Authoritarian Judiciaries in the Shadow of Interstate Tensions

• In Event: Rule of Law and International Finance

Abstract

Past studies have well documented how states react to diplomatic tensions, such as imposing economic sanctions, raising tariffs, waging military conflict, etc. However, existing research largely overlooks a tool available to some states, that is, the domestic judicial system. We argue that, when multinational corporations (MNCs) litigate in the host country courts, authoritarian governments can use their leverage over domestic judiciaries as a diplomatic tool. We demonstrate that MNCs are less likely to win lawsuits if the diplomatic relations between their host and home countries deteriorate. This unfavorable legal treatment serves two main purposes. First and at the firm level, the treatment encourages the MNC to lobby for more benign interstate relations within its home country in order to avoid further costs. Second and at the international level, the biased treatment imposes subtle pressure on foreign countries, which in turn may lead to acquiescence. Moreover, by incurring costs for both the home and host countries, the unfavorable legal outcomes convey a costly signal to the MNC’s home country and help deter future diplomatic tensions. Using a novel dataset of MNCs’ lawsuits in Chinese courts in 2002–2017, we explore an under-explored channel of diplomacy.

Authors

• Frederick R. Chen, University of Wisconsin-Madison & Stanford University

• Jian Xu, Emory University