Trading Up

By Michael Schuman / Manzhouli Sunday, Oct. 30, 2011
    • AP

    Making waves Emerging markets fueled China's exports during the downturn

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    In Manzhouli, there is a gap between the potential of the Russian trade and the reality. The markets at a tourist zone outside town, where Russians can shop without visas for Chinese-made wares, are almost completely shut by 1 p.m. A giant hotel not far from the airport, topped by Russian-style maroon domes, appears abandoned. Chinese officials complain that their Russian counterparts hamper progress by erratically changing regulations and trade policies. "The Russian bureaucrats are not eager to move forward with economic development," says Li of the Manzhouli economic zone. "Chinese officials are willing to sacrifice their holidays for development. Russian officials never work overtime." There are physical impediments as well. The gauges of the Russian and Chinese railways are different, forcing trade goods to be transferred between trains at the Manzhouli border — a productivity-killing process.

    Active efforts are under way to dismantle these barriers. Developing Asian and Latin American countries have completed 13 free-trade agreements since 2004. Russian Prime Minister Vladimir Putin recently raised the idea of forging a free-trade "Eurasian Union" among former Soviet states, and during an October visit by Putin to Beijing, Russia and China formed a joint $4 billion fund to encourage investment between them. New roads, railways and ports are connecting emerging nations more than ever before. Burma is rebuilding an old road across the country that will link China and India, potentially cutting the cost of transporting goods between them by some 30%. Beijing, wary of relying on the Panama Canal for the shipping of Brazil's vital natural resources, is proposing a new route through Colombia, with a $7.6 billion railway connecting its Pacific and Caribbean coasts. And China is liberalizing (albeit slowly) its currency regime, encouraging its major partners to use the renminbi instead of the dollar in their trade. HSBC figures that the renminbi could be the currency of choice in at least half of China's trade with other emerging nations in three to five years.

    But even as some roadblocks come down, others go up. Competition among major emerging markets for exports, investment, jobs and global influence fuels tensions. Officials in Brazil and India have complained that China's control of the renminbi's value hampers their exports by keeping competing Chinese goods artificially cheap. Resentment toward China spans from Brazil to Zambia over Chinese investors' buying up large swaths of their economies while providing few benefits in return. Resolving such differences could be crucial for the future of the emerging world. As HSBC's King points out, giant emerging economies can no longer count on the overextended U.S. consumer to raise their living standards up to the level of the West; only exports and growth created within the emerging world can achieve that. Consulting firm Accenture estimates that India's expanding business with other emerging markets could create 28.2 million jobs in the country by 2020. And as the emerging world becomes more integrated, pressure mounts on the U.S. and Europe to join in — by, for example, signing more free-trade agreements like the ones Washington approved in October with South Korea, Colombia and Panama. "The story for the developed countries is that you have to get on your bike and be part of the rush to key emerging markets," says ADB's Wignaraja. Otherwise, "you run the risk of being left out."

    Huang Jincai has no intention of letting that happen to him. The Manzhouli-based timber processor has pinned all his hopes — and money — on China-Russia trade. In 2003, Huang was a migrant worker, spending long hours in the Russian Far East cutting timber. Today, his desk overlooks a buzzing Manzhouli from the 20th floor of an office tower two blocks away from the new, swank Shangri-La Hotel. Over the past seven years, Huang, his brother and a Russian partner have invested almost $5 million in a timber-processing factory in Russia that employs 100 people, and this year he started a Manzhouli company to import and sell the timber. Though he regularly confronts difficulties, from bewildering local tax codes to occasional Russian hostility to Chinese workers, those problems can't squelch his enthusiasm. "My life has changed a lot" because of the Russia trade, Huang, 31, says. "I'm pretty optimistic. After all, the trade just can't stop." No, it can't.

    — with reporting by Nilanjana Bhowmick / New Delhi, Jessie Jiang / Manzhouli, Simon Shuster / Moscow And Sheena Rossiter / São Paulo

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