By Dr Kamal Mannoo
Can Pakistani companies compete against the Chinese companies once CPEC (China Pakistan Economic Corridor) gets completed along with its economic zones and industrial estates? This is the question, which is troubling majority of Pakistani entrepreneurs and perhaps rightly so, as they have good reasons to be fearful. Unlike the impression that CPEC will open new doors of development in Pakistan, Pakistan’s most competitive sector (globally), Textiles, has already started to fear the stiff competition after the introduction of a 10-year textile development plan by China in its Xinjiang Uygur Autonomous Region. As nearly 35% textile units in Pakistan have closed down for various reasons, including a higher cost of doing business, becoming uncompetitive on account of respective subsidies & support to international competitors by their respective governments, etc., the huge investment on the textile park at bordering region of China is now being perceived as a serious threat to the local industry, which as mentioned is already struggling to compete with its international challengers and with an uncertain economic environment at home. According to this (Chinese) 10 year plan, by 2023, Xinjiang will host China’s largest cotton textile production base and the largest garment export processing base, making Xinjiang the largest manufacturing and exporting base of China in cotton textiles. Xinjiang already accounts for 60% of China’s seven million tons of cotton production and in addition to funding the textile industrial parks and clothing factories (with latest state-of-the-art machinery) the Chinese government under this plan will also be subsidizing local cotton, electricity and labor-wages to the millers. Ironically, in response, no safeguard measures so far have been taken by the Pakistani side to protect its industry that roughly contributes 60% exports, 40% industrial employment, 40% bank-credit and 10% GDP.
The concern is that even under a normal trade environment most global companies find it hard to compete against their Chinese counterparts, because it is often argued that China cannot really be termed as a market economy and its companies naturally do not operate with the necessary transparency or with a fair adherence to norms of corporate governance. In a recent move while the European Union (EU) Commission resolved to treat all World Trade Organization (WTO) members equally in determining whether or not they are dumping products into the EU, they at the same time singled out China for a special attention cum scrutiny. Of 32 trade investigations the EU Commission is carrying out, 22 feature Chinese imports, and the EU officials now openly air their concerns on China in reality not qualifying as a market economy. United States (US) also shares the same concerns with the EU. Recently in a public hearing held by the US Trade Representative’s office, US businesses openly communicated their complaints in what they said were China’s efforts to tilt the economic playing field in favour of its domestic companies and WTO’s inability to police all such unfair trade practices of Beijing. Whether right or wrong these US companies alleged that they face increasing threats to their operational sustainability from Chinese investment rules, industrial policies, and subsidies to Chinese state-owned enterprises, excess manufacturing capacity, cyber-security regulations and forced technology transfers.
Of late, these allegations have gained momentum are now refer to some very explicit explanations on how exactly the WTO rules are bent in favour of the Chinese companies by the Chinese State,
* Electrical power from hydroelectricity dams like “three gorges dam” (22,000 MW) is virtually supplied free to the Chinese export driven companies – at US Cent 1 per KW – No such luck for the foreign companies operating in China.
* Loans to Chinese companies are generally for a tenure of 30+ years and sometimes mark-up is not charged for the first 10 years; thereafter also, a nominal rate only.
* Lower import tariffs to Chinese companies (as compared to foreign companies operating in China and also in general on a regional parity) for importing raw materials.
* Lower excise duty, sales tax, etc. to Chinese companies as compared to the foreign companies operating in China.
* Unfair labour practices towards Chinese companies vis-à-vis labour laws including minimum wages, over time, retirement benefits, etc. Chinese workers in many cases, they allege, were not paid any cash salaries till just about 2-3 years back, and they were given jobs in export driven manufacturing plants only on the basis of accommodation plus food.
* Restriction on sales of products produced by foreign companies in China to only major cities and not allowing them to sell on all Chinese sale points within the mainland.
* Any surplus production of the Chinese companies is simply bought by the Chinese government organisations in a barter exchange – where the end product is picked at zero sale prices and raw material is also given at zero sale prices. E.g. the surplus steel is picked up by the Chinese government and the raw iron ore is given to the steel mills at zero value to produce this steel – And this, without the involvement of a single currency transaction.
Soon these problems will not be some distant pleas of foreign companies in the West, as soon Xinjiang will more or less be getting similar advantages – if not more – from the Chinese government. Only this time the threat will be closer to home: to the Pakistani companies. But then, like in the 80s, who really cares as long as the dollars are flowing in!