Google's decision signals change in Western businesses' approach to China

By John Pomfret
Washington Post Staff Writer
Wednesday, March 24, 2010; A01

BEIJING -- The showdown between Google and the world's most populous country marks a turning point in one of the great alliances of the late 20th century -- the bond between Western capitalists and Beijing's authoritarian system.

After Google's audacious decision to confront China over the issue of censorship, officials here insisted Tuesday that the Internet giant's case was an isolated one and would not affect China's opening to the West or its market-oriented reforms.

But Western businesspeople said the episode had underscored a broader sea change in how U.S. and European companies deal with the government here. More specifically, they said, Western businesses have begun to push back openly against China.

In announcing Monday that it would stop censoring results on its Chinese site, Google acknowledged that it was "well aware" that the Beijing government "could at any time block access to our services." But the company also made clear that such an outcome would be better than having to censor itself any longer.

Although China has not yet taken any draconian action against Google or its employees, it has started censoring results for sensitive searches in China on Google's Hong Kong-based Web site, where its users on the mainland have been redirected. (Hong Kong users could see uncensored results.)

There were also signs that China wants to punish Google in other ways. On Tuesday, a Hong Kong-based Internet company, TOM Online, announced that it had stopped using Google's search tools. TOM is owned by the family of Li Ka-shing, Hong Kong's richest man and a supporter of the Communist government. Meanwhile, analysts said two major state-owned mobile phone companies on the mainland, China Mobile, with 500 million users, and China Unicom, China's second biggest, were rethinking deals with Google.

Analysts say that China's willingness to stand up to Western firms is a consequence of its meteoric economic rise. The government doesn't need Westerners' investment as much as it once did, and it is increasingly bald-faced about its desire to acquire their technology.

"The Google affair is both catalyst and evidence of change," said Arthur Kroeber, managing director of Dragonomics, a Beijing-based economics firm. "We are at a turning point. It had been very, very unusual for foreign business to say anything too negative about China because the opportunities here were too large."

Indeed, for decades, Western businesses have been Beijing's closest friends. When Congress railed against China over human rights issues and threatened to revoke its most-favored-nation trading status in the 1990s, the American Chamber of Commerce in China and other groups flocked to Washington to state Beijing's case. The last major Western company to openly confront the Chinese government was Levi Strauss, which withdrew from the country over what it called China's "pervasive violation of human rights."

But more recently, Western businesses have begun to voice concerns about their treatment in China. The European Chamber of Commerce has issued reports over the past several years that say China's business environment is deteriorating. One report accused China of embracing "economic nationalism"; another said China had effectively halted economic reform.

"In 2009, China was one of only two major growth markets in the world, but the door here isn't opening wider, it's narrowing," said the chamber's president, Joerg Wuttke. "China talks about opening up, but in fact local implementation is not just really bad, it's worsening."

Even the American Chamber of Commerce in China, which has long been a friendly venue for the Chinese government, has gotten into the act. On Monday, it issued a report that said business confidence among 203 members surveyed was at its lowest point since polling began four years ago.

And in December, the U.S. Chamber of Commerce in Washington took the unprecedented step of organizing a joint letter, signed by 33 business associations from around the world, criticizing China for a plan that would force foreign companies to hand over their prized intellectual property and trademarks to China if they wanted to keep selling goods here.

Joe Studwell, an author who has followed the perils for Western businesses in China for more than a decade, said the change in tone was part of a "new realism" toward China.

Businesses now understand, he said, that the "unspoken arrangement with China is coming unstuck." China is not opening its markets, nor is it allowing its currency to increase in value, as many had assumed it would.

Relations between China and world's business leaders, however, are still strong. Among the Fortune 500 companies, 480 have investments in China. There are 660,000 foreign companies represented in the country. Foreign direct investment, after wavering last year during the global financial crisis, seems to have rebounded, with an estimated $7 billion to $8 billion a month flowing into China. With its 8 percent growth rate in 2009 and more of the same predicted for this year, China remains one of the only bright spots in the relatively dim firmament of global business today.

And there are still Western business leaders who put a positive spin on the relationship.

Michael Barbalas, president of the American Chamber of Commerce in Beijing, said his group's expanding profile reflects not a souring on China but a realization that political changes have mandated a more boisterous approach.

Ten years ago, for example, China allowed comments on very few, if any, of its laws. Last year it allowed foreign interests to comment on 300 pieces of legislation, he said.

"As China opens up these laws for comment, we found a lot of special interests speaking out," Barbalas said. "So we had to up our game."

Chinese officials insist the Google case is unrelated to the broader business climate here. After the Internet giant made its announcement Monday, Microsoft indicated that it would continue to "comply with the laws in every country in which we operate," disappointing human rights advocates.

In fact, no one expects another Google to confront China soon. But the Internet giant's willingness to do so is a sign of the times.

Meanwhile, how China treats Google going forward is widely viewed here as a test case. The government could force the firm out of China entirely, or it could allow Google to be a symbol of a new kind of relationship with Western companies -- one in which foreigners can do business here without feeling compelled to kowtow to the political system. Many analysts view the latter scenario as highly unlikely.

"Tactically, yelling at Google is unwise," said Rebecca MacKinnon, a visiting fellow at Princeton University's Center for Technology Policy. But "how they handle Google is either going to contribute to reassuring foreign companies that you can do business in a rational manner or to convincing them the regulatory environment is so politicized that you have to prove your loyalty."

"If I were China on this case, I would declare victory," she added, "and then walk away."

Staff writer Ellen Nakashima in Washington contributed to this report.

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