Duncan McCampbell (duncan.mccampbell@metrostate.edu) is an American lawyer and Associate Professor of international business and law at Metropolitan State University in Minneapolis, Minnesota, USA. He is currently on sabbatical, researching cross-cultural compliance and teaching law at a Chinese university.
This is the first article of a three-part series on managing your company’s compliance risk with China.
It wasn’t so long ago—say 10 or 15 years—that an American compliance professional didn’t have to think very much about China. For much of the last three decades, China was where American companies went to make and buy stuff—cheaply. Although China calls itself a communist country (it actually isn’t), the “Red China” echoes of the Cold War began to fade with its “opening up” in the late 1970s, and with its World Trade Organization accession in the 2001. China compliance, therefore, largely involved the subspecialties of trade and product safety: getting Chinese-made products into the United States legally and making sure that they conform to US product safety laws.
Until quite recently, most Americans and their businesses didn’t see China as an adversary. Oh, how a decade can change everything.
These days China is letting the world know that there is a new kid on the block—a kid who demands respect and doesn’t necessarily want to play by the old rules. The affordable Chinese-made products that you snap up at Target have made China economically strong and its ruling elite fabulously rich. Along with that financial clout comes an increasingly assertive, one-party Chinese government that owns or controls China’s largest companies, often doesn’t agree with your values, and demands compliance with its wishes. How powerful is China’s government? Influential China business lawyer Dan Harris recently put it this way, “President Xi and those at the highest echelon of China’s government can snap their fingers and thereby create a new business reality.”
This can be rather disconcerting for a US compliance professional, who probably isn’t accustomed to managing their company’s domestic political compliance risk—to say nothing of foreign political risk. But doing business with a country like China, where government, politics, and business are all rolled up tightly together and globally impactful, the risks are real for the uninformed. In an era of increasingly tense US-China economic, trade—even military—relations, those risks are growing.
This first part of our three-part series introduces you to the newest and potentially most difficult risk to manage: foreign political risk. Part 2 will address the various forms of financial risk that doing business with China presents. Part 3 will address ways that you and your company can manage those risks and carry on pursuing commercial successes with China.
Foreign political risk: The China factor
If compliance is the science of helping your company and its employees do what government regulators and courts require under law, then business with China today adds an entirely new dimension: political risk—complying with the political doctrine of China’s Communist Party and the Chinese government, which it controls.
The recent flap over an NBA official’s tweeted support for Hong Kong protesters[1] highlights just one major change—a very important one—in how compliance professionals should now view China. The Communist Party of China increasingly expects foreign companies doing business with China to comply—globally—with their positions on several very sensitive political issues, such as the status of Taiwan, the map of the South China Sea, and the current unrest in Hong Kong. Failure to comply can have serious, even catastrophic, consequences for a non-Chinese company, as the NBA, Delta Airlines, Cathay Pacific Airlines, Versace, and many other companies have all found out recently.
China’s claims in the strategic and resource-rich South China Sea are marked by the famous “nine-dash line.” Neighbors Taiwan, Vietnam, Malaysia, the Philippines, and Brunei all assert ownership claims that overlap with China’s.
China claims sovereignty over virtually all of the South China Sea, where they’ve built and militarized several artificial islands. China maintains its claims even though four other countries (and Taiwan) also claim parts of the disputed waterway. The United Nations (UN) Permanent Court of Arbitration in The Hague has ruled that China’s claims have no basis in international law. Nevertheless, China is adamant and unyielding in its claims. If your company’s products or website contains a map of that disputed waterway without the “nine-dash line” that China uses to assert its disputed claims, it is quite possible that they will notice and make you change it—or you can say goodbye to your China markets.
The status of Taiwan, Hong Kong, and Macau
The oft-mentioned “One China” policy is a position taken by the Chinese government (under Chinese law and various official pronouncements) that democratically self-ruled Taiwan is actually part of mainland China, and that the island will eventually—by force if necessary—be made to come under the authority of Beijing. China has pressured other countries and the UN to choose between recognizing either the People’s Republic of China or the Republic of China (Taiwan), but not both. This is why Taiwan is the largest “country” in the world that is not a member of the UN, and why the U.S. doesn’t have an official embassy there, despite strongly supporting Taiwan’s government, its military, and its separateness, if not outright independence, from the rule of mainland China.
If your company does business with China or Taiwan and your products or literature in any way imply that Taiwan, Hong Kong, or Macau are countries and not part of China, you will likely be hearing from the Chinese and told to make changes and apologize—or else. Fashion designer Versace carried a T-shirt identifying Hong Kong and Macao as countries (both were former European colonies that were returned to China in the late 1990s.) The Chinese government loudly complained, and the designer was forced to publicly apologize. Prompt action by the designer headed off more serious consequences, but a simple review of the design by a product compliance professional with knowledge of China could have prevented the flap entirely.
Last year China brusquely instructed 44 international airlines to stop referring to Taiwan as if it was a country and not part of Chinese territory—or lose landing rights in China. The White House got into the act and issued a statement calling China’s demands “Orwellian nonsense.”[2] But the three biggest US carriers, Delta, United, and American, all fly lucrative routes to Chinese cities. They complied.
Unrest in Hong Kong: Political kryptonite
Protestors fill the streets of Hong Kong (July 2019).
Tweeting support for the protesters in Hong Kong, which is part of China under their “One Country, Two Systems” construct is political kryptonite for your company’s China business, as Houston Rockets basketball executive Daryl Morey recently discovered. Let’s leave aside, for the moment, the fact that Morey tweeted his views from his personal account, or that Twitter is banned in China, and thus whatever anyone says on Twitter should have no impact there.
The Chinese government learned of the tweet and cranked up the domestic outrage machine. The Communist Party, which controls all traditional and social media in the country, soon had cyberspace on fire. Several big Chinese companies canceled deals with the Rockets. The Chinese government severely criticized the NBA and demanded that Morey be fired. Days of awkward apologies followed, with several American politicians criticizing the NBA for compromising its principles to placate China, where the league has made major investments.
Hong Kong-based Cathay Pacific got into major trouble with the mainland government over participation by some of its air crew in this summer’s Hong Kong protests. Despite the fact that under Hong Kong law Cathay Pacific has no control over the off-duty political activities of their employees, the mainland government decreed that those employees were to be banned from staffing flights that went to mainland cities. Some were later fired. Both Cathay Pacific’s CEO and its chairman, who signaled support for their employees, resigned under pressure from the Chinese government.[3]
So the message from China is characteristically simple and direct. If your company does business in China and one of your employees does something or says something that touches one of China’s sensitive tripwires, the Chinese government may find out and make things difficult for your company.
Next month in Part 2 of our China compliance series, we will examine the growing financial risks that rather predictably follow from a country boasting the world’s second largest economy, but which operates from a legal, regulatory, and economic framework that, in many ways, is quite different from the US and much of the West.
Takeaways
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China’s rapid economic growth has changed the face of Chinese compliance.
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The Chinese Communist Party, which controls the government, has become increasingly assertive about statements made by people and businesses outside of China.
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China’s government expects foreign companies to “toe the line” on politically sensitive issues.
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The status of Taiwan, the protests in Hong Kong, and China’s claims in the South China Sea are three potential trouble areas for American businesses.
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If your company does business in or with China, it pays to learn more about the trouble areas.
