called the Trans-Pacific Partnership that would have excluded China. Working out a deal would require solving some thorny issues. “I’m not optimistic about that deal to be materialized in November,” said Takeshi Niinami, chief executive of Suntory, the Japanese beverage company, and a member of a council that advises Japan’s prime minister, Shinzo Abe, on economic issues. “Maybe we need more time,” he said. One obstacle had been China’s own high tariffs. Beijing long feared that if it cut tariffs, manufacturers would flee China’s surging wages and find lower-cost refuges in countries like Vietnam and Bangladesh. Starting in May of last year, China began reducing its tariffs. Trade tensions with the United States were rising. Chinese leaders had also become increasingly willing to lower protective walls around the country’s labor-intensive, low-tech industries so as to focus on more sophisticated manufacturing. Though average tariffs remain higher than those of the United States and the European Union, the categories for which China has reduced tariffs include many low-tech manufactured goods, like handbags and low-cost garments, which many of China’s neighbors would like to export. ImageNew cars at the port in the Chinese city of Tianjin. China is plagued with excess capacity for the staples of global trade. New cars at the port in the Chinese city of Tianjin. China is plagued with excess capacity for the staples of global trade.CreditLam Yik Fei for The New York Times “We will continue to lower overall tariffs voluntarily, remove non-tariff barriers, actively increase the import of goods and services, and enhance import facilitation,” Premier Li Keqiang said in a speech on July 2 in Dalian, China, at the “summer Davos” session of the World Economic Forum.

China’s economy will inevitably fall now due to excess capacity and debt overhang

Panos Madourakotas, July 27, 2019, https://www.forbes.com/sites/panosmourdoukoutas/2019/07/27/trade-war-is-hiding-chinas-big-problems/#4d826d8a5bb3, Forbes, Trade War Is Hiding China’s Big Problems

The ongoing US-China trade war is a distraction from China’s big problems: the blowing of multiple bubbles and the country’s soaring debt, which will eventually kill economic growth. It happened in Japan in the 1980s. And it’s happening in China nowadays. The trade war is one of China’s problem that dominates social media these days. It’s blamed for the slow-down in the country’s economic growth, since its economy continues to rely on exports. And it has crippled the ability of its technology companies to compete in global markets. But it isn’t China’s only problem. The country’s manufacturers have come up with ways to minimize its impact, as evidenced by recent export data. And it will be solved once the US and China find a formula to save face and appease nationalist sentiment on both ends. One of China’s other big problems , however, is the multiple bubbles that are still blowing in all directions. Like the property bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of starting a family, as discussed in a previous piece here. New Home Prices 2015-19 New Home Prices 2015-19 KOYFIN YOU MAY ALSO LIKE Unlike the trade war, that’s a long-term problem. Low marriage rates are followed by low birth rates and a shrinking labor force, as the country strives to compete with labor-rich countries like Vietnam, Sri Lanka, the Philippines and Bangladesh—to mention but a few. Then there’s the unfavorable “dependency rates” — too few workers, who will have to support too many retirees. And there’s the impact on consumer spending, which could hurt the country’s bet to shift from an investment driven to a consumption driven economy. Japan encountered these problems over three lost decades, even after it settled its trade disputes with the US back in the 1980s. China experience many more.

BRI boosts China’s economic security

Cavanna, July 2019, https://tnsr.org/2019/07/unlocking-the-gates-of-eurasia-chinas-belt-and-road-initiative-and-its-implications-for-u-s-grand-strategy/, Thomas P. Cavanna is a visiting assistant professor at the Fletcher School of Law & Diplomacy in the Center for Strategic Studies. He writes on U.S. grand strategy and U.S. foreign policy toward China and South Asia. He holds a French “Agrégation” and a Master’s degree and doctorate in history from Sciences Po. He was also a Fox Fellow at Yale. Dr. Cavanna is currently working on a book on the Belt and Road Initiative and U.S. grand strategy., Unlocking the Gates of Eurasia: China’s Belt and Road Initiative and Its Implications for U.S. Grand Strategy

The Belt and Road Initiative helps protect the foundations of Chinese national power in three areas. First, it bolsters the country’s national sovereignty and domestic stability. Second, it buttresses its economic security. Third, it enhances its industrial-military potential. These mutually reinforcing dynamics allow Beijing to hedge against potential U.S. aggressions.

Border and Domestic Security

Belt and Road is designed to bolster China’s border and domestic security. The vastness of the country’s western and southern peripheries, the local demographic superiority of non-Han ethnic groups, and the historical weakness of local state authority have always exposed Chinese leaders to domestic unrest and foreign interference.85 In that light, the United States has, in recent history, been a perennial concern. Washington tried to exploit turmoil in Tibet and Xinjiang during the early Cold War.86 Beijing has also worried for decades about America launching ideological attacks to “bring [China] into its own system.”87 For example, in recent years, Chinese leaders have resented Washington’s decision to grant political asylum to Xinjiang activists as well as its support for the National Endowment for Democracy and Radio Free Asia.88 Furthermore, the Obama administration’s “pivot” to Asia caused Beijing to pay even greater attention to its neighbors.89 The Indo-American rapprochement, starting in the mid-2000s, compounded Sino-American tensions. Indeed, China has long competed with India across territories that stretch from Myanmar to Kashmir and Tibet, and it deeply resents New Delhi’s protection of the Dalai Lama.90 Although Belt and Road reduces Washington’s ability to interfere in China’s backyard, doing so would have always been highly dangerous given Beijing’s nuclear status and growing power. The Belt and Road Initiative addresses those problems in several ways. First, it is likely to stimulate the economies of China’s remote provinces, thereby reducing incentives for unrest. Second, combined with a robust military buildup in Tibet, the $62 billion China-Pakistan Economic Corridor and Beijing’s investments in Central Asia, northern South Asia, and continental Southeast Asia, are aimed at blunting regional separatist and terrorist threats.91 Third, the Digital Silk Road, which promotes Chinese telecommunications equipment and internet standards, optimizes surveillance and repression, buttresses domestic security cooperation with like-minded regimes, including Russia, and secures data from interception by foreign governments.92 Moreover, Belt and Road increases China’s push against New Delhi’s regional influence and could even tighten the encirclement of India, whose vulnerable northern flank, especially the Siliguri Corridor, provides strategic leverage to Beijing. Most important, the initiative reduces the harm that America could potentially inflict on Chinese peripheries.93

However, the increase in Beijing’s border and domestic security should not pose insurmountable problems for the United States. Although Belt and Road reduces Washington’s ability to interfere in China’s backyard, doing so would have always been highly dangerous given Beijing’s nuclear status and growing power. Furthermore, as it improves China’s security, Belt and Road may allow American leaders to manage bilateral tensions more easily. The initiative has the potential to increase autocratic tendencies in Central Asia, inner Southeast Asia, and northern South Asia. However, promoting local democracy was never a priority for Washington. The United States does have an interest in backing India in its border disputes with China. Yet, beyond that specific imperative, massive regional efforts would risk diluting America’s resources in distant areas where Beijing often has a comparative advantage. Pakistan deserves attention, especially given India’s strident opposition to the China-Pakistan Economic Corridor. However, given Washington’s inability to influence Islamabad — despite spending more than $33 billion in economic and military assistance since 2001 — striving to match Beijing’s local grip would be pointless.94 China’s vested interest in stability could actually restrain the Pakistani army and facilitate a U.S. withdrawal from the deadlocked war in Afghanistan. More broadly, Belt and Road could bolster counter-terrorism efforts, help economic development, and divert (at least temporarily) some of Beijing’s resources away from areas that are of utmost strategic importance to the United States, like the Strait of Malacca.

Economic Security

Belt and Road is also designed to enhance China’s economic security. This effort targets multiple contingencies but the challenges posed by America rank particularly high among them. Chinese leaders have never forgotten Washington’s trade embargo, which lasted from 1950 to 1971, nor its support of Taiwanese operations against Beijing’s sea lines of communication in the mid-1950s.95 The United States became a tacit ally of China in the later decades of the Cold War. However, Beijing’s concerns gradually resurfaced following the fall of the Soviet Union. Washington’s persistent military encirclement of China, its debates about blockade scenarios, and its Air-Sea Battle Doctrine only aggravated those concerns.96

Doubling down on longstanding patterns, Belt and Road targets fast-growing, underdeveloped countries to boost national growth, attenuate industrial overproduction, transition away from a low-cost, low-end production paradigm, and reduce exposure to competitors. This reorientation appears sound — Belt and Road partners’ share in global GDP rose from 21 percent to 37 percent from 1995 to 2015.97 The trade war that the Trump administration launched in mid-2018 gave this process more urgency. However, Beijing’s ability to resist pressures is rising. Washington disrupted China’s supply chains and businesses, but its measures also hurt American companies and are unlikely to have transformative effects on Beijing’s behavior.98 Belt and Road also optimizes Chinese trade routes. By 2015, China had already invested in two-thirds of the 50 largest container ports worldwide and represented 39 percent of the top 10 operators’ traffic.99 Beijing has concentrated its attention on chokepoints. Indeed, 10 of its main port installations surround the South China Sea and eight command access to the Strait of Malacca, a crucial chokepoint that is exposed to the U.S. Navy. But China is also pressing for the Kra Canal in Thailand, which could more quickly link the Indian and Pacific Oceans.100 It is expanding its influence near the straits of Hormuz and Bab-el-Mandeb, including in Djibouti, which hosts Africa’s largest free-trade zone, and Oman’s $10.7 billion port in Duqm.101 Likewise, Beijing acquired a 20 percent share in the Suez Canal container terminal, is erecting a second local terminal, purchased southern European port facilities, and is developing major ports and a Red Sea-Mediterranean railway with Israel. China also ramped up investments in northern Europe, including a 35 percent share in Rotterdam’s Euromax terminal.102 Finally, the nascent Polar Silk Road could bypass current chokepoints, cut sailing time to rich northwestern European markets, and save Beijing between $533 billion and $1.274 trillion annually.103

In parallel, Belt and Road is betting on roads, railways, and facilities across Central Asia, the South Caucasus, Turkey, and Eastern and Southern Europe. Although most Eurasian economic centers abut coastlines and maritime shipping remains more capable, affordable, and predictable,104 land transportation, which is faster than the sea and cheaper than the air, could help the high-tech, fashion, agriculture, and heavy machinery sectors, among others. The digitization of border procedures and the ongoing logistics revolution could boost traffic further.105 Moreover, major hybrid sea-land routes are set to emerge. For example, transportation infrastructure across Greece and the Balkans will link up with the Suez Canal maritime routes to allow products in Beijing to reach northwestern European markets eight to 12 days faster than through the Strait of Gibraltar.106

China is also focusing on energy and food security. Beijing has leveraged America’s post-Cold War regional security architecture and the unpopularity of the war on terrorism to nurture its economic presence in the oil-rich Middle East. China’s trade in the region grew by 350 percent from 2005 to 2016 and its foreign direct investment reached $29.5 billion in 2016, compared to Washington’s $6.9 billion.107 Saudi Arabia is gravitating toward Belt and Road: A number of bilateral deals worth $65 billion were signed during King Salman’s visit in March 2017 and Riyadh has signed agreements worth $20 billion as a preliminary investment in the China-Pakistan Economic Corridor. Iran, an old ally of Beijing, has enjoyed renewed favors since the signing of the 2015 nuclear deal: China’s local foreign direct investment rose 20 percent between March 2014 and January 2018, bilateral trade soared 19 percent from 2016 to 2017, and joint ventures like the North Azadegan and Yadavaran oil fields, estimated at $5 billion, are moving forward.108 The Trump administration’s recent sanctions have curtailed this momentum; however, Beijing — which may be joined by others, including European countries — is likely to work around them, as it has in the past. Meanwhile, China’s noninterference principles have helped to spread its regional influence, as illustrated by the fact that Qatar, Kuwait, Syria, and Iraq support Sino-Iranian ties while Saudi Arabia, the United Arab Emirates, and Israel see Beijing’s relationship with, and potential leverage over, Iran as a reason to engage China diplomatically and economically.109 Similarly, Beijing is investing in energy assets in Central Asia, Africa, Latin America, Canada, and the Arctic. It has also become the main producer of 23 of the 41 most strategically valuable metals and minerals worldwide.110 Finally, China’s investments in Belt and Road partners’ agricultural sectors and in companies such as the Swiss Syngenta — a leader in agrochemicals, seeds, and biotech acquired for $43 billion in 2016 — improve the country’s resilience by diversifying suppliers and increasing domestic production.11