Investors Beware: The WTO Will Not Cure All Ills with China

Wednesday, January 1st, 2003 at 12:00 am by Lindsay Wilson
Lindsay Wilson, Investors Beware: The WTO Will Not Cure All Ills with China, 2003 Colum. Bus. L. Rev. 1007

China has traditionally been suspicious of trade with the West, and has imposed substantial limits and regulations upon foreigners doing business within the country. Under the Canton System (1760-1842), the Qing required that all foreign commerce enter through the port at Canton, and foreigners were restricted to dealing only with the Cohong, a group of Chinese tradesmen who had been granted a monopoly by the emperor Qianlong. That emperor, after viewing an array of cutting-edge British technologies, famously spurned an English envoy agitating for free trade with China, saying, “We have never valued ingenious articles, nor do we have the slightest need of your country’s manufactures.” China’s resolute rejection of foreign goods eventually sparked the Opium Wars (1839-1842), which ended with the Treaty of Nanjing. The treaty opened five major port cities to Western trade, allowed foreign settlements within China, exempted foreigners from domestic Chinese law, placed Hong Kong under the authority of the Crown and required the Chinese to pay twenty-one million Spanish silver dollars in war reparations to Great Britain. This treaty formed the basis of treaties that other Western powers, including the United States and France, imposed on China later that decade. This era, known as the Period of the Unequal Treaties, has left the Chinese suspicious and even hostile toward globalization.

After the horrific years of the Cultural Revolution (1966-1976), it fell to Deng Xiaoping to revive the economy that Mao Zedong had annihilated. Deng lifted two hundred million peasants out of poverty and reopened China to foreign investment. Per capita income quadrupled during this period. As part of Deng’s reforms, China joined several international monetary organizations and applied to rejoin the General Agreement on Tariffs and Trade (“GATT”) in 1986. China’s fifteen-year odyssey to join the World Trade Organization (“WTO”), the institutional offspring of the GATT, ended with its accession in late 2002.

The accession protocol outlines the agreements reached between China and WTO countries and gives particular attention to Chinese laws and the judiciary. China agrees to provide independent, impartial tribunals before which administrative actions regarding trade issues can be reviewed. All decisions are subject to administrative review (if available) as well as judicial review. China is also prohibited from enforcing unpublished laws, and must publish a journal containing all trade-related laws.

While these provisions address major sources of concern for foreign investors, they do not go far enough. The West seems to have a romanticized view of the WTO: that it will solve all of China’s domestic legal issues and create a Chinese system in the West’s own image. The WTO does not require a member state to have a good legal system, however, or even a fair one. Instead, it merely insists that foreigners and nationals be treated alike, for better or for worse.

China’s legal system has progressed rapidly from ruin to reform. It still fails, however, to provide the basic legal rules upon which market economies rely. A stable, predictable legal system is imperative for successful investment. Without it, assessing and allocating risk is impossible. The WTO makes large demands of China, but neglects three major points of concern within Chinese legal institutions: (1) the lack of a cohesive legal “system;” (2) pervasive vagueness in the language of statutes and administrative rules; and (3) the difficulty of enforcing judgments once they are obtained. Until these issues are addressed, China will continue to be a disappointing investment for many Western firms.

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