The trade war within China

Although many are embarrassed to admit it, foreign correspondents learn a lot from taxi drivers. In China economic correspondents can also learn a lot from the taxis themselves. Most cabs in Beijing are Hyundai Elantras. In Shanghai they are often the Volkswagen Touran or Passat. And in Wuhan they are commonly Citroën Elysées. In each case, the explanation is the same. These foreign brands have joint ventures with local state-owned carmakers that the city government is keen to champion—even if it is at the expense of other carmakers and their own consumers.

This is one prominent example of China’s persistent “local protectionism”. Many of its provinces, prefectures and counties try to shield local firms from outside competition. These measures divide the mainland’s vast, singular market into something more plural. “China in many ways resembles the European Union,” says Jörg Wuttke, president of the eu Chamber of Commerce in China. “We have 27 member states; they have 31.” The eu has been trying to perfect its single market for three decades, often in the teeth of national rivalries and resentments. China has been battling local protectionism for just as long. Newspapers in 1991 were full of tales of “economic warlords” dividing China into “dukedoms” protected behind “bamboo walls”, recalls Andrew Wedeman in his book “From Mao to Market”.

Some of those walls remain. If a provincial border divides two cities 200km apart, lorries will flow between them as if they were about 100km further apart, according to Lu Ming of Shanghai Jiao Tong University and his colleagues. The “toolbox” of local protectionism is “wide”, says Mr Wuttke. Governments might, for example, put out a tender with customised requirements that only a home-grown champion can fulfil. They might enforce rules on safety or unfair competition more zealously against outside firms. In the past governments have even given locally made cars priority access to express lanes, according to a paper by Panle Jia Barwick of Cornell University and her co-authors.

Some recent barriers were documented by China’s National Development and Reform Commission (ndrc) in May. The province of Jilin, for example, required fertiliser companies to traipse to a local institute to get their products tested. The city of Ma’anshan refused to allow private firms to bid for the rights to mine dolomite without seven stamps from local departments (which withheld them because they “did not understand the companies’ background”). Taiyuan required lorries to specify their route when applying for permits, which put drivers unfamiliar with the city at a disadvantage. The traffic-control departments in parts of Jiangxi province delegated the licensing of electric bikes to local insurance companies that compelled owners to buy insurance too. These cases of local malpractice have all been rectified, according to the ndrc. But it presumably hopes that publicising them will help deter similar meddling elsewhere.

One way to expose the seams in China’s market is to see what happens when they are removed. China’s counties (which have populations of about 500,000 on average) are sometimes absorbed into larger prefectures (with millions of residents), removing the administrative borders between them. When this happens, the absorbed counties tend to prosper. Their gdp per person was 12.6% higher than counties that applied to join a prefecture but failed, according to Yi Han of the University of Pittsburgh. The counties benefited from joining a larger market, just as small European countries benefit from joining Europe’s single market.

Efforts to tear down these bamboo walls have gained new urgency in recent years. After the global financial crisis, the trade war and the pandemic, China’s rulers have concluded that they can no longer rely on foreign markets. They are trying to steer the economy away from a growth model based on importing vast quantities of commodities and components and exporting similarly vast quantities of manufactured goods (a model known as da jin da chu, “big in, big out”). Their attention has turned from fickle markets overseas to the one that has been in front of them all along.

In April the Communist Party’s central committee and the Chinese government’s state council (the equivalent of its cabinet) jointly published a set of opinions calling for a “national unified market”. They lamented “market segmentation”, “repetitive low-level construction” and “vicious competition in investment promotion”. The timing was unfortunate, an exhortation to remove metaphorical bamboo walls just as literal metal fences were appearing in locked-down Shanghai. But the initiative is nonetheless welcome, says Mr Wuttke. “They realise this export miracle they experience now will end,” he says. “They’re trying to find other means to get the economy going. And knocking down protectionist walls is not a bad idea.”

One worry is that if local governments lose regulatory discretion, they will stop building their economic dukedoms and instead “lie flat”, lapsing into apathy. The fierce economic competition between different parts of China does, after all, keep local governments on their toes. But even in a more unified market, local governments could compete to provide good infrastructure, well-trained workforces and brisk administration of rules that are more standardised across the country.

The bigger worry is that local protectionism will persist despite the exhortations of China’s rulers. A more unified market will create losers as well as winners. It will, for example, require some local carmakers to lose custom to rivals from elsewhere. Local officials resist these market forces for a reason. They wish to preserve jobs, tax revenues and social peace, criteria that determine how they are evaluated by the party. If they imperil stability, they will also jeopardise their chances of promotion. To stop them bestowing favours on local champions, then, China’s central government will have to rethink how it bestows favours on local cadres. ■

The Economist