China Discrimination Against Foreign Businesses

China lawyer client loyalty

I have been practicing international law for so long that I can understand English language lawyer emails from just about anywhere in the world, pretty much no matter how poor the English. I love getting emails in Kanglish (Korean-English) or Chinglish (Chinese-English) and showing it to someone with absolutely no clue what it says and then explaining it to them. Well you see, “maybe” in Kanglish means “no way” and “we can do that” in Chinglish means “very unlikely.” You get the point.

I feel the same way about reading the China Daily. It takes years with that newspaper to be able to cull out the inner meaning of so many of its articles and I consider myself somewhat a master at it.

The China Daily story that precipitates this post is entitled, No discrimination over China contracts [link no longer exists], and it fits into the following common genera (plural of genus) of China Daily stories:

  • Me Thinks Thou Doth Protest Too Much/Stopping the Buzz. This is the China Daily article that comes out after weeks or months of rumors about something completely true, the goal of which is to disprove that which everyone knows or will soon know.
  • Too Categorical to be True. This is one of my favorites because one knows instantly from the title that it just cannot be true.

This China Daily article proclaiming no discrimination against foreign businesses in China starts out by noting “rising complaints from major trading partners that foreign companies are being treated unfairly in China’s huge and rapidly growing public procurement market”.  It then dispenses with this silly idea by quoting “Peter Duncan” (who the hell is he anyway?) who tells us that “I don’t see discrimination against foreign businesses in Chinese government tenders:”

Duncan and some other foreign business people who have been working closely with their Chinese partners and clients have a rather different perception. They say they suspect the perception of “unfairness” stems from a misunderstanding of the rules and the less obvious nuances of doing business in a different culture. Duncan says that the experience of his company in China can help ease foreigners’ concern about the complicated rules.

I ain’t buying it.

For years, my law firm’s China lawyers heard little about this sort of discrimination from our American (North and South) and European and Australian clients who sold goods and services into or in China. But in the last three to five months, we have been hearing so many complaints we are thinking someone from on high in Beijing issued some sort of directive. Our clients who sell to China from overseas are telling us that if they do not form a China WFOE or a China Joint Venture, the State Owned Entity (SOE) to which they have been selling their product or service will likely be “required” to stop buying from them. Some of our clients with China WFOEs are telling us that their SOE customers are suggesting business would be better for them if they were to go into a joint venture with a Chinese company.

The companies from which we are hearing these things are some of our most China-experienced clients and they (and a bunch of other people) are talking about this now because they are seeing and feeling the difference.

It is getting to the point where our lawyers are telling clients that if they want to sell goods/services to Chinese SOEs the best way to do so is through a Joint Venture, the next best way is via a WFOE, and the third best way is via a foreign (U.S., Spanish, Hong Kong, or whatever) entity.

What are you seeing/hearing out there? Who do you trust, my clients or the China Daily?

UPDATE: The Associated Press has come out with an article, Survey: China treating foreign companies unfairly, that refers to a just released European Chamber of Commerce report in which “43 percent of 598 European companies that responded to a survey see Beijing discriminating against foreign businesses, up from 33 percent in a similar survey last year. It said 46 percent expect the problem to get worse over the next two years, up from 36 percent last year.”

31 responses to “China Discrimination Against Foreign Businesses”

  1. There’s two sides to every story, seems the China Daily is airing both opinions in print. Nowt wrong with that, your just China media bashing.

  2. Actually, I think the Chinese Media has been becoming more critical lately and these issues are being reported more often. It is not just about criticizing the treatment of workers from foreign companies, see this in the ‘food scare’ criticizing their government for not doing enough to battle this problem.

  3. Couldn’t agree with you more. You can spot these stories from a mile away. While I think the quality of China’s English language state media has improved dramatically over the years, it will continue to be what it is at heart. There are certain theories that you cannot be sure are true until you see a China Daily/Xinhua English article that vehemently denies it, particularly via extensive quotes from foreign experts on the matter.

  4. During a period of perceived increasing economic instability, especially inflation and a need to create 20,000,000 new jobs a year, that a government treats nationals differently from aliens fits within the notion of state [and nation] self-defense and is understandable, indeed justifiable, unless one adheres to the notion that “free trade” is a suicide pact and that nations and borders have no existential meaning.

  5. I think this totally depends on the business in which the Western company is involved. For instance, we have a Western client in the IT market segment whose largest customer is the Chinese Centeral Government and the second largest customer is the PLA. I don’t see these issues for all Western companies.

  6. @mary&martha,
    Interesting that you would think quantity equals quality, but okay. But what is even more interesting is that according to Alexa, China Law Blog actually has a greater readership than China Daily’s English language version (www.chinadaily.com). Seriously!

  7. What am I seeing? I am seeing China getting tougher every day for foreign companies and though we are all talking about it in private, if I had been interviewed by the China Daily, I would have said the same thing these foreigners said.

  8. I used to work at China Daily and this is true. Articles in this vein were sent down from the seventh floor (where we big noses were not allowed to roam) … and we were told not to change a word. They embodied the official ‘line to take’ and were typically drawn up several days/weeks after a contentious event or change in policy.

  9. Who cares what China Daily thinks? There are about a hundred better Chinese media sources.
    Even as a ***propaganda mouthpiece***, it’s not that particularly good.
    Having said that……
    Dan: What I am mostly hearing from our clients who sell to China from the United States is that if they do not form a Chinese entity the SOE (State Owned Entity) to whom they have been selling their product or service may have to stop buying from them.
    Which is largely irrelevant to Mr. Duncan since he happens to be Australian.
    Different country. Very different trade politics. In particular, the Australian government is quite interested in expanding trade and investment ties with China. By contrast the US government is trying very hard to reduce the volume of trade with China. One thing that I’ve been hearing is that US companies are having a tough time because unlike the Australian and German governments, the US government has absolutely no interest in convincing China to make it easier for American businesses to do business in China, because the logic is that the harder it is for US businesses to do business in China, the more likely it is that they will give up and pull the jobs back to the US.

  10. @ Steve Laudig
    “unless one adheres to the notion that “free trade” is a suicide pact and that nations and borders have no existential meaning.”
    It’s interesting that you say that. There was an article in the Harvard Business Review recently explaining that multinational corporations originally envisioned the world’s future as just such a borderless commercial frontier… Also, to a certain extent, I think the framers of the global trading regime, while they wouldn’t use the words “suicide pact,” saw the death of many industries in many places as a good thing for the global economy. In other words, a country doesn’t have the right to do whatever it needs to do in order to “create jobs,” especially specific types of jobs in pre-selected industries. I’m not saying that I disagree with you, but, believe it or not, what you accept as understandable and justifiable was precisely what they were trying to eliminate to the greatest extent possible…
    @ Twofish
    “the US government has absolutely no interest in convincing China to make it easier for American businesses to do business in China”
    This is just not true at all. The US government has tried very hard for decades to make it easier for US businesses to operate in China, and it continues to do so. Whether or not that fits into any sense of economic logic is a different question, I guess.

  11. Anon: This is just not true at all. The US government has tried very hard for decades to make it easier for US businesses to operate in China, and it continues to do so.
    Things have changed recently (first hand experience). The US government is applying nowhere near the pressure on the Chinese government to open markets that they did a few years ago (i.e. 2005). This is largely because of a change in US politics since 2008. Neither the Democrats or the Republicans are really that interested in expanding US business in China if it means the perception that Chinese workers are being hired rather than US workers.
    What has happened (again first hand experience) is that Chinese government stomps on US company. US company tries to get the US government to do something. US government just shrugs and says “sorry we can’t help you, we have other things to worry about.” Five years ago, things would have been different.
    Part of the problem is that in order to have any credible effort to have the Chinese government open markets to American companies, the US would have to open US markets to Chinese companies, and there is no political desire to do that. Right now, you can point to almost any restriction that China puts on US companies, and the fact is that US policy toward Chinese companies is even more restrictive. (Just try to get work visas for Chinese to travel to the US.).
    http://www.ft.com/cms/s/0/3337e62c-ac81-11df-8582-00144feabdc0.html#axzz1NKOxB9jI
    That’s just one example, there are dozens of others.
    Australia is different.
    Also things are relative. One interesting thing about Hassell is that its other major markets are Thailand and Indonesia. Something that I have heard are people who have successfully done business in Thailand and Indonesia talk about how easy and wonderful the Chinese government is. The story that you hear from them is how the Chinese government is efficient, clean, friendly, transparent, and extremely helpful.
    It sounds bizarre, until you realize that they are used to doing businesses in other places where the situation is much worse, and so the standards are different.

  12. Anon: It’s interesting that you say that. There was an article in the Harvard Business Review recently explaining that multinational corporations originally envisioned the world’s future as just such a borderless commercial frontier…
    They still do….
    And to a large extent they succeeded. One thing that does come up is that multinational companies are multinational. Suppose you are in a meeting talking about moving a factory from the US to India. How dare they!!!! I’m going to complain at the meeting!!!! And then you realize that you are the only American in the room. The other people are British, French, Italian that don’t care, and Indians who think it’s just wonderful to move jobs from the US to India. At the end of the day, it will boil down to dollars and cents, and nationalism is not going to matter much.
    One other thing is that working for a big multinational is very different from working for an SME that does business in a few countries.

  13. Twofish “And then you realize that you are the only American in the room. The other people are British, French, Italian that don’t care, and Indians who think it’s just wonderful to move jobs from the US to India.”
    Nice try but no… almost all multinational companies have national leaderships: Wal-mart, GE, GM, Maersk, BOC, Siemens, Apple all have national leaderships so what you are saying is pretty far from reality. So it would be something like this “And then you realize that you are not the only “blank” in the room. The other people (for Siemens) are German, Austraian, German, Swiss, German.” or “And then you realize that you are not the only “blank” in the room. The other people (for Maersk) are Danish, Danish, Danish and Danish.
    Nationalism is very important and Wall-mart excecutives will play ball if they are perceiving that their local or social enviroment will shy away from decisions.

  14. You are correct on both counts. On articles like this, we should assume the opposite and in this case, the opposite is true. China no longer thinks foreign investment is important for it and it is acting that way. Hardly a day goes by where I do not discuss with another company manager of a foreign company here in Suzhou about whether or when we should leave.

  15. @ Twofish
    “What has happened (again first hand experience) is that Chinese government stomps on US company. US company tries to get the US government to do something. US government just shrugs and says “sorry we can’t help you, we have other things to worry about.” Five years ago, things would have been different.”
    I think you’re right that the US government has more “other stuff” to worry about right now than it did in 2k6. I think it’s also true that the USG finds itself with far less bargaining power than it used to have, such that it is more often forced to abandon certain issues given the nature of the increasing demands that the Chinese will make in return or given sheer intractability on the Chinese side. I think, however, and also from first-hand experience, that it’s a mistake to equate this with either 1) a lack of concern/effort or 2) a broader economic agenda oriented towards forcing US firms to reinvest in US operations over expanding in China. There are several offices of highly trained and qualified negotiators and policy makers who are wholly dedicated to improving conditions for US businesses in China. There are two major annual high-level US-China dialogues (JCCT and economic track of S&ED) that focus in large part on the treatment of US investors in China and continued efforts to open more sectors of China’s economy to US investment. And US and Chinese negotiators are traveling back and forth working on these issues year-round. Many people. Many hours. Many headaches. Many resources. Not dismissal.
    Another thing to consider is that, if the US government appears less active/aggressive in engaging the Chinese government on issues of concern to US businesses there, it is highly likely that certain sectors in the US business community in China is, for strategic reasons (i.e., don’t want to be seen as unfriendly towards China by engaging home government), putting less pressure on the US government to take an aggressive stance. It also depends on where in the USG you’re looking for hard-nosed effort. DIfferent offices/branches, different mandates/responsibilities, different goals/nas/content/live/harrisbstagingroaches.
    I agree with you that MNC’s continue to see the world as a single commercial whole and avoid placing the concerns for the well-being of a single economy above their own global, micro-economic interests. I guess my point was that they are, more and more, coming to realize that the vision of a borderless world in which national sensitivities would be of no concern was a pipe dream, and that national sensitivities have to enter the calculus of their global, micro-economic interests.

  16. Anon: . I think, however, and also from first-hand experience, that it’s a mistake to equate this with either 1) a lack of concern/effort or 2) a broader economic agenda oriented towards forcing US firms to reinvest in US operations over expanding in China
    Both the US and China have to respond to the “man on the street.” I’m sure that the people in the Department of Commerce are all for more trade with China and their counterparts in the Ministry of Commerce also have the same agenda, but ultimately they have to act within a political and social system that constrains what they can do.
    Anon: There are several offices of highly trained and qualified negotiators and policy makers who are wholly dedicated to improving conditions for US businesses in China. There are two major annual high-level US-China dialogues (JCCT and economic track of S&ED) that focus in large part on the treatment of US investors in China and continued efforts to open more sectors of China’s economy to US investment.
    True, but all of them are operating within US political system that has changed wildly since 2007. It’s very unlikely that you can force China to do something new without giving up something in exchange, and right now the political system is not going to let US negotiators make concessions to China. Even if the people within the Department of Commerce want to make it easy for Chinese business people to easily get visas for the US, they have to get congressional approval, and that’s not going to happen.
    You can also try to use threats, but right now threats against Chinese trade are not credible.
    Anon: It is highly likely that certain sectors in the US business community in China is, for strategic reasons (i.e., don’t want to be seen as unfriendly towards China by engaging home government), putting less pressure on the US government to take an aggressive stance.
    Sure, but one other big worry is that businesses are terrified that something that they do will be the subject of an campaign in the US. One problem with taking an aggressive stance in economic issues is that it is impossible to *quietly* take an aggressive stance. If you are talking about negotiations on say human rights or nuclear missiles, it’s possible for people to scream at each other behind closed doors and then have smiles afterward. This isn’t possible with economic issues since a lot of the important stakeholders are non-government officials that have no interest in keeping things quiet.
    It’s possible to force the Chinese government to make a concession on missiles or human rights, and then agree not to talk about it. This won’t work for economic issues, because if you save someones job in Peoria, it’s useless unless they know about it.
    Anon: I guess my point was that they are, more and more, coming to realize that the vision of a borderless world in which national sensitivities would be of no concern was a pipe dream, and that national sensitivities have to enter the calculus of their global, micro-economic interests.
    There is a different between having a borderless world, and one in which you don’t have to deal with governments. For example, if you are a big MNC and you want to build a factory in Peoria, you have to deal with the Peoria city council. To a large extent, you have to think of national governments in the same way that you think about local governments, because in the global village, national governments are “local.”
    What makes the world “borderless” is that any MNC has to deal with multiple national governments that interact in complicated ways. Something else that makes things complicated is that it’s hard to define “national interest.” In the “old days” the idea was that interest groups would come up with a consensus that would be promoted by the national government. That’s not the world we live in, in which interest groups both within the government and outside the government interact.
    Just to give you an example. I’m pretty sure that the staff of the MOFCOMM and the US Department of Commerce have more in common with each other than they do with the PLA and the US DOD.

  17. @TwoFish: I might be simplifying or misreading what you write, but it seems to me that you are suggesting that the difference between exporting to China and importing from China is lost on the U.S. population and that U.S. politics is playing a significant role in this issue. I don’t think so, not even close. I think that the U.S. population applauds opportunities to export and has naturally grown wary of lopsided trade that results in a ballooning trade deficit to the U.S. with concomitant loss of jobs. I don’t understand at all the argument that there is a lack of effort or pushing by the U.S. on behalf of U.S. companies. A decade ago, for a U.S. company to enter China was like pushing on a string: the Chinese welcomed it, the technology exchanges that the companies routinely made were hardly pushed by the U.S. gov’t (!!) but were rather carried out by tiptoeing around technology export restrictions. More recently the string become a closing door. The U.S. did not fail to support Google, nor does it fail to support its other businesses, but after all in the U.S., companies basically operate outside of the gov’t and without its explicit cooperation. It’s hardly analogous to the intense coupling between business and gov’t that exists in China.
    In brief, I think it’s wrongheaded to blame the U.S. gov’t or politics for the phenomenon highlighted by this article. It’s also not true that the Europeans have suddenly stopped supporting their businesses. Of course they don’t have the option of pushing to widen the trade deficit even farther! But then again the Chinese are not resisting *selling* stuff to the outside world, so that’s hardly at issue.

  18. “I am telling people that if you want to sell goods/services to Chinese SOEs the best way to do so is through a Joint Venture, the next best way is via a WFOE and the third best way is via a foreign (U.S., Hong Kong, or whatever) entity.”
    I just returned from a conference on US-China collaboration and the term for this phenomenon was termed “pay to play.” It also seems to arise in situation of selling specialty goods/services to Chinese consumers that requires substantial government approval.

  19. What am I seeing? I am seeing a country that has always discriminated against foreign businesses and I have seen that discrimination go into high gear in the last year or so and most businesses are afraid to say anything about it for fear some excuse will be ginned up to shut them down.

  20. There is a simple solution: reciprocity. Close our markets to the Chinese just like they close our markets to us. Trying to open up is a fool’s errand.

  21. I read the China Daily the same way. There are certain article you just know were planted from above. Very far above.

  22. You guys are at about 90% on issues like this and the China Daily is at about 20%. I believe you on this one.

  23. It is getting worse and it has been getting worse for the last six months and now that we are beginning to see a slowdown it is going to get worse yet. I am 100% convinced of that.

  24. Business ethics is virtually non-existent in China to the level all Westernized and Western business mind adopted fully capitalistic nations. I hear the same complaints from my uncle doing business in China. The government and the powers that be are greedy for money but they really do not know or honor the true capitalism spirit with a sense of fairness for all. This will be the primary impediment for China becoming the biggest player in the world economy. In fact, the cultural political revolution upturning their current rising is more likely than China being some world economic power. They are incredibly deluded and corrupt. And if you go to China with some neat little business idea or even some great product, it will be ripped off by a ton of companies and the government will think it is only “competition” and won’t do anything about it. And some will be sold with your product name and your company logo on it. So if it is a badly ripped off producing using subpar manufacturing methods and God forbid it is a food item and it was made with poison, only your business will get in trouble since it has your product name and logo on it. And you might as well pack up and leave rather than try to prove that you didn’t make it to the Chinese officials.

  25. Mary&Martha sounds like a typical China propaganda machine. Always jumping in to blindly defend China machine and mentality. In China, a stronger more suffocating form of Communistic revolution is more likely than China being some world economic giant. They still have a million ton of stuff to learn from USA and Americans not to mention rest of the capitalistic world but their arrogance will be their doom. Mark my words.

  26. Hi,
    I have been in China many years and I know Chinese people very well.
    The source of the problem is just their low education and culture.
    Chinese people are against foreigners for a lot of reasons, their bad history,
    the differences of education, welfare and services in their Country and in western Countries.
    They totally feel inferiors……so, they naturallly react discriminating foreigners, in everything, not only business, just because their culture is too low to respect themselves and foreigner people.
    It is a problem of education , and inferior feeling, only their Government can change this, and it is so far ……maybe it doesn’ t want……
    Western Countries should do the same , dont believe Chinese partners, make different taxations to their companies and more difficult visas or everything…….

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