Access to Markets in China

Will access to markets in China solve the debt issues of the European Union or the United States? Will access to markets in China boost the EURO and USD against the YUAN? These questions come to mind as China’s heir apparent meets with the US president and European leaders enter into trade talks with China. The message that Mr. Obama and his administration want VP Xi Jinping to take home is that with China’s new found wealth and power come increased responsibility. Mr. Xi Jinping is visiting the USA and is expected to take over the reins of leadership in China a year from now. The two stage transfer of power will make Xi Jinping the leader of the Communist Party in China in the next few months and see follow Hu Jintao in the presidency a year later. The “managed capitalism” of China has been very successful if what you look at is balance of trade. China runs a trade surplus with most nations on earth, especially the two largest economies, the United States and the European Union. Partly the positive Chinese balance of trade is because of their low labor costs. Largely it is because it can be very difficult to sell products and services on the Chinese mainland.

European and American officials constantly state that China needs to play by the same rules as everyone else when it comes to world trade. However, China is not the first nation to limit access to its home markets. China like all nations puts its own problems first. A good reason to limit access to market in China, from their viewpoint, is to provide more employment in the Chinese interior, especially as exports are falling off. The threat of a renewed recession in Europe has Chinese manufacturers cutting back. The building of a bullet train system, without much outside help, is an example of China going it alone in order to develop its own technology and not bypass its own workers. Those trading foreign currencies are well aware that China works hard to keep it currency cheap versus the dollar and Euro. By doing so China is able to sell into the two most lucrative markets in the world at low prices. A rise in the value of the Yuan versus the dollar and Euro would cause Chinese exports to drop and those from North America and Europe to rise. Access to markets in China for a whole range of products and services from the West would help ease the trade deficits that both the USA and Europe have with mainland China.

No one wants a trade war, especially in light of the weak global economic picture. However, we can expect to see both the US and the EU ratchet up pressure on the Chinese to expand access to markets in China and allow the Yuan to float upwards to a more realistic value. How soon the Chinese will let this happen or if this does happen is uncertain. To the degree that China decides to avoid confrontation with the West we will see increased access to markets in China.