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US-China trade

Are private Chinese companies really private?


Published 02 October 2020 | 8 minute read

Private Chinese companies will be increasingly called upon to conduct their operations in tight coordination with governmental policy objectives and ideologies in no uncertain terms. The rest of the world should take note.

Article originally published in The Diplomat.

China has often been criticized for a lack of transparency, especially with regard to its economic and trade policies. While in many cases these criticisms are valid, it belies that fact that in other instances, China is remarkably open and transparent about its intentions and ambitions. 

Such is the case with China’s “Opinion on Strengthening the United Front Work of the Private Economy in the New Era”, recently released by the Central Committee of the Chinese Communist Party (and further elaborated on by President Xi himself). This document tells us in no uncertain terms that Chinese private companies will be increasingly called upon to conduct their operations in tight coordination with governmental policy objectives and ideologies. The rest of the world should take note.

A different vision of “private” business

The 5000 word “opinion” aims to ratchet-up the role and influence of the CCP within the private sector in order “to better focus the wisdom and strength of the private businesspeople on the goal and mission to realize the great rejuvenation of the Chinese nation.” The objective is to establish a "united front" between business and government and facilitate the “enhancement of the party’s leadership over the private economy…”  According to the plan, “…private economic figures are to be more closely united around the party”, thereby achieving “a high degree of consistency with the Party Central Committee on political stand, political direction, political principles, and political roads…”

All of this stands in stark contrast to long-accepted concepts of how private companies function in a free market. The overriding purpose of business, according to these traditional precepts, is to earn profits through the provision of value-added products and services, in response to marketplace signals and under the constraint of basic economic realities. Government ideology plays no role in that equation.

But China has a very different vision. Government officials and government ideologies are directly infused into business operations and private sector employees are “educated” on government policies and ideologies, with the expectation that this “enlightenment” will help inform their business decisions. This government-business symbiosis is further cemented by the provision of massive government subsidies (estimated to be about 3% of China’s GDP) to Chinese companies.

To be clear, China – like any other sovereign nation – is entirely free to define the nature of the relationship between the Chinese state and the Chinese private sector, and craft its own economic development philosophies. So there can be no complaint with China for exercising its sovereignty. 

Complaints are justified however when these unique features of China’s economic system impinge on the ability of China’s partners to compete fairly with Chinese companies. In those cases, remedial actions can be pursued, in theory at least, through various channels in the global trade system.

Existing trade rules inadequate

Unfortunately however, these rules – first laid out in the GATT and then its successor organization, the WTO – were predicated on the assumption that there is a clear and immutable dividing line between government and business. The smooth and effective functioning of those rules is contingent upon maintaining the integrity of that demarcation. But China’s state-directed system has blurred the line, and its new “opinion” binds business and government together even more closely, further muddying the waters – and complicating trade governance.

On issues ranging from industrial subsidies to intellectual property, current trade rules either fail to address, or fail to adequately address, the damaging distortions which are introduced into the trade system as a result of the “hand in glove” partnership between business and government in China. Unwritten “understandings” between business and government can steer purchases away from foreign competitors and towards domestic Chinese companies. Informal policies that are rarely codified can result in proprietary foreign technologies being “shared” amongst Chinese companies, SOEs, and government agencies. And preferential arrangements between Chinese companies which exclude foreign companies are made financially viable as a result of tacit government support.

What then is the best way to forward?

In an ideal world, the best approach would be straightforward. The 164 members of the WTO would agree to a new set of trade rules which explicitly acknowledge the deep systemic differences between China and market driven economies which operate with truly “private” private sectors.  Although it would be pointless to try to strong-arm changes to China’s governing or economic philosophies, the new rules would need to capture and discipline the full range of ways China’s government-business fusion disadvantages foreign private companies – and perhaps more importantly – provide China’s partners with prompt and effective redress. This would likely entail reform of the dispute settlement system which often moves too slowly to be relevant, and in some cases (especially subsidies) places unduly high evidentiary burdens on the complainant.

China would then be free to either absorb the costs associated with the remedial measures or adjust its policies to remove the distortions. In either case, trade relationships could continue on a basis that is voluntary, mutually acceptable and therefore sustainable.

Unfortunately, such a scenario has virtually no chance of materializing, at least in the near term. The WTO membership is simply too fractious, and the issues are too complex to even imagine consensus agreement on a comprehensive set of new trade rules anytime in the foreseeable future. 

Where does that leave us? The road will inevitably lead back to the US and China sitting across from each other at the negotiating table. Like-minded partners such as the EU could potentially be brought into the mix, but the more viewpoints around the table, the lower the prospects for success. US and EU views are similar but not identical, and China is skillful at exploiting any such fissures.

The impending US presidential election has of course put everything on hold, but as soon as is practical, the two countries need to begin the hard work of hammering out accommodations which recognize and mitigate (at least to the extent possible) the distortions which result from China’s “united front” on business and government. As has happened so frequently in previous bilateral or plurilateral negotiations, the WTO could then subsequently absorb any ground-breaking new provisions agreed to by the US and China on a basis and at a pace of its own choosing.

The West has often been guilty of not listening to China. But China has communicated with great clarity that its definition of “private” business diverges in fundamental ways from the assumptions which underpin our existing global trade rules. It is not in anyone’s best interests to ignore or minimize this glaring and expanding fault line. Pretending that a private Chinese company is essentially the same as a private Australian, Chilean, or American company is simply delusional. If we wish the global trade system to continue to be sustainable, we need to recognize and address this reality head on. A more sustainable trade system will benefit everyone – including China.


Author

Stephen Olson

Stephen Olson is a Research Fellow at the Hinrich Foundation with over 30 years of international trade experience. Previously, he was an international trade negotiator in Washington DC and served on the US negotiating team for NAFTA negotiations.

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