Reykjavík Grapevine - 21.09.2007, Síða 17

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As Iceland and China moved closer towards
signing a free trade agreement, the state tele-
vision news came up with a great graphic to
illustrate what might happen. Two lace-less
shoes arrive duty-free in Iceland from China.
Icelanders tie on a set of laces. Then we resell
the shoes duty-free to Europe at way less than
Europe’s price for importing direct.
The unstated fear that this news story
played upon runs basically like this: China has
infiltrated the Icelandic government and has
a secret plan to use Iceland as a back door to
Europe’s markets. A few people in Iceland will
make lots of money on this, at the moral cost
of collusion with an ethically bankrupt coun-
try which mistreats its people and is ruining
the environment.
In fact, country-of-origin rules mean that
Iceland would have to add more value than
tying on a pair of shoelaces in order to be able
to re-label Chinese products as its own. But
this story illustrates how the China buzz in
Iceland is riddled with myths and hype. The
Grapevine’s editor asked me to cut through
them and find out what is really happening.
Conspiracy theorists probably imagine
that all of the talk about China in Iceland is
because rich, corrupt Chinese businessmen-
cum-politicians have paid off rich, corrupt Ice-
landic businessmen-cum-politicians to be able
to influence the political process here (and
kick some Falun Gong butt in the process!)
But the more I looked into the situation, the
less sensational it turned out to be. China is
neither as much of a threat, nor as much of
an opportunity, as it is made out to be.
Not Just Free Trade
Iceland is not really that special. China has al-
ready signed several free trade agreements,
and is now working on adding New Zealand,
Australia, Switzerland, Iceland, and Norway.
For the time being, China has left the big
fish – the EU, the USA, and Japan – out of
their sights, probably because those negotia-
tions are trickier and more politically charged.
Smaller, peripheral countries like Norway
and New Zealand have more to gain from
an agreement, and China’s smaller successes
might pave the way for bigger ones.
Signing a free trade agreement requires
recognising China as a “market economy,”
which is something that many countries would
prefer not to do. China is, increasingly, a free-
market society, but it is also still opaque, au-
thoritarian, and centralised. So being among
the first to recognise China as a market econ-
omy means being among the first willing to
say that the glass is half full rather than half
empty. This is a justifiable move at this point in
history, and at the same time it is a somewhat
dubious honour for countries like Iceland.
There has been lots of talk about how the
agreement between China and Iceland will
be a “new generation” free trade agreement,
which will cover services as well as goods. I
have heard people say that thousands of Chi-
nese workers will flood Iceland to offer their
services to the construction or fishing indus-
tries at very low wages.
However, it seems that free trade in “ser-
vices” really means things like letting Icelan-
dic shipping companies move goods not just
from Reykjavík to China, but also between
two different Chinese ports (what’s called
“cabotage” in the language of international
transport). It also might be defined to include
the types of banking services that an Icelan-
dic-registered bank like Glitnir can offer to its
customers in Shanghai. The free trade agree-
ment will not change the residence and work
permit system that limits Chinese workers’
ability to come to Iceland.
Old-Fashioned Gains
It seems that Iceland’s main gains from a free
trade agreement with China will be very old-
fashioned and simple, and incremental rather
than revolutionary. To start with, halibut and
redfish exported from Iceland to China are
currently subject to a customs tariff of 10-
15%, which would hopefully disappear under
the agreement.
Meanwhile, ninety-eight percent of Ice-
land’s imports from China are manufactured
goods like shoes or telephones. Export manu-
facturing has boomed in China, especially in
the coastal cities, over the last two or three
decades – just as it once did in other Asian
countries like Japan, Korea, and Taiwan. For
the first time in 2006, Iceland imported more
from China than it did from Japan.
Many Chinese goods actually stop in other
European countries on their way to Iceland.
Some are subject to a 15% tariff when they
enter the European Union. This is supposed
to be refunded if the goods are re-exported
to Iceland. But in practice the refund doesn’t
always take place. So imports wind up being
subject to Icelandic tariffs on top of the Eu-
ropean ones, which increases Icelandic retail
prices.
As long as Iceland remains outside of the
EU, a free-trade agreement may encourage
more Icelandic wholesalers to import directly
from China, by making the savings from doing
so significant enough to offset any inefficien-
cy in importing directly to such a small market
instead of through larger mainland facilities.
As any introductory economics class teaches,
free trade is, at least in principle, good for
both parties’ bottom lines.
Refrigerated Transport: Eimskip
Icelandic exports to China totalled 2.75 billion
ISK in 2006, 80% of which were frozen sea-
food products. Fish is a high-status protein in
Chinese culture, although the Chinese prefer
to buy live rather than frozen fish when pos-
sible. Much of the Icelandic fish that is sent
to China travels with Eimskip, Iceland’s largest
shipping line.
Eimskip has four offices in China and just
signed a contract to manage China’s largest
refrigerated warehouse in Qingdao. While Ice-
landic frozen fish will surely spend time in this
warehouse, it will also serve other shippers
from other nations, as do Eimskip’s operations
in general.
This is in turn a sign that growth oppor-
tunities for Iceland, in China and elsewhere,
may no longer be in raw exports of Icelandic
goods. The game now is to manage, own, or
invest in all sorts of businesses, which serve cli-
ents worldwide and employ local people. This
might mean logistics and transport, or supply
chain management, or airlines, or banking.
Modern Icelandic businesspeople no lon-
ger move abroad to sell fish, like in the old
days. They drive their jeeps to work in Reykja-
vík, where they might own part of a company
based in London which serves German cli-
ents in Asian markets. While Iceland’s “flag”
products are still important – the ones that
tourists talk about, like fish and geothermal
know-how – Icelandic companies have, very
sensibly, grown up and gone global.
Virtual realities: EVE Online
A completely different example of Icelandic
operations in China involves CCP, a successful
computer-game company based in Reykjavík.
Their star product is EVE Online, a multiplayer
role-playing game with about 200,000 users
worldwide who pay $15 a month to play. CCP
needs to offer user support 24 hours a day, so
they opened two extra offices in places where
people are awake when Iceland is asleep.
They chose Atlanta and Shanghai as the loca-
tions and now have around twenty employ-
ees, mostly Chinese, working in the Shanghai
office.
China’s bureaucracy requires that provid-
ers of online computer games be licensed by
the government – few other countries have
such rules – and no foreign company in Chi-
na has yet received such a license. So even
though CCP has an office in China, they can-
not offer EVE Online to Chinese users. They
do, however, lease EVE Online to a Chinese
company which sells it to Chinese users under
a different name. However, the virtual world
in the Chinese version of EVE Online is not
connected to the virtual world accessible to
users in other countries, so Chinese users can
only play with each other, not with Europeans
or Americans.
Naturally, CCP hopes that a free trade
agreement between Iceland and China would
let them sell their services directly to Chinese
customers, so that Chinese players could reg-
ister and pay directly to CCP for membership
in EVE Online and participate in the same
virtual environment as the rest of the world.
No one seems sure whether the free trade
agreement under discussion will actually bring
about any change in this kind of complex situ-
ation, where regulatory power, Internet free-
doms, and online payment issues interact.
Idealism and Pragmatism
China’s growing importance in world trade
disturbs the “China idealists” who still feel
that Western relations with China should be
conditional on the humane development of
Chinese society. Idealists are horrified by the
quality of life in Chinese society, and the Chi-
nese government’s seeming indifference to its
peoples’ suffering. They condemn China’s use
of the death penalty, its cultural imperialism
in Tibet and Xinjiang, the working conditions
in its factories, its lack of freedom of speech,
the way that ordinary Chinese people keep
each other under ideological surveillance, the
weak rule of law, the poor state of the envi-
ronment and public health, China’s belligerent
ethnocentric tendencies, and its stubborn op-
position to letting Taiwan become a normal
independent country. They want the rest of
the world to act harshly towards China – no
Olympics, no free trade – until it changes.
These days, the idealists are losing their
battle to the so-called China pragmatists.
Deep down, pragmatists sympathise with the
idealists’ concerns, but they have concluded
that the only sensible way to deal with China
is to engage it economically and politically.
They suspect that criticising Chinese society
is counterproductive. (On a personal level,
direct criticism can make Chinese representa-
tives feel they have lost face, and thus disen-
gage.) They see benefit in increased business
with China and hope that in an economically
stronger China, social and environmental con-
ditions will improve from the bottom up.
Iceland’s China policy has long since
moved from idealism to pragmatism. But even
to pragmatists, the degree of recent Icelandic-
Chinese contact sometimes seems dispropor-
tionate. A recent report in Fréttablaðið (June
24) says that 20 official Chinese delegations
were expected in Iceland in 2007.
All of them will take up Icelandic public
servants’ time and money. One can’t help but
wonder whether this will be time and money
wisely spent. Chinese officials tend to come to
Iceland in large groups. Of course one wants
to be hospitable and to promote cultural ex-
change. But the protocol and security arrange-
ments for Chinese visitors have sometimes
seemed excessive. Even Minister of Justice
Björn Bjarnason, a person who normally takes
pride in Iceland’s police and border security
capability, has repeatedly criticised the Icelan-
dic government’s heavy-handedness towards
Falun Gong protesters during Chinese presi-
dent Jiang Zemin’s visit to Iceland in 2002.
It’s easy to see how these visits make
some people start to imagine that Iceland has
lost track of its self-interest and swung be-
yond pragmatism to a point where it is letting
itself be manipulated. I haven’t managed to
learn enough about the costs, incentives and
outcomes of these visits, the interests behind
them, the time they take or the amount of
free food involved, to really judge whether
this is the case.
New Zealand is another country which has
moved from idealism to pragmatism in the
last few years. Much like in Iceland, critics ac-
cuse New Zealand’s government of suppress-
ing protests against visiting Chinese leaders,
stonewalling local journalists who have ide-
alistically criticised China, and moving too
quickly towards a free trade agreement with a
country for which many New Zealanders feel
a considerable amount of moral queasiness.
But for now, economics has trumped
idealism. When I studied Chinese in Beijing
in 1992, the atmosphere was still politically
charged, and it is only a small exaggeration to
say that every conversation with Chinese stu-
dents was thought of as an example of friend-
ship between nations. Now, most foreigners
in China have making money on their mind,
not political principles. This has pulled the po-
dium away from those who are troubled by
social, environmental, and human rights is-
sues in China.
Europeans’ personal relations with Chi-
nese have started to resemble their relations
with Americans, in which feelings about, say,
the death penalty or the war in Iraq are mostly
set aside.
Still, it never takes long before a disturb-
ing story comes over the news from China
– or the United States – about pollution, or
corruption, or discrimination, or cultural im-
perialism. Such stories force the idealist deep
inside every pragmatist to ask again what we
should do when we see fellow humans suffer.
No amount of business success can ever quite
make this question go away.
The History of China Hype
It’s skilful marketing, in addition to business
realities, that has created a China buzz in Ice-
land. And marketing often means creating ex-
pectations that people can get excited about,
even if they never fully pan out.
The myth that the future of business is in
China is very old. As early as 1840, European
and American manufacturers ran the numbers
and calculated that they could get hugely rich
if they could just sell one toothpick or but-
ton to each person in China. Iceland’s current
exports to China work out to only about two
ISK per Chinese. What if we could boost that
to two hundred ISK, by getting every Chinese
person to eat half an Icelandic cod fillet on
average every year? Just a few hundred grams
– that’s not much, now!
These speculative dreams have a history of
not working out. One of the most poignant
examples was the story of the Icelandic-owned
Scandinavian Guangzhou Candy Company,
which began producing liquorice in China in
March 1993 and closed amid land ownership
disputes in the summer of 1994. (For more
detail, see Stefán Úlfarsson’s master’s thesis,
“Kína í íslenskum veruleika.”)
I lived through a more modest example
of high expectations when I went to work for
the then Bifröst School of Business in 2005.
Amid much fanfare, the school had signed
a partnership agreement with a university in
Shanghai. The hype was that just as many
Chinese students have come to American
and European universities in the past couple
decades, dozens of Chinese students would
soon be studying business at Bifröst. This
sounded exciting at the time, but little by little
it turned out to have been a misjudgement of
the market. No Chinese students ever came
to Iceland. But there was actually a workable
business model in the relationship. Shanghai
became a popular, inexpensive, and exotic
study abroad destination for Bifröst students
– essentially, another outsourcing role for Chi-
na, with Icelanders as purchasers, and teach-
ing rather than phones or TVs as the prod-
uct.
Besides sheer size, another way to get
people excited about China is to play on the
natural tendency to imagine that foreign cul-
tures possess secret spiritual wisdom. Own-
ers of Zen retreats, purveyors of meditation,
massage, and Chinese medicine, and tattoo
artists who post Chinese character designs on
their walls all lick their lips when Europeans
and North Americans come through the door
convinced that Asians understand the path
to cosmic bliss. (Similarly, Landsbanki’s recent
English-language advertising campaign, which
The myth that the future
of business is in China is
very old. As early as 1840,
European and American
manufacturers ran the
numbers and calculated
that they could get hugely
rich if they could just sell
one toothpick or button to
each person in China.
China is neither as much
of a threat, nor as much
of an opportunity, as it is
made out to be.
Iceland–China
Text by Ian Watson
Is Free-trade as Good as Claimed?
REYKJAVÍK_GRAPEVINE_ISSUE 15_007_FEATURE/FREE TRADE_17