The global economy is witnessing with alacrity the threat hurled by the United States of America to impose tariff on potential imports from China of goods valuing around USD 60 billion, ostensibly on the grounds that it violated sanctions imposed on Iran and North Korea. The trade tussle between these two global economies was simmering for long and has now come to the surface.
To compound the matters, China is well positioned to salvage the Middle Eastern post-Iran sanctions environment after the US rescinded the Iran Nuclear agreement as in the year 2017 the Export Bank of China initialed a USD 1.5 billion deal sponsoring electrification of a fast speed railway in Iran. China’s venture into maritime investments in the Israeli port of Haifa for a period of 25 years may be rattling on US perception of being Israel’s sole guardian angel.
The proverbial Achilles heel of the Chinese giant is its dependence on acquiring hi-tech components and software from the West, mainly the US, which may retard the development of the IT and telecom industry in China thereby increasing the technology gap. In the digital age, and with the slogan of “Artificial Intelligence” resounding, China still has not penetrated the upper echelons of the higher-end semiconductor value chain, dealing a fatal blow to its aspirations to unrivalled IT affordability and quality claims. The prowess and claims of ZTE and other Chinese IT companies have been exposed as dependent on US and European critical components and parts. The ban imposed by the US Commerce Department from using semiconductors for seven years leaves ZTE and Alibaba nowhere else to turn to since the US entirely dominates the semiconductor market. China is dependent on the established US supply chain as exemplified by its reliance on supplies from Intel and Micron Technology, chips from Qualcomm, Corning glass, optical components from Maynard, Acacia, and software from Microsoft and Oracle.
China’s retaliatory tariffs include purchase of passenger aircraft of manufacturer Boeing and the slack could be taken up by the rival European manufacturer Airbus. China could retaliate by imposing tariffs on soya bean import from USA, although it could conveniently turn towards higher priced imports from Brazil which may lead to a spurt in inflation in China with accompanying discontent. China may also counter by enhancing tariff on import of pork as a tit for tat response to US actions.
China launched a pioneer venture into manufacturing of passenger jetliner which made a maiden public test flight. The C919, domestically designed and manufactured, has been hailed as a symbol of China’s aviation ambitions. However, only half of the parts for the jetliner are manufactured locally with critical components including engines and electronic systems being imported wholly or manufactured through joint ventures with companies of American or European origin.
Although the Chinese economy shies away from disclosures, a staggering amount of USD 250 billion has been ploughed into roads, pipelines, rail tracks, container terminals and power plants outside China which tempts one to draw a comparison between Chinese oversea investment and the Marshal Plan. Significant dissimilarities include that the USA invested in Europe and concurrently reduced tariff barriers. The General Agreement on Tariffs and Trade facilitated European economies to trade with USA at the detriment of the huge trade surplus of the US with Europe yet the Chinese doctrine does not factor in complementary trade. The Marshall Plan doctrine advocated provision of technical advice whereas the Chinese doctrine involves a “brick and mortar approach” through an extensive loan portfolio in the recipient country without enhancing the economic and technical capacity of the recipient country. China also invested in eastern Europe in utilities and energy and ongoing infrastructure projects, such as the Port of Piraeus in Greece where Chinese state entity Cosco Shipping obtained a strategic stake and symbolically over 1000 trains travelled the length and breath of China to Western Europe transporting electronic goods, perhaps justifying the cost of opening logistic hubs, laying tracks and harmonising gauges across the continents.
The C919, domestically designed and manufactured, has been hailed as a symbol of China’s aviation ambitions. However, only half of the parts for the jetliner are manufactured locally
The consistently rising non-performing loan portfolio of the Chinese banking sector, formal or shadowy, is exacerbating the ability of the Chinese economy to sustain and slog out any trade war with the West as the banks may lose money in droves. Initially a portion of these loans acted as a stimulus to growth culminating in China’s GDP growth between 9.5 percent and 10.5 percent between 2008 and 2011. It is asserted by Chairman of China Huarong Asset Management that the total size of nonperforming loans may reach a staggering USD 476 billion by 2020.
Chinese regulators are exploring sharing the massive securitisation of the last decade to attract foreign participation to absorb potential losses but for such a policy to be embraced by the West certain disclosure requirements need to be adopted. The policy of allowing foreign investment to acquire a controlling stake in joint ventures with a minimum net asset value of Yuan 100 billion is unlikely to attract multinationals. China learns fast from its earlier mistake of ZTE’s failure to comply with the terms of its settlement in March last year despite agreeing to pay USD 1.2 billion to the US government to settle the case.
China remains focused on reducing the technology gap with the West. China’s Ambassador to the USA Cui Tiankai cautioned the US that it is not contending with the US for global dominance but only desires large nations’ relationship without seeking confrontation and conflict. It is not a routine practice for the US President to get involved in trade regulatory affairs and in a latest tweet he has shared concern for employees in China losing jobs. Such tweets may be a precursor for a strategic or economic alignment in the context of a rapidly evolving digital and technologically oriented world which is redefining its own parameters .At some stage, the US and China will find the tussle mutually damaging and may make the necessary concessions and adjustments in strategic and economic terms. What Pakistan should be concerned about is not being wedged in between the skirmishes between the Eastern economic juggernaut and the capitalist West and we should avoid becoming economically dependent upon either. This is not possible by policy formulation alone but by good governance unbridled by sinister mechanisms and in a liberal atmosphere to encourage creativity and lend direction.
The author Razeen Ahmed has done his Bachelor of Science in Business and Management from the London School of Economics and Political Science and is involved in research in the areas of finance and energy. Nadir Mumtaz reviewed the article.
Published in Daily Times, May 19th 2018.