Doing business with China in 2023 has become more risky

2430 Director Glenn Chafetz and Patrick Walsh argue in the The Dallas Morning News that U.S. government's rules and institutions do not offer our private sector any protection.

Americans doing business with China should rethink their operations and plans. On April 26, the Chinese government passed an amendment to its 2014 counterespionage law which defines all business data as national security information.

Now, seeking or revealing monthly sales figures, accounts receivable or number of employees is prohibited by the same law that prohibits seeking state secrets. Those of us from countries with the rule of law can be forgiven for thinking that business operations have nothing to do with national security. In the United States they do not. However, the Communist Party of China and its leader, Xi Jinping, see the world quite differently.

The CPC makes no distinction between the private sector and the state. To the CPC, business is the state, the state is business, and both are at war. For example, Article 7 of China's 2017 intelligence law requires that Chinese citizens and companies, anywhere in the world, provide whatever assistance or information the Chinese intelligence services demand. Furthermore, Chinese companies can task the Chinese intelligence services to steal business information on their behalf. Xi and the CPC are mirror-imaging; they see American and other foreign businesses as national security threats to China because Xi and the CPC wield Chinese businesses as weapons against the U.S. and its allies.

It is tempting to believe that the U.S. government and the post-World War II rules and institutions offer our private sector a measure of protection. They do not. Neither have the resources or authorities to protect tens of millions of private enterprises from CPC predation.

The CPC simultaneously rejects and exploits the post-World War II economic and political order. It uses Western adherence to rules and institutions as a weapon. For the CPC, intellectual property theft is fair game, the CPC is the best player in history, and no company in the U.S. is safe. Texas is an especially high-priority target because of the outsize role it plays in energy, tech, agriculture, biomedical research and defense.

Everyone knows about cybertheft, but that is just one of the CPC's many techniques, and not even the most effective. Others include supply chain infiltration; predatory investment, including through venture capital firms; “lawfare," or the use of legal systems to harm an opponent; purchase of our data on open markets; coercion; old-fashioned human espionage; and bartering. ("You can have access to our market and labor if you share your intellectual property.")

China uses all of these in various combinations to acquire quickly and cheaply what it has taken our companies years to develop. With intangible assets approaching 90% of the S&P's total assets, these collective activities expose U.S. companies and equity markets to significant risk.

However, the opposite does not hold true. Now, foreign firms cannot ask for even the most benign business information in China. This is not theory. The Chinese government has detained and imprisoned business representatives from all over the world, including the Philippines, Australia, Singapore and Ireland. Between 2016 and 2022, the People's Republic government has also prevented more than a hundred foreigners from leaving China.

Moreover, inside China the government grants itself the right to seize any foreign company's data, documents, media or devices that authorities deem relevant to their investigations. In mid-April of this year, provincial government agents in Shanghai raided the offices of the American consulting firm Bain & Co. Shanghai state security officers detained local Bain employees and seized computers, drives, phones and documents. Chinese authorities also raided Mintz Group and Capvision.

A number of Western companies in China report that security institutions directed them to use only government-approved, Chinese-made software in their IT systems. The authorities insist that this is a condition of complying with Chinese law. It is impossible to keep one's business confidential from competitors if the Chinese government has access to your systems. This is but one of many strong-arm tactics the authorities use in China.

They also rely on so-called tax violations, patent and trademark infringement, data mismanagement, civil complaints and other accusations as pretexts for arrests, detentions, raids and seizure of foreign company intellectual property. There is no law in China except the CPC; the April 27 amendment simply serves notice to foreign companies that inside China, no one, Chinese or foreign, has any rights.

All of this raises the question of why any foreign companies continue to do business in China. When asked about his plans after the recent arrest of one of his executives, Astellas Pharma CEO Naoki Okamura said Astellas would remain in China, but would seek to reduce supply chain dependence on the country.

Another obvious reason for staying is the lure of the huge Chinese market. Both reasons make sense. However, Xi appears determined to sacrifice economic growth to greater communist party power. He stated as much explicitly during last fall's party congress. We should expect more demonizing of the West, harassment of its companies, theft of intellectual property and use of Chinese business as an arm of the Chinese military, security and intelligence services.

No Western government or private sector actions can divert Xi from this path. Moreover, because the U.S. government cannot protect the entire American private sector, American business leaders must protect themselves.

At a minimum, this means understanding what the Chinese government has done and can do to their companies. At the board level, it means recognizing these new threats in real time and taking appropriate actions, including researching investment sources, diversifying supply chains, hardening computer and communications systems, and training employees.