Hirsh: Scandals Threaten China’s Prowess

It wasn't long ago that we were hearing a great deal about the rise of the "China model" and the decline of the American brand. Beijing was spreading its gospel about blending state repression and economic freedoms to societies as far afield as Iran. In Tehran today, religious conservatives who worry about the durability of clerical rule like to talk about how the mandarins in Beijing managed to quash political dissent after Tiananmen Square by redirecting the popular demands for a better life into a booming economy. Even Raúl Castro, filling in for his ailing brother, Fidel, has seemed interested in rescuing Cuba by adapting China's model of a state-dominated market economy with one-party political control. As recently as late May, the commentator James Mann wrote in the San Jose Mercury News: "As the U.S. model has become tarnished, China's has gained new luster."

No longer. The tainted-products scandal that continues to bedevil Chinese imports has awakened the world to one of the critical flaws in the China model: without a sophisticated and transparent legal and political system, it may be impossible in the end to compete in the front ranks of developed nations. And without political freedoms, it may be impossible to develop the system that is needed. "For all China's commercial success, we're seeing that a lack of transparency about worker safety, product safety and labor rights has clearly kept them from being the so-called wonder model that some have suggested," says Gene Sperling, a top economic adviser to Hillary Clinton. "I think that now that China has become such a global economic force, when reports of their quasi-slave labor practices or horrible product safety are revealed, the stakes are higher for them and the pressure on them is greater."

In truth, the idea that the "China model" was exportable has always been dubious at best. Yes, the reforms begun by Deng Xiaoping in 1978, when he opened up first the agricultural sector and then other parts of the economy to free enterprise, have been far more enlightened than those of other authoritarian regimes that tried to reform themselves. But the truth is that China has become an export giant for other reasons, principally a policy of extortion of foreign businesses and investors based on the sheer size of its economy.

Back in the late '90s, U.S. Trade Representative Charlene Barshefsky used to lament how Chinese delegations would always follow the same pattern when bargaining with U.S. businesses. The Chinese would smile for the cameras, but then once the door closed they would stare unsmilingly at their counterparts and begin what Barshefsky called "The Lecture." It went like this: "China is special. If you want to do business here, you'll do it on our terms. Otherwise—well, there's always the Europeans and the Japanese." Typically U.S. companies—whether computer makers envisioning 1.2 billion desktops, or deodorant firms contemplating twice that many armpits—would shudder in horror at the implied threat. Then, more often than not, they would cave into whatever terms China demanded. You want half ownership in a joint venture, while making only a fraction of the investment? Uh, OK. You'd like us to put up $1 billion toward developing your own auto industry—and agree to an indefinite ban on our sales locally? Um ... where do we sign? In every trade parley, Barshefsky said, Beijing's point was the same: "1.2 billion people put China in a category different from all other nations, and therefore ... fill in the blank." The result was that China grew lazy and spoiled with its success.

But now American dogs are dying, consumers are turning away from dioxin-contaminated seafood and tainted toothpaste, toys painted with lead are going unbought and China's mandarins are rightly panicking. Even they seem to recognize that if the scandal endures, many Chinese products could be shunned in major economies around the world. But they seem unequal to the task of wrestling with the problem. They simply don't have the system in place to rein in the rampant corruption and double-dealing that has always been the way of doing business in an economy left backward by the kid-glove treatment it has gotten from the rest of the world. Shooting the former head of their FDA won't do the trick. And while they rush to catch up—forming a cooperative agreement with U.S. regulatory authorities—more bad products are streaming into the market.

That will raise even more doubts about China's ungoverned manufacturing sector. "If there's any silver lining to such tragedies it's the increased pressure it will put on the Chinese government and on multinational companies to not look the other way because they're so worried about offending the Chinese government and losing some sense of access or preference," says Sperling. "Now the lesson is: if you don't pressure the Chinese and you let these things happen, the cost will be even higher." What began as a few cases of bad dog food could well end up as a major challenge to Beijing's iron rule—and to the China model.