China leans in on international adjudication: Why Beijing’s answer to defeat will be more forceful engagement

This year China might suffer the third in a string of stinging defeats at international tribunals that would then cover trade, investment, and law of the sea matters. Contrary to persistent expectations in some policy circles, China’s leaders will not opt for withdrawal. They have resolved to make existing mechanisms work for China, and shape global governance by doubling down on engagement. In line with different degrees of Chinese integration into these systems, Beijing will respond by ratcheting up litigation (trade), upgrading bilateral treaties (investment), and pushing for favourable state practice through diplomacy (law of the sea). The international community will have to deal with a newly powerful legal actor who is very much on the offense.

Failure and Frustration

In two ways, trade law could this year deliver the third bombshell setback in China’s recent engagement with international adjudication. Firstly, there is China’s soon to be decided WTO complaint against the EU’s retention of a distinct (although modified) antidumping methodology for (states like) China. A similar case against the United States is in the consultation stage. Beijing had expected that its Accession Protocol would deliver automatic ‘market economy status’ including more favourable antidumping treatment 15 years after it joined the WTO.

Secondly, a major trade law standoff is unfolding between China and the US, involving the mutual adoption of tariffs and filing of WTO complaints, which could come to a head this year. The US filed a complaint on China’s protection of intellectual property (IP) rights alleging TRIPS Agreement violations. At the same time, the US Trade Representative (USTR) proposed tariffs following a Section 301 US Trade Act of 1974 investigation into Chinese IP practices. Beijing already responded with a WTO complaintalleging that such tariffs would violate the GATT, and its own list of proposed tariffs. Less crucially, China initiated another case alleging GATT and Safeguards Agreement violations through US tariffs on steel and aluminium products.

Previously, giant life insurer Ping An became the first Chinese company to lose an investment arbitration, when its $1 billion claim against Belgium over the Fortisbank nationalization was rejected in 2015. A year later, China suffered an almost total defeat against the Philippinesin an Annex VII UNCLOS law of the sea arbitration on South China Sea issues in July 2016.

Such setbacks trigger angry reactions in China against allegedly biased international institutions that might never give China a fair shake. Many commentators decried China’s supposed second-class membership in the WTO, when the EU decided against granting market economy status, while recent US trade actions are termed severe violations and ‘typical of unilateralism and trade protectionism’ by the Chinese government. Chinese officials were stunned when the investor in Ping Anlost over the ‘technicality’ of whether to rely on the older or the more recent bilateral investment treaty (BIT) between China and Belgium. Following the South China Sea case, it was mooted that Beijing could ‘denounce’ the UN Convention on the Law of the Sea (UNCLOS) to be safe from other states’ attempts to ‘exploit’ the system ‘for political reasons’.

Doubling Down

Yet China is not going to withdraw, and Western governments, as guardians of the current system, will be surprised by how forcefully it will instead lean in to shape existing legal regimes. Tools will differ, but trade litigation, investment treaty making and law of the sea diplomacy to influence state practice serve the same purpose: align the rules further with China’s interests.

This effort is part of the more assertive foreign policy outlined by China’s president Xi Jinping, who just consolidated his power at the First Session of the 13th National People’s Congress. In a major shift, Xi has declared that China will no longer just participate in the international system, but provide ‘guidance’ towards a ‘new international order’. A recent treatise in the People’s Daily confirmed the ambition to seize the ‘historic opportunity’ to shape a new order while US policies under President Trump leave a leadership vacuum.

An underestimated driver of such strategic decisions is a policy elite of Chinese international lawyers who overwhelmingly favour playing offense. Prominent academics and legal counsels to the Chinese leadership have argued that with WTO dispute resolution, just showing up is half the battle. They have called for China to develop the litigious ‘mind set’ and investment treaty framework to go with its new status as major global investor. Lastly, they want China to go around the South China Sea award and influence the law of the sea by shaping state practice through diplomacy.

Bespoke Strategies

After China was refused ‘market economy status’, its Ministry of Commerce immediately struck back at the EU with a complaint at the WTO. Should it now lose the case, its appeal will already be prepared, as will be fresh complaints tackling the broader issue from different angles. At the same time, Beijing encourages Chinese companies to more proactively ‘prove’ to regulatory agencies abroad that they operate under market conditions, and contest adverse decisions at local courts.

Similarly, the Chinese government very quickly responded to recent (partly only proposed) US tariffs, with two fresh complaints. The current overall dispute with Washington will see a Chinese leadership that is more open to negotiated solutions than on antidumping methodology. Should there be any adverse decisions, though, China would again immediately appeal and file further complaints.

Flanking its litigation strategy, China continues massive diplomatic lobbying. Firstly, this serves to gain recognition as a market economy. More than 80 countries have already complied by explicitly providing such recognition, and FTA negotiations in line with theBelt and Road Initiative are to increase that number. President Xi has called for hastened implementation of China’s free trade strategy to strengthen its position in writing global trade rules, after failed Western efforts with TPP and TTIP left the field open.

Secondly, Beijing is actively portraying itself as defender of the WTO trade regime against a protectionist Trump administration onslaught. While many governments share US concerns about IP rights in China, Beijing uses (potential) US tariff implementation without WTO decisions, especially where broadly targeted such as on steel and aluminium, to position itself as the better trade citizen. China’s aim is not only to offset pressure concerning domestic legal changes, but also to shape future coalitions of states in international trade law reform (or rather in blocking reform where existing frameworks suit China).

On investment law, the investor’s defeat in Ping An spurred the Chinese government to quickly improve its investment treaties and seek influence on global investment rules harmonization. Beijing wants to get new investor-friendly treaties in place that include improved transitional clauses, and grant broad access to international arbitration, as well as, quite unusually, appellate bodies. Chinese lawyers argue that such mechanisms may improve legal predictability, but perhaps more importantly they would give the Chinese side another chance in case of defeat.

Wanting to make use of the full arsenal of available measures, the Chinese leadership also acts on the multilateral level. On the path towards a common worldwide investment law system that looks more like the WTO in the trade area, Beijing seeks to set the agenda and touts the ‘Guiding Principles for Global Investment Policymaking’, adopted at the 2016 G20 Summit in Hangzhou, as a first step. The non-binding principles are infused with Chinese wording and interpretations of principles such as legal predictability, transparency, and effective dispute resolution.

Finally, in the third issue area of the law of the sea, after the stunning loss on South China Sea claims, Beijing decided to undermine the award’s authority with a diplomatic push to underline contradictory state practice. Chinese officials aim to prevent the arbitrators’ restrictive interpretations of ‘historic rights’ and ‘island’ status from becoming international customary law. They point out, for example, that the United States and Japan use tiny rocks to make extensive maritime claims, and lobby states worldwide to support China’s interpretation of its islands’ entitlements. Some scholars point out the potential for further UNCLOS implementation agreements(as on deep seabed mining), which could clear up ambiguity in terms favourable to China and override the tribunal’s decisions.

While China may strictly reject compliance with the South China Sea award, it needs UNCLOS to protect its interests and gain influence on maritime governance. Beijing aims to secure a large UNCLOS-sanctioned continental shelf in the East China Sea, based on favourable geography vis-à-vis Japan. It wants Chinese companies to be in a prime position for the coming International Seabed Authority-sanctioned mining bonanza under the high seas worldwide, and it intends to have a seat on the table regarding Arctic governance issues. Indicative of its strategic choice to shape the system from within, China now adopts more UNCLOS-like language for its South China Sea claims and backs away from the ‘Nine-dash Line’.

The Future of China and International Law

So, in a nutshell, what should we expect China to do? Its approach has already evolved considerably. The focus shifted from the international legal order’s ‘hardware’ – joining institutions and equipping them with Chinese judges and staff – to its ‘software’. Now the Chinese leadership wants more influence on the treaties and customary law behind the system. In a parallel process, once it feels confident enough in a particular field, China gradually but inevitably boots up participation at court.

Prominent voices in China, including Prof. Yi Xianhe, member of the Foreign Ministry Consultative Committee on International Law, have argued that China must be a ‘leader country’ on international law, if it is to consolidate economic and political gains. That includes actively engaging with international tribunals. Such statements represent an emerging consensus among Chinese international lawyers that forward-leaning engagement will on balance be a positive for China, and the best protection of its national interests.