BY Bill Powell
06/24/2019
NEWSWEEK
MAGAZINE
In the summer of 2010,
Jeff Immelt, then the CEO of General Electric, sat on one of the private planes
at his disposal, headed to a conference of Italian business executives in Rome.
He had just come from meetings in Shanghai and Beijing, and was in a sour mood.
GE had spent years—and invested millions - in China, believing, like so many
other Fortune 500 companies did, that it was the future: the largest and thus
most important market in the world. The year before GE's sales there had been
$5.3 billion.
Now Immelt was losing
faith. Growth in the company's key businesses, including power and medical
imaging, had begun to slow from the levels GE expected. Government regulators,
meanwhile, seemed increasingly hostile, holding up permits and increasing
inspections of company facilities for what seemed like no reason. In Rome,
Immelt let his fellow CEOS know what he was thinking. "I really worry
about China," he told the group, according to several executives present.
"I am not sure that in the end they want any of us [foreign companies] to
win, or any of us to be successful."
In the years to follow,
similar grousing would become commonplace among senior Fortune 500 executives.
Life wasn't getting any easier in China, it was getting tougher. But few
companies—GE included—were willing to do much about it, by bringing their
complaints to the U.S. government and petitioning for a formal trade complaint.
The risk of angering their hosts in Beijing was too great. Indeed, when news of
Immelt's remarks in Rome later made headlines in the financial press, GE beat a
hasty retreat, issuing a statement saying that the CEO's words had been
"taken out of context."
Nearly 10 years later,
the U.S. China relationship—for decades routinely called the most important
bilateral relationship on the planet—has all but collapsed. When this magazine
went to press, Presidents Donald Trump and Xi Jinping were scheduled to meet on
the sidelines of the G20 meeting in Osaka, in the midst of a deepening trade
conflict between the world's two largest economies. The deteriorating economic
relationship is but one aspect of what has devolved into Cold War 2.0, as the
two countries now openly vie for influence in East Asia and beyond.
In the U.S., in the
community of China watchers and policy makers, the stunning turn in relations
with Beijing has triggered an increasingly acrimonious debate about a basic
question, one with deep historical resonance: Who lost China?
The role of big business
in the current dismal state of affairs can't be ignored.
For more than a decade,
I watched it unfold from a front row seat, as China bureau chief for Fortune
Magazine and then for Newsweek. As the world's most populous nation, China has
always been a dream market for foreign businessmen. Shirtmakers in England at
the turn of the century dreamed of selling "two billion sleeves" in
China. Today, Mark Zuckerberg takes Mandarin lessons in the hope that one day
he can lure 1.3 billion Chinese to Facebook.
China Has Always Been Irresistible.
When, under Deng Xiaoping, the
architect of Beijing's rise to economic power, China began opening itself to
foreign investment, the money flowed in: first in search of cheap labor in low
tech industries like footwear and textiles, then in pursuit of those 1.3
billion customers, as China got steadily richer as economic reforms took hold.
For American CEOS, the
potential Chinese bonanza meant that U.S. policy toward Beijing had to revolve
around nurturing—and expanding—the economic relationship. So potent was the
vision of China transforming itself from an insular, hostile and dirt poor
nation into the country of "one billion customers," as James
McGregor, former head of the American Chamber of Commerce in Beijing put it,
that even the shock off the 1989 massacre in Tiananmen Square—the thirtieth
anniversary of which just passed—faded in relatively short order. Just two
years after Tiananmen, American direct investment in China shot up from just
$217 million in 1991 to nearly $2 billion the next year.
For U.S. policymakers
and businessmen alike, it was hard to overstate how promising the world looked
back then. The Soviet Union had fallen and Deng was bringing China into the
world. Immelt's predecessor, former GE CEO Jack Welch, told me on a visit to
Shanghai a few years ago that in those days "we all had our fingers
crossed that the sky would be the limit [for China economically]. And we
basically turned out to be right."
The big business
community made it clear—first to the Clinton administration and then to his
successor, George W. Bush—that trade with China was its highest priority.
Washington readily agreed. "The Fortune 500 and the U.S. Chamber of
Commerce didn't just influence policy," says Alan Tonelson, a veteran
trade analyst in Washington, "they made policy."
The first goal for
corporate America was to get trade relations normalized "permanently"
(known as PNTR, for "permanently normalized trade relations"). Prior
to 2000, because of the post Tiananmen hangover, Washington every year would
have to decide whether to grant China the same access to the U.S. market that
it did other trading partners. With the U.S. Chamber of Commerce and the U.S.
China Business Council as point men in Washington, corporate America lobbied
hard for the move. More than 600 companies pushed for China's PNTR status. They
got what they wanted. After a contentious debate with human rights advocates,
the U.S. approved PNTR in 2000.
Unacknowledged at the
time by its corporate advocates was the huge impact on corporate supply chains
that the seemingly obscure legislative change would eventually cause. As the
economists Justin Pierce and Peter Schott argued in an influential 2016 study
entitled "The China Shock"—which looked at how swiftly U.S.
manufacturing employment declined as China's rise accelerated—"without
PNTR there was always a danger that China's favorable access to the U.S. market
would be revoked, which in turn deterred U.S. firms from increasing their
reliance on China based suppliers. With PNTR in hand, the floodgates of
investment were opened, and U.S. multinationals worked hand in glove with
Beijing to create new, China-centric supply chains."
The Fortune 500 crowd
was only getting started.
China's next goal was to
join the World Trade Organization, the international body that sets the rules
of global trade and is supposed to enforce them. WTO accession would be China's
economic coming out party—the ultimate signal that Beijing had transformed
itself into a global trading power. The U.S. business community was all for it,
arguing that it meant "at long last that China agrees to play by the rules
of the road," while ensuring that U.S. exporters "would benefit from
a broad reduction in Chinese tariffs on imports," as a paper from the
U.S.-China Business Council argued at the time.
In December of 2001,
they got their wish. China officially acceded to the WTO. And the U.S. Chamber
of Commerce practically turned handstands, issuing a statement saying that it
was "unquestionably a win for U.S. exporters and U.S. consumers."
WTO accession served as
rocket fuel to U.S. corporate investment in China. It skyrocketed in the first
decade of the new century (see chart ) In 2012 I met James Vance, the American
CEO of a supplier to Nashville's Hospital Corp. of America, a guy whose company
made walking boots, air-casts, slings and other low end medical equipment. He
said not long after China joined WTO his firm moved production mostly from the
southeastern part of the U.S. to the province of Guangdong in southeastern
China. The reason: "We could make the stuff so much cheaper and export it
to the world than we could in the U.S. It was that simple." And because it
was that simple, nearly everyone got into the act. By 2015, the share of
China's exports to the U.S. that came from foreign-owned companies was no less
than 60 percent.
A neighbor of mine in
Beijing in the early 2000s headed Ford Motor Corp.'s massive new plant in the
city of Chongqing, 900 miles to the southwest. (He would go out during the week
and return to his family on weekends.) In an era when it was politically
incorrect for an American corporate executive to say so, he told me one evening
he thought eventually Ford would move more production to China, not just for
the domestic market (which is now, by the number of vehicles sold, the largest
car market in the world) but to send abroad as well. "This place will
become just like Japan, an export powerhouse," he said. (Ironically, the
fear of exactly that happening in such a high profile, politically sensitive
industry, particularly in the developed world, has actually slowed China's
emergence as an auto exporter.)
Over the last 30 years,
prominent American companies have become part of the fabric of Chinese life.
Starbucks is as ubiquitous in Beijing or Shanghai as it is in New York. General
Motors sells more cars in China than anywhere else in the world. KFC and Papa
John's are in all major cities. And Apple has opened 42 of its iconic retail
stores.
But the company's reach
in China goes far beyond that. An entire network of companies, led by Taiwan's
Foxconn, assembles or supplies Apple products in China. Today, nearly five
million Chinese are employed by companies in that network.
The decision to set up
such China-centric supply chains would become the stuff of the "China
Shock"—the outsourcing of manufacturing jobs that would, to the dismay of
most of the U.S. corporate establishment, play a significant role in the
election of Donald J. Trump more than a decade and a half later.
The belief among
executives back in the early 2000s was that China's economic reform would
continue indefinitely, in part because Beijing had been embraced by the outside
world. China would eventually become the world's largest economy, but that was
OK, because it would be a "normal'' country, playing by the rules as laid
down in the post World War II U.S. dominated order. As former Deputy Secretary
of State Robert Zoellick famously wrote, the goal of western policy toward
Beijing was to encourage it to become "a responsible stakeholder" in
that established world order. All along, until Donald Trump came to office, the
underlying assumption was that Beijing was willing to let the United States
define what being a "responsible stakeholder" meant. That was a
mistake.
Trouble in Paradise
For most of the first decade of this
century, reform did continue. But the Fortune 500's love affair with the nation
came back to bite them. Increasingly, China began to generate its own
competitors to the foreign firms that had set up shop there. State owned
companies in big industries ( oil and gas, pharmaceuticals, finance and
telecommunications among them) pushed their government to favor domestic
players, and make life harder for foreigners. When Hu Jintao became President
in 2003, he was receptive to that kind of pressure. Economic reform slowed.
Then something else
happened: the 2008 global financial crisis, which tanked the U.S. and the rest
of the developed world, but not China. The political leadership in Beijing
looked around and said, in effect, "wait a minute: we were supposed to
play by these guys' rules and look what happened to them." In the future,
economically speaking, China would increasingly play by its own rules.
That has particularly
been the case under Xi Jinping, who succeeded Hu in 2012. Xi is a nationalist
who believes sooner or later China will be number one, and the sooner the
better as far as he's concerned. The American business community began to
understand that the ground in China was shifting under their feet soon after Xi
took power. XI's government made it plain, in its so called Made In China 2025
plan, that it sought to dominate key growth industries in the world. And though
that meant for now Beijing would still buy high technology components from the
U.S., it would do so only in the service of developing Chinese competitors,
who, the government hopes, will eventually supplant American, Japanese and
European firms in every key industry. So much for the 1.2 billion consumers.
James McGregor, the
former head of AmCham in Beijing and now the China CEO for APCO Worldwide, the
consulting firm, says he's been shocked at how slow on the uptake many U.S.
companies have been about what the trajectory in China is, and has been. He
notes, "In industry after industry there is a smaller and smaller piece of
the pie available to a lot of foreign firms. That's just a fact."
The reason they were
slow to adapt to that is, well, things had been going so well. "A lot of
them had convinced themselves that [Beijing] would ride the reform bicycle
forever and the economy would grow and grow and everything would be fine."
The fact that that wasn't happening put at risk all the hard work and
investment needed to establish a beachhead in China.
Well before Donald Trump
was elected, the carping about Beijing's policies from the Fortune 500 crowd
intensified. In the annual reports issued by the American Chambers in both
Beijing and Shanghai, the number of respondents who felt the regulatory
environment in China was worsening steadily increased. A senior executive at
Honeywell in 2015 told me flatly that his company was fed up with Beijing's
demands for technology transfer. Friends at CISCO and Microsoft said the same.
Privately, the complaints about companies like Huawei stealing intellectual
property also ratcheted up.
Moaning and groaning was
one thing. Actually doing something about it, from a corporate or governmental
policy perspective, was another. It rarely happened. And for that, big business
is partly to blame. Michael Froman, who was the United States Trade
Representative under Barack Obama, acknowledges that businesses's unwillingness
to put its name publicly on trade complaints—in bringing a high profile case to
the WTO, for example—"was a definitely a real problem. Not many of these
companies," he says, "wanted to stick their heads above the parapet
for fear of taking incoming fire." In eight years of the Obama
administration, 16 cases against China were brought to the WTO.
That number could well
have been higher, trade hawks like Alan Tonelson believe, were it not for
corporate America's relative passivity in the face of the economic challenges
Beijing posed. The government had been persuaded that, as in the 1950s in
America (when the first "Who Lost China" debate raged) what was good
for General Motors was good for the country.
Then came the election
of Donald Trump, who came to office threatening holy hell if Beijing didn't
reduce its trade surplus with the U.S., stop its intellectual property theft
and forced technology transfer. Worn down by Beijing and shocked by Trump's election,
some members of the Fortune 500 snapped out of their stupor. The status quo
when it came to dealing with Beijing wasn't going to cut it.
In December of 2016,
during the transition, a small group of senior executives from the U.S.
semiconductor industry made the pilgrimage to Trump Tower to meet with incoming
administration officials, including the man who would be the new U.S. Trade
Representative, Robert Lighthizer.
The delegation, two
sources present say, included a representative from Intel, who acknowledged his
company was beyond fed up with IP theft, among other concerns. In an interview,
Lighthizer is circumspect when asked if U.S. companies waited too long in
allowing the government to get tougher with China. "That may be true of some,
but not for others," he says, noting that in his years as a trade lawyer
at Skadden Arps he brought several cases against China as an attorney for U.S.
steel companies. But, he allows, "yes, I'd agree it was past time for a
more robust response [to Beijing.]''
The problem now is that
Trump's response has been to use the battering ram of tariffs, which some in
the administration hope will force U.S. multinationals to rip up their
China-centric supply lines. Anecdotally there are reports that some companies have
begun to do that, but corporate resistance to it is, not surprisingly, intense.
"Having spent so much time and money building out their supply chains,
there aren't too many CEOS who want to spend more time and money rebuilding
them somewhere else," says former Trade Representative Froman, now a
senior executive at Mastercard. And with a Presidential election now less than
18 months away, the possibility that a Trump successor may not be a
"tariff man" (or woman) also means companies are unlikely to tear up
their supply lines, at least for now.
Beyond that, there is
little consensus as to what U.S. policy should be toward China, whoever is
inaugurated in 2021. "These guys just long for the good old days,"
says trade analyst Tonelson. And he may be right. The U.S. Chamber of Commerce,
which insists today it did the right thing in helping lead the charge for China
gaining permanent trade status and joining the WTO, is a staunch opponent of
Trump's tariffs. And a recent survey of American companies by AmCham Beijing
showed that more than forty percent of respondents said they simply wanted a
return to the "pre tariff status quo."
That fact, make no
mistake, will put smiles on the faces of Xi Jinping's trade negotiators
whenever they next meet their American counterparts. China knows that the
recent history has been that the U.S. government will dance to U.S. business's
tune. Trump and his team of advisers may not be inclined to do that. But their
problem is, there are no easy solutions to resolving the trade issues that
beset U.S.-China relations. Lighthizer has been telling Trump to hang tough
and, if necessary, increase the tariffs on Beijing, arguing that that will
force China to a deal sooner or later.
But corporate America
hates that idea, and, problematically for Trump and his re-election prospects,
so does the U.S. stock market. Increasing costs to U.S. businesses and
consumers from goods made in China isn't a winning formula on Wall Street, nor
in 2020.
The truth now dawning on
both the U.S. China policy crowd and the Fortune 500, is that there may not be
any answer for the dilemmas Beijing now presents to the U.S. No less than Henry
Kissinger, the man who, under Richard Nixon, secretly paved the way for the
U.S. and China to re-establish relations, recently said he thought designing a
"grand strategy" to deal with China today is "too hard."
If that turns out to be
true—and it may—American big business will have to stand up and partly take the
blame.