The Whirlpool of US-China Conflict. Part 1: The Drivers

US-China relations are clearly spiraling downward, and the ramifications for business negotiations are dire. Only a year ago the international community had reason to hope that a new US administration and a successful Chinese leadership could cooperate to lead the world out of economic crisis and environmental ruin. Now the only example of the US and China pulling together is our joint commitment to paddle directly into the whirlpool of an acrimonious trade dispute. The recent tit-for-tat blows over Taiwan and Iran are merely the latest manifestations of a competition that began in 2008 – and they are unlikely to be the last.

Two issues are undermining international cooperation. The first is that the US and China are at variance over the benefits of cooperation vs. competition. The second is that the two actors are working off a faulty stakeholder analysis – leading to misinterpretation of how the other side values the variables on the table.

Cooperation vs. Competition: An extended Prisoner’s Dilemma scenario:

Work I’ve done with US & Chinese negotiators in a prisoner’s dilemma-type scenario does not give cause for optimism. China-US negotiation is often characterized by relatively simple, naïve initial deal-making (usually based on incomplete or erroneous information) followed by increasingly uncooperative, competitive, often hostile disagreement.

Cooperation requires a ‘growing pie’ of benefits
For US & Chinese counter-parties to achieve stable cooperation in a Prisoners Dilemma type arrangement, 2 conditions must exist.

    1. Both sides must believe that steady-state cooperation will enhance their long term benefit over multiple iterations compared with short-term competitive behavior.
    2. The global payout must be rising over the course of the arrangement. In other words, for cooperation to be stable the ‘economic pie’ must be growing. Faced with a stable payout (a zero-sum game) the default behavior seems to be competition over cooperation.

Modern Chinese negotiators tend to believe that their BATNA (Best Alternative to No Agreement – otherwise known as ‘Bottom Line’) is enhanced by a constant stream of new counter-parties or options. American negotiators operating in mature economies tend to view stable-growth scenarios as sufficient to maintain cooperative negotiating relationships. Combined with lower penalties for breaking contracts in China than in the US, the result is that Chinese negotiators tend to be quicker to switch from cooperators to competitors than their American counterparts.

Stakeholder analysis & relative valuation of variables.
The second oar propelling us towards the whirlpool of acrimonious trade war is improper stakeholder analysis performed by both sides. Because US and Chinese actors seem to be working with a simplistic, incomplete view of their counterparty’s priorities and interests, each side made gross errors in estimating how the other side valued variables. In other words, US negotiators didn’t know what was important to Chinese counter-parties and Chinese negotiators didn’t know what was important to the US. This has driven China’s negotiation position to shift from relatively cooperative to extremely competitive over the last 2 years.

In many ways, our present problems started in 2008 when an uprising in Tibet turned violent. America and the West seemed not only sympathetic – but were perceived by China to be taking an active role in spreading false rumors and images about the cause and nature of the protests. A similar scenario played out in the summer of 2009 when violence broke out in Xinjiang – and anti-Beijing photos & clips (some of which were admittedly of a highly suspicious nature) started showing up on social media networks and YouTube.

These incidents were perceived as relatively minor or ‘business-as-usual’ in the West – especially since demonstrations and public criticism of US policy were commonplace in the waning days of the Bush administration. To Western negotiators, public reaction to mild street violence on the other side of the world simply wasn’t that big a deal. To Chinese decision-makers, however, these uprisings were considered to be major threats to their core values – the legitimacy of the CCP. In Beijing, US commentators and social networks siding with the protesters was likely perceived in much the same way that Washington policy makers would react to a string of Xinhua editorials cheering on Al Qaeda and the Taliban. It not only undermined trust and cooperation – but also empowered right-wing conservatives who felt that China had opened to far too fast.

The economic crisis in the West further undermined US-Chinese cooperation. In March 2009 Wen Jiabao sealed China’s competitive position in a speech at the CCP conference bluntly attacking the US currency and economic policy. This was an unusually unambiguous signal that China was taking a competitive tack in US-Sino relations.

This makes sense from China’s perspective – at least in the short term – since a crippled US economy meant that there was now a much smaller pie to divide. The system-wide payout was dropping just as China’s contribution to the global economy was rising in both relative and absolute terms. China simply had less to gain from cooperating with the West – and shifted to a competitive mode.

The Way Forward
Unfortunately, once a multiple-iteration negotiation (same 2 negotiators, many different negotiations over time) turns competitive it is very hard to break the cycle. Trade hawks on both sides are empowered and there seems to be little benefit for either Beijing or Washington to make the first move. If the US economy recovers or the Chinese economy stumbles, it will only reinforce the competitive mindset. Bluster about Iran sanctions or Taiwan arms sales might be just the beginning. Each new trade sanction or public dispute will reinforce the competitive environment and make it harder to break the cycle of conflict.

Next: The Whirlpool in your shop – how to negotiate under adverse US-China conditions.

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