Two issues are undermining international cooperation. The first is that the US and China are at variance over the benefits of cooperation vs. competition. The second is that the two actors are working off a faulty stakeholder analysis – leading to misinterpretation of how the other side values the variables on the table.

Cooperation vs. Competition: An extended Prisoner’s Dilemma scenario:

Work I’ve done with US & Chinese negotiators in a prisoner’s dilemma-type scenario does not give cause for optimism. China-US negotiation is often characterized by relatively simple, naïve initial deal-making (usually based on incomplete or erroneous information) followed by increasingly uncooperative, competitive, often hostile disagreement.

Cooperation requires a ‘growing pie’ of benefits
For US & Chinese counter-parties to achieve stable cooperation in a Prisoners Dilemma type arrangement, 2 conditions must exist.

1. Both sides must believe that steady-state cooperation will enhance their long term benefit over multiple iterations compared with short-term competitive behavior.
2. The global payout must be rising over the course of the arrangement. In other words, for cooperation to be stable the ‘economic pie’ must be growing. Faced with a stable payout (a zero-sum game) the default behavior seems to be competition over cooperation.

Modern Chinese negotiators tend to believe that their BATNA (Best Alternative to No Agreement – otherwise known as ‘Bottom Line’) is enhanced by a constant stream of new counter-parties or options. American negotiators operating in mature economies tend to view stable-growth scenarios as sufficient to maintain cooperative negotiating relationships. Combined with lower penalties for breaking contracts in China than in the US, the result is that Chinese negotiators tend to be quicker to switch from cooperators to competitors than their American counterparts.

Stakeholder analysis & relative valuation of variables.
The second oar propelling us towards the whirlpool of acrimonious trade war is improper stakeholder analysis performed by both sides. Because US and Chinese actors seem to be working with a simplistic, incomplete view of their counterparty’s priorities and interests, each side made gross errors in estimating how the other side valued variables. In other words, US negotiators didn’t know what was important to Chinese counter-parties and Chinese negotiators didn’t know what was important to the US. This has driven China’s negotiation position to shift from relatively cooperative to extremely competitive over the last 2 years.

In many ways, our present problems started in 2008 when an uprising in Tibet turned violent. America and the West seemed not only sympathetic – but were perceived by China to be taking an active role in spreading false rumors and images about the cause and nature of the protests. A similar scenario played out in the summer of 2009 when violence broke out in Xinjiang – and anti-Beijing photos & clips (some of which were admittedly of a highly suspicious nature) started showing up on social media networks and YouTube.

These incidents were perceived as relatively minor or ‘business-as-usual’ in the West – especially since demonstrations and public criticism of US policy were commonplace in the waning days of the Bush administration. To Western negotiators, public reaction to mild street violence on the other side of the world simply wasn’t that big a deal. To Chinese decision-makers, however, these uprisings were considered to be major threats to their core values – the legitimacy of the CCP. In Beijing, US commentators and social networks siding with the protesters was likely perceived in much the same way that Washington policy makers would react to a string of Xinhua editorials cheering on Al Qaeda and the Taliban. It not only undermined trust and cooperation – but also empowered right-wing conservatives who felt that China had opened to far too fast.

The economic crisis in the West further undermined US-Chinese cooperation. In March 2009 Wen Jiabao sealed China’s competitive position in a speech at the CCP conference bluntly attacking the US currency and economic policy. This was an unusually unambiguous signal that China was taking a competitive tack in US-Sino relations.

This makes sense from China’s perspective – at least in the short term – since a crippled US economy meant that there was now a much smaller pie to divide. The system-wide payout was dropping just as China’s contribution to the global economy was rising in both relative and absolute terms. China simply had less to gain from cooperating with the West – and shifted to a competitive mode.

The Way Forward
Unfortunately, once a multiple-iteration negotiation (same 2 negotiators, many different negotiations over time) turns competitive it is very hard to break the cycle. Trade hawks on both sides are empowered and there seems to be little benefit for either Beijing or Washington to make the first move. If the US economy recovers or the Chinese economy stumbles, it will only reinforce the competitive mindset. Bluster about Iran sanctions or Taiwan arms sales might be just the beginning. Each new trade sanction or public dispute will reinforce the competitive environment and make it harder to break the cycle of conflict.

Next: The Whirlpool in your shop – how to negotiate under adverse US-China conditions.

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Younger MBAs, Europeans and Asians prefer a stakeholder perspective. Stakeholders include everyone and anyone who can affect a decision – or be affected by it. It’s softer, messier, and much, much more complex.

In Chinese deal-making following the money just won’t work. Too much is hidden, unspoken, contextual and driven by non-economic factors. In many cases, you’ll never see the money trail because it may be irrelevant, hidden, non-existent – or may start AFTER you have transferred your funds. If you plan on negotiating successfully in China, you’d best start mastering the messy art of stakeholder analysis.

A stakeholder model is more applicable in China than in the US, but some American’s are still blundering around vainly searching for the key decision maker. In China dense, opaque organizational structures have evolved to make sure that this kind of tactic is unsuccessful. Overly aggressive Americans often find themselves negotiating with people claiming to be the true decision-maker – while the real power is hidden far away.

Mapping Chinese Stakeholders
A simple but powerful mapping technique for understanding stakeholder influence in Chinese negotiation is to set POWER along a horizontal X axis and ENGAGEMENT along the vertical Y axis. This is particularly useful in China, where your counter-parties may intentionally obscure or misrepresent the decision-making process.

Power is simple enough. In a deal-making context, half the ‘power’ story can be understood as the ability to make things happen. In a highly bureaucratic environment like China, regulatory approval often translates into power. The central bureaucracy is the stakeholder of last resort, and very little of significance can occur without the government’s knowledge and approval.

The power of negative thinking.
In China, the other side of the coin is Negative Power – the ability to STOP things from happening. Often the most potent negotiators are the ones that have the power to block, slow or alter the course of regulatory approval. Chinese negotiations are characterized by AVOIDANCE tactics to a degree unmatched in the US. Saying YES is often far more politically sensitive and riskier than saying NOT At This Time. The more frustrated you become with the delays, the more reluctant the counter-party is to take on the risk of approving your request.

Engagement is a big deal in China.
Often overlooked by American negotiators in China, discovering the true decision makers – and then getting them to participate in the process – is a huge challenge. If you are dealing with a purely commercial counter-party and negotiating about standard deal-terms like price, timetables and quality, you may find that you are only addressing half of the real issue. American negotiators in China have to devote time, energy and bandwidth to uncover the entire deal-making process and identify all of the stakeholders who need to buy in. If you are ignoring the bureaucracy until the last minute, you will find that your position is incredibly weak in the second, REAL negotiation.

3 Classes of Stakeholders in China.

Government bureaucracy.
This is the stakeholder of last resort. They are always there but rarely visible.

In general, the bureaucracy occupies the High-Power, Low-Engagement quadrant. Chinese bureaucrats are Avoiders
simply because so much of the power structure is stacked in their favor that they have very little to gain from direct involvement. One of the toughest negotiations in China is just identifying who the real decision makers are and how you can exert influence.

Bureaucratic avoidance is as potent as it is unfamiliar to most Americans who are accustomed to head-on horse-trade type negotiations. Pressure tactics are almost always counter-productive with Chinese bureaucrats. This is why so many Americans end up with signed contracts that can’t be executed – or worse, are executed poorly or partially.

Bureaucrats tend to avoid direct negotiation with foreigners. You’ll see these guys in their office or ministry, and the conversation is largely confined to paperwork and red tape. All of the high level wheeling-dealing takes place somewhere else – with someone else. Unless your Mandarin is excellent and you have already built up a great deal of credibility with the government, you probably won’t ever meet with one of these people on your own. You may however find yourself in a banquet or board room situation, but all of the serious stuff will happen in much more discreet settings. To negotiate with the Chinese bureaucracy, you will need someone with the right connections.

Connectors-
The second class of Chinese stakeholder includes consultants, partners, suppliers or service providers who negotiate on your behalf with the bureaucracy. Sometimes you hire these people directly and sometimes they are your counter-party who is responsible for regulatory approval.

These guys are highly engaged — in many cases they are actively looking for you. What you have to determine is A) their true level of power and B) whether they are a positive or negative force for you.

Connectors manage the relationship with the bureaucracy — and they almost always do a much better job than you could. The good news is that the right partner or agent can easily accomplish things that you never could. The bad news is that they’ve attained and maintained these relationships due to their utility to bureaucrats — not to the client. Often their real negotiation centers on strengthening their relationship with important officials – using your resources as currency.

Remember – in China many officials are given quotas and policy goals that run counter to your own. Many of those Westerner’s who lost their shirts in China due to misunderstandings, regulatory delays or failed approvals were really just cases of unsuspecting westerners trusting the wrong partner and ending up someone else’s guanxi payment.

Outsiders.
Foreigners, technical experts and multinationals make up this group. Highly engaged but usually fairly low power. The good news is that they can’t make bad things happen. The bad news is that they can’t make good things happen — except for special situations. Those situations include goal-setting, research, knowledge, staffing and due diligence — so this crew has definite uses. These guys are reliable in terms of safeguarding your IP and will have the most usable analysis of Chinese economic & market conditions. Their utility is that the bureaucracy has relatively little influence over them, so they will be loyal to your interests. Good for knowledge, niches and specific transactions, these outsiders rarely have the ability to complete a deal cycle.

Outside experts are most useful early in the process before you have made the catastrophic mistakes that are so common to this region.

Know what you need and who can deliver.
You’ll probably have to deal with all three in one form or another. Just makes sure that you know who is who. The bureaucrats are easiest to spot — they are unambiguously official. Connectors bridge the divide between you and the bureaucracy – but you have to have very clear goals and understand the lay of the land to make the right choices and ask for the right variables at the right price. Your process should begin with honest, competent research, planning and selection of the right connectors & counter-parties – which almost always requires a reliable outsider.

The danger for Westerners is in trusting a connector who is working against your interests. This is a leading cause of problems in China – and the best preventative is to locate loyal outsiders who can help you set appropriate goals and know how to perform due-diligence on the agents and counter-parties you will need to be successful in China. Many Americans in China end up relying on their highly competitive supplier or partner to negotiate on their behalf with the bureaucracy. It’s a huge mistake.

Outside consultants first, then motivated connectors and finally the bureaucrats. If you can find the right people in the right sequence, then you might stand a chance of negotiating successful in China.

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