Under Eastern Eyes

May 07, 2019

The Sunday Business Post, 6 May 2019, Cars, I was surprised to read recently, are the EU's number one export to China.  Surprised, that is until I found myself in Beijing on a business trip some days ago.  There may indeed be 9 million bicycles in Beijing (if Katie Melua was right) but to this casual observer there are nearly as many Volkswagens, Skodas and Mercedes-Benz.

While much of the focus in the Irish media in recent times has been on tensions between the EU and the US on tariffs and trade, and to a lesser extent on trade disputes between the US and China, it would be wrong to disregard the importance of the Chinese market to European interests.  The EU imports considerably more from China than from the US.  Conversely China buys substantially less from the EU than the US does.  The scale of the imports and exports is mind blowing, and their value is counted in the hundreds of billions of Euro.  It’s strange therefore that last month's trade summit between the EU and China passed off here with hardly any fanfare.

By contrast the importance of international trade in China itself is quite literally well flagged.  Driving in to the city centre from Beijing airport, the lampposts are festooned with slogans.  Our lampposts are decorated with posters for the local and European elections; the Chinese lamppost flags promote the trade initiative known as Belt and Road. 

Belt and Road is a confusing name for a simple idea.  Belt involves the construction of better infrastructure – rail links and roads primarily between China and its main markets.  Road doesn't refer to roads, but rather to sea routes, and involves the development of ports and ancillary infrastructure.  China lends money and construction expertise and manpower to countries to fund capital investment projects to develop their land and sea routes.  For foreign trade to take place, commodities have to be transported, and merchandise has to be shipped.  The expansion of trading links cannot happen without more efficient transport links and that requires new infrastructure.

If their own cities are anything to go by, the Chinese are master hands at infrastructure development.  The metro system is exemplary in Beijing; the docks infrastructure in Hong Kong stretches as far as the eye can see, and that city is also building a third runway at its international airport to boost its existing capacity to deal with airfreight.  While it is not clear that all of this infrastructure activity is well directed, there is no question that the Chinese capacity to carry it out is there. 

The April Sino-EU summit outcomes officially signalled that there would be synergies between the EU’s own infrastructure programme and the Chinese Belt and Road initiative.  Some EU member countries are already going further.  From speaking to the Hong Kong authorities, it seems there is a particular interest in establishing direct links with countries on the eastern fringes of the European Union; the likes of Hungary and Poland. 

While this Belt and Road initiative is relatively new – it was unveiled by Chinese President Xi in 2013 – it has acquired greater prominence and significance due to the increased trading tensions between the US and China since President Trump took office.  Colleagues on that side of the world tell me that there is nothing in the Chinese media to suggest that relations between the two great nations are anything other than sunny, but local business sentiment may be quite different. 

A recent study by accounting firm EY on attitudes within China's industry found that over 50% of businesses felt there was already either a significant or moderate impact of US trade actions on their business.  Perhaps more significantly, approximately the same proportion felt that the challenging trade actions will continue into the medium and long term.  This is prompting some businesses to restructure their Chinese operations. 

Tax is of course a critical factor in any such restructuring programmes.  The Chinese tax code is relatively short and straightforward, but dealing with it in practice can be a bit trickier than its brevity might suggest.  There are multiple regions in China, along with other local authorities each with different degrees of taxing rights, and tax rulings change on a regular basis. 

In addition, while there is little or no difficulty bringing money into the country, a tight system of exchange controls exist which necessitate pre-clearance for capital and some revenue outflows.  Just like knowledge of customs duties, managing exchange control has been a largely forgotten skill for many traders in this part of the world.  As protectionism continues to supplant globalisation, Irish businesses may well need to develop that expertise again.

An ultimately successful Belt and Road programme would reduce China's dependence on US markets and therefore the risk of US tariff threats.  The programme has its critics, with some pointing to the increasing debt burden owed to China by developing countries in particular.  However, no more than as with Trump trade and tax policies, or Brexit policies, business will have to adapt and adjust to this further new dimension to the trading environment.  Future trading opportunities between the EU and China won’t be just about cars.

Brian Keegan is Director of Public Policy and Taxation at Chartered Accountants Ireland