In Washington President Trump champions protectionism while China’s President Xi becomes the world’s chief cheerleader for free trade. Has the world been flipped on its head?
Are they saying something different, or are they saying the same thing? The answer rests not in words but in actions.
The past three decades have seen great growth in international trade. Since the start of the century, global trade has grown 1.5 times and China has grown – and profited – with it. What is less well known is the story behind the numbers.
This massive opening of trade for the world, did not mean open trade for foreign companies coming into China. Joint ventures were mandated for any company seeking to access the China market. For Chinese firms, however, expanding abroad meant using anything but joint ventures.
Chinese firms learned from developed country multinationals to not only close the competitive gap, but to create a gap that they led. As a result, Chinese multinationals are now market leaders in electronics and home appliances, with some set to become global leaders in key emerging industries such as solar power.
But we should not envy market leaders for their success. We can feel regret when that success was born from inequitable trading conditions. We can cry foul for inequities and imbalances in the past. But all this will do nothing other than brandish those who lost as sore losers.
Rather than complain, managers and policy makers need to learn from past mistakes. More crucially, we need to ask: Are the same mistakes are being made today?
China’s economy is now in transition again – from one based on manufacturing, investment and government expenditure to one driven by services and consumerism. Achieving this means boosting service industries such as banking, insurance, consulting, new economy firms and entertainment industries such as movie making.
Barriers to entry, even under the guise of national interests, is still protectionism that creates ample opportunity for the growth of national champions.
The new economy in China has long been a sore spot for Silicon Valley’s leading firms: Google, YouTube, Facebook and the like. Their exclusion from the Chinese market occurs both ostensibly and realistically for censorship as connected to national security. But the absence of these worldwide tech leaders has allowed Chinese homegrown firms such as Baidu and TenCent and Sina.com to grow unimpeded by foreign competition. And now these powerful Chinese internet giants are looking abroad for new growth opportunities.
Barriers to entry, even under the guise of national interests, is still protectionism that creates ample opportunity for the growth of national champions. This same perversion of competition occurs even more shamelessly in the Chinese movie industry.
Hollywood films have for years had limits on entry to the Chinese market. Currently just 34 are allowed per year. This restriction on entry to the world’s second largest film market motivates American studios and their actors to push hard for their movies to be screened in China.
American studios engage in tie-ups with their Chinese counterparts. They co-produce and co-develop movies, enabling Chinese filmmakers to learn the tricks of the trade from American filmmakers. As if cooperation is not enough, Chinese firms and individual Chinese nationals make substantive investments in Hollywood studios.
Like an unoriginal sequel to a well-known movie, this story is a repeat of the same one we have seen for several decades across manufacturing industries – automotives, electronics, chemicals and light machinery.
China opens its doors but it restricts access. It hangs out the carrot of market potential to incite desire for market entry; market entry is granted but only under tough terms of engagement; foreign entrants must partner with local firms, enabling a fast and furious drift of technical skills from foreign firms to local firms.
Once the domestic industry gains strength, the doors are opened wider, to mute the cries of foul play made to the WTO or other such multilateral bodies.
The same tactic is now being applied to shift the learning from a century of Hollywood movie-making to China.
The steps taken to transfer knowledge under the guise of opening doors are both obvious and insidious. Hollywood’s films are censored, whilst other filmmakers pander to the central government: Jackie Chan’s latest action epic, Kung Fu Yoga, features a character obsequiously praising the greatness of the “One Belt, One Road” initiative.
Meanwhile resources for the development of China’s movie industry are marshalled from all sides of the economy. Look closely at the credits for financing of movies and you will see emerging leaders of the Chinese economy – TenCent and XiaoMi for example – funding domestic productions.
Is this funding done out of goodwill, or is it an odd form of diversification for these companies? Or if one likes conspiracy theory, it is the price paid by domestic firms to operate in China’s protected but “open” markets.
Looking at the story in this light, do we see President Xi’s China as being the new beacon of fair and open international trade?
Or do we see a simpler story: China’s political apparatus is leveraging on a perceived protectionist shift in America in order to cleverly re-direct the world’s perception of China. The image it seeks to present is one of an open and fair economy when, in reality, nothing could be further from the truth.