Against the backdrop of a new wave of economic globalization, a growing number of Chinese companies are expanding overseas, moving beyond export trade into cross-border investment and operations. Business considerations often dominate decisions about overseas expansion, while labor and employment issues receive comparatively little attention. As competition among major powers intensifies and national security concerns become more prominent, Chinese companies must take a more systematic approach to labor and employment issues in their cross-border investments and operations in order to mitigate potential legal and economic risks.

Introduction: Starlight’s Overseas Expansion [1]

Starlight Group is a well-known privately owned textile company in Xinjiang and has long supplied numerous leading international brands. After more than 20 years of development, Starlight has diversified its business and listed on China’s A-share market. Seeking access to global capital, the Group plans a secondary listing on the H-share market. Rising labor costs in China have also placed overseas expansion on its agenda. In 2022, the United States enacted the Uyghur Forced Labor Prevention Act“(the “Xinjiang-related legislation”), prompting Starlight to choose Vietnam, a popular investment destination, for its first overseas venture.

When Starlight shipped products made at its Vietnamese factory to the United States, US Customs detained the goods at the Port of New York on suspicion that they violated the forced-labor provisions of the Xinjiang-related legislation. Starlight was forced to explore alternatives while incurring substantial storage costs. It initially considered transshipping the goods to neighboring Canada or Mexico, only to discover that both countries enforce forced-labor rules similar to those of the United States under the United States-Mexico-Canada Agreement.

Like many Chinese companies in the early stages of going global, Starlight dispatched experienced technicians from its Xinjiang factories to Vietnam to mentor and support local employees, while also introducing its “striver” management model at the Vietnamese factory. Shortly after operations began, however, local employees sought to establish a trade union and presented a range of demands, including higher wages and better working conditions, ultimately leading to a strike. The resulting production stoppage and cultural tensions prompted some of the seconded technicians to resign and bring claims against Starlight in both China and Vietnam for overtime pay and other entitlements.

The final blow came from the capital markets. A leading ESG rating agency issued a report identifying Starlight as presenting a high level of supply-chain ESG risk in relation to forced labor. The Group’s share price fell sharply, the prospects for its H-share listing deteriorated, and some business partners even sought to terminate their agreements…

How could what appeared to be a relatively straightforward labor issue produce so many complications? This article examines the problem in the hope of helping Chinese companies facing challenges similar to Starlight’s see their way more clearly and make effective preparations and adjustments.

I. Three Labor Compliance Challenges Facing Chinese Companies in Cross-Border Investment and Operations

Amid the continuing wave of overseas expansion, Starlight’s difficulties are far from unique. Its experience provides a multifaceted illustration of the complex labor compliance challenges facing Chinese companies engaged in cross-border investment and operations. In recent years, those challenges have been particularly evident in three areas.

1.Day-to-Day Employment Risks

Most Chinese companies investing and operating overseas use a hybrid staffing model that combines employees seconded from the Chinese parent company with locally recruited personnel. The cross-border elements of these arrangements can create a wide range of human resources management issues and labor disputes in day-to-day operations. For example:

First, how should the employment documentation for employees seconded from China be structured? Should the employee sign separate employment contracts in China and the host country, or should the parties enter into a supplemental secondment agreement? Should salary and benefits in China be suspended during the secondment, or may they be offset against compensation and benefits received overseas? If a dispute arises, may the employee bring proceedings in the host country or in China, and how should competing claims to jurisdiction be resolved? May a seconded employee receive overlapping or multiple layers of labor protection and corresponding financial benefits under both Chinese law and the law of the host country?

Second, may a Chinese company apply its headquarters policies and management culture directly to locally hired employees? May it apply different standards of compensation, benefits, and performance appraisal to local employees and employees seconded from China?

Other critical questions include how to balance relative consistency in cross-border human resources management with the flexibility needed to reflect local conditions, and how to manage collective labor relations, including trade unions, collective bargaining, and strikes. Chinese companies must consider all of these issues carefully in their day-to-day overseas employment management.

2.Supply-Chain Risks

In recent years, many developed countries and regions have enacted supply-chain legislation incorporating labor standards. Examples include US legislation relating to Xinjiang, Germany’s Act on Corporate Due Diligence Obligations in Supply Chains, and Canada’s Fighting Against Forced Labor and Child Labor in Supply Chains Act. These laws require entities entering the relevant markets or participating in supply chains involving capital or businesses from those jurisdictions, to comply with the labor standards they prescribe.

As a result, the developed markets of Europe and the United States—which are major destination markets for the products and services of Chinese companies operating abroad—have increasingly become subject to supply-chain review mechanisms that incorporate labor standards, including forced-labor standards. A Chinese company that fails to satisfy these requirements may be denied market access or excluded from supply-chain activities, directly undermining its overseas business objectives.

The Xinjiang-related legislation, for example, establishes a rebuttable presumption that products originating in Xinjiang involve forced labor. By shifting the burden of proof from enforcement agencies to importers, the legislation has sharply increased business risks and compliance costs for the Chinese companies concerned. Some companies, like Starlight, have attempted to avoid the legislation’s reach by moving production lines overseas. Yet Xinjiang is an important production base for many basic raw materials used by Chinese companies. If those materials cannot be effectively segregated, the companies may ultimately be forced to withdraw from the relevant supply chains and markets.

To satisfy supply-chain labor review requirements as fully as possible, Chinese companies may be asked to disclose key operational information throughout the supply chain, including sourcing information, inventory data, purchase prices, customer lists, and information about origin. Such disclosures are highly likely to involve the trade secrets of the Chinese company and its upstream suppliers and downstream customers. Chinese companies must also comply with China’s Data Security Law, Anti-Foreign Sanctions Law, and other applicable legislation. Determining how to respond, and how much information to disclose, therefore presents a genuine dilemma.

3.ESGRisks

The rapid development of ESG has increased the attention corporate stakeholders—particularly investors and financial institutions—pay to labor standards. Forced labor, in particular, is regarded as a key indicator of whether a company is fulfilling its social responsibility to protect human rights. Chinese companies engaged in cross-border investment and operations, especially those seeking capital from developed markets such as Europe and the United States, may face serious consequences if they fail to understand and comply with mainstream international ESG labor standards or to develop labor strategies tailored to particular countries and clients. Those consequences may include the loss of customers, financing difficulties, declining share prices, and failed listings.

II. Two Dimensions of a Labor Compliance Framework for Chinese Companies Engaged in Cross-Border Investment and Operations

1.A Coordinated Framework Centered on Domestic Law

Of the three challenges discussed above, day-to-day employment risks are relatively conventional. Multinational companies encountered similar issues during earlier waves of economic globalization. Chinese companies can therefore draw on established experience. The key is to develop a comprehensive, detailed, and accurate understanding of the host country’s labor laws, regulations, and practices, while coordinating those requirements with the rules of the home country, such as China.

From this perspective, the foundation of cross-border labor compliance lies in coordinating the domestic laws of different jurisdictions. One example is the treatment of social insurance contributions for seconded employees under applicable bilateral social security agreements.

2.A Hybrid Framework Incorporating International Law and Soft Law

Unlike the relatively straightforward and mature framework based on domestic law, supply-chain and ESG risks have emerged more recently, leaving Chinese companies with little established experience on which to draw. This development is closely connected with the characteristics of the current wave of economic globalization.

In examining economic globalization, Harvard political scientist Dani Rodrik developed the well-known “globalization trilemma,” which holds that economic globalization, national sovereignty, and democracy cannot all be fully achieved at the same time; only two can be pursued simultaneously. Since the Second World War, and particularly since the end of the Cold War, economic globalization centered on “free” trade and investment has facilitated cross-border capital flows and created increasingly integrated global industrial and supply chains. At the same time, the movement of jobs to countries and regions with lower labor standards has led workers in developed economies, including Europe and the United States, to press their governments to incorporate labor protections into the international economic and trade system.

The world is now undergoing changes on a scale unseen in a century. Faced with domestic electoral pressures and seeking to preserve a world order centered on Western countries, the United States and other developed Western economies have used their first-mover advantages and market power to shift the emphasis from “free” trade and investment to “fair” trade and investment. They have incorporated labor protections extensively into international and domestic law, including major free trade and investment agreements such as the CPTPP and the United States-Mexico-Canada Agreement, as well as supply-chain legislation. These measures have created de facto trade and economic barriers for developing economies whose comparative advantages include labor.

The labor provisions and related mechanisms in these free trade and investment agreements may also reshape the labor environment facing Chinese companies over the medium and long term. Vietnam, where Starlight established its factory, provides one example. Before joining the CPTPP, rank-and-file employees in Vietnam were not permitted to establish trade unions or organize strikes. To meet CPTPP requirements, Vietnam amended its laws to allow grassroots worker organizations and necessary collective action. It also remains to be seen whether the “fair economy” pillar of the US-led Indo-Pacific Economic Framework for Prosperity will lead its participating countries—including the United States, Australia, Brunei, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam—to raise their labor and employment standards further.

These developments are also becoming increasingly intertwined with soft-law principles promoted for decades by civil society, particularly in developed countries and regions, and by international organizations such as the United Nations and the Organization for Economic Co-operation and Development. Those principles include responsible investment, ESG, sustainable development, corporate social responsibility, and human rights. Together, they have significantly affected Chinese companies’ access to cross-border financing and participation in global supply chains.

Chinese companies seeking to participate deeply in the current wave of economic globalization through cross-border investment and operations must therefore understand the relevant labor standards. This is particularly important where developed markets such as Europe and the United States are involved, whether through market access, access to capital, or participation in industrial and supply chains. Companies must become familiar with international labor standards, labor provisions in regional free trade and investment agreements, and soft-law rules established by international organizations, financial and credit institutions, and NGOs. The complexity of this task is unprecedented.

These international legal and soft-law rules are not, however, entirely disparate. Their most important requirements generally center on the fundamental labor rights set out in the International Labor Organization’s 1998 Declaration on Fundamental Principles and Rights at Work, namely:

• freedom of association and the effective recognition of the right to collective bargaining;
• the elimination of all forms of forced or compulsory labor;
• the effective abolition of child labor; and
• the elimination of discrimination in respect of employment and occupation.

China has ratified all of the ILO fundamental conventions except those concerning freedom of association and the effective recognition of the right to collective bargaining, and the relevant requirements are also reflected in existing Chinese labor laws and regulations. Chinese companies’ domestic experience therefore provides a practical foundation for cross-border labor compliance. A company whose domestic operations do not comply with Chinese labor law, however, may face immediate and stringent enforcement if it simply exports those practices overseas. For example, the “996” schedule long prevalent in China may create a risk of being characterized as forced labor.

For any Chinese company engaged in cross-border investment and operations, understanding and complying with applicable international law and soft-law rules centered on international labor standards is therefore essential to achieving its commercial objectives in the current wave of economic globalization.

III. Preliminary Recommendations for Strengthening Labor Compliance in the Cross-Border Operations of Chinese Companies

Many Chinese companies expanding overseas currently focus primarily on day-to-day employment compliance. Human resources and other relevant functions often remain in a passive supporting role and rarely participate meaningfully in the overall strategic planning of cross-border investment and operations. Companies consequently tend to adopt a wait-and-see, trial-and-error approach, addressing issues only as they arise and repeatedly applying piecemeal fixes. If a major problem occurs—particularly one involving the supply-chain and ESG risks discussed above—the company may be caught unprepared and may waste substantial human, material, and financial resources, potentially finding itself in a position similar to Starlight’s.

From a systematic compliance perspective, Chinese companies should address cross-border labor compliance at two levels: strategic planning and implementation.

1.Strategic Planning

Given the increasingly complex international economic and trade environment, Chinese companies should incorporate cross-border labor compliance into their overall global expansion strategy. Before finalizing an overseas expansion plan, they should pay particular attention to labor requirements under applicable domestic and international law in each potential host country and in other jurisdictions connected with the supply chain, including the final destination of their products.

Because the relevant international law, domestic legislation, and soft-law rules are complex, companies should engage cross-border labor counsel familiar with the circumstances of Chinese businesses, the international economic and trade environment, and the relevant legal rules and practices. Such counsel should provide strategic advice for the company’s global expansion, including assistance in assessing the free trade and investment agreements applicable to the countries and regions within its product and service supply chains, the relevant international labor standards, and domestic labor requirements under supply-chain legislation. They should also coordinate with local labor counsel in each host country to ensure that specific action plans are implemented effectively.

2.Implementation

To manage day-to-day employment risks, Chinese companies can ask cross-border labor counsel to work closely with local counsel in the host country to prepare and implement the contracts, policies, and procedures required for cross-border employment. These may include employment contracts, secondment letters, employee handbooks, and benefit plans in both the home and host countries. Companies should also strengthen their labor standards framework in areas such as working-hours monitoring, compensation and benefits, and employee health and safety.

To address supply-chain and ESG risks, Chinese companies should work with cross-border labor counsel, supply-chain compliance specialists, and other professionals to benchmark their practices against applicable international law, domestic law, and soft-law labor standards. On that basis, they should establish supplier labor compliance guidelines, labor and human rights assessment and review mechanisms, accountability systems for breaches by supply-chain partners, and risk-remediation measures. These steps will help ensure compliance and prevent labor issues from obstructing the company’s commercial objectives in cross-border investment and operations.

In the current wave of economic globalization, the international expansion of Chinese companies is an undeniable and inevitable trend. Establishing and implementing a comprehensive, systematic labor compliance framework for cross-border investment and operations will provide the essential foundation for Chinese companies to expand overseas steadily and sustainably.

Xu Yuheng also contributed to this article.

Endnote

[1] This story is entirely fictional. Any resemblance to real events is purely coincidental.

This article was originally published onJuly12,2023, on the “Cross-Border Employment Compliance CEC” WeChat official account.WeChat official account.