Not so long ago, it seemed there was no U.S.-Chinese diplomatic conflict that the booming bilateral business relationship couldn't trump. In April 2006, when Chinese President Hu Jintao stopped in Seattle on his way to Washington. D.C., it seemed that private industry based in "Washington the state" had sidelined elite-level politics in "Washington the capital" as the force behind an increasingly profitable partnership.

Chinese firms had just placed a $5 billion order with Boeing and committed to large purchases of Microsoft Windows. Starbucks had opened hundreds of stores, including one inside Beijing's Forbidden City. Hu was given private tours of these companies, and Bill Gates had the Chinese president over for dinner.

Things have changed, and many of the same Washington state-based iconic brands have come to symbolize the widening divide in U.S.-Chinese commercial interests. Starbucks retains a large presence in China, but its iconic Forbidden City location was shut down in 2007 after a well-known Chinese blogger complained that its presence insulted Chinese culture.

When Boeing supplied a Defense Department arms sale to Taiwan in January, China responded with threats to impose sanctions on the company.

Google, of course, drove headlong into conflict with the Chinese government earlier this year when company officials complained in January that state officials were (at least) tolerating cyber-attacks on its Gmail accounts coming from inside China. Accepting self-censorship of search results as the price of admission to the Chinese marketplace is one thing. Coping with direct attacks on the company's infrastructure is quite another.

That conflict has been resolved, for the moment, and Beijing has renewed Google's operating license. But this battle will likely continue on multiple fronts, especially now that Baidu, Google's principal Chinese competitor, is offering newly attractive products and Beijing has announced plans to form a state-owned search engine.

Officials at Microsoft have said publicly that Hu must keep his promise to step up intellectual property protections for U.S. companies. Then the company's CEO raised eyebrows in May when he said publicly that piracy concerns made China "less interesting" to Microsoft than India or Indonesia.

None of these other companies has followed Google's lead into direct confrontation with Beijing, but a growing number of U.S. business leaders now warn that they have little choice but to speak up about the much more challenging commercial landscape they face inside China.

How did we get here? For three decades, China has increasingly welcomed foreign companies and their investments in the country, in part to help Chinese firms gain access to the management skill, marketing savvy and advanced technology that only foreign firms could provide -- assets that would one day help China climb the value chain and build a 21st century economy. The strategy has proven a resounding success. Many U.S. firms have proven indispensable partners in the country's growth, earning handsome profits in the process.

But as Chinese companies have found their footing, some of them have come to see American companies less as potential partners or storehouses of valuable knowledge than as direct market competitors. To push their growth to the next level, some of them have begun to use political connections in Beijing and within local governments to push for laws, regulations, subsidies and countless other tools to tilt the commercial playing field in their favor and at the expense of the foreign competition.

As a result, U.S. and other foreign companies operating in China will have to make some tough calls and revisit central assumptions about how long they'll be welcome. For many years, expectations of game-changing profits have persuaded them to accept the many risks that come with doing business in an authoritarian country where rules of the game are not always fairly enforced. For the most part, the fittest have reaped the rewards. Anxious to safeguard access to still-inexpensive Chinese labor and the surging number of Chinese consumers with money to spend, many within the American business community have publicly opposed threats from Washington to redress currency distortions and an imbalanced trade relationship with punitive trade legislation.

That, too, has changed. As many U.S. firms see their competitive advantages slipping away, they're turning to Washington for help. Ironically, the man who arranged Hu's visit to Washington state four years ago, then-governor Gary Locke, is now the Obama administration's commerce secretary. On Aug. 26, Commerce proposed 14 measures intended to tighten enforcement of laws aimed at halting unfair trade practices from non-market economies like China.

In general, the Obama administration has tried hard to keep relations with China on track, most notably by delaying a decision on whether to formally charge China with currency manipulation. But with U.S. unemployment hovering stubbornly near 10 percent, midterm elections looming, congressional Democrats in desperate need of a scapegoat, U.S. business leaders asking Washington to pressure Beijing, and China looking to gradually reduce its dependence for growth on the spending habits of cash-strapped U.S. consumers, it will take much more than another decision to kick the can down the road to restore the world's most important relationship to a more solid footing.

Ian Bremmer is president of Eurasia Group and the author of "The End of the Free Market: Who Wins the War Between States and Corporations?"

 

Available at Amazon.com:

The End of the Free Market: Who Wins the War Between States and Corporations?

Running Out of Water: The Looming Crisis and Solutions to Conserve Our Most Precious Resource

Bottled and Sold: The Story Behind Our Obsession with Bottled Water

Water: The Epic Struggle for Wealth, Power, and Civilization

The Great Gamble

At War with the Weather: Managing Large-Scale Risks in a New Era of Catastrophes

 

 

(C) 2010 Ian Bremmer