China is the largest market for General Motors, but there is no GM China. Instead, there is SAIC-GM, a joint venture between China’s largest state-owned auto company and GM. All auto companies operating in China have a similar partner, such as SAIC-Volkswagen, GAC-Toyota and Changan-Ford. And the partners are typically state-owned companies, and their names come first. Doing business in China requires such joint ventures in several other industries as well, including finance and telecommunications. Even when they are not formally required by law, joint ventures are often needed to help foreign companies navigate the complex Chinese business environment. This restricted entry leaves foreign companies choosing between sharing profits and technology with a local partner, sometimes affiliated with the government, or forgoing the largest and fastest-growing market. Not surprisingly, despite these market entry rules, foreign companies invest in China anyway, because of the unrivaled growth prospects. In 2000, the year before China entered the World Trade Organization, fewer than two million vehicles were sold in China; last year 23.9 million were sold. In comparison, about 17.5 million vehicles were sold in the US in both years. For China, the benefit of strict entry rules is that the government or local companies get a sizable chunk of the profits that would otherwise accrue to foreign companies. Because competition is limited, the main costs are higher prices and less product variety than would be the case in a free market. New products are frequently absent on the Chinese market because US and other foreign companies don’t want their Chinese partners to gain access to cutting-edge technology. The Growing Problem: During the 2000s, while China’s economy was growing at double-digit rates, there were few complaints about the compromise. US companies were glad to have access to the growing market. Now, with slower global growth and the rise of Chinese competitors, they are becoming less complacent. Among the foreign companies’ concerns are laws aimed (directly or indirectly) at boosting technology sharing. For example, to combat pollution, China’s five-year plan targets 8 percent of vehicles sold to be electric by 2018 and 12 percent by 2020. From an environmental perspective, the plan is impressive, but from a manufacturing perspective, there are some strings attached. A 25 percent tariff on foreign autos means less than 5 percent of cars in China are imported. Foreign producers are essentially being told to bring their new electric-vehicle technologies or go home. Rules tend to be especially strict for computer and technology companies. IBM divulged propriety source code to get support to expand in the Chinese market. Apple was temporarily barred from selling a phone that was similar to one offered by a Chinese brand. After facing a $975 million fine in 2015 for anticompetitive behavior, Qualcomm is now working on high-tech computer chips with a government-financed partner on government-supplied land. All tech companies are struggling under data localization requirements. China is charging a high entry fee, one that many companies choose to pay to gain access to its large and fast-growing market. To the extent the rents extracted by China’s government or local companies help fuel development, it has been a smart policy. But China is a big economy, which should start behaving in line with world norms to help make globalization sustainable. Such policies are not entirely novel for a rising economy (the US pursued British trade secrets in its early years, smuggling in textile workers and technology, with the support of government funds under Alexander Hamilton). But they should be phased out as an economy develops. In China, investment reform has been slow. Remedies or deals?” The concerns of the US government and American companies in China are real. One way to respond is with tariffs and investment restrictions on Chinese companies operating in the US market. The rumored Section 301 investigation of China’s intellectual-property abuses would be a step in this direction, potentially allowing the president to impose tariffs on China. This type of method might work if the US could impose more pain on China than China can inflict on the US But escalating trade tensions is a risky strategy, given our interdependence in the global economy. The US government will also be perceived as violating international rules, making the US, not China, the villain. There is little doubt China will retaliate if duties are put in place. In 2015, when the US put antidumping duties on Chinese solar panels, China responded with antidumping duties on a US input to the very same panels. Even the threat of tariffs can lead China to respond. Back in 2011, when the US threatened tariffs on solar panels, China responded with antidumping tariffs on several American SUV models. Punitive across-the-board tariffs on Chinese goods would likely lead China to target major US exports, like soybeans and airplanes, and make it even more difficult for American investors to do business there. Published in Daily Times, August 15th 2017.