Small and medium sized American factories are already losing out to China in a big way. A new Reuters article asks a intriguing question: How should America deal with its China problem? The best answer, they suggest, is to discuss China-US tensions more openly and honestly.  From Reuters:

Big American companies with investments in China are afraid to criticize Beijing because of the controls it has over just about any access to the Chinese market. They fear too strident a stance could mean they will lose contracts or even be ostracized as Google Inc was after a dispute with China over censorship and hacking.

Another risk to not talking more openly and directly about America’s China problem is that it leaves the field open to extreme rhetoric and populist politics.

A solid majority of Americans in opinion polls say they view China as an economic threat and if America’s dysfunctional relationship with the country is not addressed more openly, some fear it could prompt a marked protectionist swing in American politics.

“It would be better to deal with issues like the undervalued renminbi more directly and openly,” said Menzie Chinn, a professor of public affairs and economics at the University of Wisconsin. “I am concerned that if these problems are allowed to fester for too long, voters will force Congress into an open trade war. And that would be bad for everybody.”

America’s political elite would rather not give the debate much oxygen because they haven’t come up with any real solutions,” Schier said. “But the majority of the public has a sense there’s something very wrong with our relations with China.”

“It’s a prescription for chronic instability,” he said. “You can’t build a long-term working majority in a situation like this. Voters are going to zig and zag and we’ll likely see backlash after backlash.”

China and U.S. economic tensions are likely to be exacerbated in the future, as the Chinese government focuses on boosting its own domestic companies at the expense of foreign companies. Just today the American Chamber of Commerce issued its annual White Paper on China, in which it criticized China for favoritism of Chinese companies and hurting American business interests. From the Washington Post:

China’s efforts to promote local industries are undercutting American competition here, U.S. business officials said Tuesday as they questioned the nation’s commitment to fully opening its economy.

In its annual report on the U.S. business climate, the American Chamber of Commerce in China said a collection of rules, standards and other requirements under China’s “indigenous innovation” policy were starting to hamper the ability of outside technology firms to operate.

There is a growing acknowledgment, however, that the economic access that has boosted China’s growth over the past 20 years — and opened the country to companies such as Wal-Mart and General Motors — has entered a new and, for the United States, more complicated phase.

U.S. officials worry that China, a decade after joining the World Trade Organization, may be intent on barring foreign ownership from key parts of its economy, including the financial sector, service industries and other areas where U.S. companies think they hold an advantage.

At the same time, strict regulations and state support are helping local Chinese businesses in technology, energy, aviation and other fields where the government hopes to establish Chinese leadership. The U.S. Chamber of Commerce argued in a recent report that those policies are “a blueprint for technology theft” and force foreign firms to either hand over their ideas and know-how or miss out on the growth of what is now the world’s second-largest economy.

For the time being, though, most American businesses surveyed by American Chamber of Commerce in China responded that their business have been profitable. However, profit margins are affected by the size of the company and its familiarity with Chinese business culture. From CRI English:

The American Chamber of Commerce in China (AmCham-China) released the American Business in China White Paper on Tuesday in Beijing. According to the White Paper, 85 percent of respondents reported revenue growth in 2010, while 78 percent said that they were profitable or very profitable.

Christian Murk, president of AmCham-China, said about 41 percent members reported their margins in China are higher compared to worldwide margins.

Murk said, “Profitability, having good profit margins, is closely correlated with the length of time a company has been in the market. So if you look at somebody who’s been doing business here for two or three years, they are very likely not to be profitable at all. If you look at companies that have been here for five years or more, almost all of them have learned how to operate here and have been able to offer products and services that give them most revenue growth and good profit margins.”

Matthew J. Estes, vice president of AmCham-China, added that profitability is closely correlated with companies’ scales.

Small and medium sized enterprises from the United States are facing more difficulties in China, despite the fact that they are also drivers of economic growth in China and the US.

He said, “So it’s the large multinationals being able to invest long periods; large multinationals with reach have the management team able to deal with the bureaucracy, licensing challenges and other issues – they do well. Vise versa, here is the question of SMEs, you see the opposite.”