Chinas Big Plans for Capitalism
By Dr. Peter Morici, Professor of International Business

The stalemate at the recent World Trade Organization meetings was a significant setback for U.S. and EU policymakers for political as well as economic reasons.

The WTO promotes global commerce by cutting tariffs and instigating domestic market reforms, and these can powerfully accelerate growth and social progress, especially in developing countries. As important, open markets encourage democracy, because entrepreneurs and innovation flourish with democratic legal protections.

Yet, history demonstrates that the link between markets and democracy is far from certain, and China has quite different plans for global capitalism.

Pre-World War II Japan and Germany had autocratic governments and successful market economies, and contemporary China exhibits strong parallels with those experiences.

In Japan, large networks of companies, similar to contemporary keiretsu, participated in industry associations that stabilized production and prices consistent with customer requirements and profitability. Cartel capitalism proved resilient and adaptable, and helped transform Japan from a feudal society into an industrial power within 50 years.

China intends to convert its largest state-owned enterprises in autos, banking, and other industries into dominant players in domestic and export markets. China seeks technology from foreign investors but limits equity participation and market shares.

Already, Chinese industry is assisted by massive central bank intervention in foreign currency markets that creates an undervalued yuan, subsidized exports and a horde of U.S. dollars that may be used to scarf up strategic foreign assets. In textiles, consumer electronics and a widening range of manufacturers, the China price is becoming the global price, and Chinese firms are driving western competitors out of business.

Now, China plans to experiment with cartel capitalism in global commodities markets.

China consumes 30 percent of the worlds steel and has a similarly huge appetite for other basic materials like copper, cement, cotton, coal, and petroleum, and China wants its commodities and futures exchanges to play key roles in setting global prices.

Chinas markets are hardly transparent or modern. Yet, it intends to require that import contract prices be set in Chinese futures markets, and it is planning to consolidate company purchases so that buyers, anointed by the Chinese government, can dictate prices for imported cement, cotton, and the like.

Given its size of purchases, China could make its commodity and futures markets the places where many global prices are set and rig prices to its own benefit and the expense of others.

The worst abuses of capitalism have emerged from concentrated power in critical markets. That is why the United States, EU and others have antitrust enforcement. If Archer Daniels Midland and Cargill conspired to manipulate commodities prices, western enforcers would impose steep fines and perhaps jail time.

In China, though, the cops and robbers are one in the same.

Given the size of its investment and financial activities, it is not a huge leap to envision China establishing similar markets to determine prices for foreign currencies, securities and insurance. This would compromise the integrity of global markets that spread risk and limit the frequent financial crises and recessions that once plagued western economies.

By grabbing shares of commodities and financial markets with mercantilist tactics, instead of merit, and manipulating prices, China would become richer but at the expense of everyone else, especially developing countries. The latter would become even more disenchanted with free trade and institutions like the WTO.

If successful, Chinas strategy would enhance its global economic influence, help the Communist Party maintain its grasp on power, and bolster Chinas efforts to offer its model of autocratic capitalism to developing countries in Asia and elsewhere.

For Europe and the United States, significant Chinese state leverage in determining commodity prices and the terms of financial contracts would greatly reduce their national wealth, economic stability and global influence.

Despite reports of Chinese intentions by the Wall Street Journal and other media, U.S. and EU officials are noticeable only by their silence.

Can anyone in Brussels or Washington connect the dots?