Posts of the Week: 9/21 - 9/27

US-China Tire Case Part II - US Politics at China Hearsay

EU Afraid To Share Sensitive Proprietary Info With China at IP Dragon

Understanding China FCPA Risks. Who Is A Foreign Official? at China Law Blog

What’s behind China’s skyrocketing residential property market? Subsidies … subsidies … subsidies at dragonbeat

Posts of the Week: 9/14 - 9/20

Blame the PRC Ministry of Foreign Affairs for the Broad J-1 Exchange Visitor Skills List at lawandborder
Interesting information on the fruits of the PRC's lobbying efforts from the US State Department.

Coming soon: new design law for China at Class 99

Why foreigners are beating China’s tea-makers on their home turf at dragonbeat

Brick mill worker gets 615,000 yuan in worker's compensation claim at Chinese Law Prof

China Clarifies Nonresidents' Eligibility For Treaty Tax Benefits at China Law Update

"Socialized" Medicine In China And The US. What's That You Say, Mrs. Robinson? at China Law Blog

Tire Posts
China Strongly Opposes US Tire Import Duties at Tax-News.com

Barack Obama does a bad thing at Free exchange

Barack Obama Does Something Really Stupid: Tire Tariffs at Grasping Reality with Both Hands

Obama tires of free trade at Shadow Government

US-China Tire Case - Part I at China Hearsay

Tax Specific
Changes to Chinese Input VAT Credits on Fixed Assets at China Briefing

China Tightens Double Tax Treaty Reporting at China Briefing

Draft Foreign-Invested Partnership Regulations - A Move to A National Framework for FIPs at China Law Update

RBS Chief China Economist on China and the Arab World Plus Some America for Good Measure

Just returned from attending a talk at Columbia University by RBS Chief China Economist Ben Simpendorfer on the topic of his recently released book, The New Silk Road: How a Rising Arab World is Turning Away from the West and Rediscovering China. What follows at a summary of Mr. Simpendorfer's thoughts on China soaring exports to the Middle East (ME), what role oil plays in the China-ME relationship, the next 10 years for China-ME relations, and China's foreign policy objectives in the ME. After that I'll give you Mr. Simpendorfer's response to my inquiry about Islamic finance in Hong Kong and China.

Before all that, a brief introduction to the main theme behind Mr. Simpendorfer's theories. He does not doubt that the US will maintain its global hegemony over the decades to come, but he finds that US influence around the world "is being eroded at the margins." The common narrative in the media is that Beijing and the Party are actively directing this policy, but Mr. Simpendorfer instead has found that "individuals are driving the change" through trade and interaction. And this is as much true in China as it is in the Middle East.

Chinese Exports to the Middle East Are Soaring
Mr. Simpendorfer said that the increase in exports from China to the ME is due to events less than a decade ago, and to Chinese traders catering specifically to the ME. But he also suggests that comparing China's activity in the ME with China's activity in Africa is a useful exercise.

Until a few years ago, the US was the number one exporter of goods to the ME. Then China's exports surpassed the US. My initial was response was that makes perfect sense because China is a huge exporter everywhere. But that only explains half of the story. The other half is that ME traders appreciate the comparative ease with which they can travel to China instead of the US since the events of September 11, 2001. ME travelers to the US have declined significantly since then, and Chinese visas for ME travelers have become much easier to get. The exact figure eludes me, but the average time for a MErner to get a visa to the US was greater than 15 days, while it took a single day for MErner to get a visa to China. Thus ease of access to the supplier is very important.

Chinese traders have also played a significant role in bringing in ME business. One city in particular, Yiwu, has become a hub for ME traders in China with Islam being the prime draw. Yiwu has a robust Huizu (回族 - Han Muslim, not an ethnic minority) population. Some local business leaders speak Arabic fluently, and have encouraged students to learn Arabic to become translators. The city has built a mosque. There is a lot of halal food available. And orders are available at a smaller scale than in Guangzhou. In Guangzhou you typically order by the container, whereas in Yiwu traders can order by the box. Today Yiwu receives 200,000 ME visitors per year while there are only 680,000 ME to the entire US each year. By catering to their partners linguistic, cultural, religious, and more financially modest needs, Yiwu has turned itself into a ME export power.

But Mr. Simpendorfer says that we need to put this in perspective by comparing the ME to Africa. There are still a lot more Chinese in Africa than the ME, and there are still significant restrictions in ME countries on foreign traders operating domestically.

Oil
China imports ~50% of its oil from the ME, and the amount of oil that China plans on importing from the region should only increase. This suggests a warm relationship. This is not so much the case with Saudi Arabia. Although Mr. Simpendorfer thinks relations between between Saudi Arabia and China should warm, there are several major problems with the relationship:

• There is tension because Saudi Arabia is a religiously orthodox state and China is "an increasingly capitalist atheist state."
• China only has a functional relationship with Saudi Arabia of about 10 years whereas the US essentially built Saudi Arabia's oil industry.
• China has been publicly and aggressively hedging its exposure to Middle Eastern oil by investing heavily in Africa and by investing heavily in alternative energies. Chongqing's announcement that all cars in Chongqing will eventually be electric was not well received by the ME.
• China has yet to seriously independently analyze the US. Mr. Simpendorfer said that China has several journals dedicated to ME policy, but all the footnotes cite to American analysis. This means that China is largely analyzing the ME through US eyes. Mr. Simpendorfer told us that he has discussed this with John Altman and several of his ME friends, and they all get a big kick out of it.

The Next Decade for China and the ME
Mr. Simpendorfer stressed that he did not see an inevitable upward trajectory for China-ME relations. He offered potential roadblock, a way to avoid that roadblock, and a reason why the next decade might work out well for the two.

The potential roadblock is that there have been several factory closures in the ME as the work goes to China. Textiles in particular have been hit hard in the ME. Unfortunately the reality in the ME is that the population is very young, unemployment is very high, and there is a strong possibility that this could result in anger being directed at China. Mr. Simpendorfer suggested that as oil prices and transport costs increase, Chinese manufacturers might find it advantageous to setup manufacturing facilities in the ME for goods that are destined for Europe which could potentially solve this problem.

Where China will really be of service to the ME is in its lessons for development. Mr. Simpendorfer said that the US and China basically offer the exact same lesson for reform, that the free market and adequate access to capital markets will bring peace, prosperity and stability, but that when MErners, such as the frequent China visitor President Mubarak, visit China they can see and feel what China has gone through to go from point A to point B, as opposed to when they visit Washington, D.C., and feel like America is trying to get them to move from point A to Point Z.

China's Foreign Policy Objectives in the Middle East
This part of the talk was worth the price of admission (a subway transfer and a walk in the rain). The US and China simply have the exact same ambitions in the Middle East: stability and a low oil price. There is plenty of room for cooperation between China and the US, but Mr. Simpendorfer, who has the access, has witnessed that bureaucratic inefficiencies in Washington are preventing the US State Department from working jointly with China in the Middle East.

The US government economic sectors understand the deep connection between the US, China, and the ME, but there are deep divisions and little intra-sector cooperation within the US political and security sectors that are preventing them from putting the pieces together that the US and China could achieve a lot in pursuing their ME goals together. Or at least this is what Mr. Simpendorfer's experiences have shown him.

China itself has been able to get away with not taking much of a position on anything in the ME. Mr. Simpendorfer says that this is for two reasons. The first has to do with Iran, with which China has had a close relationship. China defers to the US on everything Iran when Iran is at the top of the US list, and China does what it wants when Iran is low on US priority. Quite convenient. China has also had the advantage that most ME issues pit the US and the UK versus France and Russia. And again China is conveniently able to not take a position. Mr. Simpendorfer does not think that this convenient foreign policy will be sustainable, though, and China will need to start taking a position. Let's hope we can start working together in a meaningful way. China would be a useful ally because they have a long history of having a well integrated Islamic minority, the Huizu.

Islamic Finance and China
I always find Islamic finance interesting, so I asked Mr. Simpendorfer, "To what extent have you seen the Hong Kong financial industry embracing Islamic financial products in investment, offerings, or the creation of derivatives?" I had no idea what to expect, but I got a good answer.

Hong Kong is very enthusiastic about Islamic finance with Donald Tsang and the Arab Chamber of Commerce as the leading cheerleaders. Hang Seng Bank offers an Islamic fund, but as far as Mr. Simpendorfer knows, it is simply indexed to the Dow Jones Islamic Fund. Hong Kong's current goal is not to compete with Bahrain as a center for Islamic finance, but to offer Islamic bonds.

The problem with Hong Kong is that, unlike in Yiwu, it does not cater to Muslims. Mr. Simpendorfer said that 3 mosques and not a single halal restaurant in Hong Kong are serious barriers to Islamic finance.

There has been an interesting development for investors who want an Islamic option for investing in China. Previously Islamic banks have tried opening up shop in China, but the combination of religion and no interest rates prevented the Chinese authorities from granting a license. But Mr. Simpendorfer noted that a foreign bank may have recently setup shop in China that offers Islamic investment and lending without calling itself such.

Conclusion
At the core of this relationship is Islam, and the Chinese entrepreneurs catering to the religion. A strong lesson that cultural accommodation or at least respect can be a powerful tool in building a strong economic relationship.

The talk was good, and I think I might have another book to read.

Are the Chinese Safeguard Duties Just an Obama Political Play?

Yesterday the OECD, the UNCTAD and the WTO issued a joint report on G-20 trade and investment measures under the headline G20 governments refrain from extensive use of restrictive measures, but some slippage evident. The slippages were not where you would expect them.

New antidumping investigations for 2009 remained at the same level as in the first half of 2008. But they only remained at the same level because of a sharp decline in new antidumping investigations by the US, Brazil, and the EU member countries. Making up for the decline? India, Canada and Argentina had an increase in the number of new antidumping investigations. But China's increase in new antidumping investigations from 3 to 14 was greater than the increase in those three countries combined.

Safeguard investigations were a whole other story. New safeguard investigations increased from 2 in the first half of 2008 to 16 in 2009. China had no new safeguard investigations, the US had 1 new investigation, and India had 14 of the 16. FYI, Turkey had the other. I have no idea why India has so many new investigations. Let me know if you do.

If you've only been half paying attention you probably noticed that this post has been written in the past tense. If you're actually reading this blog, you probably have more than an inkling that my tense has to do with both last week's decision to impose countervailing duties (CVDs) on imports of Chinese steel pipe at a weighted average of 21% and with Obama's announcement at 9:45 pm last Saturday in response to the conclusions of the ITC's single safeguard investigation to impose an initial tariff of 35% on imports of Chinese tires. Interesting fun fact: recommendations on CVDs are fully out of the hands of the President; safeguard duties are solely at the discretion of the President.

These decisions, particularly the tire decision, have caused quite the hullabaloo in the blogosphere. Section 421(e) of the 1974 Trade Act gives the US special power to implement safeguards against Chinese imports that cause market disruption. Market disruption is defined as existing "whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry." This marks the first time the US has ever used section 421. The derision of the safeguard is twofold: 1) it is not supported by economics; and 2) it could set the precedent for further safeguard actions against China.

The Economist's Free Exchange suspects that Obama is trying to earn political points on a minor product, but that even this might be dangerous in a recession:

Mr Obama appears to be betting that because the products involved constitute a very small percentage of trade between the two economies, it is safe to earn some domestic political points on the matter without excessively angering Chinese officials or citizens. But this is a dangerous gamble, particularly amid a deep global recession.

Supporting Free Exchange's position is that the 35% initial tariff is well below the ITC's recommended tariff of 55%. China, unsurprisingly, filed a challenge to the complaint. We can say one reason that China challenged the complaint is obvious, and the other is speculation. The obvious reason is that China estimates that the tariffs could cost Chinese tire manufacturers $1.7 billion. The speculative reason is that China does not want the US to set an easy precedent for imposing safeguard duties against countries dominated or controlled by Communism (the wording of 421).

The political reaction was predictable. Democrats think the tire tariff is a great move towards getting those 4,000-5,000 American tire manufacturing jobs back, and that it sets a good example of strong trade enforcement. The Republicans said that the tariffs amount to a tire tax on struggling consumers enacted by a Democrat bowing to the pressure of unions. Yawn.

Now if you really want to read why this whole tire thing is either about scoring political points and/or establishing roadblocks to free trade with China, head over to one of Foreign Policy's blogs:

Here's the problem. The China safeguard is a bilateral policy in a multilateral world. The Chinese are often the lowest-cost suppliers of a good, but they're not the only suppliers. In the Bush cases, importers testified credibly that if Chinese imports were blocked, other countries would undersell U.S. manufacturers in these particular products.

So if you're not dominated or controlled by Communism, and you sell tires cheaper than a US manufacturer, then you can cause market disruption in the US.

The tire situation appears to be similar. U.S. tire producers did not even support the case; they said they were more interested in producing high-end tires. The petition was filed by the United Steel Workers. If U.S. tire producers are uninterested, then there is little prospect of gains for American workers. The tires will just be sourced from other countries at somewhat higher cost.

So the USW is using tires as a pawn in their trade disputes with China? Is there a less appropriate venue for the upcoming G-20 Meeting than Pittsburgh?

So where does this all leave us? New American jobs appear unlikely. Prices should rise a bit for U.S. consumers. Some lucky third country will gain new American orders, redirected away from China. And there is real concern that other countries will follow the U.S. lead. China is exploring ways to block U.S. cars and poultry. Later this month, Pittsburgh G20 discussions of how to pursue open markets together should be particularly awkward. But at least Obama retains the support of organized labor.

Ugh... The notion that this is a political play in health care reform to garner wider Democratic support and get them to stop their internal bickering over a health care plan is growing stronger. Could Obama have chosen some token other than free trade with China to throw under the bus?

Posts of the Week: 9/7 - 9/13

Foshan Saturday’s Textbook Case of How to Grow, Prosper and Stage a Successful IPO in China at China Private Equity

China's First Foreign Nail House. Dude, Where's Your Contract? at China Law Blog

Commitment Phobia on China A-Share IPOs at China Journal
A-share market performance is not necessarily a sign of China's economic health. It is a sign of Chinese investors' habits.

Is it Really the Time for China to Buy U.S. Real Estate? at Deal Journal

Tax Specific
China Tax Issues Concerning Employee Stock Options at China Briefing

China Tightens Double Tax Treaty Reporting at China Briefing

Posts of the Week: 8/31 - 9/6

China Law On Term Employment Contracts at China Law Blog

What Happens in Shanghai... at China Journal

“One shouldn’t look at the Chinese equity market to tell us about what’s going on elsewhere, but my fear is investors might,” says Michael Spencer, chief economist for Asia-Pacific at Deutsche Bank. He concurs that Shanghai “doesn’t have particularly high correlation with anything else,” calling it “probably the most difficult market to try to map to [corporate profit] growth.”

Why Suing Chinese Companies In The US Is Usually A Waste Of Time at China Law Blog
Some more thoughts on enforcing US judgments against Chinese counter-parties.