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COVER STORY: China and the USA. Is It Business as Usual or a New Normal? Talking USA - Chinese relations with William Zarit, Chairman of the American Chamber and Senior Counselor of The Cohen Group
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China and the USA

Is It Business as Usual or a New Normal?

Talking USA - Chinese relations with William Zarit

Chairman of the American Chamber and Senior Counselor of The Cohen Group

By Richard J. Cook

cover 02As the world holds it's breathe for a glimpse of what America's latest Commander in Chief has to offer we can but sit back and watch the headlines roll out in frenzied fashion. Apart from hyper-stimulated media perspectives it's business as usual within the Middle Kingdom, yet foreign policy conditioning between the U.S. and China seems to be shaping up pretty quickly. A new trend of "Great Power Relations" between the two economic juggernauts has begun to form and this should be no surprise to anyone. President Obama's flagship policy "The Pivot to Asia" had previously signaled this, however scholars around the world are now delegating theories and perspectives to re-align the relationship of China and the U.S. As seen from President Trump's appointments and foreign policy rhetoric it is also fair to assume that we are going to see a return to hard-pressed realism in terms of international relations.


If you're not sure why that's significant, Thucydides Trap is sure to explain. In addition it is conceivable that a new model of power balancing by the USA will produce a firmer stance on protecting American business, a fact that is already self evident. Furthermore, this must not rest well for American business leaders in China as notations of a "trade war" swing back and forth between Washington D.C. and Beijing, as well as on Twitter. As such, this comes at a time when not only many American businesses seem increasingly dissatisfied with the Chinese commercial environment but also many European firms also share a similar impression.


If we rewind back to last August, the European Chamber's "Business Confidence Survey" noted these concerns like level-playing fields; transparency; bureaucratic complexities and double-faced standards. What is for certain is that there seems to be a new normal on the horizon for the commercial environment in China.


William Zarit, the new Chairman of the American Chamber of Commerce in China, shared with us his important input on the future of the commercial environment in China.

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As one of the most notable experts in the world, renowned for expert advice and a noted partner of The Cohen Group advising multinationals in the Chinese business Environment, what do you believe are the most significant commercial concerns off late? What is most frequently referenced as a potential issue?


If you take a look at the Business Climate Survey we released this week, you can see that the main challenges, for our members at least, fall into two categories. One is around costs, particularly those related to human resources. Labor costs are the No. 2 challenge, and difficulties in finding qualified management, presumably for the right price, is the fourth. In Tianjin, I know, labor costs were the No. 1 challenge for our members here. These have been long-term challenges in China, not just for our members but for all companies in China, particularly private ones.


However, the other issues are policy-based issues, some of which impact all companies and some which disproportionately affect foreign companies. The top concern for the past two years has been inconsistent regulatory interpretation and unclear laws. Rounding out the top 5 are increasing Chinese protectionism, which by definition discriminates against foreign companies, and difficulty getting licenses to do business, which should be just a bureaucratic process but is actually a serious business challenge for our members.


Recently there has been a lot of hype on whether foreign businesses have a suitable commercial environment in China, specifically referring to a level-playing field. What is your take on this?


More than four out of every five of our members feel less welcome than before, and more than half believe foreign companies are treated unfairly as compared to local companies. The Organization of Economic Cooperation and Development ranks China 58 out of 59 countries in terms of openness to foreign investment, ahead only of the Philippines.


But it doesn't have to be like this, and we'd like to see the government promoting development through open investment. The benefits of open, vibrant markets extend well beyond foreign-invested enterprises. We believe government policy should help all parties in Chinese society, including consumers, farmers, private companies, and not just the narrow interests of the few who benefit from protectionism. This is especially important given the increasing scrutiny of the US-China commercial relationship and the questions being raised internationally about the access being granted to Chinese companies overseas compared to the access foreign-invested companies have in China.

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What is needed to achieve a suitable level-playing field for foreign businesses in China?


For American companies, the single biggest thing the government could do is to conclude a bilateral investment treaty with the United States. In our survey last year, a vast majority forecast that a bilateral investment treaty would go a long way toward resolving many of the problems I mentioned earlier.


In particular, the treaty includes what is known as a negative list of industries where foreign investment is excluded. This marks a turnaround from the current system, which excludes everything unless it's on the "positive list". However, there have been 34 rounds of discussions already, and it seems the negative list of excluded industries is still very, very long, so the benefits of the treaty, to Chinese consumers, workers and companies as well as foreign companies, is still some way off.


In addition to the issue of a level-playing field, it is noted that unclear regulation is also a significant problem that faces businesses here in China. What steps do you think should be taken to overcome these issues?


That's a very good question, Richard, and an important one. If realized, greater transparency, predictability and fairness of the regulatory environment was cited by more than half of the respondents to our survey as a potentially very or extremely significant driver of new investment. As you can see from several questions in our survey, the actual laws and policies might be OK, but the enforcement is lacking, and that's often a legal issue. China ranks 80 out of 113 countries for regulatory enforcement in the 2016 Rule of Law Index, just ahead of Uzbekistan. For an economy as large as China's that wants to modernize, this is a big hindrance for private companies. So we hope the government can look at how its laws and policies are enforced, not just at the national level but also at the local level, where regulatory interpretation can vary widely.

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From your previous comments on China liberalizing or privatizing the economy, you have suggested that reforms have only being designed to make state firms more competitive. Do you view this as a masked attempt by Beijing to maneuver state firms whilst attempting to hold face?


Increasing protectionism was cited as the No. 3 challenge - it wasn't even in the top five last year, so clearly this is an issue of expanding significance. So I go back to that issue of promoting development through open investment. State-owned companies control something like a third of the economy, especially in primary industries and financial services, and private companies in monopoly situations control other important sectors, but we have to ask: does this really benefit the broader population or only specific interests? The insurance industry, for example, isn't developing very quickly here simply because it doesn't have the competitive pressures that would force it to produce better products. The result is companies and individuals have fewer and poorer choices when it comes to insurance.


From comments made at the World Economic Forum, certain hints have been dropped that suggest China has preplanned measures in the event the new administration attempts to impose restrictions on trade and investment with respect to China, more specifically by Lester Ross. He has also hinted that anti-dumping investigations are on the agenda, prompting a potential backlash from Beijing. What precautions are on the cards in order to protect American investments in China?


I always encourage companies to stay engaged, that is with the regulators here, their local partners as well as with their political representatives in the United States. It's not clear exactly how this year is going to pan out, so those discussions and connections are going to be even more important as events unfold.


One of China's most significant headline geo-economic projects is the "One Belt, One Road" initiative, over the last several years it has come to fruition in terms of creating systematic linkages between China and involved states. How does the USA business community view these developments and what does it say to you about China's rapidly developing sphere of economic influence?


It's certainly a bold strategic plan, and is certainly attracting interest from some of our members. In June last year we took a delegation of our members to Xinjiang to witness some of the initiatives that were already under way, and Tianjin is obviously another base of opportunities, but it's still early days.


Obviously the initiative is more targeted at alleviating some of China's overcapacity problems, but American business can contribute through areas such as financing, specialist equipment provision and various consulting services in the many countries that will strengthen their ties to China through infrastructure. But as I say, it's still early days so we'll have to see exactly what kind of opportunities emerge.


What do you think will be the impact to US companies, if Trump administration pulls America out of the TPP?


The Trans-Pacific Partnership would have been an excellent demonstration of United States' continuing leadership in raising the bar of quality of international trade agreements. It's very disappointing to see that the TPP has been abandoned for the moment, but we still hope that it can be revived in the future, unless an equally high-quality alternative emerges in the meantime.


Has the global media over-hyped talk of a potential "trade war", between the USA and the PRC?


From our survey, it's clear that our members are expecting some significant developments in the US-China relationship, but exactly what is impossible to forecast and it will probably be much more complicated than a simple trade war. So perhaps the focus on a trade war is a little misguided, but the important point is still true that the risks of increased frictions between the US and China are high.


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