Editor’s note:
“Law and development” is a concept historically associated with US efforts beginning in the 1960s to export American ideas about rule of law to developing countries. The US government wanted to facilitate commercial transactions with such countries and believed that transplanting elements of American law would promote both economic development and democracy.
In the 2010s, China became a significant source of investment capital to developing countries in Southeast and Central Asia, Africa, and Latin America. In 2019, Matthew S. Erie, an associate professor of modern Chinese studies and member of the law faculty at Oxford University, began an ambitious project called China Law and Development in an effort to understand the role that law plays, directly or indirectly, in China’s outbound investment.
As he wraps up the project in 2024, the U.S.-Asia Law Institute invited Professor Erie to share some of what he and colleagues have learned. What follows are excerpts from his talk at NYU Law on October 10, 2024, including questions from the moderator and audience and his responses. The content has been edited lightly for clarity and brevity. A recording of the program can be found here.
Taking Stock of Law and Development with Chinese Characteristics
By Matthew S. Erie
The China Law and Development Project was born out of the heyday of Chinese globalization back circa 2013, when the Belt and Road Initiative was announced. The year 2016 was the peak in Chinese foreign direct investment outflows, and there was a buzzy excitement in academia that this was China’s moment. Then 2018 was when the Supreme People’s Court set up the China International Commercial Courts in Xi’an and Shenzhen. There was just a tremendous amount of interest and optimism in what was going on. People believed that there was something paradigmatic happening, something new and quite exciting.
The original research design was focused on building empirical data about what Chinese actors were doing outside of China to engage with challenging legal and regulatory orders, primarily in low income and middle income countries, and their interactions with these legal systems as well as with international law. There were two analytical levels. One was the international level and the other was the domestic law of host states that were receiving Chinese capital.
We were interested not just in international private law or international commercial law, but also in labor, environment, public procurement, tax, and dispute resolution. A number of research questions were driving the project. The first is: how are Chinese capital and law affecting jurisdictions outside of the People’s Republic of China (PRC), either intentionally or unintentionally?
Second, how are Chinese actors -- and by that I mean everyone from state-owned enterprises (SOEs) to private companies, tech companies, lawyers, officials, arbitrators, and business people -- adapting to these challenging regulatory orders? In return, how are these jurisdictions responding and how are they being changed as a result of these interactions? Lastly, what does all of this mean for the study of law in economic development?
Then two things happened. One, COVID, and two, the US-China trade war. These two shocks greatly changed the subject of the study because the outflows of Chinese capital greatly decreased as a result of these dynamics. Secondly, our ability to study them was greatly decreased. We couldn’t travel. The entire research project was predicated on long-term immersive fieldwork. So what we did was reach out to junior scholars, researchers, lawyers, NGO activists, even some officials from the countries that receive Chinese capital, and invited them to contribute data to the project.
The first goal of the project was to collect empirical data about what’s actually happening on the ground, analyze it, and generate outputs for different audiences: for legal audiences, for social scientists, for policy people, and for governments.
A related goal was to build an ethnographic record of what was happening. When we think about the study of empire, anthropologists have looked at the dynamics in local settings. I think of Max Gluckman in northern Rhodesia. Paul Kramer has done work on the US in the Philippines and Sam Erman in Puerto Rico. We don’t really have a good ethnographic account in terms of global China.
We also wanted to build partnerships with people in these countries. We wanted to learn from them and also, if possible, contribute some of our own knowledge. Many of these communities actually have a paucity of knowledge about China.
As principal investigator I collected about 550 interviews and conducted many months of field work in multiple countries, including Pakistan, Cambodia, Singapore, and elsewhere. I collected primary source material, including hundreds of court cases in these various jurisdictions. There’s a saying in Chinese that 屁股决定脑袋 pigu jueding naodai, which I’m going to translate very politely as: “Where you sit is how you see the world.” So I lived in Singapore for a year because the conversation about China is so different there from the way it is here [in the United States].
One major finding of the project is that there is no uniform approach to what could be called transnational legal ordering. Chinese companies were quite opportunistic at times.
One major finding of the project is that in terms of observable effects [from China’s presence), there is no uniform approach to what could be called transnational legal ordering, to use Gregory Shaffer’s and Terrence Halliday’s term. Rather, there is a much more ad hoc approach to trying to create environments for contractual and transactional certainty in these challenging countries [where China invests]. Chinese companies were quite opportunistic at times in terms of how projects were designed.
What’s happening in the Chinese case is not what happened in the case of the US expansion overseas, or before that, the UK. It’s not a forceful imposition [of law]. Also, a layer of Anglo-American law already exists through international transactions and often is adopted into the frameworks of former colonies, so the host countries for Chinese investment are not a blank slate.
Because of this, there was a much more subtle approach to the integration of Chinese law or foreign law into Chinese projects in the contractual arrangements that they deployed. This finding invites a concept that I am calling “legal infrastructure” or “law as infrastructure.” Legal infrastructure is not about law that’s unilaterally forced upon a population, but rather assemblages or bundlings of different types of law, including Chinese law as well as the law of England and Wales or Singaporean law, that are integrated into the Chinese project. There are multiple layers of law that interact with each other. Sometimes Chinese projects are built upon pre-existing layers of law, but at other times there are emerging areas where new legal infrastructures are built.
“Legal infrastructure” is not my idea. It comes from Katharina Pistor in her excellent book, “The Code of Capital.” Gillian Hadfield, the great scholar of law and technology, has written about this, and Benedict Kingsbury here at NYU has written about this in his fantastic “megareg” project. It draws on comparative law, international law, and science technology studies to move away from the idea of pure legal families to look at how they are integrated and combined in the course of cross-border work.
Let me give you a concrete example of what we’re talking about. Liu Zhenya, former chairman of China’s State Grid Corp., showed a map at the 2014 CIGRE Conference in Paris. CIGREA is the International Council on Large Electric Systems, a major standard-setting body. Several thousand people were in attendance. Liu’s map was a blueprint for his vision of a world interconnected through ultra-high voltage and smart grid technology. Subsequent to the conference, Mr. Liu founded GEIDCO, which stands for the Global Energy Interconnection Development Cooperation Organization, to carry out this vision. China is very much central to this vision because China has really mastered this technology and is bringing it to the world. Latin America is a region where we see a lot of Chinese electric grid projects.
Our research team has been conducting interviews with experts, engineers, and lawyers in Latin America, and the image of Liu’s map keeps coming up in the conversations. It made a deep impression on people who were in attendance at that 2014 meeting. It was a captivating vision of global interconnectivity.
GEIDCO nominally was established to promote technical standards for emerging clean energy industries. To date it has been largely a failure. One of the reasons is that many countries have very different regulatory regimes for dealing with energy production and transmission standards. However, at the same time, GEIDCO has worked with already established standard-setting organizations to promote its standards. One approach is to integrate Chinese standards into international frameworks through existing bodies, such as the IEEE (Institute of Electrical and Electronics Engineers) and IEC (International Electrotechnical Commission), which set standards for electrical power equipment.
In Latin America, Chinese actors have been working within existing regulatory regimes to promote Chinese standards.
In Latin America, we’ve gained insights that Chinese actors, China’s State Grid, and local affiliates have been working within existing regulatory regimes to promote Chinese standards. The cellular level of technical and industrial standards enables additional layers of law (contractual, regulatory, etc.) to be built on top of them, thus enabling “legal infrastructures.” There have been many failures, but also a few successes. Success helps give Chinese companies better market access and market share, and creates stronger bilateral ties to the local economy.
Much of the success of legal infrastructures depends on the operation of the regulatory regime in the host state. We’ve collected data that demonstrates the very important role that the local regime plays in either permitting transfer of standards or blocking them to give preference to local versions.
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Q: You didn’t find evidence of an effort to impose a uniform approach to transnational legal ordering. Does that mean that Chinese government ministries are not rolling out directives telling Chinese companies how to deploy law overseas? Are Chinese companies behaving differently in host countries from other actors?
Erie: Three points. One, there are notable differences between types of Chinese commercial entities. Among the SOEs, there’s clearly a greater nexus between their operations and the government. There you see clear lines of communication, but it’s not necessarily a simple unilateral communication. Oftentimes SOEs have quite a bit of agency in determining the scope of their work and business operations. And the relationship between the company and the Chinese government agency is much less clear in the case of private companies.
For example, in the event of a dispute, oftentimes the Chinese company that is operating in an African country will go to the PRC Embassy in that country in hopes it can mediate a dispute with reference to the corresponding African governmental agency. The SOEs will have some success in doing that. When the private companies try to do that, it doesn’t work. They just don’t have the same kind of relationship with the PRC government.
One of the big things that differentiates Chinese companies [from other actors in the same markets] is market share. In some of these countries, Chinese companies clearly have a majority share, particularly in emerging industries.
Two, Chinese companies in many of these countries are newly arrived, and so you see them making a lot of mistakes. This opens up what we call in our project a learning curve. Chinese companies are learning how to acquire local knowledge, sometimes through local counsel.
Three, the PRC legal regime for governance over outbound investment varies from that of other capital-sending states. The Chinese legal regime for regulating the social and economic effects of inbound investment is much more sophisticated and cutting edge than the regime that governs outbound capital flows. The Ministry of Ecology and Environment actually only has jurisdiction over domestic matters. As a result of that, you don’t have really hard law governing the Chinese outbound investment flows on questions of social and economic impact in local communities. That’s different from companies from other countries.
You don’t have really hard law governing the Chinese outbound investment flows on questions of social and economic impact in local communities.
Q: What are the implications of your research for US and other governments as they develop policy towards China and the Belt and Road?
The US right now is stuck on certain points such as a data trap and debt trap. The US government needs to calibrate what it’s doing in terms of having a more empirically informed approach to potentially compete with what China is providing in public goods to these countries. Furthermore, the current talking points are in many cases based on weak evidence. The debt trap narrative, for example, has been largely debunked by a number of scholars.
Q: Given the amount of money that has been flowing out from China as part of the BRI, it would be unsurprising if there was corruption. Have you found evidence of corruption?
Erie: This is a real problem. It’s to some extent reflected in the case law that we’ve collected from host states. For many years China has had its own version of the Foreign Corrupt Practices Act (FCPA), Article 164 of the PRC Criminal Law. [Paragraph 2 reads in part: “Whoever gives any property to a functionary of a foreign country or an official of an international public organization for any improper commercial benefit shall be punished ....”] To my knowledge, almost no PRC court has cited this provision except for very recently, where there have been one or two cases where it has been used to prosecute Chinese parties conducting business overseas. So we may be at the cusp of more enforcement of anti-corruption outside of China. Perhaps more so than formal law, CCP rules discipline corrupt officials in Chinese SOEs.
Q: What have you have learned about Chinese law as the governing law in contracts with Chinese companies?
One interesting finding is that Chinese companies are not necessarily incentivized to use Chinese law. There’s use of English law, Singaporean law, other foreign law because the Chinese companies may be as comfortable with that as they are with Chinese law. If it’s a major SOE that’s been doing outbound investment for 20 years, you see a certain ecumenical approach to choice of law in their contracts. If it’s a smaller company that’s going out for the first time, you might see a greater likelihood of Chinese law being used.
Q: Is the Chinese preference for mediation or other form of conciliation in those specific settings different from what other actors are doing? These may be places in which nobody wants to go to the local court or everybody wants to avoid expensive litigation or arbitration in Paris.
Erie: These behaviors are not unique to China. I think it’s often a matter of a difference of degree and not kind. A lot of people that we talk to in these countries will say: Yes, the French, the Germans, and the Americans also avoid our courts, but the Chinese in particular. That’s kind of a refrain that we hear over and over again. However, even there, Chinese investors are learning to navigate local courts.
Q: There is a debate about how much bilateral and multilateral investment treaties actually affect outbound investment. Do you see patterns in Chinese outward flow, depending on whether there is a treaty in place to protect investment, whether it’s a regional one or bilateral?
Erie: The Chinese have more BITs than any other country except Germany. Some of the data suggests outbound FDI does follow once a BIT is in place. It’s less common to have that effect from multilateral agreements. But China has certainly benefited from the Regional Comprehensive Economic Partnership (RCEP). The Chinese are very keen to support treaty formation, which is helpful to their outbound projects.
Q: From the local actors’ perspectives, what makes the Chinese legal regime or particular type of jurisprudence attractive relative to the status quo or to Western-led legal regimes?
Erie: Again, it’s hard to give a general answer, as it depends on the particular country, the context, the relationship with China, etc. Number one, China’s providing good stuff for cheap. The infrastructure is for the most part good and the material infrastructure is really what drives it.
Next, the legal, regulatory infrastructure is the tail. The example that I gave with the GEIDCO and promoting standards in the smart grid context is one instance where it’s infrastructure first, governance second. It’s kind of the reverse of the American approach, which would be something like: let’s lay down a regulatory system first, and then we input our commercial activities within that system. That hasn’t been the Chinese experience to date. But it’s been changing. Chinese parties have lost so much money that now they realize that it is important to have a solid contract in place.
Another aspect that’s attractive is the Chinese are not attaching conditionalities the way that Americans do or other international funding agencies do.
It’s kind of the reverse of the American approach, which would be something like: let’s lay down a regulatory system first, and then we input our commercial activities within that system.
Q: To the extent that recipients of Chinese investment are adopting Chinese legal and regulatory norms, why would they do that?
Erie: There are a few examples that we found of Chinese legal transplants. Countries like Uzbekistan, Vietnam, and Cambodia have a pre-existing relationship with China and see China as providing legal resources in important and emerging areas that are of concern to the host state, such as controlling data flows, cybersecurity, and artificial intelligence. China has developed, in some cases, sophisticated regulatory systems around these issues. We’ve tracked examples of officials from such countries going to China, doing training, and then soon thereafter, you see a piece of legislation, presidential decree, or institutional innovation appear that looks very similar to what China has done. While causality is not bullet-proof, Chinese influence is highly suggestive. Still, it’s important to emphasize the demand-side factors that facilitate legal transplants or regulatory adoptions.
Q: During nearly 20 years of work in project development finance in Southeast Asia, many of the [Chinese-funded and built] hydroelectric projects and railways that we worked on made absolutely no economic sense at the project level. Does that happen in other geographical regions?
Erie: Yeah, I’ve seen that. That may be another point of difference [with other investors]. A lot of these projects lose phenomenal amounts of money. In Pakistan, not only is there economic loss, but there’s loss of life. There were active terrorist attacks very recently against Chinese workers in Karachi. And yet the Chinese don’t leave. I find that astounding. While Chinese investment into the country has slowed because of security concerns, the continued Chinese presence suggests that there are logics other than commercial ones that are at play. It’s important not to over-generalize as China’s interests vary in different regions of the world, but there are clearly geostrategic aspects to China’s global footprint.
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Matthew S. Erie is an associate professor of modern Chinese studies and member of the law faculty at Oxford University.
Suggested citation:
Matthew S. Erie, “Taking Stock of Law and Development with Chinese Characteristics,” USALI Talking Points, October 10, 2024, at https://usali.org/publication/taking-stock-of-law-and-development-with-Chinese-characteristics.
The views expressed are those of the author, and do not represent those of USALI or NYU.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.