Business
China's Crime Crackdown Is Reshaping the Shadow Economy
By Ben Halder, Daily Dose, APR 15 2018
Apr 16, 2018 - 2:14:03 PM

Because today, when China catches a cold, the world sneezes.

Picture a factory full of barehanded Chinese workers scooping beer into topless Budweiser cans from a dirty plastic tub. The cans make their way along a beer-soaked conveyor before a rusty automated machine applies and seals the lid. Every month, 600,000 of these cans are shipped off to clubs and bars across China. This isn’t a case of Budweiser throwing hygiene standards out the window. This is the scene that greeted police in the southern Chinese city of Dongguan when they raided a factory producing knockoff beer last year.

In terms of counterfeiting operations in China, such factories are relatively small-time. But now, they’re being taken down on a scale that is sending economic ripples across the world.

The Chinese government in January launched a new, nationwide anti-crime campaign targeted specifically at organized crime groups — including those involved in operations such as the production and distribution of counterfeit beer — and the corrupt officials at the lower levels of government who offer them protection. Like previous campaigns — the most recent of which occurred in 2010 — the primary driver of this campaign is the domestic political stability of the Communist Party. But several factors mean this effort could have far greater international implications than its predecessors.

In recent years, China’s role at the heart of a number of illicit international trade networks has been publicly criticized by governments around the world, most notably in mid-2017 when the U.S. State Department named China a major facilitator of human trafficking. Reports by nongovernmental organizations on counterfeit goods and synthetic drugs invariably center on the world’s most populous country. A U.S.-China Economic and Security Review Commission report published in March 2017 blames China’s poorly regulated pharmaceutical industry for the huge spike in fentanyl use in the U.S. Whether the fentanyl is shipped directly to the U.S. or routed through Mexico or Canada, its production and chemical precursors are predominantly traced back to networks in China. The ability to incentivize officials to turn a blind eye, or actively participate, made China the perfect environment for synthetic drug production.

But with concern for its international image gaining traction among its leadership, China is looking to disrupt the players and facilitators at the root of many of these black markets. The current campaign is already moving far beyond previous initiatives. And as the campaign’s effectiveness grows, and the foundations of China’s black markets erode, the market for organized crime is shifting — opening up opportunities for employment in some nations, and creating new distribution routes. Already, the production of synthetic drugs and precursors is shifting to the Philippines, the Golden Triangle in Southeast Asia and India, says Roderic Broadhurst, a professor in criminology at the Australian National University.

“Xi Jinping’s corruption campaign has exerted huge pressure on those relationships,” says Broadhurst. “Environments with little or no regulation where protection by government officials can be easily coerced are much more attractive to criminal groups.”

The relationship between Chinese organized crime — often referred to as the black mafia — and the government officials who offer them extra-legal protection — the red mafia — has a long and storied history built on a concept of guanxi. Best thought of as “it’s not what you know, but who you know” on steroids, guanxi is vital to businesses in China and drives both the legal and illicit economies. Patronage, personal relationships and payoffs are required to complete deals, gain promotions and facilitate businesses at every level. For organized crime networks, developing guanxi with local officials enables the unimpeded development of vast production and transportation networks, whether in drugs, fake goods or forced labor.

Much like the drug trade, a history of ineffective regulation and extra-legal protection has bred massive Chinese operations counterfeiting everything from soccer shirts to batteries. But there’s a definite shift in the government’s approach, suggests Trevor Little, editor at World Trademark Review. “The government has clearly been upping its game,” he says. “I think this focus will continue and increasingly spread from the major centers.” Greater anti-counterfeiting efforts at other levels were well under way before the launch of China’s latest anti-crime campaign, according to Etienne Sanz de Acedo, CEO of the International Trademark Association, and tackling those at the beginning of the chain is the latest step. “Identifying and shutting down the producers of these goods is the beginning of the end of this practice,” he says.

For the global counterfeit goods industry, estimated at $460 billion annually, the closure of one base for manufacturing will necessitate a shifting of operations elsewhere.

Another well-established black market that stems from China’s black mafia is human trafficking, usually for forced labor, prostitution or organ harvesting. A Polaris investigation in 2017 identified 9,000 brothels across the U.S. masquerading as massage parlors, with most women workers there trafficked from China.

The fate of this industry also has a close relationship with other black mafia activities. Little concedes public skepticism about the links between counterfeiting and other criminal activities, such as terrorism or drug trafficking. That’s in part because the links are often anecdotal or highlighted on a case-by-case basis, he says: “That link certainly exists though.” In some cases, criminal groups involved in counterfeiting also rely on officials to overlook not only intellectual property infringement, but also the forced labor their business relies upon. As these other illegal industries start to feel the pinch, human trafficking groups will be affected too.

Not everyone is convinced the effects will be pronounced. “Usually crackdowns have only a temporary effect,” says Tom Blickman from the Transnational Institute. “A short interruption of supply routes would be the most likely, after which supply routes re-establish.” He cites China’s campaign to stop ecstasy production in the mid-2000s, which resulted in a temporary shortage of ecstasy precursors before “supply routes were re-established, using different pre-precursors, and ecstasy production was back to normal.”

But in the mid-2000s, China’s gross domestic product was a fifth of its current size, and the global economic influence of its policies was far more limited than it is now. Today, an increase in China’s production of steel or consumption of oil upsets global economic calculations. China’s attempts at clamping down on organized crime networks won’t be any different.