The European tour of Wen Jiabao is taking place while the conflict between the US and China over the yuan/dollar exchange rate is getting worse. At the same time, a similar if less noisy clash exists between China and the Eurozone countries. Last but not least, tensions have also arisen in the Sino-Japanese relations following the Bank of China’s decision last month to purchase Japanese bonds, thereby contributing to the rise of the value of the yen. Tokyo is fighting the nominal revaluation of the yen; thus the Bank of China’s move significantly undermines Tokyo’s objectives.
The widening of the conflict over exchange rates means that major capitalist countries are now trying to “solve” the crisis by grabbing slices of each other’s markets through exports. For the US, though, the official issue is how to reduce the dependence upon the external deficit given that the crisis has highlighted the damage done by the long-standing outsourcing processes undertaken by US multinationals, including large US retailers. Hence, it is Europe and Japan that are the heart of new mercantilism, that is, the strategy aimed at obtaining profits and capitalist growth by means of net exports to the rest of the world.
As for China, its export dynamics cannot be compared to the European (especially German) and Japanese attempts to get around the domestic crisis by exporting elsewhere. Over 55% of Beijing’s exports are tied to multinational companies that have invested in China and/or subcontracted out part of their activities there. These companies are extremely happy to use the low costs of production over the entire output chain in order to then make profits by selling back to the home countries.
The speedy integration of China in the institutions of global capitalism (such as the IMF, the World Bank, and the WTO) has been based on a pact between the Communist Party of China and the world’s monopolistic capitalism. On this basis the CPC is building a national capitalist class integrated with the State. The structural strengthening of this class is founded on a high share of investment at the expense of the share of wages that has kept falling relatively to national income. The pact between the CPC and global capital is therefore grounded on a persistent reserve army of labor in China. The capitalist growth of China will thus continue to rest on the twin factors of high investment and high export levels.
In this context, the current crisis underscores the gap between the national states of core countries and the large segments of global capital which absolutely do not want to see a change in China’s role. For a good part of US capital, China is still the source of profits via outsourcing and subcontracting.
For Europe the picture is more mixed. Large French as well as British retailers have been massively importing from China; and this is true also for Germany and Scandinavia. At the same time, the whole of the European mechanical, electronic, and capital goods industry, including the Italian one, has a net surplus in its trade with China. However, the industrial sectors that are most profiting from the China trade are those of Germany and of the Scandinavian countries. The German and Scandinavian capitalists and governments are not bothered by their overall deficits with China. This is because the sectors that are doing well in relation to China are also the ones that are maximizing overall German and Scandinavian net exports and sustaining their international positions. France and Italy, in contrast, are on the back foot since their advanced sectors are not strong enough, relative to German monopoly capital, to sustain French and Italian exports. Indeed the overall current account balance of these two countries has been regularly deteriorating in the last six years. Their deficits with China, bound to grow bigger, are therefore already biting. In relation to China the fault lines within the European landscape emerge starkly. Except for budget cuts, there is no common European economic policy. All that is left is the now open, now muted, row over exchange rates.
Beijing too acts upon the intra-European contradictions. The handling of the public debt by the European Central Bank and by Germany gives China an opportunity to diversify away from US treasury bills and other US bonds. This is the implication of China’s agreement with Greece about purchasing a new issuance of euro-denominated Greek bonds. In so doing China’s Central Bank also supports the appreciation of the euro against the US dollar and hence against the yuan as well.
Furthermore, Greece is also part of the Chinese project to create strong entry points for the merchandise aimed first at the Mediterranean and Eastern European countries. Chinese state-owned shipping and maritime companies have already acquired large chunks of the port of Naples. A similar Chinese investment is being made in Piraeus. These are all part of the strategy to greatly expand exports to the European Union.
Turkey, which has also been included in Wen’s tour, falls squarely within the abovementioned Chinese strategy. Ankara, which has a full free trade agreement with the European Union, has begun to import cars from Chinese auto companies. These imports, preceded by a vast advertising campaign, are competing against the brands of Fiat and Renault that also have production facilities in Turkey. Last January a large Chinese ministerial delegation signed a host of agreements with Ankara on issues ranging from trade to Chinese direct investment in Turkey, to make the country a platform to expand exports into the European Union. Turkey is likely to become a very important element in linking — in Japanese and Korean style — Chinese exports to Chinese direct investment.
Joseph Halevi is Senior Lecturer of Political Economy at the University of Sydney. A version of this article was published by Il Manifesto on 7 October 2010.