NEW YORK (Reuters) - The Western multinationals that have dominated global trade for decades are going to have their lunch eaten in China and elsewhere, and many are unaware it’s about to happen.
That’s the warning in “The End of Free Market” (Portfolio, $26.95), a new book by political risk expert Ian Bremmer.
Bremmer, known for showing the effect of political turmoil on financial markets, argues that China, Russia and other emerging markets have developed a new economic model — state capitalism — that clashes with the free-market system of the West.
State capitalism is not the rebirth of socialist central planning, he writes. It is a system in which authoritarian states dominate markets primarily for political gain. In the process, they favor national enterprises over foreign competition.
A grasp of state capitalism is essential if Western businesses are to understand its potential effect, argues Bremmer, the founder of political risk consultants Eurasia Group.
Many Western corporations — Eurasia counts about 100 of the Fortune 500 as clients — are unprepared for what they face.
“I would say that a quarter of them, max, have China strategies that are sustainable for five years. Of the ones that don’t, maybe half are aware of it, and that’s a serious problem,” Bremmer said in an interview.
“They’re going to get crushed,” he said, although he noted that the situation is hard to predict beyond five years.
Western multinationals increasingly rely on foreign sales, especially in emerging markets, where state capitalism has many sympathizers. At least half the revenue of companies in the Standard & Poor’s 500 Index is generated abroad.
Bremmer doesn’t see dramatic Cold War standoffs like the Berlin airlift or the Cuban missile crisis. But state capitalism can have far-reaching consequences, compromising a country’s security and the global economy.
Bremmer notes that state capitalism is not an economic model like free enterprise, but a tool elites will use to stay in power.
“(It’s) not a formula for producing more efficient or more equitable economic performance,” he writes.
Writing before Google’s (GOOG.O) run-in with China in March, Bremmer asks what happens when the day comes that China no longer needs foreign investment to develop and decides to shelter local companies from foreign competition.
Google’s decision to close its China-based search service and redirect traffic to Hong Kong underscores a failure to understand the politics behind the spat. It was favoritism of Google’s Chinese rival, Baidu, not censorship, Bremmer said.
“Google really believed that they were on the side of the Chinese people against the Chinese government,” Bremmer said. “That’s ridiculous.”
Something else that people have failed to grasp about China is that while the United States clearly has a divided political system, the Chinese people are fully behind their government in China’s ascension as a world power, he said.
The subtitle of Bremmer’s book is “Who wins the war between states and corporations?” Asked for an answer, Bremmer finds the West still holds advantages in terms of size and resilience, and because China, long-term, looks “bubble-like.”
But the jury, he says, is still out.
Reporting by Herbert Lash; Editing by Eddie Evans