10 August 2010
Unfair trading practices by China have resulted in it becoming the world’s largest producer of paper and products says the Economic Policy Institute (EPI), a nonprofit American think tank. These practices contribute to the over-valuation of the currencies of many other countries, including Australia, New Zealand, South Africa, Brazil and the United States and lower paper prices on world markets.
In an EPI research paper by Usha C. V. Haley, No Paper Tiger, Subsidies to China’s Paper Industry From 2002-09, published in June, China’s rapid rise in the global paper industry has been fueled by over $US33.1 billion in government subsidies from 2002 to 2009.Since 2000, China has tripled its paper production. In 2008, it overtook the United States to become the world’s largest producer of paper and paper products and in 2009 produced more than 17% of the world’s total output.
Yet according to No Paper Tiger, China’s paper industry has limited economies of scale and is geographically fragmented, operating in 30 provinces. More than 88% of the companies are small and 12% are medium-sized.
China has no natural competitive advantage in papermaking, and lacks the natural resources to fuel the industry. China’s forest base is among the smallest in the world per capita. Consequently, the country is the largest importer in the world of pulp and recycled paper.
China has no inherent cost advantages in the capital-intensive paper industry. Indeed, labour makes up about 4% of the industry’s costs; in contrast, imported recycled paper and pulp comprise over 35% of the costs. Raw materials, which make up three-quarters of the costs of producing Chinese paper, as well as electricity, coal, and transportation, have nearly doubled in price over the last decade. Yet, Chinese paper sells at a substantial discount compared to U.S. or European paper.
Despite global overcapacity, China’s paper industry has added on average 26% of new capacity every year from 2004. With saturated domestic markets, proportionately much smaller per capita than those in developed countries, exports have led the development of China’s paper industry with detrimental effects on the United States and global economies.
The U.S. trade deficit with China on paper has been increasing exponentially since 2002. In February 2010, the annualized growth rate of Chinese paper and paper-product imports into the United States approximated 22%.
A major driver of this growth are subsidies from government. The EPI estimates that in China’s paper industry, subsidies for electricity amounted to $778 million (from 2002 to 2009); subsidies for coal, $3 billion (from 2002 to 2009); subsidies for pulp $25 billion (from 2004 to 2009); subsidies for recycled paper, $1.7 billion (from 2004 to 2008); subsidy income reported by companies, $442 million (from 2002 to 2009); and loan-interest subsidies, $2 billion (from 2002 to 2009). Missing data prevented calculation of pulp or recycled-paper subsidies in 2002, 2003, and 2009
The government’s policies on forestry assume high importance for the Chinese paper industry as the government allocates resources for plantation development and trade. Policies have systematically aimed to reduce China’s dependence on imported raw materials and to subsidise the paper industry’s restructuring. Central and local governments’ subsidies and soft loans also protect debt-ridden, state-owned enterprises (SOEs) and small, local companies with excess-production capacity.
In an EPI research paper by economist Robert E. Scott published in March, Unfair China Trade Costs Local Jobs, China’s share of the U.S. trade surplus has soared, thanks to currency manipulation and other trade distorting practices by China, including extensive subsidies, legal and illegal barriers to imports, dumping and suppression of wages and labour rights, especially in 2009.
“A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation,” says Scott. “Unlike other currencies, the Chinese yuan does not fluctuate freely against the dollar. While the value of its currency should have increased as China exported more and more goods, it has instead remained artificially low, and China has aggressively acquired dollars to further depress the value of its own currency.
“Undervaluation of the yuan has forced other countries to bear the burden of global current account realignment pressures. As a result, the currencies of many other countries, including Australia, New Zealand, South Africa, and Brazil, as well as the United States, have become overvalued on a trade-weighted basis.”
Footnote
The Economic Policy Institute, a non-profit Washington D.C. think tank, was created in 1986 to broaden the discussion about economic policy to include the interests of low- and middle-income workers. From 2005-2007, about 53% of the institute’s funding was in the form of foundation grants, while another 29% came from labour unions. EPI also receives support from individuals, corporations, and other organisations.
