Economy

But Pepsi is Chinese, right?

Why ‘Buy America’ rules are more trouble than they’re worth

Woman ponders where Pepsi originated

Did you know that Thomas Jefferson – author of possibly the most influential political document of modern times – was also fascinated with the ideal process for making manure?

It may seem paradoxical that the great Virginian could reconcile a passion for animal waste with the lofty sentiments penned in the Declaration of Independence, but America’s history is full of paradox. And here is the latest: the nation that has lectured the world for so long on free trade is now penning protectionist ‘Buy America’ bills.

So how has China reacted to the ‘Buy America’ provisions in President Obama’s $787 billion stimulus package?

Quite well, at first. Jiang Zengwei at the Ministry of Commerce opted for the moral high ground in his initial reaction to the news – promising to “treat domestic and foreign goods equally so long as we need them.”

But Chinese patience was soon to show signs of fraying.

The Senate had initially provoked the ire of its trading partners by stipulating that any public works projects funded from stimulus funds could use only US-made iron, steel and manufactured goods. Language was then added last week to soften the terms, requiring that they be applied in a manner consistent with America’s obligations under international agreements. However, this excludes countries like China, which lack reciprocal arrangements on government procurement.

So, by the beginning of this week, the rhetoric was being cranked up. China’s official news agency Xinhua was talking of the “poison” of trade protectionism, and Mei Xinyu – a colleague of Jiang’s at the Ministry of Commerce – warned that China would not “wait to become a victim”.

Critics of the ‘Buy America’ stipulations in the US doubt whether the returns are worth the accompanying risks. In a recent study (Buy American: Bad for Jobs, Worse for Reputation) the Petersen Institute for International Economics points out that only around a thousand additional jobs in the US steel industry will be created as a result.

The most immediate concern is foreign governments could choose to limit public procurement of American goods in a tit-for-tat response. In 2006 – the most recent year in which consolidated figures are available – the Chinese government, for example, purchased $8 billion worth of American goods and services (which was about a sixth of the total China spent on overall US exports).

Any curtailment in its procurement policy would obviously hit American firms tendering for government contracts. Manufacturers of heavy industry items (turbines, industrial machine tooling, forklift trucks etc) could be amongst those most seriously affected. All this at a time in which China’s own $586 billion infrastructure-laden stimulus plan should be offering opportunities to foreign firms.

The proposed US legislation throws up other unknowns, not least how products might be defined as “foreign”. How would a Toyota manufactured in Michigan be classified, for example? Or a US product engineered from parts sourced or even partially assembled in China?

It turns out that the Chinese are confused about what constitutes “foreign” too. The Pepsi Taste Challenge (or, more specifically, a Chinese variation of it) helps in suggesting why.

Some readers may recall that Pepsi has long promoted a test in which blindfolded tasters are encouraged to identify cola drinks. A report last year by the Boston Consulting Group (Foreign or Local Brands in China) gave a new twist to the story. There were no blindfolds in this particular survey but respondents in Shanghai and Beijing (hardly rural backwaters) demonstrated blinkered vision of a different kind. A quarter of those surveyed revealed that they thought Pepsi was a Chinese company.

This was the most glaring example of what BCG calls the “chameleon effect”. Foreign marketers have been so successful in tweaking their international offerings with Chinese names, logos and packaging that shoppers often can’t tell which brands are from China and which aren’t. About 80% of respondents incorrectly identified popular foreign household and personal care brands as being domestic ones, for instance.

Chinese consumers seem to be more governed by rationalism than nationalism when it comes to shopping. It should be hoped that legislators come to similar conclusions. With protectionist policy tough to enforce in today’s global economy, and with so many consumers (in China at least) not even aware that they are purchasing overseas brands, restrictions on foreign goods would seem to create more problems than benefits.


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