Earlier this week, James Fallows provided a nice three-letter guide to trends in China. The three letters were B-A-D. Beyond the myriad [INSERT COMPASS DIRECTION HERE] China Sea brouhahas, Fallows also mentioned China’s decision to give the boot to U.S. consulting companies such as McKinsey and Boston Consulting Group – specifically, severing any ties between these consulting firms and China’s huge state-owned enterprises. Fallows’ take:
Yes, this is bad. It’s obviously a tit-for-tat in response to last week’s U.S. report that specific, named Chinese military officials had conducted commercial-secrets spying, not plain old fate-of-nations spying, against U.S. industrial firms.
The Chinese are saying: You want to enlist companies in the game of nations? Okay, we’ll target your companies too!
If anything, though, Fallows is underselling the bad news. The Justice Department’s indictment of five Chinese military officers was loud and splashy and perhaps embarrassing for China, but didn’t really matter all that much. None of the Chinese officers were actually going to be arrested or extradited. China could retaliate rhetorically by, say, calling the United States a “mincing rascal,” and other bad words. Short of a Batman-style raid into Shanghai, however, that was gonna be that.
China’s actual tit-for-tat response is more serious. Obviously, it affects real economic transactions — but then again, so does Chinese cyberespionage. More importantly, China is screwing over one of its most potent interest group allies in the United States. One of the ways in which economic interdependence is supposed to promote peace is by fostering interest groups in other countries that have a stake in maintaining a good bilateral economic relationship . Over the past decade or so, U.S. consultants have seen a large market opportunity arise in advising firms based in the People’s Republic of China, as well as advising Western clients interested in doing business there. Not surprisingly, they have been staunch defenders of openness towards Beijing and eager to advise both sides about how best to go about trading with each other (see, for example, here and here). When anxieties about sovereign wealth funds cropped up in the United States, a raft of management and financial consultants defended them against congressional restrictions. If China is willing to cut the McKinseys of the world loose, it suggests that China’s leadership does not believe that these interest groups are useful anymore in altering U.S. foreign policy.
These ties of interdependence matter. I argue in The System Worked that China acted like a responsible stakeholder in the wake of the 2008 financial crisis in no small part because it benefited from its interdependence with the United States. Any action that weakens Sino-American interdependence also weakens the constraints that stop conflicts from spiraling out of control. Yesterday, Tom Friedman made a similar point when he painted an interesting post-Ukraine faultline in the world:
The crisis in Ukraine never threatened a Cold War-like nuclear Armageddon, but it may be the first case of post-post-Cold War brinkmanship, pitting the 21st century versus the 19th. It pits a Chinese/Russian worldview that says we can take advantage of 21st-century globalization whenever we want to enrich ourselves, and we can behave like 19th-century powers whenever we want to take a bite out of a neighbor — versus a view that says, no, sorry, the world of the 21st century is not just interconnected but interdependent and either you play by those rules or you pay a huge price.
It could be that this dust-up eventually settles — Xinhua already issued an editorial urging trust-building between the two countries. Or, it could be that this the start of a wider Chinese government attack on U.S. multinationals. If this is the moment when China decided to start reducing its interdependence with the United States, then that’s a bad, bad sign for the future of the Pacific Rim.
Developing … in a rather disturbing way.