Beijing made the right decision last week in deciding not to oppose a World Trade Organization ruling that it unfairly supported its domestic UnionPay financial transactions network at the expense of foreign rivals like MasterCard (NYSE: MA) and Visa (NYSE: V). Now it needs to show it is prepared to wean its other big industries from unfair state support, starting with the unrelated solar energy sector that has recently become a major source of friction between China and its major trading partners.
Beijing surprised some last week when it decided not to fight the WTO’s July decision that China discriminated against companies like Visa and MasterCard by severely limiting their access to the huge market for settling transactions denominated in the Chinese currency, the renminbi. (English article)
China has built up UnionPay as a domestic equivalent of Visa and MasterCard over the last decade, giving the company nearly exclusive access to its fast-growing domestic market as it tries to create homegrown companies capable of competing globally. UnionPay has even embarked on its own overseas drive over the last five years, signing a steady stream of new tie-ups with big foreign banks with little or no opposition from Western governments that welcome this new competitor.
Foreign government have also demonstrated their desire to make sure that their own markets remain competitive and don’t become dominated by companies like Visa or MasterCard the way that UnionPay now monopolizes China. They demonstrated that commitment in July, when MasterCard and Visa, fearing they would lose an anti-trust case against them in the US, agreed to pay more than $6 billion and modify their practices to settle a lawsuit filed by millions of credit card merchants.
But while foreign governments have welcomed UnionPay and shown their commitment to open and competitive markets, the same can hardly be said of Beijing, which has effectively locked companies like MasterCard and Visa out of its home market. This kind of protectionism is not only unfair but also increasingly unnecessary, since UnionPay already has huge natural advantages over its foreign rivals due to the fact that its major shareholders include most of China’s largest banks.
Beijing’s decision to open China to Visa, MasterCard and others is a positive sign, reflecting a realization that protectionism and other state support won’t help achieve its goal of creating globally competitive companies. Now Beijing has a chance to show again that it will move to dismantle unfair trade barriers in another major dispute involving its solar cell manufacturing sector.
During her visit to China last week, German Chancellor Angela Merkel told Beijing she didn’t want to start a trade war with China over the solar cell issue, even as the European Union investigates allegations that Beijing unfairly supports the sector through policies like cheap loans and tax rebates. But she added that Beijing also needed to eliminate the practices that give its companies an unfair advantage over foreign rivals. (English article)
Following its decision not to appeal the WTO’s UnionPay ruling, Beijing now has a golden opportunity with the solar panel dispute to show a new commitment to dismantling many of the unfair state-support policies that give its companies an advantage over foreign rivals. Such action would help to cool broader trade tensions, allowing leaders of the world’s major economies to focus on the more important task of restoring the global economy to health.
Bottom line: China’s decision not to open its financial transactions market marks an important step towards more free trade, with more similar steps needed to show its commitment to free trade.
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