Western Business in China: Can We Sell Without Selling Out?

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Ryan Lacey:  Hello and welcome to this Federalist Society webinar. This afternoon, Wednesday, January 25, 2023, we discuss "Western Business in China: Can We Sell Without Selling Out?" 

 

      My name is Ryan Lacey, and I'm an assistant director with the In-House Counsel Network here at The Federalist Society. As always, please note that all expressions of opinions are those of our experts on today's program.

 

      Today, we are fortunate to have an excellent panel moderated by Christopher Ekren, who I'll introduce very briefly though much more could be said.

 

      Christopher Ekren is a Global Technology Counsel for Sony. Based out of Silicon Valley, he is currently the lead US in-house counsel for key Sony technology initiatives in several crucial areas. He also has concurrent global roles supporting Sony’s technology standards, open-source software, and special technology projects.

 

      After our speakers give their remarks, we'll turn to you, the audience, for questions. If you have a question, please enter it into the Q&A feature at the bottom of your screen, and we will handle questions as we can towards the end of today's program. With that, thank you for being with us today.

 

      Chris, the floor is yours.

 

Christopher Ekren:  Thank you, Ryan, and just to reiterate, I'm here, not in a Sony role, and although I'm a moderator, should I actually have an opinion, it's my opinion, not a Sony opinion.

 

      The Right Honorable Sir Iain Duncan Smith is the Conservative MP for Chingford and Woodford Green and has been an MP continuously since 1992. Between '97 and 2001, he was the Shadow Secretary of State for Social Security and then Shadow Secretary of State for Defence, and from 2001 to 2003, he was leader of the Conservative Party. Before entering into politics, he served in the Scots Guards from 1975 to 1982. After leaving the army, he worked in industry, first with the GUC, then as a director of a property company, and subsequently as a director at the publishing company Jane’s Information Group.

 

      Mary Kissel is Executive Vice President and Senior Policy Advisor at Stephens. Previously, she served as Senior Advisor to the Secretary of State Michael R. Pompeo from October 2018 to January of 2021. Prior to joining the State Department, she had a long and distinguished career on The Wall Street Journal editorial board, including stints as chief foreign policy commentator in New York City and Asia-Pacific editorial page editor based in Hong Kong. She hosts the Nixon Seminar on Conservative Realism and National Security, is a member of the Council on Foreign Relations, and serves on the boards of the American Australian Council and Marathon Initiative, and RXO, Inc. She is a graduate of Harvard University and the Johns Hopkins School of Advanced International Studies.

 

      So on to the panel. And let us start with Sir Iain.

 

The Rt Hon Iain Duncan Smith MP:  Thank you. Thank you very much, indeed, for having me here.

 

      I really just want to start by getting pretty much straight to the point. I think that the problem we face right now is that countries in the Western world have got themselves completely dependent – hugely industriously and, in general, product – to stuff produced in China. Now, under normal circumstances, we would might argue that that wouldn't be such a huge problem except that we are dealing, remember, with an unelected and dictatorial regime that is showing its hand at brutality, I think is guilty of former genocide in Xinjiang amongst the Uyghur, has trashed the Hong Kong settlement to sign a British agreement, is now arresting democracy campaigners and peaceful journalists such as Jimmy Lai in Hong Kong, making a mockery of the concept of common law application in Hong Kong.

 

      All of this is the nature of the government, and there are further things: invasion of the South China Sea, the militarization of that area, the constant threats to Taiwan, the tacit support for Russia in their position over Ukraine, the support then to the U.N. where they constantly defy any vote that calls for reparations or sanctions. All these things make them a complete law unto themselves. And even if all of those weren't enough, we have lost tens of millions of people dead because of their failure to stick to the normal rules around infection control that took place around about the time of the COVID outbreak.

 

      So one way or the other, when you deal with a country that doesn't care very much about the norms of peaceful and democratic government, then you have a problem in the first instance. If you then make yourself completely dependent to China by rushing to do business with them because you say it's cheaper, you make it even worse. And then you encourage them through that money to be able to dominate you in other areas.

 

      So for example, now we know that China controls around about 85 percent of the rare-earth mineral mines in the world. Many of these use, by the way, slave labor—particularly in parts of Africa, which are appalling—child labor, etc. And also, more importantly, you could argue that they control pretty much the global manufacture of the processed rare earth minerals, which is a very dirty business, but they have it. So that means, essentially, rare earth minerals are, I think we can loosely describe, as "the oil of the 21st century." And what we have here now is we have placed in the hands of a very peculiar regime – one that we cannot possibly trust to have our own security and our own peace at their heart – we have placed in their hands the control of that particular industry, which is critical to all of us. The telephones that we use here, the internet, pretty much everything that we normally accept for granted now comes back to that one little sect of small little magnets that are made from these different minerals. So all of that means that we have gone blindly into this process over a period of some little time now, over the last, perhaps, 15 to 20 years.

 

      It does mean we have to reappraise where we are because China doesn't show any signs of changing. In fact, when President Xi came to power, they hardened their stance towards the West and their brutality, the changes in Hong Kong. All these things have come pretty much directly from President Xi's desk. That means, essentially, we need to take a strategic view.

 

      I have a concern that I think even the Five Eyes countries are beginning to drift now into this idea that, somehow, if you don't say too much, then the problems won't arise. If you don't show China that you are opposed to them in many respects, then somehow, they will be reasonable. And to that extent, my own country, I was concerned that when the present prime minister got elected, as it were, he originally during his campaign talked of China—I remember he told me this—as a "systemic threat" and one that we have to deal with.

 

      Actually, the first statement he made on his way to the G -- I think it was the G20 quite recently onboard the flight he stumbled on that phrase and then corrected himself and said, "No, no. I don't mean systemic threat. I mean systemic challenge." Well, if that doesn't tell you that you change policy to reflect the nature of the people you're about to meet, then nothing else, I'm afraid, makes bad foreign policy.

 

      But the second bit which concerns me is that then the foreign office produced a wonderful statement, which only a foreign office set of officials can do, to try and describe how we will deal with China strongly but reasonably, and they produced this wonderful idea of robust fragmentism. Well, if anyone can tell me what robust fragmentism looks like in application, then I'd love to know. It's like saying to somebody, "If you take another pace forward, I could; I might; maybe I won't. But then, again, if I did threaten you, counter threaten you, punch you, perhaps not punch you; I might not punch you. I could punch you. No, well, I won't. I don't know." Anyway, the point is you should understand that something could happen. If that is what we consider now to be a deterrent, then God help us all.

 

      So my point really is that we now have to change that. And one of the areas that I would say -- and I will close quite quickly because Mary will want to speak in a second. But the one thing I will say is that our addiction to the idea that only China can manufacture things leads us now, as we head helter-skelter towards electric vehicles, even further in deficit to China because almost every electric vehicle that I'm aware of is made in China. The batteries are mostly manufactured in China. Huge mega battery factories going up regularly. All these things take us deeper, and we should be reappraising that now. We should be trying to pull back.

 

      There's no reason in many of these cases why we do need to manufacture in China. Robotics, the advance of non-human labor in much of the manufacturing, particularly the value-added area that we're discussing, all of this is now could be done amongst the Western democracies again. I'm pleased to see that America has started to pull some of this back, particularly production of some of the telephones, and at least the microprocessor technology is now being pulled back to the States, which is critical, although there's huge efforts to try and get them the details.

 

      So all I would say very simply, in conclusion, is this requires all of us together to unite, to reappraise the nature of our addiction to China, our dependency on it thereafter, and the damaging effect it has. And if no lesson could be learned, it should be learned from what happened in Europe with regards to Russia. The idea that Germany put forward that somehow it would never be a problem and that Russia would never cause us a problem if we just took their oil and gas, that would be fine, turns out that, actually, that was an assessment that was fundamentally wrong. So dealing with a regime that is dictatorial and brutal, you must recognize the nature of that regime is likely not to hold your interest anywhere near their interest at all.

 

      Thank you.

 

Christopher Ekren:  Thanks.

 

      Mary.

 

Ms. Mary Kissel:  Great. Well, first I just wanted to thank The Federalist Society for putting together this extraordinary panel.

 

      And as usual, Sir Iain has given us a tour de force of the nature and the scale of the problem. And I agree entirely. But before I make some remarks on adding a bit, if you can, to what he said, I just wanted to apologize in advance because I'm going to have to jump off a couple of minutes early for a Stephens commitment at 1:00. And I know Sir Iain may have a vote, too, so it's going to be an -- perhaps an exciting call in that way.

 

      But I think what Sir Iain said about recognizing the nature of the regime is really the key here because whenever we speak of China, the most immediate question is always, "Well, why? Why the concern? The United States, the U.K., and other Western nations have done business with China for 40 years. In fact, it's been encouraged by both sides of the aisle. And we do business with all manner of regimes that have quite abhorrent human rights records, be it Saudi Arabia or some nations in the Gulf and elsewhere."

 

      And the short answer to that question is the nature of the regime and an honest appraisal of its actions, most prominently in the military space, which is something that I'm always surprised that more investors, observers, interested parties, don't look at. And I'll just give you a couple of numbers here. You have a million-man army with the PLA, the world's largest navy, the third largest air force, biological/chemical weapons programs, hundreds of nuclear weapons, totally opaque, moving up within the next 10 years to well more than 1,000 asymmetrical capabilities, aggressive actions towards its neighbor, increasingly aggressive rhetoric. And this is not something that's happened simply under the Xi regime. It's happened over a long period of time. And so, that is an important thing to recognize.

 

      It's also important to look at what Xi Jinping says to his own people. And he states very clearly what he wants. He believes that communist China is in a struggle with the West. It wants to dominate us. It wants to make the world safe for its system of government. It has embarked on a scheme called the Belt and Road Initiative to create an economics fear so that it can then disentangle from the West. There's an actual strategy called "The Dual Circulation Strategy," in order to achieve this. This is all open-source information, so I'm not telling you anything that is somehow secret or classified. It's all out there on the record. And so, that's why I think this discussion is so important.

 

      Now, that being said, I think Sir Iain set out very well the trajectory of our relationship and the bind that we find ourselves in now. But what I would add to that is that we are in—as CEOs or general counsels or investors—in very much a gray area. The United States government prohibits trade outright with some nations, places like North Korea, Iran. We restrict certain kinds of trade with other nations. For instance, we don't sell China materials for defense or nuclear production. But it is, as of today, not illegal to do business with most Chinese companies.

 

      As a matter of principle, I want policymakers that are accountable to voters making decisions about these red lines, not CEOs. But let's be frank, even the administration that I served under in the Trump era, we did not declare China an adversary or an enemy. We simply said it was a competitor. And, in fact, that was quite a misleading term to use because competition implies that you have rules that everyone respects. And as Sir Iain laid out, no opinion here, simply the record of our experience, not just with China and international organizations where we have found them to be an incredibly corrupting influence, not just its record in terms of respecting the rules that they've set up for trade or in the military sphere or anything else, they simply have proved extremely untrustworthy. And there's no evidence that that is changing.

 

      So this really puts, I think, not just policymakers, but CEOs in particular, in a real conundrum because the title of this seminar, "Can You Do Business in China Without Selling Out?" well, they might step back and say, "What does selling out mean?" You look at Chinese stocks and, my goodness, you could make quite a tidy profit over the next 6 to 12 months potentially as China's market opens up. I have a fiduciary duty to my shareholders. Am I selling out if, indeed, I go in there, and I make a good profit for my shareholders? So there's that aspect of it, which I hear a lot in the financial community, not at Stephen's, by the way. We do not invest or do business in China. We're one of the rare financial firms that doesn't. But I think ethically you cannot do business in China without sacrificing your ethics and your principles.

 

      I was part of the decision -- the secretary of state made the decision, and I was part of the process, rather, to declare China a perpetrator of crimes against humanity and genocide in Xinjiang. I have no doubt in my mind that that is true. Several European nations and our partners have joined us in that. It is also a party state. What does that mean? That means that you can't sell anything or invest anything in China without propping up the state because everything serves the party. That's just the nature of the system.

 

      So I think to sum up, and then I'll hand it back over to you, Chris, when I speak to our clients at Stephen's, I simply say, "Look. You have a suite of risks here, be it legal because there is no solid rule of law, be it financially because everything is subject to the whims of the state, but also reputationally because you're doing business with a genocidal regime, and morally. And you will—if you haven't already—be asked to do things as an executive or a legal counsel in China that will violate the way that you do business everywhere else in the world. And for many years, many companies and lawyers made exceptions for that, and they said, "Well, that's okay because they'll change." But they don't change.

 

      And so, can you do business in China without selling out? My answer is, "Absolutely no, you can't, because of the nature of the regime and simply because of the facts that we have observed on the ground and that are only now being recognized by our policymakers, by our media, to a degree, and by others who have traveled there and done business there."

 

      So maybe I'll end there, and I'll hand it back over to you.

 

Christopher Ekren:  Sure. I think Sir Iain has a vote right now, so I'm going to focus on you, Mary.

 

Ms. Mary Kissel:  Okay.

 

Christopher Ekren:  And as you know the questions are still coming in. And at some point, I'll hear from Ryan that he'll take over with those questions.

 

      But what is the -- and I'm not going to pick on specific companies because I know Stephen's and -- but in the genre of Apple, Tesla, Nike, or even a Tiffany because there's a large luxury goods market in that country, what is the practical solution when you've already got billions invested, and your entire supply chain is embedded? It can't be cold turkey. So what is practical thinking in this space?

 

Ms. Mary Kissel:  It's a great question. I see a lot of commentators going on television shows and saying, "We must decouple now," and I just don't think that that's going to happen; however, there is a discernible trend to diversify supply chains, particularly with the COVID lockdowns in China and many companies experience with those really vast and continuing disruptions. You've seen that with Apple moving some production to Vietnam and to India. You see it, actually, with a lot of Taiwan companies that, for the first time, they've invested more outside China than they've invested in it. Taiwan investment in China, by the way, is something that we don't talk a lot about but probably should.

 

      And just from my own personal experience, I've dealt with China now in three different industries: as an observer through the editorial board, as a government official at the State Department, and now back in the financial world where I actually started my career, and I can tell you with great certainty that American investors and manufacturers have woken up.

 

      I think that when you talk about "the West," it is the American corporate space that is moving quickly or more quickly than others to diversify and ultimately to decouple. It is the Europeans, in fact, and the Brits to some extent—and I hope Sir Iain comes back so that he can talk about this—that will be less inclined to do so. And China's fully aware of that.

 

      Note that Xi Jinping, when he lifted the lockdown, what did he -- what were the first things that he did? He went to central Asia to talk to the Shanghai Cooperation Organization that was formerly the dominion of Russia. And now China is taking over as the major power there. So first, he went to kind of his nearer abroad. Then he went to the G20, and he had bilateral meetings with—not just with Biden where he humiliated him by forcing him to walk up to him—but also one-on-ones with many European leaders. Then he went to the Gulf, and he said to the Gulf, "Let's be friends. You really don't need the United States so much. Please, you can sell your oil to us, and we'll send you goods. And maybe we can settle our trade in yuan." And then he welcomed German Chancellor Olaf Scholz over to have a confab in Beijing where he also humiliated Scholz, who he barely even looked at when he welcomed him for the state visit. So he's certainly courting the Europeans. He knows that as American firms pull out, the Europeans will absolutely want in.

 

      And he's also courting specific constituencies in the City of London and in the United States. The Nikkei, for instance, just noted that China's speeding up permission for certain financial enterprises to either up their stakes in China or to start, for instance, mutual fund operations to top that huge retail market. So he's trying very hard to say, "Everything's going to go back to normal. Don't worry. Come back in. No problems here. Let's just move along and all make money together." And the question is, "Who's going to be the bigger sucker?" And in my judgment, that will be the Europeans. It will not be the Americans.

           

      I see Sir Iain is back.

 

The Rt Hon Iain Duncan Smith MP:  My apologies. I'm sorry. I will have another break in a second. That's the terrible thing called democracy, which there you go. If we were in China, we wouldn't be doing this. Anyway, my apologies.

 

Christopher Ekren:  Yeah, Sir Iain, good timing because we were just hearing that Europe is, perhaps, a greater risk in terms of being fooled by the Chinese question, in particular, being courted as American business may, as Mary was positing, leave sooner than European business.

 

The Rt Hon Iain Duncan Smith MP:  Yeah. I think there's an absolute measure of truth in all of that. I think one of the biggest problems we've got, to be fair to the state—certainly, under the previous administration, maybe to a lesser degree under the present one—but nonetheless, people are waking up to the nature of the strategic threat. So that's the first thing. And I think,  on that basis, things like, I mentioned them earlier, the removal of production of—I think Apple phones have gone back to the States or are going back to the States. I know microprocessor technology is now moving. Obviously, Taiwan possesses a lot of that, which is another reason why China would probably want to take Taiwan. But the reality is that the U.S. is certainly ahead of the -- Europe in this regard.

 

      The problem we've got is that Europe is deeply, deeply indebted to China. I'm just mentioning the -- I don't know whether this was mentioned earlier as well, but I mentioned this drive to electric vehicles that's going on here helter-skelter for a green agenda, which seems to bear no interest in strategic interests or, for that matter, commercial, financial ones. The example, for example, is in the U.K. The motor industry here had actually a global lead in lean-burn engines until Boris Johnson announced out that we were getting rid of any new purchases of those in 2023, and that collapsed overnight. And the truth is that pretty much all of that electric vehicle market is held by China, certainly the key areas and the key players in that and the battery technology. They produce -- we talked about this drive to build batteries in the U.K., but they're building battery factories on a speed which is just -- they know where the world is going, and they've got ahead of us. So the reality is that Western nations, as they rush to this technology, as they rush to this new world, this new world is controlled by China.

 

      And a lot of countries have done peculiar deals. Italy has a great dependency on Chinese labor in their textile industries. So the politics is nothing like as robust in Europe. And even in my own country where we're probably ahead of other parts of Europe, we're still—my point about robust pragmatism is a good example where the Treasury doesn't want to upset the Chinese.

 

      British universities have a real problem now with their addiction to Chinese money, not just Chinese students who pay a lot of money to come to universities but also a lot of Chinese companies have infiltrated themselves in with a lot of financing for projects. Huawei, which was banned from the telecommunications 5G network, has got its headquarters in Cambridge. If anyone can tell me why they're in Cambridge, and it doesn't come up with a simple fact is a lot of some of the brightest in the world will go through Cambridge and on to technological areas. You just can't add that up, and there's just a huge amount going on. So we're in the middle of that. They bought into our nuclear industry. We've now persuaded the government to finally bully them to get them out. And this goes on elsewhere. So we had to fight to stop them taking over Wafer Fab, which was a company that produces certain chips. They finally got driven out of that after a huge fight in the House of Commons here over this.

 

      So even the U.K., which I suspect is a step further down the road than the others by comparison with the U.S., is not there. We have an awful lot more to do. And the trouble is we should all be coming together on this because together we are all capable of seeing off this threat and seeing off the dependency. As I said earlier on, new manufacture for value-added product, which is what we're mostly talking about, not necessarily pressed plastic and things like that, and even those are done by machines now. So the reality is you don't need all this labor idea because cheap labor is a thing of the past for many of these products. And now we can do them by using computers and robotics.

 

      So it takes the strength of the government. And as I say, every time you argue this, the Treasury comes back here in the U.K. and waters everything down because they're desperately worried about loss of business in China. And a lot of industries are the same, although people are waking up in certain industries here in the U.K. to the need to get China out of their structure. But I would go along with the idea that Europe is not strong on this. Quite the contrary and is actually like a dry anchor on American policy right now.

 

Ms. Mary Kissel:  Chris, if I could just jump in and add to what Sir Iain just said briefly.

 

      He mentioned the Huawei debate. I was involved in a lot of those discussions, especially in Britain when we were trying to convince our British friends to ban Huawei. And the first couple of times that we went over and talked to Boris Johnson and to others in the government, they looked at us like we had three heads. They just didn't want to do anything.

 

      But what we did was to have our intelligence people, our scientific or technical people, kind of follow us over and sit down with our counterparts and just lay out, "Hey, this is what we're seeing. This is a company that is an arm—a surveillance arm—of the Chinese Communist Party and here's what we know. We're not telling you what to do. You're a sovereign nation, but as our best friends, we want you to know this. And if you continue to use Huawei as the backbone of your system, we're going to have to stop telling you things as a Five Eyes partner because we -- just those communications channels won't be safe."

 

      And so, it was fantastic that Britain chose to take that step to ban Huawei. Actually, Australia preceded us in doing that. In fact, many of the things that happened and became public in Australia, whether it was the infiltration of the universities, buying off politicians, the threat from Huawei and other devices, the vast influence operations in Australia, all of that stuff is going on in every other major and minor democracy around the world.

 

      And we made a lot of that information public before we left office. I would commend everybody. Former Secretary Pompeo made a speech where he talked about how Chinese influence operations go down, not just to the state level but to the local level, to PTA meetings where they are going into your communities and trying to assess who are the people that are going to have political power in the future, and how do we become friends with them?

 

      And so, it's an incredibly complex threat, and it's not at all like the Soviet threat. The Chinese are not going out conquering countries and imposing their systems on everybody else. They're simply corrupting all of these other places and saying, "Don't worry about what we're doing. Just make money with us, and everything will be fine, and then we can be friends. And you don't have to worry about uprisings. We'll sell you our safe city technology. We'll give you cheap goods. You can have cheap cell phones to sell to your populations." And that is why the nature of this challenge is so hard.

 

      And look. I don't blame politicians for not coming around earlier. I think we needed a wake-up call, and we got that, not just with the last administration but particularly with COVID, for which China's responsible. They've never had any sort of sanction or consequence, so this could happen to us all again where we have millions of people killed by some sort of artificially manufactured virus. It can happen again. And Sir Iain is absolutely right. We have to be frank. We have to be unified. But to do that, you need real political will, and that is what is lacking in the Western world.

 

      And my fear is that if COVID didn't unite us and wake us all up to this threat, what will? And my fear is that it will take something very significant. I don't know what it is, an invasion of Taiwan, Chinese troops running into Ukraine behind the Russians. Well, I doubt they'll do that, but you never know. It will take something so shocking and so dangerous that we will be forced to take these measures that we should be taking now all at once.

 

      And so, for the GCs, for the investors, for the companies out there, just know that what happened in Russia can happen in China. And I would venture to say that if we continue down this path of trying to pretend that they can be reasonable and be our friends, that that situation becomes likelier, not less likely as time goes on.

 

The Rt Hon Iain Duncan Smith MP:  You'll have to forgive me because just as I was about to come in and agree with you, I’ve just seen the bell. I'll be back in three, four minutes. I apologize.

 

Christopher Ekren:  Okay, Mary, jumping in then, this is from The Federalist Society's perspective. Our in-house corporate group is sponsoring this, and one of the issues we're struggling with as a group is the concept of ESG and various benchmarks and ways you measure that. How does this issue fit into the broader ESG issue?

 

Ms. Mary Kissel:  I'm so glad that you asked that question, Chris, because it's something that I also worked on at State with the secretary. China is the largest polluter in the world hands down: air, water, you name it. And the greatest victims are the Chinese people who have to live there and breathe that air and drink that water and all the rest. We have never really honestly acknowledged that. And the problems don't just stay in China, which is the other, I guess, aspect of this that we tried very hard to highlight.

 

      Take, for instance, their fishing practices. New Chinese "fishing vessels"—many of which, by the way, are part of the PLA navy. They just don't declare it—off the coast of South America in southeast Asia just decimating fish populations. And I'm very happy to see that this is not an issue now but is a partisan issue. It is absolutely bipartisan in the United States. So what do you do as regards ESG and China? There's nothing you can do. They're not going to change their behavior. They will not respect any agreement that they have signed.

 

      Why do I say that? Because they haven't respected a single agreement that they have ever signed in terms of international treaties, be it the treaty that they signed when Britain handed over Hong Kong back to China. They violated that. They violate their WTO commitments. They violate their WIPO commitments. We have patent attorneys out here on the line. They violate all agreements, and they'll just continue to pollute.

 

      So I share Sir Iain's concern about Washington's renewed efforts under Climate Envoy John Kerry to try to get back to the table to forge some sort of agreement. And it is a fool's errand. If I were a betting person, I'd bet a lot of money that it would fail. And I think it's unfortunate.

 

      But again, it's difficult for C-suites to grapple with this because they have to take the initiative to say, "This violates our company principles and our ethics, and we're going to step away." They are not being told right now to do that. In fact, quite the opposite. Again, I'll go back to where I began, perfectly legal to do business in certain circumstances.

 

      But one more note on ESG, Chris, that I think is very important. There was a bill passed last year, the Uyghur Forced Labor Act that prohibited American companies from doing business with any company that was contributing to the genocide and crimes against humanity in Xinjiang, and that has stopped a lot of U.S. investment in China's solar industry and several other companies. And that's something if you haven't read the text of that act, it's worth going over it very carefully because, again, not a partisan issue. And I think that as time goes on, you will start to see more of that kind of legislative action out of Congress. So better to grapple with this issue now rather than to put your CEOs, compliance officers, and other people in a really tough position in the future.

 

      Chris, I think Sir Iain is -- did we lose Chris? I think I see the screen frozen. Oh, no.

 

Ryan Lacey:  I think Chris might be having a few technical issues there, but we can take this time now to turn to a few audience Q&A questions for you while Iain and Chris return.

 

      I will start with our first one with -- it's, "What are major obstacles to nearshoring, manufacturing into Latin America or other friendly democracies? And what legal policy steps can we take in to reduce these obstacles?"

 

Ms. Mary Kissel:  Well, I think the key there is "other friendly democracies." When you think about nearshoring, I think it's natural to think about Mexico with which we've had such a close trade relationship since the Clinton days.

 

      Unfortunately, the current government, the AMLO administration, is not friendly. And, in fact, is picking trade fights with us on a number of fronts and is not so keen to help us bring our companies over there to smooth transport of goods over the border, etc. In fact, it's been a big headache.

 

      So when you speak about nearshoring, you also have to think about scale. It's not just cost, but it's scale, and it's the infrastructure that's available to you as a manufacturer, and that is really tough to find near to our shores.

 

      So I would think of it more of the so-called friend-shoring that you might find yourself looking at just the fact that you can't replicate all in one place the manufacturing capability that you have in China. The scale isn't there. The infrastructure isn't there, so you're looking at more of a multifaceted model. Maybe some of it goes to Vietnam. Some of it, to the extent that it can, can go to India, but it's still incredibly tough to do business in India; although, they are ramping up there, but the BJP-led government is not the greatest. They've brought some terrible tax cases. Made it really hard to "reshore to India." Although, I do hope that that will change.

 

      But you may have to accept higher costs to produce in the United States, to produce in the U.K., to produce in Europe, even Australasia simply to get that certainty that when you have a business dispute that it can be fairly and quickly resolved, that you won't have those supply side disruptions because the political system is more predictable. CEOs may not like that answer, but again, that's simply the reality of the business environment that's starting to evolve because what we'll see -- and I'd love Sir Iain's reaction to this.

 

      What I think is happening is that it's going to be a world of blocks. You're going to have the China-Russia-Iran-North Korea-and friend's block. You're going to have the U.S.-western alliance and friends like Vietnam and others block. And then you're going to have countries in the middle: Turkey, Brazil, Saudi Arabia, the Gulf countries, India to some degree.

 

      So the question CEOs have to ask is, "What level of risk and volatility am I willing to tolerate as I start thinking about diversifying these manufacturing bases or diversifying my portfolio?"

 

The Rt Hon Iain Duncan Smith MP:  Sorry. You want me to speak?

 

Ryan Lacey:  Yeah.

 

The Rt Hon Iain Duncan Smith MP:  Yeah. I agree with that.

 

      I'm sorry again. You hit me in the middle of an economic crime and corporate transparency bill where there is a difference of opinion amongst some of my colleagues and my party, so every vote is required. So I apologize. I expect I'll be asked again to go and vote.

 

      But in the meantime, let me pack this into what I think has become the Mary Kissel Show. I apologize for that, leaving you on your own.

 

      But, yeah, I've been talking about the reshoring stuff for ages now, trying to persuade the British government to do that. And the problem that we've got is that they're very reluctant to give a lead to industry in any shape or form at the moment, which comes back to my point that the Treasury would rather have no disturbance than any kind of decision to be made.

 

      You're right about India as one of the key areas for us, I think, from the point of the U.K. to try and develop the India interest because—I think we've got feedback somewhere, I think—but to develop that interest in India because India, technically, has some very advanced students and very good technical education. So theoretically, sort of in principle, you should be able to help develop them, but there are political problems. And so, I agree with you on that, which may take us a little bit more time to do. But it is something we have to start doing now.

 

      And even that would send a very strong signal to China that the reality is that they're losing business now because of what they do and how they behave. And I think these are things that they will register. The one thing they don't like is any idea that their economy is going to get hurt in any shape or form, and right now their economy's got some problems.

 

      So we have a period when we have a certain amount of power which we could use, but this will diminish as they get their economy back, and we will be back in the same boat we were before. So it is a matter of political will and being able to help industry recognize that the idea of never-ending cheap goods is probably over, but that therefore you have to look at quality production, and that's the key.

 

      So manufacturing should be returning in part or in whole, at least in the qualitative sense, to Europe and America. But in the more mass-produced sense, these countries will rapidly, like India and the others in Southeast Asia, begin to recognize this is an opportunity for them to be able to compete, which is why I think the U.K. has to be in the Trans-Pacific Partnership. I think the U.S. needs to, if the U.K. goes in, to think seriously about being there because that shuts out China from the influence around Southeast Asia, which I think is really important and aids Australia, I think, hugely. So those are strategic positions that will actually start to help the development of what I call the commercial side of things as well.

 

      And I'm sorry to say, but I'm just going to go off and vote again, but I will back on this one I'm afraid. My apologies.

 

Ms. Mary Kissel:  Well, I think, actually, Sir Iain is raising another kind of line of argument that I often make to our clients, which is that you can set aside all of the moral and the ethical problems and legal issues and physical risks to your people, if you can. Of course, this is a ridiculous thing to do but just to make the point. And look at just the numbers here of are you actually going to make money selling into China?

 

      This is—as Sir Iain said—they are in a crisis. They claim three percent 2022 growth. I'd be shocked if it were that. Thinking of double-digit use employment. Their population is shrinking, and they are not going back to the gradual opening that we saw prior to COVID. Those days are over.

 

      Just take one industry, the tech industry. They're now under something called "normalized supervision." What that means in practice is government control over their most innovative—if you can call them that—companies directly or indirectly.

 

      And just to give you an example of how that works, take ByteDance, the parent company of TikTok—which, by the way, no one should have on their phones and has been banned in India and should be banned everywhere else in the world—they have the former head of their cyberspace administration, which is, effectively, their online censor arm, on the ByteDance board. This is an arm of the state.

 

      And, in fact, I'll just, again, reiterate, every company in China is the arm of the state by law. It's called civil-military fusion. It's on the books. You can Google it. You can look it up. But every single company, the sole goal is to serve the party. It's the party first.

 

      I think a lot of people on this call may look at what we say about China, or what we have said about China, and they use the language that we're all used to: growth; capitalism; "win-win", which is quite possibly the worst phrase in history. I can't stand that phrase. When China says, "Win-win," what they actually mean is, "We win twice, and you lose twice." That's what they mean. They are not converts to capitalism. There is no Chinese version of capitalism. Their model is based on labor exploitation or cancel-ism and stealing of intellectual property, trade secrets, and other Western innovations.

 

      And so, Sir Iain is absolutely right. We have an enormous amount of leverage over China we're not exercising but simply looking at that market just from a numbers point of view and from the structure of the investment environment. You could make an argument, just based on that, that this is something that you don't want to touch with a 100,000 or a 100,000-foot pole.

 

Ryan Lacey:  Go ahead, Chris.

 

Christopher Ekren:  Yeah. Apologies. I've had some broadband issues.

 

      Mary, one question that I see coming up often is the growth of alternatives to the dollar and the recent, I think, Chinese visit to Saudi Arabia and that being sort of brought up as an alternative trading methodology. What's your thinking about how companies can adapt to that and whether that is a real threat given the reality of our current capital markets?

 

Ms. Mary Kissel:  Great question. Also, a question that we get here at Stephens.

 

      Look, we're very lucky that the dollar is the world's reserve currency. We do have the deepest, most liquid capital markets in the world. It's a great source of strength. And given where our debt levels are, if we didn't have the world's reserve currency, we would be Argentina right now.

 

      I think the thing that constrains China from truly challenging that reserve currency status is, of course, their capital controls. And that is, again, a result of the nature of their system. They cannot allow the Chinese people to put their money where they want. If you are a Chinese citizen, you cannot go out and invest all of your money in a S&P 500 fund or ETF fund, the Stock Exchange, or buy Nasdaq stocks. You can't do that. Chinese people get their money out in other ways.

 

      In fact, when I lived in Hong Kong, one of the ways that you could tell just how distressed the Chinese economy was is you would go up to the border with Shenzhen, and you would talk to the money changers because people would try to get these cash increments out. Or you would go to Macau and see how much they were laundering through the casinos there or how many high-roller tables. So capital will go to its highest use, but the capital controls do have a major impact there, and they will limit Chinese ability to really challenge our reserve currency status.

 

      You also have to ask, from the other point of view, if you're Saudi Arabia, and you're taking yuan in exchange for Saudi oil exports, what in the world is that yuan going to buy you? Do you really want to stock your reserves with yuan? I'm not saying that it won't happen to a degree, but I just think that there are real limits on that.

 

Christopher Ekren:  Thanks.

 

      Ryan, I think we have some questions, and maybe you can introduce those questions?

 

Ryan Lacey:  Yes, absolutely, Chris. I'd be happy to. And we got to one while you were having your issues with your internet, but I'll move on to some others.

 

      Mary, we have Jeffrey Wood on who's asking, "Granting the CCP's local, near, abroad, and global malevolence influence—malevolent influence, rather—what legal changes do the panelists suggest and in what time frame: complete embargo, marginal increase in trade restrictions or something else? And given the historical leakiness in trade sanctions, what do we need to do to make them effective?

 

Ms. Mary Kissel:  Well, I think from a legal point of view, again, the U.S. government has not set red lines in many areas, although it is increasingly doing so in strategic industries. The semiconductor export controls are a great example of that. I would expect more of that. There's talk on Capitol Hill of outbound investment reviews, sort of an outbound CFIUS. I expect that will happen, in all likelihood, sometime this year because, again, this is not a partisan issue in the United States. Congress is on board. Even the China Select Committee, headed by Mike Gallagher in the House, that is a bipartisan committee. So I think you're going to see bright lines drawn in certain industries.

 

      Separately from that, if you're sitting in a general counsel role or a compliance role, I think you really need to look hard at risk mitigation here. Who are you really doing business with? Do you know? Can you trace back the ownership structure? What kinds of statements have been made publicly about those partnerships? How long does your executive team want to be in China? Have you really adequately assessed, for instance, the physical risk to your people?

 

      You know, China has detained many dual citizens. They will not let them leave China. So do you have dual citizens that are working for you in China? They might not be able to get out of the country.

 

      But forget the dual citizenship thing. Look at what happened to Canada with the two Michaels. It is folly to think that just because you run some smallish manufacturing facility in Shenzhen, and you don't think that you're important, that you're not going to have a problem. One of the more interesting public details that came out about the two Michaels case, for instance -- these were the gentlemen who were detained when Canada very helpfully detained Huawei CFO Meng on our behalf during these last years. The Wall Street Journal did a long story about that, and they noted that China had a list of Canadians that they would seize if they ever needed to have leverage.

 

      So if they're doing it to the Canadians, and they have a list for Canadians, they've got a list for your people too. So you've got to look at your workforce. You need to look at the panoply risks that you face. You need to talk and be frank—I would advise—with your C-suite about what it is exactly that you're doing there, how much money you're really making, the risks you're facing in the future, and do you really know who you're doing business with.

 

      I see Sir Iain is back.

 

The Rt Hon Iain Duncan Smith MP:  I apologize. There won't be any more interruptions, but we're near the end, anyway, so --

 

      Can I just say that I was picking up on the last bit? It's absolutely true. Let's take one of those instances that Mary was just talking about, dual citizenship. They don't recognize it. And, particularly, if you're Han Chinese—quite a racist policy, really—but if you're Han Chinese—and you are therefore, in their minds, Chinese—you may have a British passport, but that's not recognized, so you are not allowed to hold that British passport in the sense that it gives you no rights.

 

      And I give you a very good example. Jimmy Lai, who is the Apple Daily owner, who is under arrest in Hong Kong on a trumped-up charge of leasehold corruption and now faces a further trial under the new security laws at the end of this year, September probably, which is almost certain to get close to life imprisonment. He knows that. He'll be dead before he ever sees the outside again. But he is a British citizen. He has never held a Chinese passport. He's only ever held a British passport, and the British consulate does not have visitation rights. China will not do that.

 

      Now, I have a big row going on with the Foreign Office at the moment about why they aren't kicking out publicly about that because the one thing China doesn't want to have known all over the world is they deliberately shut off consulate access to anyone who's Han Chinese. That's really important. They define Chinese as being Han Chinese, which is where you come into the problems in the Uyghur province of Xinjiang because they're not Han Chinese. So they'll either get re-educated as the kids do, or they get put into slave labor if they're the men, or they get sterilized by the women or raped. I mean you can—both probably.

     

      So this is the whole drive of their policy. It's a very tight ethnic position they take. And so, anyone you got working for you in those companies that happens to say they're dual national, they're not. They are only one national once they're in there, and that is Chinese. And so, they can block their exit. They can block everything.

 

      The second bit about this which companies have got to understand is that China doesn't passively sit by while you manage to make money in their country. They rapidly discover which of the companies that are doing well, and they set up shadow factories.

 

      I was talking to the Japanese ambassador here quite recently, and he made it very clear that one of their car manufacturers had set up a plant about eight years ago in China going very well producing cars, and then what then happened is that a whole bunch of people came in and burnt their factory down, and the police stood by while they burnt it down. It was only then they discovered that ten miles down the road the same workers had been taken to that factory as they put in production the same cars under a different badge, and they didn't need the Japanese industry anymore. They'd already done it and got it themselves, so all the technology.

 

      It's like the COVID vaccine. So China has a terrible vaccine. It's very inflexible. It doesn't cope with omicron. The third jabs don't work, and they've only got 60 percent coverage. Why is that the case? It's because they weren't able—they don't have the expertise to develop the vaccines like the Americans and the U.K., particularly, but also Europe development. And so, as a result of that, they actually demanded that we gave them vaccines. And the company's quite right. We said, "Yeah. Okay. But if you pay for them, we'll bring them to you." They said, "We're a developing nation." It's a complete rubbish. You're not a developing nation. And they said, "Well, give us the IP. You must give us the IP." And they said, "We're not going to give you the IP because that's what we've invested all our money in." So they then didn't take it. So the reason why China went into this arbitrary lockdown is because the government refused to do what everybody else would have done, which is to have bought the vaccine to vaccinate their populace. So you can see straightaway the decisions they take are decisions that we don't and cannot fathom. And lots of companies don't.

 

      And I'll finish on this particular point. I've been banging on about supply chains for ages over here. And IPAC—the group that I set up—Inter-Parliamentary Alliance on China, has been working very hard on this.

 

      There is huge amounts of slave labor going on in China right now. Production manufacturing facilities using lots of different groups but particularly the Uyghur at the moment. Well, what's quite interesting about it, lots of companies here in the U.K. deny that they have slave labor in them. And we say to them, "But we believe that you do." And they say, "Well, we can't be expected to go checking everything. We don't really know. We have to rely on what we're told." And the answer is that's not true. There are companies now that can take the genetic fingerprint for your company I know called Oritain that can actually trace back every single thing you produce, where it came from, where it was made, even the field it was grown in. There is no excuse for a company to turn a blind eye to that. And that is the key bit about part of their economic position is that they're able to undercut people quite often in the production of shirts and things like that because they use slave labor [inaudible 56:32] --

 

Ms. Mary Kissel:  I have to jump off. I'm so sorry. Thank you, everyone.

 

The Rt Hon Iain Duncan Smith MP:  [Inaudible 56:34].

 

Ms. Mary Kissel:  It's your turn, Sir Iain, to be --

 

The Rt Hon Iain Duncan Smith MP:  Yeah.

 

Ms. Mary Kissel:  -- on the firing line. Thanks so much.

 

The Rt Hon Iain Duncan Smith MP:  Thank you very much. Lovely to see you again.

 

Ms. Mary Kissel:  Thank you.

 

Ryan Lacey:  Thank you so much, Mary.

 

Ms. Mary Kissel:  Thank you.

 

The Rt Hon Iain Duncan Smith MP:  So finishing up the point that I'm making is China poses a number of threats. It's not just in technology. It's in the nature of how they use labor. It's in the nature of how they use other people's technology IP. It's how they basically set out all the time ruthlessly to figure out what you're doing and then to either replicate it or take it over. And that includes people who are living in there. And if you complain too much, as journalists have done, you get kicked out of the country if you're not -- if you're not Han Chinese. But if you're Han Chinese, you just get shut down.

 

      So this -- the problem we've got is a lot of companies and a lot of governments don't want to hear this message because they think they're able to get through all of this, but it is a significant threat. And that threat gets worse. It doesn't get any better,

 

      And so, the problem we've got in Europe is we've undervalued our technology. China's moved in and taken quite a lot of that. As I was saying earlier on, there's a company called Newport Wafer Fab, one of our last microprocessor producers in the U.K., that was about to be taken over by a Chinese company behind the Dutch company, and that was finally stopped. We had to fight for that here in the House of Commons. We fought against Huawei, and we  eventually, on the experience of American, eventually got that blocked here on voting, and we voted down some of the stuff.

 

      So all of that is about industry wanting to turn a blind eye to all of this, frankly, and the key thing is now we have to reeducate everybody and change our position. But it's a slow process I'm afraid.

 

Christopher Ekren:  Ryan, do we have time for one more or finish up?

 

Ryan Lacey:  Yeah, absolutely.

           

      Sir Iain, one last question is, "In recent years, the China threat has been posed as a serious challenge to the West and the concurrent global order. Yet, at the same time, we've been hearing about how China is undergoing demographic and economic and social collapse and several other issues. How can those two things work together? How can they be reconciled?"

 

The Rt Hon Iain Duncan Smith MP:  I think the only way we get through this is to, first and foremost, recognize who China is, what they are, what their intentions are. I always -- I've had this row with everybody else. If you go back to the 1930s, we actually -- what we're doing is following a very similar path to what happened in Europe in the 1930s, which is you look at a nation, and you deal with them as you wish they were rather than the actuality of who they are. And the problem we've had is that we constantly keep over-reading the tea leaves to try and figure out is China getting more flexible, more reasonable. And every now -- and China presents different faces to us as a result, and we go with that. But we, therefore, dismiss the evidence of what's actually happening on the ground time and time again.

 

      And so, the problem we've got is it starts at governmental level. The moment governments write that this is a systemic threat, everything changes. We've been arguing with the British government on their integrated review that Russia was a threat. China is not a threat. And as I said earlier on at the beginning, the British government twisted itself in knots over calling China a systemic challenge and that we would meet that challenge with robust pragmatism.

 

      So you can see straightway for industries they look at what the government does. They ask themselves the question, "Well, why do I need to take the lead on this? What do I need to do? I don't know. I think, therefore, if the government doesn't think they're a threat, why should I see it as a threat? And I'll try and do business with them." The problem is that many of them have learnt the hard way that, actually, it's just very damaging.

 

      And the one bit I will say about Hong Kong, quite interestingly, is that Hong Kong is covered by common law. Now, common law is what the U.S. uses. There's common law. Many countries use it, and we, of course, were the originators of it. It's the most balanced, decent, reasonable law because it's judge-made, and it's iterative, and it's flexible, and it protects the rights of individuals. So Hong Kong still says it's under common law. But I noticed the U.S. government about a year and a half ago issued a document to businesses saying, "You can no longer rely absolutely on the protections of common law in Hong Kong any longer because of the National Security Law."

 

      We have done no such thing. We've made no mention of this. We still have judges sitting in Hong Kong appeal courts pretending that they're able to somehow defend common law. They can't because it's overridden now by the Security Law. So getting businesses to understand that actually if you center yourself in Hong Kong, you are no more protected in Hong Kong than you would be in Shanghai under Chinese law. And this is the bit that will begin to, I think, make companies wake up. They don't want to be based in places like Shanghai officially because they think that they're not protected. They're not protected in Hong Kong. And the sooner that message gets across to companies in the Western world and they'll begin to realize, actually, that China poses a very significant threat to both their businesses and the ethos of their businesses, and turning a blind eye won't save them at all when it comes to the crunch.

 

Ryan Lacey:  Any last words, Chris?

 

Christopher Ekren:  No.

 

      Thank you very much, Sir Iain.

 

Ryan Lacey:  Yes. Thank you, Sir Iain.

 

      On behalf of The Federalist Society, I would like to thank all of our panel for the benefit of their time and expertise today. And I would like to thank our audience for joining us and participating, especially with those great questions.

 

      We welcome listener feedback by email at [email protected]. And as always, keep an eye on our website and your emails for upcoming announcements on other webinars and other in-person events.

 

      Thank you all for being with us today. We are adjourned.