Low Prices Under Fire

To straighten out the export sector, the government is targeting low-price exporters

By LAN XINZHEN

SURPLUS SOURCE: Textile exportation is a major source of China’s trade surplus

In a trade transaction earlier this year, Xu Qinghua made essentially nothing. In that trade, as his competitors quoted zero-profit prices to buyers, Xu had no choice but to sell a batch of textile products to his foreign partners at cost.

Xu said it was not the first time that he has been hit by unfair low-price competition. However, he had to follow suit in order to maintain the market share of his company.

Xu, a boss of a textile import and export company in east China’s Zhejiang Province, has been in the business for about 10 years.

When he heard the news that the Ministry of Commerce is going to crack down on unfair low-price competition and that a new regulation will be issued, he got very excited. He has been keeping an eye on the draft regulation since May this year, when the Ministry of Commerce began to solicit the opinions of the public.

To straighten out the order of export business, the Chinese Government appears to be seriously seeking resolutions domestically, including targeting low-price exporters. That has hard consequences for these business people. While some say only the fittest will survive, others simply say the new measures are blatantly unfair. Still others like Xu who have been hurt by local rivals are pleased with the news.

“I believe the new regulation will definitely curb the vicious low-price exportation,” Xu said.

Xu explained that with the continuous growth in the quantity of Chinese export commodities in recent years, the competition is becoming increasingly fierce. It is a common practice for traders to offer viciously low prices to foreign purchasers in an effort to grab a market share and squeeze out their rivals.

The price war is on not only in the textile industry.

Exporters of many other commodities are also subject to unfair low-price competition. Vehicle spare parts and mechanical and electrical products are just a few categories.

The Chinese Ministry of Commerce considers unfair low-price exports to be illegal, noting that the new regulation will clearly define unfair low-price exports and set out corresponding punishments. All the export commodities that are produced, manufactured, processed or assembled in China, or whose place origin is China would be subject to investigation.

Once a company is accused of an unfair low-price export practice, the company and its legal person each will be fined each up to 30,000 yuan, and the investigated product will be suspended from exportation for 12 months.

Many are victims

LOW-PRICE PRODUCT: Apart from textiles, mechanical and electrical products also are part of the low-price export industry, which is coming under fire for unfair competition

“With regard to such unfair low-price exports, many tend to concern themselves with the interests of the enterprises in the target countries. However, few of us have actually attended to the harmed domestic companies,” said Li Haiming, who had an apparel import and export business in Beijing.

Li’s company, having no production workshops but possessing the right to do overseas trade, mainly exported goods for those who didn’t have the right to export. In early 2005, one of Li’s long-time overseas partners sent Li a contract provided by a clothes manufacturing company in Guangzhou, capital of south China’s Guangdong Province. To his great surprise, the price quoted in the contract was very low, with that of a woolen suit being only $13, which, Li found, would not make ends meet for him. Soon he had to retreat from the export business. Li’s withdrawal brought huge losses to his domestic partners, with one of them shutting down his business.

“The price war first disturbs the order of the export sector,” stated Yang Danhui, a research fellow with the Chinese Academy of Social Sciences.

Yang pointed out that from 2002 to 2005, China experienced a “wool war” and a “silk war,” both of which stemmed from unfair low-price competition. In 2004, Yang said, the export volume of rare-earth products was eight times more than that of 1990, with the average price decreasing by 46 percent. China’s annual output of fresh water pearls accounts for 95 percent of the world total, but the income is no more than 10 percent.

Yang noted that at the beginning, small and medium-sized enterprises and private companies with low technology level were major players in low-price exports. Lacking sufficient quality-control systems and effective measures to expand into the overseas market, they heavily depended on their low-price edge. Some of them, having no sense of social responsibility, did not strictly follow the rules and regulations on labor, environmental protection, social security and safe production, which won them a competitive edge in price. In addition, many of them were eager to expand into the international market not long after beginning to do business. In order to grasp a piece of market share, they exported even at a price lower than cost.

Foreign-invested companies are also major participants in unfair low-price exports. They not only enjoy favorable policies provided by the Chinese Government, but also low cost of labor, raw materials and land in the country, which have greatly reduced their export cost and enabled them to compete in the international market with a much lower price. Moreover, some foreign business people, taking advantage of the low resource exploitation cost and the loopholes in export restrictions, exploited and processed products derived from resources at a low price, which gives rise to and exacerbates vicious low-price competition in the exportation of such products.

The vicious low-price export competition eventually produced two consequences: First, fast-growing export volume is buttressed only by meager profit for a vast number of enterprises, which are also confronted with dumping accusations in the international market. Second, the fierce price war exerts a negative influence on the development of export companies, which attend more to cost and profit while ignoring the importance of technological innovation.

“The government has the responsibility and obligation to safeguard the fair foreign trade order,” said Rong Min, an official with the Department of Treaty and Law of the Ministry of Commerce.

Pros and cons

The investigation and punishment of low-price exports to a great extent aims to reduce anti-dumping frictions with target countries. Low-price exports have already harmed the interests of domestic enterprises at large. The first overseas anti-dumping accusation against Chinese products occurred in 1979. Last year, Chinese products were accused of dumping 663 times, ranking first in this category worldwide.

Mei Xinyu, a research fellow with the Ministry of Commerce, acknowledged, “The purpose of enacting this regulation is to reduce the risks of being accused of dumping in the overseas market. As a matter of fact, exporting countries don’t have the obligation to do this. If we were not doing this to reduce the accusations of dumping, there would be no need to enact such a policy.”

Textile exports are a major source of China’s trade surplus, but are also a focus of low-price competition. After the new regulation takes effect, the textile industry will be hit the hardest, resulting in an increase in textile export prices.

Statistics from the China Chamber of Commerce for Import and Export show that in 2005, the total export value of China’s apparel and clothing accessories reached $73.89 billion, a rise of 19.9 percent from the same period of the previous year. However, in Guangdong Province, the largest exporter of textiles, the average quoted price of a piece of clothing was only $1.19. Xu Qinghua said only large companies with technological advantages can maintain a profit if their products are sold at such a low price. However, as for small companies with backward technologies, they are just building castles in the air.

Xu Qinghua estimated that after the new regulation takes effect, the export price of textiles may increase by 8 to 10 percent, which should be a rational price at present.

“To maintain the textile export price at a reasonable level may help reduce overseas trade frictions and enable enterprises to spare more time to carry out technological innovation and develop new products,” said Xu.

Officials from the Ministry of Commerce believe that to investigate and punish those who conduct unfair low-price exports will also enhance the self-discipline of companies. Moreover, the new regulation will help prevent some companies from reducing costs through illegally using cheap labor, spoiling the environment and depleting natural resources. Companies that shoulder considerable social responsibilities will benefit.

But some enterprises are against the new regulation. Ma Weitao, who is in the mechanical and electrical export business, argued that the new regulation actually violates the rule of free trade.

“The right to price products should be with the enterprise, and the government shouldn’t intervene,” said Ma.

Ma noted that every company has its own operational strategy, which is created for profit. The market judges whether the price should be higher or lower.

“If a company goes bankrupt due to a low price, it only proves the company is not competent,” said Ma. “The government shouldn’t punish competent companies that can offer a relatively low price to consumers.”

“Cost” an elusive word

“The regulation may be well-intentioned, but it is impractical,” noted Yuan Gangming, an economics professor at Tsinghua University.

Yuan contended that it is difficult to identify which price is “unfairly low.” According to the new regulation, there are two important indexes: the price of investigated products and the average cost. However, the regulation does not specify which average cost, either the company’s average cost or the average cost of the whole industry, should be referred to as the mentioned “average cost.” As Yuan noted, the company’s “average cost” can easily be falsified, while the estimation of that of the whole industry will probably lead to an arbitrary decision-making.

“The fundamental reason for the low price is that the production cost of Chinese enterprises is actually very cheap,” Yuan said. “But this kind of ‘cheap’ is not driven by market competition.”

Yuan said that many costs are not counted in the price of a product like resources, energy and land, which are used by enterprises at almost miraculously low prices. Meanwhile, various favorable policies enjoyed by export companies also help reduce the cost, eventually resulting in low prices.

Among all favorable policies that encourage exportation, the export tax rebate is most significant.

In September, China readjusted the export tax rebate policy and reduced the rebate for certain export commodities. It is believed that the readjustment also will help curb low-price exports.

“Some companies don’t even care about cost when they price their products, because they just want to earn the export tax rebate,” added Yuan.