Protectionism Grows in China

Protectionism is growing in China, with foreign interests increasingly losing out to local operators across a wide range of manufacturing and consumer sectors according a report issued recently by Steve Vickers and Associates Ltd. (SVA), a Hong Kong-based risk mitigation consultancy.

“Of greatest concern to foreign investors is more assertive action by China’s regulators, such as the National Development and Reform Commission,” according to the report, Trends in Economic Nationalism. “In particular, the NDRC announced investigations into price fixing on Dec. 15, 2013, although without specifying the target sectors. Its very ambiguity is troubling, although prospective targets include the automotive, finance, petroleum and telecommunications industries.”

Many of the complaints specified by the SVA report have been directed against the Chinese government and local firms virtually since China began to open up under the late Deng Xiaoping in the 1970s. Multinationals have regarded much of this protectionism as a cost of doing business in what is rapidly becoming the world’s largest market.

Whether this kind of protectionism is increasing is debatable. Other critics of Beijing’s interference in free markets have stepped forward, including the European Union, which complained last May that the Chinese government had introduced discriminatory customs and taxation measures affecting the logistics and shipping industry. Eventually, after months of negotiations, however, Beijing issued a new circular correcting the discriminatory elements in the original taxation measures.

It should also be pointed out that with global trade flows continuing to dry up, China is hardly alone. Tariffs were found to have been used 31 times against Chinese interests since 2009 and 56 countries have implemented bailouts or import licensing to protect their own interests.

For its part, the Chinese government, through the state-owned People’s Daily, in February, accused the United States of repeatedly adopting double standards against China on trade issues while claiming to be an advocate of free trade. The US, the article said, already launched anti-dumping and anti-subsidy investigations against 11 Chinese products in the first two months of 2014.

In addition, the People’s Daily said, “The US Congress recently passed the Consolidated Appropriations Act of 2014. With its discriminatory clauses against Chinese enterprises, it not only violates the basic doctrines of fair trade, but will also be harmful to the interests of American enterprises.”

However, the American Chamber of Commerce recently called attention to seeming discrimination against foreign companies operating in China, saying that “rules and regulations are not applied consistently,” that Chinese businesses get easier access to finance and government procurement contracts, and that these practices favor local companies in competition against multinationals.

“The reasons behind increased economic nationalism are not clear,” the SVA report says. “The modernization of China’s economy demands more active regulators. But it is also clear that the NDRC is focusing on sectors in which Chinese businesses struggle to compete with foreign competitors.”

In particular, the report notes, Chinese domestic manufacturers’ share of the car market is at about 29 percent and is falling. Likewise, the infant formula industry has faced enormous suspicion since 2008, when local manufacturers were caught adulterating their milk powder with substances such as melatonin, which caused the death of six infants and the hospitalization of 54,000.

The companies adulterating the formula included Sanlu, one of the country’s biggest milk products producers, and 21 others. As a result, Chinese families have been deeply suspicious of domestic milk products ever since. The Hong Kong government eventually instituted fines up to HK$2 million and a possible seven year jail sentence to stop so-called parallel traders from buying more than two tins of the stuff to transport back over the border. Chinese families in New Zealand and Australia have built profitable businesses buying milk powder for transport to China.

Whether to help out the locals or for other reasons, the NDRC recently levied US$100 million in fines against foreign manufacturers for price allegedly fixing prices and required firms including Danone, Nestle and Mead Johnson to cut prices as much as 20 percent.

Beyond milk products, the GlaxoSmithKline, Astrozenica Novartis and Sanofi pharma companies also came under investigation in 2013 on charges they had bribed medical staff to recommend their products. “The targeting of foreign companies for corruption is noteworthy, as local businesses are just as guilty of questionable practices,” the report continues.

Other industries to come under the regulatory eye include Qualcomm, the world’s largest manufacturer of mobile components, and InterDigital, a US-based tech company tthat has been attempting to collect patent royalties from telecoms manufacturer Huawei.

“The propaganda apparatus appears to be stoking economic nationalism through trials by television,” the report notes, with a state-owned CCTV broadcasting a program in December claiming that Jaguar. Land Rover and Subaru were selling spares at marked up prices and suggesting the car manufacturers were urging the replacement of parts rather than repairs for the old ones. The NDRC announced it is investigating pricing policies.

The popular US companies Apple and Starbuck’s have come under similar fire from CCTV, as has South Korea’s Samsung, for allegedly using a range of sharp practices against Chinese consumers.

Governments at various levels “may see reining in foreign businesses as a means to bolster local production and, perhaps, to divert attention from economic failings. The foreign companies most at risk, then, are probably those operating in sectors with a large foreign market share or those designated as strategic.”