Multinational Corporations, the World Trade Organization, and China’s Legal Institutional Development

Multinational Corporations, the World Trade Organization, and China’s Legal Institutional Development

Keke Zhao
A Thesis in International Relations

Acknowledgement

First and foremost, I would like to thank my grandfather, Zhao Ziyang, for inspiring my interest in international politics and history. Secondly, I would like to thank my parents for their continuous support. My gratitude also goes to Andrew Dobshinsky, Christopher Ortiz, Tim Leung, and David Schweidel for all of their help, and to Cristina Lameiro, Sylmarie Ayorro, Shilpa Jhunjunwala, and Jeff Jarret for putting up with me during this difficult process. Last but not least, I would like to thank my thesis advisor and the faculties of the IR Department at Penn for their advice and encouragement.

Table of Contents

I. Introduction

II. China’s Economic Development and its “Side effects”: A Historical Perspective

III. Globalization and Interdependence from a Neoliberal Perspective

IV. MNCs: An Influential Factor in China’s Legal Reform

a. China and its Foreign Investors: Different Agendas

b. Convergence of Expectations

i. Introduction of New Legal Norms and Expectations

ii. Protection of Foreign Investment: Legal Institution and Transparency

iii. Changing Expectation and Building Domestic Constituency: the Case of Intellectual Property

V. Accession into the WTO and China’s Legal Reform

a. The WTO and Market Liberalization

b. The WTO and Transparency

c. The WTO, Rule of Law, and Intellectual Property

VI. Conclusion

VII. Bibliography

Bribery and corruption were prevalent in China because the legal infrastructure and legal traditions were weak. One critic remarked that market participants have to depend on knowing people, especially government bureaucrats and agents, because of the loose legal fabric (Wang, Hongying 92). The weak “legal fabric” allowed unlimited discretion in law enforcement to exist. The lack of uniformed and fair implementation of law encourage the abuse of bureaucratic power and created opportunities for government agents and market participants to extract “rent” from such power. As legal expert Professor Pitman Potter stated,

[Corruption in the administrative bureaucracy] reflects uncertainties and tensions as to the permissible parameters for guanxi behavior and the parameters for formal institutional behavior—in other words, where legal requirements and processes end and where informal relations may legitimately be permitted to have influence. Whereas effective formal rules provide officials with legitimate justification for denying requests for favoritism based on guanxi ties, thus protecting officials from the demands of guanxi networks, the absence of official rules permits guanxi relations to drive official decision-making (Potter Chinese Legal System 31).

However, by committing to its WTO accession documents, China had committed itself to international trade relations under the “rule of law”. The commitment to the “rule of law” marked the retreat of guanxi based networks and corruption. The increasing importance of the legal institution and legal process rendered the guanxi network and corrupt practices less relevant. In essence, the accession into the WTO made the legal system indispensable.

The most prominent change towards the “rule of law” was in IP protection. The WTO, representing the ideals of free trade, is a champion of IP rights. “Appended to the Marrakech Agreement is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). The TRIPs Agreement extends to seven categories of rights, including copyrights, trademarks, geographic indications, industrial designs, patents, integrated circuit designs and trade secrets. The TRIPs Agreement contains provisions against unfair competition, and particularly protects against the disclosure of privileged information” (Potter Evolution of Law 143). Every member country, by virtual of accession, is required to follow the TRIPS Agreement. More than just legislative compliance, the TRIPs Agreement requires the WTO member states to publish laws and regulations, judicial decision, and administrative ruling concerning IP rights to ensure compliance.

In preparation for WTO accession, China began to strengthen its legal institution in IP protection. To remedy the lack of TRIP compliance, China’s initial step was the establishment of more comprehensive IP laws. The State Council enacted the Regulations for the Protection of Computer Software in 1991, and later amended it in several areas. The length of protection for software programs was extended from 25 to 50 years to align with internationally accepted protection doctrines. Authors have the exclusive right to lease computer software, and judges were given discretion to award infringement damages based on either losses or profits, or on a statutory damage range from RMB5,000 ($605[11]) to RMB50,000 ($6,048) (NTD Patent & Trademark Agency Ltd). At the same time, the State Council also issued the Policies for the Encouragement of the Development of Software and Integrated Circuit Industries to “promote the registration of software copyright, and provide more protection for registered software according to the national law” (Li, Yahong). The objective of the legislation was to “place present and future national priority on the development of the IT industry, especially the software and integrated circuit industry.” Also, the Article 33 of the Policies placed strict liability on the end users of computer software, forbidding the usage of unauthorized software product (Li, Yahong).

China demonstrated its commitment to improve IP protection by acceding to international standards such as the Berne Convention for the Literary and Artistic Works and the Universal copyright Convention, both drafted by the World Intellectual Property Organization (WIPO) (Fu 72). Immediately afterwards, China extended controls over broader range of IP through recent amendments to the Patent Law 1992. The 1992 amendments extended patent protection to chemical, pharmaceutical, and food and beverage products, at the same time “increased the compensation amount in the case of infringement, strengthened enforcement mechanisms, and offered opportunities for judicial review over administrative decisions” (Luo and Wang 60). In 1994, amendments were made to the Copyright Law, which imposed criminal penalties for copyright violations and provided more effective civil remedies such as injunctive relief and damages (Potter Chinese Legal System 77). As a part of its accession process, China gradually committed itself to broadly accepted international norms and regulations governing IP rights.

Even with legislations in place, piracy would remain rampant without effective enforcement. “The WTO TRIPs Agreement places considerable emphasis on the interplay between substantive standard and enforcement procedures” ((Potter Evolution of Law 138). To further placate the demand of the WTO member nations, China strengthened its enforcement of IP laws. The Public Security Bureau and the Cultural Market Administrative Bureau took the lead role in the activities of the enforcement task forces. In addition, public and punitive sanctions were applied to enforce (Potter Evolution of Law 138). Moreover, these law enforcement agencies conducted a series of raids against CD pirates. In 1996 to 1997 alone, China took significant steps to crack down on piracy by closing 38 major CD manufacturers producing bootleg CDs and VCDs. Underground factories would be closed whenever discovered. Furthermore, the law enforcement agencies required verification procedures involving SID codes to confirm lawful production of CD in existing factories. The enforcement has also broadened inspection of VCDs, CD-ROM, LDs, videotapes, and production equipments. Production plants were subjected to periodic unannounced inspections. After these inspections, unlawful products were confiscated and destroyed under the supervision of Ministry of Culture, and the violators were often sentenced to lengthy prison sentences (Potter Evolution of Law 147).

However, the road to IP reforms was marked by obstacles. The Western governments’ and international regimes’ effort to improve IP protection has met local resistance. Perceiving the IP legislations as benefiting only foreign capitalists and MNCs, many even called the negotiators for WTO accession “traitors” (Zhang 129). Due to their lack of respect for IP property rights, the law enforcement effort would be difficult to implement. The nationalist undercurrent within Chinese society weakened the enforcement of IP legislations. One cannot argued that China was at par with the developed countries in IP protection while piracy was still common.

Nevertheless, China did make significant improvement in its legal system and law enforcement to protect IP in the 1990s. The strengthening institution and more uniform enforcement caused the retreat of corrupt practice such as piracy. China’s increasing focus on the “rule of law” created less favorable environment for piracy to persist. According to Fu, anecdotal evidence suggested that some of the pirate manufacturing operations have left China for neighboring Asian countries where IP climates were more favorable to piracy. International IP observers have noticed China’s significant improvement in legal infrastructure and enforcement. Arpad Bogsch, the Director General of WIPO, praised, “it is remarkable that China has made such rapid progress in a short time” (Fu 73).

The purpose of this thesis is not to deny the importance of internal factors in Chinese domestic reforms, but to explore the role of external factors, such the WTO accession and the inflow of foreign investment, in legal developments that ultimately restrained unabated corruption in the 1990s. The Neoliberal theoretical framework suggests the surge of foreign investment and increase in the power of multilateral organizations demonstrated the intensification of globalization. With its reliance on the global capital market, China inspired to be integrated into the global capital market and to participate in global economic regimes such as the WTO. As the capital, resources, and information traveled across the borders of nations, the “interconnectedness” and “interdependence” of countries, people, governments, and regimes solidified. Interdependence also endorsed the “linkage of issues” and “package dealings.” Economic collaboration “spilled-over” and facilitated the convergence of interests in other issue areas such as domestic legal institution and law enforcement. Two external actors, MNCs and the WTO, converging China’s interests and those of the external actors, linked Chinese legal institutional reforms with economic development.

MNCs, investing heavily in China, catalyzed rapid modernization and economic development. Constrained by home countries’ anti-Corruption laws, foreign investor desired a non-corrupt liberal market environment where they could compete freely with both domestic and foreign competitors. At the same time, they required an effective and independent legal institution to protect their economic interest and China. China, depending on foreign investment to grow, became susceptible to external pressures. Utilizing their global economic power and backed by home country governments, MNCs imported anti-corruption practices and pressured China to adopt further legal institutional reforms. In addition to institutional reforms, they realized that laws without local support would not be enforced, and enforcement is a crucial component of IP protection. MNCs made significant contribution to build up domestic constituency in high-tech industries for the purpose of IP protection. The result was the convergence of interest in the area of legal developments in the forms of administrative restraint and strengthening law enforcement.

By the same token, the prospective WTO membership has altered China’s regulatory and legal environment through the increase of market liberalization, transparency and governance, and potency of legal institution. The integration into international organizations and trade dependence on foreign capital encouraged China to liberalize its market (Zweig 35-36). In addition, the Draft Protocol required the publication, consultation, and access in the legal system. Such requirements were crucial in making laws clear, knowable, fair, and enforceable. The WTO’s demands for greater transparency threatened bureaucratic discretionary power stemming from ambiguous regulations and undermines the bureaucratic rent-access positions” (Zweig 272). Furthermore, China has strengthened its weak legal institution and gradually started to bridge the gap between Chinese legislation and internationally accepted legal standards. Specifically, in response to pressure, China made amendments to a series of laws such as the Patent Law and the Copyright Law to comply with the TRIPs Agreement. These laws provided a more comprehensive protection and punishments. Most importantly, China established a scheme for law enforcement agencies to standardized enforcement efforts and to crack down violations of IP rights. These measures had considerable impact on reducing corruptive practices such as piracy.

However, the Chinese society and government are far from transparent. Even though China had made tremendous step toward establishing the “rule of law,” the legal system remains a system in transition, inefficiently meeting many of the demand of market-oriented investors (Rosen 201). The CCP interference remains strong in the legal system. Implementation of newly amended laws and regulations are sometimes ineffective. In the area of protectionism, where international monitoring of implementation is weak, it is very unlikely that China will be able to treat local and foreign investments impartially (Janisch 201). Domestic legal enforcement also continues to be weak and the enforcement of new legislations continues to be sluggish. Based on the Transparency International’s study, the corruption level remains high while transparency persists to be low[12] (Transparency International Website). Unlike the sporadic anti-corruption campaigns in the early 1990s, legal institutional reforms targets the deep causes of the corruption. They will take a longer period of time to impact corruption and bribery. Other than legal institutions, changing popular perception and expectation of bribery continues to be a formidable task. It is unrealistic to expect the domestic entrepreneurs’ and bureaucrats’ behaviors to change over night. It will take years even decades before respecting the “rule of law” and bribery-free behaviors become the norms of Chinese society.

It is important to realize that China has a tremendous job in the future to further develop its legal institution. At present, there is still a considerablely wide gap between the WTO requirements and the Chinese legal enforcement. In addition, judicial reviews need to be performed uniformly and frequently (Ostry 128-130). The future of judicial independence is precarious as long as the CCP persists to be the supreme political power of the land. The roles of the party and the roles of the law will need to be redefined before the judicial apparatus can become truly independent. At the same time, one should also realize that China had made considerable steps toward transparency and legal reforms. It is unrealistic to expect China to be at par with the rest of the developed world in its law enforcement and legal institution. After all, it took hundreds of years for the developed world to institute its legal system. The future success of reforms in combating corruption will hinge on the government’s commitment to the implementation of laws and regulations and to promote the status of “rule of law” instead of the “rule of men.” As long as China values the contribution of MNCs and the WTO in economic development, it will continue down the path of legal reform.

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[1] Corruption is defined as taking bribery, allowing illegal activities to take place, seeking benefits for others who have close personal ties, or any activity that abuses official or bureaucratic power for personal gains (Gong 8-11).

[2] Foreign investments include foreign direct investments that are long term in nature and other types of short-term investments. I focus on the long-term investment made by multinational corporations in this thesis. International investors include investors from developed countries and investors of Chinese descent from Asian countries and former foreign colonies of Hong Kong and Macao. Multinational corporations, the focus of this paper, are from foreign developed countries for the most part. They have greater longer-term interest in legal infrastructure in China. Throughout this paper, I use foreign investors and multinational corporations interchangeably.

[3] Bribery is defined as an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to any foreign official, party or candidate for the purpose of influencing or inducing the violation of his/her lawful duty in order to securing any improper advantage (US Department of Justice Foreign Corrupt Practices Act).

[4] Norms are defined as expected behaviors or commonly accepted practices or rules.

[5] Foreign direct investment (FDI) is defined as investment in a country made by a foreign participant involving long-term commitments. It includes equity investment in domestic enterprises and in enterprises founded with or without domestic partners.

[6] Based on official exchange rate. The official exchange rate was established around RMB8.3 = $US1. It fluctuated slightly from time to time.

[7] According to Kegley, Globalization is the integration of states, through increasing contact, communication, and trade, to create a holistic, single global system in which the process of change increasingly binds people together in a common fate

[8] The foreign invested performance requirements have four major parts: mandatory foreign exchange balancing, minimum local content, reporting operations plan to the government, and export targets and advanced technology transfer obligations as entrance prerequisites for wholly foreign-owned enterprises.

[9] Guanxi means relationship in Chinese. It is used to imply relationship based business dealings or nepotism. It is often linked to gift-giving practices, corruption, and bribery.

[10] Procedural fairness is defined as a process of administrative decision making that is principled, comparatively stable, and the basis for making a decision can be known

[11] Based on official exchange rate. See Footnote 5 for official exchange rate.

[12] Based on Transparency International’s Corruption Perception Index, China ranked 59^th in 2002 among the 102 countries studied.