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What Free Trade Advocates Like Me Have To Answer: Structural Barriers To Free Trade With State Run Companies

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I’m a free trader, like Ronald Reagan, like most conservatives.  But I am open to learning why those suspicious of “free trade” have some good arguments.  Berkeley Law School scholar John Yoo joined me Friday to explain one very subtle, very large obstacle –a “structural barrier”– to free trade: The claim of “sovereign immunity” by municipality-owned manufacturing concerns in the PRC:

Audio:

07-07hhs-yoo

Transcript:

HH: I am joined now by John Yoo. John is the Emanuel S. Heller professor of law at the University of California, Berkeley. For a time, he was also a visiting professor at Fowler School of Law at Chapman University where he was my colleague for a while. He goes back to George W. Bush years. He is an author extraordinaire on many things. But I wanted to talk to him about trade today. John Yoo, welcome, good to have you back, Professor.

JY: Oh, Hugh, thanks, great to be with you again.

HH: Now President Trump is on a mission to talk about, he was talking about trade with Poland yesterday. He’s talking about the fact that China’s trade with North Korea has gone up, not down. They’re not helping us. And trade is at the center of all of these discussions. And I learned that China has a unique approach to some trade disputes, and that you’re an expert on it. Would you lay this out for me? An advantage they bake into the cake for themselves?

JY: Yeah, sure. It’s a really important issue, and it’s one of the things that trade agreements have a hard time getting at. And the fact is that unlike our country, in China, a lot of the businesses are owned by the government, or by subdivisions of the government, or by the Chinese Army, the People’s Liberation Army. And that renders them immune from a lot of the remedies that you and I would have against an American producer of a good. So let me give you an example. There is this case I was looking at involving Hisense. Hisense is a Chinese manufacturer of television screens, a competitor to Samsung or Sony, or Vizio, which you might see at like a Costco or a Best Buy. The thing is Hisense is completely owned by a Chinese city, by a subdivision of the Chinese government. That means that if you or I were injured in some way by a Hisense set, say the Hisense sets were giving off too much radiation, for example, and was made in violation of federal regulations or federal law, you and I couldn’t sue them, because governments in our courts have what’s called sovereign immunity. So if you were ever injured by a Samsung or a Sony set, you and I could go to California court and sue for damages in what is called a tort action. In the case of Hisense, you can’t.

HH: So John Yoo, what did we do back in the days when Eastern European and Soviet state-sponsored industries owned everything, and we would do limited amounts of trade? This may have only come up recently because of the amount of trade we’re doing with China. But if everything is a state-owned enterprise, how in the world do we ever have the tort system adjust to state-owned enterprise torts?

JY: That’s the very problem, because you’re quite right. If we ever had trade, and we had very little trade with those countries, but that’s what these countries do. They try to, countries do, they try to hide behind the fact that they’re state-owned. Look, the idea of sovereign immunity was a good idea. You know, you don’t want people suing other countries instead of our government taking care of foreign affairs. And the problem is with these socialist countries is that they think the government, the state owns everything, that there is no such thing as private property.

HH: And so what is the resolution for an American court of law dealing, and this goes into the Trump trade policies, and trade is very complicated. I am a free trader, but this is one of the obstacles to genuine free trade if the legal system is imbalanced in favor of your trading partner.

JY: I’m totally with you, Hugh. I’m a big free trader, too. But I think Trump does have his finger on something here, which is there’s a lot of barriers other countries can throw up to prevent our companies from competing fairly and openly, and these are called structural barriers. They’re hard to detect. It’s not just like lowering tariffs or making sure countries don’t discriminate against your companies. What this, this is an example of how other countries can compete unfairly. It’s very hard to get a trade agreement, but that’s what good negotiations have to do is to say you know, you’re cheating by basically hiding behind the immunity that governments should have in each other’s courts by the government buying up companies and then giving them an unfair advantage in this way, as you say, from our normal remedies that apply in American courts of law.

HH: So looking forward, when Peter Navarro or others are doing trade deals, and there are a lot of them coming out of the Commerce Department. We’ve got to do unilateral trade deals with Great Britain. When we are dealing with a state that is prone to allow state-owned enterprises, and we have some of these in the United States, by the way, so this is a bilateral issue for other people dealing with the United States as well, what is the solution? To say that sovereign immunity will not be applicable unless it is otherwise specifically reference in the agreement?

JY: You could do two things. Yes, you could say in the agreement that state-owned enterprises, you know, aren’t going to be immune from lawsuits, and the Chinese government should waive it. Or you could at least say that if there is going to be sovereignty, it has to be invoked by the national government, because Hisense, for example, is owned by a city in China. Now I don’t know, there’s probably 10,000 what they consider little cities over in China which we consider a major, a major city on a par with like Chicago or Miami here in the United States. So they probably own, there’s, the central government in China probably doesn’t even know all the different companies that are owned by every little town over there. So at least maybe in an agreement, you say only Beijing can invoke the sovereign immunity, just like you could say only Washington, D.C. could invoke it if, you know, if a company, an American company owned by a city or a town is sued over in China.

HH: It’s a major problem, because I would imagine since there is a market advantage to having sovereign immunity, that even if you don’t want the local government to own you, you’re going to want the local government to own a part of you so that you can claim sovereign immunity. It’s an enormous advantage.

JY: Oh, yeah, it’s a big advantage. It’s hard to detect, because, right, it’s not a tariff. It’s not like someone putting 5% extra on your goods. You’re right. A company has a big incentive to have part of itself owned by a city or a local government, because it gives you not only, even if you might lose in the end, the years it would take just to get your case heard in the courts to eventually override sovereign immunity gives you a total advantage over an American competitor, or even a foreign competitor from another country just in the sale of something like a TV screen.

HH: Yeah, that’s amazing. John Yoo, thank you for bringing this to our attention. It is, it’s part of the complexity of trade. It is not such a cut and dried issue, and this is one that’s going to be recurring often down the road as we move forward towards a new world of realism on trade, not obstructionism, not protectionism, but realism. Thank you, Professor John Yoo from Berkeley.

JY: Thanks, Hugh.

End of interview.

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