What Else Does the Economic Downturn Have to Do with Protectionism in China?

In their annual survey, the US-China Business Council's (USCBC) finds that US companies' China outlook since 2008 remains largely unchanged. This is probably because 84% of the companies China operations remain profitable, and 76% have experienced revenue growth. Of the top 10 business issues in China, there is one new problem, the economic downturns impact on China operations, and one problem has deteriorated since 2008, protectionism. The increase in protectionist worries goes in hand with the economic downturn, but the reality of the situation does not (yet) justify the fears of US companies in China.

The obvious problem that the downturn has led to is in a reduction in sales in China, further investment in China, and employment of staff in China. The not so obvious problem, and the one that is raising cries of “Protectionism!” is the perception that FIEs are being excluded under the “buy local” requirements in much of China's $600 billion stimulus package. The worry is that the products of FIEs will not be included as “domestic” under the provisions of these rules. The facts just don't bear this fear out, though.

FIEs are domestic Chinese companies, so their products should be domestic. The report's take on the legal issue:

[T]he Ministry of Commerce and NDRC have publicly stated that products manufactured in China by FIEs should be considered “domestic.” This position was confirmed by Vice Premier Wang Qishan in the outcomes issued jointly by the United States and China following the July 2009 meeting of the Strategic and Economic Dialogue.

Sounds open and shut, but the optics aren't there for the US companies.

The problem seems to be in what US companies aren't perceiving any stimulus benefit, what companies are optimistic about the stimulus, and what companies have received a stimulus benefit. Companies in the consumer goods, IT, payroll, services, logistics industries have not reported any benefit from the stimulus. Pharmaceutical companies are optimistic about “capacity-building projects in the stimulus plan and the healthcare reform plan,” but these have yet to be implemented. Companies in the heavy equipment, infrastructure, high-tech component, and telecom industries have reported benefits from the stimulus package.

Frankly, it sounds like some companies are disappointed by their China performance and are looking for a scapegoat. There have been complaints about this before in regards to the “domestic” policies in the financial incentives given for boosting indigenous innovation, even though companies were unable to point to a single clear instance of discrimination.

Much ado about nothing? Time, I suppose, bears all out, but for now, looks like it.