US and Chinese Trade Harmed by Discrimination in Courts

In the midst of their trade war, the United States and China actually have something in common.  According to the last two reports on rule of law released by the World Justice Project, the United States and China both received low scores for failing to keep discrimination out of civil and criminal cases.  Discrimination in the courts not only affects the strength of rule of law, but also affects international trade prospects.  President Trump and President Xi have been prioritizing economic prosperity and international trade, but to expand trade and protect their economic interests, both countries need to address the discrimination in their courts.

The Connection Between Rule of Law, the Courts, and International Trade

Countries often see discrimination in the courts as being a domestic matter, but discrimination -- even perceived discrimination or biases -- in the courts can damage a country’s credibility and lead other countries and foreign businesses to be less likely to do business with it.

Organizations like the World Bank and the International Monetary Fund consistently look at a country’s judicial system to determine the state of rule of law in that country, and in turn, look at the strength of a country’s rule of law to estimate the potential for economic growth. Typically, rule of law is defined as a legal system in which the rules are public and understandable, the rules apply equally to all, and the state is also subject to the rules.  The judicial system in a country plays an integral role in ensuring that rule of law exists and thrives.  Rule of law needs independent and impartial decisionmakers who make transparent decisions and apply the rules equally to all by using an established, nonbiased, and knowable process.  Effective trade needs the same.  Business owners and countries need to be able to trust that they have an impartial avenue in the courts in the country in which they wish to do business.  Courts that are impartial and free of discrimination provide the necessary assurance that trade disputes and conflicts will be resolved fairly, regardless of the parties involved.  Courts exhibiting rule of law characteristics provide assurance that the trade is worth the risk.

Manifestations of Discrimination in the Court

The World Justice Project produces an index that measures rule of law across 44 indicators in eight areas, using original data from household and expert surveys.  Discrimination in civil courts is one of the 44 indicators.  Scores relating to discrimination in the courts are based on questions that ask whether certain identity markers would put a person at a disadvantage when bringing a case.  In the most recent report, the United States scored .48 out of 1.0, while China scored .44 out of 1.0.  Data on which specific identity markers triggered the findings of discrimination in civil courts in China and the United States is not available from the World Justice Project, but any type of discrimination in the courts can cause problems for international trade.

In China, discrimination in the courts seems to manifest most frequently in the form of favoritism shown toward the government. The area of trade is a good example for showing how discrimination may arise.  In China, state-owned businesses make up around 40% of manufacturing and control about 30% of the country’s total industrial and service sector assets. The Communist Party of China (CPC) is heavily involved in state-owned businesses. In a 2016 national meeting regarding the role of the party, President Xi stated that “The Party’s leadership in state-owned enterprises is a major political principle, and that principle must be insisted on.” The judiciary in China is also not independent from the CPC. According to the Congressional-Executive Commission on China (CECC), the CPC approves judicial appointments and personnel changes and sometimes directly influences the outcome of decisions if the topic is particularly sensitive. As a result, court decisions often defer to state-owned enterprises.  Local governments are particularly prone to interfere in court decisions to protect local industries.  According to a study conducted by China’s Supreme People’s Court, that was identified by the CECC, “over 68% of surveyed judges identified local protectionism as a major cause of unfairness in judicial decisions.”

Interestingly, the bias problem in U.S. courts as related to trade is similar. Dr. John S. Baker, Jr. recently wrote in the University of Miami’s Inter-American Law Review about the constitutional issues raised by NAFTA and carried over into the new USMCA.  In the article, he explains that the deference doctrines from Chevron and Seminole Rock/Auer, which require courts to defer to the decisions of executive agencies, are resulting in a judicial process that seems biased against any party that is not the U.S. government.  He argues that judicial deference to U.S. agency action is not mandated by the Constitution or the Administrative Procedure Act; therefore, U.S. courts should stop using the deference doctrines in order to provide private parties -- foreign and domestic -- with equal review by the courts when opposing government parties.

Regardless of how it manifests -- or even if it is just perceived as being present -- discrimination in the courts presents problems for trade.  Trade agreements and laws are important mechanisms for trade, but effective courts are essential.  If a person cannot be confident that they will be able to assert their rights and demand enforcement of contracts in the courts free of discrimination, fewer deals are likely to be made.

In the midst of their trade war, the United States and China actually have something in common.  According to the last two reports on rule of law released by the World Justice Project, the United States and China both received low scores for failing to keep discrimination out of civil and criminal cases.  Discrimination in the courts not only affects the strength of rule of law, but also affects international trade prospects.  President Trump and President Xi have been prioritizing economic prosperity and international trade, but to expand trade and protect their economic interests, both countries need to address the discrimination in their courts.

The Connection Between Rule of Law, the Courts, and International Trade

Countries often see discrimination in the courts as being a domestic matter, but discrimination -- even perceived discrimination or biases -- in the courts can damage a country’s credibility and lead other countries and foreign businesses to be less likely to do business with it.

Organizations like the World Bank and the International Monetary Fund consistently look at a country’s judicial system to determine the state of rule of law in that country, and in turn, look at the strength of a country’s rule of law to estimate the potential for economic growth. Typically, rule of law is defined as a legal system in which the rules are public and understandable, the rules apply equally to all, and the state is also subject to the rules.  The judicial system in a country plays an integral role in ensuring that rule of law exists and thrives.  Rule of law needs independent and impartial decisionmakers who make transparent decisions and apply the rules equally to all by using an established, nonbiased, and knowable process.  Effective trade needs the same.  Business owners and countries need to be able to trust that they have an impartial avenue in the courts in the country in which they wish to do business.  Courts that are impartial and free of discrimination provide the necessary assurance that trade disputes and conflicts will be resolved fairly, regardless of the parties involved.  Courts exhibiting rule of law characteristics provide assurance that the trade is worth the risk.

Manifestations of Discrimination in the Court

The World Justice Project produces an index that measures rule of law across 44 indicators in eight areas, using original data from household and expert surveys.  Discrimination in civil courts is one of the 44 indicators.  Scores relating to discrimination in the courts are based on questions that ask whether certain identity markers would put a person at a disadvantage when bringing a case.  In the most recent report, the United States scored .48 out of 1.0, while China scored .44 out of 1.0.  Data on which specific identity markers triggered the findings of discrimination in civil courts in China and the United States is not available from the World Justice Project, but any type of discrimination in the courts can cause problems for international trade.

In China, discrimination in the courts seems to manifest most frequently in the form of favoritism shown toward the government. The area of trade is a good example for showing how discrimination may arise.  In China, state-owned businesses make up around 40% of manufacturing and control about 30% of the country’s total industrial and service sector assets. The Communist Party of China (CPC) is heavily involved in state-owned businesses. In a 2016 national meeting regarding the role of the party, President Xi stated that “The Party’s leadership in state-owned enterprises is a major political principle, and that principle must be insisted on.” The judiciary in China is also not independent from the CPC. According to the Congressional-Executive Commission on China (CECC), the CPC approves judicial appointments and personnel changes and sometimes directly influences the outcome of decisions if the topic is particularly sensitive. As a result, court decisions often defer to state-owned enterprises.  Local governments are particularly prone to interfere in court decisions to protect local industries.  According to a study conducted by China’s Supreme People’s Court, that was identified by the CECC, “over 68% of surveyed judges identified local protectionism as a major cause of unfairness in judicial decisions.”

Interestingly, the bias problem in U.S. courts as related to trade is similar. Dr. John S. Baker, Jr. recently wrote in the University of Miami’s Inter-American Law Review about the constitutional issues raised by NAFTA and carried over into the new USMCA.  In the article, he explains that the deference doctrines from Chevron and Seminole Rock/Auer, which require courts to defer to the decisions of executive agencies, are resulting in a judicial process that seems biased against any party that is not the U.S. government.  He argues that judicial deference to U.S. agency action is not mandated by the Constitution or the Administrative Procedure Act; therefore, U.S. courts should stop using the deference doctrines in order to provide private parties -- foreign and domestic -- with equal review by the courts when opposing government parties.

Regardless of how it manifests -- or even if it is just perceived as being present -- discrimination in the courts presents problems for trade.  Trade agreements and laws are important mechanisms for trade, but effective courts are essential.  If a person cannot be confident that they will be able to assert their rights and demand enforcement of contracts in the courts free of discrimination, fewer deals are likely to be made.