The Latest Skirmish at the WTO

As reported by The Globe and Mail, on behalf of European and U.S. financial services, Europe and the U.S. have registered a complaint with the WTO that China is “breaking international trade law.”

The European Union and the United States filed a complaint with the World Trade Organization (WTO) yesterday, concerned that China is trying to freeze out foreign competitors in an effort to build a state monopoly in the $100-million financial information sector

China’s state-owned company, Xinhua, is at the center of the controversy. Financial services such as Bloomberg LP, Reuters LP, and Thomson Corp are required to go through Xinhua, their major competitor, to reach their customers.

“Our members are complaining that they can’t reach their customers in China because they’re required by regulations to go through Xinhua,” said Ken Wasch, president of the Software and Information Industry Association. The Washington, D.C., group represents the financial information industry, including, Bloomberg, Dow Jones, and a combined Thomson-Reuters, following the Thomson takeover from last year.
“We want to have direct access to our customers, we don’t want to have to go through our competitor in order to reach them,” Mr. Wasch said.

Financial services sell data, in real time, to their customers, such as banks and brokerage firms. Their customers then use the data to make financial decisions.
While money is certainly at stake, I would differ with the thrust of the article that this complaint differs substantively from China’s attempt to control the media.
Despite what China’s defenders say, China is a command economy. Whoever controls the flow of information, controls what happens. If Xinhua stays between foreign financial services and their customers, a number of consequences ensue:

  1. The flow of information slows.
  2. Xinhua becomes a de facto regulator of financial information. As the Herald Tribune points out:

    The new regulations make Xinhua both a competitor and regulator to its foreign rivals, requiring that data, videos and photos be funneled through Xinhua-approved distributors. The only currently approved distributor is a Xinhua subsidiary.

In some ways, this controversy is similar to the one surrounding Sovereign Wealth Funds. Both are extensions of a centralized government. Both create problems concerning transparency. Both can be used to forward a government’s political agenda. In the market place, both can be used to pick winners or losers.

What we are witnessing is a struggle between two radically different modes of governance, two antithetical types of economies. Those who celebrate globalization as the triumph of the free, democratic market place perhaps should look more closely at precisely the nature of what is happening. Sovereign Wealth Funds–both in China and the Middle East–are in ascendance. In both the Middle East and in China, information is tightly controlled in order to advance political or religious agendas.

This latest skirmish, while seemingly just about money, is part of the larger battle that is being waged. Oil and cheap labor have been “lures.” Just as the smart fisherman dangles colorful enticements before his unsuspecting prize so too have China and the Middle East lured us with promises of cheap energy and abundant, cheap labor. Now, weaken by our own economic folly and greed, are we ready for the struggle that is to come?