Monday, 26 March 2012

Unfair trade practices invite de-globalisation perils

Global supply chains are becoming more dynamic as the balance between off shoring, near shoring and re-shoring of production changes continuously but there is one threat to globalisation that few companies have catered for ---human frailties epitomised by unfair and illegal trade practices, which could lead to creeping de-globalisation and worsening social tensions, if not war.

Globalisation may not have done much for environmental progress but it has lifted many millions in developing nations out of poverty. And nor should it be forgotten that rich, developed countries, America in particular, have benefited hugely from China's rapid economic growth by suppressing inflation and buying up of US government IOUs. Any trade developments that reverse or trammel that trend would be a tragedy for the whole world.

As I warned in my last report, "Supply chain shifts threaten Asia," global businesses are reassessing their supply chains "which if not handled sensibly by the likely losers in the Far East... will lead to destabilising repercussions that could leave the whole world in turmoil." But if such reassessments lead to a flood of re-shoring back to or near to main markets it is in the interests of developing countries to do everything in their power to eradicate unfair trade practices that would accelerate such re-shoring. Nowhere is this more pressing than in China.

Re-shoring , it should be said, is not without risks to their promoters, which can often be as great as the risks of off shoring. One of the re-shoring risks is that costs will generally be higher than for those who remain offshore, but that is not necessarily so, especially as labour cost rises in China, for example, are galloping ahead of those in the West. Western-based companies also often ignore certain costs when making decisions on where to make products. When such costs are factored in, American costs may average only 12% higher than China's and in some cases undercut China by 22%, while at the same time remaining free of all the potentially disruptive forces acting on the supply chain. Far East suppliers also have a less than admirable quality record. The biggest potential risk not factored in, however, is the fall-out from long-standing unfair and illegal trade practices which are already leading to tariff skirmishes.

A long-festering sore between China and the West is China's unashamed, wholesale theft of intellectual property rights, in which Chinese intelligence agencies are allegedly involved. Described as the great brain robbery and "the greatest transfer of wealth in history", by the US National Security Agency's director, the costs of such theft to even single companies can be staggering. One US metallurgical company lost technology to China's hackers that cost US$1 billion and 20 years to develop.

China did not invent intellectual property theft but it is doing it on an unprecedented scale and there are already signs that their behaviour is backfiring in their face. To propel its economy, China must export more high end technology but if that technology possesses stolen software code, for example, then foreign buyers could be dissuaded from buying such Chinese goods by legal actions brought by the legitimate owner of the code. An example of this has already happened with Sinovel, a Chinese wind turbine producer, whose first major export deal, a contract in Ireland, has stalled because the turbines reportedly contain stolen code from America Super Conductor Corp.

China's law-breaking insouciance and unfair trade practices are beginning to invite retaliatory actions from countries other than America. Such ploys and behaviour like China's currency manipulation, restrictions on rare earth exports based on feeble grounds and the ordering of bureaucrats to stop buying foreign cars, mostly German, are enraging countries like Germany and Brazil, the latter of which has raised taxes on foreign cars and imposed other unfair practices. China's heavily subsidised manufacture of solar panels has also undermined Germany's solar panel industry.

Anti foreign trade measures have even taken a bizarre twist in India, which proposes a tax on some international mergers retroactive to 1962! This would mean that Vodafone, for example, is liable to pay US$2.2 billion in taxes on its purchase of Indian wireless operations. The result of all these unfair trade practices is that the US, the EU and Japan have filed a formal complaint against China to the World Trade Organisation.

The fears over intellectual property theft cannot be overestimated. Countries like Taiwan, considered a risky source for leaking patented technology to China, are also beginning to lose manufacturing business back to Britain. Even so, these fears will be tolerated by those companies wishing to maintain a manufacturing presence in emerging Far East markets, in particular, as those markets become more important in the long term. Yet this, too, is not without risk, especially in China. Western companies planning joint ventures in China involving technology transfers should remember that others who have gone before them have subsequently been dumped or otherwise sidelined.

In recessionary times, when Western manufacturing jobs are disappearing at a politically inconvenient rate, if any issue is likely to stoke up clarion calls at election times for at least a level playing field it is intellectual property theft. China should recognise this and move from imitation through theft to innovation through its own research establishments. China knows it has more to lose than any western nation in a trade war, but will it behave more honourably before it is too late? As the World Bank president, Robert Zoellick, warned those who would get tough with China, "once you start a trade war there is no telling where it will end."As with people who grow super rich, the wealthier big nations become the more arrogant and reckless they behave. The omens are not reassuring.