Trade war taking a toll on China’s plans

Paran Balakrishnan | Updated on July 09, 2019

Even as China presses ahead with BRI, US companies situated there are trying to move out their operations

It’s a small town in the middle of nowhere in Kazakhstan but it could one day be China’s gateway to Central Asia. Scores of cranes are in action and hundreds of workers are working feverishly to turn the Khorgos Eastern Gates Special Economic Zone on the Kazakh-China border into a dry port and logistics hub that will help take Chinese goods to remoter corners of this region and also all the way to Europe. So far, however, business has been slower than the Chinese would like and there aren’t any signs it’s about to pick up.

China’s Belt and Road Initiative was conceived as a visionary plan that would turbocharge economic growth across Asia and even Africa and parts of Europe while ensuring all roads led to Beijing or some other Chinese city. But though the Belt and Road Summit in April gathered a larger crowd than before, there’s no mistaking the fact the sheen has slightly gone off the giant enterprise.

China is in, what it calls, a “fight-to-the-end” trade battle with Donald Trump who is determined to maintain US global superiority, seeking to demonstrate that companies like Huawei and ZTE may be giants around the world but they can’t get anywhere without US software and components. Under the circumstances the Belt and Road must take second place to ensuring China’s own economic survival.

Take a look at Pakistan where the MOUs for 17 power projects out of a total of 21 have been signed and one SEZ is scheduled to be inaugurated later this month. The Rashakai Industrial Zone on the Nowshera-Mardan Road will have around 20 factories when it first opens though the Pakistanis hope the Chinese will ensure that industrial ventures kick-off right away. The SEZ will focus on textiles and food processing. Pakistan aimed to have seven China-backed SEZs under way in the next two years but it’s facing land acquisition and other problems that are stalling progress.

Pakistan generates some 25,000 MW of electricity during the good months and new CPEC projects will soon take that up to about 33,000 MW. But it’s not clear whether the power projects and SEZs can kick-start Pakistan’s economy.

Pakistan will also have to start making repayments for the CPEC projects from next year. What’s looking less likely than ever before is that the CPEC projects will be a silver bullet that will solve Pakistan’s economic woes.

When details of the CPEC first appeared in the Pakistani press it looked as if the country was about to be turned into a Chinese colony. The ambitious blueprint mentioned investments in agriculture and the creation of tourist hubs along the Pakistan coast. It was said that about $46 billion would be invested in Pakistan but only a fraction of that’s happened yet.

Also, other doubts are emerging such as why Pakistan is building a string of thermal power plants when the world — including China and even India — is turning to renewable energy.

But even as China is determined to push ahead with its Belt and Road Initiative, it has far greater difficulties to grapple with. China’s economic miracle was built on US and other companies making a Great Trek to China and manufacturing all their hardware there. Now, these companies are, understandably, looking at taking large chunks of production out of China. The list of companies includes many of the tech world’s biggest giants from Apple to Dell and HP. Other tech stars voting with their feet include Google, which has moved production of motherboards for its games consoles to Taiwan, and Amazon. In response, the Chinese are offering to reduce the number of sectors with foreign investment curbs.

Even local giants like Tencent, Baidu and have slowed down on hiring as have others like Huawei which is facing headwinds for obvious reasons. Ride-hailing giant Didi Chuxing slashed around 2,000 jobs early in the year. One estimate is that hiring in the tech sector is down by around 25 per cent from 2018. This had already begun before Trump declared a trade war on China but that certainly hasn’t helped the situation.

It’s true that even before the trade war many companies had started looking for new production bases because costs were going up steeply in China. Still, the trade war has speeded up the potential exodus considerably. Top Asian economists reckon China’s growth will come in at 6.2 per cent this quarter. Most of the China-focussed economists predict a trade deal will be struck by the year-end but say that if it isn’t, China’s growth might dive to around 5 per cent. China’s local Caixin Purchasing Manager’s Index also indicates factory activity is down to a three-year low.

Across Asia

The trade war is also having a knock-on effect all over Asia with slowdowns taking place in Japan and South Korea. In South Korea, exports and manufacturing have dropped steeply and growth fell to 0.4 per cent in the first quarter. Profits are down sharply at the country’s Big Three — Samsung, LG and Hyundai — and a trade dispute with Japan isn’t helping. The Japanese have imposed restrictions on components vital for South Korea’s hi-tech sector. Japan is said to be annoyed by a Korean court ruling that top Japanese firms should pay reparations for the 1910-1945 era when Japan ruled Korea and had many Koreans working as forced labourers.

Across in Vietnam, a different game is being played out. Vietnam had been a big winner in the last year with many companies looking at it as a manufacturing hub alternative to China. But Vietnam runs a $42-billion trade surplus with the US and that’s suddenly brought the country into President Donald Trump’s sights.

Amazingly, for all these countries, one great truth remains. Their economies depend heavily on the US market. Any sign of a slowdown in the US can pull down markets across Asia. Our modern world is all about interdependence, but Trump doesn’t even begin to understand that. For him trade is a zero-sum game, and if one country’s up, the other’s down. He may find out differently in the next year, but by then it will be too late for the entire world.

Published on July 09, 2019

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