Mounting Trade Tensions Are Purely Incidental to China’s New Market Deregulation Drive

Mounting Trade Tensions Are Purely Incidental to China’s New Market Deregulation Drive

Mei Xinyu

Date: Wed, 04/11/2018 - 19:00 / source:Yicai
Mounting Trade Tensions Are Purely Incidental to China’s New Market Deregulation Drive
Mounting Trade Tensions Are Purely Incidental to China’s New Market Deregulation Drive

(Yicai Global) April 11 -- Chinese President Xi Jinping announced a host of new measures to expand economic opening by substantially reducing market access restrictions for foreign businesses, creating a more attractive investment environment, ratcheting up intellectual property right (IPR) protection and proactively boosting imports.

Specific actions that he proposed in his keynote address at the opening ceremony of the Boao Forum for Asia yesterday include effectively easing equity ratio restrictions on foreign investors in Chinese banks, securities and insurance companies and manufacturing companies, especially automakers. Xi also pledged to amend the ‘negative list’ of businesses for foreign investors within the first half of the year and implement a new administrative model on a comprehensive scale that combines already-existing national treatment with the negative list. He further undertook to slash auto tariffs and lower duties on other imported products, increase imports of specialty products for which Chinese consumers have strong demand, and expedite China’s accession to the World Trade Organization’s Agreement on Government Procurement. These proposals captured the world’s attention, with global market responding positively, but some Chinese saw them as compromises that China made in response to the US’ threat of a trade war. In fact, anyone who has read reform-related resolutions adopted at the third plenary session of the 18th Communist Party of China Central Committee, the report of the 19th National Congress and the government work reports of the ‘two sessions’ (officially known as the National People's Congress and the Chinese Political Consultative Conference) this year knows that the measures announced today have been in the pipeline for many years, and are implemented to advance China’s own interests, rather than respond to a brewing trade war.

1. The State Council’s Government Work Report (2018) proposed expanding economic opening well before the China-US trade dispute

First, the ‘trade war’ started at noon on March 22 (American Eastern Standard Time), or the early morning of March 23 (Beijing time) when President Donald Trump signed a presidential memorandum targeting china's "economic aggression" according to a pre-disclosed schedule, announcing the levy of punitive tariffs on USD50 billion worth of Chinese exports to the US for steel and aluminum trade practices and IPR “theft,” and restrictions imposed on direct investment in the country by Chinese companies. Premier Li Keqiang delivered the Government Work Report on March 5, where he called for efforts (in the eighth section of the third chapter of Suggestions for the Government’s Work in 2018, details of which appear in Appendix 4 attached hereto) to “advance the formation of a new situation of comprehensive reforms, further increase the scope and level of economic opening, improve economic opening structure and related systems and mechanisms, and stimulate high-quality growth through effective market opening.” As well as boosting international cooperation along the Belt and Road, concrete measures specified in the report also include driving the steady growth of foreign investment, fostering new momentum for steady development in the foreign trade sector and promoting trade and investment liberalization and facilitation. Measures relating to market opening especially include:

“We will…strengthen alignment with international business rules and foster a world-class business environment. The general manufacturing sector will be completely opened, and access to such sectors as telecommunications, medical services, education, eldercare, and new energy vehicles will be expanded. We will phase in an opening-up of bank card clearing and other markets, lift restrictions on the range of operations of foreign-invested insurance agent companies, and ease or lift restrictions on the share of foreign-owned equity in companies in banking, securities, fund management, futures, and financial asset management. We will make market entry standards the same for both Chinese and foreign banks. Overseas investors will be granted tax deferral for the reinvestment of profits made in China. Procedures for setting up foreign-invested enterprises will be simplified, and business filing and business registration will be processed together at one time. We will spread the use of practices developed in free trade zones all over the country, and explore opening free trade ports, working toward new heights in reform and opening.

“We will actively expand imports, host the first China International Import Expo, and lower import tariffs on automobiles, some everyday consumer goods and other items. We will open our market wider to promote industry upgrading and more balanced development of trade, and to provide Chinese consumers with a broader range of choices.”

2. China pledged to expand economic opening at the third plenary session of the 18th CPC Central Committee in 2013

Now, if we look back further in time, according to Chapter Seven ‘Building a New Open Economic System’ of the ‘Decision of the CPC Central Committee on Some Major Issues Concerning Comprehensively Deepening the Reform’ passed at the third plenary session of the 18th CPC Central Committee on Nov. 12 2013, the Chinese government explicitly stated, “To adapt to the new trend of economic globalization, we must promote domestic openness together with openness to the outside world, better integrate the ‘bring in’ and ‘go globa’ strategies, stimulate the orderly and free flow of international and domestic factors of production, highly efficient allocation of resources and in-depth market integration, and foster new advantages in participating in and leading international economic cooperation and competition at a faster pace to promote reform through opening.” So back then China already made up its mind to “promote reform through opening up”!

Based on these guiding principles, the chapter went on to propose a series of actions to expand the economic opening program:

“Relaxing control over investment access. We will have the same laws and regulations on Chinese and foreign investment, and keep foreign investment policies stable, transparent and predictable. We will promote the orderly opening up of finance, education, culture, healthcare and other service sectors, lift limits on access for foreign investment in childcare, eldercare, architectural design, accounting and auditing, trade and logistics, electronic commerce and other service sectors, and further liberalize general manufacturing. We will integrate and optimize customs special supervision zones at a faster pace.”

“… we will select a number of qualified areas and build them into free trade park (port) areas.”

“Speeding up the construction of free trade zones. We will keep to the world trading system and rules, persist in bilateral, multilateral, regional and sub-regional openness and cooperation, seek more convergent interests with other countries and regions, and carry out the free trade zone strategy at a faster pace with neighboring countries as the basis. We will reform the management systems of market access, customs oversight, inspection and quarantine, etc. and accelerate negotiations on environmental protection, investment protection, government procurement, e-commerce and other such new fields to form a global, high-standard network of free trade zones.”

“Further opening up inland and border areas.”

“We will quicken the pace of opening up in border areas, and allow key ports, border cities and economic cooperation zones in the border areas to have special methods and policies on personnel exchanges, processing and logistics, tourism, etc.”

3. The 19th National People’s Congress highlighted the need to develop an open economy at a higher level

It is expressly stated in the fourth section ‘Adopting a new vision for development’ of Chapter 3 ‘The Thought on Socialism with Chinese Characteristics for a New Era and the Basic Policy’ of the report of the 19th National People’s Congress dated Oct. 18, 2017, “We must actively participate in and promote economic globalization, develop an open economy with higher standards, and continue to increase China’s economic power and composite strength.”

In terms of expanding economic opening, the fifth section ‘Accelerating efforts to improve the socialist market economy’ of Chapter Five ‘Applying a New Vision of Development and Developing a Modernized Economy’ noted that “We will introduce a negative list for market access nationwide, sort through and do away with regulations and practices that impede the development of a unified market and fair competition … deepen reforms in the business sector, break administrative monopolies and preclude the formation of market monopolies.”

The sixth section ‘Making new ground in pursuing opening up on all fronts’ states: “Openness brings progress, while self-seclusion leaves one behind. China will not close its door to the world; we will rather become more and more open. We should pursue the Belt and Road Initiative as a priority, give equal emphasis to ‘bringing in’ and ‘going global,’ follow the principle of achieving shared growth through discussion and collaboration, and increase openness and cooperation in building innovation capacity. With these efforts, we hope to break new ground in opening China further through links running eastward and westward, across land and over sea. We will expand foreign trade, develop new models and new forms of trade, and turn China into a quality trader. We will adopt policies to promote high-standard liberalization and facilitation of trade and investment; we will implement the system of pre-established national treatment plus a negative list across the board, significantly ease market access, further open the service sector, and protect the legitimate rights and interests of foreign investors. All businesses registered in China will be treated equally. We will improve the balance in opening our different region and open the western region wider. We will grant more powers to pilot free trade zones to conduct reform and explore the opening of free trade ports. We will develop new ways of making outbound investments, promote international cooperation on production capacity, form globally-oriented networks of trade, investment and financing, production, and services, and build up our strengths for international economic cooperation and competition.”

A review of these government reports makes clear that the reform measures unveiled at the Boao Forum have nothing to do with the trade war thrust on us by the world’s largest economy.

4. The measures are introduced to meet China’s own developmental needs

Why should we proactively expand economic opening? That is because China needs globalization. If history is any guide, it was isolation from the international market that forced the Qing dynasty from the throne after China had been the world’s most advanced economy for at least 2,000 years. Generation after generation of Chinese fought relentlessly and eventually overcame trade blockades by Western nations to regain access to the global market as an autonomous player. Without globalization, China would not have been able to achieve its miraculous economic growth over the past several decades. 

Sociologically speaking, the socialist nature of the Chinese economy dictates that we must develop an open economy. Especially considering our rather limited endowment of natural resources, a large population is nothing but a burden unless we manage to use external markets and resources effectively. As we all know, our huge domestic market has become an invaluable source of wealth and power today. ‘Aging population’ is a central topic of economic debates in China these days. We need to realize that, were it not for our successful economic development in recent decades, we would barely have the time and energy to talk about the labor shortage resulting from the ‘one child’ policy. Instead, we would have been struggling to meet the challenges of unemployment. For many years, mainstream politicians and economists at home and abroad have appealed to the Chinese government to reduce its economic reliance on foreign markets, and the subprime crisis and more recently the ‘anti-globalization’ movement underline the importance of driving a transition in the economic growth model. Having said that, we must not equate domestic consumption stimulation with reliance on domestic resources. What we really need is ‘low external dependence for value creation + high external dependence for material supplies.’

We have now overcome major constraints such as a foreign exchange gap facing most developing economies, allowing us to proactively open the domestic market further to the world and usher in a new era of economic development -- the third phase of ‘globalized development’ -- where China will play a key part in globalization. The priority tasks during the first and second phases are respectively ‘entering the global market on an equal footing’ and ‘driving economic growth relying on the global market.’

Why should we emphasize further opening of the domestic market as a priority in the new development phase? Firstly, it is because that we have made a solid job of what Liszt referred to as ‘catch-up industrialization,’ and most domestic industries are now fully fledged, meaning that administrative protection is no longer necessary. Instead of excessive protection, the government should bring in external competition to maintain vitality at a high level. When I graduated from the only university affiliated to the then China National Automobile Industry Corp., Wuhan Institute of Technology (now known as Wuhan University of Technology) in 1989, auto production in China was only about 583,500 units, whereas that figure swelled to 29 million last year, with car sales topping 28.9 million, which is significantly higher than the 17 million tallied in the US, the former largest auto producer and consumer in the world that held the title for almost a century. Thus, China does not need to maintain the same level of protection for the domestic auto industry, which may otherwise turn into an interest group interested only in defending the status quo -- or even worse -- into a ‘parasite’ on the national economy and public finance.

Furthering market opening will also help us gain access to a broader range of cheap, quality raw materials and energy from foreign countries to improve the cost competitiveness of our manufactured products and other domestic industries. Due to the limited endowment of natural resources, one of the side effects of China’s industrialization is the dwindling cost-effectiveness of locally-sourced materials and energy resources. This, coupled with the rising cost of domestic labor, land and other production factors, has made Chinese manufacturing products and downstream businesses increasingly noncompetitive on the global market. Downstream manufacturing, rather than upstream resources, is the foundation of our national economy, and so we need to eliminate extra costs of upstream raw materials and energy resources relative to the international average, to retain cost-competitiveness in downstream manufacturing markets.

We need to further open domestic markets if China is to lead the global market. More imports mean greater power. Other countries do not need to adapt themselves to ‘Chinese rules’ if they are not lured to China as a major international market. Foreign multinationals accept rulings issued by Chinese courts and regulators because they may otherwise lose access to China’s market. Many European and Japanese multinational companies have paid hefty fines to American judicial authorities. Why? The US’ ability to enforce its ‘rule’ inheres in the fact that the companies cannot afford to give up on the US market.

5. We can respond to the trade threat and pursue a more open economy at the same time

China is committed to pushing ahead with market reforms and is willing to share development opportunities with trading partners, but this does not mean that we will cooperate with any country. Trade partnerships must be reciprocal, and we want to work together with our partners and jointly contribute to mutual development and world prosperity. During the Boao Forum’s opening ceremony, President Xi said:
“We will encourage Chinese and foreign enterprises to engage in normal technology exchanges and cooperation, protect lawful IPR belonging to foreign companies operating in China. At the same time, we hope that foreign governments can strengthen protection of Chinese IPR.”

“We hope that developed nations can stop deliberately imposing restrictions on normal trade in high-tech products and relax control on high-tech exports from China.”

I wrote in an article titled ‘China-US Trade Frictions: Trump Is Trapped in a Dilemma,” which was first published on The Paper and later reprinted by other media outlets:

“A trade war with China will leave American business with no option but to give up their market shares in China to others. US companies sold a staggering USD517 billion worth of products and services in China in 2015. If Trump is adamant about going in the wrong direction, China can use these interests as a weapon to counter trade sanctions, and other countries would be more than happy to get a bigger slice of the pie.

A trade war will also deny American businesses the right to benefit from the new open-up measures, be it tariff cut or broader market access for foreign investors.

“Regardless of the outcome of the trade war, Chinese policymakers are determined to step up economic opening. However, if the US persists with its plan to jeopardize bilateral trade ties, US automakers and soybean producers will have to suffer the consequence -- that is, they will be denied access to an opener Chinese market. Is this something that Mr. Trump really wants? China will not stop its economic initiatives -- with or without the support of the US president, because it is required to keep the momentum going for organic growth in the country. China is willing to open its door wider to foreign companies, but it is up to Uncle Sam to decide if he wants to be left out of the playing field.” 

I would be happy to see China-US relations deepen further. I have put forward a series of proposals to cement economic and trade cooperation between the two countries. I am not a persistent critic of Donald Trump. Quite the opposite, actually: I think his ‘America First’ campaign is justified. I totally understand why he insists on tackling the so-called ‘twin deficits’ in national fiscal and trade policies and would be happy to see his government redress macroeconomic imbalance so that we can continue to benefit from the US as a growing major overseas market. I would be happy to see American politicians advance their political career by promoting bilateral ties with China … however, we will never accept any unilateral actions taken by the US against WTO rules, or any prescriptive plans to reduce trade deficits on the US’ part that run counter to the objective law of economics, or foreign politicians who deliberately misinterpreted -- for the sake of their own political gains -- China’s further economic opening as the result of a trade war that they initiate. I believe that China will prove its determination and ability to safeguard its own interests against external pressure.

6. China needs no worshippers of Western powers

Even today, some Chinese people still believe that China is pressured by the US to roll out new ‘open door’ policies. Some have even argued that China agreed to introduce the five-day workweek as a compromise with the US to gain access to the WTO. Alas, these people know nothing about the national policymaking system. They must learn how to stand up after fawning on Westerners for so long.

In China, every major government decision must be made based on thorough research and investigations, which typically take years to finish. Before introducing the five-day workweek system, the then Science and Technology Promotion and Development Research Center of the National Science and Technology Commission started a research program on the topic in 1986, and the research was completed in the following year with the conclusion that “the conditions in China are suitable for introducing the five-day workweek system.” The center then advised the central government to draw up a plan to implement the system by 2000. It was first piloted at a small number of organizations, when the national legislature started deliberating the legislation. After many years’experimentation, the government decided to have ‘a five-day workweek in alternate weeks’ in March 1994. Then-premier Li Peng released the ‘Decision of the State Council to Amend ‘Employee Working Hours Regulations’ via Decree No. 174 of the State Council on March 25, 1995, which resolved that, from May 1, 1995, Chinese workers should work eight hours a day and 40 hours a week, i.e. a five-day workweek. About four months later, the Labor Law was formally promulgated after several rounds of draft revisions. It mandates that “Working hours in China should not exceed eight hours per day or 44 hours per week on average.” All this had nothing to do with the Americans, and all the studies, investigations and experiments were conducted by China free of any external influence. Furthermore, the new working hours system was introduced over the forceful objections of foreign employers. I was studying on a postgraduate course in the department of world economics at the Wuhan University that year, and I was impressed by the news.

Our workers and farmers have grown up through competition with American competitors over the years and stand on their own feet. Our government officials have engaged with the Americans in numerous diplomatic negotiations, also standing on their own feet. Our academics and the Chinese media must stop blindAmerica worship now.


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Keywords: Trade Dispute, U.S., open door policy, Boao Forum