China's Free-Trade Credentials Under the Spotlight

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And in June, it said that if the revenue of the joint venture between Rio Tinto and BHP Billiton reaches "a certain amount," China's anti-monopoly law would apply. The law requires government approval before consolidation if the new venture's global revenue exceeds Rmb10 billion ($1.47 billion) and its revenue in China is more than Rmb2 billion. In the year ended June 30, BHP Billiton's revenue in China was $11.7 billion, while Rio Tinto reported a top-line income of $10.8 billion.

Meanwhile, Rio Tinto turned down a planned $19.5 billion investment by Aluminum Corp of China (Chinalco) on June 5, in favour of a proposal by BHP Billiton to pay Rio Tinto $5.8 billion to set up a joint venture to run the iron ore resources of both companies in Australia. Australian public opinion had been hostile to the deal.

However, it is important to distinguish between intervention by rule-bound regulators and public noise. For instance, 11 out of 12 Australian government bodies approved the Chinalco-Rio Tinto deal—and a positive verdict was expected from the final one, the Foreign Investment Review Board. Yet, political and media rhetoric took attention away from this. In the end, Rio Tinto's rejection of Chinalco's investment plan was not a protectionist move; instead, shareholders simply chose a different option.

Nevertheless, governments often face a dichotomy during times of economic hardship; on the one hand they need foreign investment, and on the other hand they want social peace. But countries tend to be less enamoured by free-trade ideology when jobs at home are at risk and China has been taking a lot of flak for what its trade competitors see as blatant protectionist measures.

China has stopped the renminbi's appreciation against the dollar this year, and introduced various measures to help exporters. Among other things, it has increased export-tax rebates seven times since last August, provided generous loans to finance trade, and even subsidised more government-paid travel to promote their wares at world trade shows.

Claims and counter-claims

Coincidently or not, China's announcement of a "Buy Chinese" policy on June 4 for its Rmb4 trillion ($585 billion) economic stimulus package was followed by complaints by its trade partners into other allegedly dubious trade practices. However, the ban on government agencies from buying imported goods is legitimate in the sense that China hasn't yet signed a global agreement preventing protectionism in government procurement.

Also, some analysts reckon that the sub-contracting structure of the Chinese manufacturing system means that the "Buy China" policy will have little effect.

But the U.S. and the European Union (EU) went on the offensive in a different direction, complaining that export quotas and tariffs on raw materials used in the chemical and metals industries favour domestic producers at the expense of themselves, and asked for the issue to be sorted out by the World Trade Organisation (WTO). Separately, Australia launched an investigation into "dumping" by Chinese aluminium producers at below market prices.

At the end of June, China not only rejected allegations of protectionism and illegal trade subsides, but it went on the counter-attack. It asked the WTO to examine U.S. restrictions on imports of Chinese poultry products (the U.S. and China banned imports of each other's poultry in 2004 after outbreaks of bird flu, but China subsequently lifted its ban), and launched its own anti-dumping investigation into methanol imported from Saudi Arabia, Malaysia, Indonesia and New ­Zealand.

Together with other emerging countries, China also complained at the beginning of July against U.S. plans for a carbon tax on imports from countries without their own emission caps. Yao Jian, a spokesman for China's ministry of commerce, said that "the proposal of some developed countries to slap a carbon tariff on some imported products violates the WTO's basic principles and is trade protectionism in the disguise of environmental protection."

It might seem strange to watch China present itself as a victim. But if the West's response to the Rio Tinto arrests is to block Chinese outbound investment, then this is likely to become an increasingly familiar posture.

Rupert Walker is a senior reporter.

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