China's Facebook Syndrome

Censorship hinders access to China's online markets

By Brendan Greeley and Mark Drajem

Since 2009, China has blocked Facebook, the world's largest online social media network. This year, Renren, one of China's largest social networks, plans to raise $500 million on the New York Stock Exchange (NYX). So a Chinese social network can tap U.S. capital markets, but American social networks can't tap Chinese consumer markets. Does that sound fair?
If Facebook grew corn or built cars, the cry would go out that China was putting up barriers to trade. That hasn't happened because U.S. officials and politicians have typically viewed China's Internet censorship as a human rights, not a trade, problem. That's changing—slowly. The Office of the U.S. Trade Representative, which negotiates trade deals, has been reviewing the idea of Internet censorship as a trade barrier at least since 2007. A nonbinding clause protecting "cross-border information flows" is part of the still-unratified Korea-U.S. Free Trade Agreement. And on Mar. 7 the trade office told Bloomberg Businessweek it is "considering proposals" for stricter language in the Trans-Pacific Partnership, an agreement under negotiation with Pacific-Rim countries such as Vietnam, Australia, and Malaysia (not China).
Here's the problem: While the USTR has been quietly inserting language in trade agreements, perhaps to cite as precedent in some future negotiation with China, it's playing a game of inches. China's Internet users, some 400 million-strong, make up the largest Internet market in the world, one U.S. social networks are largely prevented from competing in. But if the U.S. moved more aggressively and brought a trade case before the World Trade Organization, it could alienate China, disrupting trade in other products—and the outcome would be uncertain. "They are definitely trade barriers," says James Bacchus, a lawyer at Greenberg Traurig in Washington and a former WTO apellate judge. "Whether they are illegal under WTO trade laws is another matter."
Andrew McLaughlin, who then directed global policy for Google (GOOG), first presented the argument to the trade rep's office in a 2007 visit. Google, which still operated in China, suspected Chinese users' traffic to foreign websites was being slowed. Chinese university students had to pay a fee to visit foreign sites. The trade office was interested, and asked Google to gather evidence. "My recollection," says McLaughlin, "is that we were not the only people they had heard from."
Two years later, Hosuk Lee-Makiyama, then a trade negotiator for Sweden, wrote a paper suggesting that WTO member states, including China, are legally obliged to allow Internet services to cross borders without restrictions. Since then he says he's fielded requests for clarification from governments "on both sides of the debate." Google approached the trade office again when President Barack Obama began assembling his trade team in 2009. On Mar. 7 the USTR in an e-mail described barriers to trade for social networks as "a complex issue we are beginning to focus on."
As Google has continued to draw attention to the issue, trade officials are still only beginning to focus on it. Google, meanwhile, left the Chinese market in 2009. Twitter and Facebook, which declined to comment, have not complained openly about lack of access. "If you want to work here," says Bill Bishop, an independent analyst based in Beijing, "you don't complain about this stuff." Even Google spokeswoman Niki Fenwick, in an e-mail, says censorship is first a human rights issue, adding: "When a government blocks the Internet, it is the equivalent of a customs official stopping goods at the border."

U.S. financiers and investors seem indifferent to Chinese barriers. In addition to Renren, several Chinese companies that offer services comparable to banned American social networks are listed on U.S. stock exchanges or planning offerings. In December, Goldman Sachs (GS), which declined to comment, ushered Youku, a YouTube-like video sharing service, onto the New York Stock Exchange (YOKU). YouTube is frequently blocked in China. Brookside Capital, a unit of Bain Capital, and the TCW Group, a Los Angeles investment manager, are Youku's two largest institutional investors.
The U.S. is feeling little pressure from domestic interest groups to take a harder line. The standard WTO admission agreement, which China signed, includes exceptions for enforcing national values and protecting public safety; if the U.S. were to complain to the WTO, China would almost certainly avail itself of them. Lee-Makiyama, now at the European Centre for International Political Economy, says China often applies a different standard to foreign companies, a violation of the WTO agreement. China has argued that foreign sites contain pornography. So does Baidu (BIDU), a Chinese search engine, says Lee-Makiyama. Though "the WTO can't get rid of censorship," he says, a WTO case could compel China to abandon its worst practices, including the complete blocking of sites without notice or remedy and the lack of transparency on censorship standards. McLaughlin, the former Google executive, has often wondered why Congress hasn't demanded more from the U.S. directors of Chinese companies listed in America. "This is the one tool we have," he says, "that is extraordinarily potent."
The U.S. could pick up the pace soon. Ron Wyden, chairman of a Senate subcommittee on international trade, on Mar. 9 pressed Ron Kirk, the U.S. Trade Representative, to make "binding and enforceable agreements on data flows" a priority. "I believe the Internet will become the biggest shipping lane in the world," Wyden said. "I am talking about keeping the Internet open. That's what we haven't put the focus on."


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