Wednesday, March 24, 2010

Google, Chinese Badasses, and Trade Wars

. Wednesday, March 24, 2010

I meant to post something about the Google/China row when it was more newsworthy, but got busy with other things. For those not up to speed, Google discovered that hackers, presumably working for the Chinese government, were hacking into the Gmail accounts of dissidents, trying to get data on subversive searches, and otherwise using Google to serve domestic political purposes. Or, as Google's chief legal officer put it:

The initial premise, that it all started from a hacking episode, is not quite right. We did have a hacking incident. Most hacking incidents that you see are freelancers -- maybe government sponsored, maybe not. They are out there trying to steal intellectual property, make some money. Or they might just be hackers who want to damage something for whatever reason. That's a fact of life that internet companies deal with all the time.

This attack, which was from China, was different. It was almost singularly focused on getting into Gmail accounts specifically of human rights activists, inside China or outside. They tried to do that through Google systems that thwarted them. On top of that, there were separate attacks, many of them, on individual Gmail users who were political activists inside and outside China. There were political aspects to these hacking attacks that were quite unusual.

That was distasteful to us. It seemed to us that this was all part of an overall system bent on suppressing expression, whether it was by controlling internet search results or trying to surveil activists. It is all part of the same repressive program, from our point of view. We felt that we were being part of that.

Google apparently took their famous corporate motto -- "Do no evil" -- to heart, and decided to close their Chinese ( search engine and redirect traffic to the Hong Kong ( engine. The issue? The .cn engine has filters on politically sensitive queries while the .hk engine does not, and it is illegal to operate a search engine in China without filters. China's "Great Firewall" now treats as a foreign search engine, and blocks many searches.

Needless to say, I think Google was absolutely in the right here. They were not willing to become a tool of the Chinese state to oppress would-be reformers, or even just curious citizens. But China obviously wasn't too pleased. The government immediately began threatening Google's other business arrangements in the country:

The overseas edition of the People’s Daily, the main newspaper of the Chinese Communist Party, on Wednesday accused Google of collaborating with U.S. spy agencies, Reuters reported.

‘‘For Chinese people, Google is not god, and even if it puts on a full-on show about politics and values, it is still not god,’’ said a front-page commentary piece. ‘‘In fact, Google is not a virgin when it comes to values. Its cooperation and collusion with the U.S. intelligence and security agencies is well-known." ...

But some of those other businesses quickly came under pressure. China Mobile, the biggest cellular communications company in China and one of Google’s earliest partners in its foray into smartphones, was expected to cancel a deal that had placed Google’s search engine on its mobile Web home page. Millions of people use the page daily. In interviews, business executives close to industry officials said China Mobile was planning to scrap the deal under government pressure, although it had yet to find a replacement.

Similarly, China’s second-largest mobile company, China Unicom, was said by analysts and others to have delayed or scrapped the imminent introduction of a cellphone based on Google’s Android platform. One popular Web portal,, already ceased using Google to power its search engine. The company is controlled by Li Ka-shing, the Hong Kong billionaire who has close ties to the Chinese government. ...

“We certainly expected that if we take a stand around censorship that the government doesn’t like that it would have an impact on our business,” Mr. Drummond said. “We understood that as a possibility.”

This, too, could be expected and indeed Google expected it. Google was willing to bear the costs, but that doesn't mean they are insignificant. As Tyler Cowen tweets, Google are heroes for doing this.

But this made me think of something else: the claim made by trade warriors that the U.S. can force China to revalue the yuan by threatening tariffs if they do not comply. Krugman made the case:

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.

But if we can learn anything about the China/Google affair, this is the exact opposite of what is likely to occur. (Nevermind for now the fact that Krugman has the economics wrong, or that there is no reason to think that the EU, Japan, and other countries will follow suit since the incentives to free-ride s are very high.) Instead of simply capitulating, China will call the U.S. protectionists, take us to the WTO (where they will win), and will enact countervailing duties on our products. If they wanted, they may also sell off some Treasuries, which would depreciate the dollar and cause American standards of living to doubly drop -- first from the increased price of imports, second from the devalued dollar. Now we've got a trade war with massively declining standards of living in both countries.

China has shown plenty of times that it is willing to take some economic pain in order to preserve its autonomy. The recent case with Google is merely the most recent case, but it is illustrative: Google is the world's largest internet company, and China seems willing to cancel all economic relationships with them simply because Google wouldn't self-censor, and because they had the audacity to oppose targeted cyber attacks against political dissidents. Imagine how they'd respond if the U.S. took the Krugman/Bergsten line and "got tough". I very much doubt that China would simply rollover and capitulate. That's not how they operate.

(In other words, I'm saying that the Chinese leadership are badasses.)


Google, Chinese Badasses, and Trade Wars
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