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Home > Blogs > Anthony Harrington > Google in China—A thorny lesson unfolds

Google in China—A thorny lesson unfolds

Finance Blogger: Anthony Harrington Anthony Harrington

What to do? Doing business with the world’s second largest economy, which looks like it may become the world’s largest economy within the working life of today’s 20-year-olds, is a “no brainer” from a strategic point of view. Granted, China is not a Western democracy, but it is more and more embracing market economy practices, and some economists would argue that you can’t be a little bit pro free market any more than you can be a little bit pregnant.

Markets are either free or they are not, the argument goes, and where they are not the strain created by the heavy thumb of the regulator or the government pressing on the scales generates its own absurdities. After a bit that either causes the regulator or the government so much embarrassment that the choice is either for them to bow out or to give the whole free market notion the bullet. Since China is making mega billions out of trade, the latter option looks highly unlikely.

Those who disagree with this “completely free or not free” philosophy point to the fact that China has actually done pretty well out of some aspects of state control, as in setting the value of the renminbi against the dollar, keeping China’s exports cheap and the West’s imports dear, and racking up enormous balance-of-trade surpluses. True, this created a credit bubble when the Chinese dollar mountains recycled back into US Treasuries, making credit cheaper and cheaper, but hey, would you rather be a world class debtor or a massively rich creditor?

Another point to be made here is that we in the West are in the process of moving into more rather than less state intervention, via regulation, in supposedly “free” markets anyway. Which is why the high capitalist fraternity in the US are totally scandalized by the scale of the bank bailouts. You can find “the death of capitalism” bemoaned in any number of US postings and blogs. Don’t take my word for it, try a Google search (provided you are outside China, of course…)

Then there is the fact that there is an awful lot going on in China, including modernization at a frenetic pace and mass migration from the countryside to the cities on a scale that would make any Western government go into cardiac arrest.

With this backdrop, Google, which was always in a fantastically difficult position having compromised its standard business practice by censoring its own search engine at the Chinese government’s behest, found a sophisticated hack attack on its service, aimed at a segment of its customer base (human rights activists) to be the proverbial “last straw.” It will no longer censor its search engine and if that means it can’t do business in China, then it won’t do business in China. Yahoo, one of Google’s biggest rivals has politely applauded Google’s decision from the sidelines.

The Chinese reaction was still developing at the time of writing, and has been restricted so far to a comment by the Chinese censor, along the lines of “we expect you to honor your contract”—ironically, and doubtless not accidentally, a quintessential free market response. What are markets without contracts, after all?

So far there is no guessing what the Google/Chinese spat will mean, if anything, to Western businesses. Political risk is an unavoidable dimension of a great deal of export or foreign-based activity and companies need to take up the theme of insurance against political risk with companies in the insurance sector who specialize in providing this kind of cover.

It would be interesting to know how much insurance risk cover, if any, Google has for its Chinese operation. If a lot, some insurer or reinsurer somewhere will be in need of a stiff whisky and steady nerves as they watch this particular tussle unfold in the weeks ahead.

Further reading:

Tags: China , free-market economics , Google , international differences , political risk , trade
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