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China and Soft Protectionism

March 6, 2013 By

In the Hutong
What, cold again?
2142 hrs.

Protest in Hong-Kong against WTO on december 2005

(Photo credit: Wikipedia)

Though we may not be talking about it much, those of us who watch China for a living are looking forward with a mixture of dread and anticipation to the upcoming “two meetings,” the annual sessions of the National People’s Congress and the China People’s Political Consultative Committee. Even though the die of China’s future leadership was cast at the Party Congress in November, the coming NPC is the juncture where the reins of government are handed over to the new leadership, and the retiring members of the Hu Jintao/Wen Jiabao entourage graduate to the status of “elder statesmen.” For that reason, this is the point at which we will all be watching for some indication of how Xi Jinping and Li Keqiang will run the show a little differently.

While some will be looking for signs of political reform, my eyes will be cast elsewhere, namely to trade. What I want to find out is whether and how the new administration plans to play by the rules it signed up for when it acceeded to the WTO eleven years ago. Or, indeed, how it intends not to do so.

Since at least the early days of the Hu Jintao administration it was clear that the so-called Fourth Generation of leaders was somewhat less enthusiastic about playing the globalization game, and much more interested in just keeping a lid on the place. Stability was the name of the game, and the spirit of we-can-take-whatever-free-trade-can-dish-out that exuded from Zhu Rongji like a heavy cologne was blown out the window when Zhu left the building in 2003. In its place came a series of policies that I term collectively “Soft Protectionism (软保护主义),” a series of measures and behaviors that allow China to circumvent the intent of the global free trade regime almost at will.

Soft Protectionism, as I see it, consists of several pieces.

National Standards. We see this most blatantly when it comes to technology. The government establishes a standard based on a technology that is locally developed, and by so doing secures all or at least part of the market for Chinese output. The TD-SCDMA standard for third-generation mobile phones is a great example, as is the WAPI wireless LAN standard that was supposed to supplant Wi-Fi. China has learned that this policy is best conducted when it is done within the parameters of global standards-making bodies like the International Telecommunications Union (ITU) and the Institute for Electrical and Electronic Engineers (IEEE.) Through organizational activism, horse-trading, and the occasional theatrical tantrum, China is able to gain acceptance for standards that are, in some cases, little more than laboratory experiments. Using this global legitimacy, the standards ploy becomes legitimate. And lest you accuse me of being biased, let me make clear that we Americans all but invented this game, and we perfected it with our bull-headed nationalist behavior when it came to standards for digital televisions and the first digital phones. China is simply turning the tables.

Creative Use of Non-Tariff Barriers. Despite the openness promulgated by the WTO, there are still back doors that will allow governments to selectively protect industries. The first and favorite of these is the so-called National Security Exemption from the World Trade Agreements. The key phrase is “Nothing in this Agreement shall be construed . . . (b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests”

That exemption gives wide latitude to any government willing to interpret it liberally, and China can and does do so, especially when it comes to information products and software. Other countries use this exemption to ensure that they have access to weapons production in the event of international isolation. The U.S. uses it, for example, to ensure its ships, tanks, and warplanes are all made by factories on US soil, but it does not use it to stop the import of foreign merchant hulls, diesel trucks, or civil aircraft. China, according to Nathaniel Ahrens at the Center for Strategic and International Studies, is comfortable crossing that line.

China also manages to restrict the free trade in publications, television, film, and music by stretching the WTO’s Cultural exemption (introduced by France in 1993) beyond the breaking point. Under the guise of protecting its vulnerable culture, China requires specific approval for any publication, recording, video, or film coming into the country. Keep in mind that we are talking about the culture that for nearly two thousand years has managed to assimilate every culture and nation that tried to subjugate it. Nonetheless, the exemption is used at every juncture.

Passive resistance to WTO Rulings. Rather than submit to WTO rulings it does not like, China conducts a passive-aggressive policy of resistance, even at the risk of undermining the institution. Dan Harris of China Law Blog fame put it like this:

“China still intends to remain within the WTO so as to be able to obtain certain trade benefits. Rather than openly disregard the minerals decision, China will resort to “procedural games” (游戏规则) to render any response against China ineffective as a practical matter. China is proud of how it has  used “procedural games” to avoid its responsibilities to respond to adverse WTO decisions and it openly states that it will continue to use this approach in these “national interest” cases. In fact, the term “procedural game” has become a standard feature of the China’s trade policy vocabulary.”

Government Catch-up initiatives. These are the micro-level great leaps that the government attempts to engineer over time in order to substitute domestically-made products and technology for locally-made equivalents. The past thirty years has seen China-government sponsored initiatives succeed in “catching up” in several industries, including shipbuilding, digital telephone switches, heavy trucks, wind-power generators, and solar power, and it is attempting to do so in automobiles, commmercial aircraft, microprocessors, and encryption software. The end result is the same: serviceable and appropriate products from overseas are gradually pushed out by government programs designed to deny them access to the market.

Government encouraged SOE support. This comes in many forms, but the most prevalent is outright cash payments. By offering low-interest or permanently rolled-over loans for state owned enterprises through state-managed policy banks at either the national or local level, China creates effective trade subsidies that are not counted according to international standards. A senior Obama administration official confided in me on the sidelines of the Strategic Economic Dialogue in Beijing last year that China’s export loans dwarfed even the U.S.’s generous programs through the Export Import Bank.

There is not much that the US, the EU, or any grouping of governments can do about any of this, short of an all-out trade war, if China chooses to continue with these policies. What this means is that even as a full-fleged WTO member, China is still capable of providing a protected environment for its firms, and has proven willing to do so.

Such policies will help companies beat foreign interlopers at home, but at what cost? At some point China will confront the other edge of that sword, whether in the form of having its behavior mirrored by other countries with tit-for-tat trade measures within the scope of the WTO; or by discovering that the companies it protected at home were weak and unprepared when venturing abroad.

For Xi Jinping, the choice in the coming months is whether to continue to use Soft Protectionism as the nation’s de-facto trade policy, or whether he will instead switch off the pumps and force Chinese companies to build the resilience necessary to beat global competition away from home. For the companies themselves, as Sunzi said, “Enemies strengthen. Allies weaken.” The wise Chinese company will seek to step out from under Beijing’s umbrella as early as possible to learn to compete on a globalized playing field, rather than a nationalized one.

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Filed Under: China Rules, Current Affairs, Policy & Governance Tagged With: , , , , , , , , ,

Business and The Xi Team: Focus on the Drivers

December 3, 2012 By
Xi Jinping 习近平

Xi Jinping 习近平 (Photo credit: Wikipedia)

In the Hutong
Information coma
1958 hrs.

Over the last couple of weeks, several people have asked me what the changeover in the Communist Party leadership will mean for international business in China. The short answer is that if I knew, I’d be wealthy. The longer answer is a bit more helpful.

Many years ago I had a mentor and boss who taught me that the parade of personalities and the flow of policies were fun to watch, but that sticking your finger up to feel the political winds would never offer the insight a business requires to make decisions beyond a six month threshold. What you need to understand, she told me, were the fundamental drivers of policy, not the policies themselves.

By fundamental drivers she meant the five or six issues that the nation’s leaders worried about the most, overlaid with the three core goals of the party at any given time. Add to that a general understanding of the climate in the country, and any relatively educated person could at least have a general hunch about a company’s horizons.

For example, I believe the thee core goals of the Party are:

  1. The continuance of Party rule
  2. The social stability of the nation
  3. China’s rise to global economic and political leadership

No rocket science there. Beyond this, though, things get tricker. What are the five things the members of the Politburo Standing Committee worry about when they wakes up at four o’clock in the morning?

Here is my list of the top five.

  • Controlling corruption without blackening the entire Party in the process
  • Getting the economy stabilized and on track for continuing growth
  • Keeping the PLA in line while retaining its political support
  • Cleaning up the environment without disrupting the economy
  • Keeping expressions of popular discontent from coalescing into a coherent anti-party front.

These are certainly open for debate, but what all of this suggests is that global companies will be welcome in China to the extent that they address (i.e., demonstrably take into account) these five priorities. What is more, given that domestic attitudes about foreign investment in China have, in the past five years, gone from “generally positive” to “generally ambivalent,” companies are going to find themselves compelled to make a case to their local stakeholders that they have something unique to offer just by being here.

Mind you, I’m not necessarily talking about approvals to do business, although that is an issue. Instead what I mean is that with every audience, from regulators to consumers, every business would do well to remember that being foreign no longer buys you much, and that in the current environment there is no particular priority placed on letting foreign firms into China.

In short, the outlook is not exceptionally good in the near term, but there is as yet little cause to be pessimistic. All of us need to stay tuned.

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Filed Under: China Rewires, Current Affairs, Policy & Governance, Public Affairs Tagged With: , , , , , ,

The Economist Nails the Case for Elections in Hong Kong

April 26, 2012 By
Consultation Document on the Methods for Selec...

Consultation Document on the Methods for Selecting the Chief Executive and for Forming the LegCo in 2012 (Photo credit: Wikipedia)

Leaving aside any ideological preferences one might have, The Economist makes a realist’s case for elections in Hong Kong.

In this case, though, there are practical reasons for China allowing a proper election, with non-acceptable candidates running too. It would bolster the mainland’s pitch to Taiwan: that “one country, two systems” means what it says. Full democracy may also be the safest option in Hong Kong. The uneasy coalition of Beijing’s supporters on the island—tycoons, party hacks, trade-unionists—could fracture under the weight of another ludicrous selection process. As for everyone else in Hong Kong, they showed in 2003 that when denied electoral outlets for their frustrations, they will take to the streets.

via Hong Kong’s chief-executive “election”: The worst system, including all the others | The Economist.

I can add two more: it would offer the world an opportunity to see the Party administering a high-profile local election, thus adding a much-needed bit of buoyancy to China’s bid for global soft power; and it would provide a laboratory for the Party in its own efforts to evolve.

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Filed Under: Current Affairs, Policy & Governance

Railway Reform is Coming to Town

August 12, 2011 By

In the Hutong
Managing Chaos
1311 hrs.

In a characteristically articulate editorial last week, Caixin called for an extensive overhaul of China’s Ministry of Railways (MoR) in the wake of the high-speed train crash in Wenzhou on July 23rd. The publication called for an open investigation into the accident conducted by experts from outside the control or influence of the MoR, for the functions of railway development, construction, operation, and regulation to be divided among independent entities, and for the folding of the resulting regulator into a larger ministry with a purview over the wider transport sector.

These changes are not without precedent in China. Aviation went through a similar change in the early 1990s, the telecommunications sector was similarly reformed five years later, and the energy sector has gone through a series of reforms that have separated the regulatory function from the business of generating and distributing energy. There are so many examples of where this has happened, in fact, that not only is the MoR something of a relic of China’s pre-reforming-and-opening past, it is also a matter of suggestive speculation as to why the MoR was left alone for so long.

So this sort of reform is overdue, and it looks like the higher organs of the Chinese government will try to unravel the hairball of conflicts-of-interest and mismanagement that serve as China’s railway industry.

Quis Custodiet Ipsos Custodes?

Unfortunately, even the measures suggested in Ciaxin’s excellent piece will not be enough. The world is replete with examples of industry-specific regulators who have become intertwined with – and co-opted by – the very industries they were created to regulate. One need look no further than the U.S. financial industry and its relationship with the Federal Reserve, the Department of the Treasury, and the Securities and Exchange commission to find proof, and there are ample additional examples.

The lesson of history is that regulators are most effective when they themselves are watched from the outside. While Caixin’s editors would be too modest (or timid) to say so, it is Caixin and all of the others who are watching the regulators from the outside who provide the best guarantee of a better and safer railway system for China.

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Filed Under: Current Affairs, Policy & Governance, Public Affairs

Journalism, China, and Merton’s Law

November 4, 2010 By

In the Hutong
Struggling with November
2009 hrs.

The monitoring and censorship of China’s Internet is a matter of continuous outrage and fascination for audiences outside of China. And why not? It is superb theater. It pits the world’s extremist information libertarians against a faceless bureaucracy seeking to control information flow, and it provides a public forum to watch and gauge China’s evolving polity. As a result, the topic is of great interest to reporters covering China.

Most of the time, the attention journalists give to this ideological tug-of-war is either good, or at worst harmless. But there is one type of story that, when reporters cover it, they have the potential of doing a great deal of harm: what I call “loophole stories.”

Guess Who’s Reading Your Story?

Recently a reporter for a large global wire service ran a story wherein he/she revealed that owners of Amazon’s Kindle e-book reader devices in China could use the device’s built-in browser and circumvent the systems put in place by Chinese authorities to restrict access to websites deemed unsuitable for local audiences. The story has run, at my last count, in over 150 publications and websites in English alone around the world.

I understand the urges that motivated that reporter to cover the story: the sheer glee that China’s regulators had been foiled again, and the urge to pander to readers who would read the story as a triumph of technology over censorship.

But the consequences of running that story will be something else altogether.

Translators working at the Xinhua News Service, China’s wire service agency directly subordinate to the State Council Information Office, will see the story as they monitor the global news wires to which Xinhua subscribes. They will translate the story and, rather than run it over their own wire, they will include the piece among the stories that will be passed as a part of a daily internal briefing to the senior leaders of the government and Party.

Once the pesky loophole is called to the attention of the senior leadership, it must be dealt with, if for no other reason than to prove that the nation’s regulators are not the Keystone Kops the story implied they were. A way will be found to isolate Amazon’s Whispernet network and block it in China.

Loophole closed.

Congratulations, intrepid reporter. You will have assisted the authorities in making the censorship lid on China’s Internet all that much tighter. If it was your intention to do so, job well done. Your fellow foreign correspondents will, I am sure, be so proud.

Knowing When NOT to File

The pressures on a modern journalist, especially a wire service journalist, are brutal. Not only do you need to make sure you have every worthwhile story on your beat, you must also ensure that you file before everyone else. There is not a lot of time to weigh the moral and ethical issues around any given story.

But in a place like China, where the unintended consequences of a story could range from the infuriating to the downright deadly, those consequences must be understood and weighed. And when you have a doubt, you must have the courage to spike the story.

Filed Under: Current Affairs

The Looming Crisis for Public Relations in China

November 1, 2010 By
I love PR (public relations)

Image by DoktorSpinn via Flickr

In the Hutong
Watching candy-wrappers blow in the wind
1818 hrs.

Gady Epstein and Imagethief have offered spot-on commentary about Mengniu‘s alleged hiring of a Beijing PR firm to disseminate libelous disinformation about a competitor. This sort of extreme case makes a good story, and hopefully there will be a few visible prosecutions to ensure these particular practitioners never twist the truth again.

But there are a wide range of activities in the public relations industry in China that, while they would be considered unethical or illegal elsewhere, are accepted practices here. While the practices in isolation may not seem egregious, they create an atmosphere of permissiveness that undermines the effort by many public relations people, both Chinese and foreign, to move public relations out of the sewer and into the boardroom.

Practices I have witnessed in the past decade include:

  1. Corporations and their public relations firms paying reporters a “transportation fee” of anywhere from RMB 200 – RMB 700 simply to come to a press conference or an interview, regardless of any relationship that fee has to the actual costs incurred.
  2. Public relations firms writing pro-client stories – essentially press releases in the style of a feature – for reporters to publish under their own bylines.
  3. PR firms pricing their services on a per-published-word basis, who, after taking a cut, then pay reporters to write reams of laudatory copy in return for a gratuity for each word published.
  4. Companies entertaining reporters at expensive restaurants, plying them with expensive gifts, or taking them on junkets.
  5. Companies paying reporters outright to write positive stories about them.
  6. Companies paying reporters outright to spike negative stories about them.
  7. Companies buying ads in newspapers in order to keep those publications for writing negative stories about them, with the reporter taking a commission on ad sales.
  8. Companies paying PR firms to hire people to go onto online forums and pretend to be consumers who love their company’s products (or who hate a competitor’s products). (We call it “astroturfing” because it fakes grassroots sentiment.)

These are not practices followed by all PR people or companies in China. There are firms and clients who are willing to put themselves at a short-term disadvantage in order to keep their practices above reproach, and they do so quietly. But the ethically-challenged practices remain altogether too common.

Until they are stamped out or drastically reduced, they will not only foster more scandals, they will undermine the credibility of China’s maturing news media in the eyes of the public. The government and the Party can afford neither. And therein lies a great danger for the PR business.

A PR industry truly interested in its future would move to put a stop to practices that may be considered unethical. If the motivation of protecting their clients against the kind of official attention Mengniu is getting these days is not enough to provoke a change, perhaps the specter of the government stepping in to regulate the industry in detail will be.

The global PR industry is not without its considerable ethical failings. Indeed, I reckon I will spend the rest of my professional life in a quixotic battle against spin as a substitute for true communications.

But it is early days in the evolution of China’s own craft of corporate communications. It would be a regrettable pity if that craft were to dissolve itself in the acids of disinformation and ethical compromise, right when it – and the companies it advises – most desperately needs to learn to communicate.

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Filed Under: Craft, Current Affairs

The Google Shuffle and the Hong Kong Twist

March 23, 2010 By
Airport Expressway, Inbound
Suffering from Pitch Fever
1241 hrs.

As we all take in the latest wrinkle in the Google vs. China story, a few thoughts. (Full disclosure: I own something like 5 shares of Google, Inc.)

Let Them Have It Both Ways

First, Google’s decision to redirect traffic to Hong Kong carries the faint scent of a company trying to have it both ways. On the one hand, Google would like to take the moral high ground with audiences worldwide, saying that it is no longer under the meaty thumb of Chinese government oversight.  On the other, it wants to be able to tell advertisers and shareholders that the company is still doing business “in” China, albeit from a sort of offshore data haven, and if possible maintain its #2 market position against Baidu. (Clearly, Google isn’t excited about leaving the worlds largest Internet market for a potential global competitor to dominate, or about creating a vacuum that would invite new competitors.) If they can pull this off, more power to them.

Success is not a given, however. In order to convince shareholders, they have to convince advertisers, and in order to convince advertisers, they need to maintain and build their user base. This means that the Hong Kong servers need to be as fast and easy to access as the Google.cn servers were. It also means that the government needs to resist the temptation to block access to the Hong Kong search engine from China. 

Saving Face for Everyone

It is tempting to stop here and simply say “any bets on that one?” But this brings us to my second point. There will be some among China’s policymakers who will be tempted to block the Hong Kong Google service completely. There are better choices that would allow Chinese users and businesses to enjoy Google’s search and SEO capabilities while serving the purposes of the government. 

This is an excellent opportunity to demonstrate strength by exercising restraint. I don’t think unrestricted access to an offshore Chinese language search engine is in the cards. But it would be a simple matter for the central government to treat Google.com.hk the same way they treat Google’s English services. Allow the site to remain accessible, but block searches that use terms the government finds objectionable. A nanny-moderated Chinese Google experience is better than none at all, and it gives China an opportunity to take a little high ground of its own. It would also serve to boost Google’s effort to expand its Hong Kong operations, something Hong Kong would surely like to see, and potentially help position Google as China’s Internet Entrepot. The SAR could sure use a boost, and seeing the central government take a stance that will benefit Hong Kong might help improve sentiment about Beijing on Jardine’s Rock.

It is not a perfect solution, but it is one that would allow both Google and the government – and Hong Kong – to come out of this better off. 

Unanswered Questions

Third, Sergei Brin’s high visibility on this issue raises more questions than it answers. As a child of the Soviet Union, Mr. Brin’s outspokenness on the China matter creates an unspoken (and not entirely accurate) parallel between China and the USSR that seems to bolster Google’s moral position. But it also keeps in the pubic eye a disturbing question: where was Mr. Brin in 2006 when Google made the original decision to operate a local China search engine under the terms spelled out by Chinese regulators? After all, the Hong Kong option was as open to Google in 2006 as it is today. Why did Google come ashore in the first place?

Did Mr. Brin or others strenuously object to the compromise and were overridden? If that is the case, what provoked the sudden change of heart? (And please, do not bring up the gmail hacks issue: that is an issue unrelated to the continued operation of the search engine.) Or was the company naive enough to believe that the reality of operating in China was at odds with its professed beliefs? 

These are not academic questions, nor are they relevant only to Google’s China business: they speak directly to the matter of the company’s corporate governance, and, of wider interest, to the way in which the company balances its moral stance with the temptation of business opportunities. As Google grows more influential and ubiquitous, it needs to make these matters clear to the public and, if necessary, rectify inconsistencies. Those of us who enjoy Google, its services, its software, and its share price want to know whether Google will truly be different as it grows, or whether it will simply become Microsoft-in-the-Cloud.

Posted via email from Silicon Hutong on Posterous

Filed Under: Current Affairs, Internet Business

Beware of Dumb Investors

March 7, 2010 By

In the Hutong
Catching up
0916 hrs

Reading a thoughtful article a year after it was originally written might seem folly, but given that I am still running to catch up with my backlog means that I have no choice. And sometimes, that’s a good thing.

Perusing a Martin Wolf (no relation) column in the Financial Times from 8 March 2009 entitled “Seeds of it own destruction” is sobering. As the world’s stock markets were still in their half-year-long nosedive, he noted:

“The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it. As Mr Volcker remarked during a speech last April: ‘Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the marketplace.’”

It would be very easy for me to jump on the bandwagon of Main Streeters jumping all over Wall Street and scream for better regulation of the markets. While that may be part of the answer, the other part is an old adage my mom taught me when I first started following her at swap meets in Southern California as a kid:

Caveat emptor. Let the buyer beware.

The more you read through the details of the story of the crash, the more you realize that buyers, driven by greed, willingly bought financial instruments they didn’t understand on the basis the two factors you should never trust when purchasing a financial instrument: past performance and the assurance of salesmen of the security of the asset.

To be sure, there were other factors involved, but it is illustrative that the greatest assurance against having a bubble blow up in your face is a dose of clear-headed thinking.

Which brings us to China.

Chinese enterprises and individuals are being given opportunities to purchase financial instruments about which their only knowledge and understanding comes from the people who are selling said instruments to them. They are buying real estate with the absolute conviction that property prices only go up, they never go down. And they are doing all of this believing that if a crash happened, the government would step in and bail out individual investors.

The buyers are not aware, and this is an implicit danger the government is going to have to address in a broad, systematic manner in a way that doesn’t cause a run for the exits. So the question is, how do you inform a hundred million small investors without completely undermining confidence in the markets? Especially when there is no comparable, successful model that has ever been used elsewhere?

Or, believing that to be an insurmountable challenge, and recognizing the weaknesses underpinning China’s still-developing financial and property industries, do you not even open that can of worms, and instead choose to foot the bill when the air finally leaves the balloon?

This is important. Because if there is a single factor that is more worrisome about China’s economy than its real estate prices, it is the under-informed, over-trusting, investor living in a cloudcuckooland of moral hazard.

Filed Under: Current Affairs, Development

China’s Education and Great Wall Street

February 23, 2010 By

In the Hutong
Planning a Den Meeting
0834 hrs.

Superb article in The New York Times by Beijing’s own Didi Tatlow covering the issues she faces in putting her child into the Chinese educational system. It was fascinating to me as a parent, but what really grabbed me was this throwaway comment deep in the story from a friend who was commiserating with Didi about today’s Chinese school kids:

“Once, the nation’s elite wanted to be scientists and build their country. Today they want to be bankers, or stick with safe state jobs.

‘They don’t know what they want, but they hear bankers make the most money and everyone else is doing it, so that’s what they want to do,’ Hua said.”

China’s best and brightest don’t see a future in inventing or making things. They want to work for Goldman Sachs. Sounds familiar, doesn’t it? The story could just as well be quoting someone talking about undergraduates at any of America’s elite universities, as Don Peck does in the March issue of The Atlantic:

“…to an unprecedented degree, people who graduated from high school in the 2000s dislike the idea of work for work’s sake, and expect jobs and career to be tailored to their interests and lifestyle. Yet they also have much higher material expectations than previous generations, and believe financial success is extremely important. “There’s this idea that, ‘Yeah, I don’t want to work, but I’m still going to get all the stuff I want,’” Twenge told me.”

Two generations of young Chinese people have been told “to get rich is glorious,” they want to take the easiest route possible, and they see investment banking as that route.

China needs to cultivate a core of smart investment bankers to help the nation wisely invest its treasure, guide the consolidation of overbuilt industries, and extend its reach overseas. But does China want to become a nation led by its investment bankers in which the primary locus innovation is in arcane financial instruments? Or would the nation and its leaders prefer to be a global leader in science, in innovation, in solving the world’s problems and profiting richly therefrom?

If China starts siphoning its best minds into investment banking at the expense of other industries, teaching finance at the expense of creativity and innovation, the PRC may well follow America’s path into looming national insolvency.  To stop that, China’s youth need to be infused with a passion for not just doing well, but doing good.

No easy task.

Filed Under: Current Affairs, Development

Where Morozov is Wrong

February 22, 2010 By

In the Hutong
Recovering from Food Poisoning
1518 hrs.

Georgetown fellow Egveny Morozov wrote a must-read op/ed piece for The Wall Street Journal that is being Twittered a lot today, and deservedly so. He takes to task those who believe (including, apparently, the U.S. Secretary of State) that the route to global democracy is digital openness. This is little more than wide-eyed, hopeful utopianism, and Morozov makes a clear case for the Obama administration to back away from its current approach to Internet freedom around the world.

Where Morozov and I part ways is toward the end of the piece, where he notes:

“Diplomacy is, perhaps, one element of the U.S. government that should not be subject to the demands of “open government”; whenever it works, it is usually because it is done behind closed doors. But this may be increasingly hard to achieve in the age of Twittering bureaucrats.”

I disagree. While it would be undesirable to make Twitter and Facebook de-facto extensions of U.S. government policy, the role of public diplomacy (defined as the conduct of foreign policy by direct engagement with foreign audiences) in an increasingly transparent world is well appreciated by leaders of many of the worlds governments, including China’s. They understand that public support for the relationship between countries is increasingly as essential to strong international relations as whatever happens behind Morozov’s “closed doors.”

Public diplomacy has been dying in the United States since the fall of the Berlin Wall. This has been a foolish oversight, and Morozov is shortsighted to so lightly consign it to the dustbin just as the international relations experts are starting to ask how to most effectively update and use the tools for direct “G2C” outreach.

With public diplomacy in the early stages of a renaissance, the digital means of conducting such efforts will undoubtedly be awkward at first, but this is no reason to warn the U.S. government off of experimenting with such channels. As U.S. military and economic power wane, the Obama administration would be foolish to cast off whatever tools are available to ensure the continued influence of the United States in world affairs. We can be sure that the governments of India, China, and Russia, to say nothing of a host of non-state actors, will not do so.

Filed Under: Craft, Current Affairs

How the East Will Rise

February 14, 2010 By
China Construction Bank
China World Tower 2, Beijing
Watching the pre-holiday ATM rush
1129 hrs.

In the face of a growing herd of commentators foretelling the rise of China, Niall Ferguson has identified what he believes to be the six factors that gave the west an opportunity to overtake and surpass China’s early cultural and technological lead. He shares them with us in the Financial Times:

“What gave the west the edge over the east over the past 500 years? My answer is six “killer apps”: the capitalist enterprise, the scientific method, a legal and political system based on private property rights and individual freedom, traditional imperialism, the consumer society and what Weber probably misnamed the “Protestant” ethic of work and capital accumulation as ends in themselves.

Some of those things (numbers one and two) China has clearly replicated. Others it may be in the process of adopting with some “Confucian” modifications (imperialism, consumption and the work ethic). Only number three – the Western way of law and politics – shows little sign of emerging in the one-party state that is the People’s Republic.”

One could argue with Professor Ferguson’s conclusions, and as an (amateur) historian I have a problem with such deterministic models. Any number of ex post theories can be drawn to fit the facts, and Dr. Ferguson is neither the first nor the last to propose a reason for China’s failure to keep up with the rest of the world during the Ming and Qing dynasties.

For the sake of argument, though, let us grant him his six “winning” factors. In return, he must grant that had he made a case for these six factors to European leaders 500 years ago he would not have been feted for his foresight. Rather, depending on the country in which he made the case, he would been ridiculed, cashiered, excommunicated, exiled, and possibly executed.

Plainly, there was no deliberate choice or point of determination where the west consciously chose such a path. It was a series of unrelated, non-sequential choices and events that brought about these changes, each important but few if any seen at the time as critical. Indeed, as my fellow readers of alternate histories will readily point out, at any number of junctures things could have gone a very different way.

It seems equally unlikely that we could foretell with any accuracy what factors will drive the rise of an Asian or African civilization in the future, or whether they would be as palliative as the happy factors that got the west to where it is today. Indeed, to assume that the influences that brought the west to its zenith are required for the east to attain its own apogee reeks of cultural hubris, wishful thinking, or both.

The political, cultural, economic, and ideological drivers behind the rise of each successive civilization in the history of the west – Babylon, Egypt, Greece, Rome, The Caliphate, Spain, England, and America, to name a few – have varied radically from one to the next. Certainly a professor of history at Harvard would consider that. Why might he believe this time would be different?

It is (to me at least) axiomatic that the forces and factors that will determine what nation, political system, or culture leads the world in the coming centuries are probably not what we think, and are likely not what Dr. Ferguson thinks, either. Those factors will emerge over time, and we will have to leave it to historians hence to sift such insights from our future.

No one would be happier than I if Dr. Ferguson is correct. Yet while I am warmed by Dr. Ferguson’s implicit faith in the underpinnings of western civilization, we must all acknowledge that the road to the future of China and the world will likely be paved with somewhat different ideas and institutions.

Filed Under: China Breaks Out, Current Affairs, FITG

Holding Fire on Google vs. China

January 18, 2010 By

In the Hutong
The Semi-Sabbatical Begins
1243 hrs.


A lot of excellent thinking – and a lot of polemic tripe – has been written in response to Google uberkounsel David Drummond’s blog post last week announcing Google’s intention to stop filtering Google.cn content and possibly leave China altogether.

There is much in the way of speculation and precious little in the way of information bubbling to the surface right now, and rather than simply add to the froth, I’m going to spend some time doing some homework before discussing them.

In the meantime, my thoughts are with the people at Google China, and my hopes that despite the uncertainty that must surround them every day that they can still enjoy their coming Chinese New Year holidays.

Filed Under: Current Affairs, Internet Business

Whose Moral Relativism?

October 14, 2009 By
In the Hutong
Dry dry dry dry
1701 hrs

Uber-establishment public intellectual and Newsweek International editor Fareed Zakaria does a decent job calming the otherwise financially panicked in a pallative column from June 13.

What I found most intriguing about the article was the conclusion (proving, once again, that it does occasionally pay to read long essays all the way through,) where he explains that the West is in the throes of a crisis of morals as much (or arguably more) that a crisis of finance. When he first started this bit of his rant I shook my head. “Yes,” I thought. “We’ve all heard this before – the old Wall Street is an Ethical Wasteland argument, with Bernie Madoff, Allen Stanford, Alan Greenspan, Wall Street traders, and subprime mortgage brokers all trotted out as poster children.”

But then Zakaria pointed out that Wall Street was not alone.

“Most of what happened over the past decade across the world was legal. Bankers did what they were allowed to do under the law. Politicians did what they thought the system asked of them. Bureaucrats were not exchanging cash for favors. But very few people acted responsibly, honorably or nobly (the very word sounds odd today). This might sound like a small point, but it is not. No system—capitalism, socialism, whatever—can work without a sense of ethics and values at its core. No matter what reforms we put in place, without common sense, judgment and an ethical standard, they will prove inadequate. We will never know where the next bubble will form, what the next innovations will look like and where excesses will build up. But we can ask that people steer themselves and their institutions with a greater reliance on a moral compass.”

(Italics mine)

Leave aside for a moment the problem that when you start blaming society, you deflect the blame from the bad guys. I do not get the impression that this is Zakaria’s intent.

No More Higher Ground

Zakaria makes two points, one implicit, one explicit but not sufficiently so, that we need to take into account for China.

The first is one I have discussed and heard from other China hands over the past year. Anyone who thinks that Chinese leaders and the Chinese people are blind to the malfunctioning moral compass in the West – especially in the wake of current events – is wrong. If we ever were in a position to preach, either at a systemic, enterprise, or personal level, we have lost that position.

And that means that any American who excoriates corruption in China will be dismissed as a hypocrite; any foreigner who tries to explain to a factory owner why it is better to make produts safer will be held to a higher burden of proof; and any executive trying to preach the importance of integrity and ethics to a recent recruit will face annoyed skepticism.

The Law of Rules

But the larger point – the one I do not think Zakaria makes plain enough – is that rule of law is not all that we have made it to be. As we talk about China’s development, we attach to the concept of “rule of law” a Holy Grail-like quality, as if the quest for the rule of law, as much as finally attaining it, will be the answers to many of China’s major social challenges.

In pointing out that in America, the paragon of societies living under a fully developed body of law, legislative process, and criminal and civil court systems, is deeply socially flawed in spite of the rule of law, Zakaria sends us a warning about China, one that will discomfort many of us. Rule of law, as important a goal as that may be for China, is inadequate to ensure that leaders, enterprises, and people behave in ways that are not sociopathic.

A rule of law must be paired with what I would call a Law of Rules, a detailed code of behavior that is rigid enough to withstand relativism, is adaptable enough to stand despite massive social change, and is set forth by a body or entity that operates at a level removed from our own unlimited ability to rationalize almost any behavior.  Law of Rules is more than just a moral compass. It is a clear description of how to live, so that the rule of law – the nation-specific constitutional, criminal, and civil codes standards of behavior – need only come into play in exceptional cases. The rest of the time, it is our fear of doing wrong and our desire to do right that guide us, not the fear of the cop, the lawsuit, the jury.

The Law Gone Missing in China

Twice in the last hundred years, China has had its Law of Rules stripped away. The first was what might best be called Confucianism, an imperfect but longstanding code of behavior rooted in a system of rigid interpersonal obligations. Ripped away in the aftermath of the 1911 overthrow of the Manchus, it died a slow death, and was eventually replaced by Maoism.

Maoism was battered by almost continuous challenge and upheaval, until finally its precepts of egalitarianism, service, self-sacrifice, and patriotism were abandoned in the 1990s. What replaced them were two simple maxims: “To Get Rich is Glorious,” and “It doesn’t matter if the cat is black or white, as long as it catches mice.”

Now, we are told, all that we need to lay upon this highly practical foundation is a legal system backed with apolitical courts, and everything will be fine. Not bloody likely. If the fear of prison and death are not enough to keep the chief executive of a dairy from making decisions that will kill babies, no rule of law can hope to end such behavior.

There is no silver bullet solution to this problem for China, no simple path to change, because the change that must take place is not in institutions but in individuals. This is not one battle, but 1.3 billion battles. And for that reason, it is the greatest single challenge facing China today.

Where to begin?

Filed Under: Current Affairs, FITG

Afghanistan 2009 = China 1945

October 9, 2009 By

In the Hutong

Contemplating Awareness

0936 hrs

Starting to catch up with my reading – I’m at least four years behind – I came across some of the writing CFR Fellow Elizabeth Rubin is doing from Afghanistan, in particular an August 4 piece in the New York Times Magazine called “Karzai in His Labyrinth.” I spend less time than I should reading into the situation in China’s neighbor to the southwest (an oversight, because much of China’s thinking about the world is dictated by the “near abroad”), so this piece was something of an eye-opener.

The more I read about the Afghan political scene in the midst of a brutal civil war, the more similarities I see with China in 1945. The United States is, once again, essentially supporting a leader who has forged a weak and tenuous polity out of an uneasy alliance of warlords and narco-barons that have emerged from the wreckage of a weak and brutal neo-feudal theocracy offers.

The U.S. has  done this in the name of expediency and ideology, preferring a corrupt, secular, and nominally democratic alliance to a centralized fundamentalist state. And, to be fair, the U.S. did so with the best of intentions but with painfully little care, planning, and expertise.

As a result, it is working little better in Afghanistan than it did in China 65 years ago.

None of this is to suggest that America and its NATO allies should throw in the towel and come home. It is, however, time for some realpolitik and some more creative thinking.

In World War II, the U.S. sent a combined military-civilian mission to Yan’an to investigate the possibility of working with the Communists after the war. Called  the “Dixie Mission,” the three year effort was eventually undermined by a combination of McCarthyism, a failure to appreciate the latent rifts between the  Soviet Union and the Chinese Communist Party, and the policy myopia of the Truman Administration and specifically Ambassador Patrick J. Hurley.

If there is an implicit message coming from the ground in Afghanistan, it is that we need to start looking for alternatives to the present situation rather than bolstering it. Even if the Taliban were to pack it in tomorrow, would what was left truly be the kind of government of which we could be proud – or that would promise stability for anything longer than a lunch break?

None of this is meant to suggest that the U.S. ally itself with the kind of regime that ruled Afghanistan prior to October 2001. Instead, it is time to start getting a little more creative in casting about for solutions, rather than “backing a horse and sticking to him.”

“Sticking to our horse” failed in China in 1946, in Cuba in 1959, in Vietnam in 1975, and in Iran in 1978. It has failed in Afghanistan for two centuries at least. History may not repeat itself, but it does echo, and this is an echo worth heeding.

It is also an echo that suggests that China has as much – and perhaps more – at stake in the eventual outcomes in Afghanistan than the U.S. and NATO (as do Iran, Pakistan, India, and the Central Asian Republics), and that if there was ever an opportunity for China to begin exercising itself on the world stage, this is it.

That is, of course, unless China’s strategy is to hang back, watch the U.S. make a mess of Afghanistan, and then swoop in and try to clean up the mess afterward. In which case, we can only hope they learn from the mistakes of their predecessors rather than repeat them.

Filed Under: Current Affairs, Public Affairs

Questioning China’s CyberLegions

October 8, 2009 By

In the Hutong
Not a Caveman
1045 hrs.

The Open Society Institute is not an organization you would classify among China’s great supporters. But OSI Fellow Evgeny Morozov suggests in the Boston Review that our fears of “digital Pearl Harbors” and “cyber-Katrinas” launched from non-democratic countries are, at best, overblown, and at worst distract us from more worrisome threats.

Not least of those in Morozov’s mind would be the implicit threat to democratic regimes by their own governments who may curtail freedoms in the effort to secure their systems, driven by good intentions but hamepred by a misunderstanding  of the real threat.

Skynet? No…er, not YET

Morozov does an excellent job taking apart some of the misperceptions and complexities around computer security and cyber-warfare, adding some balance to a discussion normally dominated by the voices or proxies of what we might call the Cybersecurity Industrial Complex (CIC, pronounced “sick.”)

Morozov resists the temptation to turn China into a punching bag, choosing instead to take a wide-angle look at the issues, and in the process putting to rest much of the fear, uncertainty, and doubt around cyber-security.

It is a superb article, and I agree with about 90% of it, especially his contentions that the most important targets for cyber warfare will (initially at least) not be militaries or governments but enterprises and NGOs, and that much cyber-conflict will take place in the realm of the criminal rather than the martial.

What concerns me about Morozov is that in the course of his article he gently manages to sing us to sleep vis-a-vis information warfare. His offhanded dismissal of cyberwar sounds a bit like the U.S. Admirals who ridiculed General Billy Mitchell’s contention in the early 1920s that aircraft would render battleships obsolete. The Admirals were absolutely right – at the time. On December 7, 1941 and dozens of occasions afterward, however, they were 100% wrong.

History has proven that the premature dismissal of a new technology because of poor initial performance on the battlefield is as foolish as it is common.

As difficult as it might be to separate calm, rational threat assessment from alarmist hyperbolic hucksterism, it would not do to allow Morozov to shrink military-class information security threats to the point of non-existence. Computers are commonplace and a billion people are online, but  we are only beginning to understand the full security implications of a connected world.

I am a still at the stage of “student” when it comes to information warfare. My greatest accomplishment to date on that score has been to assemble a fairly intimidating body of literature on the topic that by its very presence on my bookshelves tasks me to take it on.

But it does not take an expert to discern that China’s substantial budgetary challenges, balanced with a need to build a credible and modern national defense, will drive it to choose asymmetric strategies. China will build systems to deny advantages to its adversaries rather than try to match them. Put in concrete terms, that means building lots of anti-ship missiles rather than lots of aircraft carriers, anti-satellite missiles rather than its own constellation of GPS satellites, and hacks, cracks, viruses, and botnets rather than complex C4I networks.

That there are technical, doctrinal, and practical challenges to these approaches should not make us think that they cannot constitute the pillars of a viable and potent defensive (and possibly offensive) capability.  Wisdom, not hype or hysteria, suggests that every military commander in the world begin to plumb the evolving possibilities of anti-network warfare, and by all accounts the PLA seems, wisely, to be doing so.

Filed Under: Current Affairs
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