China’s vital internet economy cannot be sacrificed for trade deal

Business, China, Company Strategy, Economics, Environment, Polyolefins, Sustainability, Technology, US

By John Richardson

THE latest stumbling block for the US/China trade talks is the Chinese reluctance to open up its market to foreign cloud computing companies, curb requirements for companies to store data locally and loosen restrictions on the transfer of data overseas.

Many people’s first reaction will be that this is all about the Chinese government wanting to retain political and social control of the online world. Sure, that’s important. But in my view, an equally important if not bigger issue is China retaining sufficient state control of what has become a critical driver of economic growth.

Just think where China would have been if Facebook, Google and YouTube had dominated the local market rather than Tencent, Alibaba and Baidu. Economically, quite literally, light years behind. These local champions have become a major route down which China is travelling as it attempts to escape its middle income trap. The same applies to Huawei, another private company that is in effect also a state champion.

There is a direct link to the petrochemicals world here. If it had not been for the economic growth delivered by locally controlled mobile internet sales, would we have seen the extraordinary growth in Chinese demand for packaging materials made from polymers? No. There has been a big wealth effect from new local jobs and businesses tied to the growth of Alibaba etc.

Without that growth, would we have seen China’s polyethylene (PE) demand nearly double since 2009, delivering major benefits to global cracker-to-PE operator as China has been nowhere close to being able meet its local demand? (Last year, for example, net PE imports rose by 22%). The answer is again a definitive “No”.

There are other factors behind booming PE demand in China, including the one off boost from the heavy restrictions on imports of recycled plastic. But the benefits from the growth in China’s internet-based economy are big.

Weight of Chinese history hangs heavy

In this context, how realistic is it to expect China to agree to the full extent of the US request for IT liberalisation? Not realistic at all, so let’s hope a compromise can be done. Tencent etc. have, as I said, done a lot to boost the Chinese economy to date. But they need to carry on delivering value as the pressures from an ageing population build.

We should also think of the political sensitivity here if China were to accede to everything being asked by the US in the internet and every other space. Would this be seen as colonialism in a new form, including “internet colonialism?” The weight of history hangs heavy in China as of course it does everywhere.

Please don’t misread me here as I am not picking sides. I am instead trying to be objective. Absolutely, there are many, many legitimate concerns about intellectual property rights protection in China and the lack of fair and equal access for foreign companies to many Chinese service and manufacturing sectors.

But I believe it is essential that the US negotiators put themselves in the shoes of their Chinese counterparts by understanding that the demographic challenges faced by China are enormous.  Much of the tone of the US public rhetoric during trade negotiations suggests to me that this is not happening. Let’s hope what is taking place behind closed doors is very different.

I may not have read the relevant documents or the right news reports, so apologies in advance if this is the case. But I have not read anything where the US, in effect, says:

Look, we know you face huge issues here because of the One Child Policy. We know you risk becoming old before you’re rich. Nobody wants this as it will be bad not just for you, but for the rest of the global economy. But please listen to our concerns and let’s get a lasting and solid deal done based on workable compromises.

Do the US negotiators even know the extent of China’s demographic problems or am I doing them a major disservice?

Prepare for no lasting deal

Equally, to what extent have Chinese negotiators placed themselves in the shoes of their US counterparts? The US, too, faces an ageing population, the rise of automation and the loss of many middle income jobs. This will be the subject of a future blog post as I attempt to create fair balance in this debate.

As the FT suggests, China might be prepared to budge on restrictions applied to transferring data overseas as it wants access to overseas markets. But it may continue to insist on limiting the size of data transfers, imposing restrictions on transfer of overseas sensitive and personal data whilst ensuring that Chinese customers agree to the offshoring of their data.

What if China is thinking ahead here of a world where search preferences and “likes” become the property of individuals everywhere? Facebook etc. could end up going the way of Standard Oil as individuals are allowed to charge for their personal data.

At the very least, therefore, China might feel that its citizens should continue to be given the permission to opt out of data being freely transferred to foreign internet companies, ahead of the day when citizens everywhere can monetise their own data. But China would be rightly accused of double standards if it continued to at the same time insist foreign internet companies store data locally.

Let’s hope this week’s talks in Beijing yield a firm framework for a lasting deal and not just one that papers over the cracks. But you must build a scenario for your chemicals company where no such deal is reached this week or at any time.

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