Opening Statement Before the First Public Hearing
of the U.S. - China Commission

by Jerome A. Cohen
Professor of Chinese Law, New York University
Adjunct Senior Fellow, Council on Foreign Relations
Of Counsel, Paul Weiss, Rifkind, Wharton & Garrison

Washington, D.C.

June 14, 2001


Mr. Chairman and Members of the Commission:

Sino-American relations have come a long way since I started my study of China's law and language in 1960. At that time relations were still extremely hostile, and our government was vigorously enforcing its embargo against trade and investment in China. As the embargo began to lift in the early 1970s, I served as a lawyer for American and foreign multinationals in their trade with China. After the PRC launched its twin policies of moving toward a (socialist market economy) and opening to broad cooperation with the world in late 1978, the Beijing Municipal Government invited me to be the first foreign lawyer to establish an office in China, in return for training its officials in international business law. Since then I have specialized in the legal htmects of US - China trade and investment, focusing in the 1980's on the making of contracts and, inevitably, in the 1990's on the breaking of contracts - i.e., the settlement of disputes. At the same time, I have continued my teaching of Chinese law, first at Harvard and now at NYU. For the past five years at the Council on Foreign Relations I have also been responsible for a program on the rule of law in China, and I have recently advised, on a pro bono basis, the families and employers of a number of persons of Chinese descent who have been detained by the PRC on criminal charges.

On the basis of this experience, today I have been asked to discuss China's legal institutions, especially the PRC's ability to comply with three basic legal requirements for WTO accession: (1) transparency of relevant laws, regulations, judicial decisions and administrative rulings of general application; (2) uniform, impartial and reasonable administration of those legal norms; and (3) institutions that guarantee independent, objective and impartial review of all relevant administrative actions.

Background

China's anticipated entry into the WTO is already stimulating a new, third wave of law reform in the PRC. The first wave rose in late 1978, following the end of the Cultural Revolution, with China's momentous decision to open the country to international cooperation and specifically to welcome foreign direct investment (FDI). Over the next decade, this resulted in development of a legal framework that has helped China to become, far and away, the most attractive FDI destination among the world's emerging economies. The second law reform wave, which required another intensive decade of legislative innovation, began in the early 1990s with the decision to establish securities and other financial markets that would be increasingly open to foreigners. The current WTO-inspired wave has already witnessed prodigious PRC efforts to revise existing laws and regulations relating to trade, technology transfer, investments, banking, insurance, securities, taxation, customs, intellectual property, telecommunications, health, professional services and a host of other subjects in order to bring them into compliance with the WTO regime and to make the adjustments required by market access commitments.

China's WTO accession will also be the capstone of its substantial post-ë78 achievements in acceding to virtually all of the significant multilateral conventions that grease the wheels of international commerce. In addition, the PRC has concluded a vast network of bilateral business-related agreements with the world's trading nations that have enhanced investor security and incentives, avoided double taxation, promoted a broad range of cooperative projects and facilitated dispute resolution.

Of course, it is easy for specialists to find flaws in these domestic and international rule-making accomplishments. For example, there are inconsistencies between some of China's international agreements and its legislation, between the promulgations of different central government institutions, between central and local norms and between the regulations of one locality and another. Last year's poorly drafted but important Law on Legislation, which was designed to clarify legislative confusion, has added new complexities, and many more laws in critical areas such as telecommunications and antitrust are yet to come.

Transparency

In light of this background, the PRC will undoubtedly find it burdensome, but feasible and even useful, to meet WTO transparency standards. First of all, China will be expected, at all levels of government, to publish and make readily available all relevant laws, regulations and administrative rulings of general applicability, including internal "normative documents," prior to their enforcement. This requirement is designed to allow an adequate opportunity for potentially-affected parties to comment, consult, and have their views considered before the norms in question become legally effective. Implementing this enormously important change will take a few years to achieve, especially regarding regulations and local norms. Second, although in view of China's size and complexity it does not seem wise rigidly to require that all norms slated for promulgation be made available at a single inquiry point, the PRC will be expected to make them available in a number of convenient ways including publication in journals and on Internet sites. In certain designated emergency situations the opportunity for advance comment need not be provided, but in no case will a norm be enforceable prior to official publication.

Thus, at least in principle, gone will be the days ñ and there have been many ñ when foreign firms and their lawyers have been told that the problem under negotiation is controlled by an "internal document" that, unfortunately, cannot be shown to them. Again, it will take years consistently to abandon old habits, but those who have been negotiating the details of China's accession seem to have wisely avoided the imposition of a precise schedule in this respect as in others. Finally, the transparency requirement should stimulate PRC courts, which have been publishing only selected judicial decisions, to make available all their relevant judgments, an expensive but desirable task.

Uniform, Impartial Administration of Norms

Yet the major legal challenges confronting China's WTO accession do not lie in transparency and law-making but in application and enforcement of the law. Can Chinese administrative agencies, so traditionally intertwined with the enterprises that they have controlled and usually owned, become impartial and independent agencies that have no substantial interest in the outcome of the matters they must decide? Will provincial and local government institutions, enmeshed in conflicts of interest and political/economic struggles, learn to resist the very strong pressures of "local protectionism"? Will it be practical or even wise to attempt to enforce uniform administration of rules in different parts of a country possessed of such diverse regional conditions?

The PRC has reportedly agreed to establish an inquiry point within the Central Government to which complaints concerning differing provincial and local implementation standards can be referred, and this office ñ yet to be designated ñ will be obligated to take prompt action to address such complaints. How effective this office is likely to be in attaining remedies for aggrieved parties when confronted by the acute sensitivities and obstacles that mark central-local relations will depend, of course, on its staff, its budget and the leeway granted by central leaders. Experience thus far with similar problems in China suggests that expectations for this office's effectiveness in the near term must be kept modest.

The fact is that, contrary to American images of the PRC as a ruthlessly-effective authoritarian regime whose writ runs from the Standing Committee of the Party Politburo in Beijing to the most remote hamlet, in many respects contemporary Chinese government resembles a series of feudal baronies more than a totalitarian dictatorship. To be sure, when it comes to suspicions of espionage or the "threat" of the Falun Gong, the Central Government allocates maximum resources to carrying out its will. But most economic matters cannot consistently make equivalent claims upon central resources. Thus, whether one speaks of enforcing upon a far-flung populace national environmental standards, intellectual property protections or securities regulations, the Center's will is often deflected and indeed frustrated.

Independent, Impartial Review of Administrative Actions

China's courts, to which WTO members would normally look for the independent, impartial review of all relevant administrative actions, suffer similar problems. This is not to say that the PRC's post - ë78 law reform program has neglected legal institutions. A court system that now handles well over five million cases a year has been erected from the shambles of the Cultural Revolution, as has a nationwide organization of prosecutors. The legal profession has also been revived and includes about 120,000 practitioners plus large numbers of government legal specialists and in-house counsel to PRC companies. The China International Economic and Trade Arbitration Commission (CIETAC) has become the busiest international commercial arbitration organization in the world, and virtually every Chinese city of any size has its own domestic arbitration commission eligible to handle foreign-related as well as domestic disputes.

Civil, administrative and criminal procedure codes and an arbitration law have been enacted to guide the operation of these burgeoning institutions, and laws governing the conduct of judges, prosecutors and lawyers have also been adopted. Specialized court divisions have been created to deal with intellectual property matters and other foreign-related economic disputes. From time to time Chinese courts hand down well-reasoned judgments in cases important to economic development, such as recent decisions settling disputes over contested Internet domain names. The Supreme People's Court has specifically sought to educate the courts about the new tasks to be thrust upon them as a result of China's WTO entry, and a court leader has announced that, in cases where WTO rules prove in conflict with Chinese laws, the former should prevail. A much-needed evidence law is also being drafted. All of the above activity has fueled a boom in legal education and scholarship, and there is widespread hope among China's rapidly growing legal elite that WTO entry will boost the country's prospects for establishing a genuine legal system  not merely rule by or through law but a rule of law to which the Party and government as well as all other people and entities are subject.

Despite all these positive developments, however, the sad truth is that, for the foreseeable future, China will have great difficulty providing independent judicial review of administrative actions. Although improving every year as tens of thousands of bright young law graduates join the many former soldiers and police who were the mainstays of the judiciary, the professional level of the courts outside the major cities is still quite low. Corruption is a depressingly serious problem for judges, who are underpaid and generally treated like other officials rather than instilled with a distinctive professional and ethical spirit. Even more widespread is the responsiveness of judges to "guanxi," the personal network of social relations in which they are embedded and that exposes their decision-making to a range of distorting pressures.

Moreover, judges, who enjoy no tenure of office, are, by and large, appointed, promoted, compensated and removed not by the Supreme People's Court or Ministry of Justice in Beijing but by the local party and government elite. Thus, they and their courts are usually responsive to local influences more than legal norms, notwithstanding the Constitutional guaranty of the independence of courts. This is the root cause of the "local protectionism" that the Supreme People's Court condemns in its annual reports but that it is helpless to eliminate. Although efforts are under way to introduce adversarial trials and to render trials more meaningful by often allowing trial judges to decide the case, matters of any importance continue to be decided by leading court officials, either individually or through "Adjudication Committees", even though these court administrators may have only rudimentary legal training and limited acquaintance with the case. Moreover, the courts are under control of the local Party Political-Legal Committee, which coordinates their conduct together with that of the local prosecutor's office, police and justice department. Over 90% of the country's approximately 180,000 judges are Party members.

The Supreme People's Court itself, which has done so much to improve the system in recent years, has nevertheless contributed to the widespread lack of confidence in judicial professionalism and impartiality. It has tolerated and even fostered non-transparent communications between lower courts and higher courts, allowing lower courts to obtain the advice of superior tribunals with no notice to the parties, or opportunity for them to be heard, thereby often nullifying the significance of any subsequent appeals taken from the lower court decisions. And in its own handling of individual cases the Supreme Court has violated civil procedure rules that call for transparency, setting a poor example for the lower courts.

Because of lack of confidence in the courts, foreign companies have long preferred to insert arbitration clauses in their contracts with China. Their PRC counterparts usually agree, but strive to persuade the foreign side to accept CIETAC arbitration. Yet there is no escaping PRC courts, whether arbitration is conducted in China or abroad, if the foreigner wins and the Chinese side refuses to comply with the award. Because the Chinese company's assets are usually in China, the foreigner must then look to China's courts to recognize and enforce the award. Since PRC civil procedure law was amended to require the foreigner to seek the assistance of the court located where the liable party or assets are located, thereby maximizing the prospects for "local protectionism enforcement of the award has been uncertain, even if a foreign award that falls under the relevant UN Convention is involved. We should note that the record of Chinese courts in enforcing their own judgments and orders is amazingly poor, even in purely local cases, vividly demonstrating the weakness of judicial institutions in the PRC.

Further, the longer my experience as either an advocate or an arbitrator in disputes presented to CIETAC, the graver my doubts have become about its independence and impartiality. I used to believe that CIETAC panels offered PRC courts an encouraging example of the possibility of becoming respected, independent adjudication bodies. Yet several recent experiences have opened my eyes to the fact that, despite CIETAC's impressive progress in improving its rules and administration, much remains to be done. At a minimum, I would surely no longer advise clients to accept CIETAC jurisdiction unless the contract's arbitration clause requires the appointment of a third country national as presiding arbitrator. And CIETAC needs to improve the ethical and professional standards of its staff, prevent breaches of confidentiality and conflicts of interest and insulate its arbitration panels from the hazards of politics, corruption, guanxi and exparte communications that plague the courts.

Yet it would be mistaken to believe that China's prospects for developing independent judicial review of administrative actions are entirely bleak. Efforts since 1990 to implement the PRC Administrative Litigation Law and related legislation, including even the State Compensation Law's limited provisions for responding to the grievances of victims of unlawful official conduct, suggest that better days may be on the way, especially if these laws are revised to expand their scope, remove existing obstacles to their use and strengthen their remedies. Yet, unless national Party and government leaders give a much higher priority to judicial reform than they have to date, we can expect progress toward independent judicial review to be slow, piecemeal and disappointing.

What is needed is not a succession of bandaids for a patient that is severely ill but radical surgery and structural rehabilitation. For example, a leadership that is sincerely determined to overcome "local protectionism guanxi and corruption in the courts, and that can summon the necessary political will, can dramatically improve the situation by transferring the powers to appoint, promote, compensate and dismiss judges to the Supreme People's Court and by granting judges security of tenure subject to conditions that are common to other countries with a judiciary of the continental European type. Even imperial China took stronger measures to fight the perennial problem of "local protectionism," prohibiting its magistrates from serving in their home districts and requiring their rotation to new places every few years in order to reduce the risks of local embeddedness.

A far-sighted PRC leadership bent on swifter modernization and greater national and international legitimacy would go further by prohibiting and punishing the interference of Party, as well as government and other influences, in judicial determination of concrete cases. There was a period in the late 80's, just prior to the Tiananmen tragedy, when it seemed that then Party General Secretary Zhao Ziyang had decided to try this. In the conservative climate of today, as Zhao's successors seek to cope with the profound economic challenges of WTO accession, the selection of a new generation of leaders and a restless populace over which they have diminishing control, they are too nervous and timid to surrender control over court decisions. What even Prime Minister Zhu Rongji fails to see is that, without systemic court reform, none of his essential programs to reform state-owned enterprises, the banking and tax systems and the securities markets and to create a market economy that will inspire the confidence of foreign financial investors can fully succeed.

Courts are not the only PRC institutions that might develop into fora for independent, impartial review of administrative actions. Neither Chairman Mao nor Deng Xiaoping accepted Montesqieu's doctrine of the separation of powers. Thus, PRC Constitutions, following the Soviet model, have purported to confer supreme governmental power upon the National People's Congress (NPC) and its Standing Committee. Although the NPC Standing Committee (not to be confused with the real locus of political power, the Party Politburo Standing Committee) has long possessed the formal power to review and invalidate administrative actions that violate Chinese law, it was only the March, 2000 Law on Legislation that spelled out broad procedures for how individuals and entities that desire such review might proceed at the national level. Indeed, the Law on Legislation even introduces the possibility of seeking a determination by the NPC Standing Committee that certain governmental actions violate the PRC Constitution.

I was excited when I read these provisions of this little-noted, complex and inadequate law, for they open up, however tentatively, a potential path toward the implementation of government under law. Yet many Chinese law reformers and scholars, disappointed at the Law on Legislation's failure to establish an independent constitutional court, which would be a major milestone en-route to the rule of law, have downplayed the possibility that the NPC Standing Committee, a highly political legislative body, might some day become an effective functional substitute for judicial review. China's judiciary, which has never been allowed to wield the power of constitutional decision-making, was undoubtedly relieved that the NPC had not authorized the creation of a separate constitutional court that would have upstaged the regular courts. Yet the Supreme People's Court, which has long annoyed the NPC Standing Committee by its frequent resort to the device of "judicial interpretation" as justification for what can only be recognized as the functional equivalent of legislation, was presumably not pleased by the NP's go-ahead for its Standing Committee to undertake important adjudicative functions that in other countries might be allocated to the judiciary.

Thus far, Chinese lawyers I have spoken with seem either cautious or uninformed about the possibility for reviewing administrative action apparently offered by the Law on Legislation. Perhaps the PRC's WTO entry, with its requirement that China provide some type of independent institutional review of administrative actions, will stimulate interest among lawyers and scholars in cooperating with the NPC Standing Committee to develop a credible quasi-adjudicative body even within the bosom of the legislature. This would give flesh to informed speculation that, while an independent constitutional court is not currently acceptable to Party leaders, formation of a new constitutional committee within the NPC Standing Committee might receive political approval. Of course, the Standing Committee has thus far failed to develop into a credible quasi-adjudicative institution the Basic Law Committee of legal experts that was added to the Standing Committee by the PRC's Basic Law for the Hong Kong Special Administrative Region. So it may well be that nothing significant will be built on the possibility offered by the Law on Legislation. Yet, nothing ventured, nothing gained. Chief Justice (and former California Governor) Earl Warren once remarked: (California wasn't built by pessimists!)

The Need For Post-WTO Legal Cooperation

Virtually every supporter of the PRC's WTO accession has noted that it is likely to promote those forces in Chinese society that favor development of a genuine rule of law. Many believe that progress in law reform will inevitably, if indirectly, help to improve the human rights situation in the PRC. China has long welcomed and benefited from cooperation on legal matters with foreign governments, public international organizations, charitable foundations, NGOs and foreign universities, law firms, bar associations and individual lawyers. Given the immensity and duration of the task, U.S. Government assistance would be extremely desirable. In 1997 in Washington Presidents Jiang and Clinton formally agreed to undertake a bilateral program of cooperation on legal matters, and they reaffirmed this goal during President Clinton's return visit in 1998. Last year, thanks to the efforts of Senator Arlen Specter and others, the Congress for the first time appropriated $2 million with the recommendation that it be allocated to projects relating to the rule of law in China. I hope that, at some point before I meet my maker, the State Department will distribute these funds and the next year's budget will appropriate a much more substantial sum. Fostering a more open, law-abiding China will facilitate the PRC's compliance with WTO accession requirements, promote American business as well as our national security and values and strengthen Sino-American relations. I think it's worth the cost of a missile or two.