Doing business with China just got another level of riskier.
1. What The CCP Does In China Does NOT Stay in China
Ten years ago, our China lawyers would explain to our clients how what they did in China might redound to their detriment outside China. Three years ago, our China lawyers started explaining to our clients how what the CCP does in China might redound to our client’s detriment outside China. Now, our clients are explaining to us how what the CCP is doing in China might redound to their detriment outside China.
In December, 2019, in Will Your Business in/with China Hurt Your Business Reputation Outside China? we wrote about reputation risks for businesses that sell Made in China products or do business in China. That post began by referring back to an August, 2019 post, The Top 14 China Wild Cards/Future Risks, that listed the top 14 risks for foreign companies doing business with China. In that post we wrote about how there might eventually be a “tipping point” when China’s human rights record starts negatively impacting companies doing business with China:
当美国、欧盟及其他地区消费者对中国对待维吾尔族和藏族人口的方式（参见此处和此处）、其对香港或台湾的行径，以及其在境外施加控制的努力感到日益不安时，可能存在一个临界点。 随着中国光环褪色，此类问题近来频频曝光。我们接到越来越多来自美国及其他地区客户的反馈：员工拒绝赴华出差，消费者抱怨商品产自中国。 以巴塔哥尼亚公司为例，这家以关怀环境与人文著称的企业甚至自诩为"行动主义公司"——当其部分产品仍在华生产时，还能维持道德制高点多久？
2. Few Companies Saw China’s Crackdown on Hong Kong as a Business Issue
Our August 2019 post discussed how our clients did not see much risk stemming from China’s crackdown on Hong Kong, which was in its nascent stages back then, and how they were mostly telling us the following:
1. Americans don’t even know what goes on in the United States, much less in China.
2. China is better than X country and nobody seems to care what X country does.
3. The U.S. generates more ill-will in the world than China.
3. China’s Feud with the NBA got Just a Few Companies Thinking
But just a few months later — after China bullied the NBA for Daryl Morey of the Houston Rockets having tweeted support for protests in Hong Kong — our clients became more pensive about their worldwide risks arising from doing business with China. See China and the NBA are coming to blows over a pro-Hong Kong tweet. Here’s why.
Though “likely none” was still the most common answer to our questions regarding the impact the NBA-China feud would have on our clients’ businesses, they started sharing comments like the following:
1. I don’t think there will be any problems, but this is certainly something worth us considering.
2. I expect everything will blow over and be fine in a few weeks, but this might have a tiny impact on our sales in the meantime, but I doubt even that.
3. I can see how some people really care about this, but unless it rises to the level of a real movement, I do not see it having any real impact.
4. The Xinjiang Papers and Calls for Boycotting China Worried Some Companies
After the Xinjiang papers and increasing calls to boycott Chinese products and the Beijing 2022 Winter Olympics, and especially after international sports stars like Mesut Özil, Sonny Bill Williams (and more recently, Enes Kanter) started speaking out against China, many of our clients began worrying. But as we wrote in December, 2019, “virtually nobody was planning to cease doing business with China tomorrow over China’s human rights issues, but many now see China’s bad actions as a potential threat to their business outside China.” But around this time, many of our clients’ views on how China’s bad actions might impact their businesses began shifting to the following:
1. If we could stop doing business with China tomorrow, we would. But we can’t. Or if we can, it’s too expensive. Or we can, but it will take a lot of time and now is not the right time to go through that process.
2. We have employees who want us to stop doing business with China and we are taking that seriously.
3. There’s a 50-50 chance this will all blow over within the next few months. There is also 50-50 chance more bad news will come out about China and if it does, the ______ could hit the fan.
4. Look at our business. I’d be crazy not to be concerned.
5. The CCP’s Handling of Peng Shuai’s Sexual Abuse Allegations AND the World’s Reactions to That Are Worrying Many Companies
The CCP’s treatment of Peng Shuai, coupled with the so many calling for boycotting the Beijing Olympics and products coming from China, and even companies doing business with China, have ramped up client concerns about doing business with China and we are now hearing the following:
1. I’ve been telling so and so at my company that we must move faster to move our manufacturing out of China, but I was the only person truly worried about that. Now, everyone is asking me where we are in that process and what we can be doing to speed it up.
2. If you think it’s bad now, just wait until the Beijing Olympics start. I just wish we could get out of China before then, but that’s impossible.
3. You saw what happened to Jamie Dimon right? That same day, one of our most trusted Chinese employees told us that our company and our foreign employees in China would be better off if all our foreign employees returned home before the end of this year.
4. We need to talk with one of your international trade lawyers to help us figure out what we can do to change the country of origin on our products so we no longer have to label them as made in China. See Avoiding the New Tariffs on China Products: Substantial Transformation is Key and China’s Greater Bay Area and Country of Origin Markings.
5. We sell industrial equipment so I don’t think any of this will impact us directly, but I am worried how this will impact our clients that make consumer products and how that might turn impact us.
6. I’ve had it with China and I don’t know how much longer my family and I can take it here. It’s been six months since I asked to be able to go somewhere else but because nobody in their right mind wants to take my place here in China, I’m still here. And what’s happening with Peng Shuai has only made things even worse for me. My two kids with us in China are begging to go home because they don’t want to be in a country that denigrates and gaslights women.
6. Profit Motives Will Force More Businesses to Confront China
Yesterday, Michael Shuman (who knows the China zeitgeist as well as anyone) wrote a piece for Bloomberg entitled, More Businesses Will Stand Up to China After the Peng Shuai Outcry, positing how profit motives are now causing foreign companies to speak out against China:
The WTA’s [World Tennis Association’s] tough stance has been characterized as a glaring exception. But it could signal a different future for the relationship between China and international business. A confluence of factors—heightened U.S.-China tensions, intensifying repression within China, and, most of all, more pressure on companies outside China to support social equity—will make it harder and harder for big business to turn a blind eye to Beijing’s abuses. The outcome could be a lot more sharp confrontations between prominent businesses and the Chinese state, with the potential to reshape China’s economic relationship with the rest of the world.
This paragraph reinforces what I said two years ago about how there would come a time when companies like Patagonia, will no longer be able to “maintain its moral high ground while still having some of its products made in China.”
Shuman rightly says there is “nothing new about China’s human-rights horrors, nor the awkward position in which they have placed international companies,” but whereas “profits in the gargantuan China market were [for so long] just too juicy to sacrifice”, that is changing, and the WTA shows the shifting business priorities. Per Shuman, the WTA’s unwillingness to back down to the CCP:
[H]ighlights the pressures corporations are facing to play a greater role in ending discrimination and injustice. Every large company now must have an ESG strategy or face the ire of employees and activists. Under a microscope for their efforts to promote diversity, close the gender gap, protect the environment, and support workers, CEOs will find it increasingly uncomfortable to justify their operations in a China where the government suppresses minorities and denies its citizens basic civil liberties.
During the NBA’s kerfuffle with China, a client of ours lost valuable employees because it had begun discussions with a Chinese company about working together in China. After that incident, I told some clients how they should be mindful of how their relationship with China might impact their employee relationships. Some of these clients then told me they had already experienced employee issues arising from their doing business business with China.
7. Doing Business with China is Another Level of Riskier and You Ain’t Seen Nuthin’ Yet
Shuman lays out how Beijing has steadily been making it more difficult for foreign companies to continue doing business with China:
Yahoo! and Microsoft Corp.’s LinkedIn both recently exited the China market amid stiffening state control over information. Meanwhile, Washington’s sanctions related to human-rights issues have also complicated U.S. business in China. The government’s detention of untold numbers of Uyghurs, a Muslim minority in the far west region of Xinjiang, has become a flashpoint. The U.S. barred the import of cotton from Xinjiang over concerns Uyghurs were being forced to work, a step that has caused headaches for apparel brands with supply chains in China. More hurdles are likely. Pending legislation in Congress would expand the cotton ban to all products sourced from Xinjiang.
Shuman is savvy enough to recognize that what makes sense for the WTA, Yahoo! and Microsoft/Linkedin does not make sense for every company that is doing business with China:
None of this means that Starbucks Corp. is about to shutter its Chinese coffee shops or General Motors Co. its car plants. American companies invested almost $300 billion in China from 1990 to 2020, and they aren’t about to walk away. Executives will still try to tiptoe between supporting social causes and reaping riches. Jamie Dimon, chairman and CEO of JPMorganChase, quipped on Nov. 23 that he expected his bank to outlast the Chinese Communist Party, while reaffirming his company’s commitment to doing business in China; a day later, he said in a statement that he regretted the remark.
I disagree with Shuman regarding Dimon’s “tiptoeing.” Dimon never refuted the import or the truth of what he said about the CCP; he merely said he regretted having said it. Dimon is a very savvy CEO and I’m guessing he planned the whole thing to show JPMorgan customers and employees his independence from China and then expressed his regrets to allow the CCP to save just a tiny bit of face.
I do though wholeheartedly agree with Shuman’s concluding paragraph:
The minefield between international companies and China’s bounty will become just that much harder to navigate safely, increasing the likelihoods that there will be more confrontations between Beijing and business, and more executives, like Simon, willing to stand up for social justice against the Chinese regime.
In particular, I agree there will be more confrontations between Beijing and the West. Way back in October 2018, we called the US-China trade war the “New Normal” and in Would the Last Company Manufacturing in China Please Turn Off the Lights, we forecast an inevitable decline in China manufacturing. On May 8, 2019, in The US-China Cold War Starts Now: What You Must do to Prepare, we warned of a “straight line decline in US-China relations” and we laid out what businesses should do to respond to that. Our gloomy predictions have angered many, and I get it because what we are saying is not pleasant, especially for those with companies/livelihoods dependent on China trade. Our task is to call things as we see them, not as we want them to be.
On September 8, 2021, I testified before the U.S. Congress regarding US-China economic relations and the theme of my testimony is that the CCP under Xi Jinping prioritizes CCP remaining in power and its ability to control its citizens over anything economic. The below is an excerpt from my testimony that highlights this.
A. The CCP is Cracking Down on Private Businesses
中共对私营企业的敌意由来已久，其历史几乎与共产主义本身同龄。以我所在的律师事务所为例，我们曾代理多家美国和澳大利亚大型电影公司在华处理法律事务，其中几家公司在了解到电影通过中国审查的难度后，都感慨中国"憎恶外国电影公司"。 我们通常回应说，中国其实憎恶所有电影公司——因为电影能直抵人心。
China also does its utmost to wall off its Internet from foreign companies. It does this by not giving foreign companies Internet content provider (ICP) licenses, which in turn forces them to pay Chinese companies with ICP licenses to host their websites on Internet servers within China. The CCP does this to control online content. Because Chinese domestic companies fear the CCP, they usually do not put anything on the Internet that the CCP does not want there. And if a Chinese company does put something on the Internet that the CCP does not like, a Chinese government official can threaten that Chinese company or even arrest someone from that Chinese company. Doing this to a company whose leadership is in New York is considerably more complicated. As a result, the Chinese company that allows a New York company to use its ICP license will make sure the New York company does not put anything on the Internet that might offend the CCP.
另一个例子是，中共不允许外国公司经营面向中国儿童的学校，最近还禁止了核心学科的私教辅导。中共对那些能够触达广大受众的个人和公司始终心存戒备。
中国难道不在乎外资吗？中国难道不在乎本国经济吗？我今天对这些问题的回答，与五年前、十年前乃至十五年前的回答如出一辙：中国既在乎外资，也在乎本国经济，但前提是这些必须有助于巩固中共的权力并确保其生存。
作为一名律师，我所见到的最能体现投资与经济利益与中共权力控制之间张力的例子，莫过于中国的法院体系。 客户常问我中国法院是否公正，我的回答始终如一：若你起诉中国企业违约生产橡皮鸭，定能获得公正审判；但若起诉中国国企窃取尖端半导体知识产权——嗯……祝你好运。许多中国律师称之为"九成对一成"法则。 九成情况下，中国法院会作出公正裁决——这既保障经济运转，又符合中共利益。但当案件关乎中共核心利益时，公平性便被抛诸脑后，法院永远会作出有利于中共的判决。法学家称此为"依法治国"，而非"法治"。
The same is true for Chinese IPOs in the United States and for VIEs. China allows select companies to IPO in the US — oftentimes via VIEs – because it wants the money. But if for any reason the balance shifts and prohibiting an IPO or a VIE, the CCP will – as it has done frequently lately – block them.
可变利益实体（VIEs）是中共运作方式的绝佳例证。中共之所以允许VIEs存在，是因为它们能引入外资，但从未正式将其合法化。如今中共正通过各种方式表明不再像从前那样重视VIEs，投资者和承销商们正陷入恐慌。 但其实，这些警示——更准确地说，是警示的缺失——始终昭然若揭，只要有人愿意察看。VIE始终游走于法律灰色地带，既非明确合法也非完全非法。这种灰色地带使中国既能允许其存在，又可在任何时刻予以禁止或取缔。
中国新出台的数据隐私法规也大致如此，其核心目的更多是为中国政府获取数据提供便利，而非保护中国消费者。尽管媒体近期大量报道了中国"新"数据隐私法，但这些新法规与先前法规在本质上并无太大差异。 多年来，中国政府实际上对所有数据都拥有完全访问权限，甚至包括海外运营的外国公司所持有的数据。新法规主要只是重申并明确了这一现状，与其视作新规，不如理解为中共向企业发出警示：若收集中共不允许收集的数据，或试图向中共隐瞒数据，则可能面临政府行动的风险。
B. Why is the CCP Accelerating its Crackdown on Private Businesses Now?
首先，我必须再次明确指出：自习近平掌权以来，中共几乎一直在打压民营企业、压制言论自由并践踏法治。
The CCP’s recent crackdowns on private businesses should not be surprising, both because similar crackdowns have been going on for so long and because they were entirely predictable. What I find more surprising is how many people are expressing surprise about the crackdowns. When people tell me they did not see them coming, my response is, “Right, how could you possibly have known there were communists in China?” “And why would you not expect a country that is – at the very minimum – engaging in a cultural genocide against its Uyghur and Tibetan populations to respect private property, private businesses, and the rule of law?”
On July 27, in an article headlined “Wall Street Gets a Chinese Education: The Communist Party Control Always Trumps the Needs of Investors”, the Wall Street Journal’s editorial board had this to say about the CCP’s antipathy towards private business and lack of concern for the economy: “The big surprise from this week’s slump in Chinese company stocks is that people are claiming to be surprised. President Xi Jinping has made plain for years that he intends to bring ever greater swathes of China’s private economy under the state’s control. Guess what, Wall Street: He meant it.”
西方商界人士长期以来对中国存在误解，很大程度上是因为他们倾向于认为所有人都是纯粹出于经济利益行事。但对中共而言，经济只是实现目标的手段，而最终目标是建立一个完全由中共掌控的社会主义国家。
习近平和中共是马克思主义者，而马克思主义者认为资本主义之后是社会主义，再之后是无国家的共产主义。自毛泽东以来，中国一直在沿着马克思的发展阶段前进，习近平似乎认为中国已接近社会主义阶段，因此可以开始抛弃越来越多的资本主义元素。这正是其打压民营企业所做的事情。 西方近期脱钩中国的举措，更是促使中共加速推进这场打压的另一原因。
外国投资者难道不知道这些关于中国的状况吗？许多人确实不知情。商界人士和投资者通常只关注行业和企业，而非政府。
然而，许多人其实心知肚明，却因经济利益而不愿让他人知晓。每当我司律师撰写任何对华稍带批评的文章时，在华外籍人士（他们正从中国获利）常会告知我们，希望我们不要触及这类话题，因为我们的文章可能促使他们的公司撤离中国，从而导致他们失业。鲜有商界人士愿意为揭露中国的真相付出代价。
What are you seeing/hearing out there? How do you see businesses that are doing business with China being impacted? How will businesses that have their products manufactured in China be impacted?
