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.

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