Economic Engagement and Freedom in China
About This Event

An underlying assumption of U.S. economic engagement with China is that the market forces unleashed by international trade and investment will necessarily spur economic and political change in Chinese society. To what extent has this assumption been borne out by more than two decades of booming economic ties between the United States and China? Is American business promoting economic and political freedoms in China, or do U.S. firms risk co-optation by Chinese authoritarianism as a result of doing business in China? AEI will hold a panel discussion to address these and other questions raised by the growing number of U.S. business ties with China.

Agenda
9:45 a.m
Registration
10:00
Speakers:
John Frisbie, U.S.-China Business Council
Ethan Gutmann, author, Losing the New China: A Story of American Commerce, Desire and Betrayal
James McGregor, Vermilion Ventures
Moderator:
Ying Ma, AEI
Noon
Adjournment
Event Summary

March 2006

Economic Engagement and Freedom in China

An underlying assumption of U.S. economic engagement with China is that the market forces unleashed by international trade and investment will necessarily spur economic and political change in Chinese society. To what extent has this assumption been borne out by more than two decades of booming economic ties between the United States and China? Is American business promoting economic and political freedoms in China, or do U.S. firms risk co-optation by Chinese authoritarianism as a result of doing business in China? On March 7, AEI held a panel discussion to address these and other questions raised by the growing number of U.S. business ties with China.

Ying Ma
AEI

In 2000, China and the United States opened permanent normal trade relations. From the American perspective, it seemed American business and trade would help China move toward democracy. Presidents Bill Clinton and George W. Bush have expressed the opinion that open markets and American business in China should heighten the demand for democracy there. However, China does not have a democracy today, and some argue that American businesses have not helped to promote democracy and have instead been co-opted by the Chinese government. Some Congressmen recently noted that instead of changing China, China has changed American businesses. However, others have noted that five years is not enough time to allow democracy to develop.

James McGregor
Vermilion Ventures

Since 1990, China has changed dramatically: the standard of living has increased substantially for the Chinese people, and the government has released many of its controls on both foreigners and citizens. The business community has brought huge changes to China, simply by being itself. American companies demonstrate best practices by following environmental laws and business laws and by treating their employees well. The Chinese people recognize this, and many would rather work for an American company than a Chinese one.

Washington does not always realize that there is a lot that cannot be controlled through policy and that it cannot always orchestrate change in other countries. However, American business is doing a phenomenal job in China, and it is critical that businesses are allowed to continue doing what they are doing. American businesses are not being corrupted by the system; they are dealing with the system as best as they can.

While Congress has beat up on Google, Google should not blamed. The Internet has transformed China, and Google has a right to try to capture a piece of China’s substantial Internet market. Instead of standing aside and allowing a Chinese company to take over the market, they did the honorable thing by letting consumers know that they were censoring information under government regulation. They are actually the first company to publicly announce that the Chinese Internet is censored, since in the past it had been done quietly. Google is also keeping their chats, e-mail, and blogs out of China, so the company is not put in a position where it has to turn user information over to the government.

Yahoo should follow a similar path. They should let all e-mail users know that everything written can be handed over to the Chinese government. By labeling what they do, American companies can force the Chinese government to be honest about things they have tried to hide in the past.

The “Blue Team” here in Washington believes that China is the United States’ next enemy, but if that happens, it will be because it is a self fulfilling prophecy. However, if China really were the United States’ next enemy, then American goals should be to disarm and isolate it rather than to make agreements and strengthen ties. Instead, we have transferred immense amounts of technology to China, even at the expense of our own industries.

Regarding the Congressional threat to restrict visas, we should keep in mind that this country was built by immigrants. Instead of requiring students to leave when they graduate, the United States should force foreign students to stay after they graduate, and the United States should give automatic green cards to those who graduate with a PhD in the hard sciences.

John Frisbie
U.S.-China Business Council

The Chinese economy and Chinese society are significantly more open now than they ever have been before, and American companies have been the most important external factor in determining that openness. This impact is not planned; it simply happens by being there and bringing new ideas, approaches, and values to all American businessmen encounters. It is not perfect, but the trend line is undeniably clear.

The change in recent years has been substantial. Only 35 percent of businesses are state owned. The number of ministries is down to 28 from 45--resulting in the government having less involvement in all business. The currency is now convertible, there are no export requirements, and it is possible to hire employees directly.

More recently, foreign companies can sell their products directly in China. There have been tariff cuts, new sectors are open to foreign investment, and import licenses are basically gone since China's entrance into the WTO. Foreign companies can now hire their employees from anywhere in the country and move them around as they need to. Seventy-five percent of foreign investment in China goes into companies that are directly owned by foreign entities, allowing foreign companies to establish their own company policies without outside influence.

Transparency is the biggest issue companies face in China, but even now, there is far more information available than there ever was before. Censorship definitely exists and strongly affects companies operating in the media and information sectors, but companies operating in other sectors do not face these controls. The information sector has slowly opened, and changes are noticeable. Communication technology is evident throughout China, and it is not a genie that is going to go back inside its bottle. It is hard to say to what extent this information age is affecting those in more rural communities, but American business has shown that even in rural areas, it is making some impact.

American companies are not being corrupted and co-opted in China; they are rather having a positive impact in these areas. American companies are subject to the Foreign Corrupt Practices Act, and the United States has export controls, limiting what kind of technologies can be sent to China. Corruption is clearly an issue, but it is not something American companies have to buy into to be successful there. While some companies may involve themselves in corruption, it is certainly not a widespread practice, and American companies are combating it, rather than encouraging it. American companies are also known for bringing world-class facilities and practices to their companies in China.

The combination of China and Hong Kong is America’s third largest export market. Service sectors are opening up, creating new opportunities for American businesses. There are still problems--intellectual property is an issue, the trade deficit remains high, and there are transparency and market access issues. But engagement is the best means of challenging these problems.

China is constantly changing, and American companies helping to promote progress.

Ethan Gutmann
Author of Losing the New China: A Story of American Commerce, Desire and Betrayal

American business representatives have repeatedly said that they would change China; however, China has also changed many American corporations’ business practices. A parallel can be drawn particularly with American Internet companies in China and a failure to release a more humane China.

During the years immediately following the Tiananmen Square Massacre, China appeared to be opening and the repression slowly lifting; however, five years later the trend reversed itself. By 2006, a minimum of 2,000 Falun Gong practitioners are dead. The dream of village elections is fading, and the promise of township elections has been dropped. A recent white paper declared the PRC a democratic dictatorship. All forms of media undergo periodic cleansing. China’s amazing growth rates and open markets tell a compelling story, but it is certainly not a complete one.

China’s growth rate may only be measuring the coastal areas where 9 percent growth is possible. Growth is also not necessary translating into American corporate profits. Government restrictions, counterfeiting, and corruption are certainly still issues.

It seems democracy and freedom are actually in decline, and it seems that nationalism is the replacement. Chinese nationalism seems to be the only political passion available to Chinese citizens. About every three years there appears to be nationalistic outburst, closely paralleling increases in Chinese military spending, to build up for a Taiwan invasion scenario.

Motorola has outsourced top of the line research and development plants to China. Fourth generation technologies with military applications are going straight to the People’s Liberation Army and the Chinese Communist Party. The United States cannot contain China, but it can hold back technology.

Whenever possible, the United States should make China pay a “democracy tax” for American technology. The Chinese government knows the damage the Internet can do, and in true Chinese fashion has tried to take control over it and fill it with their own opinions. However, the sector was split between several competing companies. To force compliance, the Chinese had to create firewalls, blocking the Chinese Internet from the outside world. Three companies competed to do this, and Cisco won out.
 
By 2000, Yahoo began to censor information so as to maintain its position as the top porthole in China. Microsoft and Google’s later concessions were only following a well-beaten path. There were many companies willing to sacrifice principles to get into the Chinese Internet market.

Cisco’s device blocked not only outside sources, but also alternate sources of power within the system from connecting. In 2002, Cisco developed Police Net for the Chinese State Security to maintain its competitive edge. Police Net allows officers in the field to access all available information about a citizen, even accessing the websites they have viewed and their email. Police Net is being used by State Security in twenty-one out of twenty-two provinces.

There is outrage over the three who have been jailed after Yahoo released their email files, but it is unknown how many have been jailed, killed, or beaten due to Cisco’s technologies.

Cisco is the extreme case, but the actions of Cisco, Yahoo, Google, and Microsoft have all contributed to Chinese self censorship. It is this self censorship that translates into lost pride and eventually rages as nationalism against the United States and Japan.

American businesses operate under tremendous pressure, but they can also do something about it. Microsoft fought the Chinese government and won over Chinese government access to foreign source codes and control of foreign encryption. Microsoft formed a coalition and made it clear that if the government did not back down, they would pull out of China forever. The Chinese government chose to clarify their laws, demonstrating the power business can have in China.

AEI researcher Anne Siarnacki prepared this summary.

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