Trade Tone Improves Between China And The West
After fraying under a steady stream of disputes over the last 2 years, China-Western trade relations took a much-needed turn for the better last week with new reports showing that Beijing and its major trading partners were taking constructive steps to reduce the tensions. Two reports indicated Beijing will take steps to reduce some of the government support it gives to emerging high-tech industries, addressing a sore spot in its trade relations with the west.
At the same time, a third report of a major new tie-up between China Mobile (HKEx: 941; NYSE: CHL) and European networking equipment giant Nokia (Helsinki: NOK1V) eased concerns that Chinese state-run carriers might favor domestic suppliers due to the trade tensions. These signals could point to a new era of mediated settlements in China’s trade disputes, amid a broader drive by Beijing to force its emerging high-tech manufacturers to survive as true commercial companies.
Such new moves would reflect a more conciliatory attitude by both sides, and indicate that Beijing is ready to take a more market-oriented approach to development of key industries. All parties need to seize on the positive energy created by these new moves, and maintain the momentum to build a sturdy framework for the development of healthy longer-term trade relations.
After 2 years of accusations, threats of punitive actions and counter threats of retaliation, reports emerged last week that the European Union (EU) and China were on the cusp of a major agreement to end their long-running dispute regarding telecoms equipment. (previous post)
EU trade leaders have accused Beijing of unfairly supporting domestic high-flyers Huawei and ZTE (HKEx: 763; Shenzhen: 000063) through a wide array of policies, ranging from export credits to cheap product financing for their overseas customers. Both ZTE and Huawei have made huge roads into Europe over the last decade, taking a quarter of the market from a group of older, mostly European companies like Ericsson (Stockholm: ERICb), Alcatel-Lucent (Paris: ALUA) and Nokia.
According to reports late last week, the 2 sides were in late stage talks that were expected to produce a landmark settlement as soon as this week. (English article) The centerpiece of the deal would be China’s agreement to limit export credits for Huawei and ZTE, which effectively give government money to the companies when they sell their equipment to overseas buyers. China gives such credits in a wide array of industries in its bid to promote development through exports.
Nokia announced its own mega deal at almost the same time, saying a new framework agreement would see it sell nearly $1 billion worth of networking equipment to China Mobile this year and next. (English article) That announcement came as China’s 3 major carriers spending billions of dollars to build out 4G networks. It sent a signal that the European suppliers would get equal access to contracts to help build those networks, after disappointing early results appeared to favor Huawei and ZTE.
Meantime, a separate report on ambitious build-up plans for China’s green energy sector also contained hints that Beijing intends to pare back its current support for makers of wind and solar power generation equipment. (English article) In discussing the ambitious build-up, an unnamed official said government subsidies to makers of new energy generation equipment will be capped in the future. He added that domestic companies needed to improve their technology and control costs to succeed, rather than depending on government subsidies.
Those remarks should be welcome by governments in both Europe and North America, which have accused Beijing of unfairly supporting its solar panel sector that has risen rapidly over the last decade to now provide more than half of the world’s supply.
Those accusations led to investigations by both the US and EU, which ended with Washington imposing anti-dumping tariffs on Chinese panels last year. The EU and China managed to reach a settlement that avoided such tariffs, after Chinese manufacturers agreed to voluntarily raise their prices. But that deal has shown recent signs of unraveling amid accusations the Chinese firms aren’t keeping their word.
These latest signals from Beijing look like a much better long-term solution to the current and future similar disputes, since reduced subsidies will naturally force companies to raise prices to levels similar their global rivals. Beijing should be commended for its efforts, and both sides for their more constructive approach to resolving their differences. Such efforts will ultimately benefit everyone, creating cutting-edge products and healthy industries that can innovate and thrive over the longer term in these important emerging sectors.
Bottom line: A deal to resolve an EU-China trade dispute, and new comments on China’s resolve to cut back solar subsidies auger a potential thaw in chilly Sino-western trade relations.
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