What can government do to make big business put security above profit?
The Big Ask | No. 09.2024
Making a profit is an essential function for businesses to grow and prosper. But in an era of heightened geopolitical tensions and with revisionist powers using both their economic and military might to challenge the free and open global order, democratic governments must rein in corporate operations which strengthen competitor nations.
However, international companies based in Europe and North America continue to operate in Russia and the People’s Republic of China (PRC), aiding both authoritarian states’ economic and technological advancement. So, in this week’s Big Ask, we asked seven experts: What can democratic governments do to make big business put security above profit?
Associate Fellow in Economic Modernisation, Council on Geostrategy
Companies used to operate in an international order where globalisation was king, just-in-time supply chains were dominant, and history was over. But history is back, messy as ever, and the era of a fully globalised world with unlimited boundaries for companies is over.
The challenge is substantive: retain profits as a global company in an increasingly risky global environment. Here democratic governments can help. Tackling this challenge may not require the firm smack of mandating or new legislation. Instead, governments should be collaborative with business and supportive in their approach.
Governments should work with businesses on structural segmentation to build-in geopolitical resilience and take a proactive position in helping reshape production and supply chains. The era of the Euro-Atlantic as a majority-service economy and the East as its factory – built on cheap labour – is at risk. That does not mean ‘reshoring’ all activity, but it does mean governments taking their industrial strategy seriously and rebuilding domestic manufacturing capabilities to price in supply chain resilience. The Covid-19 pandemic provides a lesson, albeit a costly one: an estimated 6% and 10% of business revenues in 2020 and early 2021, according to the Economist Intelligence Unit.
Governments and businesses need to crystallise their approaches to the increasing risk of a world in which global trade is significantly reduced. They need to prepare to localise supply chains.
Dr Ksenia Kirkham
Lecturer in Economic Warfare, King's College London
The cases of economic warfare with powerful states, such as the PRC, Russia, and Iran demonstrate that the analysis of sanctions’ effectiveness should depart from clearly defined political objectives, while the mechanisms of compliance to make big business put security above profit should be counterposed to a wide spectrum of other national security goals.
There have been multiple successful steps by various enforcement agencies to tighten sanctions legislation and boost sanctions compliance. However, the paradox is that better sanctions compliance rarely translates into greater overall effectiveness due to multiple mechanisms of adjustment in the target states. Strict compliance systems hit back and hurt businesses in the jurisdictions of the sender state and its allies much more than in a (more self-protected) target state.
The creation of security-driven supply-chains is hardly possible as some target states control vital natural resources (as with the case of Beijing): decoupling strategies in one market segment end up in a greater dependence on the target state in another. Moreover, as it is impossible to reduce the cases of sanctions evasion without recurring to secondary sanctions against states in Africa, Central Asia, Southeast and South Asia, there are rising concerns regarding the legality of sanctions and securitisation of businesses from the standpoint of international law.
The global perception of means of economic warfare is more important than political rhetoric and official legal protection: low risks and good expectations are the bedrock of a positive investment climate – a crucial component of national economic security strategy. Loss of trust means loss of credibility in the financial system overall – and as a result – capital flight from financial centres, such as London or New York City.
Patrick Horgan
Independent Advisor on Strategy and Geopolitics
In November 2022, Gina Raimondo, United States (US) Commerce Secretary, answered this question, saying: ‘…in such a complex environment, it’s on us in government to provide clear and consistent guidance.’ She was right. Government has unique capability and authority to be the arbiter of national security. Companies do not have armed forces, intelligence agencies or foreign ministries. While security is not usually their competence, most companies do recognise the changed strategic environment. They may have interests on issues of national security and foreign policy, but ultimately, they look to government for guidance. Clarity and consistency are all the more important because geopolitics are dynamic.
Being a ‘competitor nation’ in and of itself is an insufficient basis for severing commercial ties, indeed there is competition between close allies. Each country presents a different strategic equation requiring a calibrated relationship and policy prescription. There is no crib-sheet for business, dividing the world into ‘Good Guys’ and ‘Bad Guys’, and the authoritarian/democratic distinction is ineffectual in guiding companies on whether they should be doing business in countries such as Saudi Arabia and Vietnam. When government chooses to mandate security above profit, it has tools to do so in the form of export controls and sanctions. When it lacks tools, it has the authority to create them, as in outbound investment controls. Companies have healthy self-preservation instincts and, for the most part, a genuine desire to operate within the law.
The fact that the burden of national security decision-making and enforcement rests squarely within government is a product of our system of governance. We should not wish for a system which abdicates that responsibility and encourages companies to make moves ahead of a settled policy position based on their own self-interested and limited view of national security. The East India Company is a thing of the past for good reason.
Policy Fellow in the China Observatory, Council on Geostrategy
For decades, Chinese leadership has viewed economic stability, strategic autonomy, and national security as intertwined. The Chinese Communist Party (CCP) employs a Leninist governance model, maintaining a degree of control over the Chinese economy and ensuring cooperation between companies and the state. The CCP harnesses private sector capabilities for national objectives through the National Intelligence Law and military-civil fusion strategy, for example.
His Majesty’s (HM) Government faces a fundamentally different challenge in safeguarding national security within the UK’s open market economy. Businesses naturally prioritise profitability, and may have little understanding of the long-term implications of their actions in relation to national security. Without the centralised control of the PRC, Britain must strike a delicate balance between upholding its free market principles and democratic values while protecting national interests. A more proactive approach from HM Government which nurtures collaboration with the private sector is needed. This should be grounded in deep understanding both of the nature of the CCP, and of British national security.
A new approach should involve not only setting clear regulatory frameworks and improved corporate governance standards – but also providing guidance and incentives for businesses to align their strategies with national security goals. Government initiatives could include regular dialogues between key industry leaders and security agencies to share intelligence and best practices for conducting business with authoritarian regimes.
Additionally, HM Government can play a role in educating the private sector on the PRC’s approach to economic security and the CCP’s strategic intentions, particularly in relation to key emerging technologies, and the importance of supply chain resilience. Providing financial incentives, including tax breaks and grants, for companies that diversify their supply chains away from authoritarian states would further encourage responsible business practices.
Ultimately, by fostering a culture of shared responsibility and continuous engagement, HM Government can help ensure that Britain’s economic and security interests are mutually reinforcing. A collaborative, informed, and strategic approach is essential for safeguarding national security in a complex globalised environment where security threats are often economic as well as military.
Chief Advisor, China Observatory, Council on Geostrategy
The Labour government is currently auditing relations with the PRC before, one hopes, doing what its predecessor failed to do, laying down a clear China strategy. When drawing on the experience of business, the government should listen more to those who have worked on the ground in the PRC, rather than heads of corporations who fly to China infrequently, swallow CCP propaganda, and then regurgitate it when they return – a prime example appeared in The Times this week.
There are two early measures which would serve Labour well in reinforcing security over vested interests. The first would be to strengthen the powers of the Advisory Committee on Business Appointments (ACOBA). A number of ex-ministers and top civil servants have moved seamlessly from government to consultancies or advisory companies. Many represent Chinese companies – which are beholden to the CCP by Chinese law – in telecoms and other sensitive areas. They are paid to promote the interests of these advisory companies, not least in the political space. Through their still serving ex-colleagues, they may have an undue influence over policy formation. Current politicians and government employees may also be tempted to moderate policies to protect potential future job opportunities. ACOBA needs teeth.
Secondly, the Labour government should immediately and properly implement the Foreign Interests Registration Scheme under the National Security Act, putting the PRC on the ‘enhanced tier’. This would require advisory (read ‘lobbying’) companies to declare they’re working for Beijing. That at least would allow government policy makers to recognise that the advice of former colleagues or of senior business people may come with pro-CCP strings attached.
Thirdly, last March, David Lammy, now Foreign Secretary, declared that, ‘We will prioritise Britain’s national security above all else.’ But this requires putting in place the right legislation and regulations, while also monitoring its implementation – another failure which Labour can lay at the door of its Conservative predecessor.
Senior Research Fellow in science, technology, and economics, Council on Geostrategy
While the focus is often on how to make companies more aware of national security concerns from without, there is also a need to make them more efficient from within.
Defence contractors regularly overcharge militaries on a wide range of products. These companies are often able to charge significantly above the production and investment cost because of a lack of competition – a practice known as ‘price gouging’. It’s one of the many ways in which big business can profit enormously at the expense of taxpayers and national security.
We’ve all heard scandals: the Pentagon being charged US$10,000 for an engine oil pressure switch which NASA had been able to purchase for $328, or the US government paying $900 for a control switch valued at $7.05.
Part of this is an issue of supply and competition. Some defence companies are the sole supplier of specific products. One contractor, for example, was estimated to have 75% of its sales in products for which it was the sole supplier. This company was also found to have margins of more than 1,000% in seventeen of its products.
But there’s also an issue of incentives and costs. If UK forces are encouraged to purchase from British manufacturers, but then do not purchase in sufficient quantities, then the production runs for such products will be shorter – and therefore more expensive. While Britain could look to produce on a larger scale and export, it’s often difficult to compete with exports from countries such as the US. As such, these businesses may try to recoup costs elsewhere by increasing prices.
How can we address this? There are several approaches government can take, from oversight mechanisms and review boards, to performance-based contracting. But a key way to tackle the monopoly of big businesses is to support small and medium sized businesses in being able to get onto defence procurement frameworks. Their agility and specialisms can boost competition and bring prices down, to the benefit of the military, taxpayers, and ultimately national security.
Executive Director, China Strategic Risk Institute
Any escalating conflict between the PRC and Taiwan would have a catastrophic impact on the global economy. Taiwan produces 90% of the world’s most advanced chips – critical to nearly every advanced manufacturing supply chain – and nearly half of the world’s container ships pass through the Taiwan Strait annually. Even ‘grey zone’ scenarios, such as a temporary ‘quarantine’ of ships transiting the Strait, would cause major disruptions to global trade flows. Allowing businesses to profit from bolstering the PRC’s military capabilities is a penny wise, pound foolish policy.
To address this, governments should urgently review their military and dual use export controls to Beijing. Although the European Council announced an European Union (EU)-wide arms embargo on the PRC following the 1989 Tiananmen Square massacre, it has been up to EU countries to interpret and implement this embargo as they see fit, which often means only excluding lethal equipment.
Coordinated EU action to expand restrictions to include non-lethal and dual-use equipment is an essential first step. Secondly, governments should act to screen outbound investment flows into sectors which could give the PRC military an advantage in strategic sectors. The US bid to regulate investment into the PRC’s semiconductor, Artificial Intelligence and quantum sectors is a start, but should have support from the UK and EU to be effective – proposals which are still under consultation.
Thirdly, governments should put a moratorium on universities conducting joint research projects with companies and universities embedded in the PRC’s military industrial complex. The UK and other governments should follow the lead of Canada, which has named research organisations of concern because of their links with military development in Russia, the PRC and Iran.
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