US-China trade relations have zigged and zagged since the onset of the recession in 2008, but now it looks like we are in for a summer of setbacks and increasing tension. As is so typical in US-Chinese negotiations, the old conflicts were never really resolved – they were just politely ignored and swept under the rug. Now they are back with a vengeance. After a brief period of feel-good photo-ops at summits and Expos – trade disputes, forex rates, market access, WTO complaints and labor disputes are all crowding the headlines and home pages.
Old tensions were brushed under the rug
It’s been about 14 months since March 2009 when Wen Jiabao signaled the start of the ‘new relationship’ between China and the US by very publicly fretting about the future of the dollar and Treasuries. The winter of 2010 saw relations between China and the West sink to their lowest level in decades. During the few weeks between the Second China-US Strategic and Economic Dialogue (SED) and start of the Shanghai Expo there was a noticeable improvement in top-level relations. Even the People’s Daily gushed that the world was amazed over sharp turnaround in China-U.S. relations:
The China-U.S. relations entered into a warm spring from a cold winter in less than a year, and previously, it also took almost the same amount of time to drive the ties from summer to winter.
New troubles on the way.
Ironically, it was China’s success at managing the last round of international tension that is feeding into a new, more serious round of conflict. Leaders like Timothy Geithner who were so expertly ‘handled’ by the Chinese side in Round 1 are now looking like empty-handed suckers whose kowtowing to Beijing yielded nothing. China’s argument that it could help the world most by keeping its own economy strong is wearing thin as the global economy sputters along while China overheats. Globalists from Washington to Geneva have very little to show for their patience and diplomacy, and the international trade environment is becoming more hawkish than ever.
Old tensions are spawning new conflicts. The WTO regulations that helped China pry open foreign markets are now being used by Europeans and Americans to press for increased access to Chinese consumers. Labor unrest in the factories seems to be focused solely on overseas firms. China’s whitepaper on the internet has enshrined censorship and blockages as official policy. Domestic content rules and new trade restrictions are destroying hopes for a level playing field for domestic and international firms.
The economic recovery in the West is moving in fits and starts with persistent unemployment and uneven economic growth. Main Streets in the US and Europe have grown tired of empty promises. Chinese managers are facing troubles of their own, as inflation, labor strife and fear of bursting housing bubbles eat up what was left of their margins and threaten the only business models they know. The Chinese operating environment is becoming expensive, less profitable and far less predictable than at any time in the last decade. There are fears that a double-dip recession may strike in Europe, the US and China.
Why is this time different?
Where the pre-SED (crash – May 2010) round of tension was primarily a clash of world leaders over macro issues, the new troubles will be much more bottom-up. If you were negotiating with a Chinese counter-party in the last year you may have noticed that the atmosphere was less cordial than in the times gone by, but your deal-points and goals probably weren’t affected. Emerging tensions, however, will center on more bottom-line issues. We all know that Chinese negotiators tend to put more emphasis on relationships. During times of international harmony, this represents a significant but not necessarily unpleasant challenge for American negotiators. What about during times of rising tension? How should Americans handle their relationship building? In a word, ‘cautiously’. Unlike the first round of trade conflict, this will not be a war of words between elites, but more of a bare-fisted brawl between street fighters.
The game is changing, and it’s up to you to decide whether or not the next phase will benefit you.
Next: Best Practices for Bad Times.
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