Confucius Has Some Advice for Trading With China
Confucius was once asked if there was a single word that could act as a guide throughout one's life. "Reciprocity," the sage responded. He then preached a form of the Golden Rule: "What you do not want done to yourself, do not do to others."
It sometimes seems that China's policy makers have forgotten this ancient wisdom. More and more, Chinese companies are taking advantage of the openness that the U.S.-led global economic system ensures, but Beijing isn't reciprocating by allowing foreign companies similar liberties in China. This imbalance is becoming a major impediment for Western companies: While they're unable to fully benefit from the expansion of the Chinese economy, Chinese companies are buying up vital technologies and setting up new operations around the world, to their great competitive advantage.
Despite promises to continue "opening up," China's government still bars or restricts foreign companies from engaging in many basic business activities. Chinese automaker Geely purchased Sweden's Volvo in 2010, but foreign carmakers can still only manufacture in China with a local partner. Property group Wanda is busy buying a Hollywood empire -- purchasing theater operator AMC in 2012 and production house Legendary Entertainment earlier this year -- but foreign firms still face limits when investing in the movie business in China. The Bank of China bought itself a ritzy new office in Manhattan, while in China the expansion of foreign banks and insurance companies has been constrained by regulators. The list goes on.
As China grows richer and more powerful, this double standard is increasingly irking its trading partners. One notable American politician is even talking about blanket tariffs against Chinese imports and other punitive measures. That's a bad idea: It would damage U.S. economic growth, corporate profits and consumer welfare.
But current policies for challenging China's behavior don't work particularly well either. The World Trade Organization ruled in 2012 that Chinese regulations discriminated against foreign card-payment companies (such as MasterCard and Visa) in domestic yuan transactions, yet Beijing took four years to even release guidelines to make it possible for them to apply for a license.
Reciprocity offers a better solution. The U.S. and other countries should place restrictions on Chinese companies to match those China imposes on foreigners. These should be narrowly defined and carefully targeted, and the U.S. should remember that investment from China could be an important source of future jobs. But if Chinese bureaucrats are slowing the advance of foreign financial firms, for instance, the U.S. should restrict the expansion of Chinese financial companies in its own market. Likewise, the U.S. should limit Chinese investment in sectors it believes are critical to its economy, just as China does. With access to much-needed foreign technologies and markets curtailed, China would quickly face pressure to reform.
Unlike tariffs, such reciprocity wouldn't have a huge impact on American households. With so many choices already on the market, it won't matter to the average American if the expansion of certain Chinese companies is impeded. Over the long term, such steps may actually help the American economy by keeping important technologies out of Chinese hands and ensuring that U.S. companies maintain an edge in know-how versus their hard-charging rivals.
This isn't the type of reciprocity Confucius had in mind. He would've advised the West to take the moral high ground and maintain its liberal policies, in the expectation that China would eventually see the light and respond in kind. To many in the U.S., a reciprocal approach might seem a gross violation of the country's cherished free-market principles.
But what the West has to realize is that China isn't wedded to those same principles. It engages the global economic system without feeling bound by its norms, and crafts economic policies to advance its national agenda. The U.S. and its allies have to reciprocate to protect their interests.
China might respond by slapping even more controls on foreign businesses. That would be bad for all sides. But the reality is that China is already making it harder for foreign companies to do business there: In a recent survey from the American Chamber of Commerce in China, 77 percent of respondents said they felt less welcome in the country.
Even Confucius realized that there's a fine line between being a gentleman and being a chump. He was once asked whether wrongdoing should be met with kindness. "With what then will you recompense kindness?" he asked. "Recompense injury with justice and recompense kindness with kindness." In trade as in life, that's good advice.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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