When a Chinese 'anti-corruption' drive is anything but

The Chinese government's anti-corruption effort recently resulted in the arrest of a powerful former Chinese security chief, allowing the country's leaders to again declare that no one person is above the law or immune from prosecution.

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No one disputes the need to address the endemic corruption that threatens the legitimacy of Communist Party rule in the eyes of the people. Seeing the sons and daughters of political chieftains joining the ranks of the uber rich by dint of their connections rightfully enrages everyone who is not also getting rich and does little to encourage people to play by the rules.

However, the reform efforts by Chinese President Xi Jinping and his loyalists go beyond a desire to end the self-serving dealings of government functionaries. Chinese authorities have been using the anti-corruption drive to systematically target and damage U.S. businesses operating in China that are competing against established Chinese enterprises. It's a duplicitous course of attack that is straining U.S.-Sino relations and has the potential to chill foreign investment, possibly even derailing negotiations for the Trans-Pacific Partnership.

A raid under false pretenses

Few U.S.-based companies know the risk of having anti-corruption laws used as a cudgel against foreign competitors better than OSI Group, whose Chinese subsidiary Husi Food was the victim of a raid last summer made by the Shanghai Food and Drug Administration (SFDA). Making the accusation that Husi was selling expired and repackaged meat to customers like McDonald's, Burger King and Starbucks operating in the country, the SFDA arrested and detained six employees, all Chinese nationals. Damning the organization was a leaked video of two employees throwing back into the mixing bin meat that had fallen onto the floor. The rub is that the employees who did this were in reality undercover reporters working closely with the SFDA.

Under Xi's widespread anti-corruption campaign, the need for high-profile action items by provincial and local-level government entities has risen, and so the SFDA, desperate for press coverage, targeted this plant under the benevolent guise of food safety.

For them, the raid and arrests were a win-win-win outcome. By targeting a U.S. subsidiary, officials deflected attention from their own rampant political corruption, shamed a foreign-owned company to the benefit of Chinese-owned competitors and claimed that action had been taken, however falsely, to improve food safety.

Shanghai is well-known for its particular brand of corruption, as is that of the country's food safety regulators and state-controlled media. Moreover, a well-established pattern exists in China of prosecuting and intimidating American firms, especially in recent months, by using anti-monopoly laws to pressure foreign businesses or by launching probes without even "disclosing what they are investigating," according to The Wall Street Journal.

The SFDA is following the same playbook in its investigation and detention of OSI employees. Observers have also recognized the use of anti-corruption drives to extort bribes from local businesses. One favored tactic is to detain and deport managers employed by foreign firms.

A worsening investment environment

The baldly political nature of the SFDA's attack on OSI Group is an example of the broader problem in a worsening foreign investment climate in China. Testifying before the U.S.-China Economic and Security Review Commission, American Foreign Policy Council's Joshua Eisenman said: "China has been making it harder for foreign firms to operate in the mainland by disproportionately targeting them in crackdowns ... clamping down on their operations and employing innovative discriminatory tactics to restrict their ability to conduct business."

The overzealous crackdown on food processors is having a chilling effect on China's export market and makes wary any entity thinking about investing in China.

Despite the fact that all seven of OSI's other plants in China were cleared of any wrongdoing, the company has lost hundreds of millions of dollars. The company even publicly attacked the SFDA's action, almost unheard of in China, where businesses usually just smile and nod.

The harm inflicted on individuals by such capricious actions is even greater. The prosecution led to the company laying off hundreds of workers, but they are far better off than the six Husi employees who remain in jail with no charges brought against them. Shanghai authorities are keeping them in legal limbo indefinitely since their case lacks any supporting evidence — an increasingly common practice of "justice for none, headlines for all."

A need for action

An oppressive regime that uses its laws as a cudgel against foreign business interests harms every sector of the Chinese economy and the companies that participate in the Chinese market, and there are numerous U.S. companies that have been victims of this capricious behavior.

The U.S. has to walk a fine line in this matter, simultaneously encouraging reform efforts but also speaking up for U.S. companies that get caught in the maw of a Chinese regulator using anti-corruption efforts for more nefarious ends that harm U.S. workers or investors.

The great risk here is that continued assaults on U.S. companies postpone the completion of the Trans-Pacific Partnership, which promises to bring greater prosperity — and even more foreign investment — to the masses of Chinese citizens who have yet to leave their villages for the wealth of the coastal provinces. The other risk is that this egregious behavior gets swept aside in the push to get the long-stalled trade agreement across the finish line, costing the U.S. its last bit of leverage to use in protecting businesses prosecuted for baldly economic reasons.

Brannon is a former chief economist for the House Energy and Commerce Committee. Whitley is a former White House staffer in the George W. Bush administration.

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