By John Pomfret
Washington Post Staff Writer
Wednesday, January 12, 2011; 12:04 AM
When General Electric approached the U.S. Export-Import Bank in 2009 wanting to sell 150 locomotives for $477 million to Pakistan, there was a sense of futility. GE had already lost an earlier bid to a Chinese firm. Why would Pakistan buy American-made locomotives this time?
After all, China was a powerful competitor that routinely offered low-cost financing - below-market interest rates, easy repayment terms - that cut tens of millions of dollars off the bottom line of its international deals.
But in a case that underscores a significant shift in how the United States and the rest of the developed world are dealing with the challenge of China's economic might, the U.S. Ex-Im Bank decided to fight back. In February of last year, U.S. Ex-Im informed Pakistan's Ministry of Railways that it would take the unprecedented step of matching China's below-market-rate financing terms. And on Dec. 9, the executive committee of Pakistan's National Economic Council approved the purchase of the locomotives. While the case remains caught up in Pakistan's famously Byzantine court system, thanks to a lawsuit brought by a Chinese-backed plaintiff, the Ex-Im decision underscores an evolving new view on China.
"There's a new willingness to take on China, to compete toe-to-toe with China on financial terms," said Fred Hochberg, the chairman of the Ex-Im Bank. "This is a policy change that we will compete with anyone who's not compliant."
China's president, Hu Jintao, will travel to the United States next week for his second and probably last summit with President Obama. Behind the visit, with the pomp of a 21-gun salute and a state dinner, the relationship between the United States and China is undergoing a sea change.
The consensus about China formed during the Clinton administration, that as long as the United States was patient with China it would ultimately adopt Western political values and business practices, is "crumbling," said Daniel Rosen, a longtime China specialist and principal at the Rhodium Group, a New York-based consultancy.
What's replacing it is a new willingness to challenge China - in Congress, within the federal bureaucracy and in business circles - as more and more officials and executives draw the conclusion that Beijing, emboldened by its success at riding out the global financial crisis, is not interested in playing by Western rules.
A new Defense authorization law, signed by Obama on Friday, contains a provision banning Defense Department purchases of solar panels from countries that haven't agreed to open up government procurement to all competitors. The provision was written to target China, its authors said, because China has failed to sign the agreement. In the past, administration officials said, the federal government would have lobbied to strike the provision, fearing a backlash from Beijing. Not anymore.
The United States is not alone. With China in mind, Japan's Bank for International Cooperation changed its rules late last year, giving it more flexibility to finance loans for Japanese companies all over the world. Faced with heavy competition from Chinese firms in Africa, Brazil has sought U.S. help to establish its own export-import bank. And France is worried about China's challenge to its high-speed rail industry; French officials have aired the possibility of encouraging a merger of competing European firms to confront Chinese competition.
"The political resistance to brash tactics which would imperil the delicate management of the China relationship has collapsed," said Rosen.
Instead, Rosen said, he sees Western and other major countries employing what is basically an industrial policy to confront China. Take the Pakistani case. "By choosing to offer potentially costly concessionary economic terms on financing," he said, "the U.S. is saying that this industry has to be a winner for the U.S. We may not call it industrial policy, but it is."
Hochberg contests the idea that the United States is embracing an industrial policy. "We are not picking winners or losers," he said. The United States is simply responding to unfair competition, he said, or otherwise Chinese firms are going to snap up contracts all over the world.
China's arrival on the stage of global business has been swift. A decade ago, China's firms had only barely begun to operate overseas. Now telecommunications giants such as Huawei, dam builders such as Sinohydro and mining behemoths such as China MinMetals are involved in tens of billions of dollars worth of deals across the globe.
Many of those deals are powered by below-market-rate financing courtesy of the Export-Import Bank of China. Asked to comment about its practices, a spokesman at the state-run bank in Beijing said, "It's not convenient to answer questions, especially any questions about interest rates." He declined to give his name.
Another key to China's success is its prowess at patching together contracts that combine sales and aid. The deal China offered Pakistan was simple: You buy our locomotives and we will build you a railroad. In Tanzania, a Chinese telecom company and its government offered another one - you buy our gear and as collateral you put up your sovereign fishing rights. Such tactics - phones for fish - are beyond what U.S. companies and the government can match.
For one, U.S. foreign aid is run out of the State Department and is supposed to serve diplomatic or strategic goals. But in China, the Ministry of Commerce dispenses those funds and its purpose is simple: making money for China.
Ian Bremmer, the president of Eurasia Group, a Washington-based political risk consultancy, calls China's practices "state capitalism" and says they amount to a unique challenge to the Western way of business.
For decades, the guarantor of that way of business has been the Organization for Economic Co-operation and Development. Made up of the world's richest countries, the OECD has banned competitive financing as a tool of trade.
But the OECD was formed 50 years ago when, as Hochberg said, "no one anticipated large industrial powers would arise outside the OECD. Those days are gone."
GE first got an inkling that there was hope of winning the deal when Pakistani rail officials approached them and said they preferred GE's locomotives to China's, based on their experiences with previously purchased Chinese equipment.
In February, the U.S. Ex-Im Bank, after securing approval from the departments of State and Treasury, informed the OECD that it was going to compete with China's terms for the Pakistani deal. In recognition of the need to be creative when it came to confronting China, the OECD did not oppose the move. Instead of fees of up to 21 percent of the contract, the United States said it would charge Pakistan 8 percent. Repayment was stretched from 10 years to 12.
China lobbied heavily against the deal. In December, Premier Wen Jiabao traveled to Pakistan and the locomotives were a key topic in his discussions, government sources said. That prompted Secretary of Commerce Gary Locke to write to Pakistan's president and prime minister requesting that Pakistan ensure that the bid was awarded in a transparent manner.
In a statement, GE thanked the administration, saying the financing created "a level playing field for U.S. companies to compete and" would save and even create new jobs at its plant in Erie, Pa.
For Hochberg, the lesson for American firms is clear: "Don't throw in the towel. Sharpen your pencils. And don't be scared of China."