With China’s New Standing Come New Errors.
This post is very much based on Steve Dickinson’s article in this month’s China Economic Review, entitled, “New Image, New Error.“
With China being hailed as the world economy’s savior, its government has concludedthis is its century. The West is irrelevant and China will lead a vanguard of new players — and the game will be played by Beijing’s rules. Particularly in the area of trade and investment, China hopes to jettison the constraints of world trade law for a return to the policy of national interest and raw power. In this new world order, Beijing sees little need for foreign economic or technical assistance.
From the standpoint of foreign investors in China, this new self-image is already having a significant impact:
• Applications for wholly foreign owned enterprises (WFOEs) and joint ventures are more often being delayed or denied by demands for documents or capitalization not required by law. Officials openly state they are no longer interested in encouraging foreign investment.
• Registration of technology licenses is either prohibited or restricted in direct violation of law. The idea is that Chinese business should no longer be required to pay for access to foreign technology.
• Visas for foreign workers are increasingly being delayed, denied or restricted. The position is that Chinese workers are available to do any job.
• Investments in China used to be falsely profitable as foreigners qualified for tax breaks unavailable to domestic businesses while employment and wage rules were not enforced. This position has completely reversed. Chinese and foreign companies are expected to operate under exactly the same rules, making many foreign ventures unprofitable.
Assuming China truly has no need for foreign investment and technology, these changes are rational and there is no reason for China to back off from them so long as its economy remains strong.
It is less clear how this new image of China as world leader will play out in the country’s commercial dealings with the rest of the world. Though an old civilization, China is actually a
very recent entrant into the world system and it tends to view the legal and trade rules governing this system with extreme suspicion. As a result, many Chinese officials believe China should disregard these constraints and simply take what it wants.
There were a number of examples of this approach in 2009:
• China uses the world trade legal process to make claims against foreign practices, but when
the WTO rules against China, as in the recent copyright case brought by the US and others, Beijing feels free to simply ignore the decision.
• As the major purchaser of many raw materials, China believes it should
be able to dictate purchase terms, without negotiations. Iron ore is a good example of this. China formed a buyer cartel (in violation of its own and foreign anti-monopoly law), which demanded a single price from its suppliers, with no room for negotiation. This “hardball” approach is being considered for other industries where China is a major purchaser of raw materials.
• China has made a number of high profile investments in the third world, both for resource extraction and infrastructure development. It often employs a “take our terms or forget the deal” approach, insisting on total Chinese staffing, financing and control.
In the international arena, this strong-arm approach is certain to fail. Regardless of its recent
economic success, China simply does not have the power to force its will onto other countries. No country has that power – as errors made by the US in the 1970s and Japan in the 1980s attest.
Should we be surprised with how China is poised to repeat the same strategic missteps in this new century? Are you seeing this change in attitude? What impact is this having or going to have on your business?
UPDATE: Just noticed that my good friend Andrew Hupert, over at Chinese Negotiation, just did a somewhat similar post, entitled, “The New Chinese Negotiator: From Harmony to Our Money (Part 1).“
Andrew sees the following five things shaping the US China relationship (both on the macro and the micro level):
1. Copenhagen proves China is done playing coy about its status in the world.
2. “China’s default negotiation position is zero-sum game/ competitive – and there doesn’t seem to be a crisis big enough to get the US and China pulling in the same direction.
3. The Chinese government is running more of the private sector show now than a few years ago. “Scratch a private Chinese business and you’ll find a policy-driven organ of the bureaucracy.”
4. “The new projection of Chinese power will be infrastructure projects and commercial deals. China’s foreign policy is driven by a need for raw materials, and it isn’t squeamish about who it has to get in bed with to obtain them.”
5) “Non-economic considerations drive Chinese organizations, as long-term policy concerns ace short-term profit/loss decision. For years Western dealmakers were driven to distraction by Chinese counter-parties that seemed blind to their own self-interest. It’s not that the Chinese side was dim or daft – rather they were driven by non-economic factors like policy, bureaucracy, relationship, technology and access to intellectual property.”
I urge you to read Andrew’s post.