The trade relationship will grow incrementally more challenging and MNCs may finally air their grievances in public.
2014 will be challenging for international negotiators in China, but not particularly unstable or erratic. An unsettled economy in China will bring out protectionist impulses in Beijing bureaucrats, who will be increasingly defensive and conservative about what happens within their borders while at the same time becoming more ambitious and assertive in their dealings abroad.
Access to the the Chinese market will become a touchier issue for deep-pocketed MNCs, who will exhibit a greater willingness to go public with their complaints about market access to China — and may even mobilize connections at home to limit Chinese access to western markets. China in 2014 will continue its trend of greater nationalism, protectionism and defensiveness, but shouldn’t hold too many surprises for experienced international businesses. Savvy negotiators will find ways to turn bureaucratic heavy-handedness to their own advantage by offering Chinese partners help moving offshore to more attractive, less restricted markets.
1. Big Deals & Big Guns.
Internationally, 2014 will see China open for business – and little else. China had been fussing with “soft power” and half-hearted demands for “its proper place on the global stage” since the crash of 2008, but this year will finally settle on a consistent policy. Strategic ambiguity lifts as Beijing narrows its focus to big deals and big guns. Look for more high-level M&A and investment, but less cooperation and dialogue on military, political, social and humanitarian issues. China will spend less energy on international institutions and expend more resources on shows of military strength and regional clout. Mainstream western media will finally acknowledge what most Old China Hands already knew — China and the US are opportunistic cooperators, not allies.
This has always been what China wanted, and the Xi administration isn’t shy about projecting a tougher image. China has never liked nor understood 50-50 partnerships, and still views the world in terms of Confucian hierarchies. China no longer considers the West necessary to its economic goals, and is starting to openly regard the US as a full-on competitor. While this isn’t news in Beijing, 2014 will see a big shift will take place in New York editorial meetings and European boardrooms. Liberal globalists and old-style Chamber of Commerce accommodators are going to finally accept that China is an associate in the international economy — not a partner in a global community.
Impact on international negotiators in China: You’ll have to work even harder at internal negotiation within your own HQ to develop consensus and a unified front. Prepare for a more aggressive Chinese bureaucratic agenda. Business as usual with Chinese commercial counter-parts.
2. Middle class Chinese continue to vote with their feet – and Beijing takes notice.
In 2014 CCP mouthpieces will acknowledge the forbidden truth – that Chinese with enough money to leave the country will do so. Xinhua and CCTV will co-opt it as best they can and try to make it look like it was the Party’s idea all along, but the government will attempt to clamp down on it in the second half of the year. While BJ appreciates the utility of accessing western technology, markets, and schools it will soon have to stop turning a blind eye towards the capital flight and potential brain-drain. The giveaway will be when the official state media starts regularly talking about corruption and outward bound capital flows in the same sentence.
Impact on international negotiators in China: Look for new areas of cooperation with PRC companies and individuals – you will uncover greater interest in helping them expand into western markets (and school districts) when Beijing starts restricting capital flight.
3. FTA or the Highway
Bilateral negotiations and one-on-one Free Trade Agreements (FTAs) will effectively replace multilateral global structures. This is really a 2012-2013 story, but our prediction is that in 2014 both China and the World will acknowledge that China feels it has outgrown multilateral organizations. Watch what happens between China and European countries, and how China handles the growing Trans Pacific Partnership. Look for China to start applying leverage to Asian neighbors via FTAs as thinly veiled threats to market access. China has a friends list and an enemies list — the friends list is shorter and they will all have bilateral FTAs if they don’t already.
Impact on international negotiators in China: Watch those FTAs, since they will determine your status with Chinese officialdom.
4. China begins to look more isolated culturally and politically.
US-China relations get frostier as military, regulatory, and global institutions fail to create credible back-channels. Europe drops to Tier 2 diplomatically, but becomes even more active in M&A and trade. China’s Asian neighbors are wary, and will move closer towards the US – to China’s annoyance. The appointment of Senator Baucus to the top US diplomatic spot in China looks like good news for business, but actually makes relations more brittle. His all-business “chamber of commerce” approach will make for more pleasant banquets, but his inability to speak to military or high-level diplomatic issues deprives the US-China relationship of an important channel if the road gets bumpy.
Impact on international negotiators in China: Chinese isolation leads to Chinese innovation, and that’s a mixed bag for US negotiators in China. The Chinese internet showed huge growth and dynamism after Beijing shut out the big Silicon Valley media giants – but Western investors had trouble capitalizing. As China drifts away from global standards, there will be more opportunities for Western firms that can innovate and add value – but tough times for famous brands that try collecting rent on past achievements.
5. 2014 will see new tests of China’s openness to international business — and new pressures on international firms to openly complain of unfair treatment.
As western economies continue to mend and China shows sensitivities to rebalancing and higher cost levels, both sides will be forced to reevaluate the international business in China. On the Chinese side of the equation, there will be new pressure to defend valuable markets and redirect assets to serve the lucrative domestic consumers. MNC strategists will realize that China is not the never-ending story they had once believed it to be. The deciding factor will be financial flows — if China feels its access to western capital and investment is in peril, it will likely strike a more conciliatory, compromising tone. If China decides that too much money is moving out of China and too much western influence is moving in then trade restrictions will increase.
The big question for international negotiators is about market access. SOEs have been ordered to become more competitive and that could mean that MNCs will have less free access to Chinese markets in 2014. Intensifying private-sector competition was the bogeyman of the expat community in 2013 – sometimes it meant more efficient local firms, but sometimes it was code for bureaucratic roadblocks intended to hamstring foreign business trying to sell to consumers. As state giants search for profits, the market environment will become even more challenging this year.
Impact on international negotiators in China: 2014 will see increasing resistance to foreign market access that brings trade restrictions into the open. Chambers of Commerce have traditionally been Beijing’s most effective supporters in DC and the EU, but that could change in 2014. This will be a frustrating year for international negotiators in China – but a better one for western firms negotiating with Chinese companies looking to expand internationally.
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