Will Foreign-Related Rule of Law Save China’s Economy?

China wants the global community to think new laws will protect their companies—but is that the real reason behind the new legal approach?

Commentary

The timing of China’s recent changes in laws governing foreign companies operating within its borders couldn’t be better—at least for China. The Foreign-Related Rule of Law is one of the more recent adaptations the Chinese Communist Party (CCP) has made in its efforts to maintain and attract foreign investment and manufacturing.

A Major Concession to the Global Business Community?

On the face of it, it appears to be a major step or concession to the international business community, and in some ways, it is. CCP leader Xi Jinping views the new foreign-related rule of law as a critical part of China’s plan to further integrate into the global economy. As a result, China’s legal establishment, including the Supreme People’s Court, is leaning toward new laws.

Some cases are already in play and involve foreign jurisdictions such as the UK (England and Wales), the United States (Delaware), Mexico, Tajikistan, and Hong Kong. There are few cases at this time, but some see the application of foreign laws in Chinese courts as a way to protect foreign interests in China at a level that hasn’t been seen in decades.

Why Now?

But the timing of the Foreign-Related Rule of Law is suspect, to say the least. That’s because the time for China to adapt its laws to protect foreign companies and investors in the country is long past. It should have been a non-negotiable condition for China’s admission into the World Trade Organization in 2000.

It was, in theory, and on paper. But in practice, for the most part, it was not.

Nonetheless, the new “protective” laws are generating some attention in the West and are being heavily touted by the CCP, including by Xi himself. Furthermore, a new law firm in Guangzhou, the capital city of Guangdong Province, is now operating a legal research institute, which is believed to be the first in CCP-ruled China.

The location makes sense since Guangzhou has been a leading city of commerce with the West and has an international business outlook. That’s why it’s a reasonable place to start and publicize the CCP’s new opening-up policy. Again, this is a new development that wouldn’t be possible without the CCP’s approval, and more such legal centers are expected to open up.

A few questions are in order. For example, why change the laws now?

Is Theft Just the Cost of Doing Business in China?

The short answer to that question is that laws protecting foreign investors were relatively rarely insisted upon or successfully applied by U.S. or European companies. Furthermore, the Chinese legal system lacked any recourse or transparency. These companies should have insisted on legal protections, but they didn’t. The reality is that foreign investors and companies were willing to overlook the lack of legal protection in China in order to cut their manufacturing costs by huge margins and grow even richer by doing so.

And it worked out quite well for all parties for a long while. It’s clear that since 2000 and even before then, for most companies investing capital and factories in China, losing legal protection against intellectual property theft, competing against cheaper knockoffs of luxury brands, from purses to automobiles, and even the theft of entire factories were all just considered part of the costs of doing business there. The profits were so high for so long that foreign partners in China endured the losses with mostly tight lips.

Those days are long gone. In fact, since 2018, with the high tariffs imposed on China by the United States, Western companies have been leaving China, for that and other reasons. Tariffs remain in place and have even gone up.

The Bloom Is Off the China Business Rose

Today, the business outlook in China is very different. Western companies can no longer afford to compete against their own technology, designs, and products that China has been stealing from them over the past two decades or so. Not only are China’s business advantages—such as exceptionally low-cost labor—no longer available, but many companies are now facing extinction from adversarial Chinese companies, most of which are tightly controlled by the CCP. In other words, Western companies now know that they’re not just competing against other companies for their survival but also against the CCP itself, which wants to destroy their competition.

What’s really going on in the minds of Xi and the CCP?

A combination of things is happening at the same time. There has certainly been a huge expansion of China’s business presence abroad over the years, and the need for foreign-related legal services is a natural outcome of that. That’s one of the main reasons for the new impetus for adopting foreign-related laws and legal services.

But is that the real reason?

Stopping the China Exodus and Lowering Suspicions

After all, China’s overseas expansion is hardly a new development. However, what is relatively new is the growing tensions between Beijing and its trading partners around the world. As noted above, labor costs in China are higher, and the rising public awareness of the poor and even inhumane working conditions in Chinese factories has caused countries to think twice about moving to or continuing to do business with China.

The consequences are real. Companies with a presence in China are—and have been—searching for alternative manufacturing bases that are more business and worker-friendly. The so-called nearshoring has been happening for years and accelerated during the Trump administration’s tough China policies and the extended COVID-19 pandemic factory lockdowns in China.

Places such as Vietnam, India, Turkey, and Mexico are capturing many of the companies’ manufacturing businesses that are or have already left China to some extent. That trend doesn’t look like it will change anytime soon.

Foreign and Domestic Demand Conditions Are Iffy

In the meantime, Beijing is using every angle it can to recapture or entice companies to continue to do business in China, and for good reason. The trend in the Eurozone, China’s biggest trading partner, is to “de-risk“ from China. In other words, the European Union is diminishing its reliance on China-based manufacturing. A similar trend is occurring in the United States.

Concurrently, China’s economy faces a variety of significant headwinds. Lower domestic demand, deflation, high unemployment, a simmering debt crisis, an aging and expensive senior population, and collapsing birthrates are just a few negative trends that plague China today and for the foreseeable future. Without strong economic growth, the CCP faces even a greater challenge for its existence.

The only thing more challenging would be for the CCP to take a page from Mao Zedong’s little red book and appeal to ideology for continued support of its legitimacy.

And look how well that turned out.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

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