Why?

We’ve got increasing US-China friction on a number of issues.  Observers have offered some pretty simple explanations for this situation, e.g. “the Obama Administration has been too soft on China so they feel they can push us around” or “China holds so much US debt that they have leverage to push us around”, etc.

Albert Einstein has been quoted as saying “Make everything as simple as possible, but not simpler”.  Chinese government behavior (like our own) is driven by a complex set of factors (with domestic considerations by far the most influential).  The following is a partial list of the factors as I see them:

• Continued sensitivity about being bullied or dominated by foreigners, growing out of China’s experience in the period 1840 – 1949 (sentiments kept fresh by the Chinese educational system and media).

• (Overconfidence) (Justifiable pride) from success in managing the domestic economy in face of global economic crisis, which has (incorrectly in my view) discredited the US model of growth in the eyes of some Chinese.

• Leadership insecurity at home driven by Tibet, Xinjiang, and increasing protests over economic and social issues, leading to a stronger voice by security and propaganda officials, who tend to be more suspicious of foreign companies/governments than the average Chinese official.

• Jockeying before unusually large leadership change in 2012 (Party Chairman, Premier, and most of the Politburo Standing Committee turning over); at a time like this hopefuls for senior positions want to look tough on domestic and foreign issues.

• Success of foreign companies in the China market since China’s WTO accession in 2001 that has created a backlash (think:  US in the 1980s (yikes, Japan is buying Rockefeller Center!))

• Impact of internet opinion, which by all accounts Chinese leaders regularly view and take seriously and which in turn tend to be dominated by a nationalistic tone (younger people use the internet more and they tend to be more nationalistic).

Ok, so what to do about this?  Complex issues do not have simple solutions.  There is no magic bullet, but there are important steps we can take.  The subject of a future post.

Complexity

In a previous post I have railed against some pretty poor analysis in the NYT.  However, it is a great newspaper and can produce great reporting.  An example is a lengthy piece in the Sunday Magazine today, titled, “China’s Cyber Posse”  (link here:  NYT)

What’s great about the article is first, that it covers a fascinating topic (the efforts by netizens in China to track down and humiliate people who have for one reason or another incited public scorn).  But second, unlike much reporting on China, this article manages to convey the full complexity of the issue.  Yes, the Chinese “human flesh search engines” are a way for Chinese people to seek justice against some (e.g., corrupt local officials) in a society where a fair and effective justice system is still very much of a work in progress.  At the same time, it is frightening example of unrestrained vigilantism which can be directed at people whose only transgression is being seen by the mob as “unpatriotic” or who are mistakenly believed to have committed a crime.

Read the article.

Keeping Our Eye on the Ball

There has been an increase in friction between the US and China in a number of areas.  As any reader of this blog (read:  hi mom!) would know, I am no China basher.  But I must say I place the weight of responsibility for the current situation on the Chinese side.  I think there are a complex set of factors driving Chinese behavior now, though I will save that discussion for another time.

The important thing for policymakers and observers now is to distinguish between bilateral issues where increased frictions are mainly rhetorical and those where there is a real substantive problem.  I put issues such as Taiwan arms sales and Tibet in the former category.  There seems to be hotter rhetoric from the Chinese side, but the fundamentals of the issues have not changed.

Bilateral economic relations are another matter however.  I am not talking about the RMB exchange rate issue, which I happen to think is worth only a small fraction of the time the US government spends on it.  This issue will continue to be the subject of much rhetoric and perhaps, unfortunately, concrete action on the US side (though I concur with observers who believe that China will allow the RMB to appreciate this year somewhat, based on their domestic concerns).

But the real story has to do with the Chinese view of the role of foreign companies in the Chinese economy:  Over the past few years the strong momentum behind the “reform and opening” policy in China has slowed.  This is not to say China is going backward toward a planned economy, but the voices in China most supportive of increased competition and openness as the way to fuel innovation and economic growth have been pushed into the background.  Instead, we have seen a surge in the voices of those who favor government intervention (aka industrial planning), as the way to propel China’s economic future.  This has been coupled with a noticeable rise in economic nationalism and increased influence for propaganda and security officials (who tend to be more suspicious of foreign influence than the average Chinese official).

Foreign tech firms have felt the brunt of these developments.  Under the rubric of promoting “indigenous innovation”, the Chinese government has undertaken numerous policies, in areas such as technical standards, government procurement, taxation, and M&A policy, to support local firms and disadvantage those from abroad.  Even non-tech firms have felt the sting of the changed environment, with some major foreign acquisitions of well-known Chinese firms in non-sensitive sectors foundering on the rocks of Chinese domestic political concerns.

But here’s the really significant part:  I’ve been involved in US-China relations for 25 years and I have seen commercial issues come and go even as major US companies remained excited about China and worked strenuously to avoid crazy actions by the US Congress and all administrations.  Over the past several months, for the first time, I have begun to hear some major firms express the view that their very future in the China market could be at risk.  They are not proposing to pull out of the market, which they still see as important.  However, their frustration level is so high that some are questioning whether the business community should sit on the sidelines the next time strong China legislation is moving on the Hill.  Such a “neutral” stance by major US companies could pave the way for some truly awful, anti-China legislation.

It’s not that there are any companies today demanding that their industry and trade associations stay out of the next major China legislation fight.  Nor is there anything close to a consensus on taking such action.  However, the fact that some major firms would even pose the question for discussion represents a striking shift in mood.  And of course, a decision by the business community to withdraw from its active efforts to prevent serious anti-China actions would have a significant destabilizing impact on bilateral relations.

I don’t know how this will develop nor where we will eventually wind up.  But I am sure that something is happening with regard to US China economic relations as it relates to the role of foreign companies in the Chinese economy.  I am also sure that in this area we are seeing an issue of substance, not mere rhetoric.  This is the one to keep an eye on.

Obama Shanghai Town Hall: Mission Accomplished

I stayed up way past my bedtime last night to watch the live feed (via White House website) of the President’s town hall meeting with students in Shanghai.  I took a particular interest in this event because while serving as Consul General in Shanghai I frequently visited college campuses and engaged in similar exchanges.  the format  (minus any press interest) was similar; I’d start with 20 minutes or so of views on US-China relations (including whatever topic was hot at the time) and then open the floor to questions.  Based on those experiences here are my reactions to yesterday’s event:

1)  The students were more polite to the President than they were to me.  This is no surprise.  I am certain the participants yesterday had been warned to maintain a respectful and polite attitude and to stay away from inflammatory questions.  This reflects more than anything the sense that China would be judged around the world by the demeanor of the students at this globally aired event.  To try to embarrass the President of the US or put him on the spot would be considered poor manners and would reflect badly on China.  So the questions for the President were pretty soft, though the clever students did manage to get in a question re US policy toward Taiwan (couched as a question from a Taiwan netizen); one about US aggressiveness around the world (couched as a question contrasting China’s drive for a “harmonious society” with US greater comfort with “diversity”); and one on internet freedom (again, a question from a netizen, relayed by a student in the room).

In contrast, I found in discussions with Chinese students that given the chance without the glare of cameras they could be very pointed, posing questions such as: Wasn’t it US policies in the Middle East that brought about the 9/11 attacks?  Why does the US see itself as the policeman of the world?  (in the aftermath of the EP-3 incident) Why does the US spy on China; isn’t it true the US wants to contain and weaken China? Why is the US so protectionist and why does it impose so many anti-dumping penalties on Chinese products?

As noted above, no surprise that in a very public forum Chinese students stayed away from very direct questioning.  That said, the students in the room were among the best and brightest in the country and I was impressed (again, as noted above) in the way that they managed to gently slide in questions on controversial topics.

2)  I thought the President did a great job, especially on the human rights and information freedom issues (take that NYT!).  He clearly intended to show the audience back home that he would not shy away from raising these tough issues.  However, he did so in the most effective way possible, which can be summarized as follows:  “Here is the way we in the US think about [human rights] [treatment of minorities] [internet freedom]; we are not perfect but we think our values in these areas have been central to our success as a nation; we are not out to force our views on other countries, but we do think that basic principles of freedom and human rights apply everywhere and we will continue to speak out in support of that view.”  In other words, his responses did not contain a direct rebuke to China but rather conveyed a humble expression of why we think our values/system is good for us and why we think these basic principles are universal.

3) Tiny nitpick of interest:  in responding to the question re Taiwan the President repeated our commitment to a one China policy and the Three Communiques.  Readers who know the intricacies of US policy on this issue will note that he did not refer to the Taiwan Relations Act, which is usually part of the mantra by USG officials when they mention the Three Communiques.  I took this not to be some intentional signal but rather a function of information overload for the President.  As insiders know, the language the USG uses on the Taiwan issue is exceptionally complex and nuanced.  In fact, the President clearly stumbled a bit when at one point he referred to Taiwan and then started to say “… and the rest of China”, but unsure if that was the right formulation, caught himself and said “…and the People’s Republic”.  So to me, he had done a great job of absorbing the sensitivity attached to the language surrounding Taiwan and dropping the TRA reference was, I think, not a signal but a sign of the limits of even his prodigious capacity to master complex issues in very short time spans.

The bottom line:  my goal in talking with students was not to enter into a debate nor win them over to my point of view.  Rather, it was to show them that the US government had a thoughtful, basically friendly approach to China, even if we did not agree on all issues.  I think the President conveyed very much the same message yesterday.

Jim Lilley

I, like so many in the China field, have noted with great sadness Jim Lilley’s passing.  My wife and I both worked with him over the years.  We had the greatest respect for his intelligence and integrity.  And we were impressed by his always friendly and down-to-earth approach to those who worked for him.  He will be missed.