Two Hus, and China's hardball trade game

China's form of economic hardball is possibly unique in these times, a game that has emerged from a specific set of temporal factors, including their culture and their current global economic status.

The immediate context for this is the arrest in China of Stern Hu, an Australian executive of mining conglomerate Rio Tinto. Hu has been accused of, but not yet charged with, espionage. The Chinese government said Hu and three other Rio Tinto employees arrested "have already broken Chinese law and have violated international business ethics".

This was preceded by pricing negotiations that ended up being more favourable to Australian resource companies than had been generally expected. Further, on 5th June Rio Tinto backed out of a $AU25 billion deal with Chinalco, and instead joined forces with rival BHP Billiton. China's burning need for raw materials makes major dealings with resource companies extremely sensitive. Upon the deal's collapse the Chinese immediately convened a high-level political task force to "assess the political and economic risks" of large outgoing investment deals.

Yet: "This is certainly not 'revenge' for the Chinalco deal not going through," said a Chinese Government source. "It is part of a considered, all-of-government response to the general resources question that was made after considering the likely international response."

Maybe not specifically, but it could well be a tactical manoeuvre underpinning the Chinese government's overarching strategy on resourcing.

What happened is not clear yet. But it's obviously tied to the dangerously tricky nature of doing business in China.

The Sydney Morning Herald's John Garnaut noted : "Rio Tinto has strong rules and a strong corporate ethos that should mean that China's 'conclusive evidence' about the company paying bribes turns out to be unsubstantiated." But between Rio's official policy and China's "enormous system of laws that are seldom enforced", there is the traditional Chinese way of business. Another Herald journalist commented:"The immediate very public escalation of the arrest issue makes discreet high level use of guanxi - the uniquely Chinese concept of personal relationships - extremely difficult".

There is thus a wide chasm between the customary way of doing business, and how it should be done if legally enforced. That chasm constitutes an enormous manouvering space under the direct control of the Chinese government. So they are deciding when to enforce practices that would usually be seen to be corrupt or involving undue personal influence.

The deliberate revelation that President Hu Jintao personally approved the "investigation" that led to the arrest, signals an escalation in the politics of trade. Until the Chinese government becomes obliged to close the gap between customary practice and law in a uniform way, they control the playing field. Internation economic and political pressure will force the issue, but until then the Chinese government will be taking full advantage of it.


16-Jul-09 Update: Although PM Kevin Rudd's (public) response to the arrests has been characterised as lukewarm to date, as a sinophile ex-diplomat he is probably better versed than most in the intricacies of communication at that level. But his public words are now somewhat stronger: the world is watching. Meanwhile, a Chinese newspaper quoted an unnamed industry source that Rio had bribed executives of 16 steel mills to get access to industry data "which has become an unwritten industry practice" - which begs the question why those executives weren't also arrested. Lastly, the incident has caused a spike in the spot price for iron ore. Whilst economists can always give explanations for a sudden price jolt in either direction, in this case it could be said to reflect perception that the cost of doing business (with China) is higher than previously expected.

Environmental crisis (#3 of 2008)

The eye was off the ball this year, distracted by the global financial crisis.

In the last two decades, habitat destruction has been recognised as the biggest threat to biodiversity - but recognition has not sufficiently translated into action. That very narrative was compounded and magnified by the complete wrenching of the global ecosystem, simply because we vote for leaders who are too lacking vision to grapple with the large-scale industrial revolution needed to counter global warming.

The European Union has been - by and large - a bastion of sensible policy. However, their approach remains far too evolutionary and not revolutionary enough. China and India are slow to respond, but are not helped by lack of leadership from the industrialised nations. In America, we have to wait for George W Bush's pathetic body to be shovelled bit by bit out of the Whitehouse - and then have to wait for Obama's plan to translate vision into action.


Which, as it happens, is where Australia has tripped up in a big way. While espousing mantras on the absolute imperative of combatting global warming, Kevin Rudd's leadership has been characterised by lengthy inaction and delaying investigation - trumped by the release of a policy raft that demeans all Australians in the smallness of its vision - so much so that it has been said to actively encourage dirty carbon emitters to ramp up their destructive practices for some time to come - whereupon they will be handsomely rewarded with government handouts, and have plenty of room to make token improvements.

Kevin Rudd was characterised by a Canberra insider as being especially indecisive. His deputy - and frequent acting Prime Minister - Julia Gillard was in turn described as being particularly intelligent and action-focused. I have heard her performance in parliament several times, and her ability is clear and strong. Waiting for the great leap forwards.

Climate change and oil: an ironic confluence

It could be speculated that if the current oil shock had come about fifteen years earlier - say when Bush senior was waging his war - our global environment would not have such a drastically unhealthy prognosis.

Aside from the effects of maintaining war in Iraq the American way, this incredible rise in oil prices has other roots, particularly in the rapid rate of industrialisation in China (and to a lesser extent India). The irony of timing remains: if a few factors in the course of human history - or planetary composition - were tweaked, we might be switching from fossil fuels before the irrevokable global damage that we are busy causing.*


But we're caught unaware. Due to soaring petrol prices, Sydney's seeing a sudden strain to public transport infrastructure, after decades of favouring cars at the expense of rail. In Spain, the government shows signs of bowing to pressure from truck drivers. And despite governments across the world turning around on the issue, the pace of policy change is far too slow to match the urgency of the problem.

Belatedly, this shock has slightly increased the rate at which we are moving away from fossil fuels. But it's not enough, and precious lead time has been lost. Further, despite some arbitrary claims that we have reached a time of "peak oil" (which would deliver its own shocks), in reality the science and the economics is not incontrovertibly there, as it is with climate change. The surge in prices only makes it more lucrative to explore for and extract fossil fuels.

If the stars were in fully fortuitous alignment, we'd experience our current rapid technological spurt first, followed by an oil shock, followed by global warming danger. These factors are strongly intertwining, but the timing is off, and our mettle is being tested so harshly that one might stop to think there were no heavens to guide us. Our leaders are tested, but just as culpably we ourselves, who vote in those leaders and who wait around for others to take action or for governments to legislate to force our hand.

The Iraq-specific factor in the oil shock is temporary. But the galloping industrialisation of China is not.


*When I say our damage to the planet is irrevokable, I mean that the Earth has recovered several times in the past, however recovery doesn't happen on the scale of human history - it's in the millions of years. So this human-caused event is an "in our lifetimes" type situation.

Climate Change conference: Rudd's hard call

The current Climate Change conference in Bali would test anyone's mettle.

This year's IPCC reports demonstrate the problem is more urgent than previously acknowledged, and carbon emission targets need to be more stringent.

The developed world has four big issues that sound simple, yet are nigh on intractable politically.

First, agreement on targets for developed countries. The European Union recognises the need for greater urgency, and is aiming for 25% to 40% emission reductions by 2020. New Zealand is in line, but the US, Canada, and Japan are likely holdouts. Australia's delegation signalled that it supported that goal. However, PM Kevin Rudd subsequently hedged, saying he will "take advice on whether the targets are workable".

Second, the industrial world has a clear responsibility to support the developing world in meeting targets. The current problem is almost entirely due to the rich nations, both in their industrialisation, and in their decimation of their own wilderness. And from a letter in today's Herald:
"Appealing to self-interest alone will fail as the countries with the best capacity to bring about change face proportionately fewer effects from climate change and have greater capacity to adapt than the countries that are the smallest polluters." - Simon Biddle

So, the challenge lies specifically with the rich countries: in industrial restructuring, and in supporting others with technology and money. I am quite confident political will is going to be thin on the ground. Except with the EU and New Zealand.

Third, China. China has to agree to real emission goals, and this is going to be hard. To make any sense at all, they need to cut emissions, however they can cogently argue that they are not properly industrialised yet, and so should not cut, or should be treated as a developing country. The pragmatic solution lies in treating them as a special case, with a bit of both in the mix.

Fourth, the US. Bush will absolutely remain a holdout, and will only agree to tokenism. That is, aspirational but not real goals. Two of Bush's delegates to the conference (mentioned here) are James Connaughton, one-time energy-sector lobbyist, and current stooge in the Council on Environmental Quality, and Paula Dobriansky, neo-conservative Under Secretary of State and staunch defender of the US's refusal to ratify Kyoto.


What chance do we have? What will Australia do, now that we are no longer as firmly glued to US policy as we were under John Howard?

Rudd is caught in a bind. His election campaign presented two principles that are apparently diametrically opposed: commitment to climate change, and economic [fiscal] conservatism. Quite a big test so soon after taking the reins.

There is one clear answer to that, as demonstrated by the Stern Review: the cost of action is far less than the cost of inaction.


I'm quite pessimistic about seeing an appropriate outcome. It is clear that Stern will be treated as a Cassandra - correct but unheeded. But... there remains hope. We still have the leadership of the EU to look to: I believe they are capable of forging ahead, and waiting for the world to catch up.

World: How to promote technological advance

The US Congress wants to keep Google out of China. To "promote human rights" - or to encourage technological innovation in enemy territory?


IT Toolbox notes that the US Congress is considering legislation to "keep vital computer servers out of China and other nations the State Department deems repressive to human rights". From what I've seen of Congress in action, this is a fairly typical small-picture approach. Next, watch them tack it on as a small item on a much larger, unrelated "must pass" bill. That's a one of many less-than-ethical tactics Congress has learnt over the years, which I have yet to see in other parts of the world.

Question 1: will this legislation foster human rights in China?
Question 2: will this legislation foster even Congress' version of human rights?
Question 3: is China at a pivotal point in innovation where this action would encourage R&D, resulting in a homegrown version of Google? (If so, the US would be fighting four-to-one odds, in terms of population.)
Question 4: just what does Congress really believe in, and do they express it with any consistency?
Question 5: Was a BBC commentator right when he called it simply a response to an economic threat, i.e. disguised protectionism?


I could keep coming up with questions on this. But I'll stick to one final thought:
If you think this is major cultural/ideological hegemony on the part of the US, I have one word for you: Hollywood.

You don't have to legislate hegemony.