China’s growth and rapid development over the last two decades has been a monumental achievement. However, China’s dash towards the summit of political, economic and military primacy has not occurred without its fair share of rule breaking. Humanitarian, environmental, labour and moral concerns aside, China has broken international trade rules that it accepted as a signatory to the World Trade Organisation (WTO) in order to build its domestic capability and capacity. Policies such as local content requirements, mandatory transfer of sophisticated technology, state subsidies to favoured domestic companies and so-called indigenous laws meant to favour homegrown businesses have hamstrung foreign multinationals hoping for a cut of the world’s fastest growing market. Time and again, they have had to share proprietary technology and IPR with future rivals, and in some cases the Chinese military, to please the authorities and hold on to an increasingly smaller place at the table.
Two examples-the first from the aviation and the second from the renewable energy industries-demonstrate how China has used unfair rules and regulations to fuel its meteoric rise.
Last year’s joint-venture between GE and the Aviation Industry Corporation of China, or Avic, is a prime example of firms trading prized technology for a piece of the booming Chinese market. In exchange for access to a commercial airline market estimated to be worth $400 billion over the next two decades, GE will share its most sophisticated technology-some of which is in Boeing’s state-of-the-art 787 Dreamliner-with the state-backed Chinese company. Another point of concern highlighted by the US-China Economic and Security Review Commission (USCC) is that because Avic is state-owned, the Chinese may not hesitate to use GE’s technology to play military aviation catch-up.
US companies like GE contributed $60.5 billion in FDI to China in 2010. The government shepherded that money into key industries by coercing foreign investors "into entering joint ventures or other technology-sharing arrangements," as the price for access. These companies face a grave commercial risk. Once Chinese companies acquire the technical prowess, it is only a matter of time before they start undercutting international competitors by sharply pushing down prices-with aid from the government and state-owned banks, and lower manufacturing costs.
Nowhere is this more evident than in the global renewable energy industry where, in a matter of years, China has become a world leader. This spectacular rise is due in no small part to questionable practices like strong-arming international companies into following rules heavily skewed in favour of domestic, state-backed enterprises.
When Gamesa, a Spanish turbine manufacturing company, first entered China to build wind farms, authorities required a steadily increasing share of the equipment used to assemble turbines to be made in China rather than imported. These provisions eventually led to a blanket requirement on July 4, 2005, when China’s top economic policy agency, the National Development and Reform Commission, passed a measure known as Notice 1204, which mandated that wind farms had to buy equipment in which at least 70% of the value was domestically manufactured.
This local content requirement is inconsistent with Article III Section 4 of the General Agreement on Tariffs and Trade (GATT), the precursor and foundational framework of the WTO. The Obama administration complained about the rule in 2009 and the Chinese government revoked it, but by then the damage had been done-some of Gamesa’s turbines then comprised of 95% local content.
Before that could happen, Gamesa had to train local manufacturers to produce the parts required to meet the onerous domestic requirements. These producers would go on to sell to Gamesa’s Chinese rivals as well as export to Gamesa’s factories abroad at the expense of its other manufacturing bases. Domestic rivals barely existed in 2005 when Gamesa controlled a third of the market, but with government assistance in the form of low-interest loans, cheap land and preferential contracts from state-owned power companies, their local share has increased to 85% (to Gamesa’s 3%) and almost half of the global market.
Companies almost never raise objections because of the danger of being locked out of the fastest growing market in the world-even with a 3% market share, Gamesa sells more than twice as many turbines as it did when it was market leader in 2005. Only groups like the US Steelworkers Union, with no direct contract risk, have dared to file a case against unlawful trade practices. The case addresses China’s illegal activities in five key areas: restrictions on access to critical materials, performance requirements for investors, discrimination against foreign firms and goods, prohibited export and domestic content subsidies, and trade distorting domestic subsidies. The US government rallied behind them with a case challenging wind power subsidies in December 2010.
To secure its renewed commitment to the Asia-Pacific region, the US must reinforce its presence in the region while simultaneously ensuring that China becomes a responsible stakeholder in the established world order. Much can also be done to rebalance economic and trade ties between the two. Some companies have chosen to take a stand, as Google did when it moved its services off mainland China to avoid censorship rules. Others are increasingly vocal about their problems-last year, GE CEO Jeffrey Immelt lamented the difficulties of doing business in an environment where national industries are favoured over foreign companies.
The US should encourage its western allies to form a united front and support aggrieved parties, as it did when it supported the Steelworkers Union and brought an end to China’s subsidies to wind power manufacturers. In an increasingly globalised world where economic power is often the most valuable currency, taking a stand for free trade and the rule of law by supporting private sector interests may be a more useful show of force than a carrier group in the Pacific.
(The author is a research scholar at Observer Research Foundation)
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