We were supposed to be entering the era when there would be just a party of two at the grown-ups' table: the place where the real power lies and where the key decisions get made. The U.S. and China the world's strongest developed nation and the world's fastest-growing major developing economy were going to partner quietly to resolve some of the world's biggest ills. Climate change. Rebalancing the global economy. Reworking the world's financial architecture. No one ever called it the G-2 in public why insult Europe, Japan, India and everyone else? But every time a senior U.S. official went to Beijing for meetings, the point was pretty clear: Now, the important business gets done.
That era is on hold. The U.S. and China aren't solving problems; they are trading trans-Pacific insults that have given a jarring, Cold War era tinge to a distinctly 21st century debate: Just how free should the Internet be, and to what lengths can governments go to exploit it for its own aims? The trigger, of course, for the current war of words between Washington and Beijing was Google's Jan. 12 declaration on its website that it would no longer agree to censor its search engine in China. Google said it believed the authorities were behind a series of cyberattacks against its computers, including probes designed to steal the Gmail addresses of human-rights activists and other dissidents inside China. (Beijing denied any state involvement in the cyberattacks.) U.S. Secretary of State Hillary Clinton then followed with a high-profile speech on "Internet freedom," which took direct aim at Beijing, among others.
In the immediate aftermath of Google's announcement, Beijing was conspicuously quiet. In part, this was because the authorities were unclear over how to respond. Says one Chinese Internet executive: "Are there security types in the government who would shut down the Internet tomorrow if they could? Sure there are. But there are also [policymakers] who want China to be a modern, tech-savvy country, and having Google threaten to walk out isn't exactly helpful." However, once it became clear to Beijing that this was not only Google's fight but one that Washington would adopt, China fired back. Said a Jan. 25 editorial in a state newspaper: "In the eyes of American politicians, only when information is controlled by the U.S. does it count as free information."
International commercial spats involving China are increasingly common as it becomes ever more integrated into the global economy. But none have so quickly attained the white-hot intensity of the Google fracas. The Mountain View, Calif., Internet giant openly flouted one of the cardinal rules of dealing with China: no matter what the dispute, quiet backroom diplomacy is the only way to deal with the rulers in Beijing. That is truer for large corporations than it is for governments, because the China market just doesn't stop growing, not even, as 2009 demonstrated, in the teeth of steep global recession. For one of the most powerful companies in the world to publicly assail the Chinese government, and effectively threaten to abandon the China market unless Beijing stops censoring the Internet, was not only unprecedented, "it was astonishing," says the head of China operations for a FORTUNE 500 company.
The Bigger Picture The public démarche provided more than shock value. For much of 2009, China was rightly lauded for keeping its economy humming, enabling it to be a growth engine for the rest of the world. But in a way that could not have been anticipated least of all by Beijing's leaders the Google issue has crystallized a whole range of discontent with China, economic and otherwise. "To a degree, it has put a punctuation mark on what has been a very bad run of publicity for China," a top Western diplomat in Beijing says. Some of that discontent has been very public. The sentencing of dissident Liu Xiaobo to 11 years in prison and the controversial execution of a British citizen of Pakistani descent, convicted of being a drug trafficker, angered human-rights activists, while many environmentalists fairly or not hung the failure of the Copenhagen climate-change summit around China's neck. With awareness, as well as concern, growing about the country as a world power, China's global role is certain to be dissected and debated at gatherings like the World Economic Forum in Davos.
Less public, but not necessarily less intense, has been frustration building in segments of the international business community operating in China. Many foreign businessmen interviewed by TIME in the wake of the Google announcement concede they are deeply conflicted by what has happened in the China market since the onset of the international financial crisis and the global slump that followed. On the one hand, many of their companies are leveraged to China's growth as never before. Ask General Motors, which is in bankruptcy in the U.S. but enjoys surging sales in what is now the largest market for cars in the world. At the same time, among many business executives, there is a sense that China is moving backward on issues of key concern to foreign businesses, from antitrust enforcement to intellectual-property protection to market-entry issues. As China prospered while much of the rest of the world slumped, attitudes among policymakers in Beijing and even in far-flung provinces have shifted noticeably, many foreign business executives say. Some call it arrogance. Some say it's simply increased confidence. But as Kent Kedl, a Shanghai-based consultant at Technomic Asia who helps foreign businesses navigate the China market, puts it, "Beijing's attitude is, My house, my toys, my rules."
An Emerging Backlash That perception has been shaped in part by some high-profile incidents last year. Many foreign companies were (and remain) stunned by the 2009 arrest of four executives from Rio Tinto, the minerals company, about a month after the Anglo-Australian giant decided not to accept a $19.5 billion investment from China's state aluminum company, Chinalco. Beijing insists the case against the men revolves around commercial bribery allegations, and has nothing to do with the Chinalco deal. But the widespread belief among foreign businesses is that the case represents little more than a fit of pique from jilted Chinese authorities.
Or consider antitrust regulation. In 2008, Beijing put into effect a muscular new antimonopoly law that, while in many ways an improvement over what had existed before, allows the state to protect "national brands." The Ministry of Commerce later blocked Coca-Cola's proposed acquisition of a well-known juice company called Huiyuan. The ruling befuddled independent lawyers who had looked at the proposed merger. Competition-wise, "this would not have [negatively] affected the nonalcoholic-beverage market at all," says Michael Gu, an attorney at the Zhong Lun Law Firm in Shanghai. Coca-Cola executives were privately shocked. The company, before the ruling, had unveiled a $90 million "global technology and innovation center" in Shanghai and committed to invest $2 billion in China over the next three years. Coke had been, in other words, close to a perfect corporate citizen in the country, and on the merits probably should have been able to acquire Huiyuan. But sources close to the aborted merger suspect the government's ruling was partly tipped by pressure from a local company that did not want Coke to acquire Huiyuan. Says an adviser to the deal: "It was home cooking, pure and simple, and it didn't taste real good."
Home cooking, of course, doesn't just exist in China when it comes to business deals. Uneven playing fields can be a fact of life pretty much anywhere business is done. The current angst among foreign businesses operating in China is that a fundamental precept for their investments there particularly since 2001, when Beijing joined the World Trade Organization is that on key business issues (intellectual-property protection, tariff barriers to entry, antitrust enforcement) things would slowly but surely continue to improve as the China market grew. And for a time, in the wake of WTO entry, they did. Now, some executives say, the problem is not simply that the momentum has slowed, but that it has gone into reverse.
The Google-driven Internet fight comes at a deeply awkward moment for China and the outside world. Trade clashes of the more prosaic kind the U.S. steel industry filed another antidumping allegation against China in early January were already intense. And that's not Beijing's only problem. China's trade relations with the E.U. the country's biggest trading partner are even worse than they are with Washington, because in a period when the U.S. dollar has been weak against the euro, China's de facto peg of the renminbi to the dollar has put excruciating pressure on many European companies trying to compete with Chinese producers.
Nobody ever said managing China's rise was going to be easy, not for Beijing and not for the rest of the world. There's never a good time for a trade war, but absolutely no one Beijing, Washington, Brussels can afford one now. Someone's got to reconvene the grown-ups' table.