Everybody Eating Bitterness in Solitude

This last line of Keith Bradsher’s story in the New York Times today says it all.

Some executives in China working for Western multinationals advocate taking a tough line in their negotiations with Chinese officials. But they say that the reluctance of other companies to take public positions means that united action is extremely difficult.

The result, one senior Western executive said in an e-mail, is “everybody eating bitterness in solitude.”

America’s industrial giants and technology powerhouses are now so dependent on the China market for growth and quarterly profits that they are hiding behind the United Steelworkers Union as the USW lodges complaints against China’s web of industrial policies that constitute the country’s Indigenous Innovation campaign.

As Bradsher points out, there has been nearly dead silence from the business community in the wake of Wednesday’s action by the Obama administration to pursue its first trade action against Chinese Indigenous Innovation industrial policies based on the Section 301 Petition filed in September by the USW.

The US action on Wednesday calls for consultations with China at the World Trade Organization. It focuses on a specific program of government subsidies for Chinese makers of wind power equipment. If the US and China are unable to reach a settlement through the discussions triggered by Wednesday’s filing, the case will then move into the formal WTO process and a dispute settlement panel will be established.

Despite their silence, this case is being closely watched by industrial and technology companies in the US, Europe and Japan. The outcome may provide a glimpse of whether real changes in China’s Indigenous Innovation industrial policies are possible.

It is unlikely that this will be the only WTO case to come from the USW’s petition. The 5,800-page USW Section 301 complaint goes into great detail regarding five main allegations of unfair Chinese trade practices. The complaint focuses on the Green Energy Sector. But the Chinese Indigenous Innovation industrial policies that the petition complains about are considered to be a threat to industrial and technology companies in sectors ranging from software to aviation to electric automobiles to rail and telecom equipment, among others. So the WTO cases that are filed as a result of this petition will affect industrial and technology companies across many sectors.

The five areas in the USW’s 301 filing include:

  • Restrictions of access to rare earth materials, of which China controls 90% of global supply, that are critical for nearly all technology products.
  • Subsidies that are contingent on export performance or on the use of domestic over imported goods.
  • Discrimination against imports and foreign firms through the use of such tools as local content and local manufacturing requirements.
  • Requiring that foreign companies transfer technology as a condition of investment approvals.
  • Government subsidies to Chinese companies that lower their cost of business so they can significantly undercut global market prices.

The real issue here is that a broad range of multinationals believe that their future global survival is threatened by these industrial policies. That is because the policies appear aimed at strong-arming them into handing over their technology to Chinese state-owned “national champion” companies if they want to do business in the China market. Under the Indigenous Innovation policies, the Chinese state-owned “national champions” are required to “digest” and “re-innovate” any foreign technology they obtain, and then become global leaders with their new “Chinese” technology products.

The dilemma facing multinationals is explained clearly in Bradsher’s story:

China’s solid rebound from the global economic downturn, compared with continued malaise in the West, has made the Chinese economy look like a much better place for Western companies to pursue near-term opportunities — instead of fighting drawn-out trade and regulatory battles. It can take up to three years for a W.T.O. case to wend its way through a dispute resolution panel and any appeals…

Regulators also have the authority in every industry to approve foreign investments, and even demand a say in details like what equipment will be purchased by foreign investors for their factories. Regulators have long used their involvement in the minutiae of corporate management, and their ability to delay even minor decisions, as a way to discipline companies for taking stances at odds with Chinese policy.

“They have shown themselves to be retaliatory, and it really has the intended effect,” said a Western lawyer who advises many multinationals in China, and who insisted on anonymity because he said that he feared retaliation.

But there are more than a few members of the Obama administration and the US Congress who view the Indigenous Innovation industrial policies as a national security threat. The worry is that America’s technology base will erode as US industrial and technology companies, one-by-one, do deals in China in which they hand over their best technology to state-owned enterprises that have global ambitions and access to enormous government loans and subsidies to fuel those ambitions.

As members of Congress told the New York Times the day of the US trade action announcement:

“The United States needs to take a more assertive approach to China’s mercantilist policies, and the administration’s action today is a welcome step in the right direction,” said Representative Sander M. Levin, a Michigan Democrat and the chairman of the House Ways and Means Committee, which oversees trade…

Senator Sherrod Brown, an Ohio Democrat, said in a statement that China was on track to make half of the world’s wind turbines and solar panels and urged the administration to make trade enforcement a priority. “The United States cannot replace its dependence on foreign oil with a dependence on clean energy technology made in China,” he said. “American manufacturing must lead the way — and to do this, they need a level playing field.” …

The US trade action took place one week after the US and China appeared to make progress on some of these issues in the annual Joint Commission on Commerce and Trade meeting in Washington DC.  According to the US Commerce Department press release:

China agreed to significant initiatives in several areas, including intellectual property rights enforcement, open and neutral technology standards, clean energy, and government procurement. Importantly, on indigenous innovation, China agreed not to discriminate in government procurement based on the origin of intellectual property or to use discriminatory criteria to select industrial equipment. China also agreed to resume talks on beef market access.

“The 21st JCCT was both productive and effective,” said Commerce Secretary Gary Locke. “We were able to make progress on significant issues in a number of areas, and on other issues we have established channels that will allow us to continue our robust engagement and pursue timely solutions.”

The JCCT has a history of producing nice rhetoric but limited timely follow through. Let’s hope that doesn’t happen with these agreements.

The central issue is that the world has changed very suddenly in the wake of the Global Financial Crisis. The US and other developed nations are the leaders in innovation, but China is the market where these innovations can scale. This is partly because of China’s continued robust growth, the country’s breathtaking infrastructure build-out and the fact that there are still one billion Chinese citizens striving to reach a middle class lifestyle. But it is also because China has a very smart and focused government that makes detailed plans for the future and will do whatever is necessary to get there.

Even if many of China’s Indigenous Innovation industrial policies are able to slide through loopholes in the narrow WTO legal requirements – and that is likely to as skirting rules is well-honed practice in the Chinese businesses environment — the policies will lead US and European politicians to seek more ham-fisted remedies. China’s industrial policies and the accompanying strong-arm tactics have already nearly destroyed the goodwill and trust that China spent 30 years cultivating with foreign industrial and technology businesses. When visiting Beijing these executives are still full of smiles and happy handshakes, but they are “eating bitterness” in their boardrooms and figuring out how to out-game China.

All of this is unnecessary. The solution is simple. Everybody deserves a fair deal. Rigorous protection of Intellectual Property is the answer. Instead of using brute force to “absorb” and “assimilate” foreign technology, China can rigorously protect the intellectual property of its foreign partners, and then require that the world rigorously protect Chinese intellectual property for genuine innovations that result from the Chinese-foreign technology deals. All innovations are built on existing technology. If everybody is protected, and everybody gets their proper patent and royalty payments, China can rebuild trust with global multinationals — and perhaps make real strides towards genuine Chinese indigenous innovation.

Multinationals Sit Out China Trade Battle: http://tinyurl.com/299n68u

 

U.S. Says China Fund Breaks Rule: http://nyti.ms/hAY0Un

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About James McGregor
James McGregor is an American author, journalist and businessman who has lived in China for more than 25 years. Currently, he is chairman of APCO Worldwide, Greater China. A professional speaker and commentator who specializes in China’s business, politics and society, he regularly appears in the media to discuss China-related topics. McGregor is the author of the books "No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism" (2012) and "One Billion Customers: Lessons from the Front Lines of Doing Business in China" (2005). He also wrote the 2010 report "China’s Drive for ‘Indigenous Innovation’ – A Web of Industrial Policies." From 1987 to 1990 McGregor served as The Wall Street Journal’s bureau chief in Taiwan, and from 1990 to 1994 as the paper’s bureau chief in Mainland China. From 1994 to 2000, he was chief executive of Dow Jones & Company in China. After leaving Dow Jones, he was China managing partner for GIV Venture Partners, a $140 million venture capital fund specializing in the Chinese Internet and technology outsourcing. In 1996, McGregor was elected as chairman of the American Chamber of Commerce in China. He also served for a decade as a governor of that organization. He is a member of the Atlantic Council, Council on Foreign Relations, National Committee on US-China Relations and International Council of the Asia Society. He serves on a variety of China-related advisory boards.

One Response to Everybody Eating Bitterness in Solitude

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