Should China Motorize?
By Walter Hook
Over the last year, working with the Energy Foundation and the Rockefeller Brothers Fund, ITDP traveled to Shanghai, Guangzhou, Chengdu, Xian, Beijing, Xiamen and Wuhan. We gave presentations to government officials, the press, business people and ordinary citizens on the advantages of Non-Motorized Transport, Bus Rapid Transit and the dangers of becoming as auto-dependent as the U.S. We spoke to the China Bicycle Association, to the largest bicycle companies, to major bus manufacturers, to experts. We spoke plainly about our concerns that bicyclists are being pushed off the road or onto sidewalks, or banned all together; about the doubling of road accident fatalities in the past five years; about worsening traffic congestion and deteriorating quality of life in China’s cities. The press covered our comments sympathetically. And people raised good questions.
First of all, it’s a strange message to be sending, as Americans. The U.S., with 5% of the world’s population, consumes 26% of global oil production, and has been consuming oil on a massive scale since the 1920s. Some 90% of our commuting trips are by private car. If the average person in China used as much oil as the average American, China would consume virtually all of current global oil production. Many Chinese officials assume we don’t want them driving cars because if they do, it will drive up global energy prices. While intelligent people disagree as to whether the world’s oil supplies will begin to run out in ten or in thirty years, one thing is clear: If China motorizes, it will be sooner rather than later. As for global warming, China agreed to sign the Kyoto Protocol, whereas the U.S. walked out of the negotiations.
While U.S.-dominated institutions like the World Bank and the IMF preach laissez-faire economics, free trade and getting the state out of the economy, China has ignored much of this advice, and the result has been the most impressive rate of economic growth anywhere in the world: over 10% per year, sustained for more than two decades. Back in 1994, China’s government decided to make auto production one of its four pillar industries, believing it was critical to economic growth. Today, China is producing about 800,000 cars a year; auto manufacturing is a nearly $8 billion industry, and it accounts for some 20% of the gross regional product in Shanghai and other cities with motor-vehicle manufacturing. Alone among the Asian tigers, China barely felt the Asian economic meltdown of 1997.
There is no question that if China succeeds in developing a powerful automobile export industry, the economic dividends will be large. When China joined the WTO, it was clearly eyeing the motor-vehicle export market. As part of the agreement, China agreed to reduce its tariff protection for automobiles (currently as high as 80% on some vehicles) by at least 10% per year until 2006, when all tariffs must be reduced to 25%. Do you think the smart money believes China will be flooded with U.S. cars in five years when these tariffs come down, or will the U.S. be flooded with Chinese cars?
Unlike the relatively open U.S. market, China has numerous forms of non-tariff barriers. In the U.S. and most of the world, the automobile industry is dominated by the private sector. Not so in China. Virtually all motor-vehicle production is now in joint ventures between foreign and state-owned companies. The Chinese auto lobby doesn’t influence the government; it is the government. Volkswagen’s joint venture (JV) with the Shanghai Automotive Group and with north-eastern China’s First Auto Works controls 45% of the total market. General Motors’ JV with Shanghai Automotive Group, Daihatsu’s JV with Tianjin, Suzuki’s JV with Changan, Citroën’s JV with Wuhan, and Honda’s JV with Guangdong Automotive Group, all state companies, account for 86% of the total market.
China’s state-owned companies control the domestic distribution networks. Most major motor-vehicle industry experts, wanting a piece of China’s domestic motor-vehicle market, have thus gone into JVs with state companies. Even with very low tariffs, it will be hard to sell cars inside China with-out a state partner. The government can also prop up state-owned companies with low interest loans from state banks, government procurement contracts (state-owned companies are also some of the largest consumers of motor vehicles in China), capital investment, supporting infrastructure investment, direct subsidies and other measures. Industry executives are split about whether China will become a major auto exporter. In June 2002, China exported its first shipment of automobiles to the U.S. Though they were re-exported to Mexico, it was seen as an important political gesture inside China.
Honda just announced that it would build an automobile factory in Guangdong that would focus entirely on export. With extremely low cost credit (less than 3% a year) available from state banks, access to capital is not a problem. While some industry experts believe that China is years away from becoming a significant automobile exporter, with this kind of state support, it can afford to wait.
As long as wealthy countries like the U.S. do nothing to curb our own completely unsustainable consumption of motor vehicles and oil, why shouldn’ t China’s economy profit from it? Japan grabbed a large share of the U.S. auto-mobile market, profiting richly. Over the next ten years, manufacturing in China might well capture the rest. Exporting cars is the perfect solution. You make all the profits, plus you get rid of the cars. Some other country has to deal with the oil dependence, the air pollution, the traffic congestion, the mile-high stack of used car tires that might catch fire and poison every-one for miles around.
But will China’s economy grow faster if it increases its domestic consumption of automobiles? Does China really need to compromise the livability of its cities to ensure economic growth, or is China preparing its cities for the economy of yesterday?
Most economists agree that the more a country saves and invests, the faster it grows. The rapid growth of the Asian economies was clearly related to their higher savings and investment rates. The fastest-growing Asian economies – Japan, Hong Kong, Singapore, Korea and China – all consumed far fewer automobiles than other countries at similar income levels. The more money a country “consumes” on automobiles, the less money it has left over to save or invest, by definition.
The Asian economic miracle was the result of conscious efforts to increase domestic savings and decrease domestic consumption of things like automobiles. In the period of Japan’s economic miracle, from 1945 until 1990, it was a bit like China today. Japan had very low levels of automobile ownership and use compared to its per capita GNP.
High consumption taxes, fuel taxes and extremely high parking charges and land costs made automobile use very expensive, and government investment went more into public transit and rail than into roads.
At the same time, however, Japan was developing an export-oriented automobile industry. In the 1960s, some 30% of the capital going to the Japanese motor-vehicle industry was coming from heavily subsidized loans from the Japanese Development Bank. Japanese motor-vehicle manufacturing was protected by a 40% tariff barrier, and soon Japanese companies had driven out all but 1% of foreign car sales in the country. By 1978, Japanese car manufacturers were so competitive that tariffs were reduced to zero. That same year, more than half of the cars manufactured in Japan were exported, and 40% of these went to the U.S.
Japan’s combined efforts in discouraging car ownership and use at home and encouraging exports paid rich economic dividends for more than three decades. In 1995, Japan consumed 27% fewer cars per capita than the U.S. Japanese workers took the bus to automobile plants selling vehicles to the U.S. By not trapping its working class in a costly dependence on private car ownership, Japan was able to keep labor costs down. And because Japan spent only 10% of its GNP meeting its transport needs, compared to closer to 20% in the U.S., its products were more competitive.
Japan also had a huge trade surplus, whereas 45% of the mushrooming U.S. trade deficit was directly related to oil and motor-vehicle imports. This had everything to do with Japan’s phenomenal economic growth from 1945 into the 1990s. After 1990, however, another fundamental change took place in the global economy.
Manufacturing as a share of world economic output began to decline dramatically, and so-called “producer services” and “information technologies” became much more important. The loss of so much motor-vehicle manufacturing to Japan should have destroyed the U.S. economy, but in fact the U.S. rebounded in the 1990s as Japan stagnated. As Japan’s preeminence in manufacturing was increasingly challenged by China, Taiwan and other emerging economies, the U.S. remade itself into an economy based on information-intensive, rather than capital-intensive, industries.
While the motor-vehicle industry has proven perhaps the most resilient of the heavy manufacturing sectors, it is still a heavy industry. As heavy industry has become more and more capital-intensive, it has employed fewer and fewer people. Auto and oil companies remain some of the most powerful multinationals in the world, but they have now been joined by more and more companies with names like Microsoft, Cisco Systems, Dell Computers and IBM, not to mention the ever-growing tourism and entertainment industries.
Manufacturing used to account for 30% to 40% of the U.S. GNP. Today it accounts for closer to 10%. Tourism now accounts for 11% of the world’s GNP, and it may be only a matter of years before it passes manufacturing in importance.
A big question mark is what will happen to oil prices. The U.S. economy would be heavily exposed to a sudden sharp increase in oil prices. If the skeptics are right or there is a political meltdown in the Middle East and oil prices double or more by 2020, the U.S. will pay dearly. Will China benefit from having trapped itself in a costly dependence on private car use? China is already a net importer of oil, and is projected to become a major importer in coming years.
Chinese cities are also fifty times more dense than U.S. cities. This means that road congestion is fifty times worse at the same level of motor-vehicle use. Cities like Guangzhou have expanded their road network by 9% a year, an astonishing pace. China’s weak property rights and strong state make it much easier than in other countries to acquire land for the right of way. Big box chain stores like Wal-Mart and Carrefour have been quick to take advantage of the new highway infrastructure, grabbing up in no time a large share of China’s retail market, at the expense of Chinese-owned shops in town centers.
Meanwhile, all these new roads have been paid for by fantastically low interest loans from state banks. Some experts believe these loans are in default. Ultimately, it will likely be the Chinese taxpayer who has pro-vided the subsidies that have given Wal-Mart and Carrefour their competitive advantage.
Building these new roads has also led to the destruction of some neighborhoods that are thousands of years old, destroying entire communities. The air has become less breathable. Bikes have been banned from major city streets, or pushed onto sidewalks. While the shopping is better, China’s cities just aren’t as nice as they used to be, and this is already cutting into tourism dollars.
Meanwhile, China’s bicycle industry, which probably employs more people than the automobile industry, is suffering.The bicycle industry currently earns more foreign exchange, probably around $2 billion a year. Shanghai Phoenix has seen its market drop by 50% this year alone. The China Bicycle Corporation, once an industry leader, is in Chapter 11 and has seen a similar collapse. This would produce a more visible economic impact if China’s bicycle industry weren’t also taking over the rest of the world.
It’s hard to argue with China’s past two decades of economic growth. But this phenomenal growth happened in part because bicycling, walking and taking public transit have been a part of China’s incredibly cheap standard of living, which has kept down its labor costs. Perhaps China will become a global leader in auto manufacturing. But perhaps current policies are also killing the goose that laid the golden egg.
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