Why US sanctions on ‘state-controlled’ Chinese companies smack of hypocrisy
- Washington’s targeting of Chinese enterprises it claims are controlled by Beijing has seen hundreds of companies banned on national security grounds
- Yet the US and other Western countries often exert significant influence over businesses to comply with their ‘requests’. And, in return, they receive billions in subsidies
Sanctions have landed hard and fast on Russia after its invasion of Ukraine. Not only have the US and other Western governments inflicted economic punishment on Moscow, but many of the world’s biggest multinational companies, including ExxonMobil, Apple, General Motors and Disney, have joined unprecedented boycotts by stopping or curtailing business with and in Russia.
This rare lock-step between Western governments and what are supposed to be apolitical private or publicly traded commercial entities has upended conventional wisdom on the state-business relationship.
Targeting foreign enterprises is one of the oldest and most powerful moves in Washington’s international politics playbook. Chinese companies, in particular, have been hit with an array of US sanctions in recent years.
In February, the US Commerce Department’s Bureau of Industry and Security added 33 Chinese entities to its “unverified list”. That is not to be confused, of course, with the bureau’s more damaging “entity list” which has included 611 Chinese companies, institutions and individuals since 2018.
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As enterprise researchers, we have in recent months closely studied state-business relationships in Western countries, especially the US, in an effort to understand the reasons often cited by Washington for imposing sanctions on Chinese companies. The results are unexpected, to say the least.
For instance, while there are ostensibly only a handful of SOEs in the US, there is strong evidence suggesting a large number of US companies are “influenced and controlled” by the US government to comply with its “requests”.
In addition to those companies with over 50 per cent state ownership, traditionally regarded as state-owned enterprises (SOEs), there are companies with less than 50 per cent state ownership, but which are still under the state’s control. They are known as “state-controlled enterprises” (SCEs).
Since their emergence before World War Ⅰ, SOEs have played an important role in developed countries, despite a century of swinging between privatisation and nationalisation.
According to the Organisation for Economic Co-operation and Development, the average asset value of SOEs among member countries is around 15 per cent of GDP. The number varies from about 44 per cent in Finland, to 12-15 per cent in New Zealand, Italy and France.
SCEs are also prevalent in developed countries, and commonly include research institutions, defence contractors, top companies of certain industries, and multinationals in key sectors.
For instance, although defence contractors in the US are mostly privately owned, the US government has considerable control through procurement contracts; the orders it places are signals for where research and production should be heading.
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“Quasi-governmental entities” are a typical type of SCE in the US. Though not referred to as such, they are essentially identical to SOEs, with a hybrid structure that is part government department, part private company.
We have found that, in developed countries, it is common for SOEs and SCEs to carry out government “requests” in fields such as infrastructure, technology upgrade, energy resources and national defence.
Examples of Western SOEs doing their governments’ bidding include German KfW Development Bank promoting the national green hydrogen energy strategy, and the establishment of KNDS to enhance France’s military leadership in the EU and Nato.
On the SCE front, one only needs to look at Japan’s NTT Communications promoting its national 6G industrial upgrading, Siemens’ participation in Germany’s Industry 4.0, and Intel supporting the US’ semiconductor research and development.
In return, governments offer these companies subsidies, tax preferences and procurement convenience. According to the policy resource centre Good Jobs First, the US has been providing as much as US$213.53 billion to manufacturing since 2011. Boeing, General Motors and Intel are the top three beneficiaries, collecting US$15.37 billion, US$8.24 billion and US$6.01 billion respectively.
A more obscure method, meanwhile, is for developed countries to nudge small and medium-sized enterprises (SMEs) under their influence through business partnerships. For example, the US National Security Agency initiates many civil-military integration projects, such as the NSA Set-Aside for Small Business and Program for Innovation.
Another example is the CIA establishing its own investment firm In-Q-Tel, what we call an “intermediary-level institution”, to invest as venture capital firms. As such, it is able to identify and incubate cutting-edge technology firms that can safeguard national security interests.
To sum up, it is common practice for developed countries to exert significant influence over their SOEs and SCEs to comply with their “requests”. In the US, though SOEs are few and less efficient, the government supports an extensive list of SMEs and quasi-governmental entities, and uses approaches including business partnerships and intermediary-level institutions to “influence and control” them.
In this light, US sanctions on Chinese companies citing state ownership or control are not only illogical, but also carry more than a whiff of hypocrisy and cynicism.
Moreover, this new form of “economic proxy war” – using state-business relations as a convenient excuse for launching arbitrary sanctions against another nation’s strategic enterprises – will only become more pervasive, as more governments take a page from the US playbook.
It follows that multinationals will find it increasingly difficult to keep the favour of host countries, even the ones that have reaped substantial benefits from their presence. The breathing space for truly globalised companies will further diminish, as we trudge somewhat reluctantly down the path of decoupling.
Zhengjun Zhang is the founder and CEO of King Parallel Consulting. He previously headed the SOE division in the Enterprise Research Institute of the Development Research Centre of China’s State Council and was a core member of OECD Asia Network on SOE Governance
Yanyan Li is the director of consultancy at King Parallel Consulting, focusing on strategy, industry, market and policy consultation
