China and the Hong Kong WTO Meetings

While many free trade advocates are rightfully concerned about the potential collapse of the Doha Round of trade negotiations at a WTO ministerial meeting to be held in Hong Kong next month amid thousands of anti—globalization protestors, they should step back for a few moments and ponder the larger picture.   

As they consider their next move, the world's trade negotiators should note two articles recently published on the other side of the Pacific Rim.  In The Australian, Mr. Alan Oxley argues the WTO, while spending so much precious time debating agricultural subsidies, is overlooking a far more important task of 'keeping China on the path of free—market reform.'

There is the very real possibility of an economic jolt from China should domestic turmoil result in economic policy changes. An economic jolt from China?  Don't start laughing.  It could happen.  

Playing By the Rules

China is now a leading trading partner for many countries, and Mr. Oxley recognizes how Beijing often tries to mix politics and trade.  As a former Australian ambassador to the GATT and chairman of a Washington—based NGO called World Growth, Mr. Oxley argues:

Take, for instance, the hints during President Hu Jintao's visit to Germany that Berlin should push for an end to the European Union's arms embargo if Siemens wants to win a bullet train contract in China. That's one reason why integrating China into the global trading system is so vital. By joining the WTO, Beijing is forced to play by the rules and can be penalized for playing politics with trade.

Moreover, China's transition to a market economy is far from complete. The main reason why former premier Zhu Rongji fought so hard to tie China's economic reform program to the rules imposed by WTO membership is that he knew pressures to backtrack on free—market reforms would continue for many years.

While China has been a proud member of WTO for the past three years, many of its market—opening commitments —— such as in the banking sector —— have yet to be implemented.  Many of the challenges of doing business in China develop because of the fragmented nature of political authority.  Every time Beijing issues a policy change, some local officials in the vast hinterland fail implement it because it goes against their protected self—interest.

A Change of Heart

In an interesting twist, it seems one the leading voices calling for more backtracking is one of the key architects of reform during the Deng Xiaoping era in the early 1980s. 

According to Mr. David Wall writing in the Japan Times, Professor Liu Guogong, a loyal Communist Party member and former director of the Institute of Economics, a home of many market—oriented reformers, now says it was all a big mistake. As research associate for the East Asia Institute at the University of Cambridge, Mr. Wall writes:  

Liu, in the latest issue of the in—house magazine of his old institute, argues that the last 20 years have demonstrated that there is no room for two economic philosophies, the Marxist canon and the liberal market—economy canon. One of them has to go. The surprise is that he is calling for a full—fledged return to the Marxist canon.

Does Mr. Liu really want to return to the bad old days of a centrally planned economy where everyone was equally poor?  Someone please give this man a one—way ticket to that economic paradise called North Korea.

Hidden Weaknesses

In the past few months, the Western media have been overflowing articles discussing the economic rise of China and India and the threat they pose to America's economic and political leadership. While it is true that many American enterprises face growing competitive pressures from Asia, we must keep this economic challenge in perspective.   

Projecting China's high growth rates out into the future, researchers at Goldman Sachs, for instance, tried predict how the world would look by 2050. Their report claims that China's economy could overtake the US by 2041. (And India may bypass Japan by 2035.)

While every economic evaluation system has its flaws, many of these studies fail to grasp the scale China's internal weaknesses.  According to another report released a few months ago by the World Economic Forum, China's overall global competitiveness has, in fact, declined for the past three years. 

With the massive social problems that Beijing now has to deal with, it is easy to fall victim to Professor Liu's perspective.  Mr. Wall goes on to explain:

It is easy to see why someone of Liu's age and stature might feel let down by the last 20 years of economic reforms. As the main objective of his work was to provide the justification for the CCP to continue in power while the country adopted a market—economy system, he must feel disappointed now that the CCP's enjoyment of that power is under threat. The fiat of the party leadership is being widely ignored, often with damaging, even fatal, results. Recent developments in China's coal industry can illustrate this.

Coal miners are dying at the rate of almost 15 every single day across China, and while the party would like to stop, or at best limit, this with improved safety measures, it has failed completely. Several more fatal accidents have been reported in the last week.

And coal miners are not the only victims.  Last year alone some 3 million workers joined a total of 57,000 protests countrywide, according to China Labor Bulletin, a Hong Kong—based rights group.

Conclusion

In Hong Kong, WTO officials should realize the risk that growing unrest in China's countryside poses to the global economy.  In the past few years, more than 100 million poor farmers have migrated into the urban areas in search labor, many facing discrimination from abusive managers.

Unfortunately, many Communist elders like Professor Liu fail to understand how Communist rule, has made the situation worse, not better.  Because Beijing's rulers fear instability, their reactions may be exaggerated.    
 
Without a doubt, managing an economy that is in the middle of a major transformation is tricky. Potential investors should realize that the Middle Kingdom's economic development is likely to suffer some pretty serious bumps in the years ahead.

Nobody can predict the future, but without doubt the next few years are going to be very interesting times in China.

Brian Schwarz publishes the website China Challenges, and is based in Shanghai.