Today two well known participants in the China Policy Dance issued reports that reflect important concerns about China's business environment and how China engages the world. Yet there were also important differences between them that reflect that value of being careful and not painting China with a single broad brush stroke.
The US Economic and Security Review Commission released its annual report, and as usual, the commission went overboard in its criticism of China, painting almost everything China does as a violation of international norms. (The commission does deserve credit for recognizing progress in cross-strait relations and admitting that Chinese holdings of US Treasuries doesn't threaten the American way of life.)
Leaving aside their analysis of security issues, there are two parts of their report on the business environment and trade that are typical of their bias. First, they go overboard in their criticism of China's Indigenous Innovation policies and in particular the November 2009 policy to promote government procurement of domestically-made technology products. However, they fail to report that this draft policy was subsequently revised in April 2010, largely satisfying the demands of foreign business and government critics. China is still not a member of the WTO's Government Procurement Agreement (GPA), and it doesn't make sense to harp on the backsliding and ignore the positive adjustment.The report also claims these policies have been quite costly to American industry, but these claims are not substantiated, and that's where the rubber meets the road.
Second, the report inaccurately accuses China of continued widespread "noncompliance" with its WTO commitments. Yes, China still has a variety of non-tariff barriers, and some of these are more substantial than when it joined the WTO in 200; but it is inaccurate to characterize these policies or industrial policies in general as "noncompliance of WTO commitments" (p. 46). As the report indicates, when the US and others bring China to the WTO, China has lost most of the cases, but in those cases it has routinely complied with the verdict and changed the relevant policies. (One should note that respondents typically lose WTO cases, the US being no exception -- though the US is exceptional in that it regularly delays modifying domestic laws longer than any other loser.)
But what the report's authors really mean is that it isn't that China is overtly noncomplying, but that China's system is inherently incompatible with the WTO's norms of openness and reciprocity. Hence, they write,
Atlhough the commission may not like industrial policy, the WTO as a rule doesn't ban it, and it likely never will.
Why does the commission have such a consistent record over going overboard? I can't say for sure, but in reading their reports and informally talking with the commissioners, I don't think it would be unfair to suggest that the commission views China's rise as an inherent threat to the United States, and everything China does or says is viewed through that prism. The predictability of the Commission's reports may be why they have so little effect on the American debate, even in Congress.
The second report released today is the US-China Business Council's 2010 Member Priorities Survey Results. They ask their members about trends in profitability, business strategy, and problems with China. Since the Commission's discussion of China's business environment for American companies is geared toward identifying problems for American companies and how things should be made better, it would seem to me that the Commission's report above ought to be somewhat consistent with what the US-China Business Council found. They're not. Instead, there are huge, unbridgeable differences.
First, whereas the Commission paints a picture of China as an economic threat and damaging to US economic interests, the Council reports that 87% of its members report being profitable in China, with 65% saying their profits grew by 10% or more. Surprsing to many who think foreign industry goes to China just to take advantage of cheap Chinese labor and then sell the goods back in the US, 96% of respondents said they are operating in China in order to sell to the Chinese market, compared to 40% who said they use China as an export platform (multiple answers allowed). And 94% of their respondents were optimistic about their China business going forward.
Second, the Council identifies substantial problems companies face in China, but it is a much more complex picture than the one painted by the Commission. This is summarized in the below figure (printed here with the Council's permission).
Some company problems are consistent with those identified by the Commission. Continued and growing problems with administrative licensing, competition from SOEs, market access in services, protectionism risks, government procurement, and standards all fit the Commission's story. Yet there are some major differences to note:
1) The #1 problem is human resources, that is, obtaining and keeping quality employees. This is complemented by another worry, the growing cost of doing business in China, which companies said is primarily the result of rising wages (which is in part the result of labor reform laws passed since 2007);
2) Some problems that are still serious enough to warrant being in the Top 10 are nevertheless improving. It's incredible to see that American industry believes there has been a general improvement in protection of intellectual property rights and that Chinese policy and the policy process are becoming more transparent. This is a major change from just a few years ago. Moreover, although companies are worried about Indigenous Innovation policies, over 70% report that these policies have yet to substantially harm their business interests; and
3) The Commission spilled a lot of ink harping on China's nefarious manipulation of the Renminbi and quoted the (weakly defended) claims of Fred Bergsten and others that the US is losing over a million jobs due to China's policies. By contrast, the forex problem is irrelevant to the US-China Business Council's members. Currency is not (and has not been) among their members' Top 10 concerns, and it doesn't even make it into the top 20. It'd certainly be a shame for Washington, DC, to go to the mat over currency when much of industry finds the issue largely irrelevant to their concerns.