China Focus Blog Editor-in-Chief Marika Heller, China Focus Senior Advisor Jack Zhang, and I sat down with renowned China law expert and NYU professor Jerome Cohen. Professor Cohen has been at the forefront of Chinese legal reform since the very beginning of Deng Xiaoping’s Reform and Opening Up. We asked him about how law in the PRC has evolved, the current cases involving Western multinationals in China, the rule of law in Taiwan versus Mainland China and much more. Check out Professor Cohen’s recent work at the US-Asia Law Institute at New York University School of Law here: http://usali.org. Below is our exclusive interview with Professor Jerome Cohen.
Jack Zhang: Thank you very much Professor Cohen for giving us this opportunity and welcome to UCSD. You’ve been involved with China law, PRC law, since Westerners were allowed to go back into China again since the opening in the 70s. Could you describe for us the key episodes in the evolution of that process? It transformed from an insular, socialist system to one that accommodates so many multinationals that operate there today. What are the major evolutions that PRC law has undertaken?
Prof. Cohen: A lot of countries are interested in how China became such a prominent, successful environment for attracting foreign investment. I visited Iran in 1999 and I was the first American to lecture at Tehran University’s School of Law and Politics in 20 years. I said what would you like me to talk about? They said we would like you to tell us how China became so successful in attracting foreign investment. Although at that time Iran was still riding high on oil revenue, it knew you can’t be a one product or one commodity country. You’ve got to have a broad foreign investment environment and they wanted to know how to do it. They still want to know how to do it because they haven’t been that successful for political and other reasons.
I was involved right from the beginning with the effort to attract foreign direct investment. That requires the creation of a legal environment, economic environment as well as having the infrastructure, labor and regulatory bodies. You have to have at least something that gives the appearance of a legal system. China had none of that when the Gang of Four was overthrown in the fall of ‘76. It took a while to pull things together. Deng Xiaoping was the leader in this effort. When it became clear in December ‘78 at the famous Third Plenary Session of the Eleventh Central Committee that Deng had really made it back, at that point Deng announced that China would have a legal system again.
Deng Xiaoping, although people tend to forget it, was the product of the Soviet-influenced Communist Party system. He was Secretary General of the Party at the time of the Anti-Rightist Movement of ‘57-’58, and he was a classic Leninist. As part of that he knew you need a legal system. Lenin was a classic totalitarian dictator, but he had been a lawyer.
Deng Xiaoping, although people tend to forget it, was the product of the Soviet-influenced Communist Party system. He was Secretary General of the Party at the time of the Anti-Rightist Movement of ‘57-’58, and he was a classic Leninist. As part of that he knew you need a legal system. Lenin was a classic totalitarian dictator, but he had been a lawyer. Very few people realize that before the Bolshevik revolution, Lenin even defended some cases in the Russian courts “unsuccessfully, by and large” then he decided revolution was quicker. But he was sophisticated enough to understand if Russia was going to attract the British and French capitalists, it had to have a legal system. It had to make them feel that their investments would be secure, even if in practice they may not have turned out to be secure. But part of a foreign investment environment is illusion, that you have created the institutions necessary for processing the needs of foreign investors, for dealing with their complaints, settling their disputes. And you needed not only institutions, you needed procedures, you needed to have personnel, you needed norms and you needed rules. So all of that has to be created by a foreign investment environment and Deng Xiaoping knew it.
I was quite excited when I read the renmin ribao for several days running in early December ‘78 because it was clear that the resurrection of a formal legal system would be done Soviet-style. I knew a lot about how that had happened. It meant there would be much more order, much less chaos and much more contact with foreigners in order to make that possible. So they set about the task and they asked me to help. In the spring of ‘79 I did quite a lot to foster the development of rules. And that culminated in July 1, 1979 with the promulgation of seven basic laws. Except for the revision of a regulation about arrest and detention of people that came out in February ‘79, there had been virtually no legislation following the end of the Gang of Four and Mao’s death. July 1, which happened to be my birthday, was a memorable day for other reasons because of these laws, one of which was the equity joint venture law.
In the spring of ‘79, there were attempts to attract foreign investment. I had been involved in a few of them, especially what they call contractual joint venture “a less formal, more flexible structure than equity joint venture” but foreign investors were very leery of the situation. When the equity joint venture law came out, in a way it was disappointing because it was pretty thin. Nevertheless, it did authorize basic innovations and for four years thereafter there was a process of trying to build upon it, give it some flesh, put out implementing regulations that didn’t come out until September ‘83. But it did have some immediate impact on our negotiations, for example. Until July 1, ‘79 when the law came out, if we wanted to discuss a contract for an investment with a state-owned enterprise, as they all were, and we wanted to put in a provision about settling disputes “ what happens if you have a problem and the parties can’t agree “ we would try to put in a provision for the arbitration of disputes in either China or the outside country depending on the bargaining position, etc. But the Chinese at the outset would always say, “When people get married, they don’t plan for divorce.” I explained to them in some societies, including Western ones, if there’s enough money involved they do have prenuptial agreements. But it was always a hard sell. You Americans, you’re always complicating things. We don’t need to talk about settling disputes now, we’re just getting started at cooperation.
Jack Zhang: I think James Mann wrote about that in his Beijing Jeep book. This was exactly one of the issues he talked about.
Prof. Cohen: Once the law came out, it showed we were not making this up in the excess of Western anxiety “ although there was plenty of anxiety, China was just a black hole as far as we knew “ and of course from the Chinese point of view, they knew nothing about foreign direct investment and they were very anxious that we were going to take their pants from them unfairly, etc. So both sides had considerable basis for anxiety. It wasn’t ridiculous at all. But the law helped us legitimize some the main questions on the agenda negotiating any investment contract.
Jack Zhang: It seems like there was a master plan for implementing rules and laws that enabled FDI to succeed, because there’s a counter-narrative that FDI really took off in China and companies found massive fortunes to be made because it was poorly regulated, deregulated at the local levels. There were these exceptions and loopholes that foreign multinationals exploited. This is the whole narrative about sweatshops, etc. How would you adjudicate these two different views?
Prof. Cohen: This afternoon I’ll talk about what I call China’s federal problem. You don’t have federalism in China but you have inevitable tensions between the central authorities and local authorities. In the foreign investment picture as it developed, this is apparent everyday. Foreign investors go to a city, they want to set up a factory and start making things, and immediately they’re confronted by central norms, laws, regulations, implementing rules, etc. Those laws and regulations require central approval beyond a certain modest investment level. It used to be $10 million investment, anything above it and you had to have Beijing’s approval. It was a question who Beijing was. There are various authorities there that struggle even over antitrust law.
We’ve just come from a nice talk over at Qualcomm. You have more than one antitrust authority, even today, to deal with. But at the local level, when we wanted to put things in a contract we would often be told, Don’t worry about the central authorities, we’ll just do it our way. If they say any investment over $10 million requires central approval, we’ll do it this way: we’ll make two contracts, $5 million each. So there’s no need for central approval. They would induce us to consider seriously plans that were really techniques for getting around central control. In other words, a local government is often asking you to conspire with them against central authority, which is a pretty risky business for foreigners in China. Especially since what it holds out for you is you can get this contract approved, but at some point, maybe after you put in your money, the contract could be invalidated when the central authorities discover you’ve joined in a conspiracy to undermine their laws.
In other words, a local government is often asking you to conspire with them against central authority, which is a pretty risky business for foreigners in China.
It was always a tough call for a lawyer. What do you tell the client? The client wants the deal. The client is annoyed if its legal department brings in people like me who start spoiling things. The client, salespeople usually, and they’re usually dominant, they want the deal to go ahead because they know if they don’t do it, as an American investor for example, some South Korean company will come in. Maybe they’ll bribe the local people and they’ll hope for the best, they’ll gamble. Our client doesn’t want to lose the deal to some other foreign company. On the other hand, our client has to satisfy the legal department at headquarters back home, so it’s a tough call. Often it makes the lawyer ask who is my client? Is my client the legal department back home that may have retained me to ride herd on its own, overenthusiastic salespeople? Is my client the head of the group in China who’s trying to make the deal? Is my client the Chairman of the company? To whom do I finally report this and lay out what the challenge is?
Jack Zhang: There’s been a lot of news coverage of law being applied unfairly to foreign companies: this latest case about anti-monopoly against Qualcomm, cases against Wal-Mart, McDonald’s and Yum Brands in recent years. I’ve seen no media reporting looking at the original text of the contract or the technical legality of this. How much of the explanation for these recent cases is the federalism problem you just discussed, and how much of this is actually law being used disproportionately against Western multinationals?
Prof. Cohen: Well the way it’s come up recently and it’s come up in many contexts involving taxation, antitrust, intellectual property, labor, criminal justice. It’s come up from the central authorities, really. It’s not being presented largely as a local violation of what Center wants, but it’s really the center treating foreign companies in certain ways. You have to distinguish here not only local against central, but when you start to look at the deal, you have to start thinking substance of what’s provided for in the contract versus procedure, how you handle any demands of the central authorities. Often this is not prescribed in the contract. The contract deals with, I’m going to put up so much money and you’re going to do this and then together we’ll build this. But it doesn’t say what’s going to happen if the government regulatory authority that ultimately approves the contract, a year or two or three down the line, then decides to police the agreement. Maybe because your Chinese partner complained, maybe because your competitors complained foreign competitors, local competitors. That’s not prescribed in the contract. For that you look to other laws and regulations about how you run your economy and how you treat investors, local and foreign. That becomes the focal point.
Then the issues become are you being treated unfairly, as your question implies, because that’s what some companies have alleged, or are you being treated roughly but in the same way as Chinese companies are being treated? Is there really discrimination against the foreigners, or are they all being denied fundamental fairness? Or are they all being treated in a fair and equal manner? This where it begins to get murky, because China is not a transparent society. To answer some of these questions you would need a lot of information. Although China in recent years has begun to develop a kind of equivalent to our Freedom of Information Act system, there are very, very many exceptions to this. We don’t know whether Qualcomm is being treated very differently; A, from other foreign companies or B, from Chinese companies. Maybe China has made some effort to make it look like they’re treating foreign and Chinese companies the same, but we don’t have enough information to know whether that’s a kind of put up fade, a Potemkin regulatory system, or whether it’s really true. Those are the kinds of issues that we are confronting now.
We don’t know whether Qualcomm is being treated very differently; A, from other foreign companies or B, from Chinese companies. Maybe China has made some effort to make it look like they’re treating foreign and Chinese companies the same, but we don’t have enough information to know whether that’s a kind of put up fade, a Potemkin regulatory system, or whether it’s really true.
Marika Heller: We wanted to also ask you about comparing the rule of law in China and Taiwan. How have the Taiwanese courts changed since democratization and can that be applied to some of what we’re seeing in the Fourth Plenum and the changes that are being proposed?
Prof. Cohen: I always like in this context to quote Alexander Pope. Hope springs eternal in the human breast. But the next line is often forgotten, Man never is, but always to be blessed. We don’t know whether someday Beijing will follow the political legal progress of Taiwan. When I started going to Taiwan in 1961, I tried to learn what was happening and one thing I learned was that Chiang Kai-shek’s son, Jiang Jingguo, was then the head of the secret police and he was a notorious killer. He’d spent time in the Soviet Union. Chiang Kai-shek was a student of Lenin. He, like the Chinese Communists, both learned about the Leninist system.
When I started going to Taiwan in 1961, I tried to learn what was happening and one thing I learned was that Chiang Kai-shek’s son, Jiang Jingguo, was then the head of the secret police and he was a notorious killer.
If you look at the guomindang legal system on the mainland before 1949, it looks very similar to the Communist legal system you have after ‘49. Judges were not picked just for their professional performance, judges had to be Party members. They had to be schooled in Party ideology. The Party controlled the legal system, many parallels to what was taking place under the Communists. Only Chiang Kai-shek for a long time was able to persuade the American government and people that his government, even after he left China for Taiwan, was Free China. Of course, many people said it certainly wasn’t free and it didn’t look like China. To many people it looked like it should be separate from China. Jiang Jingguo was a loyal subordinate to his father, and yet when he died, I think it was 1988, and the media asked me what did I think. To my surprise I found myself saying pretty positive things about him, because by the mid-80s he had learned what Deng Xiaoping never learned: you can’t go on repressing people indefinitely.
I was asked yesterday in Irvine, What’s the sustainability of the current repressive system in China? That’s a key question. We don’t know and we can’t know yet. There are various factors that will determine how long the Chinese people will want to endure the kind of repression that Xi Jinping has brought to them, even greater than under Hu Jintao. In Taiwan, what we saw was beginning in 1985-86, a decision that they had to begin giving more weight to the demands for openness. They certainly didn’t want to welcome a Taiwan independence movement, even though that underlay many of the demands for greater freedom. But they had to provide more pluralism, more outlet, more popular expression. Jingguo set in motion a process that without violent revolution gradually led to change. With the end of martial law, with the gradual effort of judges and prosecutors to free themselves “especially the younger people” from Party control, and the gradual demand for free elections, and the formation eventually of the dangwai, outside the party movement, that became the DPP opposition movement. So I admire very much the process that got underway in 1985.
In 1985, I took part in the most famous criminal case in Taiwan’s history. This I could already see from the way newspapers were trying to report honestly on this murder case, where Taiwan had sent over leading gang leaders from the zhulianbang, the Bamboo Union, a group to assassinate a Chinese-American reporter in San Francisco in his home. His pen name was jiangnan and this became known as the famous jiangnan ming’an, the murder case involving Jiang Nan. That, I could see, was the beginning of the fight for a free press that began to ventilate things. By the time martial law was declared to be over in ‘87, you already had gradual development.
In 1985, I took part in the most famous criminal case in Taiwan’s history…[The Jiang Nan murder case] I could see, was the beginning of the fight for a free press that began to ventilate things. By the time martial law was declared to be over in ‘87, you already had gradual development.
This is a great story, and I’m a great supporter of Taiwan, even though of course you can’t endorse everything that’s been done under the mantle of democracy. The fact is that Taiwan is a very democratic place. It has free media to a large extent. It has freedom of public expression as well as democratic elections. It has established a credible legal system that brings government increasingly under law, and that’s what the rule of law means. Not rule by law, using it as an instrument as the way Chiang Kai-shek did, of oppression and getting economic modernization going, but a government and political party that is restrained by law in various ways that are increasingly implemented.
It would be wonderful if China’s future model can follow Taiwan’s example, but the first thing you start with is 1.4 billion people. Taiwan then was only 8-10 million, now it’s up to 23 million, which the population of Shanghai.
It would be wonderful if China’s future model can follow Taiwan’s example, but the first thing you start with is 1.4 billion people. Taiwan then was only 8-10 million, now it’s up to 23 million, which the population of Shanghai. The dimensions of the attempt to make this live, even when you look to South Korea, which has gone through a very similar process to Taiwan at the same time. ‘87 was a crucial year in South Korea and again, without violence of a significant nature “there were a few incidents” but without significant, continuing violence, Taiwan like South Korea they both have constitutional courts, those courts play a role. My hope is still that someday China will accept a constitutional court.
Jack Zhang: You very much feel that it’s democratization that led to the rule of law in Taiwan and South Korea, rather than modernization or just getting wealthier.
Prof. Cohen: Things can’t be separated. Modernization led to greater education, greater economic development. People became more comfortable. They weren’t looking for their next rice bowl; they were looking for a better life. They had more contact with the world. Taiwan wanted the respect of the world. There are many motivations and factors here that affect what makes this possible. Taiwan had been sending people to the West for legal education for a long time. Many of them came back and were inculcating those principles. There are so many factors that go into the modernization of a country and the extent to which it demands a legal system and what kind.
Jack and Marika: Thank you so much, Professor Cohen, we really appreciate it.
Featured photo of our interview from left: Peter Larson, Jerome Cohen, and Marika Heller.
Interview transcribed by Peter Larson.
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