U.S. price hikes likely result of Beijing's efforts to curb smog

McClatchy NewspapersAugust 14, 2008 

BEIJING — Earlier this summer as the Olympic Games approached, the Chinese government sent businesses around this capital city an unmistakable message: China would do everything possible, including shutting down whole industries, to ensure the games' success.

The restrictions quickly followed. In what turned out to be a futile effort to rid the city of air pollution, officials blocked heavy truck traffic from entering Beijing and closed nearby factories. The government also tightened visa restrictions to keep out protesters, a move that prevented foreign buyers from visiting the country's booming factories and filling Christmas orders.

The measures, analysts said, have paralyzed industries in Beijing and much of five affected regions and will be felt around the world long after the Olympics.

With China dominating global production of many goods, U.S. consumers will likely see higher prices if not outright shortages for products such as mobile telephones manufactured in the affected areas. The Olympics restrictions will also affect world supplies of auto parts, semiconductors, Vitamin C, steel and domestic Chinese supplies of cement and aluminum.

"We have a pretty good idea that the restrictions will slow things down, but we won't know the true impact until September," said Richard Brubaker, managing director of the Shanghai-based consulting firm China Strategic Development Partners. "Because of the Olympics and other factors, there'll no doubt be higher prices."

For foreign investors, the Olympic restrictions, coupled with rising energy and labor costs in China, have shaken confidence in the country's reliability as a world supplier, sparking searches for other sources of cheap labor, said Steve Keifer, vice president of product and industry marketing for GXS, which is a Maryland-based firm that helps companies streamline their supply chain.

Keifer said U.S. companies could move production lines to Mexico, Costa Rica and even Argentina to replace China, and European companies could go to Eastern Europe. Soaring fuel costs have also thrown into question the wisdom of producing goods so far from their markets.

"(The Olympics' impact) is one of a number of things happening associated with China to make companies rethink their sourcing strategies," Keifer said. "It's adding to the larger psychological effects of risk associated with working in China."

Chinese officials have stayed quiet about the economic impacts of the Olympic restrictions while touting what they say has been the boon Beijing's received in hosting the games.

A press release on the Beijing Olympics Web site said the games have infused $13.4 billion into Beijing's economy since 2004 and created 1.8 million new jobs, much of those to build the 20 new and temporary Olympic venues and other infrastructure in the city.

Faced with the challenge of clearing Beijing's polluted air, Chinese officials took about half of the city's 3.3 million vehicles off the streets and barred all non-local cargo trucks from entering Beijing. Licensed trucks could only enter central Beijing between midnight and 6 a.m.

Officials also ordered 20 heavily polluting industries around Beijing to reduce emissions by 30 percent, required five other provinces to adopt temporary measures and stopped all construction work around the city.

Amid the patriotic pomp surrounding the games, local businesspeople were reluctant to talk about the restrictions' impacts although one manager for a Beijing transportation logistics company said traffic restrictions had taken about a fifth of his trucking fleet off the road.

In an e-mailed comment, James Zimmerman, chairman of the American Chamber of Commerce in China, said most of the affected industries in Beijing did not produce for export and that the bulk of businesses had planned for the disruptions ahead of time.

"For those limited companies that still produce goods for export in Beijing, they probably shifted some production to other facilities in China to meet U.S. consumer demand," Zimmerman wrote. "The impact on U.S. consumers is most likely nil."

The shipping company DHL, for example, moved many transport operations to the nearby city of Tianjin and advised customers shipping through Beijing to send their packages earlier, according to an internal memo.

Yet many of those measures haven't undone the damage caused by some of the restrictions, particularly immigration rules that prevented many buyers from entering the country to complete purchase orders, said Gilbert Van Kerckhove, a management consultant who has worked with Beijing officials on Olympics planning.

"Many companies have said to the Chinese because of this, the Christmas orders can't be filled, and we can't move Christmas to February," Van Kerckhove said. "So now those purchase orders have gone to other countries."

While businesses understood the need for the measures, many have also complained that Chinese officials did not communicate them in a timely, transparent way, said Ben Ou, director of government relations for the communications firm APCO Worldwide. The government waited until early-July, about a month before the start of the games, to announce a few of the measures, Ou said.

"Some foreign companies are facing complications and are wishing these games would be over soon," Ou said.

If anything, global worries about the restrictions, which will run through mid-September after the Paralympic Games, reveal the tight production chains that nowadays depend on China.

Factories here produce 70 percent of the world's umbrellas, 60 percent of all buttons, 72 percent of shoes worn in the United States and 80 percent of U.S. toys. The economies of Beijing and the provinces affected by the restrictions equal more than a quarter of the country's gross domestic product.

Chinese officials, however, saw the Olympics as their top priority this summer and were willing to lose some foreign clients if that's what it took to pull of the event, Van Kerckhove said. Those industries will surely resume operations at a furious pace after the Olympics.

"The government said we don't care, because we have only one goal, which is a safe Olympics, a picture-perfect Olympics," Van Kerckhove said. "They said we don't want business now, come back in two months."

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