SIM REPORT: Northeast Asia, Issue 9

CHINA, UNITED STATES, AUSTRALIA & EU: IMPACT OF WORSENING GEOPOLITICAL TENSIONS ON FOREIGN BUSINESSES IN CHINA AND HONG KONG

Reports by the American, Australian, British, and European Union (EU) commerce chambers in 2020 have, overall, expressed a dampened business sentiment for several reasons. These can be condensed into concerns around the continuing dominance of Chinese state-owned enterprises, hurdles towards equal market access, and information security issues that could hamper communication across global and local offices. Notably, though, the matter of geopolitical tensions has occupied a more significant role in this year’s reports. For instance, the EU commerce chamber voiced concerns over ‘arbitrary punishment.’ The form that such punishment of international businesses could take includes various legal and political risks.

In terms of legal risks, an amendment to China’s criminal code on foreign economic espionage was introduced in July 2020, which sets out harsher sentences for trade secrets theft by foreign entities than the current three-year prison sentence and make penalties as severe as those in the US Economic Espionage Act, according to legal experts. The amendment could give Beijing a way of retaliating against the Washington over alleged economic espionage involving Chinese entities. A further significant legal risk is a nationwide data security law that was introduced in July 2019 but is likely to pass unchanged before the end of 2020. The law will affect international firms collecting data in China, in that personal information will be more stringently regulated. The law could also be used as a way for Beijing to retaliate against international companies and compensate both the supposed victim and Chinese interests, as businesses could be fined or sanctioned for alleged breaches.

In terms of political risks, China’s Ministry of Commerce (MOFCOM) on 19 September released rules on the proposed ‘unreliable entity list’ that will target foreign entities that are deemed to damage China’s security and sovereignty. Listed foreign businesses will be barred from investment, export, and import in China, according to the ministry. The use of the list as a reprisal for foreign countries’ measures targeting Chinese firms should not be discounted, particularly if geopolitical tensions continue to intensify. Of further concern is a recent government clampdown on China’s private businesses through the United Front Work Department, a Chinese Communist Party (CCP) agency that carries out local and international influence operations. The agency has been tasked with expanding the CCP’s ideological and operational control over private businesses. In the long-term, tightened ideological control could extend to encompass foreign companies as well, which could trigger criticism of foreign firms in their home countries. In the short-term, increasing politicisation of the business environment could raise the likelihood that Chinese business partners will view their foreign counterparts through a political prism that may be tarnished by geopolitical tensions, making business cooperation more difficult.

Among major issues driving geopolitical tensions are the diplomatic and trade dispute between China and Australia, as well as the trade war between the US and China. Relations between China and Australia have cooled over several issues, leading to the unfolding of a diplomatic and trade dispute. The dispute also probably contributed towards the Australian government’s likely enactment of a new law that is expected to directly impact an infrastructure deal between the state of Victoria and Chinese firms linked to China’s ‘Belt and Road Initiative’ (BRI), Beijing’s flagship international development strategy, and will also likely prompt a review of tentative agreements related to investment, scientific cooperation, and access to the Antarctic between the Chinese government and the state governments of Western Australia, South Australia, and Tasmania. Regarding US-China relations, geopolitical tensions caused by the trade war may be worsened by the outcome of the US government’s ongoing probe into allegations that China undervalued the Chinese Yuan to give Chinese exporters an unfair advantage. However, vital in determining the course of not only US-China relations but China’s international relations overall, especially with Western countries, will be the upcoming US Presidential election in November.

Although US diplomacy under a Biden administration would be more predictable and less openly hostile in tone than under Trump, it may also enable the formation of a more coherent EU-US response towards China over shared grievances. Furthermore, Washington’s general strategy towards China under a Biden administration would be unlikely to change significantly, particularly given bipartisan support for a tough stance on China. A full reset of relations in the medium term is therefore unlikely. It also seems unlikely that the US will alter its current policy of strategic ambiguity towards Taiwan, meaning that it will continue to leave the question of US military intervention open, in the very unlikely event that China attacks Taiwan. If Trump is re-elected and US-China hostilities escalate, the US could exert pressure on EU firms in China to divest their interests in China through restrictions on EU companies’ access to strategic goods such as semiconductors. Regardless, tensions with Washington in particular are likely to intensify ahead of the US presidential elections in November as Trump and Biden compete in demonstrating their anti-China policy credentials in a bid to increase their votes.

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