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Trade between Iceland and China


A very informative conference celebrating 40 years of official Iceland-China trade relations was held at the Tower in Smaratorg, Kopavogur, yesterday between 14:00 – 17:00. The conference was opened by Mr. Ossur Skarphedinsson, Minister of Foreign Affairs, and Dr. Su Ge, China’s Ambassador in Iceland. Among the presenters were Kjeld Erik Brodsgaard, (Copenhagen Business School), Huni Heidar Hallsson (Arctic law expert), Vala Valtysdóttir, Deloitte, Magnus Oddsson (Ossur), Kjartan Pierre Emilsson (CCP) and Magnus Bjornsson.

External trade with Iceland

In his opening speech, Mr. Ossur Skarphedinsson traced Iceland/China trade relations back to the Viking ages as both walrus and narwhal teeth have been found in Chinese graves of royalty. The link is that of Viking mercenaries and tradesmen (Varangians) residing in Miklagard (Istanbul). He also made a reference to the silk route, which he brought to the present by pointing out that imports from China to Iceland have far exceeded Iceland exports to China. To anyone that has read James Clavell’s Tai-Pan (highly recommended!) or studied the history of trade between Europe and China, especially 1750 – 1850, this reference gives indication as to how trade relations will develop (download the spreadsheet from which the image to the left is derived).

Dr. Su Ge followed with a captivating speech on how Iceland and China have strengthened their bonds over the years.  When discussing the credit line issued by China during Iceland’s recent economic hardship, he discussed how the IMF/Icesave affair was approached by Chinese officials and ended on the powerful sentence: “IMF and Icesave are not related – period!” I venture to say that anyone present felt the impact of that statement. While Europe and the US struggle to save their deteriorating credit systems by creating a jigsaw of intertwining ‘regulatory’ conditions, enters China and takes a firm position with this microscopic economy in the north. Does Iceland really need Western allies given that this emerging superpower is sufficient strength to quench them?

Kjeld Erik Brodsgaard followed with a superb overview of the economic situation in China, titled “The political and economic consequences of China’s integration into the global economy – background and perspectives.” What stood out were three issues:

  • China’s leading – and key industries – are state controlled. Good or bad? Take a look at the Unites States power grid and how privatization enabled a firm to literally blackmail the state of California. Also take into account the collapse of the entire private banks in Europe and the US. Iceland’s Landsbanki Islands had been around since 1885 and was never in any real danger of collapsing (unless the economy itself collapsed). Privatized in 2003, it took the new owners 5 years to not only bankrupt the bank but also the country! The same happened at Kaupthing’s side, which was a merger of Kaupthing (established 1982 as a small agency financial advisory and securities brokerage) and Bunadarbanki Islands (established 1930). The argument against China’s methodology therefore does not fly. The Westerns have proved beyond reasonable doubt that privatization of key sectors carries significant economic risk and rating firms ought to take key sector privatization into account when awarding their ratings.

  • According to Brodsgaard, there is no clear strategy behind China’s shift toward a more market-oriented economy and overall economic management. It was pointed out that instead of strategy, China carries out experiments in various regions and if successful, are implemented nationally. Is that not exactly how things should be done? Test marketing is always good before launching and even the best laid plans are prone to backfire because of the multiple variables that affect each scenario. Again, the privatization rage that engulfed Europe 2000 – 2005 led a large section of Europe to fall on its face (PIIGS) and the US economy to take a direct hit from which it is still recovering. Re-privatizing the Icelandic banks is questionable; Western bank owners are simply not to be trusted and neither are the regulators. But do we really want public banks with all the red tape and political favoritism? Perhaps not; a middle ground must be found.

  • China already has 46 companies on the Fortune 500 list, with 2010 had  Sinopec at #7, State Grid at #8 and China National Petroleum at #10. The problem for China is that it wants global market leaders (brands really) but does not appear to have a clear idea how to go about creating such entities. Known for cheap, mass-produced products (Made in China which is tainted by Made in Taiwan), China is suffering from a history of inferior quality products. To the Western consumer, Made in China translates to junk. Japan overcame that problem and so will China if it completely rebrands its firms and embarks on an aggressive, long-term image campaign. China is increasing foreign direct investment (FDI) abroad, partly to buy such an image, partly to maximize returns on surplus funds and keep FDI in balance. As far as image is concerned, buying Western firms is not enough; China itself needs a more modern image. It has come a long way but more is needed if China wants to become more alike Japan. South-Korea is for instance battling the image problem of North-Korea, which continues to taint products despite the fact the the two economic regions are completely different.

The case outline regarding the Northern Route (East or West around the North Pole, usually referred to with that connotation) by Huni Heidar Hallsson was exceptionally informative and well delivered. There is one concern, however, and that is how long the route stays open. That the polar ice cap is melting is a fact, but scientists have raised questions regarding the effect on the Gulf Stream, which carries warm water north. If that current changes, the Arctic region may well freeze solid completely. Another issue is the effect on major ports. If ocean level rise, what happens with the major ports? Is this opportunity perhaps even larger that calls for a complete remapping of the entire shipping line system globally?

After all, the Earth looks a bit different today than it did at the time of the Pangea supercontinent, in the center of which is the soil on which New York stands today. Some of the concerns regarding the ice cap meltdown are:

Over most of geologic time, long-term sea level has been higher than today. Only at the Permian-Triassic boundary – 250 million years ago was long-term sea level lower than today. Long term changes in sea level are the result of changes in the oceanic crust, with a downward trend expected to continue in the very long-term.”

The Mediterranean Basin’s gradual growth as the Neotethys basin, begun in the Jurassic, did not suddenly affect ocean levels. While the Mediterranean was forming during the past 100 million years, the average ocean level was generally 200 metres above current levels. However, the largest known example of marine flooding was when the Atlantic breached the Strait of Gibraltar at the end of the Messinian Salinity Crisis about 5.2 million years ago. This restored Mediterranean sea levels at the sudden end of the period when that basin had dried up, apparently due to geologic forces in the area of the Strait.”

If small glaciers and polar ice caps on the margins of Greenland and the Antarctic Peninsula melt, the projected rise in sea level will be around 0.5 m. Melting of the Greenland ice sheet would produce 7.2 m of sea-level rise, and melting of the Antarctic ice sheet would produce 61.1 m of sea level rise. The collapse of the grounded interior reservoir of the West Antarctic Ice Sheet would raise sea level by 5–6 m.”

That said, if the ice cap melts, it may have far greater impact than simply opening up a new trade route. The major issue regarding investment in ports has to be if such an endeavour is sustainable. The Arctic region is rich in raw materials, metals, minerals and energy sources. Is there any wonder that China is interested in creating strong relationship here in Iceland? Thinking long-term (short-term does not work for an economy of China’s size), the name of the game is secure a foothold in the goldmine of the future. As China has played the game since the economic collapse and even before it, it is completely outmaneuvering both the EU and US, who are stuck in a rut attempting to save seriously flawed credit and political systems.

This conference was very informative and enjoyable. Thanks to the Iceland-China Trade Council and other institutions for organizing it. Forty years of trade relations will doubtless extend into another forty.

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