Publication of working papers for the SPF project “Shaping the Pragmatic and Effective Strategy Toward China”
IINA (International Information Network Analysis) will upload the working papers written by U.S. and Japanese project members focusing on shaping a pragmatic and effective strategy toward China. We hope that this series will help IINA readers understand how experts from the U.S. and Japan see China and the U.S.-Japan joint efforts, which have the potential to determine the future world order.
In recent years, the administration of Chinese President Xi Jinping has been working to develop the rule by law. One of the key goals in this is to increase Beijing’s influence in the creation of international norms. As it works to address the disadvantages of the extraterritorial application of laws by the U.S. and other countries, China is drawing on the experience of other nations to reconcile its own laws and regulations with international norms. Beijing, locked in conflict with other states and international actors over this extraterritorial application, wants to find a way to pursue its own interests and values in a way that is acceptable to the international community. At the same time, it is taking the lead in building a framework for international cooperation on the rule by law through the Shanghai Cooperation Organization (SCO) and with the countries involved in its Belt and Road Initiative (BRI). Considering the many intersecting fronts in this kind of international rule by law, there is little significance in whether a country supports liberal democracy. It would be realistic for both Japan and the U.S. to secure a forum for fair and open norm-building with China based on their own interests and values.
１．Development of Rule by Law Under the Xi Administration
One notable feature about the Xi administration has been its promotion of rule by law and regulations. Rule by law became a main agenda item at the plenary session of the Party’s Central Committee in October 2014, and “[governing] the nation according to law” became one of the “Four Comprehensives” laid out at the 19th Party Congress in fall 2017. In addition, in January 2021 the Central Committee issued the “Plan for the Construction of a Rule by Law China (2020-2025)” (hereafter referred to as the “Plan”). On March 1, 2021, Xi wrote an important article in Qiushi, entitled, “Resolutely Follow the Path of Socialist Rule by Law with Chinese Characteristics and Provide Powerful Rule by Law Guarantees for the Comprehensive Construction of a Socialist Modernized State.”
Politically, Xi’s objective in promoting the rule by law is to strengthen the one-party rule of the Communist Party of China (CPC). By establishing the rule by law, starting with a disciplined Party, China’s leaders want to extend the Party’s leadership to all organs of the central and local governments, and to all parts of society. Economically, the effort is focused on building a disciplined market. To improve the quality of economic development and secure approval for its participation in the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) trade agreement, the Xi administration has charted a course aimed at improving laws related to the economy, curbing unreasonable government interference in economic activity, and abolishing unreasonable restrictions on private companies. On the other hand, as Premier Li Keqiang emphasized in his "Report on Government Activities" to the National People's Congress (NPC) in March 2021 and as seen in the moves to tighten regulations on financial holding companies and fintech businesses, strengthen control under the antitrust law, and prevent the disorderly expansion of capital, the government is trying to impose restrictions on the unruly management of giant private companies. Both of these trends can be seen as moves toward a market based on laws and regulations.
Moreover, in recent years the establishment of the rule by law has gained attention as a tool to develop foreign relations in a favorable manner. To counter the extraterritorial application of law by other countries and to ensure its voice is heard in international norm-building, the Xi administration has been pushing for the creation of an international cooperative framework focused on the rule by law.
This paper will therefore focus on the external aspects of the rule by law development being promoted by the Xi administration. However, as the author is not a legal specialist, it will not address the details of individual laws. Rather, it will examine how the Xi administration is trying to use the rule by law to develop foreign policy to its advantage, and then discuss how other countries should respond to these developments.
２．Trends in China’s Development of External Rule by Law
1) Advocating for the Development of External Rule by Law
As previously stated, one distinctive feature of the Xi administration’s efforts to develop the rule by law is that they focus on the issue as it relates to foreign relations. In particular, after the fifth plenary session of the CPC’s 19th Central Committee (October 2020) announced the strengthening of the rule by law in foreign relations, and the subsequent central conference on the all-around law-based governance (November 2020) announced Xi's policy of promoting the integration of domestic rule by law and the rule by law in foreign relations to protect national sovereignty and core interests, the Xi administration's rule by law development as an external strategy has been attracting attention at home and abroad.
In the aforementioned speech, Xi said the following on the development of external rule by law:
Many countries are trying to propose international rules that are in line with their interests in new areas like space, the internet, big data, and AI. In this context, China should also promote the integration of domestic rule by law and the rule by law in foreign relations. As a part of this, the domestic legal system should be optimized, and major areas of legislation and legal reforms should be promoted to more effectively implement the extraterritorial application of law. At the same time, we should send personnel who are involved in the rule by law in foreign relations to international organizations, and through them actively participate in policy making, rule design, and regular operations.
The policy of advancing the development of the rule by law in foreign relations was also clearly stated in the aforementioned Plan. This includes: improving the legal system for work related to foreign relations; strengthening legal services related to foreign relations to protect the legitimate rights and interests of Chinese citizens and companies abroad and foreign citizens and companies in China; providing guidance to domestic and foreign economic and trade enterprises to strengthen compliance and raise awareness of legal risks; accelerating the creation of a legal system for the extraterritorial application of law; developing international exchanges and cooperation in the judicial sphere; and actively participating in the formation of international norms and the creation of a fair and reasonable system of such norms.
Based on this policy, in his March 8 report to the Standing Committee of the NPC, which is responsible for legislative functions in China, Chairman Li Zhanshu proposed that policy for fiscal 2021 should focus on legislation in areas related to foreign relations, enhance the legal toolbox for dealing with problems and preventing risks, and promote the formation of a systematic and comprehensive system of laws and regulations related to foreign affairs so as to deal with sanctions, interference, and long-arm jurisdiction.
This paper will next provide an overview of recent developments in China’s response to the extraterritorial application of law under policies laid out in Xi’s speeches and the Plan, as well as China’s moves toward international cooperation in judicial fields.
2) Addressing the Extraterritorial Application of Domestic Laws
The extraterritorial application of law has become an important issue in the field of competition law and other fields as economic activity becomes more globalized. In other words, states have come to accept that the provisions of domestic laws on cease-and-desist orders and surcharge payment orders can be applied to recognized cartels outside the country if they infringe upon a state’s free competitive economic order. The same argument has since been widely applied to securities law, tax law, trademark law, copyright law, patent law, information law, and laws regulating bribery of public officials, and it has sometimes been used to achieve political and security objectives. The U.S. in particular has tended to misuse the extraterritorial application of law in ways that are problematic. The 2001 Patriot Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001), the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010), and the CLOUD Act (U.S. Lawful Use of Offshore Data Clarification Act, 2018) are examples of laws that have stirred controversy domestically and abroad. If countries start abusing the extraterritorial application of their domestic laws based on their own interests and political objectives, it will undermine fairness and may lead to international conflict. Therefore, the extent of permissible extraterritoriality has always been a matter of debate both domestically and abroad.
Considering this, in the development of the current U.S.-China conflict, Beijing’s response to the series of export controls imposed by the U.S., including extraterritorial measures, did not particularly stand out, and could be seen as generally cautious and passive.
The U.S. fined ZTE a total of $1.19 billion for violating U.S. sanctions on Iran and North Korea, and in April 2018, the U.S. announced that it would place ZTE on the Entity List and prohibit U.S. businesses from exporting components to the company for seven years for repeatedly filing false reports on the issue (the ban was lifted in July 2018). In December 2018, Meng Wanzhou, vice chairperson and chief financial officer of Huawei Technologies Co., Ltd. was detained in Canada at the request of the U.S. for, among other things, misrepresenting to financial institutions the Huawei's dealings with Iran. The case showed that foreign executives and individuals who are suspected of violating U.S. sanctions and export control laws are at risk of being taken into custody when they visit the U.S. or countries with which the U.S. has mutual legal assistance agreements. The U.S. also placed Huawei and its affiliates on the Entity List in May 2019, and added a number of Chinese-owned companies to the list for their roles in China's military-civil fusion strategy, human rights abuses in Xinjiang, and the creation of military bases in the South China Sea.
The Chinese government has publicly condemned these U.S. measures. At a press conference on August 4, 2020, Foreign Ministry spokesperson Wang Wenbin said, “The U.S. cited national security as the grounds for its oppression of relevant businesses, but this turns out to be a flimsy excuse they made. Relevant companies do business in the U.S. in accordance with market principles and international rules, and abide by US laws and regulations. However, the U.S. side imposes restrictions and oppresses them on the pretext of trumped-up charges, which is nothing but political manipulation.”
As a direct response to the extraterritorial application of foreign laws and measures by the U.S. and other countries, in January 2021 the Chinese Ministry of Commerce issued the “Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures,” which stipulate that the Chinese government may issue a ban on Chinese companies and citizens following the "unjustified extraterritorial application" of foreign laws and measures. In June 2021, China’s “Anti-Foreign Sanctions Law” was approved by the Standing Committee of the NPC and immediately went into effect. Article 3 of that law states that China has the right to take appropriate countermeasures “in cases where foreign countries violate international law and the basic norms of international relations, use various pretexts or their own laws to deter or suppress China, impose discriminatory restrictive measures on Chinese citizens and organizations, or interfere in China's internal affairs.”
Furthermore, in September 2020 the Ministry of Commerce issued the Unreliable Entity List in accordance with the Foreign Trade Law, the National Security Law, and other relevant laws and regulations. It provides for a wide range of sanctions, including on trade, investment, visas, and criminal penalties, against "foreign enterprises that harm the development of the security and interests of national sovereignty" and "foreign enterprises that cause serious damage to the legitimate rights and interests of Chinese enterprises by suspending transactions or taking discriminatory measures.” In October of the same year, the Law on Export Control was adopted (effective December 1, 2020), which states, "if any organization or individual outside the People's Republic of China violates the export control provisions of this Law, obstructs the fulfillment of international obligations such as non-proliferation, or causes harm to the national security and interests of the People's Republic of China, it shall be dealt with in accordance with the law and its legal responsibility shall be investigated" (Article 44). It also stipulates that the Chinese authorities can conduct investigations to confirm the end use and end consumer of the export destination (Article 17), and that re-exports — in which raw materials produced in China are imported, processed in other countries, and then exported to a third country — are also covered (Article 45).
Some both inside and outside of China have expressed concerns about the growing scope of sanctions and restrictions in China’s response that are based on the authorities’ definition of “state security,” but in general the response can be considered passive and cautious.
One should also note that China has always emphasized cooperation with third countries in the extraterritorial application of domestic laws. As previously mentioned, international agreement has not necessarily been reached on the specific scope and extent of the extraterritorial application of domestic laws. In the past, each country has taken its own measures to counter the U.S. misuse of extraterritorial application. China is trying to secure its voice in the international order by cooperating with countries that share its interests, while referring to these countermeasures of other countries.
Among these countries, more recently China seems to be referring most to the France. For example, when the U.S. applied long-arm jurisdiction over corruption issues beyond its borders, levying hefty fines on French companies such as Airbus, Total, and BNP Paribas, France responded in December 2016 by creating the Law on Transparency, the Fight Against Corruption and the Modernization of Economic Life (Sapin II). The law includes provisions prohibiting the dissemination of confidential information to prevent companies' trade secrets from being investigated by the U.S. authorities prior to the French authorities. It also creates a more active environment for long-arm jurisdiction by setting stricter compliance requirements for companies than the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. An article in Liaowang, a weekly magazine published by the state-run Xinhua, assessed France’s response with the enactment of Sapin II as an effective case study for countering U.S. long-arm jurisdiction.
In addition, following the U.S. withdrawal from the Iran nuclear agreement and its reimposition of sanctions against Tehran, France requested the EU reimpose its blocking statute, which prohibits EU companies from complying with specified extraterritorial laws. France has also targeted U.S. high-tech companies with the extraterritorial application of its own laws for reasons of competition neutrality, antitrust, data protection, and so on, and its has levied heavy fines on companies like Google, Microsoft, and Apple. China has taken note of French Minister of the Economy, Finance and Recovery Bruno Le Maire’s proposal for a “national cloud strategy” after the U.S. implemented the CLOUD Act, as well as the French National Assembly's June 2019 report, “Restoring French and European Sovereignty and Protecting our Companies from Extraterritorial Laws and Measures,” and is using them as a reference in its own legislation and policymaking.
Of course, there will be differences in the application of the law and the values that underpin it between nations that advocate liberal democracy, so to speak, and China, which advocates a socialist system under one-party rule. However, as Tian Xu (Shanghai University of Political Science and Law) has noted, there is a group of scholars in Chinese legal circles who are willing to accept the EU legal model, especially in the area of civil law, even though there had been attempts to realize China's own unique values in recent years. While this is only an overview of China’s actions and internal debates on U.S. long-arm jurisdiction over Chinese companies, it would appear that there is ample room for discussion about how China can cooperate with other countries in shaping the international order in this field.
3) Establishing a Framework for International Legal Cooperation
In addition to addressing extraterritoriality, Beijing’s work in the rule by law in foreign relations is focused on creating a framework for international cooperation centered on China. In the aforementioned Plan, creating and improving international commercial courts and the development of a joint arbitration mechanism between the institutions in China and those in the countries participating in the BRI are laid out as part of the promotion of international cooperation in the initiative.
In addition to practical arbitration institutions, China has been eager to build a framework for strengthening international cooperation among legal professionals more broadly. For example, within the SCO, the SCO Lawyers Service Alliance was established in December 2016 by Li Changdao (former advisor to the Central Legislative Commission of Jiu San Socity, director of the Consultant Office of the Shanghai Municipal Government) and //Fan Yongjin 范永進 (vice president of Shanghai Financial Association). Within the BRI, various organizations bearing the initiative’s name have appeared, including the Belt and Road Legal Research and Cooperative Innovation Center and the Belt and Road Legal Research and Service Center. In December 2019, the Belt and Road International Lawyers Association was established by the All China Lawyers Association as the first international legal association registered by China, and the group’s first council members, president, vice president and secretary-general were elected at the founding general assembly held in Guangzhou. At that meeting, Wang Junfeng (JSD from Berkeley Law School, University of California; president of the All China Lawyers Association; global chairman of the Management Committee of King & Wood Mallesons, Beijing; deputy to the 13th National People's Congress; member of the NPC’s Constitution and Law Committee; vice chairman of China Law Society; vice chairman of China International Economic and Trade Arbitration Commission; special supervisor of the Supreme People's Court of China) became president. Gregory Vijayendran (president of the Law Society of Singapore), Prashant Kumar (President of the Bar Association of India), Zhang Xuebing (Master of Laws from China University of Political Science and Law, LL.M from Duke University, U.S.; vice president of All China Lawyers Association), and Lee Chan Hee (Bachelor of Laws, Master of Laws from Yonsei University, President of Korean Bar Association) were selected as vice presidents. Kang Yu (Master of International Law from the University of Nottingham, U.K.; senior advisor in international affairs and deputy secretary-general of All China Lawyers Association; former acting director of the International Cooperation Bureau of the Ministry of Justice of the People's Republic of China) was chosen as the first secretary-general. The secretariat was placed in Beijing. At the time of its founding, it consisted of 85 members from 36 countries and territories, including legal associations, law firms, legal institutions, and individual lawyers. As of December 2020, one year later, it had nearly 1,800 members from 54 countries. In a July 2021 interview, Kang expressed his intention to develop the group’s overseas membership and continue to expand its “international circle of friends.”
３．How to interpret and respond to Chinese trends
China has now entered a politically important period with the 100th anniversary of the founding of the CPC (July 2021) and the 20th Party Congress (autumn 2022). This comes amid a strained international environment, with the confrontation between the U.S. and China and the COVID-19 pandemic. In addition, Beijing will host the Winter Olympics in February 2022. In this environment, the Xi administration must steadily work to create international conditions favorable to China, while controlling the hardening of international public opinion against Beijing and responding to the extraterritorial application of laws and decoupling by the U.S. and others. To do this, in addition to pursuing technological development, it will become increasingly important for China to strengthen its voice in the international rule by law.
As stated above, China has responded in various ways to the drawbacks of the extraterritorial application of law by U.S. and others, but it understands that global markets are advantageous to its own development. Beijing has also focused on the complex axis of conflict that exists between countries and even within the U.S. regarding extraterritorial application, and it is looking for a space in which it can realize its own interests and values in a way that is acceptable to the international community. It is also trying to take the lead in establishing a framework for international legal cooperation in the SCO and with countries in the BRI as a way to improve the environment for strengthening its voice in international norm formation while aligning its own laws and regulations with international norms, all while drawing on the experiences of other countries.
In light of these intersecting fronts in the international rule of law, superficial support for or opposition to a particular value, such as liberal democracy, is unlikely to be of much use. A realistic China policy would be for both Japan and the U.S. to secure a fair and open forum for reconciling norm-building with China based on their own interests and values.
5 The Plan states that the government will work to clarify the relationship between the government and the market, as well as that between the government and society. It also says the government will focus more on curbing undue interference in economic activity through the use of laws and institutions, correcting illegal government activities disguised as the exercise of licensing authorities, and vigorously implementing a negative list system to create a business environment based on law.
7 This includes international cooperation in criminal extraditions, the repatriation of criminal suspects, and the transfer of prisoners; international cooperation in cracking down on terrorists, ethnic separatists, religious extremists, drug traffickers, smugglers, and international organized crime; and international cooperation in tracking down, repatriating, and extraditing fugitives who have committed corrupt acts or stolen goods.
9 Since July 2018, the U.S. has imposed additional tariffs on imports from China in stages, and placed greater restrictions on exports from the U.S. to China. The August 2018 Export Control Reform Act (ECRA) , which established the Export Control Act of 2018 (ECA) enabled the president and the secretary of commerce to impose export restrictions on U.S. civilian goods for reasons of security (including maintaining a leading position in technology) and foreign policy. In practice, the Bureau of Industry and Security (BIS) of the Department of Commerce is responsible for export control in accordance with the Export Administration Regulations (EAR), which were established based on the ECA and other regulations. When exporting, re-exporting, or domestically transferring items subject to these regulations, the parties to the transaction, whether they are in the U.S. or outside, and thus not generally subject to U.S. jurisdiction, must in principle apply to BIS for permission in advance. If there are EAR violations, the U.S. authorities may apply penalties even to those parties that are not subject to U.S. jurisdiction. Companies that act contrary to U.S. security or foreign policy interests, or are involved in the development of weapons of mass destruction, are placed on the Entity List.
13 For example, when the U.S. introduced the Helms-Burton Act (Cuban Liberty and Democratic Solidarity (Libertad) Act) in 1996, the European Union, Canada, Mexico, and other countries responded by promulgating a series of laws and regulations. The EU Regulation (Council Regulation (EC) No 2271/96 of 22 November 1996 Protecting against the Effects of the Extra-Territorial Application of Legislation Adopted by a Third Country, and Actions Based thereon or Resulting therefrom) states that no judgment by any court or decision by any administrative body outside the EU under the Helms-Burton Act may be recognized or enforced within the EU. In addition, natural and legal persons in the EU have the right to claim recovery for damages suffered as a result of the application of the law.
16 For example, in January 2019, the relevant general directorate in the French Ministry of Economy and Finance fined Google 50 million euros for violating regulations on the transparent provision of information and data privacy protections. This was the first fine imposed since the EU General Data Protection Regulation came into force in May 2018. Then in December 2019, it fined Google 150 million euros for “abusing its dominant position in the search advertising market by applying opaque and incomprehensible operational rules.” Furthermore, Apple was fined 25 million euros in February 2020 for "lack of necessary information constituting misleading business practices" after it was found that the speed of the company’s mobile phones could drop after users updated their operating systems. Apple was also fined 1.1 billion euros in March 2020 for monopolistic behavior in its distribution network.