The US-China Trade Negotiation: A Contract Theory Perspective (24 September 2019)
Asian Institute of International Financial Law
Centre for Chinese Law
Law & Technology Centre
Faculty of Law, The University of Hong Kong
Law and Economics Workshop Series
The US-China Trade Negotiation: A Contract Theory Perspective
Dr Angela Zhang
Associate Professor of Law and Director, Centre for Chinese Law, Faculty of Law, HKU
Commentator: Professor Zhiwu Chen
Director, Asia Global Institute and Victor and William Fung Professor in Economics, HKU
Tuesday, 24 September 2019
12:30 – 1:30 pm
Academic Conference Room, 11/F Cheng Yu Tung Tower
The University of Hong Kong
In this talk, I apply contract theory to analyze the dynamics of the ongoing trade negotiation between the United States and China. The United States complained that previous bilateral engagements with China had yielded empty promises from China without substantial progress in the legal protection for the intellectual property owned by US businesses. Thus, in this round of trade negotiations, the United States insisted upon a rigid trade agreement, hoping that China would more credibly commit to its promises. China, on the other hand, preferred a flexible agreement that would allow it substantial leeway in determining how to write and enforce its own laws. The row regarding contract specificity directly resulted in an impasse. I argue that the US trade negotiators have overlooked the incomplete nature of the trade agreement. First, the United States cannot predict every contingency that might occur during the execution of the agreement. The Chinese government retains the residual control over its enforcement and possesses vast discretion in enforcing its laws. Second, it is very costly to enforce this contract. The bilateral trade agreement can neither be enforced by a third party nor will it be self-enforcing. Third, the cost of writing the contract is very high. A rigid agreement is more visible to the Chinese domestic audience, who is sensitive to US economic pressures. Moreover, a rigid agreement appears imbalanced and easily invokes the long and painful historical memory of Chinese subjugation to western powers. The US negotiators therefore have overestimated the benefit of writing a rigid contract while underestimating the price of dignity to the Chinese government in acceding to the US demand. Instead of continuing with the legalistic approach of attempting to draft a more complete contract, I urge the US trade negotiators to take an economic approach in dealing with China — sometimes, less is more.
Dr Angela Zhang is Director of the Centre for Chinese Law and Associate Professor of Law at the University of Hong Kong. Her research focuses on applying an interdisciplinary approach to the study of transnational legal issues that bear on businesses. Dr Zhang’s work has appeared in leading international law journals and she is a four-time recipient of the Concurrence Antitrust Writing Award. Before joining academia in 2013, Dr Zhang practiced for six years in the United States, Europe, and Asia. She received her LLB from Peking University in 2004 and her JSD (2011), JD (2008), and LLM (2006) from the University of Chicago Law School.
Professor Zhiwu Chen is Director of Asia Global Institute and Victor and William Fung Professor in Economics at the University of Hong Kong. Professor Chen is a former Professor of Finance at Yale University (1999-2017). His research covers finance theory, the sociology of finance, economic history, emerging markets, as well as China’s economy and capital markets. Professor Chen has been a member of HKU Council since November 2018. He is on the International Advisory Board of the China Securities Regulatory Commission while serving on the board of directors of Noah Holdings.
The Law & Economics Workshop, directed by Dr Angela Huyue Zhang, is a forum devoted to discussing the latest research in law and economics featuring both external and internal speakers. The Workshop aims to promote interdisciplinary research, and to foster collaboration between law professors and scholars from other disciplines. Anyone with a keen interest in law and economics is welcome.