China’s exploitation of national security concerns to shield its technology companies from foreign competition has shifted the global competitive landscape. American companies, hindered by China’s Great Firewall and restrictive trade policies, are limited in their ability to compete fairly in the market. Behind this protection, Chinese Internet and technology giants were born, and have now changed the face of technology competition for the 21st century.
President Obama’s meeting with Chinese president Xi this week should focus on creating unfettered market access for American technology firms that do business in China. Beijing’s approach to the technology industry has been to limit foreign ownership rights for companies in the technology sector, often by requiring a Sino-foreign joint venture. This model not only presents intellectual property risks to American partners, but it often requires that companies partner with would-be Chinese competitors. Over the last year, American companies have met new government-initiated resistance against allowing commercial use of their hardware and software in Chinese company networks.
Foreign technology companies cope with China’s challenges in a variety of ways. In simple terms, it has become critical for companies to be in China for China—meaning they must be invested in aiding China’s development alongside their business’ growth. Dell, for example, runs a homegrown Chinese operating system on over 40 percent of the PCs it sells in China. Other companies, like Qualcomm, have invested billions to support the growth of Chinese semiconductor companies with whom they may one day compete. Other companies, such as Hewlett-Packard, decided to give up majority control to a Chinese partner for certain business units that proved too challenging under the prevailing policy environment.
The president of the United States is tasked with advancing national interests. During President Xi’s visit, President Obama should do everything in his power to ensure that American companies are not subject to discriminatory policies and government mandates, implicit and explicit, in what has become the world’s second largest economy.
Clearly, the Chinese market is too large to be ignored by foreign companies. The challenge then becomes complying with China’s protectionist policies without harming the long-term interests of your company.
Faced with this dilemma, President Obama has two options that he should pursue simultaneously. First, the US can fight for completion of negotiations in the US-China bilateral investment treaty (BIT). A US-China BIT would allow for each country to invest in the other’s market under the same conditions as domestic competitors. For example, an American Internet company in China would be given the same rights and opportunities as Chinese Internet companies.
China maintains foreign investment restrictions across multiple sectors of interest to US companies, such as banking, finance, insurance, automotive, media, entertainment, Internet, and telecom. It is critical that BIT negotiations result in China opening its technology and telecom sectors, and not allow them to remain quarantined on the negative list — a negotiated list of sectors not required to comply with BIT rules.
The second option for President Obama is to pursue exclusive trade agreements like the Trade in Services Agreement, the Trans-Pacific Partnership, and the Transatlantic Trade and Investment Partnership that empower and reward countries competing with China with the benefits of free trade. Enhanced ties with free trade partners will stimulate the economies of China’s competition. Excluding China from these agreements will encourage its domestic reform as a means to qualify for future participation.
The path forward with China is a challenging one. The US market is already open to foreign competition, and rarely distinguishes between companies based on nationality of ownership. As such, Chinese companies are already free to compete here. If American leadership hopes to force change in the status quo, it needs to find and exploit its sources of leverage over China. Otherwise, the China model of protecting home markets to the detriment of foreign competitors will prevail.
Matthew Margulies is a China analyst for Crumpton Group. He works with Fortune 100 executives to develop their China market entry/exit, partner negotiation, government advocacy, and business compliance strategies. Prior to joining CG, Mr. Margulies worked for the US-China Business Council, the leading trade and government advocacy group for top American companies doing business in China. He is fluent in Mandarin Chinese and is a recipient of the Department of Defense’s Flagship Fellowship for Chinese.
