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Harry Cassin
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At Large: New compliance era as ‘Made in China’ becomes ‘Made Elsewhere’

Last week produced the clearest evidence yet that global companies are shifting production away from China. Kearny’s annual Reshoring Index showed a “dramatic reversal” in the amount of manufactured goods U.S. companies imported from China, the first drop since Kearny starting tracking it seven years ago. In Japan, the government released a Covid-19 recovery budget that allocated $2.2 billion to help Japanese companies move factories out of China, either back to Japan or to other countries.

The business exodus that started in early 2019 during the U.S. – China trade war gained speed with Covid-19 (at first called the “Wuhan virus”). The Chinese government’s early mishandling of the pandemic amplified perceived long-term China risks. The worst came when some Chinese officials apparently threatened to punish the United States and other countries by banning exports of critical materials needed to manufacture healthcare products and pharmaceuticals. As the South China Morning Post said, China’s “Goldilocks Zone” — the 30-year sweet spot of low-cost labor with high-quality production and excellent infrastructure — has ended.

Kearny said the biggest beneficiaries of the China exodus appear to be Mexico and Vietnam, along with other Southeast Asia countries — Thailand, Malaysia, Indonesia, and the Philippines among them. India will also be in the mix. As early as April 2019, the head of the U.S.-India Strategic and Partnership Forum said he already knew of about 200 American companies seeking to move their manufacturing base from China to India.

The China exodus and accompanying relocations in other countries won’t create new compliance risks exactly. But the events will change risk patterns for the companies involved. For example, leaving China will trigger multiple one-time contacts with government agencies and officials — tax authorities, manpower bureaus, state-linked landlords, and so on. Will some of those Chinese officials demand or expect bribes? Yes. And will the company representatives dealing with the exodus be under pressure to make things happen quickly? Also yes.

In the countries where manufacturing will relocate to, a similar flurry of government contacts will occur, again raising the risks of corruption. To some extent, corruption levels in countries remain constant over the years, and may draw little attention when the country is still in a pre-development stage. But when foreign direct investment increases, the amount of corruption in absolute terms typically rises along with it. When China experienced this in the early 2000s, its leaders called it “imported corruption.”

A story from December 2007 in the China Daily, the semi-official government news source, said: “According to a report by local consulting company Anbound, of the 500,000 bribery cases investigated in China over the last 10 years, 64 percent involved foreign companies.” The story quoted a Beijinger as saying, “I cannot understand after many foreign companies complain about corruption and bribery in China, then why are they doing similar things?”

As foreign direct investment (FDI) picks up speed in Mexico and Vietnam, those countries are likely to see more reported cases of corruption involving foreign companies. After China opened its economy and grew to become the second biggest recipient of inbound FDI (after the United States), it was named in 64 FCPA corporate enforcement actions (out of a total of about 240), the most for any country. The first FCPA enforcement action to involve China was GE InVision, Inc. in 2005. Today there are still at least 15 ongoing FCPA investigations involving China, according to the latest data from FCPA Tracker.

Mexico, which ranked 15th for inbound FDI in 2018, has been named in 26 FCPA enforcement actions, and there are now at least four ongoing FCPA investigations involving conduct in Mexico. Vietnam, ranked 20th on the FDI list in 2018, has been named in nine FCPA enforcement actions. Vietnam’s FDI inflows in 2018, incidentally, were less than one-tenth of the FDI China received. So a relatively small shift of FDI from China to Vietnam could have an outsized impact on the number of corruption cases originating in Vietnam.

It remains to be seen how much “imported corruption” will occur in Mexico, Vietnam, India and other countries. But while the China exodus gains momentum — as “Made in China” becomes “Made Elsewhere” — compliance officers will face the challenge of dealing with new and sometimes unfamiliar patterns of corruption risk.

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  1. Excellent article. Which also leads us to question the effective commitment of the 193 countries that have approved and are signatories to the 10 principles of the UN Global Compact, including the 10th. Principle of Fighting Corruption. Would the list of signatory countries be a showcase for “Safe Conduct”, as the Codes of Ethics and Conduct of many local and global organizations have been for years? You can see the difference between being a signatory and effectively fighting corruption. The purchasing power of governments and even of the private sector, still seek the best margins and profitability and do not necessarily reward the best practices of Governments and Governance of the Private Sector.
    Even aware of the damage to social justice, life, and fair-trade relations.

  2. Congratulations. “Made during COVID-19” calls attention indeed. It is mandatory to observe this new scenario for the improvement and reinforcement of the integrity program. Excellent article.

  3. Excellent article. “Made in China” becoming “Made Elsewhere” has been a megatrend unfolding over the past few years and now clearly is accelerating. I have seen this in my own work. A decade ago it was nearly 100% China-related but now has gone “Elsewhere” to a large degree. We will see new and unfamiliar patterns in corruption risk in China, but as “Made Elsewhere” unfolds we also may see echoes of past corruption cases re-emerge in new locations.

  4. This is truly timely and spot-on. I shared it with my students (aspiring compliance and int’l trade lawyers from around the world), and we ended up having several hours of intense, “existential” discussions of where compliance and the compliance profession might be going over the next few years. While we don’t know with certainly how everything might evolve, we did agree that it’s going to be an absolutely fascinating, exciting and challenging time for us all in the world of compliance.

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