Saturday, July 10, 2010

Storm out of China

I've been tracking the emerging consensus among foreign businessmen about China's nationalism economic behavior. WSJ hosted an article yesterday about China's frustrated "old friends" -- businessmen who were Friends of China and are now today's used and discarded husks. What did they expect?
It hasn't quite worked out that way. Among the oldest of the old friends is General Electric CEO Jeff Immelt, who had the audiences in Beijing and welcomed Premier Wen Jiabao to Rockefeller Center in 2003. But GE hasn't been meeting its growth targets in China lately. Last week at a private gathering in Rome, Mr. Immelt blamed an increasingly protectionist government that seems intent on limiting the success of foreign businesses in China.

His view is rapidly becoming the consensus. China is using nontariff barriers to change the rules of the game. These include mundane pieces of regulation such as product standards and licensing requirements. For instance, mobile-phone makers must test and certify that every new product meets emission standards, instead of simply submitting the results of internationally recognized testing. Earlier this year, authorities in Zhejiang province cracked down on several famous brands like Hermes and Versace for supposedly selling shoddy goods.

Since standards differ from country to country, sometimes for legitimate reasons, it is difficult to prove China's malicious intent in order to win a World Trade Organization complaint. And in any case, one set of barriers can easily be replaced with another. This technique was pioneered by Japan in the 1950s, and it represents a growing challenge to free trade now that the WTO has brought tariffs down to a low level globally.

China is moving the goal posts in less subtle ways, too. Earlier this week a Chinese court sentenced American geologist Xue Feng to eight years in prison for selling state secrets. The supposed secret, however, was a database of publicly available information on the state-dominated oil industry which was only classified secret after the sale.

Ignoring the personal involvement of U.S. Ambassador Jon Huntsman, Mr. Xue's claims of police torture and the judiciary's abuses of Chinese and international law, the Communist Party chose to send a message to foreign businessmen with the harsh sentence: Be careful not to compete too vigorously with state-owned companies or to run afoul of managers who are also Party cadres.

Then there is intellectual property. The U.S. business community is pressing hard for the Obama Administration to make progress at a high-level dialogue with Beijing on innovation policies later this month. These policies restrict access to government contracts unless intellectual property is developed in China—another kind of sneaky protectionism. Given the poor protection of such property, most multinationals are reluctant to locate their most advanced research there.

When foreign officials raise such problems with their Chinese counterparts, the answers make clear that Beijing has little interest in transparency or the rule of law. It intends to preserve arbitrary power over foreign business, as it does for domestic enterprises. After all, the investment keeps coming. The economic cost is limited because if the "front door" is closed, everybody knows that there is usually a "side door" that allows the deal to get done. Forcing business into an ambiguous position may lead to more corruption, but it gives officials greater leverage, too.

For three decades, Western businesses didn't object to this arrangement because the deck was stacked in their favor. To secure foreign capital and technology, Chinese officials offered tax breaks and help overcoming the obstacles of doing business in a developing economy. It was easy to buy into the rhetoric about friendship and long-term relationships.

But now that Beijing sees its state capitalism model as superior to the West's fixation on a level playing field, the rules have changed. Beijing believes it's time to build national champions in the Japanese mode. And that requires a protected market to serve as their base to achieve economies of scale.
It is incredible that after the experience of Taiwan, Korea, and Japan, there were people who believed that China might be different. Better to say, didn't care that China would be the same.

I'm curious to see whether Taiwan's (and to a lesser extent, South Korea's) OEM/ODM contract manufacturing model turns out to be more resilient than the US corporate brand-driven, proprietary technology model in confronting China's nationalist economic practices. My impression is that China is attempting to emulate the US in erecting a corporate-driven marketing economy with large, big name firms, or perhaps the "national champion" model that some EU nations pursue. That would still leave plenty of room for the technology OEM/ODM makers, small and medium-sized firms in China in a sector dominated by Taiwan firms, to pursue their traditional role. I wish I had a better angle on whether Chinese SMEs are moving into the sectors currently occupied by Taiwan businesses and pushing them out, but information is not exactly thick upon the ground.

UPDATE: John Bolton of AEI in today's Taipei Times on a similar theme.


Also on tap from China was the controversy in Canada last month about Chinese influence on that nation's political process at all levels. Accusations that China had its fingers in Canadian politics were met with the usual off-topic retorts of racism and paranoia. David Harris, a former intelligence official, responded in the Calgary Herald. The entire piece on "foreign influenced activity" is excellent; here's the China section:
And then there is China. Fadden rightly signalled that China is a major problem in the foreign-influence department. In Canada, Beijing spies, bullies recalcitrant Canadian Chinese, funds "spontaneous" pro-Chinese demonstrations, and otherwise interferes in our democracy. It seduces politicians, public servants, academics, lawyers and other professionals with ego-boosting, expense-paid China tours and free -- albeit wired -- accommodation. All this, to buy access and influence. And there are indications that they're getting it.

Some current and past Department of Foreign Affairs' officials sit happily on the board of a major China-connected trade organization, their internationalist consciences un-niggled by China's harvesting of Falun Gong practitioners' organs. Given current benefits and future considerations, we should ask how such extracurricular involvement translates when bureaucrats and politicians go back to the office, build policy and hire future bureaucrats. The fact that some prominent beneficiaries of these networking systems graduate seamlessly into "consulting" in China, should be a big concern to the citizens they supposedly serve.

Then there was the former member of Parliament and earnest defender of democratic Taiwan's independence. After a few too many Mainland boondoggles and hostesses, the MP suddenly embraced Beijing's Taiwan-destroying "One China" policy, pressing this on Canadian ministers and officials.

Does Canada have the equivalent of the cashiered Afghan official who allegedly accepted multi-millions to -- as Christopher Hitchens put it -- "steer an enormous copper-extraction deal to China, a country whose resource imperialism is already a disgrace everywhere from North Korea to Darfur?" Hard to guess. But it will be worth watching the future career paths of Canadian ministers, officials and lobbyists who secured exceptional approvals from Ottawa for recently-announced extraction deals with Beijing-backed companies.

Fadden's initiative has been followed by confusion about its timing and prime ministerial support. Sensing weakness, several politicians and opinion-makers -- including a noticeable complement of Chineseconnected ones -- have burst into hysterical ferocity, defending what they are pleased to regard as their honour. And perhaps other interests.

Even the diversity racket pitches in. Playing the "racism" trump, a voice or two from at least one publicly-supported immigrant settlement organization that is heavily dependent on Chinese immigration, claims absurdly that Fadden's remarks interfere with "integration." Guiltifying spectres are conjured from wartime Japanese-Canadian internment, plus generations-old images of Chinese immigrants without voting rights. "This type of allegation, then, true or untrue, is just not helpful," a settlement lobbyist told the appreciative Vancouver Sun.

"True or untrue?"

Someone missed the memo from Han Guansheng, the Chinese Security Bureau defector who pinpointed Canada as the country most riddled with Chinese spies.
In Taiwan many members of local political parties are doing business in China. We have a large businessman, Robert Tsai, who opened a pro-China newspaper, and a local cable news station owned by Hong Kong Chinese. We have an entire political party with a pro-China ideology that has long been negotiating with the Chinese Communist Party in defiance of the law and of Taiwan's long-term interests.

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green sleeeves said...

I was about to tell you the wsj piece and you beat me to it, just read it on the flight back.

Look up NY Times on July 10, I heard there will be an ad on "declaration of Taiwan's Independence" on July 10 , didn't have much info though.

D said...

After the Russian spies in the US, I'm ready for anything.

But on the topic of the PRC blocking foreign business competition: to my mind this is one of the major challenges facing the CCP today, or it's emblematic of the problems they face. On one side, they have a domestic audience. No room for error there -- if the populace becomes too dissatisfied with the government, the only solution is violent repression, and that's never a great play. On the other side, the "Western powers", knocking on China's door. If the West gets too sick of "capitalism with Chinese characteristics", we're looking at the Opium War all over again. The question is whether/when the West can/will band together to insist on its business interests, and whether/when China will see the conflict coming and avoid it instead of going into battle, economic or otherwise. Interesting issue. And Taiwan's place in it is intriguing too.

Horrifying to find myself agreeing with John Bolton. I'd rather agree with Michael Bolton....

Michael Turton said...

Ha I had the same reaction to Bolton.

The PRC is really in a bind because ultimately they lack legitimacy, so they have to keep the people happy with a constant flow of economic growth and nationalistic successes. As you note, these goals are coming into conflict.

11:02 AM

skiingkow said...

Of note was the "timing" of the CSIS chief's remarks. It occurred during the visit by Hu Jin-tao right before the G20 summit in Toronto.

Marc said...

Horrifying to find myself agreeing with John Bolton.

A careful reading of John "As negative and blustery as I wanna be to deflect my lack of original thinging" Bolton's latest diatribe reveals nothing any of us don't already know. Of course, you agree with him, because we've already read all this in the news in the last year.

Essentially, you're really agreeing with Sergey Brin, and with certain Brookings folks. Bolton has long proved himself merely to be neo-con altar boy. Have we already forgotten about his brief and reckless stint as ambassador to the UN?

D said...

@MT "in a bind because ultimately they lack legitimacy".

Exactly. And for better or for worse (ok, probably the latter) the Taiwan issue is tied up in that.

Marc said...

Re the latest engineered paranoia from Beijing about Facebook (which is blocked in China anyway) and other social websites:

Do a search on FB with "Taiwan China" and see what China has to worry about.

Here's an excerpt from a FB group called
"Tibet and Taiwan BELONG TO CHINA PERIOD!" which has 175 members. This is unedited:

Siyu Yang: Fuck this group, fuck the PRC.

Jenny Xing: if you think about this carefully, taiwan and tibet are similar to Quobec of Canada. They all have different government perspectives... would canada really want to loose Quebec???


Siyu Yang: it is my real account...
Quebec and Canada both have democratic systems, that's the most important thing. Tibet wants independence because the system in PRC is AUTOCRATIC, FASCIST and WRONG. Taiwan is independent, Tibet isn't and it SHOULD BE. Have some basic PRINCIPLES people.

Jenny Lu: how about you get your facts straight have you even been to school get educated your embarrassing yourself

Siyu Yang: I love how instead of arguments you only have insults and BS. Seriously. GO back to china don't come and pollute the free world.

Jenny Lu: and i love how your so ugly that you wont show your face typical puffy eyed flat faced gook

Siyu Yang: my hotness would make your panties drop so hard they'll end up in china... provided you're a chick

Jenny Lu: LOL omg so pathetic china will always be superior to korea your jealousy really does add the icing to the cake

Siyu Yang: I'm Chinese...

Jenny Lu: wow kay than ur a disgrace :)

channing said...

I suggest not reading too much into what appears to be a teenage online catfight.

Marc said...

I suggest not reading too much into what appears to be a teenage online catfight.

How do you know they're teenagers? Did you check that fact before you said it?

Anonymous said...

Hello Dolly!

I can't believe Channing has come back at the same time a new crop of trollsters has decided to make an appearance. Arty... paging Arty!!

channing said...

How do you know they're teenagers? Did you check that fact before you said it?

I'm speaking figuratively, as in the policy dictators (and other influential people) in Beijing are strategic and have no need to resort to immature online catfights about who is cooler. Such tends to be the behavior of adolescents who overestimate their own importance.

Label me a troll for the teenage reference? I'm sure you can do better than that; after all, my opinions are blue before I even speak! Wait...or was it red?