SHENZHEN, CHINA – China is nothing if not creative in protecting its local industries. Although it has liberalized its economy in recent years, it has also erected a sophisticated set of barriers to safeguard companies it views as national champions. Increasingly, this is a counterproductive approach.
The usual method of assessing protectionism is to look at metrics such as tariff rates. And by that measure, China remains one of the least open major economies: According to the World Trade Organization, it maintains an average most-favored nation tariff of 9.6 percent on imports, compared with 5.3 percent in the European Union and 3.5 percent in the U.S.
But tariffs only tell part of the story. China has also become adept in using non-tariff barriers to prop up favored companies. The European Union Chamber of Commerce in Beijing recently identified a raft of such measures China was using to protect manufacturers, including subsidizing local businesses and forcing foreign firms to turn over technology to Chinese partners.
When China recently announced that it was granting a subsidiary of U.S.-based asset manager BlackRock Inc. an additional investment quota, it touted the deal as a major liberalization in a sector almost entirely closed to foreign firms. In fact, it only accentuated the barriers that still exist: Even now, China limits the number of branches financial companies can open and imposes ownership restrictions to protect state-owned banks.
Such measures can border on the absurd. A recent administrative order barring foreign children’s books — including beloved titles such as “Guess How Much I Love You” and the Peppa Pig series — constitutes a non-tariff barrier to trade in intellectual property. Foreign firms have even been prohibited from selling products made in China to Chinese consumers, for fear they’ll take market share from domestic competitors.
Getting China to address these barriers is a challenge, as a recent report from the U.S. Trade Representative’s office shows. WTO rules require countries to report industrial subsidies. But the report testily notes that “the United States has now counter notified over 400 Chinese subsidy measures,” while China “has included in its subsidy notifications only a small number of programs.” Making matters worse, “China has refused to engage in bilateral technical discussions to address this issue.”
In other words, not only is China failing to disclose measures that may violate WTO requirements, it is refusing to even discuss them.
Perhaps the worst part is that these barriers don’t really work. Protectionism hurts Chinese consumers and retards the very enterprise the government wants to promote.
Chinese consumers stock up on Japanese toilets and European luxury goods partly because they’re cheaper than buying at home in a protected market. The price of milk powder in Hong Kong is roughly half that in my neighborhood megamart in Shenzhen, where corner convenience stores do a bustling business in gray-market goods from across the border. This differential stems mainly from trade restrictions that drive up the cost of imported products and allow local firms to charge noncompetitive prices.
Dismantling this complex and multilayered system of protections will be a huge undertaking. Although lowering tariffs would be a good start, more fundamentally, the government needs to stop using hidden administrative means to protect local companies, reduce its vast subsidies and allow foreign firms to operate on a level playing field.
That may sound unrealistic. But doing so would stimulate competition, innovation and entrepreneurial activity, while giving consumers more choices and cheaper products. It would also help Chinese companies take advantage of cutting-edge technology and new investment from overseas. Delaying such reforms will only hurt consumers, anger trade partners and sustain noncompetitive businesses.
In short, China needs to ask a simple question: Who really benefits from all these barriers?
Christopher Balding is an associate professor of business and economics at the HSBC Business School in Shenzhen and author of “Sovereign Wealth Funds: The New Intersection of Money and Power.”