Pacific Money

Playing the Protectionism Game

Despite accusations from Chinese firms trying to gain entry into American markets, Beijing protects its own “strategic sectors.”

Recent weeks have seen three leading Chinese companies run into political and regulatory obstacles in their attempts to expand in the United States market.  The issue, associated partly of course with the U.S. political environment during a campaign year, has been developing gradually but has recently burst into the media spotlight.

The most striking case involves Huawei and ZTE, both Chinese telecoms equipment giants. They found themselves on the wrong side of a strongly negative report from the U.S. Senate House Intelligence Committee October 8th, which expressed concern about their alleged ties to the Chinese government and military, lack of openness and failure to assist the Congressional investigation openly. The consequences for their U.S. operations will be significant and long running. Things became especially heated after the report was released as Huawei labeled the report “China-bashing” and “misguided protectionism.” 

The rhetoric was turned up this last Thursday in a separate dispute by the Tycoon CEO of Sany Group, a company which has ridden China’s real estate and infrastructure boom to become a leading producer and supplier of heavy construction equipment.  Xiang Wenbo, a Sany executive, labeled the Committee on Foreign Investment in the U.S. (CFIUS) and President Obama “petty scoundrels,” while also stating that U.S. regulators “can’t be reasoned with.”  Xiang was furious with Obama’s support of CFIUS’s decision to block a Sany associated wind farm project in Oregon – on grounds that it was too close to a military no-fly zone (where drones are allegedly tested).

Ralls, the Sany affiliate suing CFIUS over the decision, then added Obama’s name to the court case, making Ralls the first Chinese company to sue a U.S. president.  Xiang went on to tout the Ralls case as a symbolic action to safeguard Chinese enterprises and set a precedent for future Chinese companies.

The China National Offshore Oil Corporation (CNOOC), on the other hand, whose gigantic bid to acquire Canadian oil firm Nexen has raised some concern across the globe (Nexen has various international assets – including in the U.S.) is also waiting on a decision from CFIUS.  In Washington, objections have been voiced about a Chinese state enterprise owning U.S. strategic assets (oil) and about the possibility of Nexen’s offshore drilling technology being used in the South China Sea to strengthen China’s territorial claims vis-à-vis various its Southeast Asian neighbors, many of whom are U.S. allies or strategic partners.

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Hence the overall impression is of Chinese firms being “under siege” as they try to grow or gain access to the U.S. market. A sense of discrimination is growing, and the electioneering and China rhetoric emerging from the presidential campaign is only adding to this narrative.

Despite the fiery accusations emanating from the affected Chinese firms though, the situation is not as unbalanced as recent events suggest. The key defense for the United States is on grounds of reciprocity.   China effectively restricts access to several “strategic sectors” (and in practice restricts / hampers foreign involvement in several others). Strategic sectors include defense, electric power and grid, petroleum and petrochemical, telecommunications, coal, civil aviation and shipping.  If the U.S. had such a list, it is clear that Ralls (electric power – wind farm), Huawei, ZTE (telecoms) and CNOOC (petroleum) would not have even tried their market entries.  Thus accusations of protectionism are unlikely to be supported too overtly by Beijing, which fears a comparison with its own policies.