China Cuts Off McKinsey, Other U.S. Consultants To Retaliate Against Cyber Indictments

May 25 2014, 7:50pm CDT | by

Today, the Financial Times, citing “people close to senior Chinese leaders,” reported that Beijing has ordered state enterprises to cut dealings with U.S. consulting firms, accusing them of spying for Washington.  The “instruction,” as the paper called it, was handed down after U.S. Attorney General Eric Holder announced indictments against five Chinese military officers for “serious cybersecurity breaches.”

“The top leadership has proposed setting up a team of Chinese domestic consultants who are particularly focused on information systems in order to seize back this power from the foreign companies,” the paper quoted a “senior policy adviser to the Chinese leadership.”  “Right now the foreigners use their consulting companies to find out everything they want about our state companies.” 

Beijing has not signed the World Trade Organization Agreement on Government Procurement, so the Chinese government is free to discriminate against foreign companies when it obtains goods or services.  Nonetheless, if the FT’s reporting is accurate, the instruction looks like a violation of the WTO General Agreement on Trade in Services, especially when state enterprises act in a commercial as opposed to a government capacity.  In Part A of Annex 5 of that agreement, China undertook not to limit market access to “Management Consulting services” and agreed that foreign parties are entitled to “national treatment” with regard to such services. 

Moreover, China, when it joined the WTO, confirmed that state enterprises would make purchases based “solely on commercial considerations, without any governmental influence or application of discriminatory measures.”  Furthermore, Beijing, in negotiating its entry into the government procurement agreement, is now arguing that purchases by state enterprises should not be covered by the pact.  In short, China’s ordering such enterprises to not do business with foreign consulting companies, as reported by the FT, is a clear violation of its WTO commitments.

Beijing does not seem to care.  The central government’s order to state enterprises is part of a concerted attack on foreign IT.  On Friday, the National Development and Reform Commission, China’s chief economic planning body, said it would strengthen national security review checks on foreign investments coming into China.

On Thursday, the State Internet Information Office announced it would establish a new screening process to vet most foreign IT products and services in China, including those in the communications, finance, energy, and other sectors the government deems related to either national security or the “public interest.” 

And shortly before the Holder announcement, Beijing banned the further purchase of Windows 8, Microsoft’s latest operating system, for central government networks.

Many say that none of these initiatives is a real threat.  The anti-consulting services measure, which Beijing will implement despite its trade obligations, means that state enterprises will be cut off from McKinsey, Boston Consulting Group, Bain, and other first-rank consulting firms.  It could take decades for the Chinese government to build a domestic consulting industry, and in the interim state enterprises will probably fall even further behind.  In the meantime, American consulting firms can concentrate on other clients, private Chinese firms and multinationals. 

The State Internet Information Office’s vetting procedure does not exist yet and could take years to put in place.  Cisco Systems and SAP, in statements to the South China Morning Post, said the new procedures are not expected to affect their Chinese businesses.  The NDRC did not detail how it would strengthen its national security checks, a clear indication that the decision to announce enhanced review was made on the spot.

And Windows is already thoroughly imbedded into central government computers, so Beijing is making sure it does not get upgrades.  As the FT notes, Beijing’s efforts to create domestic software to challenge Microsoft have floundered.  The failure of Red Flag Software, a project of the prestigious Chinese Academy of Sciences, is symptomatic of the inability of Chinese leaders to adapt their Maoist model to the 21st century.

These initiatives—and others—make the Chinese political system look not only backward-looking but increasingly anti-foreign.  As the South China Morning Post reported, observers suspect the IT vetting process announced on Thursday will probably result in Beijing favoring Chinese suppliers over foreign ones.

China’s accession to the WTO in late 2001 was supposed to prevent Beijing discriminating against foreign business.  More broadly, the entry of China into the global organization was intended to “enmesh” the country into a rules-based system. 

Unfortunately, in the last several years Beijing’s trade behavior—the country’s predatory practices are directed from the top—has markedly deteriorated.  The string of China’s losses in the WTO dispute panels—General Motors and Chrysler are the big beneficiaries of a preliminary decision handed down in Geneva on Friday—should be no surprise. 

Looking forward, it appears that China’s state enterprises will take advantage of the prevailing anti-foreign wave to entrench their position in the economy.  The thinking is that every yuan a foreign company makes is one less for Beijing.  Chinese leaders now believe they are living in a zero-sum economy, and foreign business will be the first casualty in this new environment.  China will the second.

Follow me on Twitter @GordonGChang and on Forbes

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

IPad Air Giveaway 2014 is Online
IPad Air Giveaway 2014 is Online
Our sister site I4U News is giving away a brand new iPad Air or if you can wait an iPad Air 2. This is an $499 value.
 
 
Your Parent Or Kid Moved In: Are You Covered?
A record 57 million Americans now live in multigenerational family households — double the number in 1980, according to a new Pew Research Center study. And I bet many of them have the wrong homeowner’s or renters...
 
 
Pandora Looks to Challenge Terrestrial Radio's Dominance in Cars
Pandora Media is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow...
 
 
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
Are General Manager Salaries About To Skyrocket? Will There Be A Front Office Salary Cap?
It’s January 2026. New York Yankees owner Hal Steinbrenner gets out of his driverless car and triumphantly marches before the gathered press to introduce his prized new free agent. It’s a record-breaking contract—over...
 
 
 

Latest from the Network

Kidnapped US journalist's mother pleads IS to release son
Washington, Aug 28 (IANS/EFE) The mother of a US freelance journalist, who was kidnapped in Syria by the Islamic State(IS), Wednesday released a video in which she urged the jihadist group to "be merciful" and release...
Read more on Politics Balla
 
Bieber compares himself to Princess Diana
Los Angeles, Aug 28 (IANS) Troubled singer Justin Bieber has compared himself to the late Princess Diana after he reportedly experienced a minor car collision when he was infuriated about being pursued by a...
Read more on Celebrity Balla
 
Styles helping rising star Meghan Trainor?
London, Aug 28 (IANS) English singer Harry Styles has reportedly offered to help rising star Meghan Trainor as she attempts to break into the music industry. Styles met her in the US during One Direction's 'Where We...
Read more on Celebrity Balla
 
Chris O'Dowd and Dawn O'Porter expecting first child
Chris O'Dowd and Dawn O'Porter are expecting their first child. The 'Bridesmaids' star, 34, debuted his wife's baby bump in a video clip of his ALS Ice Bucket Challenge on Wednesday (08.27.14). Upon completing the...
Read more on Celebrity Balla
 
Maliki urges Iraqi political blocs to back Abadi
Baghdad, Aug 28 (IANS) Iraq's outgoing Prime Minister Nouri al-Maliki called on the political blocs to decrease their demands and hepl form the government lead by Haider al-Abadi. "Some of the blocs' demands are...
Read more on Politics Balla
 
UN delivers food to Gaza via Egyptian crossing
United Nations, Aug 28 (IANS) For the first time in seven years, a humanitarian convoy of the United Nations World Food Programme (WFP) successfully crossed from Egypt into the Gaza Strip Wednesday, a spokesman said...
Read more on Politics Balla
 
Most people take my clothes too seriously: Rick Owens
Los Angeles, Aug 28 (IANS) American fashion designer Rick Owens believes his fans takes his designs too seriously. The California-born designer, known for his statement drop-crotch shorts and leather jackets, believes...
Read more on Celebrity Balla
 
US reporter requests privacy after release
Washington, Aug 28 (IANS/EFE) The US journalist, who was freed this week by the miltants in Syria after two years in captivity, Wednesday thanked everyone for their efforts to secure his release and asked for privacy...
Read more on Ad Balla
 
Chris Martin writes love songs about Jennifer Lawrence
Chris Martin is ''sweeping'' Jennifer Lawrence ''off her feet.'' The Coldplay frontman, who split from Gwyneth Paltrow in March after 10 years of marriage, has reportedly been pulling out all the stops to romance 'The...
Read more on Celebrity Balla
 
Neil Young will continue to support ailing son
Neil Young and Pegi Young will continue to co-parent their ailing adult son. The 68-year-old 'Heart of Gold' hitmaker, who filed for divorce from the 61-year-old singer last month after 36-years of marriage, stated in...
Read more on Celebrity Balla