This post is very much based on Steve Dickinson’s article in this month’s China Economic Review, entitled, “New Image, New Error.”
With China being hailed as the world economy’s savior, its government has concludedthis is its century. The West is irrelevant and China will lead a vanguard of new players — and the game will be played by Beijing’s rules. Particularly in the area of trade and investment, China hopes to jettison the constraints of world trade law for a return to the policy of national interest and raw power. In this new world order, Beijing sees little need for foreign economic or technical assistance.
From the standpoint of foreign investors in China, this new self-image is already having a significant impact:
• Applications for wholly foreign owned enterprises (WFOEs) and joint ventures are more often being delayed or denied by demands for documents or capitalization not required by law. Officials openly state they are no longer interested in encouraging foreign investment.
• Registration of technology licenses is either prohibited or restricted in direct violation of law. The idea is that Chinese business should no longer be required to pay for access to foreign technology.
• Visas for foreign workers are increasingly being delayed, denied or restricted. The position is that Chinese workers are available to do any job.
• Investments in China used to be falsely profitable as foreigners qualified for tax breaks unavailable to domestic businesses while employment and wage rules were not enforced. This position has completely reversed. Chinese and foreign companies are expected to operate under exactly the same rules, making many foreign ventures unprofitable.
Assuming China truly has no need for foreign investment and technology, these changes are rational and there is no reason for China to back off from them so long as its economy remains strong.
It is less clear how this new image of China as world leader will play out in the country’s commercial dealings with the rest of the world. Though an old civilization, China is actually a
very recent entrant into the world system and it tends to view the legal and trade rules governing this system with extreme suspicion. As a result, many Chinese officials believe China should disregard these constraints and simply take what it wants.
There were a number of examples of this approach in 2009:
• China uses the world trade legal process to make claims against foreign practices, but when
the WTO rules against China, as in the recent copyright case brought by the US and others, Beijing feels free to simply ignore the decision.
• As the major purchaser of many raw materials, China believes it should
be able to dictate purchase terms, without negotiations. Iron ore is a good example of this. China formed a buyer cartel (in violation of its own and foreign anti-monopoly law), which demanded a single price from its suppliers, with no room for negotiation. This “hardball” approach is being considered for other industries where China is a major purchaser of raw materials.
• China has made a number of high profile investments in the third world, both for resource extraction and infrastructure development. It often employs a “take our terms or forget the deal” approach, insisting on total Chinese staffing, financing and control.
In the international arena, this strong-arm approach is certain to fail. Regardless of its recent
economic success, China simply does not have the power to force its will onto other countries. No country has that power – as errors made by the US in the 1970s and Japan in the 1980s attest.
Should we be surprised with how China is poised to repeat the same strategic missteps in this new century? Are you seeing this change in attitude? What impact is this having or going to have on your business?
UPDATE: Just noticed that my good friend Andrew Hupert, over at Chinese Negotiation, just did a somewhat similar post, entitled, “The New Chinese Negotiator: From Harmony to Our Money (Part 1).
Andrew sees the following five things shaping the US China relationship (both on the macro and the micro level):
1. Copenhagen proves China is done playing coy about its status in the world.
2. “China’s default negotiation position is zero-sum game/ competitive – and there doesn’t seem to be a crisis big enough to get the US and China pulling in the same direction.
3. The Chinese government is running more of the private sector show now than a few years ago. “Scratch a private Chinese business and you’ll find a policy-driven organ of the bureaucracy.”
4. “The new projection of Chinese power will be infrastructure projects and commercial deals. China’s foreign policy is driven by a need for raw materials, and it isn’t squeamish about who it has to get in bed with to obtain them.”
5) “Non-economic considerations drive Chinese organizations, as long-term policy concerns ace short-term profit/loss decision. For years Western dealmakers were driven to distraction by Chinese counter-parties that seemed blind to their own self-interest. It’s not that the Chinese side was dim or daft – rather they were driven by non-economic factors like policy, bureaucracy, relationship, technology and access to intellectual property.”
I urge you to read Andrew’s post.

  • I think that there is some misunderstanding of how the world trade process works. The PRC is responding to the ruling against them by filing an appeal. Also the WTO doesn’t have any power to force nations to abide by its decisions. The most that WTO can do is to rule that a nation’s actions are inconsistent with its obligations at which point other nations are then allowed to impose countervailing tariffs.
    Also, a buyer cartel is not against the anti-monopoly law (Article 7 specifically provides an exception). It’s also not against international law (witness OPEC).
    As far as resource extraction I don’t see how Chinese behavior is that much different from those of any other nation.
    The other thing is that I think that US/China relations are pretty good right now if you look at long term history. People are screaming over trade issues, but no one is talking about going to war over anything.

  • Quote: China is actually a very recent entrant into the world system and it tends to view the legal and trade rules governing this system with extreme suspicion.
    It’s really not. The current world system dates from the Peace of Westphalia in 1648, and China was already signing treaties with Russia around this time. Also China generally *doesn’t* view legal and trade rules with extreme suspicion. It (like every other major power) wants to structure the rules in their favor, but I don’t think that China acts much differently than any other major power has or would.
    Quote: As a result, many Chinese officials believe China should disregard these constraints and simply take what it wants.
    I have a “realistic” view of officials. Any nation when unconstrained will take whatever it wants. Diplomats and heads of state are not monks. What *is* the case that as time passes the US and Western Europe will have less power to constrain China, but India, Russia, and the ASEAN states will have more.

  • The relevant regulations regarding WFOE’s, JV, and technology licensing give officials very broad discretion on approval, so I’m not sure where that complaint comes from.
    The other two “complaints” seem a bit silly to me. Horrors!!!!! China is enforcing visa regulations to make sure that Chinese citizens have first access to jobs in China. How dare they!!!! And (gasp) rewriting the rules so that Chinese companies and foreign companies now have play by the same rules. What nerve!!!!

  • chuck

    Twofish wrote
    “It’s really not. The current world system dates from the Peace of Westphalia in 1648, and China was already signing treaties with Russia around this time.”
    So are you suggesting that China has been an engaged global citizen for almost 400 continuous years? It will be hard to give you a serious response after a statement like that but I’ll give it a try:
    You could probably make the case with the use of anecdotal evidence that virtually every country on this earth is rife with nationalism, xenophobia, chauvinism etc. The point is not the existence of these things but the degree to which they exist. Powerful countries have a tendency to go through ebbs and flows of obnoxiousness (i.e. the US), and I would agree with Dan (I think this is Dan’s general attitude) that China has entered one of these phases (also see James Fallow’s blog).

  • AT

    “Also, a buyer cartel is not against the anti-monopoly law (Article 7 specifically provides an exception).”
    I don’t think Article 7 says anything about buyer cartels at all.
    On the other hand, Article 17 says, “A business operator with a dominant market position shall not abuse its dominant market position to conduct following acts: (1) selling commodities at unfairly high prices or buying commodities at unfairly low prices,” and defines “dominant market position” as “a market position held by a business operator having the capacity to control the price, quantity or other trading conditions of commodities in relevant market, or to hinder or affect any other business operator to enter the relevant market.”
    It seems to me that that is precisely what the government did when it forced all iron ore purchasers to act as a single entity for the purpose of setting a price.
    In any event, I don’t think you need to read so much into what this post is saying. I at least didn’t read it to be particularly critical, but rather just as a statement that, at least for now, China is shifting towards policies that are less friendly towards the operations of foreign businesses and foreign advancements into the country’s markets. I think that’s absolutely correct, with the temporary exception of industries like cars and alternative energy, in which foreign technology and investment is still necessary to help develop domestic industries. No one is saying this is evil; it’s just not good for the interests of many foreign businesses, which, I think we can all agree, are not there to be kind to competitors either.

  • Chris

    On the Visa for foreign employees issue, China continues to be fairly reasonable overall. Yes, quite a large number of those foreigners working illegally in China on F, L and X Visas have been given the boot. To date, all our expat employees on Z Visas (both new and existing) have had no issues with visa / residence permits applications or renewals.
    None of this is surprising or unreasonable. It is a sign though, that China considers itself a major power that will control its borders and the conditions under which foreigners will enter and remain. Much like the USA, UK or Australia.
    China is coming to terms with the issues that all major countries face with incoming economic migrants / workers / expats. China has become an attractive place to live and work for foreigners at all levels of the labour market.
    Like all countries, China will make decisions based on the competing pressures of protecting the national labour force and attracting global talent.
    None of this is too xenophobic, but it is a sign that the country is aware that it is now a destination of choice for many in the global labour market.

  • chuck: So are you suggesting that China has been an engaged global citizen for almost 400 continuous years?
    Pretty much. The Chinese-Russian border was set up in 1689. By that time you had Portuguese traders visiting Canton.
    chuck: Powerful countries have a tendency to go through ebbs and flows of obnoxiousness (i.e. the US), and I would agree with Dan (I think this is Dan’s general attitude) that China has entered one of these phases (also see James Fallow’s blog).
    Can you point out exactly the golden age in the past in which China acted less obnoxiously than it has over the last year? Complaints that Chinese diplomatic behavior has worsened are like complaints that China’s human rights record are going downhill. At what point in the last ten years has China acted very much differently that it has recently?
    Frankly, I don’t think that China has changed very much in the last year or two. I think what has changed isn’t China, but the United States. The United States has gone through a massive economic crisis, it’s scared to death of the future, and I don’t think anyone in the US really knows what direction the country is heading in. So here you have China acting in more or less the same way that it has acted in the last decade, and then suddenly people in the US jump.
    The basic issue is not that China is acting more obnoxiously than it has in the past, because I don’t think it is. The basic issue is that people in the US are feeling pretty helpless to do anything about it. What I find really odd is that you have the American voice that are showing the same signs of prickly nervousness than China showed in the 1990’s.
    The fundamental problem I think has nothing to do with the behavior of the Chinese government. The fundamental problem is that if you pick a random person in China and ask them what they think about the future, you’ll find that they are optimistic, and think that whatever happens tomorrow, it will be better than today. If you pick a random person in the US, they are quite frankly scared to death about what is going to happen next year.
    I’m not sure what the solution is, but I think its important to look at the fundamental cause of what is going on.

  • darnoc

    Interesting and timely topic….I’ll look forward to reading Steve’s article.
    I do disagree somewhat with the contention that China sees little need for foreign technical assistance. Let’s take cleantech as an example, where Beijing has clearly made global leadership a priority. China continues to actively seek international technology partners in cleantech and there are numerous recent deals that can be cited as examples. Notably, not all of these deals are being struck with large MNCs such as GE. Last week’s 2GW solar thermal transfer deal with California’s three-year-old eSolar being only one recent example. The contrarians out there will claim that deals like these are thinly disguised tech transfer plays to enhance China’s domestic IP capabilities over time. I tend to take the view that innovative technology will continue to find its way into Chinese markets, just as innovative Chinese technologies will increasingly find their way to global markets.
    Shifting gears, but staying with the ‘New Image, New Errors’ theme…..it’s extremely interesting to watch China’s interaction with the rest of the developing world…particularly in places like Latin America, Africa and Central America. While resource acquisition (an extremely interesting story in its own right) tends to be the most closely watched story here, the development of these areas as overseas markets for China should not be ignored. This is an area where I expect things will not ultimately proceed as smoothly as planned for China. Running a trade surplus (exhibit A, China) is typically a key inflection point in the economic development of a nation. Yet a significant development of these markets by China may have the tendency to push them towards trade deficits…it’s unclear to me how the optics of running trade deficits (essentially fostering employment in China) in places like Africa will ultimately play out.

  • good discussion

    Twofish:
    I am inspired to comment purely on your comments.
    Your responses are always quite stimulating. Though I often find I disagree on your perspective, your arguments usually have strong points to make and intelligent, though obviously others see things differently.
    Your perspective is hard to place because your writing comes across like a Westerner, but you tend to be more defensive of China’s ways then most Westerners I know.
    Anyway, the purpose of this comment is to acknowledge that although some readers strongly disagree with some of your comments, overall your comments make this blog much stronger as we are forced to evaluate our comments and whether they are well made or have a bias to them.
    Thanks Dan if you let this perspective be posted. 😉

  • David Oliver

    At the business level Chinese customs decided to double the value (for import duty & VAT purposes) of a shipment of goods I have coming in, basically wiping out my margin. They wouldn’t believe the value I stated even though I can produce the invoice & contract as well as a price list from the manufacturer. My import agent says it is to help protect domestic companies even though local products are much cheaper. They also said it is pointless to argue with Chinese customs as they won’t back down. It’s the first time its happened to me, I hope it’s not a sign of things to come.

  • Interesting post worth some careful consideration. However, in regard to the iron ore example, I think two additional points are in order.
    1. The China Iron & Steel Association only formed a buyers cartel when they realized – after many years – that their individual members stood no chance against the sellers cartel of Rio, Vale, and BHP. In effect, they decided to even it out into cartel v. cartel. Do two wrongs make a right? No. But I think it’s understandable, even justifiable, behavior under the circumstances.
    2. The Chinese iron ore buyers cartel has been a uniform, unmitigated failure in its negotiations with the sellers cartel. The Chinese get their clocks cleaned every year. In other words, you can try and dictate a price as a cartel, but unless somebody feels compelled (or intimidated) to take it – and Vale, BHP, and Rio don’t – then it’s a worthless exercise. The over-arching point being that even if China thinks that it has the stature to dictate, others don’t necessarily agree. This is going to be a case by case situation.

  • Ma Bole

    China has expanded about as much as it can without meeting significant resistance from other nations, particularly as so much of China’s economic growth has depended on preserving the weakness of the RMB, enormous trade disparities with the U.S. and Europe, and foreign direct investment. The next 30 years will likely be very, very difficult – certainly for China, but for everyone else too.
    The regime here simply has no choice but to aggressively pursue massive economic growth. As resistance to Beijing’s efforts grows, the CCP will frame much of the consequent friction as stemming from anti-China foreign aggression. In fact, the phrase “hostile foreign forces” is appearing with increasing regularity in the popular Chinese press and in official speeches.
    I remember reading several essays 10 or so years ago (i.e., just before China joined the WTO) that suggested that China would – at least in the short and medium term – characterize claims made against China at the WTO as foreign aggression.
    How will the U.S. and Europe respond? With combined economies of well over US$30 trillion, the U.S. and E.U. will not stand by as China (less than US$5 trillion at present) undermines a system that has worked pretty well for 60 years or more. Indeed, China itself has also benefitted from the very same system.
    I don’t believe that comparing China now to the U.S. in the 1970s or Japan in the 1980s is particularly fair. After all, the U.S. and Japan were among the richest and most developed nations in the world, while fully two-thirds of China’s citizenry remains manifestly poor (Indeed, if we apply a Western standard, so are many of China’s middle class.). In the end, I see Chinese aggressiveness as arising as much from the regime’s compelling need to grow the economy so as to fend off social instability and institutional rot as from some resurgence of Han pride as China takes its place at the table of powerful nations.

  • As far as the AML, Article 7 states that “With respect to the industries controlled by the State-owned economy and concerning the lifeline of national economy and national security or the industries implementing exclusive operation and sales according to law, the state protects the lawful business operations conducted by the business operators therein. The state also lawfully regulates and controls their business operations and the prices of their commodities and services so as to safeguard the interests of consumers and promote technical progresses.”
    What this clearly says although it may not be obvious from a literally reading of the text is that certain industries are excluded from the rest of the AML subject to special regulations by the State Council. The State Council has set up special regulations for those industries which are authorized by Article 7. Buyer cartels in the iron industry are therefore authorized under Article 7.

  • casual observer

    I think China has gone from punching under its weight straight to unmitigated arrogance without much real standing. The press may laud China’s rise, but the fundamentals have to be there. China seems to think it now has more weight to throw around than the US and that everyone will fall to one knee and obey. Won’t happen.
    China is a poor winner.

  • T.J.

    “Non-economic considerations drive Chinese organizations…”
    “Drive”…now there’s a bizarre word, suggesting a kind of mindlessness: “Git in da car and just “DRIVE”…Don’t say nuth’n…”
    The Chinese having adopted a Marxist interpretation of things have always viewed the U.S. as being…well…”full of shit”—“appearance” (xianxiang) vs. reality or essence (benzhi). Nothing is new here.

  • JL

    Twofish:
    Your comments are very perceptive. But I wonder how much is to be gained by pointing out that Chinese leaders are realists out to get the best for their country, because that’s what all countries’ leaders do.
    “Any nation when unconstrained will take whatever it wants.”
    Probably true enough, but isn’t it almost a truism? At the least, I’m not sure it helps us analyse any specific behaviour very much. If all behaviour is motivated by the same overarching urge, then how to explain the differences in policies that exist over time and between nations? How to understand how the Chinese leadership comes to understand what is best for China? Is their understanding of what is best for China a true and objective one?

  • Jay

    @David Oliver: Depending on what the goods are (i.e. not something China is putting punitive tarifs on due to some current WTO spat) you can assume you’ll get the same treatment again in the future, unless you kick up a stink, because you’ve just proven to be a source of easy money — bet the VAT official reported the ‘normal’ amount up the chain and the ‘extra’ charge went toward buying property or something. Also a pretty good bet that your import agent got a cut. Maybe time to switch agents…

  • Anonymous

    “As far as resource extraction I don’t see how Chinese behavior is that much different from those of any other nation” – the difference is China is a brutal dictatorship that does not care about mollycoddleing other dictators.
    “The fundamental problem is that if you pick a random person in China and ask them what they think about the future, you’ll find that they are optimistic, and think that whatever happens tomorrow, it will be better than today” – only because they are force fed Gov BS about how good the Gov is and are not allowed access information that may hold the Gov accountable for its actions
    What Chinese people need to understand is that not matter how “benevolent” or “good” they act or behave (even if thier intent is to be good and benevolent), most people in the world will not respect them unless they can be held accountable by thier own people. Most people cannot understand why the China Government is so scared of its own people. If thier idead are really valid based on thie merits of thier policies, they have nothing to fear from its people. The intrinsic and transparent merits of thier policies, subject to open review by thier own people, will prevail if they are truly in the best interest of the Chinese people.

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  • I think that most Chinese understand the outside world more than most Americans do. The reason that Chinese tend to be optimistic is just that the economy has been growing for the last several decades.
    And I do think that the Chinese government is quite accountable by standards of the developing world. If you have a situation in which you have stagnant economy growth for a few years, then the Party is finished. For the Communist Party to stay in power, it has to continue to deliver increasing standards of living to the Chinese public, or else they will be wiped out.
    Personally, I don’t think that China has a good political system. It’s nowhere is flexible as the US, where you can have a “peaceful revolution” without anyone getting killed. On the other hand, the US has had total control over two developing countries (Iraq and Afghanistan) and personally I think that the Chinese government compares favorably with those governments. I think that the average Chinese person has far, far more control over the Chinese government than the typical Iraqi or Afghan has over their governments.
    Given that you’ve had people with the best of intentions go into Iraq and Afghanistan, with total control over those countries, and you still haven’t put together workable political systems, makes me extremely reluctant to wipe out the “known devil” or an “unknown one.”
    Political systems are complex creatures. The US has a very good political system, but political systems are not things that you can export like widgets.

  • Chalmers Wood

    That’s great Jay! Why don’t you come to China and explain all that to the people here?

  • James Wu

    Once again, many foreigners without a single clue of reality commenting on things they have no place commenting on. Reading this blog really amuses me, albeit the part that amuses me is the sheer ignorance of the comments.

  • hebeiren

    Care to elaborate, James? It seems like a relatively informed discussion to me. Or are you just pulling the “you don’t understand us” bit out of spite?

  • Anon.

    @Chalmers Wood: Explain what? I am in China and experience this sort of crap on a regular basis. And if you mean ‘everybody here’ is the Chinese, then that’s not needed, they already know….

  • The Dude

    TwoFish:
    You mentioned Japanese protectionism in the 80’s, presumably you’re referring specifically to the auto industry and Japan’s push to undercut automakers in foreign economies through “dumping,” whilst making imports prohibitively expensive at home.
    This is not something that happened in spite of regulation, rather it has been the catalyst for creating collective international legislation for the greater economic good. History has not smiled on the unfair trade practices you have mentioned, and China is placing itself on the wrong side of history in this sense.
    In fact, the WTO can be seen as an amalgamated response to these unfair trade practices. GATT, WTO’s predecessor, was developed in a number of stages. One stage is known as the “Tokyo round,” where anti-dumping rules were instituted in response to Japan’s trade practices in the 80’s. Japan subsequently agreed on this structure for the economic betterment of the world at large, and thus themselves.
    Instead of offering conciliatory understanding and nurturing interdependent, harmonious economic cooperation as other nations have done in the past, China postures itself aggressively and prefers pride over pragmatism to the detriment of healthy global commerce. They are flauting the manifested wisdom that years of international economic experimentation and cooperation have yielded. It’s ignorance and pride, and will affect us all in the end.
    With that in mind, I don’t see it as accepting or not accepting economic “assistance” within the scope of a big brother/little brother relationship. It’s about harmonious interdependence, a level playing field for all, and that requires a sort of altruistic trade practice. It’s tragic to me that such a set of laws must be turned into a hegemonic battlefield by any side, in this case by China. I’m sure you’ll point the finger the other direction, which proves my point…why can’t such a cooperative international body ostensibly bearing olive branches and proffering global prosperity be met with a more cooperative attitude and less confrontation and squaring off?
    Also…
    America has not had “total control” over two countries. Grossly inaccurate phrasing.
    Iraqis and Afghanis can vote. That’s a lot of control. And it’s a tough thing to compare China to two fledgling governments and make a qualitative judgment about which has a better system, particularly when China often prefers the “developing country” mercy label when comparisons don’t tip to their end of the scale. Don’t Iraq and Afghanistan deserve their own intellectual label that shields them from a certain level of comparative political accountability then?
    You’re right, precipitously and militarily removing a government is often not a good idea. Having a democratic system through which one can legally and peacefully remove errant leadership is. Iraq and Afghanistan have that, and its efficacy has been evinced by recent elections.
    Also…
    as a University teacher in China of three years, I cannot agree that young Chinese people “understand the outside world more than Americans do.” Perhaps you haven’t met many Westerners, maybe this opinion is based on media-driven perception, or perhaps you just say this as prideful bravado. A more monolithic understanding, yes. More informed, certainly not. It’s not even about perspective and cultural relativism, either. There are just massive amounts of people who are not even aware of a scary amount of important globally historic events that have unmistakably shaped the current landscape, however you interpret them. Of course, that’s not to mention certain domestic events that have been swept under the rug and policies that seek to control what information Chinese people are privy to. A different perspective is respectable only if it is a generally aware and well informed opinion. Perspective is relative, but also far more meaningful the more intelligently comparative it is.

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  • shilpa

    That’s great Jay! Why don’t you come to China and explain all that to the people here?

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