Once upon a time, China appeared to be a sure thing for multinationals looking to tap into an emerging market. Now, political and economic uncertainty cloud the picture. The viability of state-owned enterprises has been called into question and it’s becoming less clear how China will weather an apparent slowdown. China’s manufacturing has contracted for an 11th straight month and may post its first below 8% GDP growth since 1999.
But even if China emerges just fine, that doesn’t necessarily mean prosperity for potential business partners. “Just because China has extraordinary growth doesn’t mean you’re going to benefit from that growth,” said Ian Bremmer, president of Eurasia Group. “First of all, to what extent do we have competitors in China that are likely preferenced by Chinese government officials? Are they serious players or not? Can they become serious players quickly or not?”
Bremmer is a political scientist who specializes in political risk and states in transition. In his most recent book, “Every Nation For Itself,” Bremmer gained notoriety for his concept of the “G-Zero world” where the traditional democratic, free market economies are no longer able to set the international agenda. In an interview with Quartz, Bremmer says China’s main question now for foreign investment is what’s in it for China.
Edited excerpts:
Quartz: You recently said, “Geoeconomics drives geopolitics as much as vice-versa.” Can you expand upon what you meant by that?
Ian Bremmer: This is part of the challenge that the United States has. If you look around the world, our projection of how we are and the way we engage with the rest of the world tends to be more oriented to diplomacy, statecraft [how a nation runs its affairs], and defense.
Increasingly, the challenges to the United States and to the world are economic and they are about economic statecraft. They’re about state capitalism. They’re about countries that do not follow American rules, they don’t follow American norms, they’re not dominated by the private sector and they pose challenges for the Americans that have economic interests around the world.
There is no desire for companies to work closely with the United States government on this stuff. They want the US government out of their business. They want less regulation. You can’t mention the words “industrial policy” or else you sound like a socialist.
The other challenge is that the US government is not set up well to do this stuff. The State Department has all of these incredibly great people but they’re not from the private sector.
Hillary Clinton gave a fantastic speech back in October talking about how important this [economic statecraft] is. There’s an analytic recognition that we need to get better at this but the structural capacity to do it is another thing.
Quartz: Do you think there is a way for the US government to encourage the private sector to work to more closely with them?
Ian Bremmer: There is this challenge but I also believe that Western multinationals increasingly see themselves as under threat from state capitalism and from governments that will promote corporations—both state-owned corporations and privately owned national champions that are directly competing with them for market access. These corporations will see that they need to cooperate across their sectors with competitors and they need to work more closely with the US government. So even if the US government has a disadvantage to its setup, the structure of the global economy and the states who are in it are driving the US and US industry to be better at this.
Quartz: You believe China’s wealth has to shift from large state-run companies to households. So Chinese consumers and their increased buying power need to fuel domestically manufactured products. What is the balance between relying on a consumer for economic viability and the state’s hesitation over relinquishing the existing system?
Ian Bremmer: It is a big question and it’s become more complicated because there’s a third factor. If it was just state capitalism versus the consumer, you could see them [the government] being pushed to move more toward the consumer over time, but the biggest thing would be, how do you deal with the government officials who will lose? They’ll lose political control. They’ll lose economic control. They’ll be forced to become more efficient and the economy moves more into consumption.
It’s actually more challenging than that. The reason it’s more challenging is because post-2008 you have this massive financial crisis and suddenly the third piece of this Chinese economy, which is the exported piece—our ability to consume product—has been hit dramatically. If you talk to Chinese officials, across the board, they are skeptical that the developed world is going to be able to return to anything like previous levels of growth at this time.
Therefore, Chinese government is incented to double down on the stakes and they’re also incented to double down on the stakes because in 2008, the reality is there wasn’t a global financial crisis. The world’s now-second largest economy did not have a financial crisis. China did not have a financial crisis because they don’t have banks.
All of those things have compounded to make the Chinese feel much more comfortable doubling down on state capitalism. That plays with the strongly entrenched interest of the Chinese government elite who economically benefit from that chief capital and from being able to direct it where they please.
As we look forward over the next few years, I would say the very thing that the United States most needs to have a relationship with China which is more positive sum and less zero sum, which is not likely to happen.
Quartz: How can multinationals court the Chinese consumer effectively?
Ian Bremmer: We need to understand that China still has extraordinary growth, 8% since the [country’s] slowdown [began in 2012]. It is growing by leaps and bounds. Having said that, the volatility of China both in terms of the potential for the government to have massive social instability because of the nature of their deeply controlled information and the potential for demonstration getting out of hand, security problems. All that, as well as the likelihood they’ll get into a major conflict with Japan, even the United States, creates much more volatility around China and around investing in China.
That’s a big point—just because China has extraordinary growth doesn’t mean you’re going to benefit from that growth. Specifically, the thing you need to focus on is the corporation. First of all, to what extent do we have competitors in China that are likely preferenced by Chinese government officials? Are they serious players or not? Can they become serious players quickly or not?
If you want to do business in China, you need to understand, why should the Chinese government let you do it? It’s not because they need foreign investment. They don’t. They don’t need the money. It used to be just saying “we’ll bring in the money,” that was a big deal. And increasingly it’s not about just practices because the Chinese will learn it fast/ It’s not “we’ll teach you to make sure your manufacturing plants are clean and safe.” That was important eight years ago. They know that stuff now. So what are you offering the Chinese that matters to the government? For how long is it likely to matter to them? When it stops mattering to them, what are you offering them next?