China is Becoming Strong in Developing Markets
FROM THE ECONOMIST INTELLIGENCE UNIT June 28th 2010
Is a new front about to open up in China's trade wars? Skirmishes with the US and EU, both of which sometimes appear to be locked in a permanent trade battle with China as they struggle to fend off an ever-encroaching tide of cheap goods, are well documented. But as the rich world begins the long process of fiscal retrenchment, Chinese exporters will increasingly be forced to rely on demand in emerging markets. This could be a source of trade friction.|
Amid all the noise that US politicians have been making over the renminbi, it is easy to forget that the recovery in China's exports to the US following the global economic crisis has been eclipsed by its trade with the rest of the world. China's US-bound exports rose 24.7% year on year in the first five months of 2010, but its total exports to all countries rose by 33.2% in the same period.
Even though demand has been stronger in the EU than in the US, the dominance of these two mainstays of China's export sector has diminished. The proportion of China's exports accounted for by shipments to the US and the EU fell to 37.4% in the first five months of 2010, down from 38.2% at end-2008.
This is a marginal shift, to be sure, but it is the start of a longer-term trend. The impact of fiscal consolidation and consumers' efforts to rebuild their finances will squeeze import growth in the US and EU in 2011 to very modest levels. Meanwhile, the emerging world is set to continue its recent boom. The Economist Intelligence Unit expects the Association of South-East Asian Nations (ASEAN) to import 13.2% more goods, in US-dollar terms, in 2011 than in 2010. We also think Latin America will increase its overall imports by 12%. This will benefit China.
Chinese exporters are well aware of the divergent prospects for the rich world and emerging markets, and have been focusing on boosting their penetration of previously untapped markets in recent years. In most cases they have had great success. For example, in the first five months of 2010 China's exports to Brazil rose 98.3% year on year to US$8.1bn. Those to ASEAN climbed 46.1% to US$52.7bn in the same period.
Many emerging markets—including Brazil, ASEAN and Africa—tend to run bilateral trade surpluses with China. However, the explosive growth of Chinese imports has still caused friction. Although the influx of cheap goods arguably raises standards of living by increasing consumers' purchasing power, developing countries typically have industrial sectors concentrated in the sort of low-end manufacturing that competes with Chinese imports.
Textile sectors across Africa have been devastated as Chinese producers have captured market share, putting local manufacturers out of business. Governments across the emerging world are being forced to consider how to respond to such trends.
To date, most have been cautious. Many have perhaps been discouraged by China's tendency to react strongly to measures that target its exports. In 2007, for example, China imposed a ban on imports of Indonesian fish and shellfish when Indonesian officials shut their markets to Chinese food supplements, cosmetics and medicines. Both sides claimed that the goods involved contained toxins that threatened consumer safety.
Safety concerns are a common reason cited for measures imposed to limit imports of products from China. Although some of these fears are clearly a screen for efforts to protect domestic industries, many are based on real evidence. Highlighting the sensitivity of such cases, however, the Chinese government does not seem to retaliate when controls are imposed in the wake of fatalities.
India is one of the few countries to employ trade sanctions against China with regularity. The government briefly imposed a ban on Chinese toys in 2009, which officials declared was driven by public-safety concerns, but which many suspected was driven more by lobbying from domestic toy firms. It also recently imposed anti-dumping duties on Chinese imports of injection press moulds, tyres and stainless-steel products, as well as on a range of textiles and industrial chemicals.
India's position is notable, in that it is a vast market and wields a high level of strategic influence on the world stage. It thus feels capable of standing up to Chinese bullying tactics over trade. However, several other emerging markets also possess these characteristics to some degree—notably South Africa, Brazil, Turkey and Mexico—and they too may resort more readily to temporary trade barriers as their domestic producers face increasing competition from China. Indeed, Brazil and Turkey both imposed measures to curb imports of specific products from China in the first quarter of 2010.
There is an additional risk that these countries could follow India's example in other ways. In April 2010 India banned imports of telecommunications equipment from China, purportedly on national-security grounds. The move dealt a blow to Chinese equipment manufacturers such as Huawei and ZTE, whose growth has been driven by surging sales to emerging markets. Nevertheless, few countries are sufficiently concerned about such security implications—which are often spurious—to bother inflaming trade tensions through sanctions. Also, developing countries generally have few alternative domestic suppliers of such equipment (India's ban is expected mostly to benefit EU-based producers), further undermining the case for copycat bans.
While a few emerging markets are in a position to hobble the surging flow of Chinese imports through trade restrictions, China's aggressive approach to smaller or less influential economies that are bold enough to attempt such measures will continue to deter most governments. The example of Argentina is telling.
The Argentine government imposed restrictions on a number of Chinese goods, including dyes and footwear, at the start of 2010, only to have China respond by raising quality-control standards on imports of Argentine soya-bean oil. The end result: China's imports of all goods from Argentina fell 42.3% year on year in the first five months of 2010, while its exports to Argentina actually jumped 74.7%. Few emerging markets will be willing to risk such an outcome when the competition to tap the potential of the booming Chinese domestic market is so intense.