International trade and the tale of an American factory

American Factory, which won the Best Documentary Feature at the 92nd Oscars, tells the true story of Chinese entrepreneur, Cao Dewang, who acquired a former General Motors (GM) factory in Ohio and hired local workers to produce glass for automobiles. In the context of trade disputes between China and the US, through American Factory, some new changes can be observed in international trade strategies and legal compliance for multinational companies.

Expansion of industrial chain abroad

Under the influence of the trade disputes between China and the US, Chinese enterprises, especially those in the manufacturing industry, have begun to go beyond the traditional international trade mode of import and export. In order to reduce import and export tax and logistics costs, shorten shipping time and improve profits, some Chinese enterprises with global market share, with the support of preferential tax and land policies in the target country, have also set up production entities abroad, through cross-border investment, to expand their industrial chain abroad.

To launch investment for an overseas industrial chain, apart from filing with, or getting approval from, China’s National Development and Reform Commission, the Commerce Commission and the Administration of Foreign Exchange, more and more cross-border investment projects are carried out through competitive bidding, which means that Chinese enterprises may need to compete with global buyers.

During the process, Chinese enterprises need to conduct due diligence on the political, economic and legal environment of the target country or region, including preliminary legal compliance predictions on the necessity of setting up entities for production or operation, government approval, taxation, land, environmental protection, labour and corporate governance, etc., and a more in-depth and comprehensive legal compliance analysis on overseas targets after winning the bidding.

In the film, many challenges arose because of the different legal environment. For example, American workers demanded the establishment of a labour union to protect their basic rights, and an increase in their hourly wage.

Elevated evaluation criteria

In international trade, in addition to the traditional legal compliance requirements such as in import, export and taxation, more multinational corporations and international organizations are beginning to pay attention to the evaluation of social responsibility. Socially responsible investing includes three main aspects: Environmental, social, and corporate governance (ESG).

Environmental means that enterprises should pay attention to the related costs to the environment in their business operation. Social means that during business operations, enterprises should pay attention to the impact on the employees, communities and society. Corporate governance mainly involves the corporate governance of such internal matters as shareholders, board of directors, management, and emoluments within multinational corporations.

Take American Factory as an example. At the beginning of the film, the abandoned factory buildings were restored for glass production, bringing re-employment opportunities to many locals who had lost their jobs due to the closure of the GM factory. Carrying out the project in the US had undoubtedly brought a positive impact to the local community.

However, the film also showed that American employees expressed concerns about the sewage treatment caused by the production of glass, the potential security threats in their working environment, and the fact that the original management was replaced by Asian-Americans with both a Chinese cultural background and American business operation experience.

Despite effective risk prevention through legal compliance with local laws and regulations, Chinese enterprises still face many challenges in actual production and commercial operations due to increasingly high requirements from developed countries for social responsibility in international trade.

For the traditional international trade mode of import and export, more industries are starting to transform. For example, in recent years natural gas has become the main imported and consumed green energy in Asian markets because of its low carbon dioxide emission compared with coal, and its low-price advantage compared with oil.

In the development of the global natural gas trade, many countries and regions are beginning to set social responsibility standards to improve the international trade order of natural gas, such as on the environmental impact of natural gas, and on the different effects of its transportation modes and pricing on communities.

Laws, policies of social responsibility

At present, standards related to social responsibility are mainly actively promoted by international organizations and rating agencies such as Dow Jones, Thomson Reuters and FTSE Russell. In some multilateral trade agreements, corporate social responsibility (CSR) requirements in international trade transactions are also mentioned.

For instance, chapter 9 (Investment) of the Trans-Pacific Partnership Agreement expressly provides that, “the parties reaffirm the importance of each party encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that party”.

Relevant laws, policies and standards in China on socially responsible investment are still at an early stage. In overseas infrastructure projects such as the Belt and Road Initiative (BRI), many Western countries have set up ESG standards such as trade barriers, which hinder China’s entry into these international markets.

As global patterns of trade shift, not only should Chinese enterprises achieve legal compliance, but also meet with ESG requirements in international trade. The author believes that with the expansion of industrial chain and the upgrading of product mix, the elevation of evaluation criteria in the field of international trade will undoubtedly bring more challenges to Chinese multinational enterprises in the trade war, as well as new opportunities.

Willow Wei is a counsel at Dentons