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The Great Divorce: The de-coupling of China and the U.S.

Why it is happening, and what it really means

By Duncan J. McCampbell

The jury has returned from their deliberations and now the verdict is in: the U.S. and China are parting ways after a 40-odd year marriage that has been largely beneficial for both parties.  “De-coupling” is the term most frequently used to describe what is happening.  I prefer the term dis-integration, because it more accurately describes how the integrated web of interaction between the world’s two largest economies has begun to pull back, to dis-entangle.  To some the term dis-integration, however, sounds a bit too much like what happens when the Klingon ship takes a direct phaser hit: sudden, catastrophic, final.  In this case it won’t be sudden or catastrophic; it will proceed slowly, deliberately.  But I believe it will be final and irreversible—at least for my lifetime—and there will be no return to the “good old days” when China and the U.S. saw themselves, to one degree or another, as co-prosperity business partners.

The Chinese, sensing that perhaps the party is over, will carry on trying to assure the West that they are still open for business (translation: we want your money, but not your values).  Soon President Trump will herald an “incredible” phase one trade deal.  China will buy soybeans that they don’t need (their massive hog herd has been decimated by disease) and promise, in ever more earnest terms, to open up its financial services sector—something that China probably has to do anyway to get Trump off the tariff train and pump liquidity into its debt-burdened financial system.

As much as some of us would like to see China and the U.S. once again growing and prospering in relative harmony, we have to face facts.  The U.S. and China have irreconcilable political economies.  The problem for Westerners is two-fold: (1) the large, decisive and growing role played by the State in China’s economic system; and (2) the abusive commercial and trade practices which China has conducted for decades with almost no consequences.

China’s political and economic systems are both completely enmeshed, configured to serve not purely commercial ends, but the desires of the State and the people running it. The more an increasingly confident and assertive China comes into contact with Western systems and values, the more it becomes apparent that the two systems just don’t synch.  China’s system of State capitalism works just fine for China, and since there is zero chance that China’s system will be imposed on us, shouldn’t we wish China and its people every possible success, go our own way (as they, indeed, increasingly are), and make sure that we protect our property, our system and our values in the process?

Here is a simple illustration of our systemic incompatibility.  China’s national intelligence laws require Chinese companies and private citizens—wherever they are–to assist the government in gathering intelligence.  That may be just fine for Chinese people, but what American is going to feel good about using Huawei products knowing that the company has a legal duty to snoop on them or their business (to say nothing of the government or military) if asked to by the Chinese government?  Are things different in the U.S.?  Well, remember when the DOJ wanted Apple to unlock the San Bernardino terrorist’s IPhone?  Apple told them to go jump in the lake. (note: they found another way to access the phone).  Nothing I can say to my Chinese friends, incidentally, will ever convince them that the Huawei ban isn’t a pure political play meant to keep China down or to beat China in the race to global 5G dominance.

The China of my lifetime has achieved many remarkable things. But one of China’s most amazing achievements goes almost totally unheralded.  In the U.S. today there is very little upon which Democrats and Republicans agree. But lately the entire U.S. political establishment has unified around a new and very negative view of China.  China’s behavior drove that complete sea-change in thinking, like so many other amazing things China achieves, in record time–about three years.  The China hawks are now ascendant in Congress, led by Senators Marco Rubio and Ted Cruz.  China-bashing trade advisor Peter Navarro and arch-conspiracist Steve Bannon both have the president’s ear on the China “threat.”

But as China suffers PR and policy setbacks in Washington we mustn’t forget that China’s government is also taking very deliberate steps to decouple from Western influences.  China tolerated and even promoted outside ideas during its decades of opening up and reform. That period is drawing to a close, according to Carl Minzner, China scholar and a professor at Fordham Law School in New York. This month the Chinese government released a new code of moral conduct for its citizens.  Pledging especially serious treatment for “people who worship foreign things and harm the dignity of the country,” the new codes, according to Minzner, are “totally consistent with Beijing’s pivot toward nativism and political tightening over the past decade — a pivot which has steadily engulfed one field of human endeavor after another: law, media, culture and higher education. All of this raises deep questions of exactly how much further such trends might run. And that could have serious implications for a range of academic, economic and person-to-person ties binding China with the rest of the world.”

China’s rise has been going on for decades without any real controversy in the West.  What has changed?  Well, to understand how China behaves it helps to know a bit about its ancient history and its painful backstory.  The Opium Wars, the Boxer Rebellion, western religious missionaries, the Japanese occupation—these are recounted in Chinese histories for what they largely are: deep injuries to Chinese dignity at the hands of foreigners.  The century of disunity and “humiliation” came to an end, according to contemporary Chinese doctrine, when the Communists took over in 1949.  (We all know that the suffering didn’t end in 1949.  The Chinese people still struggled enormously for another thirty years with the Great Leap Forward and the Cultural Revolution.  But the difference, for the purpose of the Chinese narrative, is that these titanic struggles were internal “own goals” which didn’t implicate foreign forces.)

At the core of China’s narrative today, therefore, is a steely determination to remain unified (at almost any cost), to promote Chinese values, and above all to never again be pushed around by outsiders.  This manifests in what a social scientist might call “one-down” behavior–brusque, resolute assertions of sovereignty and, at times, over-wrought demands for respect—whether earned or not–in all manner of things.

Consider what happened to the NBA, which has invested tens of millions of dollars essentially making basketball China’s national sport. (My Chinese students know all the NBA stars and even some of the players on my perennially mediocre home town team, the Minnesota Timberwolves.) The fur flew when Houston Rockets executive Daryl Morley tweeted support for Hong Kong’s protesters. Never mind that in the American system Morley is a private citizen entitled to voice his own political views (however ill-advised the sharing of such opinions might have been for a man in his position).  And let’s forget, for a moment, that Twitter is banned in China and, therefore, what someone says on that banned platform should have no effect in China.

No, the Chinese government learned of the tweet and instead of letting it go (and thus not calling any further domestic attention to the increasingly fraught Hong Kong situation) over-reacted in a way that, to me, speaks much more of insecurity than of strength.  Cranking up the domestic outrage machine, the Party had Chinese social media on fire.  Several big Chinese companies canceled deals with the Rockets and severely criticized the NBA—which subsequently didn’t shower itself in glory by cow-towing to China.  President Trump even got into the act–of course saying nothing of substance about free speech, China or Hong Kong–but, predictably, taking a cheap shot at a couple NBA coaches who once criticized him.

Then suddenly, interestingly, someone in Beijing reckoned that maybe things had gone a bit too far. Trouble with American companies, they realized, might depress inbound investment–which the Chinese very much want to see continuing in the face of a little balance of payment problem that China is going to have rather soon as a result of the trade war and its debt-fueled economy.  Overnight, anti-NBA propaganda stopped transmitting from Party organs.  Calm, soothing noises issued from the previously the breathless Foreign Ministry spokesman.

* * *

The global economic system that made the 20th century so successful for the West and, eventually, also for China was hammered out at the Bretton Woods conference in New Hampshire near the end of the World War II. The World Trade Organization, the World Bank and the International Monetary Fund all arose from the Bretton Woods framework. Funds to rebuild war-ravaged countries, the promotion of free trade and stable national currencies (tied to the almighty Dollar)—this was what fueled, in the second half of the 20th Century, the largest economic expansion in human history.

The USSR chose not to participate in Bretton Woods, setting up their own, completely separate economic universe in the Soviet bloc.  So separate was this universe, in fact, that when the Soviet Union finally collapsed in December of 1991 the event didn’t even register on the world’s major stock indexes.  Analysts today like to draw parallels to the Cold War when discussing the West’s de-coupling from China. China, they say, is too integrated into western economic systems to be separated the way the Soviets were.  They are wrong, but back to our history.

China, as an ally of the soon-to-be victorious western powers, was represented at Bretton Woods. You may recall that when the Japanese bombed Pearl Harbor, China had already been fighting the Japanese for six years. Millions died in a brutal struggle that is only given passing mention in many western histories.  Despite their sacrifice, China’s influence at Bretton Woods was limited by two simple realities.  First, China was a largely agrarian country in 1945–not an industrial, economic or military power in any sense. More importantly, China was deeply divided, embroiled in a civil war between the Nationalists, who were supported by the Allies, and the Communists.  The people attending the conference were Nationalists, who eventually lost the civil war. The Communists took power in 1949 and they, like the Soviets, had no intention of participating in a capitalist economic system dominated by the West.

Why do I mention all this?  Well, nowadays I hear some Chinese people seeking to opt out various aspects of the rules-based international order by claiming that the West’s systems were all set up deliberately to disadvantage them–to keep them down.  In the case of the global economic system that China has leveraged (or in the opinions of some China hawks in Washington, abused) to its unquestioned benefit, such a view is, to be quite charitable, specious.  The Bretton Woods system was set up to (a) economically stabilize and rebuild a war-damaged world; and (b) provide an economic counterweight to the Soviets.  Did Bretton Woods favor the U.S.?  Well, it had better, given that at the end of World War II the U.S. was the world’s top military and economic power and the holder of the world’s largest gold reserves.  China, on the other hand, was an economic non-entity–internally divided, war torn, technologically undeveloped.  It would struggle, in isolation from the West, throughout the 50’s 60’s and 70’s until Deng Xioping unleashed China’s vast potential by participating—very selectively—in the West’s capitalist economic system.  Make no mistake: where China is today is a direct and deliberate consequence of their participation in that system—and a lot of hard work.

Now China is strong, its people justifiably proud of its remarkable development.  China has the world’s second largest economy (a fact which doesn’t prevent some Chinese people from claiming–with a straight face–that they’re still a “developing” country, which gives them, among other things, favorable trade treatment under the WTO rules.)  Are they playing fair?  Well, no, but as I have heard it argued, what great power does?  So they justify the common practice of forced technology transfer as a simple commercial transaction–table stakes that foreign companies must pony-up for access to the vast Chinese market.  But no such shake-downs greet Chinese companies investing in the open markets of the U.S. or Europe.  I have never heard a Chinese colleague deny rampant IP theft. But I have heard them try to justify it by claiming that the U.S. stole British technologies when Britain was an industrial power and the U.S. was a developing country.  Even if that is true (it isn’t), nothing that Americans might have done in the 18th or 19th centuries could compare to the gargantuan, state-sponsored apparatus of brazen industrial espionage that China maintains today.  Like so many other superlatives attached to China, the world has never seen anything like it.

What China’s leaders must certainly know (because China is governed by clever people) is that the deal they’ve gotten from the West, until very recently, has been quite good, but is entirely unsustainable.  China’s economic system cannot continue growing and delivering generation-to-generation improvements in its people’s lives—the basis for the legitimacy of an unelected one-party political system–without full access to the money, markets and technologies of the developed West.  That access is now in the process of being curtailed.

The Chinese, it turns out, are rather no different than you and me.  They want to have it both ways—if they can get away with it.  They want the amazing benefits of access to a vibrant, open, relatively unregulated free market system without opening up themselves, and without playing by many of the free market’s economic and political rules.  They think that their economic power gives them the right to get what they want, and lately that has been largely true.  The West, however, is slowly wising up.  And as George Will correctly reminded us in a recent Washington Post editorial, China’s rapidly aging population means that they have about 20 years to get where they want to go economically before demographics take over–permanently.

Assuming that in the coming weeks some kind of “mini” trade deal is achieved between China and the U.S., you can be happy that American farmers can once more sell their soybeans, and maybe their pork, to China.  But I advise you to immediately dismiss anything that the president or the U.S. trade negotiators say about changing China’s behavior.  China will never bow to foreign pressure and will mightily resist changing methods which are cooked into their system of political control—a system which has, for the most part, been working quite well–for China.

Tariffs now dominate the news.  But focusing on Trump’s desperately simplistic, shop-keeper trade calculus—how much China and the U.S. are buying of each other’s products—doesn’t get to the heart of how integrated these two economies have become, and what is going to happen as they separate.  Let’s look at two specific areas and discuss how they will be affected.

Financial Services

Perhaps in no other area are the U.S. and China running faster in opposite directions.

China is still the world’s largest exporter of goods but the trade war has crimped trade receipts and inbound investment from the U.S.  So the Chinese have turned to the financial services sector to bring investment dollars into the country and take up the slack.

As an example of the imbalance that exists today in the financial services market, consider how Chinese companies and individuals are enthusiastic participants in the West’s open capital markets.  Whether through IPO or reverse merger, Chinese companies have raised billions of dollars on U.S. stock exchanges.  No such access is granted to U.S. companies on China’s exchanges, however, as foreign companies are prohibited from listing on China’s stock markets.  What’s more, individuals and companies are prohibited from owning majority stakes in some 48 Chinese industries, ranging from energy and transportation to financial services and publishing.

But the Chinese government has proposed loosening restrictions on foreign ownership in several areas, including banking, insurance, credit rating, bond underwriting and brokerage. This isn’t happening because China reckons it is time to be fairer to foreign companies.  No, it is happening because China’s economy is growing at its slowest pace in 30 years and that is a big worry in Beijing.  So the Chinese will crack the door open just wide enough (and believe me, it won’t open one centimeter wider than it needs to be) in order to achieve five critical aims: (1) to show the world they are opening-up (sort of); (2) and thereby get Trump to back off some of his tariffs; (3) to attract foreign liquidity, which will help mitigate credit risks in China’s badly over-leveraged, state-owned banking sector; (4) to make up for the steady loss of manufacturing-related inbound investment; and (5) to moderate current account balance issues and capital outflows caused by a weakening renminbi.

While the likes of Morgan Stanley, S&P, HSBC and UBS clamor for lucrative licenses to operate in these spaces, one wonders how China’s massive debt—largely ring-fenced now because of China’s closed system—could spread risk to the rest of the financial world.  What isn’t being discussed very much, of course, is how the Chinese government plans to assert political control over these foreign enterprises operating in China.

Meanwhile, as China is taking steps to increase inbound investment, China hawks in the U.S. are moving in the opposite direction.  Florida Senator Marco Rubio has joined forces with Democratic senator from New Hampshire, Jeanne Shaheen, to re-examine the presence of Chinese companies in the stock portfolios of American investors. They want to block U.S. government pensions from investing in Chinese securities.  The risks are real, as Chinese companies don’t have the same auditing and financial reporting requirements as American companies.  Some Chinese public companies, furthermore, are engaged in activities like surveillance and defense, that would be problematic for American investors in the current climate.

The U.S. Committee on Foreign Investment in the United States (CFIUS) has blocked several proposed acquisitions of U.S. companies by Chinese investors on national security grounds.  Big Chinese tech companies and Huawei and ZTE have had their access to U.S. technologies and markets severely curtailed. If you lead and American technology company and you supply a Chinese company like Huawei or ZTE with technologies or components that they incorporate into their products, you have already come to grips and managed the IP risks of doing business in China.  Now, in addition, you need to be concerned that your sales to China could be eliminated overnight by a decision of the U.S. Department of Commerce.

Manufacturing

According to all the evidence I see in China, most U.S. (and many European) businesses are actively reducing their China sourcing/manufacturing exposure as fast as they can.   And why not?  Even before the trade war China’s rising manufacturing costs were pushing foreign companies to explore sourcing in other places.   What’s new, of course, is the ratcheting up of political risk with no end in sight.  Businesses are equipped to manage economic and market risk.  But political risk is hard to predict and doesn’t (legally) yield to standard commercial levers.  We have seen how President Trump can, with a tweet and a stroke of his pen, make the electronics or machinery your company imports from China instantly unprofitable.  President Xi, with plenary authority that Trump can only envy, abruptly halted China’s canola oil imports from Canada in retaliation for the lawful detention of Huawei CFO Meng–and then just for good measure jailed a few Canadians.  “President Xi and those at the highest echelon of China’s government can snap their fingers and thereby create a new business reality,” says attorney Dan Harris in his influential Chinalaw blog.  Nothing spooks a business leader more than arbitrary, political actions by all-powerful governments.  What has become perfectly clear is that if you want to do business with China, it’s not enough to be legally compliant.  You have to please the Chinese government in political terms that most Western businesses find quite unsettling.

Now we have the spectacle of the world’s two biggest economies engaging in regular, tit-for-tat arbitrary political action against each other.  So, if you are an American company sourcing components or finished products from China, and you are not getting your stuff made somewhere else, you likely fall into one of four categories.  (1) You sell a lot or all of what you make in China so the tariffs don’t affect you; (2) you still make or source components in China but have shifted final assembly to another country to avoid U.S. tariffs; (3) you are trying to source in another country but it is hard to find production capacity in other countries when everyone else is trying to do it also; or (4) you are not paying attention.

We have always known that the U.S. and China have quite different economic and political systems.  But it was always assumed throughout the 1990’s that by welcoming China into the WTO, some degree of political liberalization was certain to follow.  That assumption has proven false.

China still needs the West, though lately that fact seems to bother them more than ever. China got to where it is today because (1) the Chinese government decided in the late 1970’s to engage economically, if not culturally and politically, with the West; and (2) millions of people worked very hard.  Now China believes it has reached a point where it can go it alone.  I don’t think they have, and I think they are making a mistake, but I can’t see them reversing course.  That is why I think responsible people should now turn to the important task at hand, which is managing the divorce of these two erstwhile business partners with a minimum of unnecessary collateral damage.

The Arrest of Huawei’s Meng: Rich in Portent and Irony

By Duncan J. McCampbell

If you are, like me–interested in China, the law, politics, business—then the recent arrest in Canada of Huawei CFO Meng Wanzhou provides you with a virtual cornucopia of writing options. Though not a household name in the U.S., Huawei is one of China’s national champions (more on that later), making more mobile devices than Apple and—more importantly—battling with the likes of Ericksson (Sweden) and Nokia (Finland) to own global 5G network standards.  Meng, the daughter of Huawei’s founder, is correctly described as Chinese royalty. If Steve Jobs were still alive, still running Apple and his daughter was Apple CFO, you might have a rough equivalent.

Meng was detained last week by Canadian authorities at the request of the U.S. while changing planes in Vancouver. The arrest warrant for Meng was issued months ago.  American authorities want her extradited to the U.S. to face charges that Huawei violated sanctions against Iran.  Meng’s bail hearing is tomorrow (9 December).  The U.S., citing flight risk, doesn’t want her released, and filed papers revealing that Meng was in possession of no less than seven PRC and Hong Kong SAR passports.

So perhaps you’ve fired up your computer and brewed a pot, ready to write something insightful and timely about the issues raised by Meng’s arrest.

The first, obvious candidate would be about the curious timing of the arrest–whilst Presidents Trump and Xi dined in Buenos Aires. The Chinese are, of course, certain that Trump ordered the arrest to give him leverage in the trade war. Incidentally, do you remember the last time the two dined—at Mar-a-Lago right after the election. That was when Trump announced, over the chocolate cake, that the U.S. had just attacked Syria in retaliation for Assad’s use of chemical weapons.  That was a very shabby way to treat a guest, in my opinion.

We learn, however, that Trump was not aware of the Meng situation. I find that quite plausible. It is the obligation of Trump’s staff to notify him of such matters.  And indeed Trump’s National Security advisor, John Bolton, was aware of the arrest. My sense is that Bolton, who is no friend of China’s, planned to brief Trump but correctly calculated that this piece of data in Trump’s hands—at that time–might lead to unfortunate results.  You remember that Trump, much to the dismay of almost everyone in the U.S. government and defense communities, reversed the punitive sanctions against another very badly behaved Chinese tech company, ZTE, in order to make nice with Xi.  Trump loves to make deals and show that he’s in charge.  Had Trump known about the arrest at the time that he met with Xi he would have told Xi not to worry, that he’d make a couple calls and get her released. Then all hell would have broken loose with the people who were merely adhering to the rule of law: the Canadians, the beleaguered Department of Justice and his intelligence communities.  Bolton, to his credit, kept that from happening.

Next in line for China’s ire are the lovely Canadians who, respecting the rule of law and their extradition treaty obligations, arrested Meng at the request of their eternally grateful neighbors to the south. This act drips with irony.  Relations between the leaders of the U.S. and Canada have not been brilliant since Trump slapped tariffs on Canadian steel and aluminum on the deeply insulting grounds of national defense.  We must remember that stalwart Canadians have been sharing foxholes American soldiers in almost every foreign military conflict of the prior century, most recently having our back in Iraq and Afghanistan.  Together with the UK, Canada has been our most reliable military ally.  But that didn’t save Canada from Trump’s tariffs.  Let’s see how eager the Canadians will be the next time the U.S. gets into a tight spot around the world.

The Chinese, displaying a need to deepen their understanding of non-authoritarian government systems, demanded that Prime Minister Trudeau intervene and release Meng. Canadians can be proud of his response:

“We were advised by [law enforcement] with a few days notice that this was in the works but of course there was no engagement or involvement in the political level in this decision because we respect the independence of our judicial processes.” Washington, if you’re listening, this is how a prudent national leader expresses correct and confidence-building perceptions of his nation’s legal institutions.

Following our political discussion one might be inclined to make comparisons between the Chinese and Canadian legal systems. But first let’s hear the breathless statement issuing from China’s Foreign Ministry.  Meng’s arrest “severely violated the Chinese citizen’s legal and legitimate rights and interests, it is lawless, reasonless and ruthless, and is extremely vicious.”  Yes, this spokesman works for the same government that recently made global news by detaining, without formal charges or access to a lawyer, famous Chinese actress Fan Bingbing for three months without bothering to tell anyone about it.  But here we have the Vancouver press reporting that Meng, seemingly recovered from her vicious arrest and, represented by counsel, appearing at her PUBLIC bail hearing, smiling and relaxed. I take this as affirmation of the widely held view that if one must be arrested, best to have it happen in Canada.

I believe that the Meng arrest stands as a milepost for a rather big idea: that we may have reached the limit of accommodation between China and the West. In short, the Chinese have gotten big enough and strong enough to demand respect (though not always, as in diplomacy and rule of law issues, actually earning it) and systems favorable to them.  I lived and worked in Beijing at a time (2007-08) when the popular view was that the Chinese were moving in more liberal directions (i.e. towards us) in many ways.  But since Xi amended the Chinese constitution to provide for an indefinite term in office, and as we have been learning recently in the realm of national industrial policy, the more China interacts with the West, the more the fundamental incompatibilities emerge. I believe, therefore, that the way forward is not to demand concessions or changes in the other’s system, but to sensibly manage the conflicts which arise out of system incompatibilities.

China’s legal system was always fundamentally incompatible with Western legal systems built around something quite foreign to China: inviolable individual rights and the bottom-up sovereignty of the people. One cannot study Chinese law and history, however, without having a deep appreciation of its unique and remarkable contributions to the law. While Rome declined and Europe slid into the Dark Ages, China was strong and vibrant, producing the world’s first permanent legal code. The Tang Code 唐律 was created in 624. Like all ancient Chinese codes, the Tang and its successor, the Great Qing (大清律例) were primarily proscriptive penal codes, detailing the relationship between the Emperor, who held all power, and the people, over whom he ruled. People in such top-down cultures can’t understand that President Trump probably didn’t order the arrest of Meng. People from bottom-up cultures like ours can’t imagine a place where you can be arrested by a government and no one knows where you are—for months.

As in law, I believe the West and China are approaching the limit of commercial integration, with technical dis-integration a still distant, but not inconceivable prospect. China’s leaders have decided that instead of the world always following American technical leadership, they want tomorrow’s global technical standards to be created and owned by Chinese companies.  Why not?  Why should the whole world (except North Korea) use, for example, Intel processors or Microsoft Office software?

So the Chinese government, taking a page out of Japan’s post-World War II playbook, has created a vision for global dominance in a number or key areas called Made in China 2025. The Japanese rebuilt their war-ravaged economy by creating national champions—companies and industries that receive generous government support and protection, and which later achieved world leadership. We know them today: autos, with Datsun (later Nissan) and Toyota; consumer electronics with Sony and Panasonic, cameras and imaging with Canon and Nikon.

This brings us back to Huawei, the world’s largest telecommunication equipment supplier and a Chinese national champion of the highest order. Western analysts often point suspiciously to the fact that Ms. Meng’s father, Ren Zhengfei, was once an officer in the People’s Liberation Army. What’s more important is that Huawei equipment and technology, if misused, could give the Chinese government and military unprecedented access to western network communications. Remember that a Chinese national champion is not just a big company; it is a company chosen by the Chinese government to advance Chinese national interests by becoming the dominant player in its industry, globally.  These companies are controlled by the Party, receive generous government subsidies and draw only the brightest scientists and engineers from China’s top universities.  Australia this year banned Huawei from providing 5G network technologies, citing espionage fears.  New Zealand followed suit shortly afterwards, as has Japan.

Huawei is the perfect bogey-man for the China hawks in the Trump administration, and they may be right. It is obvious to me, however, that they have little genuine appreciation of Chinese culture and the role of politics in China’s industrial policy.  They believe that by imposing tariffs and causing economic pain they can get the Chinese to change their behavior and play by Western rules.  That will never happen.  Oh, the Chinese will try to reduce tension and conflict by making minor concessions.  But what the Trumpists don’t understand is that Chinese industrial policy is cooked into their system of political control—a system with one over-arching goal: to keep the Party in power.

In China there is no separation between public and private sectors. Most large companies in China are owned by a unit of the Chinese government.  If you are the head of that company it is likely because you are able and energetic.  The Chinese are nothing if not practical.  But you never forget that you enjoy the trappings of wealth and power because you are a reliable servant of the Party and you do things that the government believes are good for China.  The Trump Administration wants China to treat foreign companies fairly, but that is impossible because foreign companies are outside of China’s system of political control.

I don’t think president Xi believes that Trump had Meng arrested to get a leg-up in the trade war. But if he does, we will know soon enough. They’ll arrest an American or Canadian executive.

Target’s Canada Pull-Out: The Lessons of Assumption and Adaptation

By Duncan J. McCampbell

January 16, 2015

The apparent causes of Target’s failure in Canada are well documented. They went in too big, too fast. Unresolved supply chain issues led to empty shelves. Add poor site selection, some poor store designs and questionable merchandising and, well, you have the makings of a case study that will be discussed in my International Business classes for years to come.

Target’s Canada experience is particularly useful to me as a teaching tool because Canada seems, well, so similar to the U.S.  Yet it’s hidden surprises led a very successful U.S. company to suffer a $2 billion market entry loss.

I would like to see companies—particularly American companies—stop making the same, very avoidable and often rather spectacular, foreign market entry mistakes. Such mistakes—along with a few notable successes, provide a fascinating and dramatic backdrop for my upcoming book on corporate globalization entitled The Four Dimensions of Global Business.

I am not writing this to say ‘I told you so’ to Target. I might have made some of the same decisions and indulged in many of the same assumptions. It’s not harmful to have assumptions—we all do. What’s important is (1) knowing that you have assumptions; and then (2) what you do about your assumptions when they are proven false.

The Target Canada failure hits very close to home.

I know nearly a hundred current and former Target employees-many of whom were my best students. The Minneapolis campus of Metropolitan State University, where I currently lead the International Business program, is a mere three blocks from Target’s world headquarters.

Target’s Canada failure also feels a lot like a failure I experienced first-hand: Thomson’s smaller, but no less humiliating withdrawal from Germany in 2003.

Thomson swaggered into Germany in 2000 burdened with all of the assumptions that can come from long, seemingly effortless success in much larger, very different markets. Thomson needed to do some things in Germany—like make an anchoring acquisition the “German way”—that was just a bridge too far for that very Anglo-American company. In short, Thomson couldn’t adapt.

But wait, you say, that’s Germany. Can’t a Minnesota company be forgiven for assuming some things about Canada? They speak English, play a lot of hockey and drive Chevrolets. Don’t we share the world’s longest unfortified border?

But, you see, that’s just the point. It is one thing to believe (and then be relatively unsurprised when proven wrong later) that everything you do successfully here in the U.S. will also work a “very” foreign market—say China. You are prepared for surprises because the language, culture—everything—is so different.

But when the surprises happen (as they always will) in a market that seems so similar . . .

Today I quote the famous Prussian military strategist, Moltke the Elder, for a point that every internationally expanding company (even those eying “easy” Canada) should pound into its senior leaders:

“No plan of operations extends with any certainty beyond the first contact with the [enemy].”

Of course, you need a plan to go to battle. But winning the battle once it starts isn’t about how well you planned. It is all about how quickly you learn and adapt once the battle is joined.

So, my friends, go ahead and do your market entry research. Nurture and defend your fondest assumptions. Have your clever MBA’s build more of those fabulous ppt. decks that always impress and comfort the CEO.

But remember that when the first bullet is fired–when your in-country people actually enter the market–they will get kicked around. They will come back to the HQ bruised and bleeding to tell you things that you don’t want to hear because they shatter cherished assumptions and demand rapid, sometimes radical changes in plan. If the company can’t make those critical battlefield adjustments, then it’s just a matter of time (and money) before it’s all over.

Trans Flats and Other Oddities: China’s Evolving Property and Banking Systems

China is making a slow, cautious move from a state-managed production economy to a more consumer-driven economy, fueled by the as-yet restrained purchasing power of the world’s largest and fastest growing middle class.

While China is often able to do things at blinding speed, the change to a market economy must be done carefully to avoid major economic—even political–destabilization. Here are a couple areas of reform that, because of their potential impact on the global economy, as well as millions of Chinese, warrant regular scrutiny.

photo (1)

If you want to get an idea of the strange state of Chinese residential real estate, just look at the picture. This is an apartment building in one of China’s statistically invisible third-tier cities.  Sitting side-by-side with occupied units, are vacant units–windowless, transparent voids have never been finished; most never will be. I call them “trans flats” because they sometimes allow you see right through an apartment tower. And like their unhealthy namesake, they have a sclerotic effect on the Chinese residential real estate market.

You won’t see these unfinished properties in Beijing or Shanghai, which is the worrying part. They are common in both new and old apartment complexes across the second and third-tier cities of China–the cities that the Chinese government is hoping will absorb the millions of people who are moving off the land in China’s urbanization program.  What’s the problem?  Well, the market isn’t functioning properly because these units actually aren’t technically vacant.

Let me explain.

While this building sits 50 percent uncompleted towards the end of its useful life, a block or two away, a brand new apartment building springs up, only to face a similar fate.

This is because most of the unfinished units aren’t unsold. They are owned by non-resident investors, often the very government officials who helped the developers secure the land and construction loans. These investors buy them—sometimes a lot of them–at discounts and hold them in their unfinished state as speculative investments. Steadily rising property prices over the last twenty years have made these among the safest places for the connected few to put their money.

Cavities of waste, they symbolize the decay caused by China’s sugary, GDP-at-any-cost diet, where real estate development was one of the only ways for local governments to raise revenue and achieve growth targets. But like a clogged artery, these properties take price-moderating capacity out of circulation–at a time when the Chinese government is trying to do two economically inconsistent things: keep the property bubble from bursting and creating a banking crisis, while meeting the affordable housing needs of a rapidly urbanizing population.

Necessary reform in the residential real estate sector is going to take another decade and will be intertwined with two other reforms that wait impatiently in the wings: (1) reform to the residential registration system (Hukou) which ties a citizen’s education and health benefits to their registered place of residence; and (2) rural land ownership reform, which will help China’s inefficient, under-mechanized, subsistence-driven agricultural sector become more productive.

Banking and Investment Reform

The Chinese are the world’s greatest savers. But the average Chinese citizen doesn’t have many legitimate options for putting those savings to work. There is no such thing as a 401(k) in China. State pensions pay little more than survival stipends. The few investment opportunities open to the average Chinese citizen are either very wimpy or very risky and possibly illegal.

If you are an average Chines citizen, you should think hard before investing in the Chinese stock market. The Shanghai exchange—recent gains notwithstanding—has developed a well-deserved reputation for being little more than a casino. Lax regulation and China’s inadequate corporate accounting standards mean that only insiders know what is really happening in many Shanghai listed companies. You can also forget about buying shares traded in more stable, more rational foreign stock markets. Chinese law prohibits that.

Deposit your savings in a Chinese bank account and you will earn a money-losing interest rate that doesn’t keep pace with anything. There is a reason for that. For the last 30 years or so, big Chinese banks (which are all state owned) have used a total lack of competition and the essentially free liquidity of citizen deposits to make often questionable loans to developers, local governments, and big state owned enterprises (SOE’s), many of which are now non-performing.

That China’s largest banks have huge bad loan exposure is well known, but because of China’s opaque financial reporting regulations, no one knows just how huge those liabilities are. Likewise, no one knows whether the government will make good on deposits if the banks fail. Sensing this lack of confidence and the impact it could have on bank liquidity, the government recently announced a proposed scheme to guarantee deposits.

Limited investment options lead millions of Chinese to participate in the “shadow banking” sector, a frighteningly unregulated, very Chinese sort of private equity space that tends to promise, and sometimes even deliver, unnaturally high investment returns. According to an estimate published in The Economist, at least 30 trillion yuan ($4.9 trillion), or more than 50% of Chinese GDP is invested in shadow banking products. The government is constantly playing regulatory whack-a-mole in a futile attempt to rein in the shadow bankers, who always manage to stay a step or two ahead.

http://www.economist.com/news/finance-and-economics/21615625-chinas-shape-shifting-shadow-banks-evolve-once-more-moving-targets

Market reforms in China should include the development of a normally functioning retail financial services industry with regulated (and taxed) investment products.

The Real Story Behind Falling Oil Prices–The Saudis Whack Iran and Russia

By Duncan McCampbell

December 17, 2014–Recent analysis about the rapid drop in crude oil prices depicts the Saudis in a market share battle with the frackers of North Dakota and Texas. Underlying it all is a false assumption—that Saudi Arabia, the world’s largest oil exporter and the strongest voice in OPEC, is acting merely to restore its position in the U.S. market.

“One theory for why OPEC is allowing prices to fall is that the cartel (and particularly Saudi Arabia — it’s largest member) is attempting to fight off competition from US shale oil and maintain its share of the US market. Keeping prices below $100 a barrel will put pressure on higher cost US shale producers and will prevent further erosion of OPEC’s position in the Americas.”

http://www.businessinsider.com/opec-votes-not-to-cut-production-oil-prices-plummet-2014-11#ixzz3M9a8INod

I disagree with the conventional wisdom.  Yes, falling oil prices will slow U.S. exploration in marginal or expensive areas (including deep water and the arctic) and take some lower producing fracking wells off line.  But due to improvements in production technology most U.S. shale oil is still profitable at $60 a barrel.  Wails of pain will issue from sectors of the U.S. economy which have placed bets on continued high oil prices.  Too bad.

Here is the new normal: the U.S. now produces more crude oil per day than any other country in the world.  This isn’t the sour, sulphurous sludge that oozes into Gulf Coast refineries from Venezuela and Mexico.  Much of America’s new oil is the light, sweet, easy to refine stuff that comes from North Dakota’s Baaken formation.  This oil has put the U.S. well on its way to oil independence. The Saudis know it.  I don’t think they’re trying to claw back share in a market they know they’ve already lost.

No, I think the Saudis very much want oil prices to crater—but for strategic reasons. They needed to wait until the U.S. produced enough oil to make their price play stick.  The Saudis can afford to wait out a period of low oil prices.  They are sitting comfortably on foreign exchange savings of about $757 billion (the stolid Norwegians have squirrelled away $800 billion of their North Sea oil revenue).  And the Saudis are relishing every minute of the economic pressure cheap oil is putting on two very troublesome, recalcitrant countries—Iran and Russia.

Oil producing countries that are most vulnerable to substantially cheaper oil are those with a combination of (1) inefficient or high-cost production; and (2) an unhealthy budgetary reliance on oil revenue. Because they have failed to diversify their economies and sock away a big chunk of their oil earnings, some countries need oil in the $90-130 a barrel range for their national budgets simply to balance. According to the Wall Street Journal, Iran needs a barrel of benchmark crude to price at an improbable $130.70 to balance its budget; Nigeria needs $122.70 and Venezuela, $117.50. Oil at today’s $60 a barrel is catastrophic for all of these countries–even for Russia, which breaks even at a mere $98.

Russia, whom Sen. John McCain famously—and correctly–called “a gas station masquerading as a country” has three big problems: cheap oil, Western economic sanctions, and a kleptocratic, oligarchic government that abuses its regulatory authority to plunder businesses and punish successful entrepreneurship. It is rapidly burning through its large cash reserves in a failed bid to prop up the free-falling rouble.

Venezuela—a badly behaved, poorly governed exporter of oil, regional instability and baseball players—comes close behind Russia and Iran in the trouble-maker category. But today, and thanks in part to Venezuela’s swoon, cheap oil gave the world its very first foreign policy breakthrough: the announced normalization of diplomatic ties between Cuba and the U.S.  You see, when oil was at $130 a barrel Cuba could count on the support of Venezuela, even Russia.  But with its two patrons headed toward recession and possible default, Cuba realizes that the game has changed.

And while we are on the topic of badly governed oil producers, resource rich Nigeria has recently passed South Africa to become the largest economy in Africa.  But it is, sadly, one of the continent’s worst governed countries. Like Venezuela, cheap oil will drag Nigeria down into an economic and political abyss.

But let’s focus on the Saudi’s game, because that is what the cheap oil is all about.

Mind you, the Saudis like to make money on their abundant oil. But there is one thing that the Saudis like even less than cheap oil: Iran. Iran is trying to make a bomb, which threatens Saudi Arabia and its neighboring Sunni monarchies and emirates–to say nothing of Israel’s strong views on the matter. When Iran, a country with the world’s fourth largest petroleum reserves, isn’t vigorously—and ridiculously–asserting its right to have nuclear power (and the bomb), it stirs the pot in an already tension filled region. They’ll support Shiite movements in Arab countries, send missiles and aid to Hezbollah and Hamas, and fund Shiite militias in Iraq. Iran, in the view of most of the world—and certainly the Gulf’s conservative monarchies and emirates–throws its weight around constantly and unhelpfully.

But to the Saudis, Iran’s most egregious conduct is its support for the murderous Alawi regime of Syria’s Bashar Assad. The bestial, interminable struggle in Syria has become a proxy war between Saudi Arabia (and its Gulf allies) and Iran.

And Russia, which is where we return to the plot.

Assad has survived because Iran and Russia provide him weapons and money. Russia has many reasons to support Assad. First, Russia needs friends and arms customers in the region. Egypt and Iraq, once Soviet allies, are now in the U.S. sphere. Second, Russia’s only naval base in the Mediterranean is in Tartus, Syria. And while it still has money to pay, Syria is one of Russia’s biggest arms customers–at a time when Russia needs non-oil export revenue.

The Saudis made their move at the November 27 OPEC meeting. They successfully blocked attempts to cut production despite a world-wide glut of oil caused by increased U.S. production and weakened demand from a cooling Chinese economy. Venezuela pleaded for production cuts. Russia, which is not an OPEC member, sent their energy minister to the meeting to urge production cuts—to no avail. Prices, which had already dropped $30 from their June apex, fell immediately and haven’t found their bottom yet.

So, while Americans get at least a winter of cheap gas for their SUV’s, far bigger things will happen.

Russia, smarting from low oil prices and the bite of economic sanctions put in place after Putin’s expensive Crimea and Ukraine adventures, is desperately–and unsuccessfully—trying everything from currency intervention to interest rate hikes to stop the rouble’s free-fall. Capital is fleeing Russia at a breathtaking rate. Russian banks and corporations need to refinance their debt but can’t because EU sanctions cut off access to European capital markets. Many will default.

One ponders Putin’s options for lifting sanctions, while saving face domestically (his Crimea and Ukraine moves are both wildly popular at home). I am certain that his continued support for Assad is now one of the few openly displayed cards on his table of diplomacy.

As for Iran, low oil prices worsen an already teetering economy and devalued national currency. Life becomes even more difficult for the average Iranian. Iran has one of the region’s youngest populations. If the Arab Spring taught us anything it is that lots of unemployed Internet-connected young people milling about without an economic future is not conducive to political stability. What the Iranians want is jobs, growth and an end to their isolation, and they know that only a lifting of sanctions and access to long-frozen assets will get them there.

Perhaps they will re-assess their costly support for terrorist clients in Gaza and Lebanon. Most importantly, Iran may be at the point where, in exchange for the lifting of sanctions, it ends a decades-long game of nuclear lies and delay–before a very unsympathetic, incoming Republican congress whacks them with yet more sanctions.

And as with Russia, I am certain that Iran’s support for Assad, the butcher of Syria (which incidentally isn’t winning Iran any friends in Turkey or anywhere in the Arab world) is on the table.

Assad should be very nervous, pondering various exit strategies. Getting rid of Assad merely begins the process of dealing with the threat of ISIS and the rebuilding of war-ravaged Syria. This may include (to forestall slaughter at the hands of the majority Sunni Syrians) a partition of Syria’s Alawite northwest under UN supervision.

So, by the middle of 2015, I reckon we’ll be able to chalk one up for the Saudis. Another story that hasn’t been written will be what John Kerry and the U.S. State Department did with the Saudis and their Gulf friends to make all of this happen in the most natural sort of way.

And as for Russia, Iran and all the rest, it couldn’t happen to a likelier pack of rogues.

Time for Judicial Reform in China, Part II: Moving Beyond Greater Transparency

By Duncan J. McCampbell

“You know, publishing judicial cases in China won’t work because no one cares what the courts say,” declared my best Chinese friend Mike, seemingly out of nowhere, as we entered the crowded Beijing subway on a slate-grey afternoon in the autumn of 2007.

The statement stunned me.  After all, I’d been sent to China three months earlier to build and launch a new Chinese legal online service.  Our research told us that Chinese lawyers and judges wanted access to more and better organized cases.  They certainly did in all the previous places I had worked: the U.S., the UK, Germany.

Incredulous, I stopped in my tracks.  Bustling commuters pushed past me along the filthy subway walls.

“In China it doesn’t matter what the law says,” he continued.  “What matters in China are your relationships.”

“You see, if you go to court in China you have no idea what will happen—unless of course you bribe the judge, which is what most people do.  But if you have the right relationships, then you don’t need a court.  Come to think of it, if you need a court, that means you don’t have influential friends—and that means you have no power, and that means no one will respect you.  So you’re finished, game over.”

It sometimes seems that a lifetime has passed since that shattering exchange.

I posted Part I of this article a month ago–shortly after China’s Supreme People’s Court published a very public appeal for greater judicial independence and an end to the “power, money, allegiances, relationships and other extrajudicial disturbances” that my friend Mike so devastatingly described six years ago. In that posting I made a case for why judicial reform should actually make sense to the people who run China’s government: it strengthens the stability and legitimacy of an unelected government.

A week ago, to my immense surprise, China’s domestic security boss, Meng Jianzhu, apparently agreed.[1]  He published a startling article calling for a more independent judiciary and greater transparency in trials.  The most unexpected thing he shared was a famous quote by former U.S. Supreme Court Justice Louis Brandeis.  “Sunlight,” said Brandeis in a 1913 article on Boston’s corruption-plagued city government, “is said to be the best of disinfectants.”

Brandeis noted that a government which conducts its business in the open is less prone to corrupt influences.  For China, the task of opening up government is a daunting one.  China’s government is monstrously large, heavily politicized by the existence of a single party, and dominated by a massive executive branch at both the national and provincial levels.

In this article I address reform in only a small part of China’s government: its relatively underpowered and under-appreciated judicial branch. I recommend changes that ought to result in things the central governments wants: legitimacy, stability.  I don’t address many aspects of reform that are more political in nature, such as how judges are selected, disciplined or promoted, though I believe that many of the reforms I propose will be achievable only by and through a more professional judiciary.

Also, this article is entirely about achieving reforms in the administration of civil justice—the least developed part of China’s legal and judicial system.

[Note: When discussing Chinese judicial matters it is helpful to make a very western distinction between criminal and civil justice.  The Chinese often don’t. They are fond of their criminal law. They have given us some of history’s most elaborate and elegant criminal codes.  These codes are typically proscriptive, defining relations between the ruler (emperor) and the subject people.  But you don’t need a democracy to produce a robust civil society.  The still-imperial Germans gave us their enduring, world-changing Bürgerliches Gesetzbuch (Civil Code) in 1899.  The Chinese, meanwhile, have invested far less in defining civil legal relationships—those between people or other non-state legal persons, such as businesses, to say nothing of mechanisms for resolving civil disputes between them according to law.  Under the great Qing Code, for example, these were “minor matters” to be handled under customary law by local magistrates. It could be validly argued that for centuries Chinese culture has supplied a workable, non-legal social framework for resolving civil disputes between people.  I believe, however, that global commercial engagement and the rise of private property under the modern Chinese state now requires a more robust and accountable legal mechanism in the civil sphere.]

I have recently delivered a series of lectures at a leading Chinese law school posing the following questions: (1) Can the Chinese government enhance stability and legitimacy by being more transparent in the civil judicial sphere?  (2) What would be the practical and legal effect of explaining and publishing the legal grounds upon which judicial decisions are made?

In this article I share some of the main points from those lectures.

I have no doubt—because some of the people working for judicial reform in China are my friends–that changes already underway are resulting in a more open, more professional judiciary which will, in time, produce more judicial decisions based solely upon the rule of law.

But here is the point: unless the legal grounds for those decisions are shared with the public and, crucially, with lawyers and other judges, people will simply assume that the cases were decided in the old way.  By favoring greater judicial transparency the government makes an important move.  But without the kind of transparency that changes people’s opinions of the judiciary, the government gets no benefit for a reform that requires relinquishing a certain degree of political control over the resolution of civil disputes.

What happens when cases are decided according to the rule of law?  Well, the decisions themselves become more important, especially to the legal class (other judges and lawyers), especially if they share rationale and analysis that may shed light upon how future controversies might be handled by a court.

That sounds, you may say, a bit like the common law notion of stare decisis (to stand by things decided), the doctrine descended from the English tradition of following prior decisions, or precedents.  China, you may correctly note, hews more to a civil law tradition (like France and Germany).

As a general rule judges in civil law countries, China’s included, do not follow the doctrine of stare decisis.  Chinese courts are not bound by prior decisions and are often not permitted, under the rules of the court, to reference prior decisions in their opinions.  The same often goes for the parties in their court briefs.  How a particular court has ruled on a particular law in a prior matter has no legal effect—whether dispositive or merely persuasive—in any future dispute.

Some think this fact makes prior court decisions (the very foundation of the common law system) irrelevant in a civil law system.  “Cases,” my English handlers in London were fond of saying while I ran the Westlaw Deutschland project, “don’t matter much in a civil law country like Germany.”  Isn’t it strange, then, how our market research consistently told us that German judges and lawyers wanted greater online access to well organized and comprehensive collections of cases?[3]  Cases, it turns out, can actually matter more in a civil law setting, and let me tell you why.

Classic civil law doctrine handed down from the Romans via the French posits that all legal disputes must be resolved through reference to legislation–laws made by elected representatives of the people (I will return to this point when we take up China again).  Judges are intended to merely apply the law, not step in and “make” law when the statutes are vague or unhelpful.  But here is where the civil law somewhat runs afoul of its own doctrines.

The world and its legal relationships are constantly changing.  Legislation always lags behind developments in society, commerce, technology. So when a legal system requires its courts to define all known and still-unknown legal relationships under legislation, the laws must be broad, brief, and often so vaguely drafted that in terms of concrete application they can be rather unhelpful.

Germany’s law on unfair competition, for example does not define the term “unfair.”  Where on earth does a German court go for that definition?  The answer is simple: prior judicial decisions and authored commentary, which largely codifies, in doctrinal form, what has been reasoned and decided in prior court cases.

So, the point here is that even in a civil law system old cases matter a lot.  The judges and the lawyers are all reading them, when they can get their hands on them; they’re just not always allowed to make full use of them.

What will happen, then, when Chinese lawyers, judges and law students actually take notice of what is contained in judicial opinions—especially ones from the higher courts which, presumably, have jurists of higher quality?  There will be several knock-on effects.

First, the courts will, overnight, have more power and prestige (and the quickest way to lose it would be a return to the old way of making judicial decisions). Second, the way court opinions are written, organized and published will become much more important.

Broad publication helps assure the people that their judges are making decisions based upon the rule of law.  Consider, also, the quality control benefits of broad publication. The Supreme People’s Court is at least nominally responsible for overseeing judicial quality in China’s lower courts. When a lower court judge is reversed on appeal, broad publication of that face-losing reversal—and the grounds for it—will help impose greater uniformity and discipline.  No judge likes reversal—especially the corrupt or incompetent ones.

Imagine that you represent a client whose legal position lines up nicely with a prior decision of the country’s highest court. Wouldn’t you want to point out that prior case to the lower court judge deciding your case?  And if you were that judge would you feel uncomfortable ignoring a position laid down by the country’s highest court?  Perhaps not, because it happens every day in China’s lower courts. That must change.

In 2007, when I began my work with the Supreme People’s Court, their press office wanted to publish the Court’s database of “Top 50” decisions on the online service we were building, Westlaw China.  Why?  The court was troubled by what it perceived as inconsistent interpretation of laws by lower court judges.  They wanted every judge and lawyer in China to know how to correctly decide cases.

It is not enough merely to publish judicial opinions broadly. The court’s opinion must also explain its reasoning in detail.[4]  So the third and perhaps most important effect of a new interest in the contents of judicial opinions will be the flowering of a natural desire among lawyers to source prior decisions (especially ones that issue from top courts, and are well-reasoned, supported and written) for guidance on how the court may rule in future matters.

The Chinese government wants, above all else, order and stability.  Today they achieve this throughout the branches of government by overt expressions of authority and efforts to increase discipline within the Party.  The courts of China have discipline and authority—of a sort.  It is largely supplied by the “extrajudicial” agents of money and political influence.  But as judicial reform decreases the prevalence of these corrosive influences, something else must replace it.

The answer is the highly conservative common law doctrine of stare decisis.  Stare decisis is by its nature conservative and stability-enhancing because it looks backward, not forward, for its authority.  Indeed, stare decisis could have been a Chinese invention since it presumes a hierarchy of authority, with the nation’s highest courts having the most authority and thus the final word on any legal question.

China needs stare decisis, because if you take away money and politics and don’t replace them with anything else, the courts will spin out of control. Stare decisis, administered by the Supreme People’s Court from above, will guarantee legal discipline and give the central government at least the administrative legitimacy it seeks from judicial reform.

A common misunderstanding about the distinction between common law and civil law is the belief that citation to prior judicial opinions can erode the primacy of legislation.  This is not true.  Chinese law and rules of procedure can and should mandate that legislation is the sole source of legal authority—even while it must be recognized that the civil law doctrine of legislative primacy derives largely from the fervent democratic sentiments of a post-monarchic France.

Note, also, that I have proposed civil judicial reform in matters only between private parties and businesses.  China’s judiciary is not ready to tackle the impartial handling of matters involving any of China’s ruling elites or the executive and legislative branches of government.

Once lawyers and judges are encouraged to take heed of prior judicial decisions, we are confronted with the issue of citation.  Assuming that courts and lawyers will be allowed to reference such cases in their papers and decisions, how will these cases be cited?  This may seem a terribly technical and mechanical matter for many, but how citation policy is established and enforced by a country’s courts can have a profound influence on the development of the country’s legal publishing system—a key pillar in the quest for legitimacy and stability.

China’s case citation formats are not well developed because (a) judicial opinions were not always widely available to lawyers and judges; but when they were (b) the court’s decision was often not well explained; and, in any event (c) what the court said didn’t have any legal consequence for subsequent cases.

Citations serve several purposes, the chief of which is to inform its reader, with some level of precision, where the cited authority can be found.  When lawyers and judges cite cases it is important that their citations are in a standard format and point to the same authoritative sources, preferably an official version of the cited authority.

Following judicial reform in China legal citations—especially to cases—will be far more important than they are today. It behooves the government to take control of citation policy, or private publishers will step into the void.[5]

Conclusion

The key to successful judicial reform in China is the free flow of legal information, especially cases. The people of China, thirsting for simple justice, want to repose faith in an impartial and independent judiciary.  They won’t do that until they see that disputes referred to China’s courts are resolved fairly and according to the rule of law.

In what promises to be a painful structural and cultural transition, the Chinese judicial branch needs the support of the central government to drive reform, which should include measures to reform and, to the extent possible, de-politicize judicial selection, discipline and promotion.

I have proposed adoption of the doctrine of stare decisis, primarily as an instrument of continuity and stability. When prior decisions become important, the judiciary becomes more respected. An entire legal information ecosystem needs to be developed.  Private publishers would be delighted to occupy that space.  I advocate for a strong judicial role in legal publishing and standards enforcement—especially from the Supreme People’s Court.

I have also pointed out that a stronger, more respected, more disciplined Chinese civil judiciary need not threaten the primacy of legislation or the prerogatives of either China’s ruling elites, or the more powerful executive and legislative branches of China’s central government.

DM


[3] The civil law prohibition against citing prior cases does have an impact on cases research and publishing strategy.  The most profound difference that common law researchers and publishers will note is this: with no references to prior decisions contained in a judicial opinion (and thus no embedded case citations to programmatically extract and build metadata around), there is no opportunity to hyperlink or to develop case citators of the kind published in the U.S. and UK.  Judges and lawyers still need to find relevant cases.  Mere key word searching of raw, unenhanced text will not get the job done reliably.  But the good news is that most major civil law statutory systems have very logical structures around which to organize cases.  The structure of legislation becomes the “tree” of cases classification, digesting, annotation. There is no need to create entirely separate case-based classification and digesting systems, such as those developed by private publishers in the U.S., the UK and other common law countries.

[4] A typical Chinese case report is, by western standards, terse and legally unenlightening. Besides citing the law under which the case was decided and announcing the prevailing party, little or no effort is usually made to explain the rationale behind the court’s decision.

[5] Private legal publishers, like West Publishing in the U.S., derive substantial commercial advantage from official citation policies that mandate reference to their products. Even when the government publishes an “official” case compilation (such as the U.S. government’s Supreme Court Reports), the mere fact that most lawyers, for various reasons, prefer to use the West products means that citations to West’s products are included in any complete citation to a U.S. Supreme Court decision.  When I was running the Westlaw China project (a fully online product) I advocated for the production of a paper version of our Chinese cases collection.  We would sell these books at or below cost to municipal and university libraries around China.  Why?  The volume number and page breaks in the books would mirror those in our online product.  Enterprising Chinese would invariably obtain access to the books, then copy and re-sell them to local lawyers, in violation of our copyright.  We would prosecute some token infringement cases to preserve our rights.  We would lose some low-end revenue from lawyers who were unlikely online customers anyway.  More importantly, our citation format would become widely used—and thus embedded–in the market.

Time for Judicial Reform in China: Part One

By Duncan J. McCampbell

In the week leading up to the recently concluded Third Plenum meeting of the Chinese Communist Party, the Supreme People’s Court, China’s highest court, issued a white paper recommending that the government “implement the courts’ independent exercise of judicial authority based on constitutional principles.” If that wasn’t enough to get your attention, the Court asked the government to support this proposal by eliminating “power, money, allegiances, relationships and other extrajudicial disturbances.”

“Golly,” a Chinese lawyer friend commented, half seriously, “how on earth would they make their decisions?”

In the end the desired judicial reforms did not appear from that meeting.  What we got instead was a commitment to substantial new economic reforms, a certain relaxation of the one-child-only and policy, and the elimination of labor re-education camps.

Proposals for greater judicial independence in China have been floated, in one form or another, many times in the past.  Perhaps I should not take them very seriously.  But I really believe that judicial reform is the Next Big Thing in the Chinese government’s quest for stability and legitimacy.

[Full disclosure: my interest in Chinese judicial reform began in 2007-08 with a rather more commercial objective in mind.  I was living in Beijing, leading the Westlaw China project for Thomson Reuters, the world’s leading legal publisher.  My job was to do what I had previously done in the UK, Germany and a few other places–build and launch a local-language online service that lawyers use to research the law.]

What got my attention, and what makes the Court’s recommendation so important, is not just the level at which the statement surfaced–but in its timing: in a pre-Plenum white paper. Can I be forgiven for thinking that the conditions necessary for serious judicial reform in China are now, finally, beginning to coalesce?

The Chinese government is keen to preserve and grow the legitimacy it has earned through three decades of fabulous economic—if not political—reform.  But alongside the economic growth that has positively impacted virtually every sector of Chinese society, there is also runaway inequality, breathtaking abuses of power, and, recently, a seeming inability to control unprecedented environmental contamination.  These chip away at an unelected government’s hard-earned legitimacy.

We are presented with the spectacle of an absolute government more insecure, more stability-obsessed, more legitimacy-craving than the western governments we know—ones that are run by people who could be thrown out of work in the next election.

Some people point to the American system of government and state flatly that legitimacy only comes through the ballot box.  With all due respect to the well-meaning pro-democracy communities now active in China, the answer is not elections–at least not yet.

More elections will eventually come to China, but in China’s ancient culture no one is entitled to anything.  Rights and powers are conferred—usually from above—and are not innate.  People in such a culture actually derive certain comfort from knowing their place in a highly stratified societal hierarchy. The Confucian, collectivist soil of China is a tough place to plant the seeds of messy, noisy, bottom-up democracy–the kind that Americans always think everyone else wants.

If you have raised an eyebrow, allow me to ask whether you believe the recent spectacle of a U.S. government shutdown and threatened debt default (remember who holds much of that debt) received balanced coverage in the Chinese media?  Do you think the nightly warbling of Boehner and Reid won over any converts to our system of representative government?  It works for us—sort of, lately.  But not for China.

The Chinese still want many things that we have.  But they actually don’t have a problem with basic social inequality, or even a big, all-powerful, unelected government.  All they ask, in exchange for masters not of their choosing, are three things:

-continued economic opportunity and growth;

-a reasonably healthy environment in which to raise their only child;

[it wouldn’t hurt if the government elite—especially at the local level—bloody learned to behave]; but most importantly,

-Simple Justice.

Yes, simple justice. What the Chinese people want, oh so much more than democracy, is a judicial system that is fair and impartial.  I am not talking about correcting the inequalities that pervade any single-party political system. Party members—who form a tiny minority of the Chinese population, will continue getting all the good stuff—the jobs, the dwellings, the cars, the mates.

I am talking about a system that resolves the simple disputes that arise out of a society with an exploding, burgeoning commercial class filled with people who have galaxies more property (and the desire to keep it) than Chinese people of, say, twenty years ago.

Forty years ago in China only the government and powerful party functionaries owned significant property.  Now even average citizens have their own cars, apartments, houses. They even buy and sell securities, investment properties, etc. How do they resolve their inevitable disputes?

Probably not in China’s courts.  Today, the only way to achieve “predictable justice” in a Chinese court is to bribe the judge.  And if you are well-connected in the Party, so much the better.  Would you willingly submit your property or contract dispute to a court that you know is likely to be influenced by personal connections, money or politics?

This is actually something rather basic: impartial and efficient judicial resolution of the hundreds of thousands of private disputes that arise between Chinese citizens.  The Party is not in the room as justice is dispensed.  Just the people, the facts, the law and the Court.

I propose the English model.  The English began building their greatest gift to the world–an independent judiciary–in the 11th century by focusing reforms in lower courts, ones that (1) did not deal with criminal matters, and (2) did not adjudicate the rights/property of the powerful elites: the Crown, the propertied class, the Church.

Following this example, Chinese reforms to judicial administration and the rules of judicial conduct could begin in courts that adjudicate only matters between private citizens.  The goal is to create a perception of fairness so that the people won’t continue undermining the court’s legitimacy by resorting to “extrajudicial disturbances.”

This is more judicial reform than political reform.  The English had reasonably independent magistrates meting out basic justice between private parties (and thus lending legitimacy to the Crown) centuries before representative democracy leveled the political playing field.

In tribal societies the legitimacy of the chief is maintained, in no small part, by the fairness and wisdom he displays in resolving disputes between his people.  Legitimacy through political reform (of the electoral variety) remains a ways off in China.  But if the government reforms the judicial system into a reasonably fair and impartial arbiter of disputes, isn’t this really the low hanging fruit of civil legitimacy?

Next week:  How Chinese courts resolve disputes, and then how they explain and propagate the rationale for their decisions, can be the stability and legitimacy-creating agents that the government desires.

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