Is China Conducting Regulatory Warfare Against the West?

There has been a lot of press attention lately on allegations that the People’s Republic of China has been conducting a sophisticated cyberwar campaign against the United States. Far less attention has been paid to what could be described as Chinese regulatory warfare.

There are two forces that appear to be fueling a regulatory war between China and the West. The first is the inability of the Chinese government to police its own domestic companies, particularly when it comes to product safety. There have been a number of serious incidents involving Chinese-made products that have been discovered to be poorly made or even unsafe. The most recent of these was tainted baby formula. Mainland Chinese were streaming into Hong Kong to buy baby formula produced by non-Chinese companies. The demand so outstripped supply that Hong Kong authorities had to limit the number of cans of baby formula that tourists leaving the island country could take with them. Western governments have stepped up their inspections of Chinese-made products in order to insure their safety.

The second source of friction is the growing appetite of Chinese companies for foreign acquisitions. As China expands its global trading activities, buying foreign firms and seeking to develop domestic competitors to major international brands, it has to face increased scrutiny from national and multinational regulatory bodies. In the United States one of the most important of these is the Committee on Foreign Investment in the U.S. (CFIUS). As the name suggests it is responsible for reviewing the national security implications of foreign investments in U.S. companies or operations. Since many – one might even hazard the guess most, Chinese companies have ties to the state, efforts to acquire U.S. companies involved in advanced technology must be reviewed carefully. In a number of instances involving Chinese efforts to acquire U.S. firms, CFIUS forced changes to the terms of some agreements or even denied sales outright.

Now, China appears to be fighting back, using its standards and practices review organizations in ways that could be characterized as a form of regulatory warfare. In the wake of the scandal over tainted milk, Chinese state bodies have begun a series of investigations of Western companies selling baby products for alleged price manipulation. Similarly, Beijing has begun a broad-based investigation of the sales practices of dozens of international pharmaceutical companies.

Another reason for this regulatory assault on Western companies could be to pressure them or even foreign governments into changing their behavior on regulatory matters. U.S. aviation experts have alleged that the Chinese aviation authorities have been holding up certification of the Boeing 787 Dreamliner until their foreign counterparts certify the C919, a commercial jet made by a Chinese company in cooperation with Canada’s Bombardier. Pharmaceutical companies, for example, could be in the crosshairs in order to force them to part with critical intellectual property as a condition for being able to do business in China.