Rising risks in China hurting foreign businesses | 5 things that have made trade difficult

Foreign businesses in China are seeing their efficiency and innovation hampered, and their operating costs increasing. The complexity and severity of the risks that they face in the world’s second-largest economy are pushing as European and American companies to inflate their budgets for risk assessment and compliance efforts. Their resources are being diverted away from developing better products and services, a recent report by the European Union Chamber of Commerce in China revealed.

Here’s a look at 5 things that are causing businesses to worry about risk management in China so much:

Geopolitical risks

Many foreign businesses are concerned about getting caught in the crossfire due to escalating geopolitical tensions between China and the West. Trade wars, sanctions, and the threat of sanctions loom large at times when such tensions flare up. “Businesses have been forced to consider what the impact of a potential escalation of tensions in the Taiwan Strait would have on their operations,” the report highlighted.

Politicisation of business

“The overall business environment has become more politicised,” the report said. Politicisation of business includes ambiguous laws and vaguely using terms like “national security”, making compliance difficult for foreign businesses.

Raids on foreign businesses’ offices and discriminatory risk management policies that favour domestic players can also be seen as a part of this politicisation of business.

Tight cybersecurity legislation

To address potential misuse of sensitive technologies, China has implemented stricter governance in the field of cybersecurity. This includes tighter licensing requirements and market access restrictions.

Information and communication technology (ICT) hardware and software providers, and information service providers are subject to the country’s cybersecurity review framework. Furthermore, cross-border data transfer, including exporting certain R&D data and personal information, now requires more compliance efforts. That has impacted foreign businesses.

China’s self-reliance efforts

In the past few years, critical events such as the Covid-19 pandemic, Russia’s invasion of Ukraine, and the Israel-Hamas war have led to severe disruptions in the global supply chain. It also bolstered China’s bid for self-reliance– a measure that would ensure security and controllability of required materials.

In line with this, Beijing has issued some public procurement guidelines tied to localised production. These frameworks encourage Chinese companies to avoid the use of foreign technology. The Chinese government fears that such technology, especially in key sectors, could be cut off by other countries.

The administration has been incentivising and pressurising companies to preferentially use domestic Chinese suppliers. Foreign businesses have said that this puts them at distinct disadvantage compared to domestic competitors.

Conflicting legal regimes

Conflicts between the EU’s and China’s legal regimes have put companies in a pinch. For instance, the EU’s Corporate Social Responsibility Directive (CSRD) requires all large and all listed companies operating in the EU to reveal information on the risks and opportunities arising from social and environmental issues. They must also disclose the impact of their activities on people and the environment.

Under the Chinese regime, such transfer of information may raise eyebrows and invite scrutiny of authorities. European companies operating in China—particularly those in ‘sensitive’ regions—are likely to find it hard to simultaneously deal with both the regimes.