Monday, the four executives, three Chinese nationals and one Australian from Australian mining giant Rio Tinto (and so dubbed The Rio Four by Mineweb) , were convicted of bribery and stealing commercial secrets after a closed, two-day trial in Shanghai. Their sentences ranged from seven to fourteen years. One defendant has already said he will appeal. Rio Tinto announced they would all be fired immediately.They had been arrested last July 5th and initially charged with stealing state secrets.
The four had pled guilty to accepting bribes although they rejected the prosecution’s amount of $13 million. But the outcome was never in doubt.
(David Kelly, a professor of China studies at the University of Technology in Sydney said), “This is the way Chinese law has always operated. And they only take a case if they know they’re going to win it, so there’s no room for defense. New York Times 3/23/10
(Reuters also handicapped the outcome: a light sentence would have implied that China wanted to get over with it and on to business; a harsh sentence to prove they had a serious beef and would not bow to pressure; or an acquittal, which seemed least likely, since it would amount to an embarrassment of the police and government.) It turned out to be a pretty harsh sentence.
In August 2009,
China said that it had evidence showing that for at least six years, employees working for the British-Australian mining giant Rio Tinto had engaged in commercial espionage, costing the country about $100 billion. China said computer data revealed that Rio engaged in extensive spying on the industry, allowing Rio and other suppliers to vastly overcharge China for iron ore, a main ingredient in steel. New York Times 8/9/10
Commercial bribery in any country is scarcely a novelty. Nor is it wrong for China to punish those who give or take bribes. However, it is suspicious that no Chinese businesses were accused, although China says it will be arresting some Chinese businessmen soon.
What makes the Rio Tinto case riveting is the timing and circumstances surrounding the arrests, fusing foreign policy with state commercial interests, muscle-flexing with economic national interests on both sides. To the West, this whole affair only furthers unspoken fears of China’s beanstalk-like growth spurt and its often different value system.
Still, it must be admitted there were some significant issues within the Chinese iron ore industry, beyond foreign policy.
First, in 2009, according to The Economist, Australian officials had said that the four were charged because, only a few weeks earlier, the China Rio-Tinto $19.5 billion iron-ore deal fell apart. The deal’s failure was at least in part due to Australian concerns of the size of the acquisition by a foreign country (as with the oil company UNOCAL, the US, and China a few years ago).
Second, a market (iron ore) that had usually seemed unexceptional went through wild price swings before, during and after the financial crash, which hugely affected China, one of the last buyers left standing.
Each year the world’s big steelmakers and the big suppliers of iron ore get together to fix a benchmark price for the commodity. (But after the price skyrocketed in 2008) China contended that the price was manipulated, costing the government-controlled steel industry an additional $100 billion. The Economist 8/1/9/09
Chinese steel mills had been seeking a 40 to 45 percent cut from a year earlier. But seeing an economic recovery in sight, producers offered China the same 33 percent cut given to Japan. China rejected it. Now, the price of iron ore is climbing, and China’s steel mills are being forced to pay a higher price. The arrests of the four employees came just weeks after China and the three big iron ore producers — Rio Tinto, BHP Billiton and Vale Do Rio Doce of Brazil — failed to reach an agreement on a price for long-term supplies. Stern Hu, the Australian executive detained by China, was one of Rio Tinto’s top price negotiators. (italics mine) New York Times 7/9/09
Finally, the Chinese steel industry procurement practices had themselves become controversial.
Big government-owned steel makers used their import licenses to buy more iron ore than they needed. Then they profited by illegally selling excess ore to small producers that lacked licenses to import iron ore, a critical ingredient to make steel…The market was particularly chaotic in 2007 and early 2008, experts say, when many big steel makers began hoarding iron ore supplies because of soaring global demand and then selling it to smaller competitors. Traders say that last year, companies with long-term contracts to buy iron ore at $100 a ton often sold some of that ore on the black market for nearly $200 a ton, or slightly below the spot market price at the time. New York Times 7/14/09
Still, the foreign policy aspect matters at least as much.
Australia has worked hard to maintain a successful working relationship with China, which, according to Reuters “is Australia’s biggest export market with two-way trade worth $53 billion in 2008.”
Australian officials expressed disappointment with the verdict, a sentiment which was immediately rebuffed by China’s Foreign Ministry, which was quoted as saying, “Australia should respect this outcome and stop making irresponsible comments.” (Reuters)
It’s this pushback, which is really unnecessary, which causes concern — why is China pushing so hard in this case? Why make such a fuss if it’s simple bribery? No one in their right mind would expect a major company like Rio Tinto to condone it if true.
Since the rise of China, the inextricable fusion of state and commerce (not just companies of a particular nationality), with huge sums of money and trade and enormous economic dependencies, will inevitably alter the parameters of foreign policy.
National Oil Companies, like Petronas, Statoil (sort of), and the Chinese companies, and other companies have gone more often and further afield in the Great Scramble for resources. Unlike days of yore, these companies have developed the expertise and huge bankrolls (not limited by corporate financial management) to be major players. It’s especially visible in the Chinese deals in so many African, Central Asian, Middle Eastern and Latin American countries. As components of the Chinese government, and with some sectors of their economies dependent on the outcome, how will these state-owned companies and their interests and practices affect foreign policy?
Rio brings up the question, what happens when something bad occurs? Developing countries once viewed Chinese foreign direct investment with whole-hearted joy; in many cases, they still do, since China often pays better to get what it wants. But they too have begun to recognize that with China, there is less chance for positive engagement (like job creation and local outreach), and greater secrecy and so less leverage with the company.
Of course, it isn’t only China that is like this — it’s just that there has been so much Chinese activity internationally that it is hard not to point to it.
This sticking point will come perhaps when there’s gross environmental damage on, say, the scale of the Exxon Valdez, or human rights violations as surrounds Freeport McMoran’s gold mine in Papua, Indonesia (where there has been a recent upsurge in violence). Usually multinational behemoths can held to account in courts of law, through corporate transparency and reporting rules. What happens when the company is a foreign country that disagrees?
Probably it would clean up an environmental mess post-haste. Human rights violations, I suspect, will be trickier. In the name of foreign policy, these will be dealt with as an internal matter by silencing the complainers. Many analysts have suggested one day it may be more productive to deal with the now-despised multinationals than to entangle foreign policy with foreign direct investment.
China has often simply seen some commercial dealings and values differently than is taken for granted in the West. With some justification, it feels as if it is treated differently, with more suspicion, hesitation and cynicism than more Western partners might.
The value of transparency seems to be a leap for many Chinese officials, but it is paramount to avoid such zero-sum communications and situations. In all deals, there should be only winners; good deals — like good negotiations — should be win-win. Rio was lose-lose.
