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China's Current Challenges Are Only too Familiar
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By Eliot R Cutler

John F Kennedy famously called Washington a city of "northern charm and southern efficiency". Someone old enough to have lived in Washington when it was a small and sleepy capital finds surprisingly familiar the drama playing out in China these days over the safety and reliability of everything from drugs to drinking water to automobile parts. Like 33 1/3 rpm records played on a 78 rpm Victrola, the music sounds different when it is played at warp speed, but if you listen carefully enough, you can recognize the tune and even pick out most of the words.

These are serious matters, no doubt about it. My wife and I are careful about where we buy toothpaste and aspirin, we wonder where the bottled water really comes from and we think twice now about eating baozi and some of our other favorite foods. We shudder to think about what is in the air that we are breathing, and we wonder how China will save its rivers and streams from the ravages of careening growth. But there is nothing happening in China today that is fundamentally different from what has happened in other countries - including the US - at other times. These are the sounds and groans (and dangers) of a free-wheeling market economy transforming itself into one that soon will become more regulated and even more internationally competitive. Most of China's safety and quality problems are caused by good people trying to do their jobs in a domestic marketplace that is so highly competitive and unregulated that it often accounts for nothing but the most direct costs.

In many of its sectors, China's booming economy is one of the most cutthroat in the world: Factories pare margins to the bone in order to beat out their neighbors for orders and market share, and they eliminate as many costs as possible. Bad ingredients are substituted for good ones if they are cheaper and non-apparent, and costs for largely external benefits, like clean air and water, are not incurred when they are ineffectively mandated and cannot be recovered in product pricing.

Even some of China's best and most responsible companies, those with genuine ambitions to produce high-quality goods, are sometimes forced to choose between losing money, market share or both. Caught between Scylla and Charybdis, those that succumb and sacrifice quality in order to remain price-competitive find themselves disciplined either by growing domestic outrage or by international regulators who refuse entry to shoddy and unsafe goods.

Does this sound familiar? Of course it does. Go back and reread Upton Sinclair. Recall the sweatshops in New York's garment district or the children working in New England's textile mills. Remember what sparked the creation of the Food and Drug Administration and, not so long ago, the Consumer Products Safety Commission. Before he became a gadfly and a regular presidential candidate, Ralph Nader was an important consumer muckraker ... less than 40 years ago.

This country is now furiously engaged in a remarkable frenzy of self-examination and criticism. As China looks at itself in the mirror and prepares to face the world's markets, what should we expect will change?

Well, past is prologue. Notwithstanding the differences between our politics and our cultures, there is nothing so fundamentally unique about the challenges facing China's market economy - particularly in terms of domestic expectations and international competitiveness - that we should be surprised to find its economy become much more highly regulated and the national government endow itself with considerably greater reach and leverage.

It happened in the United States after World War II, it is happening in the continuing development of the European Union, and it will happen in the Peoples' Republic of China. Corporate China will make sure of that.

Consumer expectations and demands are only slowly beginning to have an impact on product quality and safety. Truly egregious crimes of corruption and official misconduct may lead to highly visible executions, but these punishments will have only a limited deterrent effect.

Real and widespread change in the Chinese regulatory environment will come from two much more important developments. First, the better Chinese companies, the ones with Western customers and international ambitions for their own products and their brands, will band together and plead for better and more effective regulation. They will be joined by the Western companies themselves, the ones with operations in China whose managers wonder about the quality of the ingredients that they use, just like my wife and I do. These managers, after all, already are under close examination by their regulators and customers outside China. Both the Chinese and the Western companies want and need a level playing field where the worst of the price-bound competitors no longer play with an unfair advantage.

Second, the national government will step in with rules and regulations that will be enforceable ... and that in fact will be enforced. Trust me on this: The last thing China will do is leaving decision-making about its people and its companies to the international marketplace.

However much China's has become a market economy, faster and more dramatically than any in history, it remains a directed market economy, and the new direction will be more uniform and more vigorously enforced national regulations.

What will these changes mean for the size and shape of China's national government? Like the federal government in the United States during the New Deal and even more emphatically during the two decades from 1960 to 1980, the Chinese national government will grow much, much bigger, its regulatory reach into the provinces will become much greater and it will discover that purse strings provide a more humane and a more effective lever for gaining compliance with national regulations than executions and imprisonment.

Chinese companies and their Western brethren with huge Chinese operations face two challenges today. They need to manage and communicate their way through a series of crises - related to product safety, public health, environmental quality, labor practices and a host of other public issues - that are just now beginning and that likely will continue to challenge them, at least through the Beijing Olympics. At the same time, they need to learn quickly how to help shape the new regulatory directions that the government is bound to take, how to help educate government officials about which rules will work and which will not and how to make the kinds of strategic bets about regulatory policies and their own investments that either will allow them to adapt quickly and prosper - or that will condemn them to a quick demise.

All this makes a Washington lawyer in Beijing feel right at home.

The author is the managing partner of the Beijing office of Akin Gump Strauss Hauer & Feld LLP, an international law firm. He is also a former associate director of the White House Office of Management and Budget.

(China Daily July 20, 2007)

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