Subtlety has never been Beijing’s strong suit. Now its heavy-handedness has set it on a collision course with the United States over trade. Even if tensions ease in the Strait of Taiwan, commercial disputes will get worse before they get better. Next month Washington may limit Chinese exports in retaliation for China’s failure to stop illegal copying of software and compact discs. Congress’s annual debate over tariffs on Chinese goods heats up in June. And U.S. opposition to China’s entry into the World Trade Organization is raising hackles in Beijing. With compromises nowhere in sight, business is bracing for a storm. Says Howard Lewis of the National Association of Manufacturers, “Our members are very concerned.”
Concerned, yes. But not shaken. U.S. business has gone China-crazy. If you want to play in the global economy, then this is the game you’ve got to be in. Nike and Head & Shoulders shampoo are now ubiquitous in Chinese cities. Coca-Cola swoons at the thought of 1.2 billion gullets. Two-way trade has more than doubled to more than $55 billion. Enticed by fast-rising incomes and voracious demand for almost everything, American companies have spent more than $20 billion since 1990 (chart) putting their signs on factories from Shenzhen to Shenyang. Allegheny Ludlum plans a plant in Shanghai to roll stainless steel for tiny computer parts. Federal-Mogul Corp. is negotiating to make engine bearings, and Scotsman Industries just started assembling ice machines. Risks? Forget ’em. San Francisco lawyer Stanley Lubman is so busy setting up joint ventures in China that he barely has time to come to the phone. “We’ve been absolutely swamped,” Lubman says.
In the short term, there’s no doubt that a trade war would hurt U.S. businesses. By some measures, it already has–before a shot has been fired. A high-level trade mission to the United States – normally accompanied by heavy spending–was canceled in March. Chinese buyers have put off orders for grain and other U.S. exports. U.S. record companies and moviemakers are screaming foul over their treatment in China. And in the background, “a growing sense of Chinese disenchantment with United States behavior” threatens to spill over into the private sector, says Robert Kapp, head of the U.S.-China Business Council.
Disenchantment, however, runs both ways. American firms know very well that China has never been an easy place to do business. Many foreign investments there have never earned a penny. Moreover, foreign companies have noticed that the admission fee to the Chinese market is climbing steeply. Tax preferences for foreign investors have been scaled back. The central government is cracking down on joint ventures that provincial officials used to wave through. Tighter limits on investors’ returns and rising opposition to a foreign role in power generation and oil refining have led some foreign companies to focus on markets like India and Indonesia instead. Chrysler walked away from a planned minivan plant last year after the Chinese refused to guarantee its technological secrets. “There has been some toughening in their bargaining stance,” says Edmund Duffy, an international lawyer in New York. “They realize that they’re in the driver’s seat.”
At least that’s how the Chinese act. As China stretches its newfound economic muscles, it openly flouts the global rules for international trade. An open market for imports? Nope; the government still calls the shots. Enforceable contracts? Not in Chinese courts. In its own eyes, China is a poor country that shouldn’t be held to the same standards as wealthy nations. But in Washington’s sight, China’s fast-rising exports and its aggressive support for high-tech industries mark it as a long-term trade problem. Congress hates China’s rising surplus with the United States–$33.8 billion by official figures, $22.2 billion by the reckoning of Brookings Institution China scholar Nicholas Lardy. Better to make China play by the WTO’s rules on fair commerce now, the thinking goes, than to spend the next half-century butting heads over trade barriers. The Chinese want to join the WTO on their terms. The United States says no. Explains a high U.S. trade official, “We get one chance, and we’d better do it right.”
Washington’s hobbyhorse is intellectual property, a fancy phrase covering everything from porno films to engineering drawings. For years, U.S. companies have complained that bootleg software and CDs show up on Chinese street corners, even before the genuine articles hit stores. China promised to crack down back in February 1995. Nothing doing: many of the 30 factories cranking out illicit CDs belong to people with ties to top military and political leaders. Fake Jeep Cherokees still rush through the streets of Beijing, and pirated videos are everywhere. “There are a lot of serious economic interests involved,” says a former U.S. negotiator. Faced with the broken promise to go after the pirates, the Clinton administration threatens to retaliate by jacking up tariffs on $2 billion of Chinese goods. The reported Chinese counteroffer–lay off on the sanctions and we’ll buy $4 billion of U.S. airplanes–is such a transparent attempt to divide U.S. business interests that it falls on deaf ears. “Clearly, we can’t shut up about a fundamental issue,” says Chrysler Corp. general manager Denis Root.
The battle over piracy will lead into an even bloodier fight over tariffs in June. The annual renewal of China’s most-favored-nation (MFN) status, which lets its imports enter the United States with low tariffs, is an ideal vehicle for Congress to protest Chinese human-rights violations, nuclear proliferation and trade practices. Last year, Clinton averted a vote that would have embarrassed Beijing. But the intellectual-property debacle has Congress even angrier, and by turning up the pressure on Taiwan the Chinese have hurt their own case. “They’re causing substantial damage to the prospects for continuation of MFN,” says Nebraska GOP Rep. Douglas Bereuter, whose subcommittee will handle the issue. Both houses of Congress seem likely to vote against MFN, even though business wants it badly. Clinton can veto the resolution; but if Congress overrides Clinton’s veto–a long shot, but not an impossibility–higher tariffs will price many imports from China off the shelves.
Yet serious American businesses keep their eye on the big picture. Sure, the diplomatic forecast calls for turbulence. But China’s long-run economic forecast is so bright that no one can ignore it. “If it’s not MFN, then it’s something else,” shrugs an American toy executive. Many U.S.-Chinese joint ventures focus on selling into other Asian markets to avoid problems if MFN is revoked. Other companies hope their well-connected Chinese partners will help them skirt trouble. Even those who fear the worst are staying put. “If you are committed, you stay committed,” says Trevor MacMurray of McKinsey & Co. in Hong Kong. “Pulling out in a crisis and then wanting back in is the worst kind of signal to the Chinese.” And when the crisis blows over, those 1.2 billion customers–and their heads, feet and gullets – will be waiting.
China ranks second to the U.S. as a host country for foreign investment, and Hong Kong remains its most active investor.
Direct investment in China, annual amounts in millions of U.S. dollars
Country/region 1990 1991 1992 1993 1994 1995* Hong Kong/Macau 3,943 7,507 41,531 76,753 48,692 33,583 Japan 457 812 2,173 2,960 4,440 6,840 U.S.A. 358 548 3,121 6,813 6,010 5,435 Taiwan 1,000 3,430 5,543 9,965 5,395 3,731 Others 1,838 3,213 11,297 24,910 23,538 21,480 Total contracted investment 7,596 15,510 63,665 121,401 88,075 71,069 *Estimate. Source: U.S.-China Business Council
