China moral hazards

In August, in The Top 14 China Wild Cards/Future Risks, we listed what we saw as the top 14 risks for foreign companies that do business in or with China. We first listed what we saw as the top six risks “right now,” and we then listed eight more risks we thought might rise to the fore. Among these eight was the following:

There may be a tipping point when consumers in the US and the EU and elsewhere become so troubled with how China treats its Uyghur and Tibetan populations (see this and this) or how it is acting against Hong Kong or Taiwan or with its efforts to exert control outside China. These sorts of things are leaking out more of late as the bloom is off the rose and we are hearing more and more from our own clients (American and otherwise) saying that they are having employees refuse to go to China or consumers complaining about their goods being made in China. Take a company like Patagonia which has a stellar reputation for caring about the environment and people and even goes so far as to call itself The Activist Company; how much longer can it maintain its moral high ground while still having some of its products made in China?

I call this the “moral hazards” of doing business with China though I realize “moral hazard” means “a lack of incentive to guard against risk where one is protected from its consequences.” I like this phrase to describe the hazards of doing business with a country perceived to be an abuser of human rights, like China.

Since China started cracking down on Hong Kong in June I have often asked clients and others who do business in or with China whether they see their China business having a negative impact on their business reputation outside China. Might it cause them to lose customers or employees? From June until October, the answer was a uniform “no”, usually quickly followed by one of the following comments;

  1. Americans don’t even know what goes on here, much less in China.
  2. China is better than X country and nobody seems to care what X country does.
  3. The U.S. generates more ill-will in the world than China.

Then came October’s NBA incident and the answers started becoming more pensive. Though “no” was still pretty much the only answer, I started getting follow-up comments like the following:

  1. I don’t think there will be any problems, but this is certainly something worth us considering.
  2. I expect everything will blow over and be fine in a few weeks, but this might have a tiny impact on our sales in the meantime, but I doubt even that.
  3. I can see how some people really care about this, but unless it rises to the level of a real movement, I do not see it having any real impact.

Then came the Xinjiang papers and increasing calls to boycott Chinese products and the Beijing 2022 Winter Olympics and soccer and rugby stars like Mesut Özil and Sonny Bill Williams speaking out against China. Still, virtually nobody is planning to cease doing business with China tomorrow over China’s human rights issues, but many now see China’s bad actions as a potential threat to their business outside China. I am getting the following sorts of comments:

  1. If we could stop doing business with China tomorrow, we would. But we can’t.
  2. We have employees who want us to stop doing business with China and we have to take that seriously.
  3. There’s a 50-50 chance this will all blow over within the next few months. There is though a 50-50 chance more bad news will come out about China and if it does, the  ______ could hit the fan.
  4. Look at our business. I’d be crazy not to be concerned.

What are your thoughts? What are you seeing/hearing out there?

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.