Table of Contents

1. Introduction.......................................................................................................................................2
2. Impact of China’s Political Environment on foreign businesses........................................................3
2.1 Regulatory Challenges.................................................................................................................3
2.2 The Negative Impact of China’s Political Environment on Foreign Businesses..........................4
2.3 The Positive Impact of China’s Political Environment on Foreign Businesses............................5
3. NAFTA and China............................................................................................................................7
3.1 Challenges...................................................................................................................................8
3.2 Competition.................................................................................................................................8
4. Steps taken by China to overcome Challenges and Competition.......................................................9
Conclusion...........................................................................................................................................11
References...........................................................................................................................................13
1. Introduction
The transition economies are all unique, but China is the most so. It leads all other countries
in terms of size, rate of growth, and level of involvement in foreign investments and business
(Fabian et al., 2019). The fact that China's transformation is still being planned by the state
and that governmental institutions are still actively involved in economic matters makes it
unusual. Given the size of the country and the depth of its involvement in the global
economy, the peculiarities of China's system create concerns for the foreign businesses that
operate there (Wu, 2018). Deals in trade and investment, though, would benefit greatly if they
were subject to quick adjustments in China. Conflicts over geopolitics and human rights must
be settled. Like many middle-income countries, China still has a serious problem with the
uneven implementation of the law, not the law itself (Weil, 2021).

Because of China's size and enormous economic potential, considerable sums of foreign
direct investment have been attracted to the country. Since it started its economic reforms, it
has gained a reputation as one of the countries that attract the greatest foreign direct
investment (Kwon, 2012). The domestic market is enormous and growing quickly, the
institutional environment is improving, the quality of human resources is continually
growing, there are various capital rules in regional and centrally governed special economic
and high technology development zones, and infrastructure is improving (Kang, 2017). China
may present an advantageous climate for exciting new business opportunities in the home
market because of its highly developed digital infrastructure. Because of China's expanding
digitalization, foreign enterprises may access resources and break down obstacles to join the
market (Herrigel, 2013).

In China, foreign companies confront two key hurdles in terms of government, law, and
regulations. The first is that China is a growing economy with a relatively undeveloped and
quickly evolving institutional system for law and regulation (Hansel et al., 2016). Among the
numerous sectors where regulatory change is happening quickly include the environment,
regulating the environment and reducing pollution (He et al., 2016), the housing and real
estate markets, employment markets, and digital media content (Han, 2016). The
transparency of associated government processes is also generally lacking. This might be an
indication that once-routine tasks, such as acquiring the permit and product approvals, are
now taxing management's resources (Han Z. &., 2010).
The ongoing conflict between China's central government and its province and local
administrations over which laws are relevant and whether they are being followed or not
constitutes a particular type of political risk in the country. Because of this, understanding the
regulations clearly is challenging for businesses doing business in China (McKenzie, 2020).
It has been difficult for many nations, particularly those with traditionally robust civil society
and political institutions, to appreciate the ramifications of China's ascent in both the political
and economic spheres. This subject is receiving more and more attention not only in the
established industrial democracies of the United States but also in Western Europe and Japan
(Dadush, 2021). However, "vulnerable" nations, or those where there is a greater disparity
between the degree and intensity of Chinese engagement and the local ability to manage and
mitigate political and economic risks, have unique difficulties. Local elites and experts still
don't have a fundamental knowledge of the tactics and strategies China uses to exert influence
and engage in advocacy in these countries (Grieger, 2021).

2. Impact of China’s Political Environment on foreign businesses

Currently, by shifting the economy's balance away from development led by the
government and toward consumption, the Chinese government hopes to boost growth
(Henderson, 2020). A significant potential exists for UK businesses given the growing focus
on innovation and higher-end consumer goods and services. The number of foreign
businesses that can operate in a number of significant market sectors is still limited, despite
the fact that China has begun to open up its economy in several areas. A lot might be affected
by one's own networks of relationships. Local businesses are seen to have more political
protection, including from local courts, according to a generally held belief (Lardy, 2021).

2.1 Regulatory Challenges

Local and central political actors may be able to benefit from institutional instability and
regulatory change in a particular region by using the asymmetric impacts of these factors to
their advantage. In actuality, China has traditionally supported bold local industrial initiatives
to produce national champions (Aziz, 2017). One of the most significant geopolitical
concerns is the relationship between China and the US, which is intimately tied to these
present industrial objectives. For instance, forced technology transfer, government-directed
financing, and public procurement in China were the main topics of trade negotiations at the
beginning of 2019 (Boilot, 2019). In conclusion, it appears that China is favouring its own
businesses through national legal, regulatory, and political activities. Furthermore, it appears
that officials are ardent champions of this type of state-sponsored capitalism (Borensztein et
al., 2019).

2.2 The Negative Impact of China’s Political Environment on Foreign Businesses

China's unique socioeconomic structure and political framework make governmental
uncertainty more pervasive than it is in Western nations (Dayal, 2000). The sociopolitical
structure in China blends market economy and government planning institutions, in contrast
to the business economy system in the United States and other industrialized nations, where
governments employ the so-called hidden hand to allocate resources and wealth. The Chinese
government frequently employs the visible hand because resources are controlled and wealth
is dispersed as a consequence; this uncertainty for enterprises and volatility in the financial
markets has negative effects (Lemoine, 2015).

Political risk can be a factor while conducting business in China. Given the impression of the
Communist-led government's political system as being opaque and intolerably repressive of
opposition, negotiations with it may be difficult. Major restrictions on the inflows and
outflows of capital exist in the country and are subject to alteration without prior warning.
China has a severe corruption problem, which disadvantages international investors like the
United States (Luo, 2017).

Chinese government personnel are substantially more active in the management of the
national economy than those in the majority of Western countries. Domestic industries and
businesses usually have perks and protection in compared to international businesses (Akey,
2017). Market access is frequently impeded for service providers and importers of goods.
Chinese businesses, on the other hand, typically get support from the government in the form
of funding and regulations. In actuality, the federal, provincial, or local governments hold a
large number of domestic enterprises either wholly or in part (Deng, 2015).

Furthermore, the Chinese government regularly gives market access under certain conditions
in return for the transfer of technology, the accomplishment of research and development in
China, or the fulfillment of other significant, deal-specific requirements. Although this
practice has been somewhat reduced in recent years to provide business owners more
stability, joint ventures may be hampered by the desire for government interaction and local
restrictions are sometimes subject to change at the whim of the Chinese government (Gordon,
2012).
China is not the only country with this issue of unfair and ineffective law and regulatory
enforcement, it continues to generate enormous worry for foreign enterprises operating in
China (Gulen, 2016). With regard to China's commercial practices and how they affect
western companies, this policy contribution has a purposely constrained emphasis. One of the
equally important, yet unaddressed, parts of the socioeconomic relationship with China is the
impact of taxes on American and Chinese consumers, which is certainly negative (Jens,
2017).

Global corporations must tread carefully when it comes to politically or culturally delicate
topics in order to maintain good relations with China. Particularly when it comes to territorial
sovereignty, this is true. It can result in harsh condemnation from customers and the
government, as well as boycotts, if Tibet, Hong Kong, or Taiwan are mentioned as nations or
if the Dalai Lama is quoted on a product or in a social media post (Li, 2015). The most
common concerns of foreign businesspeople operating in China are related to growing labour
costs, slowed growth, and increased rivalry, particularly from Chinese private enterprises that
are becoming more and more adept (Luo, 2017).

China has made strides toward the adoption of market processes after years of having a
centrally planned, command economy. To a far greater level than in actual market economies,
the Chinese government is still involved in determining economic decisions (Sepulveda,
2019). When Chinese organizations regulate a sector of the economy while also operating in
it, a conflict of interest may arise. An example of this is the present anxiety that U.S. express
service firms, including UPS and FedEx, have over the Chinese Postal Service's twin
positions as a negotiator and rival (Kassinger, 2005).

2.3 The Positive Impact of China’s Political Environment on Foreign Businesses

Despite the fact that the epidemic and new rules have made conducting business abroad more
challenging, foreign businesses are nonetheless attempting to seize attractive prospects in
China (Risberg, 2020). The Chinese government has kept up its campaign to portray the
second-largest economy in the world as being more accessible to foreign investment even as
these companies see a crackdown on local tech firms. Beijing and Shenzhen local
governments have followed the example set by those in Hainan, an entire island province that
is becoming into a free trade zone, by declaring additional advantages for foreign investors in
special economic districts. Similar business-friendly regulations have been implemented in
the past to varying degrees of success (CT Corporation Staff, 2019).
The newest five-year development plan of the Chinese government was launched in 2021
(Dacis, 2022). In the face of increasing pressure from the US, it has lofty technical
advancement targets . Beijing also aims to increase the proportion of the economy's output
that goes toward domestic consumption as opposed to exports (Tang, 2018). Foreign
investment had a major role in the nation's fast economic expansion into the second-largest
economy in the world. Overseas companies have, however, long complained that in order to
operate there, they must import proprietary technology (Defever, 2017). Additionally, foreign
companies were not allowed to operate in delicate sectors, and joint partnerships with
domestic enterprises were required by Chinese authorities. In recent years, especially in the
financial and auto industries, the Chinese government has lifted many of these prohibitions
(Dollar, 2017).

The Foreign Investment Law of China, which was created in 2015 and approved into law in
March 2019, becomes effective in January 2020 (Grieger, 2021). More clarity, transparency,
and protection are sought-after effects of the Foreign Investment Law for foreign companies
doing business in China. Three regulations from China's 1980s Foreign Direct
Investment regulation are repealed (Hsieh, 2019). These laws date from the country's
opening-up phase. It answers calls for an even playing field between international and native
companies by bridging discrepancies in how local and foreign organizations are treated. The
Company Law currently governs foreign investors and foreign-invested enterprises, whether
joint ventures or not (Zhou et al., 2019).

Wholly foreign-owned enterprise legal organization restrictions are really removed by the
FIL. Limited liability company formations are no longer required of these businesses. These
businesses can be single proprietorships or joint-stock corporations, just like Chinese
businesses (Defever, 2017). The Company Law gives shareholders more control over
decisions and frees them from the need to go via the board of directors, giving businesses
more latitude in making them. Foreign-invested businesses are given equal access to and
consideration during government procurement thanks to the FIL (Henderson, 2020).
Additionally, it makes sure that foreign-owned businesses are treated fairly and equally in
terms of subsidies, access to the property, taxation, taxation rates, and the establishment of
industry norms and rules. Through greater remittance transfer convenience, investment
protection is boosted (Tang, 2018).
Beijing's capital city's "Two Zones" policy designation, which went into effect in 2020, lifted
regional limits on aircraft maintenance companies' complete foreign ownership (McGregor,
2020). Businesses from the United States and Europe claim that the business environment in
China has improved and that international investors are now more welcome than in the past.
For instance, according to 60% of respondents to the EU Chamber poll, they receive
treatment from the Chinese government that is either equivalent to or superior to that of
Chinese businesses (McKenzie, 2020). Comparatively, 43% of businesses in 2016 had this
problem. 56% of businesses in the Amcham poll claim they are treated equally well or better
than Chinese businesses (Alicia et al., 2018).

3. NAFTA and China

The North American Free Trade Agreement, which was approved in 1994 and created a free
commercial zone for Mexico, Canada, and the United States, is the most significant part of
the bilateral trade relations between the United States and Mexico (Andrew Chatzky, 2020).
The only services excluded under NAFTA are those related to aviation, shipping, and the
fundamental telecoms (David, 2016). In addition, the agreement protects intellectual property
rights in a number of other categories, such as copyrights, franchises, and intellectual data.
The government procurement standards of NAFTA apply to both contracts for federal
construction projects and contracts for services that are sponsored by the federal government
(Bondarenko, 2022).

The integration of Mexico into the advanced, high-wage economies of the United States and
Canada was the aim of all three nations when NAFTA negotiations started in 1991. By
creating new jobs and opportunities for Mexico's expanding workforce and deterring illegal
immigration, it was believed that enhanced trade openness would promote stronger and more
steady economic growth. Mexico was seen to be both a prospective export market and a low-
cost investment site that may increase the competitiveness of American and Canadian
businesses (KENTON, 2021).

China now plays a big role in international trade. Despite not having signed any commercial
arrangements with parties of NAFTA, China has been gaining momentum as a supplier of
commodities and moving forward aggressively in this field (NAFTA). One of the important
breakthroughs in economic integration had been the increase of intra-industry trade, which
flourished in the NAFTA member states (Li H. , 1996).
3.1 Challenges
Since China's economic reorganization and lifting of trade barriers began in the late 1970s,
economic links between the two countries have significantly increased. Although there are
more business links between the two countries, the economic relationship between them has
grown more complicated and frequently tense. According to the United States, the main
factor behind many trade disputes is China's gradual shift to an economy of free-market
(Siripurapu, 2022)China continues to follow a number of state-imposed policies that appear
to hinder investment and trading flow irrespective of the fact that its trading and economic
frameworks have largely opened up over the previous three decades (HUANG, 2021).

China's claimed widespread cybereconomy espionage against American companies, its

history of inconsistently upholding intellectual property rights (IPR), and its discriminatory
innovation policies (Kassinger, 2005), the primary areas of concern are its patchy
performance in maintaining its responsibilities under the WTO and its extensive use of
industrial policy to develop and preserve industries that are preferred by American officials
and stakeholders (Eugenio Cerutti, 2019). Numerous American lawmakers contend that such
policies have a negative effect on American economic interests and are partly to blame for
employment losses in particular industries in the country (Morrison, 2018).

The administration of Donald Trump has vowed to adopt a more aggressive approach to
reducing multilateral trade deficits with other countries, upholding U.S. trade rules and
agreements, and promoting free and fair trade, particularly with China (Hass, 2020). Based
on Section 232 national security arguments, President Trump issued an executive order on
March 8th, 2018, (HUANG, 2021), imposing extra tariffs on steel and aluminium of 25% and
10%, respectively. China said on April 1 that it has increased duties (from 15% to 25%) on a
number of American exports (Wang, 2022), which combined accounted for $3 billion in 2017
as payback for the American move (Kapustina, 2020).

3.2 Competition
China is now the United States' second-largest trading nation after Mexico as a consequence
of the trade dispute and the rise in taxes between the two nations (Sepulveda, 2019). 2019
saw Mexico surpass China in trade with the US for the first time, reaching a remarkable high
of 614 US billion dollars (Schwartzman, 2021). The sum of money is 5.58 US billion dollars
higher than the value, or 9.5% greater, between the United States of America and China. The
majority of external factors responsible for this situation, for instance the increase in taxes
and the subsequent drop in US imports from the Chinese market, are to blame (and, 2021).

Technology innovation is viewed as an important tactic for firms to gain market share and as
an important factor in economic growth. According to this, innovation generates favourable
externalities that help society as a whole (Robinson, 2010). Due to China's growing market
competitiveness, Mexican companies may step up their innovation efforts. Given that China
is introducing new goods for export and that Mexico's productive sector may play a
significant part in trade discussions with the US and other countries, this might have a
significant impact on those negotiations (Sepulveda, 2019).

With time, rivalry in Latin America has been more intense between China and the EU. Prior
to 2007, there was less rivalry between China and the EU, which was partially due to China's
predominance in the export of subpar goods (Simon, 2021). EU exports to Latin America are
a crucial area of competitiveness between China and the EU. It is discovered that the rivalry
between China and the EU is more intense for road cars and electrical machinery (Alicia et
al., 2018).

4. Steps taken by China to overcome Challenges and Competition

After the trade conflict intensified through 2019, the two sides finally came to a tense phase
one agreement in January 2020 (Jessica Darby, 2022). It was meant to endure until December
2021, but China utterly failed to uphold its half of the agreement by failing to make the
required purchases of American products and services. By the time Trump's presidency had
ended, the trade war was widely seen as a failure (Lester, 2020).

The Chinese government adopted many policy changes to lessen the negative effects after the
trade war shocked the Chinese economy (Team BBC, 2020). The CPC Politburo meeting on
April 23, 2018, discussed the state of the economy and came to the conclusion that China
should speed up economic structure adjustment while maintaining continuous growth in
aggregate demand. With regard to this round of stimulus measures in response to the trade
war between the United States of America and China, this move served as the first sign
(Gorman, 2022).

On July 31, 2018, the CPC Politburo meeting declared that the China-US trade war had
officially begun. This was just a few days later (Liu, 2019), that China has to do a good job of
stabilizing market expectations, foreign investment, international commerce, jobs, and the
financial sector. This statement was made in response to the trade war becoming more intense
(Jones, 2019).

The Chinese government reportedly received recommendations to follow a pro-active

financial approach during CPC Politburo meetings. Throughout the 2018–19 trade conflict
between China and the USA, the Chinese government expanded its spending on
infrastructure projects, in line with earlier policy responses (Pei, 2019). The State Council
issued a directive on the development of infrastructure projects on October 31, 2018, shortly
after the CPC Politburo meeting that took place on July 31, in an effort to stabilize
investments. These government-funded infrastructure expenditures are only partially
reimbursed (Wang, 2022).

The value added by the real estate sector in China was far higher than what the ratio of that
value to combined added value would suggest. The real estate industry has several financial
connections to other sectors of the economy. Despite the fact that the wealth impacts of the
real estate market had mostly favoured consumption upgrading, the real estate market, in the
form of rising rent, had greatly influenced consumption downgrading. In reality, there had
been a significant link between the macroeconomic cycle and the cycle of the Chinese real
estate industry (Kapustina, 2020).

The new Foreign Direct Investment Law of the Republic of China, which was endorsed by
the Chinese legislature on March 15th, states that the government protects the intellectual
rights of international investors and foreign-owned businesses, protects the legitimate
interests and obligations of intellectual property owners and bearers of related rights, and
robustly observes legal responsibility for intellectual property rights violation (Khandewal,
2021). In contrast to the 2015 version, which just said that government agencies and their
employees are forbidden to force technology transfer through the use of administrative tools
(Lardy, 2021). The state defends the intellectual property rights of foreign investors and
foreign investment businesses in line with the legislation, according to the current version,
which is quite explicit (David, 2016).

Changes to the protection of intellectual property rights were brought about by the trade
conflict between China and the US, in which the US accused China of stealing its rights to
certain properties. Despite this, the new legislation had a favourable impact on promoting a
more inventive environment, increasing total factor productivity, and perhaps increasing the
GDP growth rate. The new legislation were well received by the Chinese stock markets
(Brandon et al., 2021). 

Another key milestone was the implementation of urbanization-related policy measures. The
Key Tasks of New Urbanization Construction in 2019 was published by China's National
Development and Reform Commission in April 2019 (Kapustina, 2020). It contained a
number of significant policy changes, particularly those that affected the hukou system.
According to reports, the limitations on settlement were considerably reduced for cities with
populations between three million and five million, drastically enhanced for other megacities,
and totally lifted for cities with populations between one million and three million (Hughes,
2018).

It was a departure from earlier urbanization concepts that encouraged the growth of medium-
sized and small cities while setting stringent constraints on the growth of any major
metropolis with a population of above 5 million people (Lardy, 2021). It appeared that the
Chinese government started to place greater emphasis on large and megacities, as well as the
surrounding regional integrations. In other words, despite the fact that the China-US trade
war had caused the Chinese economy to face some significant obstacles, Chinese
policymakers appeared to have stuck to their initial strategy, namely supply-side reform,
while also only minimally increasing aggregate demand (Liu, 2019).

Conclusion
According to conventional knowledge, nations tend to be more restrained in international
wars when there is a higher volume of international commerce and a larger degree of
economic dependency among nations. Government regulation, which may affect business
decision-making, has a significant impact on corporate reporting in a state-capitalist nation
like China. The political and economic actions of China's partner countries have been
significantly impacted by its expanding global influence. There is considerable fear about the
risk of China being cut off from the global supply chain and commerce as a result of the
recent intensification of the confrontation between China and western nations. While waiting
for China, policymakers in the US, and the EU should temper their hopes for the country.
Average wages are about a fourth of what they are in the United States and Europe,
respectively, it is an economy with significant regional disparities. Although China has a
remarkable potential for change and adaptation, it cannot be expected to equal the laws and
institutions of developed nations that have been developed through eons and millennia
anytime soon. For leaders of West, particularly those in the United States, which has grown
to see China as a foe and a threat to security, it is imperative that they are clear about their
expectations from China. To that extent as their issue is China's unfair business practices, it
should be handled in a way that meets the requirements of both business and consumers, i.e.,
by drafting adequately constructed agreements that encourage or constrain both market entry
and changes that in China creates an equal playing field. The last thing US and European
companies want is to erect additional trade obstacles, or worse, to decouple, which would be
a disastrous course of action for both Chinese and Western customers.
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