Coping with Corruption in Trading with China

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CASE 2-5 Coping with Corruption in Trading
with China
Corruption is on the rise in China, where the country’s press frequently has detailed cases of corruption and of campaigns to crack down on it. The articles primarily have focused on domestic economic crimes among Chinese citizens, and on local officials who have been fired or assessed other penalties. Indeed, China has been rated by Transparency International as number 59 of the 102 countries the German organization rates on its “Corruption Perception Index.”1 Finland is rated the least corrupt at number 1, the United States at 16, and Bangladesh the most corrupt at number 102. Corruption’s long arm now is reaching out to touch China’s foreign business community. Traders, trade consultants, and analysts have said that foreign firms are vulnerable to a variety of corrupt practices. Although some of these firms said they had no experience with corruption in the People’s Republic of China (PRC), the majority said they increasingly were asked to make payments to improve business, engage in black-market trade of import and export licenses, bribe officials to push goods through customs or the Commodity Inspection Bureau, or engage in collusion to beat the system. The Hong Kong Independent Commission Against Corruption reports that outright bribes as well as gifts or payment to establish guanxi, or “connections,” average 3 to 5 percent of operating costs in the PRC, or $3 billion to $5 billion of the $100 billion of foreign investments that have been made there. The most common corrupt practices confronting foreign companies in China are examined here.

MNCs also are asked sometimes to sponsor overseas education for children of trading officials. One person told a Chinese source that an MNC paid for that individual’s U.S. $1,500-a-month apartment, as well as a car, university education, and expenses. Firms find direct requests for cash payments—undeniably illegal—the most difficult. One well-placed source said that a major trader, eager for buyers in the face of an international market glut, had fallen into regularly paying large kickbacks into the Honduran, U.S., and Swiss accounts of officials at a PRC foreign trade corporation. Refusing to make payments may not only hurt sales, it can also be terrifying. A U.S. firm was one of several bidders for a large sale; a Chinese official demanded the MNC pay a 3 percent kickback. When the company representative refused, the official threatened: “You had better not say anything about this. You still have to do business in China, and stay in hotels here.” Not surprisingly, the U.S. company lost the deal. Traders of certain commodities may be tempted to purchase on the black market those import and export licenses that are difficult to obtain legally. A fairly disorganized underground market, for instance, exists for licenses to export China-made garments to the United States. Some branches of the Commodity Inspection Bureau (CIB) also have posed problems for some traders. Abuses have emerged in the CIB since it started inspecting imports in 1987. A Japanese company, for instance, informed CIB officials of its intention to bring heavy industrial items into China—items that had met Japanese and U.S. standards. The officials responded that they planned to dismantle the products on arrival for inspection purposes. The problem was resolved only after the firm invited the officials to visit Japan. Some traders get around such problems by purchasing inspection certificates on the black market. According to press accounts, these forms, complete with signatures and seals, can be bought for roughly U.S. $200. Some claim that, for the appropriate compensation, customs officials in a southern province are very willing to reduce the dutiable value of imports as much as 50 percent. Because the savings can far exceed transport costs, some imports that would logically enter China through a northern port are redirected through the southern...
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