Sunday, September 23, 2012

The Dangers of a China-Japan Trade War

Protests against the Japanese purchase of the Senkaku / Diaoyu Islands took place in various Chinese cities recently, including Beijing, Shenzhen, Luoyang and Xi’an amongst others.  

Japanese branded products, including numerous cars (and even a camera belonging to a protestor) were attacked and destroyed by the angry crowds.   Panasonic and Toyota as well as Nissan reported damage to commercial properties (a factory and car dealerships respectively).   Canon has also closed some facilities whilst Japanese clothing chain Uniqlo chose to shut several locations, and covered signs at others.  Protestors have also targeted Chinese owned Japanese branded products - images of which cannot be encouraging for prospective customers.  Meanwhile, some Chinese protestors are calling for consumer boycotts of Japanese branded products.

Consumer boycotts can be damaging and reflect a level of political risk inherent in doing business in foreign markets – they are by no means limited to China.  This aspect of political risk is troublesome, but with the growing importance of China’s market, “political risk with Chinese characteristics” must be accepted as part of the business environment. Readers may remember previous rounds of anti-Japanese protests in the mid-2010s, as well as the targeting of Carrefour and MacDonald’s branches in 2008 in response to instability in Tibet and the Olympic torch protests.  In a globalized world strong brands and their logos are often taken to represent a country as much as its embassies or flag. If a large brand is operating successfully in a foreign market, they may effectively be on the front-lines of disagreements over which they have no control.  

Consumer boycotts can take various forms and be over various issues. In Europe and the U.S., they often occur over perceived immoral or unjust actions by companies, including safety concerns, actions in developing countries, poor environmental records, and the mistreatment of workers. Examples of these could be the boycotts against Nestle in the late 1990s and the more famous protests against Nike over its labor practices.

Japanese companies can expect a certain chill whilst doing business in China over the coming months, even if Beijing doesn’t take any public formal economic action against Japan.  The Chinese media has been suggesting that formal action may be in the cards, and with China accounting for nearly 20% of Japan’s exports, there is a lot at stake. However, such measures can be troublesome under World Trade Organization (WTO) obligations and tend to damage a country’s reputation.  The punishment of Japan through rare-earth export restrictions in 2010 is an example of the more extreme national level action, but the backlash against China was damaging.  Other than private consumer led boycotts and formal national policy boycotts, however, China has a powerful third option.

Unofficial boycotts are possible in China because of the power of State Owned Enterprises (SOEs) and the wider public sector in the economy.  Without announcing formal measures which are difficult given WTO rules, there has been a documented effect on trade and sales from nations as well as corporations which have displeased China.  This can be in the form of web restrictions such as that currently affecting the free Bloomberg website in mainland China (after Bloomberg published a damaging expose on Xi Jinping’s extended family wealth) or in unpublished policies at state companies (there have been reports that sales of Bloomberg Terminals have plummeted in China). 

In fact, two academics at the University of Goettingen in Germany published a discussion paper looking at the effect on trade when a foreign country angers Beijing by arranging official meetings with the Dalai Lama.  Fuchs and Klann, the paper’s authors, find a definite pattern whereby a country’s exports to China will fall by 8.1% or 16.9% (depending on method of measurement) and will remain depressed for two years after such an event.  The paper finds that heavy machinery and transport equipment are the sectors most consistently hit by such “unofficial” boycotts.  Needless to say, these sectors in China involve many state owned players (transport and infrastructure development).

Yet despite China’s growing clout in international economics, the boycott/consumer action sword can cut both ways.  Whilst Japan is the current target of action in the mainland and Hong Kong, companies from all nations are being made more aware of the particularities of political risk in China – and will also remember the recent experiences of Carrefour and MacDonald’s.  Investment decisions are affected by risk, and a company’s costs are increased if insurance premiums rise. Even shutting down facilities for a week or two is damaging to a corporation. 

Foreign firms do provide employment in China and also pay taxes, as well as deliver products which Chinese consumers usually seem keen to own.  What’s more, Japanese consumers buy Chinese made products too; a tit-for-tat boycott war will harm both sides, and many companies (not just Japanese ones) considering investment in China may now be looking at other options.  It is now well known that strong economic relationships before WWI didn’t stop the march to war, but they can’t have hurt. Let’s hope that cooler heads will prevail. 
By James Parker for The Diplomat

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