The death of the China lobby?

Posted By Daniel W. Drezner Tuesday, July 20, 2010 - 2:30 PM Share

The Financial Times has been working overtime to discussing an emergent trend: multinational CEOs in Europe and the United States ripping into China.

In some ways, this started earlier this year. There was Google's complaint, of course. And, as TNR's James Mann noted, "Both the American Chamber of Commerce in Beijing and the European Chamber of Commerce in China have issued reports in recent months conceding that the business climate for foreign companies there has steadily worsened."

Things have been heating up in July, however. First, as Guy Dinmore and Jamil Anderlini report, GE CEO Jeffrey Immelt ripped into China while in Europe:

He warned that the world’s largest manufacturing company was exploring better prospects elsewhere in resource-rich countries, which did not want to be “colonised” by Chinese investors. “I really worry about China,” Mr Immelt told an audience of top Italian executives in Rome, accusing the Chinese government of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful."....

“China and India remain important for GE but I am thinking about what is next,” he said, mentioning what he called “most interesting resource-rich countries” in the Middle East, Africa, Latin America plus Indonesia. “They don’t all want to be colonised by the Chinese. They want to develop themselves,” he said. The comments echo a rising chorus of complaints from foreign business groups in China about the regulatory environment they face.

Gideon Rachman notes that Immelt is hardly alone in his complaints:

[W]hen Google, Goldman Sachs, and GE all run into difficulties simultaneously, it seems clear that a bigger trend is at work. Privately, senior US officials have been worrying for some time that Chinese trade and economic policy is taking a more nationalist direction that is penalising US companies. They worry that, after 30 years of strong economic growth, China believes it can now afford to take a less welcoming attitude to foreign investment, and instead concentrate on promoting national champions.

What's interesting is that European firms are now joining in the chorus of complaints. Furthermore, as Jamil Anderlini notes, they're not doing it in private dinners -- they're blasting the Chinese leadership publicly and directly:

Two of Germany’s most prominent industrialists have attacked the business and investment climate in China during a meeting with Wen Jiabao, the Chinese premier.

The criticism from the businessmen, the chief executives of Siemens and BASF, came against a backdrop of rising discontent among foreign businesses operating in China.

The German executives’ comments were all the more striking as they were made directly to the Chinese premier, and in public, as part of Angela Merkel’s four-day state visit to the country.

Jürgen Hambrecht, chief executive of BASF, the chemical producer, hit out at restrictions on foreign business and complained of foreign companies being forced to transfer business and technological know-how to Chinese companies in exchange for market access.

“That does not exactly correspond to our views of a partnership,” Mr Hambrecht told Mr Wen at the weekend meeting in the western Chinese city of Xi’an.

Addressing government procurement practices, a recent area of complaint by foreign executives and governments, Peter Loescher, chief executive of Siemens, the industrial conglomerate, said foreign companies operating in China “expect to find equal conditions in the fields of public tenders”.

Mr Loescher, who is also chairman of the Asia-Pacific Committee of German Business, called on Beijing rapidly to remove trade and investment restrictions in sectors such as automobiles and financial services.

BASF and Siemens had combined sales in greater China of more than €9bn ($11.6bn) last year and employ more than 36,000 people in the area.

Mr Wen responded to the criticism by telling Mr Hambrecht to calm down, insisting that China remained open to foreign investment and did not discriminate against foreign companies. “Currently there is an allegation that China’s investment environment is worsening. I think it is untrue,” Mr Wen said.

Alan Beattie and the ubiquitous Mr. Anderlini provide some general context for the latest venting:

The risk-reward calculation between staying quiet and speaking up has shifted towards the latter. With China employing policies including ignoring intellectual property rights, forced technology transfer and government procurement skewed towards domestic companies, some foreign businesses feel they are being pushed out of the country. “We are feeling less and less welcome in China, which is why you are seeing more people speaking out and reconsidering their futures in China,” says John Neuffer of the US Information Technology Industry Council.

Business leaders say Beijing’s appetite for more liberalisation of foreign investment has waned after a rapid burst of reform around China’s accession to the World Trade Organisation in 2001. So even when current policies only represent a standstill, they feel like going backwards.

At best, current policies are moving very slowly towards liberalization. The good news is that China is seeking to join the WTO's Government Procurement Agreement, which liberalizes trade among participating countries for government-commissioned projects. The bad news is that China's latest offer is half-assed tokenism underwhelming in terms of what's on offer, and likely to be rejected by the US and EU.

So, why is China suddenly so hostile towards western multinationals? The simple realpolitik answer is that China is simply more powerful than it used to be, and its flexing its muscles now because it has them. In the Wall Street Journal, David Wessel offered a revealing anecdote that suggests President Obama shares this quasi-relative gains view:

Mr. Obama, who took office in an economy far worse and far more hostile to trade than the one Mr. Clinton inherited, appears less convinced of the virtues of free trade per se. He loves exports, easily sold as creating jobs. But he seems to view world trade like a basketball game: He wants to win, and doesn't like feeling that others are taking advantage of his team. He needles aides who worked in the Clinton administration that they let China into the WTO with a better hand than the one he has to play. Aides counter that China would be even more of a threat if not bound by WTO rules. He is unpersuaded....

Mr. Obama's trade strategy is becoming clearer. In international forums, as he did at the Copenhagen climate-change talks, he is arguing that China is posing as a developing country even though it has grown up and needs to be treated like the economic powerhouse it is. At home, he knows—no matter what his economists tell him—that neither voters nor Democrats in Congress will be convinced that free trade is good for them. So he is styling himself as a tough bargainer, who can beat other countries at their own game.

Obama could be right, but on one key dimension his bargaining hand will actually be stronger than those of past presidents. China, by continuing to alienate and frustrate western multinational corporations, is also effectively weakening the strongest pro-China lobbies in both Washington and Brussels. As Rachman notes:

Were it not for the power of big business, the relationship between the US and China might have gone sour years ago. There are forces on both sides of the Pacific – Chinese nationalists, American trade unionists, the military establishments of both countries – that would be happy with a more adversarial relationship. For the past generation it has been US multinationals that have made the counter-argument – that a stronger and more prosperous China could be good for America.

So it is ominous, not just for business but for international politics, that corporate America is showing increasing signs of disillusionment with China....

In the past, American business has acted as the single biggest constraint on an anti-Chinese backlash in the US. If companies such as GE, Google and Goldman Sachs qualify their support for China or refuse to speak up, the protectionist bandwagon will gather speed.

The Chinese government, of course, is not stupid. China’s growing confidence in dealing with the US, and the world in general, is still matched by a cautious desire to avoid conflict. At strategic moments, the Chinese government is likely to make tactical concessions – whether on Google or the currency – in an effort to head off a damaging conflict with the US. But with American business and the American public increasingly restive, the risks of miscalculation are growing.

And here I must dissent from Rachman. In some ways, I do think the Chinese government has been pretty stupid over the past year in executing its "Pissing Off As Many Countries As Possible" strategy. China rankled the Europeans over its climate change diplomacy at Copenhagen. For all of Beijing's bluster, it failed to alter U.S. policies on Tibet and Taiwan. It backed down on the Google controversy. It overestimated the power that comes with holding U.S. debt. It alienated South Korea and Japan over its handling of the Cheonan incident, leading to joint naval exercises with the United States -- exactly what China didn't want. It's growing more isolated within the G-20. And, increasingly, no one trusts its economic data.

This doesn't sound like a government that has executed a brilliant grand strategy. It sounds like a country that's benefiting from important structural trends, while frittering away its geopolitical advantages. Alienating key supporters in the country's primary export markets -- and even if Chinese consumption is rising, exports still matter an awful lot to the Chinese economy -- seems counterproductive to China's long-term strategic and economic interests.

Developing.... in a very interesting way.