China Negotiation Fail: Do Not Talk Tough and Walk Weak

The US president’s chances of negotiating effectively with China are seriously undermined by empty tough-talk on the campaign trail.

Noted economist Stephen Roach has an interesting piece in the recent Caixin.com  entitled, “The Nightmare Scenario” describing how a trade war between US and China could unfold in the event of a Romney/Ryan victory in November. It’s not a particularly partisan piece – just about every recent presidential hopeful has talked tough on China during their candidacy – Obama included.

Roach describes a commercial train wreck, and he has some great points informed by his perspective as an economist. Negotiators, however, should be aware of a less dramatic but still damaging tendency for US politicians to talk tough in the campaign, but walk weak once elected. While domestic and other Western counter-parties will shrug off campaign speeches as meaningless electioneering, it has a completely different effect on Chinese counterparties.

What are the implications of tough talking vs. weak walking when negotiating with Chinese counterparties?
Chinese negotiators look for a baseline behavior from the group of people sitting across the table. They will listen to everything you and your team have to say and then meet amongst themselves to draw conclusions about your business philosophy. Are you conservative or risk-taking? Are you consistent or impulsive? Are you credible or overly proud? Are you willing to make sacrifices to achieve your goals, or will you cave in for the sake of expediency?

That’s the point of all of those drawn-out relationship-building banquets, luncheons and endless meetings. Chinese negotiators don’t even start listening to the content of your proposal until much later. At the beginning, a good Chinese deal-maker is sizing you up and figuring out what kind of person you are.

Americans should collectively cringe every time a presidential candidate makes a crowd-pleasing threat against China – unless it is immediately followed by, “and this is what it will cost the United States.” So far, we haven’t heard much about the downside of forcing China to play by rules we consider fair. Economists and business leaders can debate whether or not those demands are reasonable or justified. Anyone with negotiating experience in China should know that threats against China carry two kinds of additional risk.

Risk number one is that making good on threats will entail great costs and grave dangers for the US economy. (See the Roach article.) If we as a nation decide that the benefits outweigh the sacrifices, then a strong and unified leadership should do whatever needs to be done to rectify injustice and safeguard the future. But popping off in front a group of Red State county fair visitors because it will make a nice sound-bite on the evening news is very damaging when China is part of the equation.

That’s what risk number two is about. If Beijing analysts hear tough rhetoric now but find that newly elected officials quickly walk back their threats and become pragmatic once in power, the Chinese will factor that into their assessment. It is a sign of weakness, and once a Chinese negotiator believes that the balance of power favors him, it determines his strategy and conduct for the life of the relationship. Empty bravado becomes part of the new President’s personality profile among Beijing leadership forever. It hurt Obama and it will be even worse for Romney.
The Obama Administration has  gone through its cycle of tough talkin’ followed by weak walkin’ on the currency issue.  A Romney presidency would be even less likely to make good on aggressive promises if elected.

A man who got rich as a private equity fund manager is never going to take a hard line with China. That’s not how people like Romney are wired. They don’t define success in terms of morale high-ground or sacrifice for a good cause. Romney’s about the bottom line – and if we’re lucky he’ll be using the S&P 20 day moving average as a proxy for America’s health – and the household wealth of his 10 closest friends if we are less lucky. The tougher he talks now, the weaker his hand will be once he starts negotiating with Beijing.

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