By LI Yifei, Fudan University

Contrary to common arguments, if the Chinese government decides to regulate US MNCs in ways they don’t like, they would never threaten to move elsewhere. Empirical studies found out that most US MNCs in China choose to agree, comply, or compromise. Very few of them ignore or challenge the Chinese government. Obviously, China’s bargaining power puts MNCs at a comparatively disadvantaged position. The scale of opportunities for investment makes China special. However, it is too early to say that Beijing completely gets the control over US MNCs. Two mechanisms balance the power of the Chinese government.

Firstly, and more broadly, globalization generates a push at the institutional level to make all economies in the world in compliance with world trade rules. In order to facilitate international trade within the global framework, rules have to be agreed in advance. Consequently, if Beijing wants to benefit from the global market, it will have to abide by the rules and regulations of the WTO, which are respected by the rest of the world.

Secondly, the bargaining power of the US keeps US MNCs at a much more desirable position. According to the Ministry of Commerce of China, the US is the second biggest export market for China, and consumes 17.5% of all ‘Made in China’ exports. This means that the US has the power to negotiate. On the other hand, according to the US Department of Commerce, China is the third biggest export market for the US, and is responsible for 18.2% of all American exports. In other words, it is necessary for Washington to pressure Beijing for preferential policies.

In 1995, for example, when negative aspects of MNCs, whether it was the corruption cases involving MNCs and government officials, or their use of legal loopholes and tax evasion, received wide media coverage and public discontent with MNCs proliferated. As a result, Beijing abolished previous policies that favored foreign investments in response.

Although MNCs were having a comparatively hard time at this stage, the situation was balanced by China’s desire to enter the WTO and the US’s willingness to support China’s entry. In November 1995, the US developed a ‘road map’ that crystallizes the 28 requirements on the US’s side, many of which are directly linked with US MNC operations in China. Here, the second mechanism dominated the situation, while the first one played a minor role. However, China has embarked on systemic reforms that, with further progress, will create a more predictable business environment for all firms operating in China. China’s compliance with WTO rules will become increasingly voluntary and self-motivated. Thus, the first mechanism will ultimately take up the leading role in facilitating the Sino-US bilateral trade.

1 Source: http://zhs.mofcom.gov.cn/tongji.shtml (in Chinese, accessed on October 13, 2008)

2 Source: http://ita.doc.gov/td/industry/otea/ttp/Top_Trade_Partners.pdf (accessed on October 13, 2008)

3 The turning point was on December 26 1995, when the State Council enacted The Reform and Readjustment of Import Duty Policies, which says ‘customs duties and import-related taxes shall be levied at the statutory rates on all imported equipment and raw and processed materials’.