Beijing and Washington seem to be traveling on parallel tracks. Both talk about improving relations while each, in its own way, imposes rules that stifle trade with and investment in the other.
Beijing’s new Anti-Espionage and Foreign Relations Laws will make it more dangerous for foreign firms to invest in China or do business there. Washington’s Chips for America Act restricts exports—mostly technology—to China, while the government plans to announce investment restraints later this summer. All these measures will stifle economic exchanges between these two nations much more than either government claims or expects. China will suffer more than the United States.
Officials on both sides, as well as many lawyers involved, claim that these laws will have only a limited effect on business. Typical is the judgment of Jeremy Daum, a senior fellow at Yale Law School’s Paul Tsai China Center. He declared that Beijing’s “legislative changes don’t increase the risk to foreign businesses in China.” On the American side, Treasury Secretary Janet Yellen asserts that Washington’s new rules—both existing and those soon to be announced—will not “broadly disrupt” trade between the two countries.
American business will assess the implicit risks and deny itself activities that are, in a strict sense, not even mentioned in either Beijing’s or Washington’s new rules. No one wants to invest large sums in a venture that an official reinterpretation might close or bear the expense of a major legal action to keep it open.
On both sides, these laws are especially dangerous to business because of their respective claims to serve “national security.” Especially in China but also in the United States, national security lends itself to expansive interpretations. China’s new laws certainly seem broad. The Ant-Espionage Law applies to anyone “seeking to align with an espionage organization” or obtaining “documents, data, materials, or items related to national security or interests.” Moreover, according to Perkins Coie’s translation, the law calls on “all levels” of government to educate and manage related security precautions.
As if to emphasize the dangers to foreign firms, Chinese authorities have already raided American and other foreign firms under these new laws. Chinese security arrived unannounced at the American due diligence firm Mintz Group and detained several staff members. Similarly, they questioned staff at the U.S. consultancy firm Bain & Co. at its Shanghai offices. Officials have investigated the international consultant Capvision. The authorities did not offer an explanation except to claim “national interest.” To date, no one in Beijing has revealed what these firms did to bring on these actions. From a foreign businessperson’s point of view, this news is a reason to steer clear of anything even vaguely like these otherwise reputable companies or simply avoid China altogether.
From the American side, things are less ominous, but the rules are restrictive, nonetheless. The Chips for America Act, passed last year, forbids the sale of advanced semiconductors to China as well as equipment to manufacture computer chips. Pending investment restrictions, according to Ms. Yellen, will focus on semiconductors, quantum computing, and artificial intelligence, with an eye on “national security.”
There is no suggestion of equivalence here. In the United States, unlike China, those subjected to such laws have recourse in the courts that might rule in their favor. From a business standpoint, however, this is small comfort. A legal fight would impose considerable expense and take considerable time, during which business would face disruption and the loss of return on what might well be a large investment. Managements might conclude that better judgment would just keep them away from anything close to the forbidden activity.
In this exchange of restrictions, China has more to lose than the United States. American business will also miss out on profitable opportunities in another large economy, perhaps as savings and efficiencies that a China operation might offer. In contrast, China wants and needs the expertise and technologies brought by foreign investments and foreign connections. Beijing has made that clear.
