China resource

I was reading the Huff Post when I came across a Eric Anderson. I highly recommend his posts as they're quite good. Moreover, he's what one could consider an expert on Sino-U.S. relations.

Balancing act

As a result of U.S. arms sales to China, the PRC government announced that it would sanction those American companies that participated. Like many others, I was curious to see how this would play out.

Turns out that two weeks ago (when I was sick), China announced that it was going to buy 20 passenger planes from Airbus, the major European aircraft manufacturer. Now on the surface this may seem like a snub to Boeing, but in all actuality it doesn't mean much.

According to Boeing, increase air travel in China will require Chinese airlines to take delivery of 3,800 additional passenger planes by 2028. Airbus is estimating that China will require 3,200 additional aircraft to meet the demand. (The difference between the two is that Boeing assumes Chinese airlines will use smaller aircraft like the 737, while Airbus is betting on larger aircraft equivalent to the 767.) Either way, Chinese airlines will need a lot of planes in the next 18 years.

Precisely because of this huge demand for aircraft, the Chinese airlines nor the Chinese government can play favorites. If the Chinese government were to completely expel Boeing from the Chinese market for passenger aircraft, it would have no choice but to deal with Airbus (which could raise its prices as a result of its major competitor being locked out). That would not be good for Chinese airlines. Not to mention that by hurting Boeing, it hurts the Chinese manufacturers Boeing subcontracts to for the production of aircraft parts.

So far it looks like the sanctions the Chinese government was talking about amount to very little. This could change in the future as Chinese aircraft manufacturers increase in capability and quality, but I expect that not to happen for at least another ten years. While on the surface it looks like China has a lot of weight, this is an example of how little it can do despite its rhetoric.

More on China's climate change position

Here's a link to an article from The Economist that covered the fallout from Copenhagen. I don't think it would be a stretch to say that the Chinese government doesn't want to be pinned because their top priority is job creation through economic growth and development. Focusing on preventing climate change would place additional costs on Chinese businesses through regulations, which would result in businesses having less cash to expand their operations (including hiring more people).

The PRC's perspective isn't without merit. The Bush administration during its 8 years in office constantly put economic growth ahead of the environment, citing it as a reason not to sign the Kyoto Protocol. Furthermore, it seems a little hypocritical of the developed countries telling a developing country that it has be more concerned about climate change when those same nations have been adding to the rising CO2 emissions since the early 20th century.

China's take on climate change

President Hu Jintao recently called for a 40-45% reduction in CO2 emissions by 2020 compared to 2005 levels. Although this is voluntary, it's a good thing for combating climate change, even if it falls short of what some in the international community would like.

There's good reason for China wanting to lower its CO2 emissions and pollution in general. According to a World Bank report, air pollution in the PRC carries a cost of 1.2% of GDP, and if you include water pollution the total cost jumps to 3.8% of GDP. This is a large sum of money and would only increase if measures aren't enacted to decrease pollution.

I recall reading some years ago that part of the problem in China's environmental management is that its version of the Environmental Protection Agency holds the same rank as provincial governments. If this is still the case (still looking into it), then China's state agency responsible for enforcing environmental regulations cannot force provinces to comply given their equal status. Moreover, provincial leaders have little incentive to reduce pollution when there is no guarantee that their colleagues in other areas will do the same, presenting a classic free-rider problem.

It should be interesting to see if Hu's call for voluntary action is successful. I highly doubt that it will be without government incentives, as businesses are loathe to do anything that would increase costs in business operations. The free market as it is practiced in China provides little incentive to consider long-term economic sustainability. But then again, which economy does?

More sales in the pipeline?

As recently reported, the United States sold arms worth $6.3 billion to Taiwan, the first since the early 1990s when Bush Sr. was in office. However, it seems that there could be another sale in the works if Congress has its way.

Defense News is reporting that Congress may be positioning itself to sell Taiwan additional weapons, specifically F-16 C/Ds that were left out of the recent sale. It's no secret that the bulk of the ROC air force is old and requires spare parts. While I wouldn't be surprised if the "defense industry analyst" was a Lockheed Martin employee (who makes the F-16 aircraft), they raise a fair point that the production line can only be maintained for so long. If it were to close without F-16 C/Ds sold to Taiwan, and if the U.S. wanted to replace ROC aircraft at some point in the future, then it would only be able to sell Taiwan the F-18 manufactured by Boeing.

While Beijing would protest the sale of fighter aircraft to Taiwan regardless of the model, the Chinese leadership would no doubt prefer F-16 C/Ds be sold as opposed to the more advanced F-18. The question is how many aircraft would be sold? Taiwan has requested 66 F-16 C/Ds since 2006, so if Congress gets it way, that amount could be sold. However, does the Obama administration want to take the risk of selling additional weapons to Taiwan at expense of Sino-U.S. relations? That I am not sure about. It could go either way, as Obama may want to stand up to China or use it as a chance to cultivate trust with the PRC. What do you think?