China Comment

Energy, Environment, and Economy

China’s Food Safety Law and Tort Reform

With its new Food Safety Law that went into effect on June 1st, 2009, China has edged closer toward an “Americanization” of its tort law system (at least in the Product Liability area). China has given a little more power to people who file lawsuits. The incremental changes in this particular law which allows greater monetary recovery; however, probably does not signal a near-term shift in China’s general attitude toward permitting recovery of higher sums in other sorts of tort law litigation.

China’s Tort Laws have been in semi-serious revision since around 2002, and have been through numerous drafts. (See 2002 draft translation; and a 2007 discussion.) One of the proposed drafts “doubles the [currently used] 1986 Code tort liability provisions from thirty-four articles to sixty-eight articles, which * * * state basic principles of tort liability.” (Conk, 937 ; 2007)

Whether or not “tort reform” in China (I.E. making it easier to sue and to recover more in damages) is necessarily a positive development or not is debatable, but it does seem that the trend in China has been to grant more power and recovery for individuals in certain circumstances.

China’s new Food Safety Law appears to demonstrate an intention to get tough on public health violations.  The Food Safety Law allows harmed consumers to claim higher punitive damages. “In addition to a compensation covering the damage they have suffered, [customers may claim] damages up to ten (10) times the purchase price of the product in question from the relevant manufacturer or seller.” (DLA Piper; additionally the law imposes more severe penalties against manufacturers and sellers, permitting criminal liability, confiscation of unlawful gains and property, and fines ranging from 2,000 RMB to 5-10 times the value of the defective product.)

Class action lawsuit reform which would make it easier for class action lawsuits to form, appears to be on hold. Although a class action suit was filed in January, the suit has not yet been accepted. The first individual lawsuit against a melamine-injecter was only accepted in Hebei in March.  To date, no class actions have been accepted against any actor involved in the melamine scandal. And class action lawsuits related to the Sichuan earthquake have also been rejected. (A more indepth study of class action lawsuit reform may be warranted at a later date).

Punitive Damages and Government-Based Compensation

Generally, the Chinese government is adverse to mass tort claims and it tends to rely on government-directed fines or state compensation to achieve the same ends that are achieved in American class action suits (Green, 152). Fines and government-directed compensation levied against Sanlu helped cause the firm to go into bankruptcy. (Also see: China milk firms ‘to pay victims,’ BBC, Dec. 27, 2008 ; demonstrating the government-fine system). In the wake of the Sichuan earthquake, Chinese local governments preferred to settle claims and give compensation rather than go to court. And indeed, few if any earthquake-related cases, have gone through trial.

[Also see an article on Xinhua that concerns possible updating of the state compensation system].

Conclusion

It is interesting to see the Chinese government taking a step back from government directed and centralized compensation policies and permitting lower courts to hear individual cases (at least one), and permitting higher recoveries on punitive damages.

Over the next few months as the case(s) wind their way through courts and the courts respond to societal pressures we will be able to see if there is any pending tectonic shift in the way that China practically handles tort law product liability cases. Although the law has “liberalized” somewhat, what really matters is what goes into practice- and a verdict on that will have to wait.

Appendix:

The Food Safety Law. (Promulgated February 28, 2009; In Effect June 1, 2009)

DLA Piper’s Report on China Product Liability.

George W. Conk, A New Tort Code Emerges in China:An Introduction to the Discussion and a Translation of Chapter 8 – Tort Law of the Official Discussion Draft of the Proposed Revised Civil Code,” 30 Fordham Int’l. Law Journal 935 (2007).

Andrew Green, Tort Reform With Chinese Characteristics: Towards a “Harmonious Society” in the People’s Republic of China, 10 San Diego Int’l Law Journal 121 (2008).

NY Times articles on the Sichuan Earthquake and the Chinese Government’s response.
PS: June 2nd, 2009 marked the one year anniversary of this website. :) 加油!(Over 65 articles, averaging 1.1 per week)

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22 June, 2009 Posted by | China Future, China Law | , , , , , | 1 Comment

The Future of China Quality

“According to the Xinhua news agency, in the first seven months of this year, 3631 small scale enterprises producing toys mainly for the US market have closed down due to a decline in the demand for China-made toys from the US. These enterprises… constituted 52.7 per cent of all toy-making companies in China— Source “South China Morning Post” and AFP.” (South Asia Analysis Group)

China’s 2007 lead toy scandal, its 2007 diethleyne glycol poisoning scandal, and its melamine in milk scandal all highlight problems of accountability in China’s sourcing system, as well as the dangers of unsupervised small (and often-times unbranded and therefore often unaccountable) producers whose goods are purchased by players higher up the value chain.

The fallout from these negative news stories might have some chance of encouraging greater CSR (Corporate Social Responsibility) in the industries affected, but in a decelerating economy, it seems unlikely that Chinese companies will choose increased quality and differentiation practices rather than cost-focused strategies.

However, if the companies do have cash, they might see benefits in investing in something other than labor which has become more protected and expensive due to China’s 2008 Labor Law. Supply-chain management, RFID tagging, and greater computerization and modernization of systems can do much to raise accountability that retailers, such as Wal-Mart are increasingly demanding.

What does China Need to Ensure Quality?

* “No law places clear responsibility on food enterprises for the production of safe products,” according to a UN Report (AP, Oct 08). “[R]esponsibility for food and drug safety [as of 2007] involve[d] as many as 17 government agencies, ranging from the Ministry of Health, which sets hygienic standards, to the Public Security Bureau, which has power to investigate criminal cases” (NYT, July 07).

* Stronger oversight and more accountable expert-overseers. Increased cadre-responsibility.

* Allowing less restricted news reporting on real scandals. Permit people to spread information in an uncensored way about which foods are damaged and which are not.

* China could benefit from better tort laws that allow people to directly sue companies for damages. This will reduce the likelihood that a “big brother” government bureaucrat protects and enables some exploitative factory owners who are good friends of people in the overseeing administrative agencies (See Note 1).

* Consolidation in factories and in agriculture. The new Farm Land-Use Law might encourage and promote this chance for Chinese producers to move along the value curve and achieve greater economies of scale. The average Chinese farm has less than two acres (WSJ), and in total there are about 200 million farms (NYT). “China [also] has around 450,000 registered enterprises engaged in food production and processing but most — about 350,000 — employ just 10 people or fewer.” (AP and NYT).

* Greater business investment in technology and modern agricultural and manufacturing practices. The big players, the Lenovos, Haiers, Galanzes, etc. already recognized the value of modernity. It’s time other less-modern economic sectors caught up.

Mixed Results With A Slowing Economy

China’s economic growth is slowing to around 9-9.5% this year, and its economy may only grow at 8.5% next year; however, if it can achieve that growth, the country will continue to have vibrant industries. The more efficient and better capitalized export manufacturers will survive in a low-priced commodity world (less than $100 oil) since the China Price continues to be relatively low despite imposition of new labor and environmental laws.

Will the better capitalized and managed export manufacturers take this downturn as a chance to invest in capital improvements to increase quality and efficiency? Will they drive down costs not by racing to the bottom and paying workers less, but by hiring fewer workers and improving the manufacturing process?

Sometimes there is great pressure for companies, especially state owned companies to value employment over efficiency. However, the January 2008 labor law, which makes it more difficult to lay off workers, may encourage companies to draft strategic plans based around equipment rather than manpower.

It is difficult to generalize about the overall Chinese manufacturing economy, but previously when market forces encouraged chaff to be weeded due to oversupply, as documented in Donald Sull’s excellent book “Made in China,” more quality-conscious manufacturers emerged.

Sull described how the white goods giants Haier and Galanz emerged from a crowded field of hundreds of low-quality manufacturers back in the 1980s and early 1990s. Both decided their product strategy would be differentiation. They made higher-end, defect-free goods and improved their production processes.

Through investment and consolidation with some well-positioned competitors during supply-glut-driven downturns, both companies gained success and dominated their markets. The lesson learned by them, and taught to other Chinese entrepreneurs through books and lectures is clear; quality sells, and accountability and branding ultimately leads to greater success than anonymity and “selfish-off-the-books, off-the-records and under-the-table economic safety”.

Quality appears to be the route to success for Chinese businesses. China Journal pointed out on Oct. 27th that “in marked contrast to the firm’s survey of American consumers, who ranked price as a top concern, Chinese consumers place greater emphasis on service,” perhaps because they have been “burned” too many times before by faulty merchandise. American consumers can afford to value price over quality because American goods (arguably) are safe if they are sold– in China that is not always the case. With discretionary income comes greater sophistication and value of “quality” over “cheapness.”

While in China (before the melamine issue blew up), I attended a lecture and spoke with Xu Erming, a deputy dean at Renmin in which he discussed  Chinese dairy manufacturing, consolidation, and improvement of quality milking procedures. Despite the recent scandals, it is important to realize that milk’s quality and quantity ballooned exponentially since the late 1990s when cows were not even healthy enough to be milked en-masse. Product pipeline oversight today is much better than even five years ago. With time, consolidation, investment in capital expenditures for tracking the product, and increasing sophistication (agricultural and business-wise), China’s industries will increasingly see quality improvements.

Successful Chinese industries will move down the path of accountability simply to survive as labor costs increase. The “easy” and “dumb” money in China has already been made; real Chinese entrepreneurs realize the need for quality and will increasingly work toward increasing it.

Are Western Companies Also At Fault?

Blame for poor quality does not rest on Chinese manufacturers alone, so it is important to examine more globalized trends that can help China’s product quality improve. As foreign purchasers realize they need to spend more money to get quality in order to avoid recalls and negative publicity, they will create a system (as Wal-Mart has) where they do not encourage producers to indiscriminately cut costs.

Or, poor quality toy makers will depart for elsewhere in Southeast Asia where labor regulations may not be as stringent. Still, it is likely many toy manufacturers will remain in China since elsewhere there are more severe difficulties in stability, resources, economies of scale, and  infrastructure.

Conclusion

Quality in China’s industries depends on foreign companies’ oversight as well as internal regulatory measures. Scandals hopefully will result in less cost-cutting since few companies want the negative publicity and customer shyness that accompanies scandals.

The ultimate future of China’s quality is murky. A sudden policy turnaround favoring uncensored news reporting seems unlikely, and development of class-action tort damages is even less likely since to allow mass lawsuits would be much too similar to Beijing tacitly approving “mass incidents” which challenge the government’s legitimacy.

However, consolidation of industries, self-regulation by foreign purchasers, and greater funding and improvement of government regulation does seem likely in the next one to two years.

Ultimately, systemic problems affecting Chinese quality will continue to plague certain low-margin parts of China’s industries, but China appears to be taking practical steps to resolving shortfalls in its quality-control systems.

Extra

Note 1:  I agree that the “Chinese” solution of the government doling out compensation can rectify some damage. However, if the “Chinese characteristics” of a society are to be respected at the same time Justice is ensured, the government needs to rectify bureaucracies and hold people accountable to encourage others to proactively comply with regulations.

Mere ex-post administrative oversight may catch some culprits, but could just as easily protect other culprits who have better connections, better guanxi, better friends in the regulatory system.

Additionally, bringing government-pursued cases into the sunshine of public oversight will do much to ensure that the Chinese people can see justice is being pursued and that the Party truly cares about their interests.

27 October, 2008 Posted by | China Economy, China Environment/Health, China Law | , , , , , , | Leave a comment

“Rule by Law” Reform

Stability, modernization, and success as a globalized 21st Century state are goals for which the Chinese government is reaching.

However, a culture of weak intellectual property rights and “Rule by Law” rather than the “Rule of Law” present unique challenges. In China, modernization means more choices for the common people. As choices become attainable, common people often clash with established authority.

Inspired by the Shanghai police officer stabbing case, I examine approaches China might take to deal with lawlessness and to craft “pressure valves” to permit its system to adapt and to address emerging challenges. (Note: The NYT had an excellent series on “Rule by Law.”)

The Pressure Builds

When people feel powerless, they can take out their aggression against public authority figures. In Shanghai, one man sought “revenge after officers from the station interrogated him last year for riding an unlicensed bicycle.” He “sued the officers who had interrogated him for psychological damage, but the claim was rejected,” and ultimately he attacked a police station and stabbed six officers to death.  

What drove Mr. Yang to such an act? People wonder if “injustices carried out by the Shanghai police” led to his brazen action. Some postulated that his genitals had been damaged by the police (AP), others assumed less or more vicious forms of punishment. Others argue Yang was just insane.

Option 1: Ignoring the Situation

What is important, however, is not the status of Yang’s guilt or innocence, but the reaction of Southern Weekend, a Chinese newspaper, and those of a number of Chinese. When the trial was held behind closed doors, some people clamoured for it to be heard in the light of day so people could know the trial was conducted fairly. The case concluded behind closed doors despite their protests, and Yang was sentenced to death. He is currently appealing the decision.

Closed-door trials can work, but if people believe the government is abusing power, then support for the government can decrease. For a system to work “above the heads” of the common people, the common people must either trust the government is morally superior, intellectually superior, or both. And with rising education and wealth spreading across China, more and more people are beginning to doubt whether or not the Communist Party really has all of China’s “best and brightest.” Still, in a 2008 Pew Global Attitudes Survey, 89% of Chinese were polled as satisfied with their government. Interestingly, only 34% were satisfied with their own life. There is possibility that as more Chinese become middle class, they will begin to demand the government “help” them more so they can achieve happiness. Comparatively, the US numbers were 51% and 65% [h/t Mei-Zhong Guanxi]).

This article by Prof. Carl Minzer suggests an attempted governmental cover-up of social unrest.

Option 2: Expanding Rights

Discontent directed against closed trials, presumed abuse-of-authority and lack of disclosure is bubbling stronger and stronger with nearly 87,000 “mass incident” protests in 2006, even though by all measures, Chinese citizens’ legal rights are expanding. “[T]his summer, criminal defense lawyers got the right to meet with their clients without official permission, request evidence from prosecutors and call witnesses in court” (AP). And that is in addition to China’s Labor Contract Law (June 2008) (Also see HERE), and its Property Law (2007), both of which expanded citizens’ rights and remedies.

These laws have spurred citizens to litigate. China Law Blog noted that in the wake of the Labor Contract Law; “[s]ince last year, labor disputes have increased in Beijing’s Chaoyang District People’s Court by 106%, by 231% in Nanjing’s Qinhuai District People’s Court, 126% in Shenzhen, 132% in Dongguan and 92% in Guangzhou.”

Option 3: Stop-Gap Patches

Weng’an County’s riots, proximately precipitated by a girl’s drowning, provide another example of China struggling to deal with accountability in the midst of a system that regrettably allows a good deal of opportunity for corruption and abuse-of-power.

Often, China’s central authorities deal with injustices and abuse-of-power by applying stop-gap fixes, like dismissing the Weng’an Party commissar and police chief. But finding ringleaders or scapegoats will only succeed in quashing corruption and abuse if the Chinese system is not plagued by systemic problems.

It appears, based on the NYT articles and prior unrest, that China’s “rule by law” may result in significant systemic problems. Still, the Chinese could prove Western analysts incorrect; their problem may not be systemic- even though 87,000 mass incidents in 2006 seem to imply the problem is widespread and beyond possibility of being addressed by stop-gap fixes.

Conclusion

Societies in socioeconomic and legal flux are presented with unique problems. In the 18th Century, the French system exploded into rioting and unrest. Louis XVI and his regime were overthrown, and in their wake, there was chaos. In 20th Century Russia, the Tsar was brought down, likewise in flames, even though he, like Louis XVI, was by some measures “liberalizing” the country in steps. In contrast, China’s path to modernity could be more like that taken by the United States in the early 20th Century.

In the United States, the late 19th and early 20th Century saw the expansion of rights for millions of previously oppressed groups that culminated with the 1960s Civil Rights Movement. A system of “rule of law” and an understanding by citizens, judges, lawyers, and juries of what that means took nearly 200 years to develop (and is still developing) in the United States.

Over the course of a century, America confronted turmoil with first the Progressive Movement, and later the Civil Rights Movement. In China, it can be argued that a “rights reform” movement is already underway. China often likes to describe how it is “different” and “unique” (Fool’s Mountain has an opinion on this phenomena.), so perhaps it will not suffer the social upheaval of 1960s-America or Industrial Age Europe.

Regardless of any perceived differences, China will still need to confront problems similar to those suffered by these countries as the Chinese people gain wealth, leisure time, become more involved in the market, gain greater mobility, and discover political power.

Hukou registration saw reform in 2003 after public outcry reacted to an embarassing situation where a legal city resident was beaten to death by police officers during questioning. At least lip-service to further reform continues (March 4, 2008). [The Chinese Law and Politics Blog, by Prof. Carl Minzer has a discussion on difficulties surrounding hukou reform.]

To respond to people’s demands for more attention and more autonomy, the government will choose whether to expand rule of law; encourage people to accept the status quo (which appears to be increasingly less likely an option); or close off influences that encourage the common Chinese 老百姓 to demand greater power.

Lawlessness might result from a society that fails to create a pressure-release valve for pent-up emotions. Rule of Law would allow China to follow the path taken by Europe and the United States. It will be interesting to see which choice China takes.

Appendix

* Or is this really a dualistic “either/or” choice of increasing lawlessness/tension or ultimate reform toward “rule of law” in China? Will China turn insular again if it must confront chaos? I welcome your opinions on the subject in the Comments.

* EastSouthNorthWest almost always has the most in-depth stories regarding mass incidents in China, if you’re interested in doing further research on that issue.

* Previously, in Rule of Law, I discussed why establishing a legal culture in China is key to ensuring “human rights” and to empowering individuals.

17 September, 2008 Posted by | China Law | , , , , | 3 Comments

Rule of Law- Not Human Rights

With Beijing receiving the 2008 Olympics, controversy erupted over China’s alleged human rights violations  and lack of democracy. Many Chinese often argue stability must be valued first before human rights can be guaranteed. While the Chinese might consider the issue too narrowly, international calls for democracy and human rights are a bit too broad and disorderly when unaccompanied by a theoretical basis that can apply to the Chinese situation. Instead of dwelling on broad concepts, China and international critics should join together to help China focus on promoting a standardized, streamlined, non-arbitrary Rule of Law.

China has progressed toward the rule of law. China currently has over 110,000 lawyers (as of 2000),  114,000 lawyers (as of 2005), and allegedly 165,000 registered lawyers (as of 2008). In 2002, the Chinese began having full-time government lawyers who advise courses of action. Still, as Xinhua states, China needs more lawyers. Its ratio of lawyers to populace is surprisingly low, so China has expanded schooling and opportunities to increase the number and quality of lawyers.

To bridge the gap of lack of legal expertise, China expanded its Xinfang system. According to Yale, “Some 10 million complaints are pursued through the traditional “letters and visits” (xinfang) system,” which can best be described as “aggrieved parties send petition letters or visit the xinfang office of a higher level of the administrative government in order to seek compensation, an apology or to correct mistakes made by a lower level of the administration…The xinfang office has its roots in the traditional top-down system of government where ordinary citizens rely on higher levels of government to alleviate their suffering” (China Labor Bulletin).

In China, extra-judicial solutions to problems are often practiced. “Some estimates based on available statistics reasonably suggest that there were perhaps four or five million administrative Xinfang petitions a year during the 1996-2004 period, but only around one hundred thousand administrative complaints filed with the courts” (Zhang, 4). According to the CFR, as of 2007: “There are 10 million to 13 million petitions filed every year as compared to 90,000 to 100,000 administrative lawsuits in China’s courts.

“Petitions, however, carry no legal weight to compel government offices to respond… according to some estimates only 0.2 percent of petitioners received a response in 2005.” That’s a huge problem.

The failure of Xinfang to fully address problems in China underscores a need for further establishment of legal tradition. When cases are administratively blocked or ignored, and root problems go unaddressed, the people lose, become bitter, and may join the over 70,000 protests that occur almost every year. 

A better developed court system can help take some of the stress off of would-be protest-situations such as the harrowing Weng’an Incident. One party secretary stated that although the girl’s death may have been the incident’s proximate trigger, “the deep structural reason is that there had been frequent infringements of citizen rights over the relocation of migrants, demolition of buildings and mining rights disputes.”

The Xinfang system and the courts had failed to properly deal with these problems, which contribuited to the rationale for people to riot. Indeed, in Weng’an’s aftermath, Beijing fired people in the Weng’an government for mismanagement.

Currently, many judges lack full judicial training and sophisticated legal knowledge since many are merely ex-military officers. (Also, Will Hutton’s comments… Although he appears to have a chip on his shoulder about China, so perhaps his data should be taken with a grain of salt.) (Also, for a note on the quality of Chinese lawyers and some theories on why a fair amount of Chinese lawyers are poor in quality, please read this anecdote [also please see the post’s comments for more nuanced views by Chinese].)

Still, if China follows its own Constitution (And see: Human Rights in China’s Constitution), the country would commit few “human rights abuses,” probably no more than the United States’. 

Fear appears to be the basis for China at times falling short of a “rule of law,” since many are locked up for “endangering the state” and “releasing state secrets,” which are often trumped-up charges that supersede other Constitutional rights of free speech in even worse ways than the US’ notorious Alien and Sedition Acts.

Before “human rights” can be guaranteed, China’s existential fears needs to be eliminated. The country, the state, and the party needs to gain confidence that following Constitutional laws can guarantee the “interests of the people.” By following its own Constitution instead of being ruled by fear, China can guarantee a standardization of law that will make living and litigating fairer- which would do more to guarantee human rights than mere foreigners organizing letter-writing campaigns or in governments and Human Rights Watch scolding Hu Jintao.

Conclusion

If China moves from being “ruled by law” to practicing “rule of law,” then grasping of nebulous concepts such as “human rights” and “democratization” will likely follow, since base-lying concepts of freedom of speech and other freedoms are already enshrined in the Chinese Constitution.

It would be nice if Human Rights Watch and Amnesty International and other NGOs dedicated to improving rights in China could focus more tightly on improving LAW in China. It appears a key failure in the Chinese system right now is lack of expertise. If money, time and energy is invested in developing such expertise, then China will more quickly see a modern legal culture emerge! 

Appendix:

* Longer descriptions of Xinfang are in Carl F. Minzer’s article and in Zhang, Taisu, “The Xinfang Phenomenon: Why the Chinese Prefer Administrative Petitioning Over Litigation.”

Zhang gives an interesting theory on the overuse of the Xinfang system, which only results in positive judgements for accusers 0.2% of the time, compared to 30% for administrative suits. As he argues:

“It may be possible to present the explanation proposed here as a more advanced version of the “rational choice” theory. This would necessarily be based on the long-term interests of petitioners: they might value their long-term relationship with local authorities more than their short-term interest in resolving the dispute…Since the heightened “adversarialism” of the litigation system would seem to damage that long-term relationship more than Xinfang petitioning, petitioners are willing to bear with a lower chance of short-term success” (Zhang, 31). 

The main problem with this argument though is, after the Xinfang petition fails, why don’t the villagers bring the problem to the local courts? And Zhang admits that is a puzzle. He eventually conclude that “dislike of “adversarialism” had simply prejudiced petitioners against litigation” (Zhang, 31) and “the best explanation for the Xinfang system’s superior popularity over administrative litigation is the latter’s inflexible and more adversarial procedure, which stems from its prohibitions against mediation and private trials” (Zhang, 32). Ultimately, Chinese citizens’ predeliction for Xinfang is an interesting phenomenon, and one worth further study.

* Chinese Law and Politics Blog also discussed the Xinfang System.

23 July, 2008 Posted by | China Law, China Stability | , , , , , , , , | Leave a comment