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China: Handle with care

Published on May 13, 2011 3:01AM

Last changed on June 10, 2011 7:39AM


During the past four decades, the People's Republic of China has evolved from an isolated country struggling to maintain its communist ideals into an economic powerhouse struggling to maintain its communist ideals.

What began with "pingpong diplomacy" during the Nixon presidency in the 1970s has transformed China into one of the fastest-growing economies in the world, in large part because of the partnership it has forged with the U.S.

China's boon, and its burden, is its population -- 1.34 billion and counting. To maintain control of its people, China has resorted to ruthless tactics that include prison, torture and executions. The most recent Nobel Peace Prize winner, Liu Xiaobo, is currently in a Chinese prison for the "crime" of advocating democracy. Just last week, the Chinese ambassador to Norway, where the Nobel prize is awarded, had the gall to demand that Norway apologize for honoring Liu. Norway politely refused.

China is beset by economic and political schizophrenia, a communist regime that depends on capitalism to maintain its power. The hybrid economy that Chinese leaders control creates a puzzling array of advantages and disadvantages for U.S. businesses there.

China's currency, the yuan, was for nearly two years pegged to the U.S. dollar and undervalued by as much as 40 percent, according to some experts in a Reuters report. This has made Chinese products much less expensive in foreign markets. A wide variety of products such as shoes, steel pipe, bedroom furniture, chicken and apple juice have been the subjects of trade disputes with the U.S.

China's tilting of the trade table has created a huge imbalance between the U.S. and China. In 2010, the U.S. trade deficit with China was $271.1 billion, up 20 percent from the previous year, according to a Reuters analysis.

Other issues swirling around U.S.-China trade include the continued piracy of U.S. intellectual property. Nearly 80 percent of the software sold in China is pirated, according to the Business Software Alliance. Likewise, Chinese manufacturers freely counterfeit U.S. consumer products -- from sneakers to handbags -- costing U.S. companies an estimated $3.5 billion a year, according to Reuters.

From its actions, China's leaders are clearly watching out for No. 1. Anyone, or anything, that gets in the way had better watch out.

Into this picture enters U.S. agriculture. As capitalists, U.S. farmers have long sought out customers around the world. They sell wheat to Asia, corn to Africa, cherries to Europe -- nearly every commodity and food product is exported. With the best agricultural practices, high productivity and peerless quality, the food and fiber they produce are welcomed in most nations.

China is increasingly seen as a value-added stop for U.S. raw materials such as cotton and hides. Last year, the U.S. exported $2.4 billion worth of hides and skins to China and imported $15.7 billion in shoes from China. Similarly, the U.S. exported $2 billion in cotton to China and imported $28.7 billion in apparel from China.

Another factor is the cost of transportation. Because of the trade imbalance between the two countries, agricultural products and crops can be transported relatively cheaply to China at low back-haul rates. Shippers cut rates to fill their containers after delivering China-made goods to U.S. ports. In fact, it costs 25 to 50 percent less to ship fresh produce from California to Hong Kong as it does to ship it to New York.

But there is a caveat to this symbiosis. China's centrally directed economy can cause the current profitable climate to change quickly. A quick manipulation of the exchange rate, interest rates, phytosanitary standards, tariffs or any number of other factors can offset any advantage U.S. agriculture might enjoy.

That doesn't mean U.S. agricultural exporters should steer clear of China. Far from it.

But it does mean that when it comes to doing business with China, two words come to mind: Be careful.

Diversification of markets is always a good strategy. That's especially true when dealing with a wild card such as China.


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