James Mann on US Corporate Views of China
Good US-China relations piece by James Mann (writing for The New Republic) on how, and why, US corporations have become disenchanted with China over the past couple of years. The question is whether diminished corporate support for engagement with China will occur as a response to China policy towards inward foreign investment, and if so, how will this effect US-China relations. Very important topic that Mann frames quite well.
He starts off with GE chief Jeff Immelt’s recent anti-China comments and moves on to the bigger picture.1
I’m a big fan of Mann and respect his China expertise, but I do have a couple of comments:
First, using Google as an example:
Immelt was merely the latest representative of corporate America to ring the alarm about restrictions on business operations in China, taking his cue from the leaders of Google and other major companies.
As I’ve said many times already, the Google situation is a special case and is not useful as an example of the problems facing foreign investors. Google decided to stop following the law and was told to stop it. This could just as easily have happened to a domestic firm. For more on that issue, I’ve written several posts on China Hearsay, and you can also check out my posts (and those of Kai Pan) on china/divide.
Second, using the Xue Feng case to illustrate the limits of American presidential intercession on China issues:
Sometimes, even presidential appeals to China produce nothing. Last November, during Obama’s visit to the country, he made a quiet appeal on behalf of Xue Feng, an American geologist who had been jailed in China. An employee of an energy firm, Xue had been charged with stealing state secrets, accused of trying to purchase information about China’s oil industry. On July 4, despite Obama’s plea, Xue was sentenced to eight years in prison.
I wrote about the Xue Feng case a couple of weeks ago. Yes, Obama and his team didn’t get what they wanted in that instance. I’m just not sure how this is relevant to a discussion about American foreign investment and corporate support of China engagement. Sure, Xue Feng was employed by an American company, but the case really had nothing to do with FDI policy. It was a criminal trial for violation of state secrets. If Mann is suggesting that the Xue Feng case has made FDI more risky over here, that’s something else.
Third, 20/20 hindsight of China’s WTO accession:
Occasional hints emerge that Obama himself has become irked—not so much at China as at the way his predecessors helped to bolster China’s position. Buried in a recent column about trade in The Wall Street Journal was this revealing tidbit about Obama: “He needles aides who worked in the Clinton administration that they let China into the World Trade Organization with a better hand than the one he had to play. Aides counter that China would be even more of a threat if not bound by WTO rules. He is un-persuaded.”
My comment here is on Obama’s thinking, not Mann’s.2 It’s funny, but when China joined the WTO, they had to do so, to some extent, holding their noses and accepting what they felt to be a one-sided deal. U.S. markets were already open to a lot of Chinese goods at that point, and it was China that was giving up a lot, including sweeping legal reforms that liberalized foreign investment and strengthened protection of intellectual property rights.
At the time, foreign investors were very happy, and they joyously poured into China and tried to make money. In the years since, the law has actually become much more favorable to foreign investors (on the whole) than it used to be. China’s WTO accession was a huge success for United States corporations — for the most part, they got what they wanted.
Yes, in the past couple of years, China’s industrial policy has become more aggressive, and some U.S. corporations have suffered as a result. I would say that it’s more of a “three steps forward, one step back” sort of deal. For Obama, and other China critics, to look at current difficulties and conclude that U.S. negotiators should have seen this coming and been tougher during the negotiation process, speaks more to the ignorance of those critics and their unwillingness to deal with a situation where the U.S. cannot dictate terms to China the way it used to. Mann drives this point home quite well:
Western business leaders still don’t seem to grasp fully the extent of this fundamental change. Some of them still speak as though they have the same clout they wielded in the 1990s.
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- I explained why I think Immelt is full of crap over on china/divide.[↩]
- Mann knows a hell of a lot more than I do about China’s WTO accession process and the US-China negotiations.[↩]
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The real issue here is that just making some disgruntled noises isn’t going to achieve much. Scaling back investment plans, laying off workers and making some large investments in other competing economies–that might get Beijing’s attention. If not, they may have better luck working with other governments. Companies can’t just keep wishing that things will return to the status quo ante. As Mann pointed out, there has been a fundamental change.
Something needs to change, but it won’t be by scaling back. As much as these guys want to complain about China, they are still enamored at the growth here and the size of the market. They will hedge their bets, but only to an extent, and Beijing knows that.
I thought this is a good cnbc’s video about the current economic climate for US businesses in China.
http://www.msnbc.msn.com/id/21134540/vp/38314322#38240747
Yes I generally agree, China just don’t want to be the low cost, cheap crap producer of the world. They just want to move up in the food chain, but many Western Multinationals just don’t realize that.
Great Post.
It seems that most Sinologists (from the business realm) are becoming more and more frustrated that Congress still hasn’t developed a coherent industrial policy to deal with China’s much more organized approach. Just like McGregor’s Op-ed in the Washington Post and Newsweek a few months back, the real target for these diatribes seems to me like an open challenge to Congress to look beyond electoral cycles and start approaching trade and manufacturing with the same zeal and laser like focus that China’s policymakers take.
Similarly, Ray Kwong’s recent piece about Five Ways China Will Rule Tech seems like another “shot across the bow” of Congress when it comes to R&D policy. Granted, scientific advancement can’t be promulgated but still, coherency seems to be the real message that these pieces seem to be conveying. It seems that they are all in agreement that State Capitalism has come of age, and we can’t solely depend on disparate policies and private corporations to keep America in the lead economically and scientifically.
These five year plans seem to be perfectly aligned with the Chinese adage “crossing the river by stepping over stones.” China takes an incremental approach to achieving the larger goal. In America, we seem to have more of an ad-hoc approach, with no real sense of depth. This needs to change, and fast. Maybe dropping the notion that everything we do is “divinely inspired” is one way to sober up and get real.
http://www.economist.com/node/16591267
What do you think?
Preaching to the choir. I’ve been citing McGregor’s article on a regular basis recently.
Look, it’s not difficult coming up with a better policy, it’s just the crappy American political system that is completely messed up. Until some fundamental reforms are made on that front, none of this is going to happen. The U.S. can’t even pass meaningful health care, finance, or energy reforms. How is it going to get anywhere near an industrial policy?
I’m down on anything coming out of D.C. these days, sad to say.
First, great blog and thanks for posting this.
Just a quick comment on your criticism of the aptly put “20/20 hindsight”:
“to look at current difficulties and conclude that U.S. negotiators should have seen this coming and been tougher during the negotiation process, speaks more to the ignorance of those critics and their unwillingness to deal with a situation where the U.S. cannot dictate terms to China the way it used to.”
I believe you and Mann are right on target in urging business leaders to come to terms with a fundamentally changed situation. The clout of the 90s has indeed been lost. But is it wrong to criticize previous administrations for not taking China seriously enough here? From a managerial point of view, probably; but from a strategic point of view, it highlights the hubris which ran through the veins of the US in the 90s. Asserting that the US did not fully leverage its previous clout while it could, that it may have taken too shortsighted an outlook the what the particulars of the country’s WTO accession meant, doesn’t seem so off the mark – the speed at which that clout has passed us by could be argued to be precisely because everyone thought it was going to last much longer.
But again, the situation has changed – and both for business leaders and the current administration, wondering what might have been is useless at best and self-defeating & deleterious at worst.
I’m not convinced that the agreement struck in ’99/’00 was at all a soft agreement. USTR and the Clinton folks got the best deal they thought was possible at the time given everything else that was going on. Period. Everything else to me is Monday morning quarterbacking (and a bit of scapegoating).
IMO the Chinese government is making a major mistake regarding Western multinationals. Western multinationals are China’s best asset in obtaining influence in foreign capitals; when it comes to Mann’s “China Delusion”, the people with some of the most to gain are international businesspeople.
If the Chinese government is smart, the pressure on foreign companies is a calculated move. During the recession, foreign companies will be weakened by poor access to capital at home. The Chinese market, for most of them, is either not profitable or only marginally profitable, with most presence there as an outlet for exports or to profit off future, not present, prosperity. So, the amount of benefit foreign companies derive from China is, to begin with, limited, and the benefit foreign companies can bring to China as far as bringing in new management techniques and technologies is also limited.
In this case, China can take advantage by tilting the field towards its indigenous businesses. It can encourage its own businesses to expand during this time, as well as consolidate market share. Then when 2012 or 2013 comes up and the world economy recovers, the Chinese can ring up the leaders or representatives of multinationals and tell them, first, that the Olympics sucked for them because of crappy press coverage in the run-up to the game. Second, after the Olympics sucked for the multinationals due to pressure on multinationals operating in the Chinese business environment. If you then make the connection, the Chinese can arrange to have foreign multinationals work to use their media departments to help China revise its international image without making political concessions. They’ll get help from spin doctors, and get political interference from foreign multinationals involved in the China market against its opponents. In return, China returns preferential treatment to Western multinationals on the condition of having positive press accorded to China in the span between 2013 and 2025, or until China exceeds the United States in GDP.
I haven’t been clear, but I’m not willing to rewrite the previous statements. China does what a Soviet spy called “merchandising air and water”, where unreasonable demands are first made, then are retracted on delivery of reduced concessions. Here, China toughens the business environment in China to start with, then they offer to loosen it provided the counterparty deliver on their demands. The timing is especially good since during the recession, what Western multinationals can offer will be reduced, so what China loses by worsening the business climate is also reduced, so it gets something for nothing.
Wen Jiabao and others in the government have already started to walk back from the edge, at least rhetorically. I think the question is just how valuable are multinationals to China (in their own calculation)? I agree that FIEs are extremely valuable and should not be taken for granted, but I’m not at all sure that sentiment is shared in Beijing these days.
I’m just wondering if the CPC knew what they were doing when they started enforcing laws against FIEs and unrolling the welcome mat during the economic crisis. From my point of view it looked like shockingly delusional overconfidence, but maybe they did know what they were doing and they were simply preparing to take hostages then negotiate for release.
Still, there’s no evidence to the latter; from the information given Occam’s Razor states that they were just being incompetent.
or pandering to the domestic base, or the result of factional warfare within the CPC letting the autarkists have their day, etc…
James Mann has probably been my favorite China-thinker ever since I read The China Fantasy a while back. Your thoughts on his piece are interesting, especially regarding China’s WTO accession, where I agree with you in part and disagree with you in part. You are right that US businesses got exactly what they wanted and that they ran joyously into battle over the Chinese market with what I think was reckless abandon. I think they saw the GATT, the Protocol of Accession, and prospects of gradually improving international intellectual property protections with TRIPS as a starting point as cementing a trend of gradual liberalization that had already begun. In that sense, the agreement that the US negotiators got was really pretty good, from a commercial standpoint.
But some of the promises that China made the Protocol and has failed to follow through with were, in my opinion, some of the most important, and they are the ones that I think are really troubling the current business/investment climate the most. This is where Mann’s thinking comes back into play: they are also the ones that are most closely associated with the power of the state. I am thinking in particular of China’s promises regarding the operations of state-owned/state backed enterprises–which it promised would operate as private entities in accordance with market principles–and its promise to accede to the Government Procurement Agreement (I believe the GPA promise was in the Protocol, but my memory is flaking out a little bit).
If predictions like Mann’s (I know The China Fantasy came later) regarding China’s future political and legal environment had held water with more officials, they may have been significantly less willing to just take China at its word regarding continuing market reforms and the political reforms that really do need to follow suit if the market is to be fair and competitive. Perhaps someone important would have asked, “Shouldn’t we ask them to do some more of this stuff BEFORE we support their accession?”
Of course hindsight is 20/20, and it’s really hard to blame people for making an optimistic evaluation of the future during an incredibly optimistic era of history. Nonetheless, I think there were always a lot of voices that were very skeptical regarding the Chinese government’s intentions and its ability or willingness to actually abide by either the letter or, even more so, the spirit of the agreements. Ultimately, the cynics (or the voices of caution, whichever way you want to put it) in the US lost and got a couple of congressionally funded China commissions and their largely-ignored (but very worthwhile, in my opinion) annual reports as window dressing for their troubles.
I should also add that, while some very important promises, especially the ones related to loosening political control, like the operations of SOE’s, have gone unfulfilled, it’s not as though China’s implementation of its WTO obligations has been a complete disaster either. On the contrary. Most of the problems that I see, even if distasteful to many, are questionable-to-arguable from the standpoint of international trade legality. Ultimately, a lot of the tech transfer and R&D centers and whatever else these western companies see as having bred the new generation of domestic competition–the vast majority of it, probably–was entirely voluntary, an attempt to create the “friend of China” image that is supposedly so important…They were arrogant when they went in, the Chinese business and cultural climate only inflated those egos, and inflated egos do really dumb things sometimes (and like to blame someone else for the fallout).
Good comments, and I generally agree. I guess, however, that I have less sympathy for anyone forecasting based on expected, but not actually promised, reforms. If you want something, you need it in the Accession Protocol (i.e. in writing). Anything else is wishful thinking, and bad lawyering.
Agree entirely. But, I guess the real problems arise surrounding issues that are in writing in China’s accession documents. For example, here are paragraphs 48 and 49 of the Working Party Report:
48. Certain members of the Working Party expressed concern about laws, regulations and measures in China affecting the transfer of technology, in particular in the context of investment decisions. Moreover, these members expressed concern about measures conditioning the receipt of benefits, including investment approvals, upon technology transfer. In their view, the terms and conditions of technology transfer, particularly in the context of an investment, should be agreed between the parties to the investment without government interference. The government should not, for example, condition investment approval upon technology transfer.
49. The representative of China confirmed that China would only impose, apply or enforce laws, regulations or measures relating to the transfer of technology, production processes, or other proprietary knowledge to an individual or enterprise in its territory that were not inconsistent with the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS Agreement”) and the Agreement on Trade Related Investment Measures (“TRIMs Agreement”). He confirmed that the terms and conditions of technology transfer, production processes or other proprietary knowledge, particularly in the context of an investment, would only require agreement between the parties to the investment. The Working Party took note of these commitments.
To the extent that the Chinese government has been involved in forcing western companies to transfer technology, then, China would be in violation of written commitments. To the extent that companies transferred technology willingly and it’s come back to haunt them, they’re out of luck. In any event, it would be very difficult to prove since there probably wouldn’t be any record of state compulsion. There are a number of other commitments in section 6 of the WPR on which the Chinese government really doesn’t seem very interested in following through. The US and China are fundamentally at loggerheads on this, and the role of the state in the “private” sector will continue to be a very thorny issue for the economic relationship moving forward. I don’t see these companies’ issues being resolved in any meaningful, long-term sense any time in the near future.