Thing (Don’t Always) Go Better with Coke

I do not intend this blog as a vehicle for commentary on every fast breaking event involving China, but the Chinese government’s denial (announced today) of Coca Cola’s attempt to acquire the Huiyuan juice company is a big deal.

To put this in context, as close observers of China know, we have seen an increase in economic nationalism in China that started four or five years ago. This phenomenon (and the related issue of the Chinese government support for “indigenous innovation) merits a detailed blog post of its own. Here I will just note that the main causes in my view involve a series of factors that include:

• Traditional Chinese nationalism and sensitivity toward being taken advantage of by foreigners (sentiments with legitimate roots in China’s 19th and early 20th century experiences, but regrettably nurtured out of proportion today by China’s education system and official media)

• The dramatic opening of the Chinese economy following WTO accession (yes, the Chinese economy is relatively open, even accounting for this Coke decision) which has allowed significant increases in market share and acquisitions by foreign companies (remember how Americans felt when Japanese companies seemed to be surging across America?)

• The populist platform of China’s current leaders. I don’t believe China’s leaders are xenophobic nor do they want to put China’s reform and opening policies in reverse gear. However, their (appropriate) emphasis on addressing problems that are viewed as products of opening and reform (increasing income disparities, environmental problems, corruption, etc.) has opened the door for increased economic nationalism and protectionist sentiment from the “left” and “right” of the political spectrum. This is in contrast to the previous leadership team (Jiang Zemin and Zhu Rongji) which placed a public priority on economic growth and attracting foreign investment.

So there is some background here; this decision is not primarily a reaction to the current economic crisis. But the timing of the decision could not be worse, for two reasons. First is its potential impact on rising protectionism around the world (which is spawned by the economic crisis). I had the pleasure recently of hearing former Mexican President Zedillo (now head of the Yale University Center for Globalization) offer his deep concerns over rising protectionism worldwide. He made the point that major economies need not just to halt new protectionist measures, but to move forward with new trade and investment liberalization. The Chinese decision on Coke (like the recent buy America provisions in the US stimulus bill and the banning of Mexican trucks from US highways) is definitely a step in the wrong direction.

Also, I have for some time viewed as unlikely the passage of truly damaging China trade legislation by the US Congress (for a variety of reasons including the highly interdependent nature of our economies and the strong lobbying efforts of the US business community), e.g., passage of 27.5% tariffs on Chinese imports. Moves like the denial of the Coke acquisition can both stoke the fires of protectionism in the US Congress and lessen the strength of the US business community’s commitment to fighting bad China legislation. Taken together, over time, such trends could alter the balance which prevents passage of really bad China trade legislation, an outcome that would be damaging to both countries.

Note: I let the US get off easily in the analysis above, mostly because I was focused on the China side of the equation. For the record, I think the political furor over the proposed CNOOC acquisition of Unocal was awful. I also believe (and this is an area I have personal experience in), that our national security establishment generally overstates the threat of technology transfer to China, resulting in overly restrictive export controls and CFIUS reviews. Further, each one of these policies by the US enters an echo chamber in Beijing, where it gets magnified and emerges to strengthen the hand of the nationalists and protectionists there.  This said, everyone, especially people in China, need to keep in mind that the US remains the most open major economy in the world.

Final note: To be very clear, I do not believe the rejection of the Coke acquisition means China is closing its doors. The majority of foreign acquisitions there will continue to go through easily. However, this type of decision, especially now, is really unhelpful for the reasons explained above and it does foreshadow increased problems for foreign companies pursuing high profile acquisitions there.

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