China’s leadership is attempting to manage international trade as if it were a game of Fluxx – a card game where players win by constantly changing the rules of the game on their opponents.
International trade cannot flourish under such conditions. And, while it may appear that the trade environment can be manipulated to benefit one side, ultimately such arbitrary actions harm all involved parties.
On June 23 and 24, Secretaries Kerry and Lew will host the seventh session of the U.S.-China Strategic and Economic Dialogue in Washington, D.C. The Dialogue, according to the Treasury Department, is an “essential step in advancing a positive, constructive, and comprehensive relationship between the two countries.” Without an honest conversation about the positive and negative aspects of the bilateral relationship, it will serve as nothing more than another bureaucratic photo op.
The U.S. delegation should use this opportunity to encourage the Chinese delegation to stop playing games with trade and commit to the rules-based trade environment that has created unprecedented global wealth and helped lift billions of people out of poverty (such a message would be enhanced, of course, if Congress would pass Trade Promotion Authority giving the Administration the same negotiating authority that every President has been granted since FDR).
For China, as well as other emerging economies such as Brazil, India and South Africa, the flourishing of international trade has been linked to a 115 percent increase in their standard of living (as measured by GDP per capita). The U.S. economy, the world’s largest exporter, benefits as well. In 2014, the total value of U.S. exports was $2.3 trillion, supporting more than 38 million jobs.
But, these benefits are jeopardized by policies that target foreign-headquartered companies at the whim of a country’s leadership. Unfortunately, many examples of selectively targeting foreign companies for regulatory action have occurred too often in China as of late. And, the allegations range across a wide variety of industries.
For experienced China watchers, this is not a new story. The emergence of a new tactic employed by the Chinese government, however, is of mounting concern. Through state-owned and controlled media investigations, Chinese regulators are effectively initiating anti-competitive regulatory actions.
In the technology space, for example, China has cited Apple as a threat to Chinese national security. CCTV (the Chinese state television network) has criticized the iPhone’s frequent locations function as a means for Apple to track, and presumably spy on, sensitive Chinese economic and security interests. Apple has also been hit with anti-consumer investigative programs from CCTV and other outlets, to the detriment of its competitiveness in the Chinese market.
In another sector, food companies Yum! Brands (owner of KFC), McDonalds, and OSI Group appear to be China’s scapegoats when it comes to the country’s many scares related to tainted food and, subsequently, victims of unsubstantiated media smear campaigns. China certainly faces a serious problem when it comes to the country’s food safety that needs to be addressed. However, there is a pattern of selectivity and willful ignorance of the rule of law when it comes to allegations against foreign-owned businesses in the food sector.
Furthermore, the actual evidence of wrongdoing against many of these companies turns out to have been nothing more than rumors. For instance, CCTV ran a report, later shown to be unsubstantiated, that accused Yum! Brands of serving its Chinese customers chickens that were enhanced with toxic chemicals turning them into “fast-growth chickens.” Competitors to KFC have jumped on the bandwagon spreading rumors that KFC serves chickens with eight legs and six wings.
Despite the lack of evidence, KFC’s brand has been negatively impacted by the rumors, which were cited as a contributor to the company’s 9 percent decline in net revenue in the first quarter of 2015.
As noted in Time Magazine, “In a country where companies routinely flout the law and officials – by the government’s own admission – are grossly corrupt, we’re forced to ask why some corporations and people find themselves in Chinese newspaper headlines or investigated by regulators, and not others. In other words, why was OSI the target of a time-consuming TV expose and not another company? The focus on a foreign-owned factory … is part of a trend.” OSI Group has since lost hundreds of millions of dollars and still has six employees of its Chinese subsidiary in jail.
This pattern of the Chinese government using the state-run (or state-influenced) media to arbitrarily impugn foreign firms create a barrier to international trade. It also violates basic principles of the rule of law.
Ensuring that such issues are resolved is precisely why the U.S. engages in a Strategic and Economic Dialogue with China. Secretaries Kerry and Lew should use the seventh session to directly raise these concerns with their Chinese counterparts.
Wayne Winegarden, Ph.D is a Sr. Fellow at the Pacific Research Institute, Contributing Editor to EconoSTATS at George Mason University, and a Partner in the consulting firm Capitol Economic Advisors