Third front likely as trade war escalates

PUBLISHED : Thursday, 13 September, 2007, 12:00am
UPDATED : Thursday, 13 September, 2007, 12:00am

Businesses manufacturing for export in the mainland had better prepare themselves. An unlikely alliance of big western corporations, trades unions and environmental campaign groups is likely to open a third front in the United States' and Europe's continuing trade war against the mainland.

So far the complaints of the mainland's trade critics have focused largely on the perceived undervaluation of the yuan and consumers' fears over the poor safety record of its exports.

For months the US Congress has been preparing a barrage of legislation aimed at punishing Beijing for artificially holding down the value of its currency. More recently, attention has focused on a series of safety scares involving everything from seafood and toothpaste to children's toys and pyjamas.

In the near future, critics are likely to open hostilities on a third front: the country's lousy environmental standards.

'Trading partners will begin to lean on China because of the perception that it has a competitive advantage because it is prepared to foul its own nest to produce cheap goods,' warns Lawrence Bacow, president of Tufts University in the US and former professor of environmental studies at the Massachusetts Institute of Technology. 'I guarantee you it will happen.'

Quite how much of a short-term competitive benefit the mainland gains by polluting its own environment is uncertain. According to a study conducted last year by the Paul Merage School of Business at the University of California-Irvine, poor environmental and health and safety standards account for only around 5 per cent of mainland exports' cost advantage over US goods. But in highly polluting sectors the advantage is very great. The same study noted that environmental compliance costs for US Steel amount to 2.8 per cent of its annual revenue. Baosteel pays just 0.3 per cent. The difference in compliance costs between US and mainland chemicals companies is similar (see chart). The country's pulp and paper, food, textile, tanning and mining companies also enjoy big benefits from their ability to pollute with impunity.

Mainland data also indicates that the short-term cost advantages of environmental degradation are significant. Last year a joint study by State Environment Protection Agency and the National Bureau of Statistics estimated that cleaning up pollution emitted in 2004 would have cost more than 3 per cent of the gross domestic product. A follow-up study covering 2005 was spiked, apparently because it showed that clean-up costs for some provinces would have been greater than their entire output growth for the year.

International competitors will not let the mainland get away with this indefinitely. It can only be a matter of time before lobby groups in the US and Europe begin to complain that the country's lax enforcement of environmental standards amounts to an unfair trade advantage.

And with the mainland's neighbours suffering acid rain from its sulphur dioxide pollution and the whole world carrying the costs of its greenhouse gas emissions - the world's biggest - the campaigners will get a sympathetic hearing from their peoples and governments. It cannot be too long before legislation is tabled in the US or Europe requiring polluting mainland industries to clean up their act. If they don't, Beijing will find itself facing punitive tariffs on its exports designed to remove the cost advantages of playing dirty.