While China is becoming a key country for growth-oriented US multinationals to break into, Google’s recent difficulties highlight the fact that China is hardly ripe for the taking. I recently spoke with Ian Bremmer, founder and president of the Eurasia Group, a political risk research and consulting firm helping businesses navigate the craggy shoals of international expansion. He’s also author of the recently released book “The End of the Free Market: Who Wins the War Between States and Corporations?” which examines the geopolitical implications of state-sponsored enterprises. –Benjamin Shepherd

Companies that are doing a growing business in China are increasingly being rewarded by analysts, but given the problems that US companies such as Google have run into there, is it really worth that kind of premium?

It’s certainly a critical market for a lot of companies, but that doesn’t mean it’s a viable market in the way it was historically. I would say that well under half of the management teams I talk to have investment strategies that are sustainable for 3 to 5 years, some of which are aware of that and some which aren’t.

The problem isn’t just that the Chinese economic system is challenging for corporations; it’s also that the local competition, which is supported by the Chinese government in the absence of the rule of law, is becoming substantial.

If there’s a huge power asymmetry and they desperately need you, state capitalism is something you can deal with. If you want to go invest in the Gulf States and bring in telecommunications that they don’t have, you don’t want to be on the wrong side of some member of the royal family that can cut you off, but they need you and fundamentally want you there. As long as you play by their rules you can make money.

What we see in China is that not only is the system challenging, but they increasingly don’t need you—outsiders that is–the way they used to. They don’t need foreign direct investment dollars, though they do need much more advanced technology then they used to, a lot of which Western companies are reluctant to bring in.

The question for a corporation is “am I indispensible and necessary for the Chinese government?”. If they’re not and there’s local competition, they’re in trouble.

The subtitle of my book is “Who Wins the War between States and Corporations?’ and the answer is: The corporation loses every time. You need to make sure that if you’re a corporation, if you see a war coming you either get out of that country or find a way to make nice-nice with the state. For some companies like Google (NSDQ: GOOG), that will be impossible since from the Chinese perspective, it was right to remove Google from the country.

Other companies will have many opportunities to work in China but they’ll have to adapt dramatically. It’s very similar to what happened to the oil companies when OPEC was created. It used to be that when you were an international oil company (IOC), you would go to a dictator and cut a deal and then you’d go stick a straw in the ground and take money out. That’s not true anymore.

Thirteen of the 15 largest oil companies in the world are owned by states. The states have won the wars versus corporations. That doesn’t mean there aren’t any international oil corporations any more; it just means that the IOCs aren’t putting straws in the ground. They’re doing the management, the technology and they’re involved in much more difficult projects. They’re adding value in a different way. Western corporations are going to have to learn the same lessons the IOCs did.

Can you elaborate on Google’s situation?

What we need to recognize is that if you’re China looking at Google, you see a Western corporation that’s amassing an extraordinary amount of data on the preferences and communications of Chinese citizens.

You have no idea what Google is going to do with that data down the road and you know that Google has cooperated with the US government in helping to track down terrorists and terrorist communications in the past.

It’s a good bet that US-China relations are going to get worse over time, so who’s to say that the US government isn’t going to demand that Google hand over that information to be used against China? Or what’s to stop Google from selling it if they want to and life gets more difficult for them and their profit model down the road? Why would you take that risk if you’re China?

The Chinese were taking that risk short-term because there were a lot of folks that saw a benefit in engaging in low-level espionage activities looking into Gmail accounts and using that to track journalists and dissidents that were annoying to the government.

Frankly though, why assume the strategic vulnerability of allowing Google to build up in China when China had its own homegrown alternative in Baidu (NSDQ: BIDU) where they had none of that risk? I was surprised Google tried to stick things out for as long as they did.

Google really did try to stick that out. Was the incentive the fact that China is a key growth market?

I think Google is a unique story in that they have the “do no evil” mantra and of course Sergey Breen and his cultural and personal disposition is opposed to the communist system. There’s no question that even if you’re Google and you’re having your lunch handed to you, the future of search, like the future of so many things in the world, is going to be increasingly dominated by countries like China and India. So if Google isn’t going to do business in China, it’s basically saying that its aspirations to be the No. 1 global search brand are history. That will have an impact on your share price.

But Google isn’t the only company that’s having similar problems; the others just don’t want to say it publicly since they still have so much skin in the game in China.

Steve Ballmer from Microsoft is now saying that Indonesia looks like a better bet than China because of the intellectual property problems. Companies are going to start saying this publicly because the pain threshold has become too great and they’re not seeing the sustainability of their growth numbers with the local competition.

When Hillary Clinton goes to China and says we need a level playing field, she’s not saying that because President Obama’s making her. She’s saying that because the administration is getting a lot of pressure from Western corporations.

Now you can talk “level playing field” until you’re blue in the face, but you have to recognize that the Chinese are moving towards decoupling from the US, developing domestic consumption, and diversifying their exports away from a US that can’t consume as much anymore. They’re going up the value chain with indigenous innovation so more of the profit of what they do export stays in China.

Do you foresee more regionally based trade relationships?

I think we’re going to see three big things. We’ll see lower global economic growth rates because this is a less efficient way to run a global economy. We’ll see more regionalization in investment, trade and capital flows, some of which will be directly political in nature and orientation. That will be partly protectionist backlash and partly the nature of state capitalism. And we’ll see that not only from state owned enterprises but also by capital flows from sovereign wealth funds.

A lot of people say that China is gradually transitioning to a free-market system. Is that a fair statement and can that even happen?

They’ve been moving very incrementally towards more openness though that’s slowed over the past 18 months. I suspect they’ll start to move again, but it will be slow; the state still holds a preponderance of power and the rule of law just isn’t there.

The real question is what happens with China in the long term when they start taking real pressure because Western corporations are no longer willing to provide them with technology and they have to develop more of it themselves, making it harder for them to grow because they have difficulties with indigenous entrepreneurship.

The nature of their educational and political systems makes it harder. Demographically, their labor situation is going to start to get squeezed from about 5 years on out. They’re going to be fighting with the Indians for increasing scarce commodities both regionally and globally.

The environmental situation is going to get much more challenging. As those things start to happen 5 or 10 years out and the Chinese government starts to feel the squeeze, then they face a decision. They’ll have to truly open up or crack down and use the growing tensions with the outside world to become more nationalistic. Either scenario is possible.

What’s your best piece of advice for investors?

Stick with the US long term. Recognize that emerging markets and BRICs as categories don’t mean very much anymore. You’ve got places that are getting harder to invest in like Russia and China where there’s going to be more conflict and you have places that are going to be easier and more integrated like Brazil and India. You need to think about this through different lens. The management of multinational corporations are going to find themselves at war with some of these states. Bet on the ones that can adapt the fastest.