Look outside. Count the number of foreign badges you see on cars versus those of Chinese auto manufacturers. Don’t be embarrassed that you are not sure about some of them. Even discounting this “unknown” category, the foreign dominance of China’s auto market verges on monopoly.
With China’s populace discerning for quality, the casual onlooker may well wonder what scant chance there is for startup Chinese auto manufacturers against foreign firms with many centuries of combined experience under their belts. That same onlooker, assuming they were paying attention 15 years ago when China acceded to the World Trade Organisation (WTO), might also now question that if the purpose of WTO is to level the playing field, where are all the Chinese cars?
Granted, the bulk of the cars bearing foreign badges on China’s roads have produced in China under joint venture arrangements with behemoths such as the Shanghai Automotive Industry Corporation (SAIC), a situation which has its roots in the very start of China’s “open door policy”, dating back to 1979.
It was then that premier Deng Xiaoping ushered in today’s China. During a much publicised visit to the USA, Deng marvelled at the technological prowess of this modern western society and even got to sit in the cockpit of the Space Shuttle. Finally he could see what the protestors in the Tian’anmen Square “incident” of 1989 and all their supporters had meant when they called for “democracy”. What they really wanted was “development”.
Deng then made a very bold decision. He decided to let in the foreign car makers. He decided to let them form joint ventures with Chinese companies and let them keep 50 percent; let them make cars in China and let them put their foreign badges on those cars and then sell them.
It was a very shrewd move, but also in reality, it was the only option open to him. The alternatives were to allow the foreign firms in and make Chinese companies compete with them; or to not let them in, thus forcing Chinese auto firms to develop on their own two feet, without outside assistance, and in their own good time.
Deng knew this was not going to happen. He knew his world history and recalled that today’s great auto manufacturers, such as the USA and Japan, were still reeling from World War II when they established serious car production. Deng knew he did not have 40 years to deliver change to his people. The only recourse was to make the foreign car firms work together with their Chinese counterparts, and to give them what they wanted; a big slice of the China market.
So with all this as the backdrop, why on Earth are western car manufacturers still up in arms over the Chinese government’s provision of preferences and financial support to state-owned enterprises and domestic national champions that allegedly continued to skew the commercial playing field?
Over the past few years, China’s leaders have been focused on bringing about yet more economic reform. Such a strategy was essentially ratified at the Third Plenum of the 18th Central Committee of the Chinese Communist Party in November of 2013 in the decision to endorse far-reaching economic rehabilitation, watered down for the public in an announcement that pronounced the market shall be “decisive” and “dominant”.
The new policy had its own poster child to boot; the Shanghai Free Trade Zone, intended to serve as a pilot project for significant trade and investment liberalisation and financial reform had been created earlier the same year.
Despite such steps in the right direction, many of the policies and practices of China have in recent years continued to generate significant concern in the USA. They cite China’s export restraints, investment restrictions, serious problems with Intellectual Property Rights enforcement (see The Gavel – p60), including the sensitive areas of trade secrets, indigenous innovation policies, technology transfer initiatives, government subsidisation and the inappropriate use of trade remedy laws, in addition to what they no doubt believe is a deliberately slow accession to the WTO Government Procurement Agreement (GPA).
Now, look outside again. Count how many cars with white plates (military) are Chinese. Again, we see a large foreign dominance. After all, everyone knows China’s generals have a soft spot for Buick and Audi.
This was made altogether more ironic when President Obama hosted his counterpart Xi at Sunnylands in June, 2013 and during Vice President Biden’s visit to China later that year, whereby China made commitments not to finalise or implement two measures that would have excluded vehicles manufactured by foreign enterprises or foreign-invested enterprises from procurement by the Chinese government and the Chinese Communist Party.
The allegations that China’s provision of preferences and financial support to State-Owned Enterprises and big name national brands is creating an uneven playing field, in the auto industry at least, now seem preposterous. The fact remains that unless the government takes some kind of action to promote home grown business and tamper down foreign dominance, the native auto industry of China would have been annihilated a long time ago. Deng Xiaoping’s model for the Chinese car market was the right one, not that of WTO.
The World Trade Organisation has what it calls a “Dispute Settlement Mechanism” which can be invoked when one WTO members believes they have sufficient evidence that another member is not adhering to the organisation’s rules. Since China’s accession, the USA has brought more than twice as many WTO cases against China as any other member. Then again, it is the country’s largest trading partner.
One such case which the US eventually won was back in 2012 when it challenged restrictions that China had in place that helped create and maintain a domestic firm (UnionPay) as exclusive supplier of electronic payment services, i.e. those needed to process most credit and debit card transactions.
The WTO upheld the American complaint but China then missed the deadline for complying with the WTO’s rulings, and US suppliers remained blocked from entering the market until as recently as last year when the State Council announced that foreign firms will be able to set up their own clearing companies in China and apply to the central bank for licenses for bank card clearing businesses. The decision allows Visa and MasterCard, the world’s two largest credit and debit card suppliers, to challenge UnionPay on their own two feet, without having to pay the existing network fees to piggyback on top of the UnionPay system.
The People’s Bank of China said in an online statement, “[The State Council announcement] fully represents the principles of opening up the Chinese financial system and achieving a fair and competitive market environment”.
Another statement, this time from Visa, said, “We are hopeful these new regulations will permit additional participants in the Chinese domestic market. Visa will review the new regulations and look forward to further implementation details”.
Sure it will; in 2014, consumer transactions for both credit and debit cards in China stood at ¥42.38 trillion.
One of the key issues to emerge throughout China’s WTO accession agreement was that of transparency. Such permits markets to function effectively and reduces opportunities for graft. The commitments that China made regarding transparency in many ways represented a profound historical shift in Chinese policy.
Big progess has been made in other areas too; China is the USA’s largest agricultural export market while Hollywood is enjoying a golden era with the numbers of its films now on silver screens in the Middle Kingdom.
Yet, there is still work to do, and while there is no doubting the need for China to adhere to WTO rules, thus holding her fully accountable as a mature participant in, and a major beneficiary of, the WTO global trading system, a step back into the realities of China is also required.
For China is China. It is not the Greece (or now, even the UK) in Europe of WTO.Change is an acquired taste, and bringing about an appreciation for necessity of such among nigh on one and a half billion people is still going to take a while, to say the least.
This article was first published in The Nanjinger Magazine, August 2016 issue. If you would like to read the whole magazine, please follow this link.
