Is China’s Anticorruption Enforcement Implicitly Protectionist?

When a Chinese court fined GlaxoSmithKline (GSK) US$490 million last year for bribing Chinese physicians and hospital administrators, Western firms doing business in China snapped to attention. Indeed, the GSK action is likely only the tip of the iceberg, particularly given a December 2012 official legal interpretation of the Chinese Criminal Law by the Supreme People’s Court and the Supreme People’s Procuratorate that departed from the prior emphasis on bribe recipients and redirected attention to bribe payers. Thus far, multinational corporations – including GSK, Danoneand Volkswagen – have figured prominently in President Xi Jinping’s anticorruption campaign, leading many commentators to argue that protectionism is at play (see here and here). To put the point bluntly, the worry is that Chinese enforcers will go after foreign firms for conduct that is equally if not more common among domestic Chinese firms, and will do so largely to protect those domestic firms from foreign competition.

I have to admit, when I sat down to investigate the claims of protectionist bias, I more or less assumed the ulterior motives in Chinese enforcement. The typical refrain among my American friends who have lived and worked in China is: “Of course enforcers intentionally favor domestic companies. Everything is politically motivated.” That may be true. But what I found – or didn’t find – actually caused me to lean in the opposite direction: We don’t have enough evidence to substantiate claims of biased anticorruption enforcement in China.

The best evidence for the claim that China’s anticorruption enforcement might have protectionist motivations is China’s apparent willingness to engage in this sort of implicit protectionism in other contexts, particularly competition law (antitrust). Over the past few years, the Chinese government has received sustained complaints about its use of the Anti-Monopoly Law to target foreign firms and bolster domestic companies. Recently, the EU Chamber of Commerce issued a statement alleging discriminatory antitrust enforcement, and the US Chamber of Commerce broached the possibility of filing a complaint in the World Trade Organization. Yet even the nascent case for protectionism in antitrust enforcement is more developed than that for protectionism in the realm of anticorruption investigation and prosecution. And this parallel scenario provides tangential evidence at best.

It is certainly true that the Chinese authorities have targeted many foreign firms in anticorruption investigations, and it may even be true (though this is not solidly established) that foreign firms are targeted at a higher rate than the domestic firms. But that is not by itself evidence of implicit domestic favoritism or anti-foreign bias. Even if foreign firms are disproportionately targeted, there are a number of potentially benign explanations. Perhaps, for example, domestic Chinese firms are better at avoiding detection. With headquarters abroad and heavy dependence on joint ventures and agents, foreign firms are plausibly less adept at navigating China’s anticorruption landscape, and may leave more extensive paper trails. Or perhaps foreign firms pay bribes at higher rates, possibly because long chains of command and make oversight difficult, or possibly to compensate for the fact that they lack the deep, personal connections and relationships (guanxi) that domestic Chinese counterparts can exploit. Or maybe foreign companies make for more appealing targets because of their deep pockets, not because they are foreign per se.

And if all this sounds like a stretch, or like an apologia for the Chinese government, perhaps it’s worth recalling that some analysts have leveled a similar accusation of potential anti-foreign bias in US enforcement of the Foreign Corrupt Practices Act–after all, 8 of the 10 largest FCPA settlements have been levied against foreign companies. Many defenders of US FCPA enforcement would be quick to point out that there are a range of entirely legitimate reasons why non-US companies are apparently over-represented on that top-ten list. Indeed there are, which is precisely the point.

Additionally, before leaping to the conclusion that China is using anticorruption enforcement as a protectionist instrument, keep in mind that there’s a natural constraint on China’s willingness to engage in such conduct: China still wants to attract foreign investment and has little to gain from sowing panic among Western businesses. (Indeed, many commentators have noted that the GSK fine was more lenient than expected, perhaps for that reason.)

I am not absolving the Chinese government, but I am saying we need more evidence before we condemn it. Observers have pointed out that the GSK case could represent a sea-change in a global anticorruption enforcement regime that has come under fire for putting supply-side companies at a competitive disadvantage due to under-enforcement in demand-side jurisdictions. Protectionist or not, Chinese enforcement is rooting out misconduct. We ought to think carefully about whether we can attack those efforts as biased.

To be sure, there are legitimate complaints against China’s anticorruption campaign – such as the lack of transparency and due process protections – that highlight the real need for systemic improvements. But making unsubstantiated accusations against the Chinese authorities only serves to dilute more developed calls for reform.

6 thoughts on “Is China’s Anticorruption Enforcement Implicitly Protectionist?

  1. Nice article that highlights a number of important issues Elizabeth!

    But from my experience in working in China for both companies and with the Supreme People’s Court leads me to conclude that most Chinese officials would say that pure financial bribery is the main driver here — not so much protectionism. Of course, this is not to say these two forces don’t sometimes coincide and feed each other and that protectionism is not alive and well within the politically controlled criminal justice system in China. However, it is less clear what anyone can do Indeed, virtually everyone in China I’ve talked to over the years tells me that bribery is the main name of the game and that the key culprits are cash hungry Chinese officials at all levels of government.

    In reality, I think it actually IS fair to condemn the Chinese government for prosecutorial abuse of the law, as it is commonly accepted by most serious analysts and certainly almost everyone I’ve ever interacted with there, is that the justice and prosecutorial system is systemically corrupt. Literally nothing happens without a bribe, Party telephone call/directive or quanxi. We don’t need a lot of empirically quantifiable research to support this reality, and it is virtually impossible to prove it anyway. While more and higher quality research is always good to have it is needed in some areas more than others. This is not one of them.

    Also, my experience has taught me that not every assumption or finding, particularly related to systemic corruption, can always be validated with undisputeable empirical research. It has also taught me not to confuse or compare prosecutorial discretion in the countries where the justice system is NOT systemically corrupt (like the U.S), with prosecutorial discretion or political mandates where the justice system is systemically corrupt (China). That comparison only serves to deny the reality that justice in China, at least at the moment, usually goes to the highest bidder. We need to shine a light on that institutional problem first. Virtually all of the other issues are secondary, moot or academic.

    In short, helping China implement the UNCAC framework for preventing and addressing corruption, starting with the justice system first, should be everyone’s top priority. Otherwise, the universal Rights of international or indigenous businesses, as well as NGOs, citizens, defense lawyers and journalists alike, means almost nothing. Global and Chinese experience tells us so.

    • Thanks very much for the detailed comments, particularly in light of your experience and expertise.

      I certainly agree with you and Funmi that there are serious, systemic problems in the Chinese enforcement landscape, perhaps more pressing and less academic than a discussion of allegations of protectionism. But talk of protectionism and anti-foreign bias is out there and my larger point is that we should instead focus on deficiencies that we know exist (or likely exist). I get at this issue in my final point, which probably merits its own post, given the fact that it pertains to what you note are concerning shortcomings.

      The comments you and Sarah have made about the fact that bribery comes into play even – perhaps especially – in enforcement add a dimension to the analysis. They are well-taken. The justice system is a necessary place to start.

      But I think my overarching argument – that it IS hard to tell what is going on with respect to the motivations of Chinese enforcers – still stands. As you indicate, proof is unrealistic and empirical research not always possible. In this context, enforcers might merit some faith for the foregoing reasons, especially since the relatively nascent anti-corruption campaign has targeted many officials (albeit, potentially for political reasons), as well.

  2. Great article. The comparison to US enforcement is really interesting. I wonder if the same phenomenon of targeting a disproportionate number of foreign companies is true in Western European countries, which also presumably have robust anti-corruption enforcement.

    One additional mechanism that fits right in line with all the ones you mentioned could also be at play. Perhaps some Chinese companies are able to fend off an anti-corruption investigation (after committing corrupt acts) through guanxi connections that many foreign companies don’t have.

  3. Nicely articulated, Liz!
    I’m also hesitant to jump on a protectionist bias. GSK (and Volkswagen, Chrysler and the others) did admit culpability.
    As you have pointed out, similar arguments have been made against U.S. enforcement actions where foreign companies pay larger settlements and fines, all of which could easily be explained away by the reasons you have so clearly pointed out here.
    I think the more important issue is that the fight against corruption is stronger and “diversified” just as UNCAC urged.

  4. Great piece Liz. One thing I’d like to add to this, building off of what others have noted is the very interesting parallel between U.S. corruption enforcement and Chinese corruption enforcement. As the first poster noted, whether the protectionism is intentional or not may be besides the point — U.S. officials bristle at the implication that they are anything but impartially prosecuting the laws of our nation, arguing that the fact that foreign companies are prosecuted more often is simply because they are breaking the law more often. Nothing protectionist about that. I’m skeptical — the U.S. has basically all of the same reasons as China to avoid protectionism, but the result is similar! I think that eventually U.S. enforcement of the FCPA and Chinese enforcement of similar laws may one day mirror each other, each demonstrating a slight bias against foreign companies. I would point to the parallels between the U.S. CFIUS review process and the Chinese foreign investment licensing regime as evidence.

    The Committee on Foreign Investment in the U.S. is supposed to protect the U.S. from national security threats, and that it probably does, but it is also a substantial impediment to Chinese investment in the U.S. Basically, if the CFIUS thinks a proposed acquisition or investment in the U.S. by a Chinese company will threaten national security (or a loose nexus of that concern), it will block the transaction. The same process by a different name occurs when American companies seek to make investments in China, with the result of many American companies being shut out or heavily disadvantaged in the Chinese market. Given that the background motivation of protectionism, whether intentional or not, is as present in this investment-approval process as it is in anticorruption law enforcement, I see no reason as to why they will not start to look and feel the same way — like protectionism. That all being said, this is a pretty cynical view so I would like to also say that I think any protectionism in law enforcement is un-intentional, on both sides. They’re just human.

  5. Pingback: Corruption Currents: NSA Tapped Into North Korean Internet | Guess Who Leads the Bribery World?Guess Who Leads the Bribery World?

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