Chinese Protectionism Comes Under Attack

Its open season on China. After years of holding back on criticism of China for fear of losing business, U.S. executives are beginning to complain openly about the Asian giants trade practices, which often heavily favor Chinese companies. Microsoft CEO Steve Ballmer has complained about the lack of intellectual property protection for software in China at a June conference. Software companies estimate piracy in China cost the industry about $7.6 billion last year. GE CEO Jeffrey Immelt has complained about Chinese purchasing decisions that favor local companies. The Wall Street Journal today ran a story that has two German giants chiming in with their own complaints. Strategic News Service has run a blog that says Googles complaint in China, and perhaps its reason for pulling out, was that the government was deliberately delaying Google search results by several seconds in an effort to give a speed advantage to the dominant Chinese search company Baidu. The U.S. administration has long complained that China has kept the value of its currency artificially low in order to promote exports.

Multinationals were willing to overook this kind of behavior while China was still a developing economy. Microsoft was willing to accept the heavy pirating of Windows and other software while it believed that China would eventually start to move towards a normal market with normal licensing practices that would allow Microsoft to make money. But China is now a big global player and it shows little sign that it will accept international trade and licensing practices.

I covered Japan for Business Week during the early 1980s and for the Los Angeles Times during the early 1990s. During those years, the U.S. government cracked down on Japanese efforts to favor their local companies including protectionist measures designed to encourage the development of domestic communications and semiconductor sectors. Japan responded by allowing the U.S. more access to its markets. Complaints about a weak yen led the a major revaluation of the yen.

The U.S. is clearly a lot more hesitant to apply the same kind of pressure to China even though our trade deficit with with China–we bought $227 billion more in products from China than they bought from us–is far higher than it ever was with Japan.

The assumption has been that our dependence on Chinese capital and the importance of their market reduces our leverage in negotiations. Yet, China is far more dependent on the U.S. market than the reverse. That’s true for the moment at least. As more and more of our industrial base moves to China, our dependence on that country goes up and are options go down. Of course China will begin to protect IP when its companies start having technology to protect. But that may be too late.

When even the CEO of General Electric, which depends for much of its growth on exports to China, starts to complain about China in public, you know that we are reaching a critical point. With Japan, the U.S. simply threatened sanctions if Japan did not change. The U.S. may have little choice but to take a similar approach to China. Failing to face up to this issue now will make it tougher in the future.

This is a delicate issue because Washington state is so heavily dependent on trade. We benefit strongly from the relationship with China. And threats against China could inflame nationalist sentiments against the U.S. But if the imbalances are not dealt with soon, the trade issue could deteriorate into an even uglier affair.

I only hope we can move early enough on this issue so that measures can be developed that are rational, not emotional. We need carefully crafted measures that help to rebalance trade without igniting a mutually destructive trade war.