Economic sanctions in the form of trade restrictions hurt Chinese exports considerably. Anti-dumping legislation forced the Chinese government to adhere to international trade practices; else, face economic sanctions, which could hurt Chinese businesses in a big way.
How does anti-dumping legislation arise? China, recipient of huge Foreign Direct Investment (FDI), was able to create job opportunities for their citizens by encouraging foreign investors to bring money into the country, and start their production units there. In return, the Chinese government provided cheap land, subsidiaries, tax exemptions, cheap electricity and so on, which were highly attractive to investors. Industries grew, and the Chinese middle class also grew proportionately. Suddenly, China began to witness the huge flow of dollars coming in. Chinese economy grew, and the country began to grow in infrastructure and amenities. Soon, the Chinese began to experience a vibrant economic growth, like never seen before. Chinese businesses began to mushroom, as the middle class now had the money to invest in businesses of their own. With the help of foreign associates, who ventured into joint ventures and partnerships, the Chinese business people began to flood the market with products at very low prices.
In order to develop their business class, the government supported every initiative they ventured into, so that they would pay the government taxes and expand their coffer. Exporters were given licences, tax exemptions on exports, and provided electricity and raw materials on subsidized rates. Chinese exporters began to sell their finished products in countries where consumers had strong buying power. Most Chinese products sold in these markets with little or no competition, and this began to hurt the local manufacturers, as their products went unsold. When their products went unsold, they lost income, and gradually, they had to close their businesses. When the matter was reported to the government, they immediately approached the World Trade Organization (WTO), and asked it to block Chinese products from entering their shores. The Chinese businessmen began to feel the heat as their products also began to lose demand and gradually, they too had to face economic difficulties and close their businesses as well. This is what economic sanctions can do to a nation. Economic sanctions can destroy a nation, for it follows a universal principle that is voted upon and implemented. Economic sanctions hurt governments more than the people, for the simple reason that, should countries stop doing business with China, their economy will crash and the country could disintegrate. In order to understand the effect of economic sanctions against a nation, the case of anti-dumping case against Chinese firms are provided.
There is strong evidence to link foreign direct investment and development. In order to prove this, a certain number of manufacturing companies were grouped into three sectors in 1988-94. This provided an estimate of the Total Factor Productivity (TFP) growth by manufacturing sector in relation to FDI inflows. The results showed significant differences in TFP growth between manufacturing sectors dominated by foreign direct investment and those dominated by domestic investment in the consumer goods industry, confirming the positive impact of FDI on economic growth (Chen & Demurger, 2002). Where there is manufacturing, there is labour. This goes to show that with the flow of foreign direct investment, China has benefited immensely though industrialization. With a strong manpower base, China has always remained a strong contender for cheap labour. In the beginning when the government decided to have an open-policy to encourage foreign investment, this communist nation was eyed with suspicion.
The economic reforms continued to make China's labour and capital more productive. Today, Chinese industries are equipped to take on the challenge posed by other multi-nationals in competing within and outside her borders. The most common incentives were income tax reductions or exemptions, and imported equipment and construction materials were free of import tariff. The flow of FDI surged the Chinese nation forward, and it has become a force to reckon with economically. The nation boasts of a huge economically strong middle-class. Almost all products are now available locally and much of its produce is exported to countries around the globe. China has been accused of dumping textiles and related products into the US thus causing many of its own textile industries to close. This has led to protests and demands for the implementation of anti-dumping measures. The U.S, in retaliation, imposed anti-dumping duty on certain polyester staple fiber from China on June 25, 2006. China has been in the news for all the wrong things, which has led many governments to seek trade sanctions on certain industries and their products.
In the first case, three US polyester fiber producers, DAK Americas, Nan Ya Plastics Corp America and Wellman filed an anti-dumping duty petition against China for profiting from unscrupulous practices in major market share in the US by underselling and aggressive low-pricing (YNFX, 2006). In the second case, the textiles saga between the Chinese mainland and the European Community produced an episode, namely that of the imposition of definitive duties in the anti-dumping investigation concerning imports of certain finished polyester filament fabrics. Hong Kong's textile traders, who faced tough times exporting to the European Union (EU) due to the temporary textile limits put into place under the Shanghai Agreement, were confronted by another restriction on free trade (tdctrade, 2005).
The US polyester fiber producers urged the US government to impose anti-dumping duties on imports of more than 100 Chinese producers including Sanfangxiang and Sinopec, reports YNFX (2006). The import of the specified Chinese polyester fiber surged 161% between 2003 and 2005, and Chinese shipments account for over 39% of all imports in to the United States (YNFX, 2006).
The textiles saga between the Chinese mainland and the European Community hit the headlines, as both parties to the issue, claimed and counter-claimed the imposition of definitive duties in the anti-dumping investigation of certain finished polyester filament fabrics. Hong Kong's textile traders, who were already facing hardship under the light of the Shanghai Agreement, found this ruling even tougher, as they faced turbulent times due to the temporary textile limits put in place with EU (Tdctrade, 2005).
The Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, also known as the Anti-Dumping Agreement (AD Agreement) governs the application of anti-dumping measures by Member States of the WTO (wto.org). “Anti-dumping measures are unilateral remedies applied by Member States of the signed WTO Agreement that investigates and determines whether an imported product of a member state, is dumped into a country, causing material and financial injury to the industries of that nation, producing a similar product” (wto.org)
The blockade of finished products by a country causes huge losses to the exporter, who then has to look for other buyers, who will, on knowing that the products were returned, bargain for a low price. The exporter has no other choice than to sell it with or without marginal profit. The other member countries, who are signatories to the WTO, will also block the sales of these products in their countries, which will kill the business of the exporter. This is precisely what happens when a country faces economic sanctions. The Chinese government had to restrain exports of certain products to some countries that filed anti-dumping case against them, and face the economic loss of their export income.
In the case of China, the economic sanction in the form of anti-dumping caused huge financial loss, as the sanction not only stopped export revenue generation, it stopped its exporters to close their businesses because of the unbearable loss. The flow of foreign direct investment into that particular business stopped, and the industry felt the impact of the sanction.
The sanctions were first mooted by organizations that felt the pressure from cheap Chinese products flooding their market segments, and preceded by their governments to WTO. The logic behind the move was to stop their businessmen from running into financial losses and closure, which would put pressure on them. The government couldn’t be a mute spectator to what was going on in their backyard, and so, had to act on it to win the support of their citizens. Since sanctions were targeted at Chinese businesses, the Chinese government felt the impact of it, as they were pressured by their businessmen to find an amicable solution. The sanctions were very effective as it curbed China’s ambitious selling policies, which left, their business class almost bankrupt.
Economic sanctions can hurt organizations and governments considerably. It would be hard to imagine how a country like China would face economic sanctions today. Agreed, the country has enough resources to support itself, but these could disappear in years if they are not supplemented. If all countries signatory to WTO were to initiate economic sanctions on China, it would find it extremely difficult to meet the needs of their people in a couple of years, leading to an economic collapse. .
Foreign pressure by organizations, or governments from out-side the state to influence them can come in many forms. Sending troops to quell external third-country, or rebellious groups within that country, is an intervention, and can be construed to be of military sanction. Economic sanctions, as discussed, are a war of attrition, but can cause insurmountable economic and collateral damage to the affected nation. It is comparatively milder in intent, but can become a huge irritant to economic development.
Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, Retrieved March 26, 2014, from http://www.wto.org/english/docs_e/legal_e/19- adp.pdf, p.145-155
Chen, Y and Demurger, S, (2002), Foreign Direct investment and Manufacturing Productivity in China, Retrieved March 26, 2014, from http://www.bm.ust.hk/~ced/Yu%20CHEN.pdf
Mataloni, R, (2007), Operations of US Multinational Companies in 2005, Retrieved March 26, 2014, from http://www.bea.gov/scb/pdf/2007/11%20November/1107_mnc.pdf
Tdctrade, (2005), Hong Kong Trade Development Corporation: Impact of definitive findings in textiles anti-dumping case, Retrieved March 26, 2014, from http://info.hktdc.com/alert/euada.htm
YNFX, 2006, http://www.yarnsandfibers.com/news/index_fullstory.php3?id=9507