How a Starbucks Latte Shows China Doesn’t Understand Capitalism

Criticism of the prices charged Chinese consumers by international companies is an unseemly interference in the free market

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People line up to buy coffee during a Starbucks Coffee shop opening ceremony on Mar. 1, 2013 in Taiyuan, China

It will come as no surprise that some Chinese believe Starbucks coffee is a bit too expensive. After all, we do pay a pretty penny for a cup of water and milk. But are Starbucks’ prices something bordering on criminal? Chinese state media seems to think so. In a series of attacks, the press has accused Starbucks of overcharging Chinese with “outrageous” prices compared to those paid by consumers in the U.S. and elsewhere.

The coffee-shop chain, however, is only the latest victim of an apparent campaign aimed at forcing down the prices of foreign goods in China. The government is investigating the price tags on foreign automobiles, while in August several foreign companies were fined for supposedly selling their milk powder at unfairly high prices. Nestle and Danone pledged to slash their prices amid the enquiry.

What gives? We can only speculate as to the government’s intentions. Perhaps officials are trying to uncover real infractions, or what they think are real infractions. Or perhaps the campaign is an attempt to beat back foreign brands and give China’s own companies a leg up in the local market.

Foreign brands are favored by Chinese consumers in many industries, since there is a perception they are of higher quality. In milk powder, for instance, foreign labels have had a huge advantage ever since local brands were tainted by a 2008 scandal in which they sickened children with milk contaminated by a chemical. Perhaps the government is irritated that foreign firms are making some juicy profits off Chinese consumers.

(MORE: China Roasts Starbucks — Foreign Brands Come Under Fire For High Prices)

Take the case of pharmaceutical giant GSK. Here there was some wrongdoing afoot. Amid an official investigation into alleged bribery by its staff, GSK admitted to breaching Chinese laws even though such practices seem to be widespread in the healthcare industry. Still, the government also let slip one of its other concerns — the prices GSK charged for its drugs. GSK “damaged markets by engaging in bribery to raise drug prices, expand sales and reap inappropriate profits,” the Ministry of Public Security said in a July statement. The company promised to reduce its prices in response to the investigation.

Whatever the reasons behind the pricing campaign, it is clear is that Chinese officials and journalists have little understanding of how corporations and markets actually work. There are lots of reasons why companies charge what they charge in different markets around the world. In explaining Starbucks prices in China, CEO Howard Schultz said that “our cost structure in doing business in China and the investments we’ve made to build that business … gave us the position where we had to charge a little bit more than in our other market[s].”

Companies may charge higher prices because they have an edge in know-how or technology and thus are able to produce a superior product. Foreign-branded cars, for instance, often have bigger price tags in China, but they also have a clear record of better quality than local marques. Companies may also charge more for their wares because they possess serious brand power and want to position that brand at a certain place in the market.

The bottom line is this: Companies will price their products based on what the consumer is willing to pay. That’s nothing illicit. It’s simple supply and demand. If Starbucks lattes were truly overpriced in China, the Chinese wouldn’t be buying as many of them, and the American firm would not have been able to build a successful network of over 1,000 shops in the country.

If foreign companies are engaged in illegal practices, then they should be stopped. But meddling in the pricing decisions of independent private companies is another thing altogether. China’s leaders persistently promise to make the Chinese economy more market-oriented, liberalized and fair. Premier Li Keqiang recently committed the government to “steadfastly pursuing reform and opening-up with priority given to the stimulation of the market.” Interfering with the prices private firms charge Chinese consumers suggests that China’s officials believe that they should make economic decisions, not free markets.

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