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The Peoples Republic of China

And an Analysis of its International Trade


Taylor M. Menke

Background
[China has] offered the world almost a how-to-do-it manual for transitioning from a State
controlled economy to an economy where the private sector is larger and the state sector smaller
than virtually any developed country in the world, save the United States. Robert Rosencrantz,
Chairman of Intelligence Squared1

To the average westerner, China seems overbearing and complex, hidden in impenetrable
oriental fog (or perhaps more accurately, smog). Some see China as an economic and military
threat to the hegemony of US global sovereignty; others see it as a miracle, an opportunity for
foreign investment, and a valuable ally. The first mistake we often make is assume that China is
a single entity, a monolith among romanticized Far Eastern nations. Its complexities
ambivalent attitudes towards concepts such as democracy, its decentralized provinces, and
infamous bureaucratic red tapehave far less to do with any cultural dissonance than the simple
fact that it is an old and geographically stretched civilization that has endured poverty and
prosperity.
The worlds fourth largest country by land area, the Peoples Republic of China can be extricated
by separating its geography into subsections. First, there is north China, consisting of the Huang
He River Valley and north China plain. Central China is located in the Chang Jiang River Valley
and the coastal provinces around Shanghai (a rich, crowded city and economic activity center).
Beijing, the political center of the one-party state, exists here. South China is the mountainous
area stretching from Guangzhou to the border of Vietnam. This chain of disconnected,
decentralized regions requires hierarchies of local governments that have limited interaction with
the seat of central power in Beijing.2
Although resources like coal, iron ore, petroleum, and natural gas exist within China, they are
being quickly depleted. 3 Dependence on coal power due to weak energy infrastructure means
that air quality in Chinas major cities, like Shanghai, is among the worst in the world.4 China is
the second leading importer of oil, only behind the United States in consumption, and a leader in
production of energy-inefficient products like steel and cement.
Most of the 1.3 billion Chinese identify as Han (91.6%), speak Mandarin, and consider
themselves to have the same cultural identity; however, there are 56 recognized ethnic groups

1
Harding, James. "Beware the Dragon: A Booming China Spells Trouble for America." Lecture, Intelligence
Squared Debate from National Public Radio, New York, January 1, 2007.
2
Ambler, Tim, and Morgen Witzel. Doing Business in China. London: Routledge, 2000.
3
"China." Central Intelligence Agency. Accessed February 18, 2015. https://www.cia.gov/library/publications/the-
world-factbook/.
4
Air Quality Index. aqicn.org/map.
residing in China who should not be discounted. During the Cultural Revolution, communist
leader Mao Zedong encouraged a baby boom that sharply contrasted with the controversial one-
child policy that came later. Because of this an estimated 29% of Chinese will be over age 60 by
2040.5 In some villages, there are four boys born for every girl, and bare branches (men who
cannot find a female partner) are becoming a widespread social problem. Regardless, over 300
million Chinese will move to cities like Beijing and Shanghai over the next 15 years, rapidly
moving to industrialized urban centers, and the population will peak at 1.6 billion within 25
years.
Most healthcare is paid out of pocket, with many Chinese opting not to receive medical care at
all, or being evicted from hospitals due to lack of ability to pay. All citizens of China must
complete a nine-year compulsory education, and the literacy rate is 95%, slightly higher among
men. State-funded education, as well as the internet (despite limitations, which shall be discussed
later) means that the youth of China are incredibly intelligent and self-aware advocates for social
progress.
China is officially a communist state with its central capital located in Beijing. The sheer
geographic size of China, as well as the constraints of the mountainous terrain, has led to a
decentralized government that relies on local administration. Currently, China has 23 provinces
(including Taiwanthough this is heavily disputed), 5 autonomous regions (including Tibet),
and 4 municipalities. Hong Kong and Macau are considered special administrative regions and
focus shall not be expended on them here.
China has imposed a socialist market economy, which means that the government regulates the
economy on a market basis, with some goods and services under complete control of the state.
Foreign direct investment depends largely on which sectors the government is willing to open to
the free market and foreign interference.
There are three branches of government6:
1. Executive. The State Council, or Central Peoples Government, is the highest body of
government and composed of 25 ministries, including the Peoples Bank of China.
2. Judicial. Consists of the Supreme Peoples Court and local lower courts.
3. Legislative. The National Peoples Congress elects executive branch officials, and the
National Peoples Congress is, in practice, composed of members of the one-party
communist state. They are elected by municipal, regional, and provincial peoples
congresses.7
Erik X. Li, a Chinese political scientist educated at Berkeley in California, says that adaptability,
meritocracy, and legitimacy are the three defining characteristics of the Chinese one-party
system.8 And, indeed, this appears to be true. There have been massive political reforms within
the one-party state, and many Chinese consider the system to uphold the values of competency,
not merely popularitya pratfall of democratic voting and multiple-party states.

5
Hoffmann, W. John. China into the Future: Making Sense of the World's Most Dynamic Economy. Singapore: John
Wiley & Sons (Asia). 2008.
6
Investment Environment. China Investment Guide, Foreign Direct Investment. http://fdi.gov.cn/
7
China.
8
Li, Eric X. "A tale of two political systems." Lecture, TED Conference from TED Talks, London, July 1, 2013.
Economy
More and more Chinese businesses are now
pinning their hopes on the huge local market
rather than uncertain global climate. Its even
thought that Chinese consumers will
eventually transform the international
economy by simply buying things.Rich
China

Gone are the days of the Silk Road and


imperial dynasties. The modern era brought
change in the form of industry, and the west
knocked China off of its pedestal as the
leading world economya privilege it had
enjoyed for centuries. The Opium Wars,
WWII, and the Sino-American War did little
to improve conditions. Desperate, the Chinese
implemented and developed democratic
centralist communism that endured for
decades.
Since 1978, when China transitioned to a
more market-oriented economy, it has
experienced what some might indeed call a
miracleor perhaps a well-timed comeback. Its GDP has grown ten times what it was in the 70s
to a whopping $13.29 trillion in 2013, and its GDP per capita has more than doubled in just a
few years.
Officially still a communist state with an economy tied to state ownership and approval, China is
now a world leader in agricultural and industrial output. It is the number one exporter and
number three importer in the world. It operates in a pan-Asian9 system in which it imports
electrical components, machinery, oil, and minerals from countries like Japan or South Korea
and manufacturers these resources into finished products for export, typically adding low-quality
labor-intensive value of up to 25%. China has gas and oil assets in 22 countries including
Australia.
Traditionally, the Chinese communist party has treated its economy as an experiment in multiple
stages, implementing five year programs. It is currently in its 12th iteration. At one time, when
the economy was more traditionally communist, each city had been planned as a microcosm:
they were intended to be self-sufficient and alienated from one another so that communication
was limited to government officials, often containing agricultural, residential, and commercial
zoning in the same block. When China wanted to dabble in the free market, it began with coastal

9
China into the Future.
cities such as Shanghai, and it is these cities that have benefited the most from the arrangement.
According to Michael J. Enwright, Virtually every city in China had to be ripped apart and
redeveloped from scratch. Still, rural areas must be accounted for, and the most recent five year
program includes provisions to simulate rural economies.
Indeed, it is not just the cities that have changed. Its the people who live in the cities, or who
have begun to migrate to them in a bid to join the growing middle class. In Beijing, where it was
once a luxury to obtain a fresh vegetable, high risessome built in as little as fourteen daysare
the norm; Shanghai, once infamous for its illegal stock market, has stocks that perform at the top
of the NASDAQ; Chinese students flock to the United States for an education before returning to
their home country.10
And there are now over 960,000 millionaires and 600,000 billionaires, growing at a rate of about
10% over the last eight years.11 Chinese refer to these new richtypically 50-year-old men and
their childrenas fu er dai that are compiled on the yearly Hurun Report Rich List. To meet
the demands of this newly wealthy class, luxury brandslike Lexushave become increasingly
popular in Chinas major cities.
But this incredible growth comes at a cost. As Chinas youth become wealthier, and its free
market entrepreneurs more affluent, it is a constant balancing act between productivity and
employee demands.12 There is noticeable and disparate inequality between those living in cities
and those living in rural areas. And many wonder about the long-term stability of Chinas growth,
and if it can sustain itself on limited resources. In 2014, for example, its growth slowed to 7.4%,
firmly marking the end of a high-growth heyday that buoyed global demand for everything
from iron ore to designer handbags.13

10
Beware the Dragon.
11
Rich China: An Emerging Class of Wealthy Elites. Australian Broadcasting Corporation, 2012. DVD.
12
No More "Made in China"? Ampersand Film & Video Tape Productions, 2012. VHS.
13
Magnier, Mark. China Economic Growth is Slowest in Decades. Wall Street Journal, 2015. Web.
Trade Specific Issues
A China that is floundering, with a sense of grievance against the world and disaffected with the
international system, would be a greater danger than a booming China that can feed and clothe
its people, educate them domestically and abroad, buy vast amounts of US goods and services,
and benefit from the international system.-Stapleton Roy14

International Trade
When China joined the World Trade Organization in 2001 after fifteen years of negotiations, it
agreed to several commitments to further open its trade both domestically and to interested
foreign investors.15Among these promises, China committed to providing non-discriminatory
treatment to all WTO members, eliminate dual pricing practices, abandon protectionist policies
such as price controls, and cease export subsidies on agricultural products. It took other steps
independently, such as the National Peoples Congress passing a law in 2007 that made a unified
corporate tax rate of 25% for
both domestic and foreign
firms.16
There are several countries
with which China enjoys
economic relationshipssome
more in its favor than others.
For example, in September
2014, the United States trade
gap with China was $35.6
billion, spurred on by
Americans buying the latest i-
Phone 6 model.
This trade deficit promises to
increase over the coming years as Americans become ever more dependent on Chinese
manufactured goods. Although profitable for China, the deficit is one of the many reasons that
the typical American is distrustful of the Republic. The yuan was pinned to the dollar for years,
and American politicians have accused China of manipulating their currency as well as bribing
US lobbyists. Additionally there is still controversy over Chinas insistent of ownership over
Taiwan, its issues with transparency and intellectual property protection, and general cultural
dissonance.
For example, Chinese business practices operate according to cultural standards and traditions
that westerners may not be familiar with. There are eight key concepts in Chinese thinking17: dao
(the way), de (virtue), li (ritual), mianzi (face), ren (benevolence), vi (righteousness), yin-yang
(two halves of a whole), zhi (procedural knowledge). Guanxi, or relationships, play an extremely
important role in navigating Chinese institutions that do not often have strong legal language to
follow. Chinese civil codes are notoriously vague and generalized to compensate for scale.
14
Beware the Dragon.
15
China and the WTO.
16
China into the Future.
17
Doing Business in China
To demonstrate how important FDI is to Chinas economy, and using a somewhat archaic
statistic, according to the United Nations Conference on Trade and Development, China received
$59.1 billion in foreign direct investment in the first half of 2012 alone.
There are three main forms of foreign investment in China18:
1. Chinese-Foreign Equity Joint Venture. Formed in China with joint capital from both
Chinese and foreign companies. Parties of the venture invest and operate together, and
share in profit and loss.
2. Chinese-Foreign Cooperative Joint Venture. Formed within China by foreign
economic organizations or persons and Chinese economic organizations or persons. The
foreign party usually provides capital, tech, and equipment while the Chinese party gives
access to land, plants, and facilities.
3. Wholly Foreign-Owned Enterprises. Invested entirely by foreign economic
organizations or persons. Liability is limited to amount of investment contributed.
Recently, this has been the most popular option for investors.
Chinese forbids investment in print and publishing, television production, internet content, some
real estate markets, and other telecommunications industries. Additionally, there are limitations
on other sectors, such as restricting investment to joint ventures with Chinese majority ownership
and caps on total foreign investment. More recently, some restrictions have been alleviated
thanks to the World Trade Organization accession, with foreign businesspeople encouraged to
invest in western region infrastructure and resource development in order to help spur rural
Chinas economy.
To contrast, at one time China restricted imports through high tariffs, taxes, quotas, and
restrictions on trading rights.
Internally, China has had to deal with a burgeoning middle class, a restless youth population
pushing for increasingly higher minimum wages, and a lack of state control that comes with the
advent of the internet.19 Although China has implemented a great firewall, its population has
begun cloning Western websites like Twitter and Facebook and developed euphemisms in online
communication to criticize the government and its officials. With over 500 million internet users,
the communist party will not be able to stifle the voices of the people any time soon.
We work for the company, hence, for our country, Zao Bo, a young Chinese factory worker
employed at Apple contractor Foxconn, said. In return we wish for a higher salary and more
comfortable working conditions. All of this needs to grow in proportion to the GDP, at least
thats what we hope for. Our generation needs to make certain efforts. But at the same time the
social system needs to be more efficient.
Because of the push by younger Chinese for better working conditions and wages, many Chinese
companies areironicallyoutsourcing labor requirements to poor countries such as Cambodia.
Some domestic factories are shutting their doors altogether.20 Such an example should highlight
the precarious position from which China currently dangles.

18
Investment Environment.
19
Anti, Michael. "Behind the Great Firewall of China." Lecture, TED Conference from TED Talks, July 30, 2012.
20
No More Made in China?
Case Studies
There have been many significant legal disputes throughout Chinas interactions with the global
market, but to cover all of them would be fruitless. For the purposes of this paper, focus will be
paid to several cases which have been selected due to their relevance in the overarching narrative
of a global economy.

Intellectual Property Protection


In December of 2003, Starbucks sued a local Shanghai coffee shop called Xing Ba Ke. The
similarity between their names (xing means star in Chinese, and ba ke sounds like bucks)
as well as nearly identical logos infringed on Starbucks trademark rights. The Shanghai No. 2
Intermediate Peoples Court ordered Xing Ba Ke to pay compensation.21

Similar events have occurred. In a particularly famous case of utility model patent infringement,
we turn to CHINT Group Co. Ltd versus Schneider Electric. Because Chinese companies do not
usually have the resources to develop technology or brands, this aspect of product creation
suffers. And given that Chinese attempt to minimize payment for foreign intellectual property at
all costs, it is not surprising that Schneiders imitate rather than innovate strategy led to their
copying of a small circuit breaker utility model. The courts awarded CHINT 333.8 million yuan.

In 2005 Chinas State Intellectual Property Office launched meetings to formulate a strategy for
China. The issue is that, although China certainly doesnt want to step on any fingers on the
global stage, they must play a delicate balancing act between their own goals for growth and
innovation and IPR protection. China does not own much stake in IP brands or trade secrets
themselves, so just as its internet users copy Facebook for practical and necessary purposes, so
too do entrepreneurs borrow from foreign or even domestic entities.

Anti-dumping and Countervailing Duties


In 2008 China accused the United States of imposing unfair anti-dumping duties (or duties
intended to circumvent goods that are being sold at below-market levels) and countervailing
duties (duties imposed to neutralize the negative effects of subsidies) on steel, sacks, and tires.22
In 2012, China complained that the US had implemented similar duties allegedly to avoid the
dumping of Chinese steel, and on this occasion, the WTO ruled that these punitive tariffs were in
violation of US obligations to fair and equal trade to nations with WTO membership.

Publications and Audiovisual Products


The United States requested consultation with China concerning the states restrictions on
imported films, home entertainment, audio recordings, and publications, as well as market access
limitations that were preventing the US from distributing these products. They claimed that these
practices were inconsistent with both the WTO accession and GATT. The WTO found that
although China attempted to argue the exemption was necessary to protect public morals it was
not satisfactorily demonstrated, and thus China had violated its obligations. This has not been the
only occasion that China has been accused of restricting information to its populace.

21
Doing Business in China
22
World Trade Organization
Analysis of Trade
All human societies develop in linear progression. Beginning with primitive society, then slave
society, feudalism, capitalism, socialism, and finally guess where we end up? Communism.-
Eric. X. Li23
One can certainly attempt to tell China how to progress and what to do nextand many,
particularly western economists and politicians, have tried. The fundamental truth is that
although China has embraced a free market, it is merely a means to an end. While China has
pushed to be identified as a free market for years, particularly after its accession to the World
Trade Organization, it remains a communist state with communist principles. Perhaps
individuals within the system intend to get rich quick, but the party has another agenda.
Despite [homelessness, rising food prices, corruption], which many Chinese do find deeply
worrying, there is at present no great call for the system to be overturned. In part, this is due to a
fear that any alternative system of government might well be worse.24While many westerners
might look at China and insist that it must be democratized and its people rallied to vote for
candidates of their own choosing, the slow-paced, decentralized, and highly planned state works
for nowand Chinese citizens dont seem to trust officials who take office only on the basis of
popularity, not competence.
For China to continue to grow in a healthy manner (many argue that China will opt for a soft
fall and intentionally slow its economic progress to avoid collapse)25 it will need to turn focus
inward and develop domestic programs. As Tony Saich predicts in China into the Future: Bold
initiatives are unlikely. An essentially technocratic approach will prevail, while the leadership
tries to maintain an authoritarian political structure combined with growing economic
liberalization.

23
A Tale of Two Political Systems
24
Doing Business in China
25
China Economic Growth
With that said, there are several things that China should do to advance smoothly and peacefully:
1. Focus on the purchasing power of citizens. This can be achieved by improving
infrastructure and transportation between cities and provinces, allowing them to migrate
and join urban society. Increasing the minimum wage and encouraging higher education
will lessen the need to important western management.26
2. Develop social programs like healthcare, pensions, and education. Demographic
issues such as gender disparity and an aging population means that economic
development will be directly tied to quality of life.
3. Improve energy capacity by researching and developing energy efficient power.
China has the greatest hydro-electric power potential in the world27 and desperately needs
a way to reduce coal/oil importation and clean its air in the near future. The government
should provide subsidies to its energy sector and create national state-owned companies
within it.
4. Work on attracting foreign investors for capital, rather than encouraging Chinese
entrepreneurs to go out into the world. Provide opportunities domestically and continue
to renovate and re-plan urban spaces like Shanghai.
5. Invest in services. China is currently known as the factory of the world, but as its
economy becomes more complex and its middle class emerges, it will have new demand
for services rather than goods. FDI in service industries in China should be encouraged.
6. Improve relations with Japan. This could be through frequent visitors by Chinese
leaders to Japan or vice versa. Additional comprehensive economic agreements and
investment in Japanese companies by Chinese companies. Tokyo and Beijing could make
attempts to negotiate a bilateral free trade agreement.
7. Transparency. Although the government should maintain a firm hold on the country
both politically and economically to prevent unrest, it should become more transparent in
its dealings and encourage active and easy-to-understand communication between its
local and central government.
8. Freedom of information. China should relieve its internet restrictions and allow foreign
companies more involvement in media communications.
9. Pledge to protect intellectual patentsbut take care not to let that come at a cost of
economic growth. If possible, independent agreements should be reached with
complaining parties. A firm stance on piracy should be taken, in theory, but in practice
the government should avoid frightening off potential innovators.
10. Remain committed to WTO obligations. China should take steps to avoid imposing on
other countries through actions such as tariff increases, or attempts to manipulate
currency. Additionally it should work on finding solutions to current problems through
independent cooperative remedies.

26
No More Made in China?
27
CIA Factbook
Citations
Rich China: An Emerging Class of Wealthy Elites. Australian Broadcasting Corporation, 2012. DVD.

No More "Made in China"? Ampersand Film & Video Tape Productions, 2012. VHS.

Harding, James. "Beware the Dragon: A Booming China Spells Trouble for America." Lecture, Intelligence Squared
Debate from National Public Radio, New York, January 1, 2007.

Li, Eric X. "A tale of two political systems." Lecture, TED Conference from TED Talks, London, July 1, 2013.

Anti, Michael. "Behind the Great Firewall of China." Lecture, TED Conference from TED Talks, July 30, 2012.

Hoffmann, W. John. China into the Future: Making Sense of the World's Most Dynamic Economy. Singapore: John
Wiley & Sons (Asia), 2008.

Ambler, Tim, and Morgen Witzel. Doing Business in China. London: Routledge, 2000.

Li, Minqi. The Rise of China and the Demise of the Capitalist World-economy. London: Pluto, 2008.

"China." Central Intelligence Agency. Accessed February 18, 2015. https://www.cia.gov/library/publications/the-


world-factbook/.

Magnier, Mark. China Economic Growth is Slowest in Decades. Wall Street Journal, 2015. Web.

Investment Environment. China Investment Guide, Foreign Direct Investment. http://fdi.gov.cn/

Air Quality Index. aqicn.org/map.

"China and the WTO." World Trade Organization. wto.org.