Thursday, 5 November 2015

Turkey's Tariff War & Global Competition with China


Anti-Chinese tariffs and sentiments are increasing in Turkey as Ankara’s dependence on Chinese imports grows. Despite this, Turkish firms are taking on China in Africa and Central Asia.

Two weeks ago, Turkish President Tayyip Erdogan announced that Turkey would again consider an offer by Chinese defense contractor China Precision Machinery Import Export Corp (CPMIEC) for a $3.44 billion air and missile defense system.

Speaking on the matter, Erdogan stated that “China made an appropriate bid. We would certainly welcome a proposal that would ‘enrich’ the offer.” Several years ago, CPMIEC originally received the contract in a major coup which saw CPMIEC beat offers from EU and US companies to supply a NATO member with advanced weaponry. Despite this, the deal was, until recently, dead in the water due to opposition from other NATO members and disputes over technology transfers.

Turkey as China’s Western gateway

Turkey’s initial acceptance of and suggestion of a “second chance” for CPMIEC’s offer appears to indicate strong bilateral relations between Ankara and Beijing. Indeed, China’s first joint military exercise with a NATO member was at the invitation of Turkey to the 2010 Anatolian Eagle exercise.

China’s invitation was secured following Beijing’s condemnation of Israeli actions during the May 2010 flotilla incident during which nine Turkish citizens were killed. Israel pulled out of the 2010 exercise and Beijing was invited instead.

Favorable Sino-Turkish relations extend beyond defense matters, as China secured its first ever foreign high-speed rail contract in 2006, for a 533km Istanbul-Ankara line, which was completed last year. In 2012, both countries pledged to increase bilateral trade to $100 billion by 2020. The same year also saw China aid Turkey’s space ambitions, launching the SkyTurk-2 satellite from its launch facility in Gansu province.
2012 was also declared the ‘Year of Chinese Culture’ by Ankara, launching a year-long series of cultural events and performances. China reciprocated in 2013, launching the ‘Year of Turkish Culture’.

China is also seeking to gain support for its Silk Road ambitions, with Turkey being a vital linkage connecting Central Asia with Europe. To this end, there has been cooperation between both countries in creating regional collaboration, as Turkey and China are two of the largest investors in Central Asia.

Economic dynamics bring tense relationship into focus

Despite the cooperation cited above, Turkey and China remain competitors with a strained relationship. Specifically, whereas foreign affairs issues such as Turkish support of Uyghurs and Chinese support of the Assad regime in Syria put significant dents in bilateral relations, economic competition between Ankara an Beijing must be taken into account.

Despite pledges to increase bilateral trade, China is by far the dominant partner. China is Turkey’s second largest trading partner and is responsible for 10% of Turkish imports, totaling $24 billion. Conversely, Turkey exports less than $3 billion to China, the large majority of which are mineral exports, notably borate and chromium.

China exports a range of commercial and industrial goods to Turkey and has displaced domestic manufacturers in many sectors. Turkey’s flagship textile industry is facing stiff competition from cheap Chinese imports, with 80% of ready-made garments and toys, as well as 100% of leather goods, manufactured under Chinese control.

Steel imports are also undermining Turkish producers, with Chinese imports jumping by 284% during Q1 2015. Turkey also increased tariffs from 12% to 30-40% for boron-added rods – from 3% to 40%, and imported rebar and bars increased from 15% to 30-40%.

In May 2015, Turkey raised the tax rate of furniture imports from 13% to 50%, citing a flood of cheap Chinese products. Moreover, the Turkish Ministry of the Economy has begun anti-dumping investigations against China.

Turkish agricultural products are also threatened by China, for despite the fact that Turkish garlic production (80,000 tons) is enough to cover national demand, Turkey imports 28,830 tons, 92% of which comes from China. In response to pressures from farmers, Turkey instituted a $2 per kilo and $2000 per ton customs duty on Chinese garlic in 2014.

Perhaps the saddest statement on Turkey’s trade imbalance is the fact that “even traditional Turkish carpets are made in China. If we import even sickles used in agricultural production, we are over the line…we need to reverse this trend,” according to Economy Minister Nihat Zeybekci.

Turkish firms take on China in Africa and Central Asia

Contrary to Turkey’s domestic reliance on Chinese goods, Turkish firms are increasingly out competing Chinese firms on the international stage, especially in the infrastructure sector.

Cavit Dagdas, Turkey’s treasury undersecretary stated that “the African region has extensive infrastructure needs. Many Turkish contractors are working in the region. Chinese companies are also active in the region.” Turkish companies such as Yapi Merkezi are capitalizing on religious and cultural links in Africa, as well as their ability to offer an alternative to Chinese quotes to increase market share.

Yapi Merkezi chairman Emre Aykar describes the paradigm shift: “Only five years ago, Chinese companies got all the contracts…nowadays there is more of a level playing field, as the stream of [Chinese] subsidies has stopped.” Yapi Merkezi is proving this point, having won a $1.7 billion contract for a 500km rail line in Ethiopia, as well as another contract to extend Ethiopia’s rail links to ports in Djibouti.

Elsewhere, Turkish construction firm Summa has built the Conakry Congress Hall in Guinea, and the Diamniadio Congress Centre in Senegal. Moreover, Summa recently stole a $300 million contract from Beijing Construction Engineering Group (BCEG) for the Kigali Convention Centre, following delays and overruns by BCEG.

Turkish firms are utilizing their linguistic, cultural, and religious links to win contracts in Central Asia, a region China is seeking to bring into its orbit. Since the fall of the USSR, Turkish firms have garnered $57.2 billion in contracts in Central Asia, and currently some 2000 Turkish firms are operating in the area. In 2010, Sembol Construction built the $400 million Khan Shatyr Entertainment Centre in Astana.

In 2013, Turkmen president Gurbanguly Berdimuhamedow exclaimed that “I am extremely satisfied with the project that Polimeks is undertaking,” referring to Turkish firm Polimeks Construction’s $2.3 billion project to build Ashgabat’s international airport. Turkish companies are also building a $2 billion seaport and container terminal at Turkmenbashi.

Originally written for Global Risk Insights

One-child policy victim of China's anti-corruption drive



The gradual abandonment of the one-child policy allows China to tackle demographic, corruption, security, and economic challenges in one deft swoop; defusing discontent and saving face for Beijing.

Last week's announcement by Beijing that it will be phasing out its longstanding 'one-child policy' created headlines around the world. The one-child policy has been a fixture of China's domestic policy for decades, and became so (in)famous that it remains one of few things about Chinese politics that the general public can recall.

While commentators in the West are heralding the long overdue demise of a draconian and anachronistic policy, this is not how the issue is being perceived by Beijing. The phasing out of the one-child policy is not being billed by Beijing as an about face, but rather a reform, since the original goal of instigating a precipitous decline in population growth has been achieved. Moreover, an outright cancellation would imply that the central government made a mistake in the first place.

Instead the one-child policy has become the latest target of Xi Jinping's anti-corruption drive. Fortunately for Beijing, the policy also touches on economic and stability concerns, making its reform a multifaceted boon for Beijing.

Population growth and political graft

China's fertility rate has plummeted from more than 6.16 live births per woman in the mid-1960s to just 1.66 births per woman in 2012; far below the replacement rate of 2.1. This decline was brought about via the strict enforcement of the one-child policy; an undertaking that employs 500,000 officials and led to 336 million legally mandated abortions (not including millions of 'unofficial' ones) as well as 197 million sterilizations.

The policy created an entire shadow economy consisting of black market abortion clinics, forged birth certificates, and fake medical records. Then there are also the illegal sales of contraceptive and abortion pills, underground pregnancy tests, black market human egg rackets, and the infamous fetal gender tests. Add to this all the bribes to officials to look the other way, forged government records and extortion by local authorities, and you have one of the largest sources of corruption in the country.

The one-child policy is a state program with Chinese Communist Party (CCP) members often the loci of corruption. With Xi Jinping's anti-corruption drive, the program is naturally a prime target, as the president has made it clear that he will not spare party organs and institutions from corruption audits.

For decades local officials have rigidly enforced birth quotas, often seizing the property of those found contravening the law, as well as using 'social maintenance fees' to plug holes in municipal and provincial budgets.

Consequently, by tackling the one-child policy and reforming it into a two-child policy, the government is seeking to cut corruption off at the source; particularly when it comes to graft surrounding second children – one of the main causes fueling rampant corruption in the program.

One-child policy spawns demographic security concerns

As result of the one-child policy, it is estimated that there are some 13 million 'ghost citizens' that exist without official documentation due to the bribing of officials. The concept of any undocumented citizens, let alone millions is security risk that Beijing cannot tolerate, as seen with China's strict rural / urban residency permits.

Furthermore, while rural residents have been allowed a second child if the first was a girl, there has long been strict enforcement of the one-child policy in rural areas. Conversely, as China's urban population becomes richer, many (relatively) wealthy urbanites have increasingly been buying their way out of the program. This trend in turn aggravates the already tense rural-urban divide in China. This relationship is one of the major sources of domestic instability, and one which is always top of mind for Beijing.

Another major concern for Beijing is the gender imbalance caused by more than four decades of the one-child policy. The traditional preference for boys – as males look after their parents and receive their wives' dowries – while girls become members of their husband's household, has caused grossly distorted gender ratio.

With a deficit of some 40 million women due to gender based abortions, the government faces a demographic time bomb as millions of young Chinese men will be unable to find a spouse. Millions of sexually frustrated, lonely, young men is a recipe for unrest. If said men recognize that their plight is due to government policies and become politicized, Beijing faces an existential crisis. After-all the government can only do so much – such as boosting military and para-military recruitment – to re-direct all that errant testosterone to serve, rather than threaten Beijing.

Policy reform ticks all the boxes for Beijing

By reforming the one-child policy, the central government can address widespread discontent with the program by framing reform in anti-corruption and economic terms; perspectives that both strengthen the legitimacy of the CCP. Firstly by framing reform in an anti-corruption light, the government can ease restrictions while diverting discontent away from the central planning that created institutional corruption in the first place. Instead corrupt local and provincial officials will be culled to satisfy public discontent and demonstrate that any excesses were due to 'bad apples'.

Successive relaxation in policy will also not result in a return to pre-policy birth rates as the dampening effects of economic development will continue to ensure small families. This combined with the fact that one child families have become a social norm, will allow Beijing to remove the source of discontent without having to worry about demographic upticks necessitating back-tracking further down the road: a perfect face-saving plan for the CCP.

Furthermore, by relaxing the policy the government can demonstrate how it has prudently guided a changing China through its successive socio-economic phases. The post-Mao CCP has demonstrated to the populace that it is nothing if not pragmatic, willing to tailor policy to serve growth above all else.

The one-child policy was instituted to prevent too much surplus labour and the attendant unrest it produces. Now as China moves towards a consumption based economic model, it needs a stable growth rate to ensure adequate numbers of consumers to fuel its next growth model.

Consequently, reforming the one-child policy is in many ways a one-size fits all salve for a host of China's systemic challenges.

Originally written for Global Risk Insights

Singapore's Start-up Drive



As Singapore seek new growth sources, the micro-nation is positioning itself to become Asia's start-up hub. By promoting outside the box thinking in the economy, Singapore could see political spillover as the government looses control over the new commanding heights of the 21st century information economy.

Lee Kuan Yew's (LKY) passing in March signaled both the (belated) death of Singapore's 20th century political and economic paradigms. The government, now run by LKY's son, may in the future still maintain a firm hand; however, Singapore's highly educated, mobile, and technologically savvy youth are pushing for a more open society. 2015 has been an auspicious year for the Asian micro-nation as it also celebrates its 50th anniversary.

With LKY notably absent, Singaporeans are understandably nostalgic, but also enticed by the future. While the government is “listening, hearing criticisms, receiving feedback and improving itself” according to Burhan Gafoor, high commissioner to Australia, political change will be spurred by the changing nature of Singapore's economy.

Singapore needs a new growth formula

Singapore's government long fostered growth by controlling the commanding heights of the economy and focusing on specific sectors such as shipping, shipbuilding and the financial sector. Large formalized institutions and their attendant hierarchies allowed the government to keep close tabs on the economy, while garnering legitimacy from their sound economic stewardship. The problem now facing Singapore is that as a mature economy it can no longer rely on these sectors alone to ensure growth.

From 2004 to 2014 Singapore's annual GDP growth declined from 9.5% to 2.9%, largely due to a maturing economy. Companies in the aforementioned sectors have also seen their stock performance decrease, with some being cut from the benchmark Strait Times Index. This is a major issue as shipping, ship building, and commodities have long been behind the lion's share of Singapore's market capitalization. Specifically, the average daily trading volume for these sectors has dropped from $1.24 billion in 2010 to $816 million in 2014.

Hozefa Tapiwalla, head of research for Southeast Asia at Morgan Stanley sums up the paradigm shift that Singapore is undertaking.

"Historically [the Singapore government was] focused on industries and what they wanted and what they don't want. What they are doing right now, as a strategy and philosophy clearly, is saying we clearly don't know what's going to work," he said. "Hence, it's facilitation now, rather than directing which sectors and what's going to work."

In order to maintain economic vitality and public confidence, the long-ruling People's Action Party (PAP) government needs to foster growth in emerging sectors, notably information technology, e-commerce etc. LKY encouraged wise investments and Singapore boasts a robust sovereign investment fund.

Singapore pursues foreign entrepreneurs

Singapore can capitalize on its ethnic and linguistic links with many parts of Asia to help foster the creation of an Asian investment and entrepreneur hub. This strategy is proving successful, as witnessed by Alibaba's decision to base its overseas business headquarters in Singapore. Alibaba also announced that Aliyun, its nascent cloud computing branch will also be headquartered in Singapore. In explaining the decision to be based in Singapore, Ethan Yu, VP at Aliyun stated that “many Chinese enterprises we serve have stepped out of China and come to Singapore.”

Singapore has been proactive in attracting foreign tech firms, launching the EntrePass program, a streamlined visa for foreign entrepreneurs seeking to found and run businesses in Singapore. Unlike similar programs in other countries, EntrePass allows applicants to have raised start-up capital from any source, not just Singaporean investors. Applicants can also apply for permanent residency in two years – or after only one renewal of the one year visa. Similarly, as part of its National Framework for Research, Innovation and Enterprise launched in 2008, Singapore touts the Global Entrepreneur Executives initiative; an investment scheme designed to convince high growth / high tech firms to relocate to Singapore.

Creating a domestic start-up ecosystem

Alongside attracting foreign firms, Singapore is seeking to promote its domestic start-up scene. Singapore's current leaders can take inspiration from LKY's statement that “the quality of a nation’s manpower resources is the single most important factor determining competitiveness.” To this end Singapore is harnessing the creative energies of its population in order to drive innovation. The aforementioned National Framework also include programs for 1:1 funding matching plans for early-stage ventures.

There is also the Technology Incubation Scheme which comprises diverse incentives including offering to provide 85% of start-up capital when investors contribute the remaining 15%. The Infocomm Development Authority of Singapore (IDA), which was created at the turn of the millennium, is fostering local start-ups. Through IDA's investment subsidiary, Infocomm Investments Pte, IDA is promoting its accelerator program which seeks to grow and build high-growth tech start-ups at the seed and early-stage levels.

These various programs have spurred a start-up wave in Singapore, with new firm creation rising from 54,000 in 2010 to 77,000 in 2014. Moreover, Temasek – Singapore's sovereign investment fund – has sought to diversify its portfolio by backing various start-ups; with unlisted private investments now comprising 30% of Temasek's portfolio – up 10% from 2004.

As a result, venture capital investment in the tech sector has risen from less than $30 million in 2011 to more than $1 billion by 2013. Singaporean millennials are also increasing becoming interested in the start-up ecosystem, with investment clubs springing up at Singapore's universities. These clubs accept members from all faculties and are training the next generation of entrepreneurs, with the National University of Singapore (NSU) Investment Society holding a public symposium at the Singapore Stock Exchange. These programs are disseminating into wider society, as 9% of Singapore's workforce are currently employed in start-ups.

Political spillover

As the government encourages people to think outside the box and explore new ideas, it risks more people questioning other elements of Singaporean society. By fostering public input and energy in shaping Singapore's economic trajectory, PAP looses the monopoly on economic leadership which has underwritten its legitimacy. Having said that, by promoting start-up creation via state incentive and investment schemes, the government may well seek to shape the nascent start-up ecosystem so as to be dependent on and comfortable with a government directed capital pool. This would allow the government – in some sense – to continue to exercise a top-down approach. Such a plan is however fraught with danger, and is likely unfeasible given the fluid and fast-paced nature of venture capitalism.

Kenneth Tan, vice dean of the Lee Kuan Yew School of Public Policy, commenting on LKY passing, made a pertinent point about Singapore's situation in stating that he expects

“the opposition to make inroads now, and in part this is to be expected in a more mature society. I hope that they do become a stronger opposition […] so we can go back to being the kind of place that experiments with alternative ideas.”
As Singapore encourages experiments with alternative ideas in the economy, it may well be sowing the seeds of diversification in the political sphere as well.

Originally written for Global Risk Insights