ANYONE WHO has suffered a Chinese burn as a child will remember the pain when two hands grip the forearm and twist the skin in opposite directions. Americans doing business in China know the feeling well. The growing strategic rivalry between the two superpowers is putting pressure on American businesses and investors in two ways. One grip on the forearm is that of the American government, which is increasing scrutiny of American firms operating in China on national-security and human-rights grounds. The other is that of China’s Communist regime, which is attempting to force companies in China, including foreign ones, to bend to its rules. At worst, this means pushing them to assist China’s armed forces and its police state. That presents firms with a big ethical quandary.
The predicament is unprecedented. During the cold war business was largely untroubled by superpower rivalry because the Soviet Union was an unwelcoming, closed economy. China, by contrast, is America’s biggest trading partner. Americans have invested more than $250bn in the country since 1990. The weight that Chinese firms listed on the mainland have in equity benchmarks such as the MSCI index is rising. Whatever the outcome of trade talks between President Donald Trump and his Chinese counterpart, Xi Jinping, heightened attention to security-related matters has made life uncomfortable for Chinese firms like Huawei. American companies are smarting, too.
Google is the most prominent example. It pulled out of China in 2010 after refusing to permit censorship on its platform. Aspects of its recent return have been lambasted by Mr Trump and General Joseph Dunford, chairman of America’s joint chiefs of staff. General Dunford’s concerns revolve around an artificial-intelligence (AI) centre that Google set up in Beijing in 2017. He says development of AI in China supports an authoritarian government, and ultimately its army. Google’s boss, Sundar Pichai, met both men recently and offered reassurances that the centre creates innocuous open-source tools available to everyone, not just the Chinese. Meanwhile, protests from outraged Googlers last August forced Mr Pichai to suspend a project, code-named “Dragonfly”, for a Chinese search engine that may have let censors in.
Another source of concern for companies and investors is Xinjiang. Authorities in the western Chinese province have sent up to 1m members of the Uighur Muslim minority to “re-education camps”. This year two American firms have been forced by unflattering media reports to sever ties with the state. Thermo Fisher Scientific, a medical-technology firm, stopped selling gene-sequencing instruments that were used to trace Uighurs’ DNA. Badger Sportswear, a big American clothing company, cut links with a Chinese supplier suspected of using Uighur forced labour.
Attention is moving to Chinese firms linked to Xinjiang that are part of the MSCI index. For instance, American fund managers have flocked to buy Hikvision, a China-based supplier of surveillance cameras with a booming global business. It has now been put on a blacklist by the American government. Some investors are dropping it like a stone. Their reputations are also on the line.
Doing business with unsavoury regimes is always fraught with risk. But in China the stakes are rising. Two decades ago, as the Communist state was opening up to trade, Western governments blithely assumed that foreign investment would help democratise it. Instead, the lure of its huge market led some firms to compromise their integrity. For a long time foreign corporations there worried more about business risks, such as intellectual-property theft, than reputational ones. This is changing as Mr Xi strengthens party control over business at home and turns more belligerent abroad. Last year some American airlines, and the Marriott hotel chain, had to change how they referred to Taiwan, which China regards as a renegade province.
The growing importance of technology makes the minefield trickier to negotiate. It is ludicrous to think that American tech firms will stop doing business in China. It is a hub of innovation, with legions of coders and endless fields of data. Amazon Web Services and Microsoft are setting up their own AI centres in Shanghai. But just as Western politicians and voters fear that such technologies, as well as improving people’s lives, will destroy privacy, so in China the line between their use for civilian benefit and for repression may blur. The risk of missteps is high.
I spy with my ai
Scrutiny is coming from many directions. The Trump administration, though loth to condemn human-rights abuses among allies like Saudi Arabia, is paying more attention to Xinjiang, not least because of pressure from Congress. On April 3rd a bipartisan group of lawmakers urged the administration to impose tougher restrictions on security firms like Hikvision, investigate their role in global financial markets and ensure that American firms do not assist in the “vast civilian surveillance or big-data predictive policing” in Xinjiang.
Employees and human-rights groups are also watching carefully, as Google has discovered. That said, American companies also have many Chinese employees, who may be more tolerant of state meddling. Companies are going to find that they have to reveal uncomfortable details about the risks of operating in an authoritarian state. Roger Robinson, head of RWR Advisory, a risk-management consultancy, says the momentum in Washington to demand more openness from Chinese and Western firms on such matters is growing. Those in the West can seize the moral high ground, refusing to sacrifice their principles to satisfy the demands of the Chinese state. That may seem like a high-risk strategy. But in the long run people respect firms that stand up for their values—just as they would a person enduring a Chinese burn without begging for mercy.