The danger of a BRICS-led world

SCMP April 8 2012

Good news continues to come out of Beijing on some aspects of economic liberalisation. Promises of lower tariffs and the easing of outward capital movement announced recently are especially welcome. However, there are other developments, in China and overseas, that should be worrying for Hong Kong, a city that has scant purpose other than as a hub of free trade.

The overseas worry is summed up by the acronym BRICS, which has graduated from being a cleverly invented device for analysis to a real grouping of countries that holds summit meetings, the last recently in Delhi. It at least purports to believe that it has a special role as leader of nations other than the Western powers and Japan. Understandably, developing nations long tired of being lectured by the West may welcome the BRICS concept as more likely to reflect their interests.

However, under the surface lurks a very real danger. Except for one, the BRICS group consists of very large countries - both in population and land area. The exception is South Africa, which is only part of the group out of a need to include one African country to appease the rest of Africa. In reality, Indonesia and Pakistan have greater claims to be part of it.

The fundamental problem with very large countries is that, almost by definition, their interests are different from those of small and medium-sized economies. They have less need of trade because geography gives them a wide selection of climate zones and variety of mineral resources. Big populations give them a market size that makes them far less dependent on trade for survival.

Over the past two decades, the economies of all these big countries have been opened to foreign trade to an extent seldom seen before. China, in particular, has shown the benefits of opening up. Yet Brazil, India and Russia still show relatively low levels of foreign trade relative to their gross domestic product. Indeed, a closer examination shows that for Brazil and Russia, most of their trade increases have been a reflection of high prices for export commodities paying for manufactured imports. The same partly applies to India.

So, the issue for the BRICS is whether they really do want furtherance of the free-trade philosophy promoted by the US that has underpinned the global economy for the past 50 years.

China may now seem to be carrying the free-trade torch as well. It has been in the forefront of free trade agreements in East Asia, notably with Asean. But two decades of trade-led Chinese growth may now be coming to an end as it bumps up against stagnation in Western markets and rising barriers in some important developing countries that want to grow their own industries.

Brazil has imposed new tariffs, ostensibly to offset the impact of an over-strong currency but in reality aimed at protecting certain local industries against mostly Chinese competition. India, too, has been a leader in imposing anti-dumping duties on Chinese goods and trying to get away from a situation where it sells raw materials but buys manufactured goods. Russia is a newcomer to the World Trade Organisation and its overdependence on energy exports is a weak foundation for commitment to open markets.

Even China has seen a tendency for the state to play a larger role again as the leading state-owned enterprises' dominance of certain sectors demonstrates a commitment to perceived national interests rather than corporate interests. In India and Russia, policies towards foreign investment are highly erratic and local politics provide many hurdles for free trade. In short, the BRICS tendency has always been towards autarky.

That brings us to the issue of Hong Kong and its Closer Economic Partnership Arrangement (Cepa) with the mainland, a deal that is almost universally regarded as a 'good thing'. This attitude shows limited understanding of Hong Kong's global role. It should never be forgotten that, from the beginning, Hong Kong was almost unique among British colonial possessions. Traders from all countries had equal access and it never enjoyed any preferences from being British. It existed, according to an early governor, to enhance free trade in general, not British imperial interests in particular.

Thus, there is a danger that Cepa comes to be seen by others as a system of Chinese preference, which undercuts Hong Kong's claim that it neither asks for nor receives preferences. So long as the mainland is seen to be liberalising and hence Hong Kong's preferential treatment to be small and transient, there should be no serious problem. The claims made for Cepa by the government are exaggerated. If they were so big, other trade partners would be protesting loudly.

But if, in a BRICS-led world, China's own direction shifts, Hong Kong will need to guard its own reputation and role as a city that gives equal trading rights to all-comers. That also means guarding against becoming involved in regional trade pacts, such as that between the Association of Southeast Asian Nations and China.

As for the BRICS group, its members are far too divided in their interests to do any good. Its claim to be setting up a development bank alternative to the World Bank is derisory as only China can spare, long term, the financial resources to back it. But the BRICS members do share inclinations to self-reliance, which could do a lot of harm to global trade and, hence, Hong Kong.

 

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