International Business Paper on China and U.A.E
Recently, China has been known to extensively liberalize its economy. The country has departed from its counterparts in East Asia, which have its investment in foreign direct (FDI) so as to protect its domestic industry and the liberal FDI strategy used in Latin America in the same developmental stage since there development state is eschewed. China seems to be taking a “liberalized two step” which means liberalization methods with regulations that differ across its different sectors of economy. Research and studies on different sectors indicate the perceived strategic value of the sectors. The features in different sectors form ways in the variety of the reregulation. Insulated from the political pressures, the state of China has moved from the global control in the aggregate level to selective controls realized at the sectoral level. It has also incorporated a strategy bifurcation in its reregulation (Hsueh, 2013).
The U.A.E on the other hand is constituted by seven states namely: Sharjah, Abu Dhabi, Umm al-Quwain, Dubai, Ras al-Khaimah, Ajman, and Fujairah. This federation came together to form what is now regarded as the UAE. The federation which boasts of being the second largest economy in the area is however faced with the problem of unemployment. Despite the fact that it is one of the largest economy in the region, the strategies for employment creation has not been able to bear fruit in recent times. There are many citizens in this region that can not be able to find employment. There are also specific fundamental strengths which UAE boasts as of now. One of this is its historic hub in the international trade. Its strategic location between the main markets in Asia and Europe has continued to serve it well and international trade.
The diplomatic relations between China and UAE first came into existence in 1984. While China has set up an embassy in Abu Dhabi, the UAE has its own in Beijing. In essence, the relationship between the two nations has been based on high level trade activities between them. For instance, UAE and China moved to new level that exceeded $19.4 billion in 2009 which pointed a growth rate of 45%. More than 2000 business organizations operate in United Arab Emirates and also many Chinese citizens are working in UAE. UAE is the second largest trading partner in the region and also the largest with regard to consumption of Chinese products. Additionally, UAE has facilitated the transfer of other Chinese goods to African and Middle East markets. There is not doubt that the recent trends in these two countries have facilitated the fundamental interests between the two states (Xinhua, 2009).
Many of the Gulf States including China and UAE are now forced to work harder with regard to economic integration to facilitate an enhanced control of the surpluses and development between the states. In accordance to economic analysts, a consolidation of the debt and equity market in the region could be beneficial in making sure that the excess fiscal surpluses are traded among the Gulf States instead of being invested abroad. In historical perspectives, UAE and China have been a net capital exporter, with some of the money being invested in countries such as Europe and US.
In recent times, there has been an increased momentum between UAE and China to focus a set of initiatives of enhancing the cooperation of the two nations. Some of these initiatives include a number of analytical pieces to evaluating the present state of cooperation and collaboration programs focusing on examining as well as exploring means of fostering enhanced business integration, prospects of migration, labor morbidity, energy integration, resource sharing and development of infrastructure so as to reduce non tariff obstacles. Alongside the anticipated integration mechanisms between the two nations, there is for the countries to address the profound challenges realized in the financial sector, labour market, service sector liberalization and diversification of revenue resources. With regard to the labor market, there is a need for the two nations to review their immigration policies at the regional level.
There is a great need for the two countries to keep on increasing their momentum regarding economic integration between them. Regional economic integration will assist these countries to focus more on essential matters in their developmental phases as well as encouraging the thriving of businesses in the nations. Among the benefits that would accrue from regional integration includes the creation of more opportunities for the nations to trade with one another when investment and trade barriers are removed. Additionally, cooperation or interaction will lead to reduction of prices for the consumers of the nations. This owes to a removal or reduction of tariffs. Research has indicated that regional economic integration subsequently leads to high rate of development between or among the countries in such an agreement (Carpenter and Dunung, 2012). Also by reducing or eliminating stringent trade regulations and labor movements, economic integration between the two states is poised to increase job opportunities. We know that both China and UAE are faced with an animal of unemployment in the states. Therefore, integration will benefit both countries as more opportunities will arise. Additionally, these countries will find it easier to making agreement with other countries because of the strength acquired from the regional cooperation. A closer political cooperation is also another element that could be facilitated through regional integration.
The Renminbi, (RMB) also known as the Chinese Yuan (CNY) is the official currency for the people’s republic of China. On the other hand, the local currency in UAE is the dirham (AED or Dhs). This is pegged against the dollar as US $ (US$ 1: AED 3.6725). The UAE is subdivided into 100 fils while the Chinese Yuan is subdivided into 100 fen or 10 jiao. The exchange rate between the two currencies was last updated on 6th may 2013 by the international monetary fund. As at 6th may, 2 AED was exchanged at 3.5 CNY while 5 AED was exchanged at 8.5 CNY (Coinmill, 2013). In May 7th 2013, the Chinese Renmibi was trading at 6.15635 against one U.S Dollar. Its Dhiram counterpart was going at 3. 673050, against U.S dollar (X-rates, 2013).
Presently, there is a huge trade deficit between China and US. In fact, the China Trade benefit with US in 2012 was recorded as $315 billion. This was an increment from the previous year which also recorded a deficit of $295.4 billion. It is interesting that the trade deficits between the two countries are in existence in spite of the fact that imports by China were regarded as being the highest in history during that time. For instance, America exported 110.6 billion of products to China in 2012. US imports from China was recorded as $425.6 billion, a figure which was more than $399.3 billion that were imported in 2011. Among the products imported by America from China includes clothing, machinery and electronics. Many imports are also made by American based organizations that send raw materials to China for cheap assembly and manufacturing. As they are returned to U.S they are regarded as imports even though those US organizations are the one which profit most (U.S. Census, 2013).
The reason for the huge trade deficit between China and US is quite simple. China is very much capable of manufacturing products that are needed by Americas at a very low cost. The reason for the low pricing of goods is two fold: low living standards in China enables firms to pay low wages to employees plus the exchange rate that is structured to be lower than the dollar. This translates that many organizations in USA are unable to compete with China because of this low pricing factor. This has resulted to lack of employment for many Americans. This has prompted many legislators to make laws in imposing higher tariffs and other types of trade barrier against China to create employment opportunities. This translates that many American organizations are unable to compete with their Chinese counterparts because of the low pricing. Consequently, many jobs are lost on the part of the American citizens. However, if at all this has to occur; American consumers would have to pay them at higher price for the products that are locally manufactured. This is one of the reasons as to why the huge trade deficit is unlikely to change. Many people would rather low amount to such products as apparels, electronics and computers even if it means that Americans would lose the works (Amadeo, 2013)
According to the US department of commerce (2013) the trade rate between US and UAE rose to US$18.3 billion (Dh67.22bn) in 2012. This was 44% rise on the figures realized in 2011. This increased level of trade between the two nations emanates from the fact that the UAE demand in most things from architectural; expertise to aircraft components, such kind of trade level translates to mean that UAE is the largest market for US exports in the Middle East.
These figures as Al Otaiba, the UAE ambassador to the America noted underscores the breadth and depth of these crucial bilateral relations of the two nations. The ambassador also observes that the UAE harbors one of the most innovative economies and most open in the world perspective. Apparently, not only in US where UAE has tried to establish good relations but also in may other states where she offers support to various jobs to important sectors such as manufacturing, aircraft , defense and services equipment.
Trade level between the two states resurfaced after the worldwide financial crisis which greatly decreased demand in UAE for components, machinery and US vehicles. Among the US exports to UAE includes aircrafts which are among the most valuable. In addition to this, the UAE has also a wide market for many services offered by US organizations. For instance, the designer of the Guggenheim museum in Abu Dhabi is the US architect Frank Gehry. The imports by the US imports from UAE on the other hand doubled in 2012 to $2.4bn with petroleum being the main element. This data has only proved the point that UAE is a crucial export market not only to USA but also to other nations. Such figures according to Arnold, (2013) supports the perception that the trade relationship between UAE and US is thriving and has remained a major pillar in supporting the strong relationship of the two nations.
One of the barriers of trade between China and US is that China has tended to restrict the imports of US products of such components as steel, autos and beef. Also its intellectual property rights have continued to remain insufficient according to a US trade representative. While China has greatly progressed in terms of opening its markets to market competition, China has adamantly refused to grant trading rights for specific US firms. This aspect has mandated Obama’s administration to seek strategies that could bolster the trading relations between the two nations. In 2012, congress established a unity that was led by USTR and the department of commerce that was mandated with the task of bolstering trade relations between the two nations.
American business organizations are having a rough time working in China owing to the unfriendly trade barriers which remain in force in spite of the fact that China has claimed to be committed to world trade organization. According to a US official, the numerous numbers of barriers of market access imposed by China, which is an impediment that has made it cumbersome for the US business organizations to, operate in Chinese markets. Among the issues labeled against China is the provision of regulations and subsides which are favorable domestic firms and failing to protect U.S copyrights as some of the barriers in the Chinese market. For example there are tensions in the telecommunication, steel, and aviation industries whereby the Chinese government are accused of favoring its own companies against those of US. There is also another aspect whereby, China’s increasing trade surplus with America has resulted into complaints by US producers that China keeps its Yuan undervalued intentionally in an attempt to give exporters a price advantage.
Some analysts have affirmed that the Chinese currency policies are largely the cause of $232.5 billion U.S. trade deficit and to the loss of employment opportunities for American Citizens since 2000. On its part, China says that it’s not ready to let the Yuan trade freely in foreign markets as doing so will result into a financial crisis and adversely affect the Chinese economy (NYT, March, 13th 2013)
On the other hand, US also face barriers in its trading endeavor in UAE. In doing business in UAE out of one of the free zones, a business organization say in US ought to be accompanied by a sponsor, distributor, or agent from UAE. These agents, sponsors or agents once selected have excusive rights only for goods that are not foods. The agency law does not include food goods. Moreover, distributors and agents selected can not be replaced easily without their consent. The UAE requires that an organization to be registered for it to be considered for a government tender and to be offered tender documents. The tendering process by the government is not usually conducted in accordance to international standards. Re-tendering is the common norm and it can be carried out more than four times. A contractor or supplier has to be UAE national so as to be considered legible in the bidding process of government projects. Moreover, government tenders ought to be accompanied by a bid bond which is usually in the form of a bank guarantee for 5% of the bidden value. Such regulations are not applicable to awards of major projects or defense contracts whereby no domestic organization offers the required goods or services. There are no formal requirements in UAE requiring that a section of the government tender to be subcontracted to domestic organizations, but to some degree, local business organization enjoy some degree of benefit.
As part of the expansion in the regional trading center, The UAE federal government has protected the intellectual property one of the basic priorities in recent times. Trademarks, copyrights and patent laws that were passed in 2002 offer a high protection level for the American intellectual property (Global Trade, 2013). Free zones were established so as to help in industrial development such as Jebel free zone situated in Dubai. In the sector of technology, the internet city in Dubai has drawn and continued to draw high profile cooperation such as IBM, Microsoft, HP, among others. The UAE economy however has never been stable and it keeps on fluctuating every now and then. This owes to the fact that UAE is largely dependent on oil and gas which have in them fluctuating prices in the world market. Revenues generated from oil and gas is used elsewhere as in enhancing other sectors of the economy such as tourism, trade, construction and others.
If were to set up business, I would choose UAE over China. This is because unlike China which favors its domestic firms over foreign investments, UAE maintains a liberal and free business system. Moreover, the Gulf cooperation council GCC which consists of the UAE states have been focusing their efforts on establishing a common external tariff. Consequently, the states have now harmonized their duties to five percent. The reason as to why I would like to invest in UAS is that its trading policies are sound. For instance, only businesses which are properly licensed are allowed to do importation. Requirements for documentations are strictly in international standards and custom clearance delays have been much rare. The business competition among the facilities in the port of the various emirates has kept the rate of users at low level as well as a premium on the services. States in UAE does not impose duties on exports. Specific regulations with regard to the import of pork products, firearms, tobacco, and alcohol are based on security and religious reasons. In addition, the state considers non tariff barrier to investment and trade in the form of restrictive sponsorship/agency or distributorship requirements as well as the restrictive regulations in foodstuffs.
The country risk includes all those risks that are associated with the investment in another state. These kinds of risks differ from political, economical and sovereign risks. If a particular risk has high rate of risks, it will discourage investments from other nations which should not be recommended at all. Investors in most cases take into consideration the status of a particular country risk because it will certainly reduce its anticipated returns. Therefore, they try to employ effective edging tools in the case they are given ago ahead in the county they want to invest.
Sovereign risk refers to risks when the foreign state of investment alters its policy on foreign exchange. This results into a reduction of the foreign investment value or making them null altogether. In UAE, sovereignty risk has been established to be stable or positive before the Dubai crisis. However, the UAE in general is trusted to meet its expectations, obligations and debts owing to large oil reserve in Abu Dhabi. The Currency risks on the other hand come up by altering the price of one currency against the other currency. In most cases, the currency risks are not compensated with increased return rate. The risk of currency in UAE perspective is regarded as being stable. This rating is due to the government’s commitment to maintaining the price of UAE’s currency and its stability even though they are not included in the single proposed currency of the GCC.
Financial risk on the other hand occurs when an organization or government defaults on its debts and bonds, resulting into bond holders to lose their money. It also occurs when an organization does not harbor adequate flow of cash to pay its debts, in turn leading to the shareholders of such an organization to lose money. Various types of risk ratios are employed in evaluating the financial risk of particular investment such as capital to debt ratios whereby, the higher the value, the higher the risk involved. The capital expenditure ration on the other hand illustrates the amount of cash are left for operating the business after settling the debts. In UAE, the financial risk is regarded as being “moderate” on account that Dubai currently harbors the international Financial Center, a free trade financial zone. This center is operated by the Dubai Financial services Authority, which are-known organization by the UAE government. This entity is mandated with the task of ensuring that the risk level for foreign investors is kept moderate.
The Dubai global debt has resulted into financial institutions being reluctant in lending out money until such a time when they recover from such a crisis. Apparently, the new policies by the UAE central bank resulted into the increased lending by 35.5% in 2012. The banking department in UAE is generally rated as being stable. Each Emirate in UAE is government by its own sheikh. All the states in the UAE is recognized for political stability, hence, the political stability in UAE is obviously rated as being stable. With regard to economic risk, the oil sector is renowned for being a predominant factor in UAE. In Abu Dhabi for instance, it accounts for more than 90% of the sum of all the oil reserves in UAE. The high rate of oil prices greatly supports the UAE economy. Other sectors which are no oil such as real estate, trade, finance which account for approximately 70 percent in the sum of the UAE percentage has began to show stability. The construction sector has however remained to be depressed. In general, the economic risk in UAE perspective is rated as being “low to moderate”.
Reference
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Available on http://students.flatworldknowledge.com/bookhub/reader/3158?e=fwk-168388-ch06_s02
Coinmill, D (2013). “The Currency Converter” Available on
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Global Trade, (2013). “Trade Barriers in UAE” Available on
http://www.globaltrade.net/f/business/text/United-Arab-Emirates/Trade-Policy-Trade-Barriers-in-UAE.html
Hsueh, R(2013). “China in the Age of Globalization” Temple University, Department of Political
Science, 443Comparative Political Studies January 2012 vol. 45 no. 1 32-6
| Hamdan , Y (2012) “The UAE Country Risk Analysis” European Journal of Business and
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Xinhua, (2009). “China, UAE agree to boost ties for mutual benefit” Available on http://news.xinhuanet.com/english/2008-04/03/content_7913974.htm
X-rates, (2013). “Exchange rate” Available on http://www.x-rates.com/table/?from=USD&amount=1
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