Dealing with China’s “Soft Protectionism”

In the Hutong
I am not a tuna
2017 hrs.

Stan Abrams makes an astute observation about Chinese industrial policy in a recent article about China’s clean energy market: while the central government welcomes high-tech firms from overseas, the implicit quid pro quo for market access is technology transfer and local manufacturing, and it has always been this way.

Somewhere on the road from China’s Reforming and Opening in the late 1970s to the decade following the nation’s accession to the World Trade Organization in 2001, global businesspeople lost sight of that fact, or believed that it had somehow quietly changed.

It hasn’t.

Across a host of industries, China continues to pursue – and hone – policies designed to give its companies a competitive advantage both at home and abroad. China is not alone in this regard: Japan, Europe and arguably even the United States have been doing the same for years, and they’ve been doing so as full, developed-nation members of the WTO.

Even if time-consuming WTO actions against China’s most eggregious protectionst policies eventually succeed, Beijing can (and likely will) continue to draw from a playbook of industrial policies written in Paris, in Berlin, in Washington, and in Tokyo. The global powers that forged the world’s trading system left for themselves sufficient wiggle room to accommodate their own favored industries. China knows where those loopholes are, and with good reason expects to use them with virtual impunity.

Chinese industrial policy – or what I would call “soft protectionism” is not going to go away. As a result, two things need to change:

  • First, businesspeople facing China as a market or as the cradle of competitors must expect that China will do everthing it can short of a blatant abrogation of its international agreements to foster and support champion industries and companies. If you are in any doubt, assume your industry is a potential Chinese champion: even if you are wrong, you will come out ahead.
  • Second, the WTO’s remit must be expanded beyond trade in goods and services to encompass a global agreement on foreign direct investment. FDI restrictions have become a popular non-tariff barrier to equal market access among all of the major powers. If the world wants China to allow open investment access to its industries, all nations have to drop their own efforts to restrict foreign investment. Of course, this presumes political will to do so. Ask yourself – is the United States prepared to sell the Port of Long Beach to a Chinese state-owned enterprise in return for open access to China’s clean energy market? If not, we had best be prepared to take other steps.

So letting the issue lay may not be a bad idea. We have to recognize – without being dismissive – that a strong industrial policy does not a global competitor make. Good companies benefit from government largese, but lousy companies with lousy products are not made better by government coddling.

China’s pursuit of industrial policy is but one of a host of factors that foster world class companies and products. If we allow ourselves to focus too much on government policy, we will lose sight of the other drivers of competitiveness, like innovation, a tolerance for failure, creativity, and speed.

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