Beijing Is Driving Away The West

It is not clear Beijing is aware of what is happening. Its abusive policies and rising costs in China have prompted Japan and the west to begin to rethink their economic arrangements in the Middle Kingdom. To turn things back the way they were, Beijing would have to change much, more than is likely or perhaps even possible.

American and European as well as Japanese sources have all taken on an anti-Chinese tone. Congress in the States is set to pass legislation that would limit investing in China and especially sourcing there. This legislation is probably behind the curve. Long before Congress moved, business almost universally began to express concerns about future Chinese relationships. Joerg Wuttke, president of the EU Chamber of Commerce in China summed up matters, recently saying that “China is losing credibility as a best-source location.” All foreign business seems eager to change former supply-chain arrangements. Few are ready to pull operations out of China, at least not yet, but just about everyone seeks to shift new investment elsewhere, either to other emerging economies in Asia or to bring it home.

The most powerful proximate causes of this new approach are the lockdowns and quarantines associated with Beijing’s zero-Covid policies. Rigid applications have made production in China both difficult and expensive, especially shipping, either within the country or for export. A recent survey conducted by Wuttke’s group indicates that some 60% of western interests in China expect a revenue decline this year. About half complain that Beijing’s policies have severely interrupted shipments of either critical inputs or finished products. Some 77% of these businesses have concluded that Beijing’s behavior on Covid alone has made China either a slightly or significantly less attractive investment destination.

Behind the headlines are more fundamental issues. There is Beijing’s less than honest approach to patents and copyrights. Foreign businesses in China have long complained about Beijing’s insistence that foreign firms doing business there have a Chinese partner with whom they must share technologies and trade secrets. These foreign interests have also complained of outright theft by Chinese agents besides their “partner.” Most have looked to their governments for remedies, the Americans to Washington, the Europeans to the EU in Brussels. These governments have failed them. Hope on this front rose in January 2020 when Beijing signed the Phase 1 trade agreement with the Trump White House. China’s government promised in that document to streamline procedures for foreign firms to file complaints against patent abuses. But it has since become clear that Beijing had no intention of living up to that commitment. Indeed, a Chinese court only recently determined that Chinese firms cannot be sued on such matters anywhere in the world.

Beijing has acted in other abusive ways as well. Most recently, it has, over what are rather minor diplomatic matters, threatened to refuse contracted shipments of rate earth elements to the United States and others. It did the same with Japan some years ago. In the past, Beijing also has abruptly altered trade policies, sometimes in response to only transitory problems. Such arbitrary moves have inflicted considerable harm on trading partners. Beijing, for instance, slapped huge tariffs on Australian trade simply because Canberra asked questions about the origin of Covid. Often the imposition of such punitive policies passes quickly but not always. Even when the pain is short lived, however, it tends to dissuade others from continuing relationships with China.

Most critical are rising costs in China. One of the great Chinese attractions to foreign business has been access to a disciplined and inexpensive workforce. In recent years, however, Chinese wages have outpaced most of the rest of the world. The 10.5% annual rise in Chinese wages between 2011 and 2021 more than double the rates of wage gains in the United States or Europe or Japan and also faster than most other Asian countries. To be sure, western and Japanese labor costs still exceed China’s, but the gap is no longer as vast as it once was, and it is closing rapidly. Relative to other Asian economies, China has already lost much of its low-cost appeal. Vietnam has long since lured away from China much of the global manufacture of inexpensive shoes and textiles. Covid has slowed wage growth in China, but that will not last, and in the meantime, the lockdowns have increased production and shipping costs.

Things have not yet reached a point where western and Japanese business seeks to end existing Chinese arrangements. But as the survey respondents have made clear, these realities have prompted foreign business to shift its new investment elsewhere. It might seem from this description that China will stabilize its position, something that might give comfort to the country’s leadership in Beijing. Such a conclusion, however, would mistake the nature of business. The focus of any business follows the new investment. Even if there is no pullout from China, the trends described here will eventually reduce that economy’s footprint in global trade and business.