Among the multiplicity of risks facing the Chinese economy, such as a tumbling stock market, a failing real estate sector, high local indebtedness, and skyrocketing youth unemployment, the greatest danger emerges lies in the cooling interests of Western multinationals in doing business in and with the People’s Republic of China. The costs of China’s closed and opaque authoritarian system are rising as Western needs for transparency and accountability gain new legislative teeth. America should raise those costs further by writing into law stronger transparency requirements.

Over the last few years, foreign direct investment (FDI) in China has nosedived, with Western multinationals actively withdrawing from the market. This week, China announced a further year-over-year reduction of inbound FDI. At this year’s World Economic Forum in Davos, JP Morgan Chase CEO Jamie Dimon said, “the risk-reward has changed dramatically” for companies looking to invest in China. Even firms with a traditionally sizeable Chinese presence are also getting cold feet.  

One important cause of the Western capital and company flight out of China is a fundamental incompatibility of legal regimes. China’s authoritarian system is built upon a rigid control of information, access, and people, whereas Western laws on corruption, human rights, and the environment demand transparency in business operations. For most multinationals, the 1977 Foreign Corrupt Practices Act mandates the companies’ examinations of operations to identify risks of contributing to foreign bribery, while the 2021 Uyghur Forced Labor Prevention Act requires companies to evaluate supply chains for slavery risks. 

In Europe, laws in Germany, France, Norway, and Switzerland mandate that companies monitor their supply chains for risks of human rights abuses, labor violations, and environmental harm. The European Union will likely go one step further with its proposed Corporate Sustainability Due Diligence Directive, which would compel large companies to scrutinize their value chain for a wide range of potential harms, including forced labor, child labor, compliance with occupational health and safety rules, and environmental impacts.

These Western laws expose multinationals to liability if they fail to investigate their operations and supply chains adequately. Companies are required to conduct due diligence to mitigate this risk—an increasingly impossible task in China.

Chinese laws, such as the recently revised Counter-Espionage Law, effectively outlaw basic corporate due diligence. Under its provisions, collecting information related to China’s “national security or interests” could be considered espionage. This law is not simply a theoretical hazard, as evidenced by enforcement actions against prominent Western companies, including Bain & Company and Mintz Group. Moreover, companies have reported instances of harassment or detention of their executives, with some even prevented from leaving the country for years. For example, without explanation, British businessman Ian Stones has been held in China since 2018. Legal regimes like this are not compatible with reasonable business practices.

As China doubles down on opacity, companies increasingly face an unpalatable choice between ignoring Western laws or leaving the Chinese market in search of friendlier shores.

Of course, China’s primary worry isn’t Western companies’ departure but Western supply chains’ realignment. In recent years, Apple, Samsung, Hasbro, Adidas, and others have shifted parts of their supply chains to more transparent and business-friendly countries. If companies cannot ascertain compliance with Western laws among their Chinese suppliers, the market will find more transparent regions from which to source. While China has maintained cost and quality advantages for decades, those benefits are waning, further eroded by something equally valuable—visibility. 

The economic resistance to Chinese opacity also provides an excellent roadmap for how America can push back against an increasingly authoritarian China. China’s domestic repression and global surveillance depend upon secrecy. In a world where multinational companies ask no questions about how goods are made or where they come from, China can thrive selling solar panels made with slave labor or close deals with a hefty bribe. However, as transparency throughout supply chains becomes a business prerequisite, China’s economic edges weaken.

Like the businesses leaving the country, China now confronts an unpalatable choice. It can continue to clamp down on due diligence and informational freedom while watching American and European companies and capital exit. Alternatively, it can make a radical pivot akin to its COVID lockdown policy. By permitting greater business and informational freedom, companies, investors, and individuals can ask the tough questions that help mitigate risk and inform better corporate decision-making.

Transparency benefits America by constraining the closed and opaque systems of autocratic adversaries that can distort markets and mask human rights violations. If America really wanted to force China’s hand towards an open, rules-based economy, passing and enforcing more pro-transparency legislation would send the right signal. 

Elaine Dezenski is senior director and head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.

Joshua Birenbaum is deputy director of the Center on Economic and Financial Power at the Foundation for Defense of Democracies.

Image: Shutterstock.com.