Leaving China: How Smart is Google?

Michelle Chang, BASC Research Assistant

One month ago, on March 22nd, Google decided to step out of China and end four years of censoring the web for the Chinese government. Thus exited the world’s most powerful Internet company from the world’s most populous country. While only maintaining some R&D and advertising activities in China, Google shifted mainland Chinese users from “google.cn” to “google.com.hk”. The company kept to an earlier statement it made in January that it would stop filtering information from Chinese Internet users.

Over the past four years, Google had been cooperating with the Chinese government to filter out sensitive political information and pornography from the web. While attracting intense criticism for compromising freedom of expression, Google argued that the benefits of allowing more of the Chinese population access to Internet information outweighed the costs. However, in mid-December 2009, Google started to detect cyber attacks from China on its corporate infrastructure. While the attacks were initially traced to a small vocational school, Google insisted that the level of sophistication of the attacks made it almost certain that the attacks were overseen by the government and the military. Furthermore, the attacks were directed at the Gmail accounts of Chinese human rights activists.

The cyber attacks exceeded the limit of how much Google was willing to compromise in order to stay in China. In a statement issued in January 2010, Google took a firm stance against censorship of information and refused to comply with the Chinese government. Over the following months, bitter verbal conflicts took place between Google and the Chinese government, and there was much speculation and debate about whether Google would eventually forsake the biggest Internet market in the world in defense of freedom. And in March, Google irreversibly decided to end its operations in mainland China.

To most people, leaving a country with one-fifth of the world’s population seems like a huge sacrifice on Google’s part. In fact, however, Google will suffer little commercial loss from the pullout. Google’s annual revenue in China is estimated at $300 million to $600 million, only a fraction of the company’s $24 billion annual sales worldwide. Instead, the biggest victims are likely to be Chinese companies. Two of China’s largest mobile companies, China Mobile and China Unicom, were forced to scrap lucrative deals with Google under political pressure. Moreover, many small startup companies who used to make their living through advertising opportunities on Google now have to find other alternatives.

Not only does Google not suffer much commercial loss from exiting China, its decision could actually be a smart business strategy in the short run. Indeed, over the past few years, Google’s compliance with the Chinese government attracted much unwanted criticism from the West. By taking a stand against an authoritarian government and defending freedom of expression, Google manages to evoke a positive corporate image in many people’s minds.

However, several problems await Google in the long run. First of all, the relationship between Google and the Chinese government has risen to such a point of hostility that it is now virtually impossible for Google to re-enter the mainland Chinese market. Secondly, by taking a stance against censorship, Google sets a high standard for itself that it might not always be able to meet, thereby opening itself up to future criticism. Indeed, if it refuses to censor information in China, how should it conduct itself in other countries that also allow censorship, such as England? In the future, Google might face a lose-lose situation in which its only options are to compromise its corporate image or forsake more lucrative markets.

While leaving China has relieved much political and social pressure from Google, the future looks rather ambivalent for the Internet giant.

Photo:

http://www.flickr.com/photos/antonis/ / CC BY-NC-SA 2.0

Letting China See the Light

Robert Nelson, BASC Research Assistant

This has been a week for deft diplomacy. Though the new Strategic Arms Reduction Treaty has been grabbing all the headlines in foreign policy circles, it is Treasury Secretary Geithner’s skillful handling of the Chinese currency crisis that deserves praise.

It seems all but certain that China will revalue its currency upward, and even let it float to some degree. Geithner pulled off his coup by keeping the whole problem at a distance and letting the situation develop under its own momentum. It would have been foolish for the Secretary to directly threaten China with a tariff or declare it a “currency manipulator.” Wisely, he let Congress do the dirty work. Meanwhile he constantly insisted that China’s currency policy was its choice, not his. By handling it in this way he managed to keep a stick on the table in the form of Congress, while also keeping an escape route open for China that would allow it to save face. Still, a question arises. Did Geithner force China into taking a position that will cause it pain, or did he accomplish the often all too difficult task of forcing a country to do something that is in its benefit?

It appears that he helped the Chinese help themselves. China’s policy of pegging the yuan to the dollar has become a bigger and bigger burden for the country to bear. Already the government spends 9.2 percent of its economic output on keeping the yuan and the dollar in line. If the dollar depreciates any further, this will become a much more outrageous expense.

Allowing the yuan to increase in value will also let China’s central bank more effectively respond to economic slowdowns, by giving it room to cut interest rates. In addition, letting the currency float, even a little, will allow the government to better respond to inflation. China’s inflation rate increased continually before the economic collapse, reaching a peak in 2009 of almost 6 percent. If China returns to growing anywhere near the rate that it did before the recession—and it seems likely that it will—the the government must be able to raise interest rates in order to cool down the economy. An increase in the interest rate will also keep high-risk speculative investments out of China.

Those in China who are skeptical of yen revaluation worry about the effects of an increase on Chinese exports. They argue that China’s economy is largely based on heavy industry and that an increase in the rate will make Chinese goods less competitive overseas. This argument ignores the fact that China’s economy is dependent on heavy industry and exports because of its low exchange rate. If the yuan were allowed to rise, the purchasing power of the Chinese consumer would also increase. This would result in a Chinese economy that is less dependent on demand from foreigners and a shift from heavy industry to the service sector.

Ironically, it appears that for the U.S., Geithner’s win will be a victory without spoils. The increase in the yuan is bound to be small and not enough to vastly decrease America’s trade deficit with China. The increase in the yuan will also not dramatically impact the cost of doing business in China, because while yuan revaluation would augment the already increasing price of labor, China’s investments in infrastructure have dramatically reduced communication and transportation costs. This means that any increase in wages will largely be offset. Nonetheless, if China continues to let its currency rise, U.S. industry will benefit in the long term.

Despite the lack of an obvious short-term gain for American industry, Geithner’s victory achieved the much more important goal of avoiding a trade war. A tariff on Chinese imports would likely not have resulted in China caving and changing its currency policy. Rather, the Chinese would have become more nationalistic and countered with a tariff of its own. We saw this tit-for-tat reaction when the U.S. imposed a tariff on Chinese tires last year.

Some may argue that Geithner does not deserve credit for China’s impending change in policy. They believe that China would have been forced to change on its own, if not out of logic, then due to pressure from other developing countries like India and Brazil who have been hurt by China’s devaluation policy. Essentially, they believe Geithner did nothing, but that’s exactly why he deserves praise. He was under immense pressure domestically to “get tough” with China, but he wisely saw that reality would force China to adjust its currency and that a bombastic U.S. Treasury Secretary would just put an arrow in the quiver of the Chinese industrialists who oppose revaluation. By holding firm, Geithner has managed to secure a deal that will benefit the United States, China, and the world.

Taiwan-China Relations: Debates over the Economic Cooperation Framework Agreement (ECFA)

Michael Chang, BASC Research Assistant

Since the ascension of the Kuomintang (KMT) and President Ma Ying-jeou into power in 2008, efforts to restore cross-strait relations in transportation, commerce and communications have been the subject of negotiations between the Communist Party of China (CPC) and the KMT. The Economic Cooperation Framework Agreement (ECFA), a limited free trade agreement between the two entities that has yet to be signed, marks another chapter in the development of Chinese-Taiwanese relations. Propelled by the global financial crisis and steep declines in economic growth, President Ma has actively pushed for the passage of the ECFA as the best option for reviving the Taiwanese economy. Moreover, in the face of increased bilateral free trade agreements between ASEAN nations and Japan, Korea, and China, Taiwan seeks to remain competitive in the global market. On the other hand, through the ECFA, China strives to develop a closer economic relationship with its Taiwan compatriots while enhancing its international reputation as a responsible economic player in the region.

The limited free trade agreement is not without controversy, particularly in Taiwan, where it touches on the country’s most volatile political issue: unification with mainland China versus political sovereignty. This issue is reflected in Taiwanese partisan politics. While the KMT supports eventual unification with the mainland through the “One China Principle”—which stipulates that the PRC and Taiwan are one unified country and that the ROC is its legitimate government--the party has moderated its position by advocating the status quo. On the other hand, its opposition party, the Democratic Progressive Party (DPP) favors a distinct Taiwanese identity and independence from China.

Debate about the ECFA takes place within this larger partisan debate about Taiwanese sovereignty. The DPP argues that the ECFA is a cover for unification with mainland China. Moreover, it argues for the negative impacts the agreement may have on the Taiwanese economy. Local businesses and workers may be harmed by the reduction of manufacturing jobs and capital outflow and brain drain of management and expertise brought on by the ECFA. The opposition party also fears that Taiwan may lose its sovereignty and be relegated to the same political status as Hong Kong and Macau.

Interestingly, the ECFA does not enjoy popular support among Taiwanese. On March 22, opinion polls published in the China Times, a pro-KMT establishment, revealed that less than 43 percent of people said they approved of the KMT’s plan to sign the ECFA with nearly 34 percent opposed and 24 percent unsure. Similarly, a DPP survey found that around 35 percent approved of passing the ECFA with a 45.8 percent disapproval rating. In addition, on May 17, 2009, a mass rally of approximately 600,000 demonstrators organized by the DPP demanded a national referendum about the ECFA, which was quickly rejected by the Ma administration and the KMT as unnecessary. Given this shaky support, the KMT and President Ma need to face the inconvenient reality that unless the administration can persuade the Taiwanese people of the ECFA’s necessity and ensure the political independence, the passage of the ECFA will be seen as illegitimate.

While President Ma has continuously pushed for the passage of the ECFA, it has often been vague about the actual content of the agreement. Moreover, its refusal of the nationwide referendum and open political debate with the opposition party may present the government with a potential legitimacy problem. Although the KMT and Ma argue that the ECFA is purely economic and would not touch on Taiwan’s autonomy, it refuses to openly debate the issue with the opposition party. Economic benefits can be cited; however, when a policy runs the risk of eroding Taiwanese political sovereignty, it will be fiercely challenged in Taiwan. A policy debate, which would better inform the general Taiwanese public, would be of utmost importance given the delicate political nature of the ECFA and its implications for Taiwanese economic and political sovereignty.

Given the precarious nature of the cross-strait problem since 1949, measures need to be taken to address the improved relations and undeniable economic ties between China and Taiwan—and while the ECFA may or may not allow Taiwan to remain globally competitive, it represents an attempt to address these important issues.