American cultural quirks that Chinese have to put up with:

• First and foremost – we are the only negotiating culture that leads with the lawyers. Europeans consider negotiation to be an exercise in diplomacy while Asians consider it the province of paternalistic company leaders to build lasting relationships. American negotiators – even when they are salesmen or purchasing managers – are fixated on contracts and legal institutions (like courts and regulations). Whereas traditional Asian negotiators feel that relationships are the key to business and that contracts are merely written records of agreements between individuals, Americans put more weight on the document than on the human bonds between business leaders.

• We are the only negotiating culture that believes that liability can be assigned in advance through a contract. This is one of the many aspects of international negotiation that has become “normal”, but it still strikes traditional Asian negotiators as crazy that Americans consider contracts binding even as the market environment changes. Asian negotiators in general, and Chinese in particular, feel that as the external situation evolves, so must a business relationship. Many Chinese partners have been bewildered and disappointed when their American partner stated waving a piece of paper in their face instead of responding fairly and maturely to new market realities.

• Americans believe that negotiations end. To Chinese, the negotiation is part-and-parcel of the business relationship. As long as the counterparties are still engaged in business, the negotiation is supposed to continue. What’s the point of taking the time to build a connection if you aren’t going to grow the relationship through continuous give and take?

• Americans want to decide everything in advance and put procedures ahead of human decisions. Chinese (and most other Asian) negotiators understand that conflict and differences of opinion are inevitable, and their business agreements usually assume that the leaders or concerned parties from each side will work things out informally. American contracts, with their penalty clauses and rigid requirements, are not only insulting and arbitrary, but seem designed to undermine any kind of positive relationship.

• Americans love deadlines, timetables and schedules, even when there is no business rationale for them. They can be arbitrary and illogical.

• Most disturbing of all, American negotiators are adversarial and rude. We insist on running everything and taking control of situations that we don’t understand. We are famous for coming to China and trying to sell inappropriate products or services at ridiculous prices. Our technology and designs are nice enough, but we expect people to pay over and over for the same thing – even after their people have figured out how to make it themselves.

I’m not proposing that we give up our way of doing things – and I certainly understand the value of contracts and compliance with regulatory codes. It’s important, however, to acknowledge that the American way of negotiating is not the only way, and the Chinese person across from you is struggling just as hard as you are to successfully manage the yawning gap between your cultures.

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Sometimes, you have to listen to what they are NOT saying.

And right now, China is saying less about the state of US fiscal policy than at any time since March 2009 – when Premier Wen publicly expressed his worries about the health of Treasury bonds.

Maybe China has tremendous faith in the democratic process. Maybe China trusts its good friend the US of A. Or maybe China has already received guarantees from the highest levels that they will continue to be paid in full in the event of a US default.  To understand China’s silence, you have to understand who sets the priorities in the event that a default means that the US can’t meet all its obligations. The US Department of the Treasury.

Stakeholder analysis: When analyzing any negotiation you start by identifying who the players are – who may win and who may lose. The stakeholders in any negotiation about the way that scarce US assets get allocated are easy to identify – you just have to look at where the money goes. According to the Bipartisan Policy Center (http://www.bipartisanpolicy.org/), the biggest payees are:

• Interest on the debt ($29 billion)

• Social Security ($49.2 billion),

• Medicare and Medicaid ($50 billion)

• Active duty troop pay ($2.9 billion)

• Veterans affairs programs ($2.9 billion)

• Defense vendors ($31.7 billion)

• IRS refunds ($3.9 billion)

• Food stamps and welfare ($9.3 billion)

• Unemployment insurance benefits ($12.8 billion)

• Department of Education ($20.2 billion)

• Housing and Urban Development ($6.7 billion)

• Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion)

That breaks down into 3 or 4 big stakeholder groups (depending on how cynical you are)

1. China (the largest overseas buyer of US T-bonds) and other overseas debt holders.
2. Military (soldiers – not defense contractors)
3. US middle class (and those hoping to stay in the middle class)
4. Wall St. (Wall Street interests align with bondholders (including China) and defense contractors. Food stamps, Dept. of Justice & Social Security – not so much.

So what impact will that kind of stakeholder analysis lead to? Here are some ideas:

Negotiating behavior: China
China favors quiet, behind the scenes dealmaking whenever possible. Students of Chinese diplomacy have gotten spoiled with free access to a bounty of information and data over the last 20 years. Those of us who have been watching China for a bit longer still remember stories of analysts sitting on a hilltop outside of Beijing counting locomotive coal cars to gauge PRC economic activity – because that was the only data publicly available.    China’s default setting for negotiation transparency is that less is best.  The PRC understands the value of secrecy, and they know the power of propaganda. The fact that they have practically stopped making public statements about US treasuries means that they have already made their deal.

Negotiating behavior: US
Secretary of Treasury Geithner has been in the public spotlight long enough for us to draw two important conclusions about his negotiating behavior. 1) He won’t stand up to China. (His office is probably the only organization in the western world still officially maintaining that the RMB is not a manipulated currency, despite the fact that Treasury is required by law to evaluate China’s forex policy twice every year). 2) His go-to solution for just about any problem is to squeeze the US middle class. He’s already bailed out Wall St., AIG, and GM at the expense of the US taxpayer (i.e.: the rapidly shrinking middle class), and there’s no reason to think he’s going to start thinking outside the box anytime soon.

Bottom line: Foreign bondholders (including China) will get paid on time, every time. US middle class will pay now and pay later – default or no. So while the USA’s slow-motion self destruction will be a disaster, those with interests in China can at least take solace from the fact that bond holders will fare the least-worst of anyone.

Every negotiation presents counter-parties with only 2 possibilities:

1. Support the status quo
2. Disrupt the status quo.

Supporters come in 2 varieties.

1. Monopolists or quasi-monopolists who have the power and/or environmental adaptation to benefit from the situation the way it is. These negotiators should be either competitive or avoiding.
2. Weak players, niche-exploiters, price takers, and those unable to adapt to an adverse environment. This class of status-quo preserver would say, ‘The devil we know is better than one we don’t’. These counter-parties are accommodators or compromisers.

Disrupters are generally pretty similar – they understand that the best way to advance their cause and maximize their interests is to shake things up. Start-ups, expanders and negotiators who believe they can benefit from shifts to the commercial or regulatory landscape are disrupters. This type of negotiator is a collaborator or a competitor. They benefit by breaking the rules or subverting entrenched market leaders.

US, China and the Status Quo
How a negotiator perceives status-quo will tell you a lot about his interests and goals.

Until about 2007, US counter-parties tended to approach US-China negotiation from the perspective that that the status quo was in their favor. This was part of the DNA of American negotiators – from the boot-strappingest start-up all the way up to the Federal government. Western strategists in China equated ‘progress & reform’ with ‘doing things the US way’. Sec of Treasury Geithner’s exchange-rate negotiating approach is a great example – he seems continual perplexed by China’s inability to conform to ‘business as usual’, and has spent the last 2 years waiting around for Beijing to come to its senses.

Chinese negotiators have their own quirks and biases when it comes to analyzing the status quo. Beijing orthodoxy is that the 21st century belongs to China, and that the rest of the world will pay any price to participate in the new China-centric economic order. Beijing seems intent on rolling back the calendar to pre-2006 times when central planning and state control was unchallenged. Compulsory technology transfers and increasing censorship of the internet indicate how Beijing sees the new world order.

Disruption Happens
The problem is that both sides can’t be right. If Washington and Beijing both conclude that inertia favors their goals, then the stage is set for a collision of interests. Ironically, conservative strategies actually lead to a highly unstable situation.

The future of US-China commerce depends on counter-parties’ ability to manage chaos and change. The same reality will govern individual businesses and industries. When entrenched players begin to lose ground to competitors – or are weakened by environmental factors – the stage is set for disruption and hyper-competition. This is not a scenario that favors soft-landings – or steady recoveries.

Our love is like a ship on the ocean
We’ve been sailing with a cargo full of, love and devotion
So I’d like to know where, you got the notion
Said I’d like to know where, you got the notion
To rock the boat, don’t rock the boat, baby
Rock the boat, don’t tip the boat over
Rock the boat, don’t rock the boat baby
–Hues Corporation 1974.

Next: When is it best to Rock the Boat?

1. Western commentators are once again connecting unnumbered Chinese dots to form the picture that they want to see.  The PBOC statement on Yuan flexibility says nothing about timing, direction –  or anything of substance having to do with the new RMB currency regime.  It may be the harbinger of a new Grand International Coalition, or it may be Orwellian doublespeak justifying anything Beijing wants to do.
2. The west is expected to take forex off the table forevermore in exchange for a vague non-promise of flexibility.  How does this change the situation on the ground?  Western financial leaders have once again been pressed into service against their own Main Streets.  If the rmb appreciates by less than 10% over the next year, Geithner & Co are going to look a lot like Jack trading the cow for magic beans.
3. The Chinese side is controlling not only the substance of the argument, but also the timing and the scope. This is classic Chinese negotiation tactics.

Still, the chundits (China pundits) and globalists are thanking Beijing and congratulating themselves for averting a crisis.  Well, it’s certainly nice to think so.  But as we prep for the Toronto G20, how does this announcement change the negotiating environment?

First, China gets to maintain the status quo until it sees fit to change.   Even more significantly, the global recovery debate has been shifted away from artificial exchange rates and structural trade imbalances to western debt levels (which are still very much on the G20 table).  China once again trades smoke and mirrors for concrete western concessions.

This time, however, Beijing may be outsmarting itself.  This is the second doublespeak manifesto to come out in 2 weeks – following close on the heels of the Internet White Paper  released on June 8.  Beijing is displaying a new tendency to spell out in black and white just how gray and subjective its standards are.  Chinese tacticians have always exalted ‘formlessness’ and misdirection, but after a while it becomes possible to benchmark deception.  A pattern is emerging – Beijing enacts a policy (the currency peg or the Great Firewall), calmly waits for international debate to die down, and then finally releases an official definition of terms.  These pronouncements are fait accompli that protect China’s complete range of motion – but are couched in legalistic terms that sound objective.

In the bad old days when capitalism was the enemy and secrecy the rule, China-watchers used to count  coal cars on trains heading into Beijing to gauge the level of economic activity.  With this new set of documents — the Internet Manifesto and the Yuan de-peg paper — we have a new metric by which we can understand Beijing’s true intent.  This time, however, we will be judging the hardness of the NO by the conviction with which we’re told MAYBE SOMEDAY.

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US business can learn a great deal about dealing with Chinese counter-parties from Mr. Geithner, but unfortunately most of the lessons are about how not to negotiate in China.

Lessons learned:

1. Timetables and deadlines must not be arbitrary. If you can’t back up a deadline, then don’t impose one. The April 15 Treasury Dept report on currency manipulation became the goal, not a tool. When Geithner punted on the deadline he lost the battle. Many have argued that the measure unfairly targeted China and never should have been used as a tactic. While that may or may not be true, Geithner’s last-minute capitulation was perceived in China as a victory and a sign of weakness. Westerners who come to China with an arbitrary deadline are putting themselves on a slippery-slope of endless compromise and back-tracking.

2. ‘Face’ might not matter to you, but it does to the Chinese. If your Chinese counter-party feels they have the advantage or that you lack dignity, it will impact on your negotiating power. Geithner and the Obama people may consider themselves to be enlightened Win-Win high-roaders, but in Beijing they are seen as amateurish blunderers who talk tough but back down. The Chinese side does not consider these Americans to be their equals, and every compromise Washington makes reinforces the Chinese notion that there are more benefits left to uncover.

3. Sell your deal at home first, settle on a rock-solid bottom line and ambit goals – and THEN sit down with your Chinese counter-parties. Be clear on your metrics and stick to them. If you want to succeed in China, you first have to develop your own notion of what constitutes a ‘win’. Like many US deal-makers before them, Geithner & Co. have returned from China to start a much tougher, more acrimonious negotiation with their own home office. Trying to explain to your senior management and Board of Directors why they should accept a bad deal in China is a career-killer.

Chinese negotiators often talk about the need for ‘harmony’ and ‘good relationships’ in business dealings, and novice Americans allow themselves to assume that this means 50-50, tit for tat compromise. More skilled Western negotiators know that the first point to be worked out is how each side defines what harmony and success really mean in the present context. The Obama administration is in the process of learning that they have been too quick to declare this deal ‘done’. Learn from their mistakes, or be ready to repeat them.

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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If you’ve been making deals in China for a year or so, you may feel that the mood is getting frosty and a bit tense. Those that have been in the game a little longer should be familiar with the attitude since it is a return to the ‘old days’ of the mid-90s when international business in China was more exception than rule. Beijing was extremely accommodating to both domestic entrepreneurs and foreign friends for most of the last decade, but now the policy people seem to have declared victory and moved on.

China Inc is maturing and the time has come to put away childish things and start getting down to real business of wielding the Mandate of Heaven. It is time for the foreign friends to either play quietly or go home.

Negotiation in China has always been adversarial – but now at least we can stop pretending in all that ‘everybody love everybody’ nonsense. Here are 10 rules for doing deals in New China.

1. This may not get better soon.
Cordial relations between China and the West is a fairly recent construct. Many tried to convince themselves that friendly cooperation & win-win business was the status quo for China deal-making, but it is simply not historically accurate. You may want to get along with everyone but US-China rivalry is written in the DNA of both governments. Look for both sides to slide into old patterns of zero-sum competition.

2. Know your counter-party.
The guy your are dealing with either represents the bureaucracy, an SOE or a private business – but they are all working off the same playbook. Every local is following both the stated and unstated policy directed by Beijing. This is trickle-down cuthroat competition, and you should beware of ‘good-cop’ partners who offer to manage the pesky bureaucrats for you.

Most negotiating problems of the past were a result of misunderstanding, incompetence or flat-out dishonesty. Those are walks in the park compared to ideological disputes. If you have been working with a local partner, agent or service provider who has been talking up his powerful connections and guanxi with officialdom, you have to understand that those are the relationships he will work to preserve– not the short-term commercial relationship he has with you.

3. Every Chinese deal has 2 negotiations.
You negotiate twice in China – once to get the deal and once to do the business. If you are not budgeting time and resources for the second negotiation, then you are committing a serious tactical blunder.

4. Double standards and unequal treatment are institutionalized.
Obama sees Dolly – and suddenly your regulatory and bureaucratic procedures become more of a hassle. The rule of law never really caught on in China, and we may have already passed the high-water mark for equitable treatment of WOFEs and FIEs. Compliance with regulations and loose timetables aren’t just best practice in China anymore – they are immutable laws of nature. Plan on competing with locals who have much lower hurdles to cross.

5. Staff up and pay up.
Buy friends to influence people. That means having a lawyer, an accountant, and access to knowledgeable consultants who are answerable to you and you alone. I love “Mr. China” type stories about smart guys learning the hard way, but they are anachronisms. The cost of failure is rising rapidly. I know that no one likes to pay for professional advice, but the ground is shifting. Local counter-parties and suppliers are no longer valid sources of information (if they ever were). Make sure you have access to reliable, timely information. If that means spending money, time or bandwidth, then budget for it.
Oh yeah — more bad news. Paying for expert advice is only the beginning. Then you have to actually follow it.

6. Lock in gains.
The relationships you have are the relationships you want to keep. The Chinese are serious about the value of relationships – but that cuts both ways. Yes, the people you’ve known and worked with for years will be loyal to you (maybe). Building new relationships, however, will be much harder in this environment. Vet new partners and suppliers carefully, and make sure that you are worthy of any trust and loyalty you’ve built up with locals over the last few years.

7. Have a plan B
You need an alternative course of action that doesn’t have the same risk profile as your main game. That might mean structuring your China operation differently — or maybe creating a scenario that doesn’t include China at all. Ask yourself a simple question – what if you and/or your key people can’t get a visa to enter China? Is it an inconvenience or a train wreck?

8. How much China do you want?
We used to ask, “How much do you need to be in China?” Now we’ll be asking, “How much China do you need to be in?” The days of growing an “organic” (i.e.: unplanned, seat-of-your-pants) China organization are over. China is now too expensive, competitive and risky to fly blind. How much money, personnel and bandwidth do you plan on investing, and what do you plan on getting in return? If you can’t answer those questions then you haven’t planned enough.

9. Stop reinventing the wheel.
Look for people you know who have already done this (i.e.: other expats) to partner with or hire as management consultants. An ideal partner is someone with a good reputation, a similar or complementary business, and has been through all the regulatory and licensing procedures. This can be a great way for newcomers and expanders to get exposure to China without taking on too much risk.

10. You only get to play hardball once in China.
Chinese negotiators tend to be passive-aggressive and are highly sensitive to perceived slights and insults. Two Americans can curse each others’ mothers in the heat of negotiations and still end up lifelong buddies and partners. This isn’t going to happen in China. If you feel that you have no choice but to issue an ultimatum or lay down the law, make sure it’s worth it. You may just trash your relationship – even if you were right about the facts.

China is becoming less cheap, more risky and decidedly less friendly. That’s not to say that business can’t be done or that you can’t make friends and have a wonderful life in China. But if the US and China slide into a trade war there is no neutrality.

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When it comes to China’s negotiating style, what’s new is what’s old. In many ways Chinese negotiating is shifting back to a more traditional style where the power of the state is paramount and the main job of rulers is to defend Chinese territory (be it physical, financial or symbolic) & keep the barbarians outside the gate. There is a new feeling in China – not isolated to Beijing – that the Deng Xiaoping’s grand experiment has accomplished its mission. International cooperation has served its purpose – now Beijing can get back to business as usual. Policymakers seem to believe that multinationals and local entrepreneurs were important steps in China’s development, but now they have outlived their usefulness. What’s good for the Party is good for China, and vice versa.

Look for 5 big trends to characterize Chinese negotiation in the coming decade. Most are already evident on the national stage, but dealmakers at every level will quickly find that Beijing sets the tone for the rest of the country.

1. China steps up to superpower status.
We’ve been tiptoeing around this for years, but Wen Jiabao’s Copenhagen gambit seems to confirm that Beijing is through playing coy about its status in the world. For years local Chinese would feign astonishment when asked if the PRC counted as a Super – hemming & hawing awkwardly before finally admitting to being “important economically – but certainly not a military or political force in the world”. But while an emergent 1960s USSR blustered and threatened, rising China will initially take a softer, more passive-aggressive approach. Khrushchev banged on a table with his shoe – Wen Jiabao convened a press conference to publicly worry about the integrity of US Treasury Bonds.

2. Head-to-head, zero-sum competition with the US
China’s default negotiation position is zero-sum game/ competitive – and there doesn’t seem to be a crisis big enough to get the US and China pulling in the same direction. In the last 2 years we’ve witnessed a financial crisis, a climate showdown, terrorist threats and the emergence of rogue nuclear states – and in each instance China and the US have been at odds with one another. If the two can’t agree on the scary but simple stuff (nuclear Iran, reduction of greenhouse gases, a functioning global banking system) then it seems unlikely that we’ll find a way to cooperate on more complex issues that don’t threaten the survival of humanity. China is reverting to the pre-Deng doctrine that what is bad for America is good for China – and vice versa. Look for China to continue to find opportunities in American & Western challenges.

3. State-control of all negotiation agendas
Not long ago, Western pundits were positing a China where entrepreneurs and an emerging middle class would exert greater influence on the CCP and bring about a kinder, gentler PRC. Well, just the opposite is occurring. The party has co-opted (or arrested) successful entrepreneurs and glamoured the urban middle class to the point where there is only one voice in China – the official one. Xinhua has done a phenomenal job of taking charge of the internet and the rest of the media, expertly using 21st Century technology to deliver an old Imperial message – that the fortunes of the Chinese people and the Chinese leadership are as one. In the last few years Beijing has learned that the party need not own the means of production to control them. State Owned Enterprises are a burden, but policy directed enterprises are the assets that keep on giving. Scratch a private Chinese business and you’ll find a policy-driven organ of the bureaucracy

4. RMB hegemony – from Harmony to Our Money
Beijing goes out of its way to promise that it will never resort to the sort of brutal hegemony practices by Western colonial powers – at every Chinese military parade and naval exercise. But it’s not the gunboats – or even the cyber-squads – that should raise alarms. The new projection of Chinese power will be infrastructure projects and commercial deals. China’s foreign policy is driven by a need for raw materials, and it isn’t squeamish about who it has to get in bed with to obtain them. Sudan, Iran, Sri Lanka, Afghanistan and Myanmar/Burma are just a few of China’s most favored nations, and for now Chinese policymakers don’t see a downside to enriching warlords, dictators and tyrants. China favors a dual purpose string-of-pearls approach that is already well developed – and expanding steadily.

5) Its not about the economy, stupid.
Non-economic considerations drive Chinese organizations, as long-term policy concerns ace short-term profit/loss decision. For years Western dealmakers were driven to distraction by Chinese counter-parties that seemed blind to their own self-interest. It’s not that the Chinese side was dim or daft – rather they were driven by non-economic factors like policy, bureaucracy, relationship, technology and access to intellectual property. For a while it seemed that all of those returning MBAs and MNC-trained local managers would influence Chinese negotiating practices and usher in a more ‘rational’ decision-making process. Beijing’s stimulus program, however, has once again made central policy the 600 pound panda in the room. This is why the rationalistic arguments about the RMB-USD exchange rate eventually conforming to market forces at best unrealistic – and at worst, completely irrelevant.

What does all of this mean to US negotiators in China? The bad news is that Beijing sets the tone – and in many cases the substance – for Chinese dealmakers all the way down the line. The good news is that now you know the bad news (as is often the case in China).

Next – Surviving the New China Negotiation

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There are three ways a sustained economy in the US could impact on the pan-Pacific meeting this month:

The Good:
A more engaged, confident, capable US will be less prone to hitting the trade-panic switch and a new sense of calm and mutual respect will characterize trade relations between the Pacific giants. A domestic recovery will keep the union bosses and congressional opportunists off Obama’s back – or at least give the President a little breathing room. The stronger economy will help shore up the flagging dollar – removing a thorn from the side of international trade relations in general, and big-lender China in particular. Peace will return to the valley and we will all find other things to worry about.

On the China side of the equation, a stronger US economy that is more capable of absorbing imports will be quite welcomed indeed. Nothing lubricates the gears of international relations like big slathers of consumption-driven spending. A US recovery in 409 or 1Q10 would be timed perfectly to help China wean its own consumption off of expensive Statist trickle-down stimulus spending.

A stronger US economy is Win-Win for everyone.

The Bad:
A recovering US economy will give US trade hawks and Buy-Americanistas the confidence and firepower to pursue their resentment. China has had it both ways – complaining about the weak dollar while still manipulating its own currency and thus preventing market mechanisms from doing their job. The recovery will be jobless at first, so the unions and the populists (i.e.: congressmen up for reelection) will be contending with uppity, unhappy constituencies that are sick and tired of being everyone’s whipping boy. First Washington, then Wall Street, and now China? Oh, No you don’t! A recovering US will be feisty and activist on trade.

A stronger US economy will also be met with mixed emotions in Beijing which has enjoyed the sustained glow of being the only stimulus hero on the block. China’s big swinging GDP has vindicated a lot of rhetoric – and burnished Beijing’s reputation as the policy-makers of the millennia. They were secretly hoping for pics of race riots and soup lines in to brighten up the People’s Daily homepage – a little payback for some unflattering Youtubery over the past couple of years. For China, this has been like Reagan and Gorbachev circa 1987 – with Wen Jiabao taking on the role of beneficent ascendant and Obama as the good-natured steward of a failed model. China has made great strides in international circles over the last 9 years – and the last thing the foreign policy people want to see is Obama’s charm backed up with muscular economic growth.

A stronger US economy is Win-Lose for China.

Most Likely –
Both sides will circle warily – with many photo ops and grand vagaries. The public sound bites will be about climate change – the back-room talk will be military cooperation. There may be an exchange or two about currency, but in the press each side will ‘endeavor to persevere” or something equally inconclusive. Cross-Pacific trade is, in actuality, one of the few global mechanisms that ain’t broke yet, and neither side is under much pressure to shake things up too much. In the grand scheme of things, US-China trade tensions don’t add up to a hill of cheap tires and chicken parts – yet.

A stronger US economy is not going to tilt the balance of power just yet.

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