- - Monday, May 18, 2015

ANALYSIS/OPINION:

To supplement profits that have been hamstrung by slowing domestic growth, Western companies are turning to emerging markets with greater frequency. Participation in those markets, however, is not without risk; businesses face challenges ranging from corruption to unfair regulations and a host of other issues.

Executives must weigh the difficulty of operating in such an environment versus the potential benefits — and nowhere is this truer than in China. One particularly daunting problem that companies face is the Chinese government’s harassment of foreign firms through coordinated efforts between state-owned media and government regulators. This threatens international competitiveness in the Chinese market, and is an impediment to the long-term viability of these ventures. It is time for the administration to demand an end to such unfair attacks on American companies.

This pattern of harassment of foreign firms by state-controlled media outlets — ironically, being carried out in the name of combating corruption — is well-established. According to testimony by American Foreign Policy Council’s Joshua Eisenman, “China has been making it harder for foreign firms to operate in the mainland by disproportionately targeting them in crackdowns … clamping down on their operations and employing innovative discriminatory tactics to restrict their ability to conduct business.”

Prominent targets have included Apple, Microsoft, KFC, McDonald’s and Pizza Hut. Cases brought by regulators typically begin with state-run media breathlessly reporting questionable, exaggerated or inaccurate claims about the American firms.

In the case of KFC, state-controlled China Central Television (CCTV) made the seemingly shocking claim that ice cubes used in KFC stores were 12 times dirtier than toilet water, according to bacterial tests conducted by the news agency. Perhaps if the experiment had been conducted by academics (instead of Chinese government propagandists) it might have disclosed that raw bacteria numbers are meaningless. Not all bacteria is created equal; according to food safety expert Dong Qingli, “the bacteria count on your teeth or on the bottom of your shoe is about the same.” What matters is the type of bacteria and whether it is harmful to people. The CCTV report, in other words, said nothing useful about actual health risks.

CCTV also led the attack against Apple, with charges of “greedy” and “incomparably arrogant” behavior. The cause for such accusations? Nothing more than allegedly subpar service for Chinese customers. Even if the claim is true, consumers are more than capable of resolving the problem themselves by shopping elsewhere. Legal force is unnecessary and counterproductive. Car manufacturers have faced similarly excessive scrutiny and overblown accusations from CCTV.

Last summer, Husi Food, a subsidiary of U.S.-based food-processing corporation OSI Group that supplies companies like McDonald’s and KFC, became the latest victim of Chinese officials. The Shanghai Food and Drug Administration arrested six employees on “suspicion of producing and selling fake or substandard products.” As with earlier cases, the raid followed a report by Dragon TV, a Shanghai state-controlled media outlet, which featured a leaked video purporting to show Husi employees returning dropped meat back into a mixer bin.

Not disclosed, however, was that both the employee who dropped the meat and the one who filmed the incident were Dragon TV employees who gained work at the factory two months prior under false pretenses. Because the evidence is flimsy, officials have kept the six arrested employees in legal limbo, where they are at the mercy of the nation’s dubious justice system. Unsurprisingly, the incident has led to the loss of hundreds of jobs, as well as hundreds of millions of dollars in lost revenue for OSI Group.

Against this backdrop, it’s little wonder that a recent survey of top-level managers at American companies in China found more than half feel regulators are focusing on foreign firms, and almost as many feel unwelcome doing business in the country.

It would be easy to suggest that American and other foreign companies operating in China should simply leave for more hospitable destinations, and if present trends continue that may start to happen. But the nation’s massive population and growing consumer class is highly attractive, and it’s an undeniable benefit for American corporations to succeed abroad.

China’s “consumer protection” efforts are little more than thinly veiled trade protectionism. All reports suggest Secretary of State John Kerry missed the opportunity to challenge this behavior while meeting with Chinese officials in Beijing over the weekend. He and the administration will get another opportunity to protect both free markets and U.S. interests next month as Washington plays host for the U.S.-China Strategic Economic Dialogue. This time they should make it count.

Andrew F. Quinlan is the co-founder and president of the Center for Freedom and Prosperity.

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