Is the Business Community Souring on China?

by John FrisbieWe have been hearing a lot lately in Washington about how the business community is “souring on China.” A closer look suggests that this characterization is exaggerated and needs a little context. By and large, companies are increasing their commitment to expanding their China business—and do not want to see the commercial relationship disrupted, even though important issues need to be addressed.

The “souring” assessment takes a lot of disparate events and puts them together—everything from Google’s threat to pull out of China, to threatened retaliation against companies involved in US arms sales to Taiwan, to trade associations writing letters about China’s procurement and domestic innovation policies, to the undervalued renminbi. Cementing it all are observers based in China who refer to “the worst business climate ever” and “angry and disillusioned” executives in Beijing.

All this gets attention, but the US-China Business Council (USCBC) is hearing a more balanced view from our members. Our membership is telling us clearly that the China market is important to their sales growth, overall company health, and, yes, US employment. Indeed, there are problems, but executives tell us these issues need to be addressed specifically and with solutions, not with sanctions that would disrupt the bilateral relationship.

Context

USCBC’s 2009 membership survey underscored this sentiment, especially because it was conducted in the midst of the economic downturn. The broadly based survey clearly showed that China is a bright spot for companies’ global operations. Fifty-one percent said 2009 revenues in China would increase, when revenues were being severely challenged in most other markets around the globe. The five-year outlook for China business? Ninety-three percent of respondents were optimistic or somewhat optimistic.

I reached out to USCBC’s board of directors in mid-February to see if this sentiment had changed. The answer from CEOs remained the same: China is an important market, and companies are increasing the resources they devote to expanding sales there, not pulling back. The issues—including the very real concerns about policy trends—need to be addressed with a targeted focus and through sustained engagement with the PRC government.

The trade numbers bear out this view. US exports to China were flat in 2009, coming in at about $70 billion for the year. In comparison, US exports to the rest of the world fell 19 percent in 2009. China outperformed in a down year.

US affiliates in China probably sell another $80 billion or more into the China market, based on the latest Commerce Department data. Though some of these sales no doubt include imports of components or inputs from the United States and therefore double-count the export total to some extent, these are sales that create US exports and that might not otherwise be made from operations in the United States. In short, China is one of the most important markets for American companies and needs to be a major part of the Obama administration’s goals to boost US exports.

Bad indigenous policymaking

None of this is to suggest that doing business in China is trouble-free. USCBC’s board and membership are concerned about China’s industrialnd other policies that could further tilt the playing field in favor of “national champions.” The recent central-government indigenous innovation directive that threatens to effectively exclude many foreign companies operating in China from participating in the government procurement market falls into that category. Policies that promote import substitution fly in the face of China’s commitment to rebalance growth and reduce the trade surplus and also need to be addressed.

China’s leaders need to understand that these are important issues that undermine the relationship and will not go away until resolved. These issues should be raised at every opportunity by US government officials at all levels, just as USCBC is doing; failure to do so would be detrimental to US commercial interests.

Solutions, not sanctions

Why does the characterization of company views matter? Rumor has it that the Obama administration is reassessing its economic and commercial policy approach to China. Some administration officials reportedly believe that one year of “engagement” has produced few results. We hope the administration recognizes that sustained engagement with China is needed to address the issues. A reassessment based on the false assumption that the business community is souring on China could result in the wrong policy choices.

If focused engagement truly fails and we cannot get the progress needed on the issues, we may face harder choices down the road. But we are not at that point. For now, the business community is clear: Solutions, not sanctions.

[author]John Frisbie is president of the US-China Business Council.[/author]