beyondbrics

Google’s bust-up with the Chinese government earlier this year is just the first sign of a looming battle between western multinationals and Beijing. That is the provocative view of Ian Bremmer, president of political risk consultancy Eurasia Group, in a recent interview with Barron’s (subscription required). “We have a lot of corporate clients, and I’d say only about 25 per cent of the major ones have strategies for China that I think are sustainable over five years,” he says.

It is a bleak forecast, but it is worth reading because it articulates a lot of the comments that some multinational executives in China (although not all) are making in private these days.

Mr Bremmer has for some time been pointing to the rise of “state capitalism” – a much stronger role for the state in guiding economic policy and promoting domestic companies, which he argues is a rejection of free-market ideas. China is the standard-bearer. As he tells Barron’s:

With the financial crisis of the last 18 months, the degradation in capacity of the U.S. consumer, the increased capacity in China, as well as the assertiveness of the Chinese state and the difference of the Chinese model — the world’s largest and second-largest economies now have economic systems that are fundamentally incompatible.

The rise of state capitalism implies that we’ve hit a tipping point, and that increasingly those markets are becoming less global in terms of opportunity for multinational corporations. Certain areas — with the biggest problem being China — are increasingly not going to be available for these multinational corporations.

For Mr Bremmer, the China-Google spat was not just about censorship but a broader strategic thrust in China to squeeze multinationals when there is a strong domestic competitor in place:

This is now happening to most Western multinationals that are investing in China, and Google is the tip of the iceberg. What sectors will be most affected? Technology, telecommunications, consumer durables, automotive, aviation. Google has gone public, but most other multinationals haven’t.

I’m not suggesting you can’t do business in China, which should grow at least 7%, 8% annually over the next decade. Western corporations will make money in China. Some of them will do so because the Chinese just don’t have local competition, like in advertising. But in places where there is competition, Western corporations have to either leave or change their model.

And it is not just state-owned companies that are getting the nod from Beijing, he says, but also some private businesses:

Home-grown doesn’t mean state-owned. State capitalism means the state is the principal actor and operator. [Governments in state-capital systems] are using the markets for political purposes. Baidu isn’t a state-owned company. It doesn’t matter. There is no rule of law in China, which means that if China favors Baidu, Google has got a problem. If China favors Huawei, Cisco Systems has a problem. And if China favors Chinese aviation, state-owned or not, Boeing and Airbus are not going to be selling aircraft into China long term.

And this battle with Chinese companies is also going to increasingly be played out in other parts of Asia, he says, which will undermine US corporate support for free trade and lead to a more regional trading system:

In Asia it is going to be very difficult, because the Chinese have very strong connections with local business communities that are ethnically Chinese. The trade ties are huge, so they have a lot of political leverage. In those areas, Western companies will have to move on to the next possibility or again focus on areas where the Chinese themselves aren’t focusing. In some areas, the Western corporates are just going to lose, and that’s a problem because this is a real tipping point in the way we see the global economy. . . . One of the biggest organizations out there that supported continued free trade was the American private sector. If the American private sector is suddenly saying we have serious problems with a lot of these countries, they aren’t going to support free trade with them anymore.

I think you are going to see increasing regionalization of trade, much more trade within Asia between China and increasingly tributary states, much more trade between the U.S. and Mexico and Canada.

There will be beneficiaries from disputes between the US and China, however, and one of the biggest will be Brazil. “As U.S.-China becomes more problematic, U.S. corporations will do more in Brazil, as will the Chinese. So Brazil takes advantage of all of that,” he says.

Related reading:
Capitalism’s State of Play, Barron’s
State Capitalism Comes of Age, Foreign Affairs
Dragonbeat: China’s ‘meanness’ is an exaggeration, FT