Wednesday, August 19, 2009

Converging State and Economy: Further Reflections on the Rio Tinto Executives Arrest in China

The arrest of four Rio Tinto executives this summer has produced a significant amount of consequences for people interested in international relations, law, foreign investment and corporate governance. See, Larry Catá Backer, From Political to Economic Wrongs--The Rio Tinto Prosecutions in China, Law at the End of the Day, Aug. 13, 2009; Larry Catá Backer, State Owned Enterprises and the Integrity of Private Markets and Commercial Activity: On the Arrest of the Rio Tinto Executive, Law at the End of the Day, July 10, 2009. The episode has generated important interest in China as well as abroad. For an excellent review (in Chinese) see, 小心低调,力拓案的中国启示录 (Washington Observer Aug. 19, 2009).

An article published on a website controlled by the Chinese State Secrets Bureau also claimed that large amounts of “intelligence and data” had been found on Rio ’s computers following the arrest of four Rio executives on spying charges last month.

The report on, a publishing affiliate of China’s national secrets watchdog, accused Rio of “winning over and buying off, prying out intelligence... and gaining things by deceit” during critical annual negotiations over iron ore prices.

Peter Foster, Chinese website slams Rio Tinto 'espionage’ , Daily Telegraph, Aug. 10, 2009. I was recently asked to consider further four questions concerning the arrest of Rio Tinto executives. The

1. Is the Rio Tinto's espionage case purely a commercial wrongs prosecution or might it be characterized in political terms as the Chinese government's revenge for the failure of Chinalco's purchase of Rio Tinto's asset, or as an indication of the rise of nationalism in the country? This question may most usefully be considered in three parts, each of which is briefly treated in turn.

The first is internal to China and deals with the application of political discretion in the prosecution of the laws of China. Prosecutorial discretion has become an increasingly controversial issue, not just in China, but in the West as well. The issue of prosecutorial discretion has become a matter of concern in international bodies as well, the International Criminal Court, for example. In this sense, China is no different from other states. However, because of its history, exercise of such discretion becomes a sensitive issue, especially where political crimes may be asserted against foreigners conducting ordinary business in China. The issue becomes more complicated in China where traditionally economic and political criminality were viewed as equivalent. But the Chinese have been moving diligently to a more conventional view of distinctions between political and commercial activity, based in part on the theories of Deng Xiaoping and its development through increasingly elaborated ideological development through the CCP. It was quite sensible for Chinese prosecutors to choose to proceed on the basis of the economic rather than the political character of the activities. Of course I have no basis for knowing the strength of the allegations or the likelihood of the success of the prosecutions.

The second is external and deals with the issue of Chinese-Australian relations. Both Chinese public and private investors, like other investors from foreign countries, have been frustrated with Australia's system of review of proposed in-bound foreign investment. From an Australian perspective, of course, the regulations are meant to protect Australian resources and economic development from hijacking by foreign public or private interests. From a Chinese perspective, though, the process might permit the Australian government to use the inbound investment process,especially when invoked by a Chinese state owned enterprise, as a means of effecting foreign policy rather than internal economic objectives. That might certainly be a reasonable view of the intensity of the Chinese frustration (by the state apparatus, the CCP and Chinalco) with its efforts to invest in a foreign natural resources entities. Indeed, it was reported today that as a consequence of the recent activity Australia is to ease its inbound investment review rules to fast track more applications by roughly doubling the minimum.

The third is cultural and deals with the issue of mass politics in China and its effects on both internal economic policy and external relations. Recall that these prosecutions have arisen not merely in the context of the somewhat difficult relations between China and Australia (on the one hand) and Rio Tinto and Chinalco (on the other hand). From the time of the development of the Harmonious Society (和谐社会) and Scientific Development (科学发展观) principles the Chinese state apparatus has been deeply involved in the issue of corruption. Anti corruption campaigns have sought to target all social, political and economic institutions--including the CCP itself. In that context, to the extent that economic crimes touch on corruption, there is bound to be a reaction that could be understood as nationalist. But, in a sense, the prosecution of the foreigners might also be a distraction from the continuation of the great work of Chinese officials against domestic corruption precisely because prosecutors chose to act against executives whose company is involved in a high stakes commercial transaction with a Chinese state owned enterprise. In this sense Rio Tinto is itself a great distraction even in campaigns against corruption by foreign individuals.

2. While China is quickly becoming an important player in the global business arena, might the Rio Tinto Executives' arrest and prosecution signal some sort of Chinese "pushback" by insisting that Chinese domestic politics factor into the management of free trade reghimes? It is hard to guess at the meanings that the Chinese State intended by the decision to prosecute the Rio Tinto employees, Certainly, it is reasonable to assume that some sort of pushback was intended when seen from outside of China--China was dealing with what appeared to be a political problem in the in-bound investment review by the Australian government, the entity seeking to make the investment was a state owned enterprise acting in accordance with a general mandate developed by the State Council and Rio Tinto appeared to continue to do business as usual within China. Other states have infused their domestic politics into the free trade game, the United States is no exception. But the problem is that the way China chose to act , at least in the foreign eyes, was far more aggressive than what would have been expected from another state in similar circumstances. And thus the fuss. Chinalco is not the state or part of its political apparatus. To conflate state owned enterprises and the business of the state apparatus makes for difficult issues of harmonious relations with foreign economic interests.

3. Has the Chinese media, in reporting the legal case, legitimately raised the issue of "multinationals' lack of legal responsibility"? Ought the issue of legal responsibility be grounded on a policy of legal rules that separate political and economic action? The issue of corporate responsibility, and especially the responsibility of multinational enterprises has been much in the press lately. It serves as a convenient scapegoat and distraction from the larger issues involved. On the one hand Chinese society remains sensitive to its position in the world in the context of the long period of quasi and partial colonialism through which it struggled in the 19th and 20th centuries. There is thus a great sensitivity to issues of equal treatment in general and special treatment for foreigners in particular. But the operation of multinational enterprises has become an issue of global concern. It is not clear that multinational enterprises operate in China in any way that is more disadvantageous than multinational corporate operations anywhere else. As Chinese multinational enterprises and state owned industries begin to engage in more economic activity outside of China, these entities will become the multinational corporations seeking to exploit other peoples. Like other states, Chinese officials will likely become more sensitive to the element of mutuality in the regulation of foreign elements within the national economy. On the other hand, in a world economy in which governments increasingly participate in markets like private persons, and multinational corporations are increasingly vested with regulatory authority in their relationships with suppliers, labor, and vendors it has become more difficult to separate political from economic matters. I have suggested that though it is more difficult to do so,the separation is useful and might still be effective if directed to the type of activity that is the subject of investigation rather than the character of the entity the is acting. In the economic context, activity that regulates the conduct of others is public and political, activity in markets is private and economic.

4. In the aftermath of the arrests, relations with Australia have been significantly affected; to what extent are these reactions likely to have permanent effect? It is one thing to make business more difficult for individuals from a non cooperative state; it is quite another to put those executives in fear of arrest without a better developed framework for understanding what is lawful and what is not--from conversations about market conditions to the engagement in due diligence investigations in connection with a commercial transaction, especially one that requires substantial investigation of the financial condition of a company that may be purchased. As a rule of law state, it makes sense for China to provide guidance for foreigners seeking to participate in Chinese economic and commercial life and to ensure that administrative officials adhere to those guidelines. The difficulty for China is that it will be very easy for that impression to become a consensus opinion among the foreign investment community in the wake of the Rio Tinto prosecutions that China is not moving in that direction. Chinese officials might find it useful to reassure foreigners about its intentions. The best way to do that, of course, is to develop rules and understandings about what precisely would constitute the sort of conduct that could lead to prosecutions under either the economic or political statutes and what sort of conduct would not.

I suspect that we have not seen the end of the consequences of the Rio Tinto executives arrest and prosecution. These events may serve as a catalyst for consideration not merely of the shape of state to state relations, but of the way in which state enterprises operate abroad, foreign investors engage in transactions with state enterprises, and the management of the intersection of state policy in the economic sector and public interventions in private markets through state enterprises. For a discussion of the way that these issues have become important in the development of sovereign investing in China, see, Larry Catá Backer, Sovereign Investing in Times of Crisis: Global Regulation of Sovereign Wealth Funds, State Owned Enterprises and the Chinese Experience(August 4, 2009), Transnational Law & Contemporary Problems, Vol. 19(1) (forthcoming 2009).

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