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China And The WTO Ten Years On

Business, China, Company Strategy, Economics, Europe, US
By John Richardson on 11-Dec-2011


By John Richardson

TEN years ago this weekend China officially joined the World Trade Organisation (WTO), and so no doubt numerous speeches have been given about all the benefits to the global economy.

Here is a somewhat more negative perspective:

*As the diagram above seeks to illustrate, China hugely built-up its manufacturing industry to take advantage of Western demand for consumer goods. As the Western Babyboomers entered their peak consumption years, meeting this demand-boom was outsourced to China. As export earnings surged, China placed a great deal of its cash in US Treasuries in order to prevent the Yuan from rising in value. This kept long-term interest rates low, thereby encouraging financial innovation as banks sought better returns elsewhere, leading to lots of cheap credit for “middle America”, enabling it to buy more stuff from China and so on and so on…So you can argue that one reason the sub-prime crisis happened was China, although, of course, it was really the fault of the greedy banks.

*Now that the Western babyboomers are ageing, China has no choice but to re-focus its unbalanced economy on domestic consumption (see our last point for more details).

*China stacked the export cards in its favour not only through an undervalued Yuan, but also through low energy, financing and labour costs – and poor environmental standards, leading to appalling levels of pollution in cities such as Beijing. This has created a much-wider gap between the rich and poor and an alarming public-health crisis.

*Millions of manufacturing jobs have been lost in the West to outsourcing as median incomes for the middle classes in countries such as America stagnate.

*Allegations continue that the Yuan is undervalued, by about 25 percent, and that China has yet to sufficiently open-up its markets to foreign competition. Particular concern has been expressed about its “indigenous innovation” rules.

*While exporters face the full 17 per cent VAT levy, which helps makes foreign goods in China expensive, Chinese export-based manufacturers that depend on imported raw material get a VAT rebate.

*Tensions over China’s trade position threaten a global trade war.

*Eight out of ten computers in China are said to run on counterfeit software as concerns remain over poor intellectual property rights standards in general. China requires foreign investors to hand-over technology blueprints before joint ventures can be established. This has allegedly led to chemicals technology being copied. In one case we heard of recently, the value of one foreign-supplied technology is being undermined because a local copy results in lower-quality product (we best not mention the details).

*It has been a tremendous decade for chemicals and polymer demand. Double-digit growth in demand in China during most of the years since 2001 has been largely the result of China deliberately re-engineering its economy in order to become the “workshop of the world”. As its economy undergoes a difficult restructuring in order to encourage more domestic demand, the chemicals industry faces a “demand growth gap”.