Chinese Free Trade Rules
Research for Online Investors

by John Dalt

12/15/10

China and free trade are like water and oil.  They don’t mix.  The Chinese talk a good talk, but are not capable of playing by the rules.  We have written often of the necessity to hold their “feet to the fire.”

Not often do I write it, but hurray for Oh! Bama.  His administration is calling China out, kind of.  The New York Times had a great detailed story on Chinese cheating yesterday.

First a preface, remember when the U.S. invaded Iraq.  President Bush announced the U.S. would spend millions of dollars to rebuild infrastructure.  Running water and electricity projects were planned to improve living conditions for the country.  The problem came when he announced that only countries that assisted the U.S. would be eligible to bid on these projects.

The French couldn’t believe they would be ineligible to dip into the U.S. honey pot of construction spending.  It seemed reasonable to many, after all, the U.S. paid for the military action and was paying for the projects.  Why shouldn’t the money go to U.S. companies or at least companies from coalition forces countries?

The New York Times tells us how the Chinese cheat at Free trade.  The government welcomes foreign companies to open plants in China and encourages them to bid on local projects.  To bid on a local project, the winning bidder must meet “local content” requirements.  If there are not local sub-contractors the foreign company can buy from, they cannot meet the “local content” requirements.

A foreign company may decide to share technology and help a Chinese sub-contractor through training so they can buy from them.  The Chinese government offers the local companies land and low interest loans to build factories.  After the local company can build the parts to supply the foreign company, they also supply them to Chinese companies that compete with the foreign company.

The New York Times details the story of Gamesa, a Spanish company that builds million dollar wind turbines.  Five years ago, Gamesa controlled 35% of the Chinese wind turbine market.  Now they barely have 3%, due to “local content” requirements.

The Chinese companies that have “learned” the business from Gamesa now control almost half of the world’s wind turbine business, presently valued at $45 billion dollars.  Gamesa executives claim to have trained over 500 Chinese companies in the last five years.

On July 4, 2005 China declared that at least 70% of the value in any wind farm equipment had to be domestically produced, not imported.  That was Notice 1204 from the National Development and Reform Commission, it said “Wind farms not meeting the requirement of equipment localization rate shall not be allowed to be built,”

According to trade lawyers, ANY local content requirement is a violation of the World Trade Organization (WTO) trade rules.  The Chinese government lets foreign companies decide to play or go home.  If they complain to their home country, or through the WTO, who would buy from them?

China agreed to abide with trade rules in 2001 when they joined the WTO.  The country’s largest domestic wind turbine maker, Sinovel, recently received $13 billion in low interest loans to open sales offices in the U.S.  Sinovel’s Chairman, Han Junliang said his goal was to sell as many turbines overseas as in China.

Thank you sir, can I have another?

In 2006, GM filed an international property rights case against the Chinese automaker Chery over this car, the Chery QQ

GM felt like it looked like the Chevy Spark

Not only did it look like it, the doors were interchangeable.  Not only were they interchangeable, they had the same part numbers.

So again, hurray for Oh! Bama for launching an inquiry into China’s trade policies.  Now, if they don’t sweep the results under the rug, maybe some of the cheap do-dads with lead based paint will disappear from U.S. shelves.

To the mailbag:

חבל שהכל באנגלית (Too bad everything is in English)—new subscriber T.F.

John’s reply:  We send all of our messages in UTF-8 format.  I see your email service provider is gmail.  You should have a setting to automatically translate our messages into your native language upon receipt.

Do you think we were on the same bus?---paid up subscriber J.P.

John’s reply:  I am the guy next to the chick with the drink.

Oh good.  Now I recognize you…J.P.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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