WHITHER CHINA? Part 3

By John Tulac

In this installment, I will identify several significant actions being taken by the Chinese government and how these impact U.S. businesses. Certain actions, trends or developments, could negatively impact any business dependent on China for any part of its supply chain.

In the past year, China has been increasingly militaristic.  Chinese belligerence tends to rise and fall in cycles.  Earlier this year, China lost its case claiming exclusive sovereignty over almost all of the South China Sea.  Instead of accepting the outcome, China redoubled its efforts to convert small spits of land into occupied space (occupied by troops), challenged fishing boats from other countries and even the U.S. Navy asserting the right of transit in international waters.  Since the South China Sea is an area of transit for a huge amount of goods exported not only from China but from other Asian countries to the United States and other destinations, the South China Sea has the potential to become a dangerous flash point that can disrupt the free flow of goods to this country.

It is also important to pay attention to the pronouncements of the Chinese military. The Chinese military exerts a tremendous amount of economic power, control or influence over the Chinese economy.  The Chinese government historically uses spokesmen from the Chinese military to test provocative statements of possible policy.  The higher the rank of the spokesman, the more the Chinese government is testing the waters for the likely response to the provocative statement.  Thus, the seemingly rash statement of a Chinese Colonel is less likely to reflect what the government would like to do than if the same statement came from a high ranking general.

I have the wonderful privilege to train a group of Chinese judges every year in U.S. and international law.  I always include a description of what an independent judiciary is like under our system in the United States.  An independent judiciary does not exist in China. After many years that seemed to be trending toward a more independent judiciary and a rule of law, at least in commercial cases, any further progress toward a true rule of law, instead of rule by law, has ceased as Premier Xi has cracked down.  This means that a foreign business cannot be assured of due process and a fair trial in a Chinese court.  Arbitration is the preferred approach.  Foreign businesspeople visiting China are not off limits these days to being hassled or detained.   Oh, and your hotel room could be bugged.  When you visit China, keep a low profile, be respectful, do not criticize the government, and be careful what you say in seemingly private circumstances about anything you would treat as confidential.

China is no longer the lowest –cost producer in many sectors, but it still has incredible overcapacity in many sectors.  The old Communist mentality of maintaining production regardless whether anyone will buy it still persists.  Many private companies have ceased doing business because their goods go unpurchased.  The Los Angeles Times featured a company that made large cement mixers mounted on trucks.  All the employees are gone now; only the owner remains, along with hundreds of unsold mixers.  If more companies close their doors, and this is inevitable, the rising ranks of the unemployed will pose a serious social problem for China.  In the meantime, China violates international law by subsidizing production and by dumping surplus products in international markets at unfairly low prices.  The U.S. has remedies for these problems that work.  Starting a trade war with China (or any other country) is ridiculously bad economic policy that would only hurt us.

Internal unrest is increasing in China.  Labor strife, even occasional riots, will create major social and economic challenges for China as it makes its slow and painful transition from an economy driven by industrial production to one driven by consumer consumption.  China will attempt to micromanage these changes with command-and-control methods, but it will be difficult, and probably brutal in many respects.  If China attempts to forcibly relocate unemployed people from the cities back to rural areas, one can anticipate violence and potential significant disruptions to the supply chain.

In the next installment, I will examine several long-term trends in China that will offer significant opportunities for U.S. businesses.

John W. Tulac is an international business attorney practicing in Claremont, adjunct professor of law at University of La Verne College of Law, and Lecturer Emeritus (retired) at Cal Poly Pomona.  He is peer recognized as preeminent in international business law and holds the highest ratings for competence and ethics from the Martindale Hubbell National Law Directory.