These economic wins for
There should have been no surprise. The fact is that
This aversion to corporate diplomacy is bipartisan, although the motivation differs. Liberals fear corporate influence over government, whereas conservatives disapprove of federal meddling in the free market. To a certain extent, wariness is justified, although for a third reason: taken to the extreme, full-throated advocacy of the private sector by
But emerging markets offer high-return investments and access to crucial natural resources that
Yet the game is not lost. Many developing countries are growing increasingly frustrated with Chinese business practices. At the same time, the U.S. government finally seems to understand the countours of the problem. The timing is thus ripe for
The U.S. government has not always been so timid in promoting commercial interests overseas. In 1794,
American advocacy got even more aggressive around the early 1900s, when the government adopted “dollar diplomacy” as its guiding foreign policy principle.
In these early days,
The U.S. government became even less interested in commercial diplomacy after the fall of the
The wars in
The notion that
Another Chinese tactic is to bundle major infrastructure investments with natural resource bids by its state-owned companies. In 2008, for example, as part of a state-owned company’s proposal for the Aynak copper mine in
These tactics have served
A Chance To Compete
Developing countries are also increasingly frustrated with Chinese business practices. Chinese companies have earned a reputation for using their own (imported) laborers instead of hiring locals, ignoring environmental considerations, and employing subpar technologies. And when it comes to less high-profile projects, the firms are likely to lack relevant experience, since Chinese officials see these as a chance to dole out favors to politically connected companies that may be technically unqualified.
To make matters more complicated, sometimes the attractive economic terms offered by Chinese businesses turn out to be illusory. For example, a Chinese company might offer a government a far higher percentage of future revenues for the lease of an oil field than will a U.S. company (say, 20 percent versus 10 percent). But then, the winning company will use inferior technology to cut costs — two-dimensional rather than three-dimensional seismic surveying, for instance, or outdated rigs and drills. As a result, the operation will end up extracting less oil than the Western one would have and sometimes will even permanently damage the reservoir. The 20 percent royalty rate applies to a smaller pie — and may come with a higher cost.
Chinese companies also take much longer to extract resources than their Western counterparts. Most Chinese oil, gas, and mining firms operate at the behest of the Chinese government, which cares more about securing long-term access to natural resources than maximizing profit. So they may move slowly on purpose to save the resource for later, when Chinese demand for it has increased. When a mining or drilling operation lies dormant for years, the host country earns no revenue at all.
China’s corporations also sometimes try to renegotiate the original terms of agreements once they have established a presence on the ground. At that point, it becomes difficult — politically, legally, and logistically — for the host governments to revoke the contracts and sell the resources to someone else, especially if
American companies would have a much harder time getting away with such behavior. They are accountable to boards of directors and public shareholders and must publicly disclose their dealings, requirements that make a strategy of over-the-top promises followed by blatant contract violation nearly impossible. They use superior technologies that can find and extract more resources and cause less damage to reservoirs and mines. And they are motivated purely by profit, which aligns their incentives with those of the host governments and gives them reason to develop the resources quickly.
It is no surprise, then, that emerging-market countries are hungering for more investment from the West, particularly from
Cutting The Red Tape
By overplaying its hand,
There are signs that it is starting to do so. Secretary of State
As it stands now, the
U.S. diplomats must also become more nimble advocates for U.S. businesses. Today, the
Diplomats should also spend time convincing their host governments to level the playing field between Western companies and Chinese ones. Right now, many deals are simplistically structured, favoring the bidder offering the highest royalty rate on a resource or, in the case of an infrastructure project, the lowest cost. Processes such as these inevitably favor inferior companies that employ no locals.
Another area for improvement is the United States’ confusing and cumbersome web of regulations. The Foreign Corrupt Practices Act (FCPA), which outlaws bribing foreign officials, and the Treasury Department’s
At the same time, the U.S. government should try to find ways to derive strategic value from its regulations. For example, it should push countries to require bidders for projects to have in place strict anticorruption procedures, which would give already compliant U.S. companies an advantage over Chinese ones. Indeed, Chinese businesses are among the most corrupt in the world; a recent report from
No Time For Timidity
But the pendulum has swung too far in the other direction. For too long now,
The declining popularity of Chinese companies in the developing world has given
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