With China being hailed as the savior of the world economy, the government has reached the conclusion that this is its century: The West is irrelevant and China will lead a vanguard of new players – and the game will be played according to 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.
Foreign struggles
From the standpoint of the activities of foreign investors within China, this new self-image is already having a significant impact:
Routine applications for wholly foreign-owned enterprises (WFOEs) and joint ventures are regularly delayed or denied through the demand for documents and the imposition of capitalization or licensing requirements not required by law. Officials openly state that they are no longer interested in encouraging foreign investment. It is something they will tolerate with reluctance.
– Visas for foreign workers – including long-term employees seeking renewals – are delayed, denied or restricted. The position is that Chinese workers are available to do any job and that foreign workers have nothing to contribute to China.
– The domestic legal system is used to make investment in China unattractive. Investments in the country 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 that China truly has no need for foreign investment and technology, this is a completely rational approach. There is no reason for it to change so long as the Chinese economy remains strong. Foreign investors need to take this as a fact of life about China in the 21st century.
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 officials believe China should disregard these constraints and simply take what it wants. There are a number of examples of this approach in 2009:
– As the major purchaser of many raw materials, China believes that it should be able to dictate purchase terms, without negotiations. The recent negotiations on iron ore are a good example: 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.
Strategic misstep
In the international arena, this strong-arm approach is certain to fail. Regardless of its recent economic success, China simply doesn’t 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 that China is poised to repeat the same strategic misstep in this new century? Historians might argue Beijing finds it particularly difficult to learn from past mistakes. It therefore is an open question how the Chinese trade authorities will respond to this string of policy failures.