Despite low expectations Xi Jinping and President Obama covered several key issues crucial to U.S. business leaders
In late September, President Xi Jinping made his first official State visit to the United States. Due to the hyped tension between the two countries in the days before the visit, expectations were low. In fact, some U.S. media outlets speculated that Xi would cancel his visit days before it was supposed to take place, due to U.S. threats of sanctions against Chinese businesses and individuals involved in alleged cyber espionage.
With expectations set so low, it is a relief that both sides agreed after the visit that it produced “better than expected” results. On cyber-security, both sides agreed that “neither country’s government will conduct or knowingly support” cyber espionage. The two leaders also agreed to maintain regular and timely communication on cyber-security cooperation, promote norms of behavior and establish a high-level joint dialogue mechanism to fight cyber crime. The two governments made major headway on climate change, with China announcing plans to start its “national emission trading system” in 2017.
The negotiations of the Bilateral Investment Treaty (BIT) continued with no concrete outcomes thus far, although the leaders agreed to, in President Xi’s words, “vigorously push forward” the negotiation. On security issues, the two governments reached a number of military-to-military agreements to better govern behavior during encounters in the air and at sea. However, the two leaders made little progress on the South China Sea issue, each merely reiterating their stance in their remarks.
To a certain extent, both leaders achieved their goals for the visit. For the United States, reaching agreements on cyber espionage and climate change helped alleviate domestic pressure on President Obama to stand up to China. On China’s part, President Xi got to demonstrate his diplomatic skills and global role to his domestic audience with carefully staged photographs, communications and messaging tactics.
Each side went to impressive lengths to meet the other’s political goals during the visit. Despite significant disagreements on many issues, the visit showed how important it is to American and Chinese leaders to preserve a working, business-like relationship that supports trade and investment growth. Parsing the explicit agreements and President Xi’s implicit messages throughout the visit, there are two key takeaways for American business in China: The cyber-security agreement is a hopeful development in the battle against online economic espionage, and Xi consistently conveyed that China is “open for business,” while implying that China expects American companies to increasingly partner with Chinese companies.
In general, as the U.S.-China relationship enters this stage of the “new normal,” American businesses should not expect radical advances in the bilateral relationship from state visits. Staying silent on the most controversial issues, such as human rights, the two countries will continue to be competitors and partners on various issues for a long time.
A turning pointThrough careful management and behind-the-scenes diplomacy, both sides were able to reach a potential turning point on the critical issue of cyber-security, which has been toxic to the relationship and had even threatened to derail the state visit.
Together, on September 25, the U.S. and China publicly denounced economic cyber theft of commercial secrets for the first time and went a step further to establish a cyber-security dialogue mechanism. This platform for high-level dialogue is a positive first step and shows that the two sides are willing to work together. It hopefully will prevent misunderstandings and allow the two countries to address grievances privately.
No one expects the cyber-security issue to be resolved by these developments, but China’s statement against hacking is a positive sign for American businesses. Another cheering development is that, according to a published report, just before Xi’s visit the Chinese government quietly arrested at least two hacking suspects identified by U.S. intelligence and law enforcement agencies. If true, this is a concrete sign that the U.S. and China can work together to eliminate the industrial hacking that is estimated to cost U.S. companies tens of billions of dollars each year.
News reports have revealed that the U.S. was able to leverage the State visit and potential sanctions against Chinese hackers to encourage China to take action on cyber theft. With public sanctions threatening to put a black mark on the state visit, China dispatched Meng Jianzhu for a flurry of last-minute meetings with U.S. security and intelligence officials. Meng later said that both sides had reached “an important consensus on combating cyber crimes,” showing that, especially behind closed doors, the U.S. can still attempt to protect American business interests through smart diplomacy.
However, whether or not American businesses vulnerable to hacking will have more recourse in the future depends upon whether China backs its cyber-security commitments with actions.
U.S. cyber-security firm, CrowdStrike, has reported a number of intrusions from hackers, who the firm affiliated with the Chinese government, the first of which took place on September 26. CrowdStrike reports that several of the companies attacked over the following weeks are in the technology or pharmaceuticals sectors, where the primary benefit sought seems to be theft of intellectual property. There appears to be, at best, a significant time delay between China’s stated agreement and its implementation of corresponding actions or, at worst, no plans for implementation at all.
The way forward
The ability of American and Chinese leaders to diplomatically work toward resolving cyber-security disputes, in rhetoric at least, is a noteworthy sign for the future landscape for foreign business in China. Prior to the state visit, American business groups and industry associations lobbied hard for President Obama and trade representatives to address unfair business practices in China.
It is clear that the U.S. side heard them. Commerce Secretary Penny Pritzker told Mr. Xi that China’s technology requirements on foreign companies “certainly have a negative impact on American firms and create an unlevel playing field for foreign companies… They also hurt Chinese businesses and make it harder for us to unlock mutually beneficial commercial opportunities.” There was also likely a host of private discussions on market access, legal transparency and other top-of-mind issues for businesses.
On his part, President Xi listened to these concerns without giving any major concessions or promises. Even more revealing than his assurances to businesses was the obvious priority he placed on spending time with business leaders: touching down in Washington State instead of Washington, D.C., was no cartographic error. Xi’s first stop in the hub of American tech industry, and those he chose to meet while there, made his objectives clear. His visit emphasized that China does value American companies, as long as they contribute to China and adapt to written and unwritten Chinese laws.
The implied message throughout his visit was that American companies are most welcome to work in China when they partner with Chinese companies. Bringing with him the titans of China’s tech industry, President Xi played a role in meetings with American tech industry leaders closer to that of matchmaker than politician. Deals that resulted include cooperation agreements between Bill Gates’ TerraPower and the China National Nuclear Corporation, between Microsoft and Baidu, and between Microsoft and Xiaomi. Boeing also announced a US$38 billion deal to sell aircrafts to China. Other agreements announced during the visit include a separate MOU signed between China’s National Development and Reform Commission (NDRC) and the Boeing Company, a cooperation agreement signed by China’s State Council Information Office with the National Geographic Channel, and a cooperation agreement signed by China’s State Council Information Office with The Walt Disney Company.
The renewed emphasis on partnership combined with President Xi’s obvious emphasis on the value of American business presents a mixed picture. Though not all companies will be comfortable with the “new normal” of strongly encouraged partnership, many others are finding the market well worth the effort. The American Chamber of Commerce in Shanghai’s 2015 China Business Report found that responding companies were “overwhelmingly profitable” and optimistic about their five year outlook.
At the same time, U.S. businesses continue to have concerns about an unclear regulatory regime, difficulty in enforcing contracts, tax administration, difficulty
obtaining required licenses, and the increasing impact of laws and regulations favoring domestic companies. During the visit, both Obama and Xi emphasized their wish to make the BIT a top priority; if negotiations progress, this should improve protections of foreign business in China. Considering the progress made during closed-door negotiations on cyber-security and President Xi’s particular emphasis on business, American businesses should be optimistic that they will be represented in the closed-door BIT negotiations.
Of course, it remains to be seen how effectively the U.S. and China can implement commitments like the cyber-security dialogue mechanism and BIT negotiations. There are many potential weaknesses with even the cyber agreement: it doesn’t include China’s military, which is accused of many hacking attacks, and there are many questions about how strenuously China will enforce its commitments. Even if the aforementioned Washington Post story about China’s arrest of hackers is true, the commitments made during President Xi’s state visit should not be taken at face value.
The way forward for American businesses is to continue pushing for fair treatment at all levels through industry coalitions such as the American Chamber of Commerce in Shanghai, as well as industry associations. Businesses can also continue to make their voices heard by U.S. politicians and officials, ensuring that concerns are raised through diplomatic channels and in critical negotiations such as the ongoing BIT talks. Just as the American and Chinese presidents showcased their ability to provide wins for each other, American businesses must continue to recognize the value that China places on their contributions to the domestic economy and industry development, while pushing for a business climate that will foster new growth.
Yao Zhang and Caitlin Lee are consultants at APCO Worldwide. Zhang focuses on China business and policy environment analysis and advisory while Lee focuses on policy research and business advisory. Blaine Johnson is an intern at the company.