U.S. Companies Need to Get Tough on China

(Bloomberg Opinion) -- Facing tariffs on another $200 billion of its exports to the U.S., China is vowing retaliation but also turning for help to old allies: American businessmen and financiers. It's a familiar role for them — and one they'd be wise to rethink.

In a new charm offensive, Chinese leaders hastily convened a group of high-powered Wall Street executives in Beijing on Sunday and Monday for talks with top officials. The meetings were part of a larger shift in tactics, whereby Chinese policymakers have sought to reassure foreign businesses that their investments in the country are welcome and safe. With the economy slowing, Chinese leaders understandably want to make sure foreign capital keeps flowing. Presumably, the bankers who rushed to Beijing this week used the opportunity to press for wider access to China's large but still tightly controlled financial sector.

China's strategy is a tried and true one: divide and conquer. The goal is to nurture a rift between the White House and U.S. business, with the hope that American CEOs will help reverse or water down U.S. President Donald Trump's trade policies.

Chinese leaders have good reason to think the tactic will work. Trump's blunderbuss approach to tariffs now threatens to damage the very companies it claims to be defending. The U.S. Chamber of Commerce calls tariffs “counterproductive” and says they “will not effectively address concerns” that the U.S. has about unfair Chinese practices. The American Apparel & Footwear Association has complained that “using tariffs as a tool to bring China to the negotiating table is not in the best interests of American businesses, American workers, or American consumers.”

That's absolutely correct, and big business should not be expected to support a policy it deems as harmful. The consequence, though, is that the administration has effectively, if inadvertently, transformed these businesses into pro-China lobbyists against its own policies.

The turnaround is remarkable, given how sour corporate America had grown on China by the time Trump was inaugurated. U.S. businesses were tired of grand-sounding but unfulfilled promises about market opening, obstacles designed to help Chinese competitors at their expense and rampant theft or extortion of their key technologies. Indeed, their complaints — usually made anonymously for fear of retaliation — undergirded the United States Trade Representative's report justifying Trump's tariffs. In a January speech, U.S. Chamber of Commerce President Thomas Donohue even said, “The White House is right to focus on China's industrial policies and their challenge to the global economy.”

In retrospect, the Trump administration should clearly have worked more closely with those CEOs to design an approach to China the U.S. business community could embrace. At the same time, however, U.S. corporate leaders themselves need to fight a better fight.

They could start by accepting some responsibility for creating their own mess in China. For instance, the Chinese government likes to claim that it doesn't “force” technology transfers to local firms; foreign companies do so voluntarily. That's disingenuous: In certain sectors, such as automobiles, regulation has been designed to leave foreign companies little choice. It's true, however, that firms of many nationalities barter intellectual property for better standing in the China market. Toyota Motor Corp., for one, is in talks with Chinese automaker Geely Automobile Holdings Ltd. about cooperating in hybrids.

U.S. companies need to do more than complain anonymously about their poor treatment — and then subject themselves to it anyway. The U.S. Chamber has a long list of fixes to improve market access in China, from lifting limits on foreign ownership in Chinese enterprises to ending market-distorting state subsidies to Chinese industry. Where the Chamber is less forthcoming is in explaining how the U.S. can convince a reluctant China to do any of these things. In his January speech, Donohue pushed the Trump administration “to work with allies in Europe, Japan, and elsewhere to forge a common response to China's state capitalism.” In its recent submission to the USTR, the Chamber urged that “now is the time to hold serious discussions with China.”

While these are worthy suggestions, the business community could take its own advice. As the meeting with Wall Street executives shows, China still feels the need for foreign investment to bolster the economy; that gives big global companies some leverage. CEOs from the world's major advanced economies could forge coalitions of their own and use the threat to take their money and technology to India, Vietnam and other competitors to prod China into better behavior. Rather than simply accepting Chinese regulations that run counter to their interests, they could act in unison to change them.

Of course, such a strategy could entail short-term strain on those companies' sales and profits from China. It would be unreasonable, however, to expect any effort to compel China to alter its unfair business practices to leave U.S. companies completely unscathed. If China is allowed to continue to subsidize local champions and extract foreign know-how, U.S. firms will find their presence in the mainland market dwindling anyway. So the next time Chinese leaders come calling, Wall Street executives shouldn't be so quick to answer the phone.

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael Schuman, who is based in Beijing, is the author of "The Miracle: The Epic Story of Asia's Quest for Wealth" and "Confucius and the World He Created."