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Economy

Business Compliance Risk Ratchets Up

Dec 18 , 2019
  • Zhai Kun

    Professor, Peking University
  • Xiong Lan

    PhD candidate, School of International Studies, Peking University

The U.S. Commerce Department recently placed 28 Chinese government agencies and companies — including video surveillance gear-maker Hikvision and artificial intelligence companies SenseTime and Megvii — on a trade blacklist over alleged violations of the human rights of ethnic minorities in China. In the wake of the announcement, a spokesman for Hikvison expressed strong objections to the groundless decision.

The past year has seen repeated occurrences of such meritless sanctions, adding significantly to the compliance risks of Chinese companies operating overseas. That’s exacerbated by the twin factors of China-U.S. strategic competition and the implementation of the Belt and Road Initiative.

Here are five perspectives:

First, the situation carries significant risks, both immediate and long-term. The BRI is a long-term project driven primarily by the government, which means Chinese businesses will, over time, face increasingly elevated compliance risks from U.S. long-arm influence. The U.S. courts claim long-arm jurisdiction to advance the country’s overseas interests and global strategies, forcing businesses and individuals from foreign countries to comply.

SenseTime has explicitly stated that it strictly abides by all relevant laws in the jurisdictions in which it operates and that it has been actively developing an artificial intelligence code of ethics to ensure that its technologies are used responsibly. The company’s operation in the Xinjiang Uygur autonomous region is in full compliance with China’s domestic laws and regulations. It is nothing short of absurd that the U.S. government should label the company as a severe violator of human rights, thus posing a serious compliance challenge for the company.

Second, U.S. reach and its implications are felt worldwide. Forced compliance of this kind not only affects Chinese companies in the U.S. but globally, whenever and wherever the interests of China and the U.S. collide.

Meanwhile, the BRI has gone global. It connects 137 countries on five continents that have signed cooperation agreements with China. Former U.S. Secretary of State Henry Kissinger noted that the BRI linked up the Eurasian continents, and the Pacific with the Atlantic, contributing to deeper bonds in the Asia-Pacific region. It is a pity that the U.S. chose not to participate.

As a matter of fact, the U.S. has been going to great lengths to tarnish the name of the BRI. According to an Aug. 13 report by Bloomberg, the European Commission was reportedly investigating whether a high-speed rail line linking Belgrade with Budapest — a hallmark project of the BRI — violates EU competition and anti-corruption laws, bringing the project to a standstill.

Third, sanctions will be imposed, regardless of company ownership. State-owned enterprises and private companies from China have been subject to sanctions under the pretext of compliance. The means vary, from the smear campaign against Made in China 2025 to the U.S. Section 301 investigation and tariff hikes in the name of national security — even an export ban on selling cutting-edge technology and devices to China (telecommunications, aerospace, robotics, etc. ) and discriminatory tariff barriers that favor U.S. products.

More companies have been added to the blacklist, with Huawei being the most prominent.

In addition, as the BRI involves multiple stakeholders. As it endeavors to advance global connectivity and partnerships, regional and international organizations and banks with a global presence, among other stakeholders, will be implicated.

Fourth, while targeting individual companies, the U.S. is also taking action at a strategic level. As mentioned, individual high-tech companies are being targeted. As the BRI gains traction globally, compliance risks in infrastructure and the digital economy will intensify.

The U.S. hosted the Indo-Pacific Business Forum in November, during which the Overseas Private Investment Corporation announced the Blue Dot Network, under which assessment and verification of infrastructure projects in the region would be conducted. It was a bid to promote sustainable infrastructure in the Asia-Pacific region and the world at large. While still short on details, the Blue Dot plan is unmistakably aiming at China’s BRI.

U.S. Secretary of Commerce Wilbur Ross said the U.S. would increase its Asia investment and trade, and would launch sustainable projects in the region to counter the BRI. When Secretary of State Mike Pompeo visited the United Kingdom in May, he accused China of using corruption and debt traps in infrastructure projects to gain influence. Though it was a rehash of old rhetoric, such language has become more frequent.

Fifth, scaling up pressure on multiple fronts, “compliance” has fallen into disfavor as a legal term. It has taken on new meaning associated with strategic competition. Compliance has become an excuse for extraordinary forms of long-arm jurisdiction, especially against countries against which the U.S. seeks sanctions. On Sept. 25, the State Department announced that six companies and five individuals from China had been put on the sanction list for purchasing Iranian crude oil.

In an interview with Nikkei, the State Department’s Special Representative for Iran Brian Hook said the U.S. was tracking down all oil tankers bound for China. That speaks volumes about the hard-line crackdown on sanctions evasion.

On Dec. 3, U.S. President Trump announced that he wouldn’t mind waiting until after the election in 2020 to reach a trade deal with China. That was one day after he escalated trade disputes with the EU.

The so-called America First policy has taken a toll on major U.S. trading partners, from China to the EU, Japan and the Republic of Korea. But of course, there are more complicated structural issues with China. As the China-U.S. trade war may be lurching toward a standoff, the U.S. Congress has passed bills related to Hong Kong and Xinjiang, in blatant interference in China’s internal affairs.

It wouldn’t stretch the truth to predict that as China further opens up and grows its economy, the “China threat” theory will only swell in the U.S., leading to more intense containment moves against China and its companies. China must gear up for a long game.

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