Pushing Back on Communist China’s Mercantilism

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By Stu Cvrk

6/7/2024

Updated:

6/8/2024

0:00

Commentary

The key pillars of communist China’s economy include the domestic real estate market, foreign direct investment, and exports.

The real estate market is in the midst of a severe crisis, having suffered major body blows, including the bankruptcy and liquidation this past January of China’s Evergrande Group, which was once listed in 2018 as “the world’s most valuable real estate company,” according to NPR. Country Garden, formerly China’s largest homebuilder, defaulted on its debt last October and is entangled with a liquidation petition from a creditor that was filed in February.

Similarly, foreign direct investments in China have dried up as Beijing’s draconian COVID-19 measures disrupted the Chinese economy in 2022. The ruling Chinese Communist Party (CCP) has also implemented a new counterespionage law that chilled foreign investors who have begun implementing decoupling measures to reduce economic dependencies on China. Those measures include relocating production and manufacturing concerns from China to other nations. Even the Europeans are getting on the decoupling bandwagon. However, they prefer the softer language of de-risking—a term coined in January 2023 by European Commission President Ursula von der Leyen—which means a more nuanced approach to balance trade with China, including diplomatic negotiations.

But what about that third leg—China’s export economy? There are increasing signs that other countries are catching on to the Chinese regime’s continuing use of mercantilist practices that bestow unfair trade advantages to Chinese producers through government subsidies to undercut foreign suppliers.

Let us examine Chinese mercantilism and some recent Western pushback.

What Is Mercantilism?

Mercantilism was an economic system of trade that flourished from the middle of the Renaissance period in Europe through the end of the 19th century. Its purpose was nationalistic, in that its main goal was the accumulation of wealth and power by a given nation through the regulation of trade to maximize exports and minimize imports. A trade surplus was the most important measuring stick of successful mercantilist practices because, on a practical level, that meant a country sold more domestically produced goods to other nations than it purchased from foreign producers.

Mercantilism With Chinese Characteristics

The United States and its allies were misguided in believing that the Chinese regime would ameliorate its mercantilist practices when China became a member of the World Trade Organization in December 2001. As part of the process, China was granted “most favored nation” status,” which provides all WTO members with the best trade terms given by its trading partners, including the lowest tariffs, the fewest trade barriers, and the highest import quotas (if any).

While accruing these benefits of WTO membership, the regime has since violated the terms of its Protocol of Accession by continuing its mercantilist practices through government subsidies, including targeted lending, tax breaks, and a ban on independent labor unions in China, while refusing to provide transparency in Chinese regulations and laws governing economic activity.

The CCP has happily adopted, adapted, and continued Western mercantilist practices since China was “opened” to the world after the United States and China jointly signed the historic Shanghai Communiqué in February 1972.

The following are a few examples of mercantilism with Chinese characteristics.

Economic Warfare

The CCP uses economics as a weapon against anyone who threatens its core interests. This includes discriminatory, non-WTO-conforming sanctions and embargoes against countries and companies that support Hong Kong’s democracy or oppose the ongoing genocide in Xinjiang and Tibet.

This is how the FBI characterizes the CCP’s ongoing economic warfare against the United States and the world: “[China] uses its laws and regulations to put foreign companies at a disadvantage and its own companies at an advantage.”

Economic Espionage

The CCP expanded the mission of its United Front Work Department to include foreign influence operations, including close coordination with the Ministry of State Security for the purposes of coordinating espionage operations. The focus has been on stealing technological know-how and trade secrets to leapfrog the Chinese industry ahead of foreign competitors and become the dominant supplier to the world.

The BBC reported in 2023 that Chinese espionage activities targeted 10 industrial sectors, including aerospace and aviation equipment, pharmaceutical development, nanotechnology, bioengineering, artificial intelligence, software technology, and more.

Joint Venture IP Theft

All joint ventures in China require foreign companies to pair with a Chinese partner according to Chinese law. The provisions of joint ventures enable direct theft of foreign intellectual property. This is how the FBI describes the process: “The Chinese government restricts the ability of certain types of foreign companies to participate in its market, requiring them to instead form joint ventures with Chinese companies before they can gain market access. Chinese companies then use some of these collaborations as opportunities to gain access to foreign proprietary information.”

Stockpiling Strategic Commodities

For years, the Chinese regime has successfully acquired control of strategic commodities while building up strategic reserves as an inflation hedge and a means of market manipulation to influence (coerce) targeted countries.

A strategic commodity is a raw material or agricultural product that is considered critical to a nation’s economy, so the economy would suffer significantly if that commodity’s trade and supply were interrupted.

Overcapacity and Dumping

For years, China has used heavily subsidized industrial sectors to generate overcapacity, which is used to export products below the cost of production in order to capture foreign markets. In April, Reuters noted that “policymakers in the United States, Europe and elsewhere are fretting about Chinese over-investment in electric vehicles, solar panels, lithium-ion batteries and other industries that may be driving output levels beyond domestic demand.” The Daily Mail (UK) reported on China “flooding the UK with electric cars.”

Chinese mercantilist practices aim to capture market share at the expense of foreign companies. The result has been the building of large trade surpluses in favor of China—for example, $576 billion in 2022—which are funding the phenomenal growth of the People’s Liberation Army.

Concluding Thoughts

To the chagrin of globalists and the China engagers everywhere, the Trump administration pursued a regimen of tariffs, a restructuring of NAFTA, and incentives to decoupling as a strategy to rebalance U.S.-China trade and undercut Chinese mercantilism. The Biden administration retained many of the Trump-era tariffs while recently adding a few of their own on electric vehicles (EVs), advanced batteries, solar cells, steel, aluminum, and certain medical equipment.

The Group of Seven nations, plus Australia, are moving toward a softer strategy of “collective resilience” to counter continuing Chinese mercantilism. The strategy involves practicing economic deterrence by collectively withholding key goods on which China is highly dependent. As the Center for Strategic and International Studies noted, “G7+A countries have almost 400 items upon which China is 70 percent dependent with a trade value of over $37 billion (2022) and almost 160 items valued at $7.5 billion upon which China is 90 percent dependent.” Threatening to reduce the export of these items to China could pressure the CCP to ratchet down Chinese sanctions and embargoes and actually live up to CCP leader Xi Jinping’s oft-stated claim that “China is opening up.”

Other responses include a European Union investigation into Chinese EV subsidies (see here), alarms raised in Western media about recent Chinese dumping (see here and here), an EU investigation that exposed Chinese government subsidies that led to withdrawal of a Chinese train-maker’s bid for a rolling stock contract in Bulgaria (see here), the U.S. Trade Representative’s initiation of an investigation into China’s “unfair, non-market policies and practices [aimed at dominating] the maritime, logistics, and shipbuilding sectors” (see here), and the EU’s new anti-dumping investigation into lysine (an amino acid important in human diets) imported from China (see here).

World consensus on Chinese mercantilism would appear to be headed in the right direction, but a much more collective response is needed.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.