WTO sides with China to kicks the US in the antisubsidies

In a surprise ruling the WTO ruled that the US had introduced illegal antidumping and antisubsidy duties on some Chinese exports.

What is interesting is that China has spent vast sums on experts and lobby groups to fight the US and Europe on their terms. If you cannot beat them, hire them. This strategy is already showing signs of working well.

Trade Body Rules in Beijing's Favor [WSJ]

BRUSSELS—The World Trade Organization handed an important victory to China, ruling that the U.S. illegally imposed both antidumping and antisubsidy duties on some Chinese exports in 2007.

The trade body's surprise decision sets a precedent in limiting the ability of China's trading partners to impose punitive duties on its exports.

China, the world's biggest exporter and its second biggest economy, faces its biggest wave of trade disputes at the WTO since it joined the Geneva-based organization in 2001.

Led by the U.S. and the European Union, China's trading partners are fighting what they say is an export machine often lubricated by state subsidies and aggressive dumping of goods below cost on foreign markets. And they complain it's a one-way street: China had $1.6 trillion of exports in 2010, with a trade surplus of $184.5 billion.

China has reacted to the trade legal war by hiring teams of consultants and expert counsel in Geneva, Brussels and Washington. It has become difficult for a reporter covering trade to find a lawyer not retained on some level by China or one of its exporters.

The WTO recently issued two significant rulings against China, finding that it improperly imposes export tariffs on raw materials in order to protect domestic supplies, and ordering China to bust a state-backed monopoly on processing some credit-card payments.

The most recent case dates back to the U.S. imposing punitive tariffs of up to around 20% on Chinese steel pipes, tires, and laminated woven sacks in 2007. A year later, China complained to the WTO that the U.S. had acted illegally. In October, the WTO rejected those claims.

Beijing appealed, arguing the U.S. couldn't legally impose two different classes of punitive duties—antidumping and antisubsidy— on the same goods. Antidumping duties punish dumping, the selling of goods below cost in a foreign country, while the latter compensate for government aid, such as grants and low-interest loans.

Typically, antidumping duties are levied on countries that are not designated as "market economies," because some subsidies are assumed in those countries. Instead, the WTO permits importers to calculate probable cost of the good using another country as a reference. For China, it is often another emerging economy such as Turkey or Mexico. Most countries, the U.S. included, don't consider China a market economy, and therefore usually don't apply antisubsidy duties. The EU has never imposed antisubsidy duties on China. Beijing has been campaigning hard for market-economy status from both the U.S. and EU because it would make it harder for those countries to levy antidumping duties.

In its 232-page report, the WTO's judges said that the U.S. couldn't apply both kinds of duties.

"The Appellate Body's decision on the 'double remedies' issue is likely to cause concern" among U.S. manufacturers and labor unions who lobby the government to impose duties, said Simon Lester, founder of WorldTradeLaw.net LLC, a Washington consulting firm.

U.S. Trade Representative Ron Kirk reacted angrily to the ruling by the WTO. "I am deeply troubled by this report," he said."It appears to be a clear case of overreaching by the Appellate Body." The U.S., he added, is "reviewing the findings closely in order to understand fully their implications."

The U.S. must now comply with the ruling by removing some of the duties and change its methodology for future cases.

U.S. trade officials pointed out that the WTO panel upheld some parts of the U.S. case, including the finding that certain banks that gave loans to the exporters were "state bodies."

China welcomed the ruling. The panel, a government statement said, "has conclusively established that the United States acts unlawfully in the methods by which it calculates and imposes countervailing duties on imports from China."

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150 years of foreign trade in China

As an avid reader of Chinese history the relationship between China and the western powers over the last 150 has been interesting to say the least.

It will be interesting to see how the relationship between politics and trade has been handled.

They have some interesting data and arrive at a rather predictable conclusion.

"China's Foreign Trade: Perspectives from the Past 150 Years"

CEPR Discussion Paper No. DP8118
WOLFGANG KELLER, University of Colorado, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR)
BEN LI, University of Colorado at Boulder - Department of Economics
CAROL HUA SHIUE, affiliation not provided to SSRN

This paper studies the trade of China in the past 150 years, starting from the first opening of China after the Opium War. The main purpose of the paper is to identify what is (and was) China's 'normal' level of foreign trade, and how these levels changed under different trade regimes, from 1840 to the present. We present new evidence on China's foreign trade during the treaty port era (1842-1948), drawn from disaggregated trade data collected by the Chinese Maritime Customs Service, that yields important findings for current research. First, although the volume of foreign trade remained limited initially, there was a notable expansion in the diversity of products, with many new goods being imported into China. Second, the regional diffusion of foreign goods through China was greatly facilitated by the expansions of the port system. Third, the importance of Hong Kong as an intermediary in China's trade has undergone long-term fluctuations suggestive of learning effects. China's recent wave of liberalization has led by the early 1990s to a trade level comparable to the high of the 1920s. While much of China's recent growth in world trade is in line with her income growth, there is no doubt that China's trade openness today, comparable by some measures to Denmark's, is a stunning reversal relative to the pre-1978 and also the pre-1840 period. The paper emphasizes the roles that history and institutional change have played in this.


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Facing the Challenge of the Rising Chinese Economy: ASEAN's Responses

I do a lot of work on Chinese trade and it's relationship with ASEAN. Is China a help or hindrance?

This recent RDE paper makes some progress on this issue.

Facing the Challenge of the Rising Chinese Economy: ASEAN's Responses

Yunhua Liu
Nanyang Technological University (NTU) - School of Humanities & Social Sciences

Beoy Kui Ng
Nanyang Technological University (NTU)

Review of Development Economics, Vol. 14, No. 3, pp. 666-682, August 2010

Abstract:
The emergence of China as one of the largest trading nations in the world provides challenges and opportunities to its neighboring ASEAN countries. In the face of the rise of the Chinese economy, there were concerns that ASEAN economies may be adversely affected with the loss of competitiveness in the international market. One of the concerns is that the world export markets of labor-intensive goods will be threatened if China turns into the world low-cost manufacturing factory. Meanwhile, trade between China and ASEAN countries increased dramatically during the past decades. Not surprisingly, China's accession to the WTO and the future establishment of a free trade area (FTA) between ASEAN and China will further change the trade relations in the region. The paper first analyzes the past trade patterns between China and ASEAN countries and assesses the impact of the rising Chinese economy on ASEAN countries, in particular, the impacts on specific industries in each individual ASEAN country. Second, the paper examines the ever-increasing role of foreign direct investment between the two regions and, finally, it analyzes and assess the policy responses of the ASEAN countries thus far and their possible consequences.

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US chicken farmers spitting feathers

China has picked on the humble chicken for the next salvo in the escalating trade war between China and the US.

Given the number of chickens in China it is perhaps surprising that China imports chicken at all given the transport costs and perishability of the said white meat.

Still, a 31.4% tariff is not to be sniffed at. Even without a tariff it is hard to believe that US chicken is competitively priced to actually have a market in China. However big that market is it is about to get smaller.

US chicken farmers will be spitting feathers (cheap gag) and US subsidies might have to get larger.

China to impose new tariffs on US {FT]

China announced yesterday it would impose a second round of tariffs on imports of US chicken products of as much as 31.4 per cent.

The commerce ministry said the tariffs were a response to what it called unfair subsidies given to US poultry farmers. The duties come on top of charges of up to 105.4 per cent placed on poultry two months ago because of alleged dumping .

Economic friction between the two countries had appeared to be relaxing after the US Treasury delayed its decision over whether to label China a currency manipulator.

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The 56% rebound - Is China back?

The China export crash was expected. The recovery is better than I thought it would be but after something has fallen so far it is relatively simple to achieve large rebounds but this is impressive.

Will it last? Doubtful. The stimulus package is in the front line again. It has a lot to answer for. My posts on the metal stocks and the empty city are also relevant here.

China’s economy rebounds with 56% annual rise in imports [Times Online]

China’s economic juggernaut showed the strength of its recovery with exports rising for the first time in 14 months and imports soaring by a staggering 56 per cent in December from a year earlier.

Chinese government economists, usually cautious in their assessments, hailed the strength of trade in December — albeit from a low base rate after exports slumped a year ago.

Huang Guohua, a customs agency economist, said that the December rebound marked an “important turning point”. He added: “We can say that China’s export enterprises have completely emerged from their all-time low in exports.”

China’s exports leapt 17.7 per cent in December from a year earlier, far outstripping the expected 4 per cent rise to break 13 months of decline, the Customs office figures showed.

The surge in export trade was matched by an even bigger leap in December's imports, which rose 55.9 per cent year-on-year to $112.3 billion (£70 billion), much more than the expected 31.0 per cent rise. That squeezed China’s trade surplus down to $18.4 billion compared with $19.1 billion in November and $39 billion in December 2008.

That rise reflected China’s stronger economic growth, driven by a 4 trillion yuan (£400 billion) stimulus package unveiled in November 2008 and by demand for imported raw materials and consumer goods at a time when demand in the United States and other foreign markets is weaker.

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With China’s trade data for all of 2009 now out, the nation's crowning as the 2009 export champion is expected to be confirmed when Germany releases full-year trade figures on February 9. From January to November, Chinese exports were worth $1.07 trillion, while data from the German national statistics office on Friday showed that exports from the European heavyweight amounted to $1.05 trillion.

The robust figures from China echo similar rebounds in South Korea and Taiwan, which reported growth of 46.9 per cent and 33.7 per cent respectively.

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"China and the Manufacturing Terms-of-Trade of African Exporters"

China's relationship with Africa is a subject that I am currently interested in. This recent paper in the Journal of African Economics is a decent place to start.

When I indirectly considered this issue for China's Asian neighbour's China's increased exports more than compensated. This may not work for African countries as this paper shows. Interesting results.

China and the Manufacturing Terms-of-Trade of African Exporters"

Journal of African Economies, Vol. 18, Issue 5, pp. 781-823, 2009

NELSON B. VILLORIA, Purdue University

China's export expansion is commonly associated with lower global manufacturing prices. For most countries, lower prices heighten global competition but also allow importing a cheaper and wider set of inputs and consumer goods. This paper investigates the balance of these two forces in Kenya, Mauritius and the Southern Africa Customs Union, the largest exporters of manufactured goods in sub-Saharan Africa. The paper uses the economic geography model of Redding and Venables (in Economic geography and international inequality, Journal of International Economics, 62, 53-22, 2004) to decompose the import growth of a large number of countries into supply and demand capacities. This decomposition allows for analysis of the extent to which China's export growth has altered manufacturing import and export prices for the selected countries. The study finds that China has significantly decreased world prices in major markets for manufactures, especially textiles, wearing apparel and footwear, potentially displacing the clothing exports of the selected African countries. As a consequence of China's export growth, these focus countries have also seen substantial reductions in their import prices across all manufacturing sectors. However, an estimation of their terms-of-trade suggests that the reductions in export prices outweigh the decrease in import prices and the countries are deemed to lose from China's manufactures export expansion.

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Foreign direct investment, processing trade, and the sophistication of China's exports

Just how sophisticated are China's exports becoming? This paper is distantly related to the Puga and Treflet paper below but is far more readable.

Another paper on my "must read" list.

Foreign direct investment, processing trade, and the sophistication of China's exports

Bin XU and Jiangyong LU

Received 28 October 2007;
revised 23 January 2009;
accepted 26 January 2009.
Available online 5 February 2009.

Abstract

China's export structure has shown a rapid shift towards more sophisticated industries. While some believe that this trend is a result of processing trade and foreign direct investment, the evidence is mixed. This paper examines variations in level of export sophistication across China's manufacturing industries. We find that an industry's level of export sophistication is positively related to the share of wholly foreign owned enterprises from OECD countries and the share of processing exports of foreign-invested enterprises, and negatively related to the share of processing exports of indigenous Chinese enterprises. Evidence from the relative export prices of Chinese goods, which measure within-product export sophistication, shows a similar pattern.

Keywords: China; Foreign direct investment; Processing trade; Sophistication of exports

JEL classification codes: F1; O1

"Wake up and smell the ginseng"

A good paper in the recent issue of the Journal of Development Economics - the premier development journal.

The paper attempts to model incremental innovation in low wage economies such as China and India. The model makes sense and this represents a potentially important paper.

Puga and Trefler and premiership academics - this is a quality piece of work.

Wake up and smell the ginseng: International trade and the rise of incremental innovation in low-wage countries

Diego Puga and Daniel Trefler

Received 12 September 2007;
revised 27 January 2009;
accepted 27 January 2009.
Available online 9 February 2009.

Abstract

Increasingly, a small number of low-wage countries such as China and India are involved in incremental innovation. That is, they are responsible for resolving production-line bugs and suggesting product improvements. We provide evidence of this new phenomenon and develop a model in which there is a transition from old-style product-cycle trade to trade involving incremental innovation in low-wage countries. The model explains why levels of involvement in incremental innovation vary across low-wage countries and across firms within each low-wage country. We draw out implications for sectoral earnings, living standards, the capital account and, foremost, international trade in goods.

Keywords: International trade; Low-wage country innovation

JEL classification codes: F1

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Will Obama "tyre" of China or the mob?

Terrible title I know and after such a long posting layoff as well. I must be rusty.

This is a good FT article from Chad Bown looking at US-China trade relations. They are already under strain - this is adding to the pressure.

I am surprised that the FT use the term "mobs". Chad has it spot on though and has read the situation well in my opinion.

China need to take this threat seriously and it might be wise for them to seek a solution so as to to set rolling a ball that may well prove difficult to stop.

Obama must resist the anti-trade mobs [FT]

The Obama administration’s first real test on trade policy has arrived. The US must decide whether to impose new import restrictions on Chinese tyres under what is known as its “China safeguard” law.

This decision is not just a test of President Barack Obama’s support for free trade. History could well record it as the defining moment when the multilateral trading system was able – or not – to withstand the crisis-provoked protectionist forces that currently threaten to bring it down.

The World Bank-sponsored Global Antidumping Database suggests that, since the economic turmoil began, countries have been ganging up to use World Trade Organisation rules in an almost mob-like response to restrict imports from China. The tyres case could make this far, far worse.

The US tyres case began in April when the United Steelworkers union asked the government to investigate tyre imports from China. By June, the US International Trade Commission recommended the president impose a new 55 per cent tariff. President Obama has the discretion under the law to accept this, offer a different package of assistance to the steelworkers or dismiss the case.

There are numerous comparisons between the tyres decision and the first trade policy test President George W. Bush faced over a steel safeguard case in 2001-2002. Each test occurred under safeguard laws subject to presidential discretion, took place early in each president’s first terms, and could lead to import barriers which would benefit a key domestic constituency.

However, for any US administration with multilateralist aspirations, an important historical element is what happened after the Bush administration imposed import restrictions. The 2002 US trade barriers ignited a protectionist fire that quickly spread across the world. Nine other economies, including the European Union and China, followed the US lead by imposing new steel import restrictions. Some governments feared that the steel exports newly shut out of the US market would be deflected into their own markets.

It is doubtful that today’s struggling world economy, still reeling from the financial crisis, could withstand a similar global protectionist backlash. Unfortunately there are three reasons to expect an even stronger international protectionist response if Mr Obama accepts new tariffs.

First, this China safeguard is just one of many anti-China trade policies currently in vogue. Industry demands for new import restrictions against China under this and other policies such as anti-dumping were up 23 per cent in 2008, and are on pace for another increase in 2009. It is not limited to the US and EU; India, Brazil, Argentina, Indonesia, South Africa and Turkey are imposing most of the new import restrictions China faces.

Second, a little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.

Third, much of the world still follows the US lead regarding new import restrictions. The most recent example was the Bush administration’s reversal of a long-standing US policy that made a particular anti-subsidy law off-limits for use against China. After the US charged China under this law, Australia and India initiated their first such cases against China, and others will follow.

Neither China’s exports nor its policies are blameless in these affairs. Some of the US and other WTO member countries’ concerns are based on legitimate problems. It is simply that the mob mentality on new trade barriers does not help the trading system address such problems.

The best option for the US administration in the imminent China-safeguard decision over tyres is to decline to implement new trade barriers, but to offer the adversely affected communities in the US help through adjustment assistance programmes. Doing so will help the US stand up for the trading system and counter the crisis-driven mob mentality that threatens to bring it down.

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Is China being screwed by the EU?

I for one did not realise that the EU tariffs on screws was so high. Why?

The FT report (plus this story makes for a good blog title).

Anti-dumping legislation is always interesting (at least to me) and the EU are getting more and more trigger happy when it comes to using anti-dumping as a means of protection. Dumping is always hard to prove.

It will be interesting to see how this plays out.

China in EU trade spat over screw imports [FT]

China has sparked a row with the European Union after complaining to the world’s trade watchdog that EU anti-dumping duties on Chinese screws and bolts are breaking global commerce rules.

The world’s second-largest exporter lodged its first complaint against the EU with the World Trade Organisation on Friday, protesting that EU tariffs of up to 85 per cent were “neither impartial nor transparent” and were damaging business for hundreds of Chinese companies.

The move signals Beijing’s willingness to defend its trade-related interests more aggressively through multilateral institutions, as well as its implicit acceptance of the authority of those western-dominated institutions.

The European Commission said the duties, imposed in January on goods worth some €575m ($812m) a year, complied with WTO rules and served to protect European businesses from unfairly priced Chinese goods.

Under WTO rules, a country imposing anti-dumping duties must prove its domestic industry has been injured by cheap imports from a specific country.

The dispute comes only days after EU trade officials approved pre-emptive penalties on imports of steel pipe from China, viewed by some as a protectionist move intended to mitigate the effects of the economic downturn within the 27-state bloc.

In a statement from its WTO mission in Geneva, China said the commission had failed to comply with the trade watchdog’s rules when it investigated the imports and imposed the measures.

“The determinations made are neither impartial nor transparent, which infringes the legitimate commercial interests of over 1,700 Chinese fastener producers,” it said.

It said the EU had been inconsistent in its application of the rules given that two Chinese subsidiaries of European firms – Italy’s Agrati and Celo of Spain – were exempt from the duties.

However, the European Commission said the measure was fully in line with WTO rules. “Anti-dumping measures are not about protectionism, they are about fighting unfair trade.

“The decision to impose measures was taken on the basis of clear evidence that unfair dumping of Chinese products has taken place with state distortion of raw material prices,” Lutz Guellner, trade spokesman, said.

Between last September and June, other WTO members, particularly the US, India and European countries, brought 77 cases worth a total of $9.8bn against China, more than double the number of cases in the same period a year earlier, Chinese state media reported.

Until recently, China has been reluctant to use the WTO to defend its interests. However, it has now decided to engage more directly to ­protect its businesses, according to reported comments from Zhou Xiaoyan, deputy director of the China Bureau of Fair Trade for Imports and Exports.

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WTO looking closely at Chinese trade restrictions

After spending so long trying to get into the WTO China now spends a long time trying to get around the rules.

Even in the face of a global recession or indeed perhaps because of the global recession the US and EU are fighting back over the Chinese restrictions on exports that are aimed at protecting the domestic steel industry.

This is really a none issue and will not save global trade. China will dig in and the US and Europe will give up.

Duties call [Economist]

DESPITE the periodic sighting of green shoots elsewhere in the economy, the landscape of global trade remains resolutely bare. The World Bank said on June 22nd that world-trade volumes, reeling from a drastic collapse in global demand (see chart), will shrink by nearly 10% this year. That would be the sharpest fall since the Depression, and the first decline in trade since a small dip in 1982.

Unsurprisingly, tempers are fraying as governments struggle to find ways to protect their own. The latest salvo was fired on June 23rd by America and the European Union, which complained to the World Trade Organisation (WTO) about China’s restrictions on the exports of nine minerals, including bauxite, coke, magnesium and manganese. These are important raw materials for the steel industry, among others, and China restricts their exports on the grounds that they are exhaustible resources. But America and the EU argue that by hindering their export, China is unfairly favouring domestic industries.

John Veroneau, a former American deputy trade representative, believes the case against China is a strong one. He also argues that this week’s move can be seen as an effort to foster more trade (as there surely would be if China were to ease its export restrictions) at a time when trade is in a great deal of trouble. In practice, it is unlikely to have that effect. If the case proceeds to the stage where a formal WTO panel is formed to decide on its merits, it could drag on for several years, by which time trade will, with luck, have recovered from its current moribund state.

Jeffrey Schott, a trade expert at the Peterson Institute for International Economics, a think-tank, says that the case against China may also help the cause of open trade in other ways. If Ron Kirk, America’s new trade representative, demonstrates that he is actively enforcing the agreements already in place, he may get “the authority to negotiate Doha and other accords”.

That may be too sanguine. True, America and the EU are not resorting to imposing fresh barriers of their own in this dispute; for that matter, China’s export restrictions are not new either. But trade experts warn that protectionism remains a serious worry. Of particular concern are the so-called “Buy China” requirements added to China’s stimulus package this month. These require recipients of money from China’s mammoth fiscal expansion to choose domestic suppliers “unless products or services cannot be obtained in reasonable commercial conditions in China”. This sounds like out-and-out protectionism. But America, which included similar “Buy America” provisions in its own stimulus bill, may find it hard to raise a stink.

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Exports just keep on sliding

I am becoming more and more convinced that politicians all over the world are making non stop comments on "green shoots", "bottoming out" and similar phrases just for the sake of "talking up" the global economy - this is perhaps no surprise at all. I just don't buy it when you look what is happening on the ground.

The Chinese growth story is another one of the great falsehoods of our time. I do not believe the figures. If you take oil consumption as a REAL proxy for output it is continuing to fall despite the massive stimulus package.

The FT reports on the continued decline in exports. This is NOT a surprise to anyone with any sense.

When will anyone report what is really going on. Now I might be on the "extremely" dismal end of dismal scientist line but I can still not see any green shoots from where I sit.

Look at the FT first two lines. What I want to know is WHO said the worst was over and WHY?

This article at least puts things in perspective. I agree - China is massively ill prepared for a continued decline in demand for its exports. The world economy will not bounce back that quickly (or as quickly as some analysts believe).

Rant finished. Apologies.

Slide in Chinese exports will hit growth strategy [Financial Times]

Chinese exports fell steeply in April for a sixth month in succession, suggesting that the worst might not be over for the world's third largest economy.

The total value of Chinese exports fell 22.6 per cent to $91.9bn (£60.2bn) last month compared with the same month a year earlier - a faster rate of decline than the 17.1 per cent year-on-year drop in March.

Imports fell 23 per cent from a year earlier to $78.8bn in what some analysts said was a sign that domestic investors remained unwilling to invest in new capacity. Exports rose 6.9 per cent between March and April. However, the month-on-month figures are not seasonally adjusted and are regarded by analysts as misleading.

JPMorgan said it estimated that month-on-month exports fell 2.8 per cent on a seasonally adjusted basis after gaining 6.1 per cent month on month in March.

The monthly trade figures are being watched closely after some economists criticised Beijing's stimulus efforts for relying too heavily on an assumption that there would be a quick rebound in global demand for cheap Chinese exports.

"The top leaders have made the calculation that this crisis is nothing like the 1930s and the global economy is going to rebound quickly, at which point China will take a greater role in the world," one senior retired government official told the Financial Times.

That view is questioned by some economists. Stephen Roach, Asia chairman of Morgan Stanley, argued in an article that the Chinese government had miscalculated and was "clinging to antiquated policy and economic growth strategies that presuppose a classic snapback in global demand.

"That leaves China illprepared for what could well be the defining feature of the post-crisis world - an enduring US-led shortfall of external demand."

In its effort to boost growth, Beijing is investing huge sums in new infrastructure projects, while also providing ample support for its export industries in the form of favourable policies, cheap loans and tax rebates.

This strategy is "strikingly reminiscent" of the Chinese response to two earlier external demand shocks - the Asian financial crisis of 1997 and the bursting of the dotcom bubble in 2000 - according to Mr Roach.

In both those instances the Chinese export-led economy emerged from the downturn in an excellent position to take advantage of the rebound in global trade.

On a more positive note, the government said yesterday that fixed-asset investment in Chinese urban areas rose faster than expected in the first four months, jumping 30.5 per cent from a year earlier.

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"Globalization" in China

The Globalist have an interesting article looking at the relationship between the Chinese state and "globalisation". It is interesting that the very phrase "globalisation" has such negative political connotations in China.

I am not convinced by a lot of this article but it does raise some interesting points.

“Democracy Is A Good Thing,” [Globalist]

While China has undoubtedly reaped many benefits from the process of globalization, many of its people are still skeptical of the true nature of this market-integrating phenomenon.

In the early half of the 1990s the word "globalization" itself was so politically sensitive that Chinese scholars avoided mentioning it in articles and books.

On a practical level, globalization was long-regarded as synonymous with capitalist development, a fact that explains the previous ideological sensitivities it carried.

"Deglobalisation" and world trade flows

I dislike the word "deglobalisation". More importantly I think it is an inappropriate description of what is happening to world trade. Yes, trade levels are falling but this does not mean the world is less "globalised".

Clearly, it depends on one definition of globalisation but unless trade barriers start rising again there is no problem. However, IF we do see increased protectionism then the word could be considered appropriate.

Plots of the extent of globalisation over time are by no means linear. It can be argued that the world was more globalisation over 100 years ago.

The FT discuss world trade levels which, given China's increasingly important role in world trade flows, should be of interest to readers of this blog.

If we are to survive this current slump in a recession and not a depression then it is essential that free trade remains free.

World trade [FT]

Deglobalisation: ugly word, scary concept and now painful reality. The World Trade Organisation estimates global trade will drop by 9 per cent this year, its biggest decline since the second world war. Given that trade was growing at a 6 per cent clip only 15 months ago, the fall is so abrupt that some now worry about the return of Smoot-Hawley, the US tariffs law that made the 1930s depression Great.

That is alarmist. Much of the recent reversal in the global movement of capital, goods and jobs has been directly due to the financial crisis. It has been the collapse in demand, not protectionism, that has savaged trade flows. A lack of trade credit has also hurt, given that 90 per cent of trade involves some kind of credit, insurance or guarantee.

So, yes, since October, China has banned Belgian chocolate, India forbidden Chinese toys and the US energy secretary said he would like to see tariffs on Chinese goods unless Beijing reduces greenhouse emissions – the “green face” of protectionism. There are dozens more such cases. Yet the effects of such incipient protectionism have been small, so far.

Will it stay that way? Reasons to be hopeful include the WTO, and the treaties that bind its members. Companies, even those producing for domestic markets, are more dependent on imported inputs than ever before. Exporters also have more political heft. This changes the politics of protectionism. The “Buy America” programme was watered down. And, in Brazil, private sector outrage that followed an attempt to impose import controls led to their removal. That is encouraging.

Even so, protectionism could rise as the recession worsens, putting governments under pressure to protect jobs at home. Indeed, anti-subsidy duties, anti-dumping rules, imports banned in the name of health, safety or the environment – all these are WTO-legal. Eight decades ago, many sensible people opposed the Smoot-Hawley bill; 1,028 economists petitioned against it, as did Henry Ford. Yet still the “asinine” bill passed. Free traders everywhere cannot drop their guard.

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China's exports fall off a bigger cliff than expected

It was always going to be tough for China's exporters. I have forgotten the number of times this blog has warned that things will be far worse for China than current pundits predict.

The news that exports fell 25% is no surprise. This will not be the end. The sheer volume of exports from China to the West (the EU and UK specifically) means that any buyers strike will hit China very heavily. The rest of Asia will also suffer as China reduces its inputs from the wider Asia trade network.

It is hard to believe any "analysts" really thought there would be a modest uptick. Who are these people? At least the excellent Pettis is on the ball as usual. That is a man worth listening to although I have previously disagreed with his overly optimistic stock market predictions.

China's policy of sending delegates to Europe and the US to diffuse the "protectionist" fears is a wise move. Having spoken to a well placed economist in China it is clear that they have a good understanding of the political-economy issues currently in play.

The fact that Chinese exporters are lobbying for a currency depreciation is a further worry on the horizon but I just cannot see it. The Chinese government would not risk such an aggressive move just yet.

China hit by huge drop in exports [FT]

China’s exporters succumbed on Wednesday to the full force of the global economic turmoil. Even after the horror show of economic statistics published around the globe in recent months, China’s exports numbers in February painted a grim picture.

Some analysts had been expecting a modest uptick, given that there were fewer working days in February last year because of new-year holidays. Instead, exports slumped by 25.7 per cent as the collapse in global demand caught up with the country’s exporters and overshadowed a sharp rise in domestic investment..

China’s exports have decreased since November, but until last month the rate of decline had been much slower than in other Asian countries with large export sectors.

Economists said the headline figure for last month, which was already much worse than expected, probably masked an even steeper decline given that there was a shorter number of working days in February 2008 due to new-year holidays.

“It was really just a question of time,” said Michael Pettis, finance professor at Beijing University. “Given the figures coming out of other Asian countries, China’s recent export numbers were not sustainable.” Chinese exports have fallen every month since November but until Wednesday they had dropped at a slower pace than elsewhere in Asia.

For Chinese diplomats preparing for the Group of 20 summit, the trade numbers might come as something of a relief. In particular, the trade surplus, which had been hovering around a record $40bn (€31bn, £29bn) a month since October, declined sharply to $4.84bn in February.

With the global recession deepening, China has been afraid that its large trade surpluses will encourage protectionist pressures and that other governments at the G20 will press China to appreciate its currency.

China this week launched its second buying mission to Europe in the past month in an effort to defuse protectionist sentiment. The government has also faced rising trade tensions with some neighbouring countries after China has begun running a trade surplus with the rest of Asia in recent months. India has already placed restrictions on Chinese imports of toys and officials fear further such measures across the region.

The figures released on Wednesday will allow the Chinese government to argue that it is starting to rebalance its economy, with exports slowing sharply and imports falling less rapidly as the government’s fiscal stimulus plan starts to kick into action. The 26 per cent rise in fixed asset investment over January and February, announced on Wednesday, lends some credibility to this story, as do huge recent increases in bank lending.

“This gives us a glimpse of what China could start to look like if fiscal policy really gets going,” said Paul Cavey, an economist at Macquarie Securities.

However, it was not clear if the trend was sustainable given signs of weak underlying demand in much of the economy. “You could find that imports fall again in a few months time and the trade surplus rises,” he said.

A smaller trade surplus would have other international implications, including fewer Chinese purchases of US financial assets. With foreign direct investment into China also slowing and some signs of capital outflows, most economists are predicting that China’s foreign currency reserves will not increase at the same rate as they did last year.

“Private buyers [of US Treasury bonds] will have to take up more of the slack to prevent the expanded supply from pushing up auction rates,” said Stephen Green at Standard Chartered in a research note.

However, while the trade numbers might help to ease some of the international criticism of China, they will also magnify the already huge pressures that the government is facing at home from the export sector. Such a large decline in exports will probably mean more factories on the verge of bankruptcy and a further increase in unemployment, on top of the 20m migrant workers who have already lost their jobs from the export sector.

Chinese exporters are likely to step up calls for a depreciation of the currency. However, the government has rejected such an option. In his speech to the National People’s Congress last week, Wen Jiabao, the premier, said that the exchange rate would remain “basically stable”. Economists point out that a modest weakening of the Chinese currency would do little to help exports in the current market but could prompt a large and potentially destabilising capital outflow, as well as anger trading partners.

Instead, the government has been looking at other measures to try to assist exporters. Chen Deming, the commerce minister, said at the weekend that China would reduce taxes on exports to zero and provide additional financial assistance to exporters. The China Iron and Steel Association has proposed lifting a tax rebate on exports of cold-rolled steel from five per cent to 17 per cent, state media reported on Wednesday.

Xie Rongfang, head of the Wenzhou Shoe Industry Association, said a further increase in tax rebates was being negotiated with the government. “The pressure on us at the moment is huge, both at home and abroad, so any financial support the government can give us will be very welcome,” she said.

However, these policies bring their own dangers, because if the government appears to be doing too much for exporters it could encourage retaliatory measures from trading partners.

“If the European market starts to be flooded again with cheap Chinese steel, then there will be a big fight,” said a European diplomat in Beijing this week.

After dropping 43 per cent in January, imports fell by 24 per cent last month, which some analysts said was a sign that the government’s fiscal stimulus measures were beginning to have an impact.

Figures for fixed asset investment for the first two months of the year were also much higher than expected, rising 26.5 per cent against the same period the year before, compared to 21.9 per cent in December.

Within those figures, transport investment – one of the priorities of the fiscal stimulus plan – rose 210 per cent over the same period the year before, while property investment was up only 1 per cent, a sign of the continued weakness in the housing market.

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Research Paper: "How vertically specialized is Chinese trade?"

This is an area where I have done considerable work. Judith Dean is a well respected researcher in this area. This is a paper I need to read.

It is odd to see so many China related papers being published in the Bank of Finland working paper series. I cannot see the link myself.

The methodology employed in this paper appear to be appropriate and make a useful contribution to the literature.

How vertically specialized is Chinese trade? [PDF]

Judith Dean*, K.C. Fung** and Zhi Wang***

How vertically specialized is Chinese trade?

Abstract
Two recent phenomena have transformed the nature of world trade: the explosive growth of Chinese trade, and the growth of vertically specialized trade due to international produc-tion fragmentation. While vertical specialization may explain much of the growth and unique features of Chinese trade, few papers have quantitatively assessed these two phe-nomena together. In part, this is because it is difficult to measure just how vertically spe-cialized Chinese trade is. The unique features of China's extensive processing trade cause both the identification of imported intermediate goods, and their allocation across sectors, to depend upon the Chinese trade regime. In this paper, we estimate the vertical speciali-zation of Chinese exports, addressing these two challenges. Using two Chinese benchmark input-output tables, and a detailed Chinese trade dataset which distinguishes processing trade from other forms of trade, we develop a new method of identifying intermediate goods imported into China. Vertical specialization is then estimated using two methods. The first method uses the Hummels, Ishii and Yi (2001) measure, the official benchmark IO tables, and incorporates our identification correction. The second method follows the first, but also incorporates the Koopman, Wang and Wei (2008) method of splitting the benchmark IO tables into separate tables for processing and normal exports, in order to ad-dress the allocation problem. Results show strong evidence of an Asian network of inter-mediate suppliers to China, and the two methods provide a range of estimates for the for-eign content of Chinese exports. In 2002 aggregate exports ranges between 25% and 46%, with some individual sectors are as high as 52%-95%. Across destinations, under both me-thods, the vertical specialization of Chinese exports declines with the level of development of the trading partner.

JEL Codes: F10, F14

Key Words: China, fragmentation, vertical specialization, trade growth

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Asia also reliant on the West - no surprise

As readers of this blog may be sick of reading about - China's continued reliance on the West has been greatly underestimated. By definition the same applies to the rest of Asia.

Why? Because a large proportion of China's import of intermediates is from the rest of Asia. The FINAL goods are then exported to the West.

If China's exports fall then so do Asia's exports to China (and any exports that go directly to the West). There will be some very large GDP falls coming up in Asia.

The FT get round to reporting this news. Of course it "smells a lot of just supply-chain dynamics”. That is because it is and has been for years.

Once over priced property prices start falling the real meltdown will start. Asian banks are looking mightily unattractive at the moment. Any rebound will be further away than is suggested here in my opinion.

Asia trade suffers as Chinese imports fall [FT]

Asia, whose economic resilience was in part meant to be guaranteed by booming regional trade, is confronting growing signs that such trade remains much more dependent on western demand than previously hoped.

Michael Buchanan, Asia chief economist at Goldman Sachs, says the dramatic fall in Chinese imports from other Asian countries in January shows that Chinese consumers have not replaced their US and European counterparts. Instead, he says a lot of intra-Asian trade still “smells a lot of just supply-chain dynamics” feeding exports to other regions.

In January, exports from Taiwan and South Korea to China fell by 50 per cent and 33 per cent year-on-year respectively. South Korea said on Sunday its overall exports fell less rapidly in February than in January. But it will release only on Monday a breakdown of shipments to China and elsewhere.

More bad news is expected to follow, at least until the second quarter, as most export-focused Asian companies cut jobs and manufacturing capacity because of anaemic western consumer demand. Government stimulus packages, heavily geared towards infrastructure spending, will only gradually help Asia recover, rather than act as an overnight cure.

Asia’s most open economies – Japan, South Korea, Taiwan, Hong Kong and Singapore – are suffering the most. Each of them is set to see their economies contract this year. In Hong Kong and Singapore, the problems are compounded by a furious race to expand a financial sector that is now bleeding jobs and triggering a tumble in high-end property prices.

Among Asian nations, only the Philippines and Indonesia have a lower ratio of exports to gross domestic product now than in 2001. Some economists are warning that other Asian nations should stop counting on intervention from Beijing to lift the region out of its economic quagmire.

“There is a sense in Asia that as long as China continues to grow relatively quickly, then the rest of Asia will benefit . . . China is now the most important market for many Asian export-oriented economies, but it appears to us that China’s economic stimulus plan will support domestic investment, which is not necessarily import-intensive,” says James McCormack, Fitch’s head of Asian sovereign ratings.

Nevertheless, many economists are still expecting a regional rebound in the second half. Some of the optimism stems from a belief that the recent slowdown was in part self-induced.

A year ago, authorities were facing surging oil and food prices, which convinced them to review their traditional bias towards growth and worry more about inflation. But having raised interest rates aggressively, they were confronted with a worldwide credit meltdown, so that “at a time when they should have been infusing liquidity to strengthen financial sector fragility, they actually constrained it,” says Subir Gokarn, Asia chief economist at Standard & Poor’s.

The good news, Mr Gokarn and others note, is that central banks, other than Japan’s, have room to cut rates further and feed into an Asian banking system that still has plenty of liquidity and has not suffered anything like the subprime-induced losses of western banks.

Furthermore, Asia will reap great long-term benefits from additional infrastructure spending, because of years of under-spending and a booming urban population.

Despite some concerns about how efficiently the money will now be spent, “Asia is one of the very few regions of the world where there is a really valid case for expanding infrastructure,” says Glenn Maguire, Asia chief economist at Société Générale.

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"China's Growing Role in World Trade"

A paper that I need to read. Apologies to those who cannot get free access to NBER papers. It is a shame that the NBER feel the need to charge instead of spreading the word.

It would be interesting to know NBER's yearly download revenues.

"Introduction to 'China's Growing Role in World Trade'"

NBER Working Paper No. w14716

ROBERT C. FEENSTRA, University of California, Davis - Department of Economics, National Bureau of Economic Research (NBER)
Email: rcfeenstra@ucdavis.edu
SHANG-JIN WEI, Columbia Business School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR), International Monetary Fund (IMF)
Email: shangjin.wei@columbia.edu

Over the last three decades, the value of Chinese trade has approximately doubled every four years. This rapid growth has transformed the country from a negligible player in world trade to the world's second largest exporter, as well as a substantial importer of raw materials, intermediate inputs, and other goods. This paper provides an overview of the microstructure of Chinese trade, its macroeconomic implications, trade disputes with other WTO member countries, and the role of foreign firms.

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China open for business as the US closes

Surely I cannot be the only one to see the irony in the different responses of China and the US to the current financial crisis. Respect to China for learning economics both quickly and correctly. Shame on the US for pandering to political lobby groups (again).

China is of course acting in its own self interest. A trade war would be more devastating for China whose reliance on exports is high.

China editorial slams 'Buy American' provision [AP]

BEIJING (AP) — Measures in a $789 billion U.S. stimulus package that favor American goods are a "poison" that will hurt efforts solve the financial crisis, an editorial by China's official news agency said.

Provisions in the U.S. stimulus bill approved Friday favoring American steel, iron and manufactured goods for government projects are protectionist measures that could trigger trade disputes, said the editorial issued late Saturday by the Xinhua News Agency.

"History and economics have told us, facing a global financial crisis, trade protectionism is not a solution, but a poison to the solution," the editorial said.

U.S. labor groups that pushed hard for inclusion of the measures have argued that their main purpose is to ensure that U.S. Treasury dollars are used to the fullest extent to support domestic job creation.

China has promised to avoid "Buy China" protectionist measures in its own multibillion-dollar stimulus effort, and appealed to other governments to support free trade. Deputy Commerce Minister Jiang Zengwei said in early February that China would "treat domestic and foreign goods equally so long as we need them."

Protectionism was a key concern of weekend meetings of the Group of Seven industrialized nations in Rome. U.S. Treasury Secretary Timothy Geithner assured G-7 finance ministers on Saturday that the stimulus package would not violate the United States' commitment to free trade.

Xinhua's editorial said protectionist measures taken during the Great Depression of the 1930s caused trade wars, hurting international trade.

President Barack Obama is expected to sign the economic stimulus package on Tuesday in Denver, Colorado.

The package, aimed at combating the worst economic crisis since the Great Depression, was Obama's first major victory in Congress.

Requirements known as "Buy American" were softened as the bill progressed through Congress and after strong criticism from abroad. Senate and House negotiators agreed to a version that would require the government not to violate trade agreements when implementing the law.

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"Made in Europe" - China to start spending

If China starts buying European technologies and increases procurement in the EU will it placate those who still see China as protectionist and a country who is keeping its currency artificially low to boost exports?

I do not think so. However, Wen Jiaboa disagrees. For sure, it will help. The man in the street recently made redundant may not see it so clearly.

Let us be clear - these purchases by China is not charity but will benefit China considerably.

China to go on European spending spree [FT]

China will set up “procurement missions” to buy goods and technologies in Europe in an effort to stem protectionist sentiment in the region against its exports.

Wen Jiabao, the Chinese premier who was talking in London on Monday at the end of a five-day trip to Europe, said the procurement trips would be established as soon as possible.

../

He said Chinese companies had signed contracts totalling $15bn (€11.7bn, £10.6bn) during his trip to Europe.

The announcement underlines Beijing’s anxiety that the global financial crisis will prompt a new wave of protectionism which would be damaging to a country such as China which is the second largest exporter in the world. Europe is China’s largest trading partner.

China hopes initiatives of this kind will help shift attention away from questions about the level of its currency, which some governments believe to be undervalued.

However, Gordon Brown is correct to point out that a return to protectionism would be disastrous for the global economy. China is to be applauded for its stance that encourages openness and trade as the solution and not the problem to getting out of the current recession. It is also good to see "education" getting a mention. Education is one of the UK's top exports and the number of Chinese students coming to the UK continues to increase.

The sectors of British industry most likely to benefit from China’s enhanced government spending would include aerospace, hi-tech manufacturing, education, pharmaceuticals and low-carbon technologies.

Mr Brown said: “Premier Wen and I agreed that the biggest danger the world faces is the retreat into protectionism, which is the road to ruin. The best attack on protectionism is to demonstrate today the benefits of trade for jobs, for businesses and for eventual prosperity.”

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