Digital Economy, Sustainability and International Economic Law 9815124072, 9789815124071

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Current and Future Developments in Law (Volume 3) Digital Economy, Sustainability and International Economic Law Edited By Lei Zhang

School of Trade Negotiations, WTO Chair Institute-China Shanghai Center for Global Trade and Economic Governance Shanghai University of International Business and Economics WTO Chair-China

Xiaowen Tan

Shanghai University of International Business and Economics WTO Chair Institute-China

& Pinguang Ying

School of Trade Negotiations, WTO Chair Institute-China Shanghai Center for Global Trade and Economic Governance Shanghai University of International Business and Economics WTO Chair-China

Current and Future Developments in Law (Volume 3) Digital Economy, Sustainability and International Economic Law Editors: Lei Zhang, Xiaowen Tan and Pinguang Ying ISSN (Online): 2589-0115 ISSN (Print): 2589-0107 ISBN (Online): 978-981-5124-06-4 ISBN (Print): 978-981-5124-07-1 ISBN (Paperback): 978-981-5124-08-8 ©2023, Bentham Books imprint. Published by Bentham Science Publishers Pte. Ltd. Singapore. All Rights Reserved. First published in 2023.

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BENTHAM SCIENCE PUBLISHERS LTD.

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CONTENTS FOREWORD ........................................................................................................................................... i PREFACE ................................................................................................................................................ ii LIST OF CONTRIBUTORS .................................................................................................................. iii CHAPTER 1 A LEGAL ANALYSIS OF THE PHOTOVOLTAIC SUBSIDY UNDER THE WTO TRADE REGIME ......................................................................................................................... Kailun Zheng INTRODUCTION .......................................................................................................................... PV AND RENEWABLE ENERGY SUBSIDIES UNDER THE UMBRELLA OF THE WTO EU Renewable Energy Policies .............................................................................................. THE INTERSECTION OF TECHNOLOGY INNOVATION AND THE WTO SUBSIDY Technology Subsidies in WTO Large Aircraft Cases ............................................................. THE DEFICIENCIES IN THE TECHNOLOGY SUBSIDY RULES ...................................... The Difficulty In Calculating Research Benefits .................................................................... LOOKING FORWARD ................................................................................................................. CONCLUSION ............................................................................................................................... CONSENT FOR PUBLICATION ................................................................................................ CONFLICT OF INTEREST ......................................................................................................... ACKNOWLEDGEMENT ............................................................................................................. REFERENCES ............................................................................................................................... CHAPTER 2 CORPORATE SOCIAL RESPONSIBILITY: THE EXPERIENCES OF CHINA, JAPAN AND BHUTAN A COMPARATIVE APPROACH ............................................................... Federica Monti INTRODUCTION .......................................................................................................................... The Origin And The Development Of CSR: A Brief Overview ............................................ CULTURAL VARIABLES AS THE MAJOR DISCRIMINATING FACTOR ...................... DIMENSIONS OF CSR IN EASTERN AND SOUTHERN ASIA COUNTRIES: CHINA, JAPAN, AND BHUTAN ................................................................................................................ Corporate Social Responsibility in the People’s Republic of China ...................................... The Influence Of Confucianism And Other Socio-political And Philosophicalreligious Movements ..................................................................................................... A CSR with Chinese Characteristics ............................................................................. Japanese CSR and the “Reverse Effect Of Thinking Kaizen”. A Brief Analysis Of The Most Common Japanese Business Terms ........................................................................................ The Kingdom of Bhutan ......................................................................................................... GNH & CSR: Is There Any Common Ground? ............................................................ THE INTERNATIONAL AND EUROPEAN TENDENCY, THROUGH SHARED CSR DEFINITIONS: A MACRO OVERVIEW .................................................................................. CONCLUDING REMARKS ......................................................................................................... CONSENT FOR PUBLICATION ................................................................................................ CONFLICT OF INTEREST ......................................................................................................... ACKNOWLEDGEMENT ............................................................................................................. REFERENCES ............................................................................................................................... CHAPTER 3 AI, CORPORATE GOVERNANCE AND SUSTAINABILITY ............................... Laura Marchegiani INTRODUCTION .......................................................................................................................... MANAGEMENT FUNCTIONS AND AI .................................................................................... RETHINKING CORPORATE PURPOSE: WHAT A ROLE FOR AI? ..................................

1 1 2 4 10 13 16 18 18 19 20 20 20 20 22 23 24 27 30 31 31 33 42 48 52 54 57 60 60 60 60 65 66 69 75

ANCILLARY ALGORITHMS: DIGITAL CORPORATE GOVERNANCE AND DIRECTORS’ LIABILITY ........................................................................................................... CONCLUSION ............................................................................................................................... CONSENT FOR PUBLICATON .................................................................................................. CONFLICT OF INTEREST ......................................................................................................... ACKNOWLEDGEMENT ............................................................................................................. REFERENCES ............................................................................................................................... CHAPTER 4 THE GLOBAL COMPETITION FOR ISSUING CENTRAL BANK DIGITAL CURRENCY (‘CBDC’) AND THE DESIGN OF ITS REGULATORY FRAMEWORK - A REVIEW OF THE DEVELOPMENT OF CBDCS IN CHINA ......................................................... Qi Lu and Xiya Ye INTRODUCTION .......................................................................................................................... THE REASONS FOR ISSUANCE OF A CBDC, CONCEPT CLARIFICATION, AND POSSIBLE MODELS .................................................................................................................... The Necessity And Merits Of Issuing A CBDC ..................................................................... Definition of CBDC – with Comparison to Other Digital Currencies .................................... Possible Models of CBDC ...................................................................................................... THE CHINESE CBDC—DCEP .................................................................................................... Elements And Models Of The Chinese CBDC In Testing ..................................................... Synthesis Of Account-Based And Token-Based Two-Tier System ................................ ‘One Currency, Two Vaults, Three Centres’ ................................................................ Remuneration Or Not? .................................................................................................. Other Features Of The DCEP ....................................................................................... Challenges That The DCEP May Encounter .......................................................................... Paradoxes Between The Narrow Banking Issue And Facilitation Of DCEP’s Wide Use ................................................................................................................................. Possible Responses to the Challenges – Differentiated Treatment for Different Types of Digital Wallets ........................................................................................................................ CONCLUSION ............................................................................................................................... CONSENT FOR PUBLICATION ................................................................................................ CONFLICT OF INTEREST ......................................................................................................... ACKNOWLEDGEMENT ............................................................................................................. REFERENCES ............................................................................................................................... CHAPTER 5 REFINEMENT OF COMMERCIAL MEDIATION SYSTEMS IN THE GREATER BAY AREA: FROM THE PERSPECTIVE OF HONG KONG’S EXPERIENCE AND IMPLICATIONS FOR THE MAINLAND ................................................................................. Hui Chen INTRODUCTION .......................................................................................................................... RESEARCH SCOPE OF COMMERCIAL MEDIATION ........................................................ COMMERCIAL MEDIATION SYSTEMS IN THE MAINLAND AND HONG KONG ...... Development of Mediation in China ....................................................................................... The Mediation System in Hong Kong .................................................................................... EMERGING PROBLEMS IN PROMOTING COMMERCIAL MEDIATION IN THE GBA The Principle of Voluntariness in Mediation .......................................................................... The Principle of Confidentiality of Mediation ........................................................................ Enforceability of Mediated Settlement Agreements ............................................................... Capacity Building of Mediators .............................................................................................. THE HONG KONG EXPERIENCE AND IMPLICATIONS FOR THE REFINEMENT OF GBA MEDIATION SYSTEM ....................................................................................................... Voluntariness and Self-Determination of Mediation Activities .............................................

78 83 83 84 84 84

89 89 90 90 92 94 95 95 95 97 98 99 100 100 106 109 110 110 110 110

113 114 115 116 116 119 120 120 121 122 124 125 127

Confidentiality Rules in Mediation ......................................................................................... Enforceability of Mediated Settlement Agreements ............................................................... Uniform Accreditation Standards and Organization ............................................................... CONCLUSION ............................................................................................................................... CONSENT FOR PUBLICATION ................................................................................................ CONFLICT OF INTEREST ......................................................................................................... ACKNOWLEDGEMENT ............................................................................................................. REFERENCES ............................................................................................................................... CHAPTER 6 A DIVERSIFIED DISPUTE RESOLUTION MECHANISM FOR SETTLING INTERNATIONAL COMMERCIAL DISPUTES IN CHINA .......................................................... Jie Zheng and Li Chen INTRODUCTION: THE DESIGN OF THE DDRM AND ITS BACKGROUND .................. THE CONSTRUCTION OF THE CICC IN CHINA UNDER THE BELT-AND-ROAD INITIATIVE ................................................................................................................................... Jurisdiction of the CICC ......................................................................................................... Enhanced Expertise in Adjudicating Foreign-Related Commercial Disputes ........................ Streamlined Procedural Reforms and Advanced Evidentiary Rules ...................................... The One-step International Commercial DDSM Platform ..................................................... RECENT ARBITRATION REFORMS IN CHINA IN SHANGHAI FTZS ............................ Nationality of Foreign Administered Awards Seated in China .............................................. Validity of Arbitration Agreements with the Designation of Foreign Arbitration Institutions Capacity Building of Mediators .............................................................................................. The Need for a Thorough Breakthrough in the Amendment of the Arbitration Law of the PRC ......................................................................................................................................... COMMERCIAL MEDIATION DEVELOPMENT IN CHINA ................................................ Mediation in China from a Historical Perspective .................................................................. People’s Mediation With Chinese Characteristics ....................................................... Judicial Mediation As A Solution To Tackle Case Overload ........................................ Development of Commercial Mediation in the Shadow of Law ............................................ Institutionalization and the Rise of Commercial Mediation in China .......................... Boundaries Between People’s Mediation And Commercial Mediation ........................ Lack Of Legal Certainty Regarding The Enforceability Of International Mediated Settlement Agreements .................................................................................................. CONCLUSION: FUTURE DEVELOPMENT OF THE DDRM ............................................... CONSENT FOR PUBLICATION ................................................................................................ CONFLICT OF INTEREST ......................................................................................................... ACKNOWLEDGEMENT ............................................................................................................. REFERENCES ...............................................................................................................................

128 130 132 133 134 134 134 134 138 139 140 141 142 143 144 146 147 150 151 153 153 153 153 155 156 156 157 158 160 161 161 161 161

SUBJECT INDEX .................................................................................................................................... 

i

FOREWORD Sustainability in digital economy is one of the most critical and challenging points of international economic law terrains. In this regard, the new volume of “Digital Economy, Sustainability and International Economic Law” of Current and Future Developments in Law series successfully delivers significant research outcomes in both theoretical and practical considerations by clarifying the legal ground, development and analytical framework for the new photovoltaic industry and technology subsidy matters. In this book, the best samples and practices are critically examined including the roles of the WTO in dealing with modern technological development. This book contains insightful chapters on the current and future development of artificial intelligence, in terms of the transformation of the WTO technological innovation and regulation from corporate governance to sustainable and digital corporate governance. Additionally, the proposed model and the designation of the Central Bank Digital Currency (CBDC) in the People’s Republic of China have been evaluated, focusing on its challenges and responsibilities. Then, this book suggests mediation as an alternative approach to deal with the diversified dispute as China’s grand strategy and legal tool for the future digital economy. The editors are China’s top-tier international economic lawyers representing the WTO sponsored research institution. In this regard, this book will be valuable for triggering progressive research development in international economic law and sustainability in the time of digitalization. Eric Yong Joong Lee YIJUN Institute of International Law Dongguk University Seoul, South Korea

ii

PREFACE Current and Future Developments in Law: Digital Economy, Sustainability and International Economic Law presents the most topical issues that address the interconnection between digital economy, sustainability and international economic law. It covers a range of topics, including renewables subsidies, AI and corporate governance, digital currency, dispute resolution and other important research on new developments in the law. The selected chapters illustrate how the digital economy, sustainable development goals and arrangements could influence and potentially shape international economic law, and how they are intertwined in an increasingly connected world. However, as the concepts of digital economy and sustainable development integrate unevenly into different fields of law, the selection focuses on the most visible influences in the current international economic law. This book is a valuable source for legal scholars, practitioners and law students seeking updated and critical information on a more digital, and sustainable international economic law. The chapters in this volume are written by eminent authorities devoted to the emerging multidisciplinary fields of international economic law. Zheng in chapter 1 of the volume discusses WTO rules on renewable energy​ with a focus on the photovoltaic subsidy. Monti in chapter 2, explores the connotation of corporate social responsibility from a comparative point of view among China, Japan, and Bhutan. Marchegiani, in chapter 3 analyzes the prospect of algorithmic governance in contemporary corporate law systems and demonstrates that pursuing sustainable development of firms invariably needs human intelligence and sensitivity in the exercise of discretion at the board level. Lu et al., in chapter 4 investigate the most cutting-edge issue of digital currency and the challenges digital currency may have under the internationalization of the Renminbi. Chen, in chapter 5 considers the great disparity in the development of commercial mediation in different GBA regions and proposes a uniform rule framework to govern the mutual recognition and enforcement of commercial mediated settlement agreements across the GBA. Zheng et al., in chapter 6 discuss the emerging diversified dispute resolution mechanism and evaluates both its recent and future developments. I hope that the readers will find these views and examination valuable and thought-provoking so that they may trigger further research on a digital and sustainable international economic law. I am grateful for the timely efforts made by the editorial personnel, especially Ms. Humaira Hashmi and Ms. Rabia Maqsood at Bentham Science Publishers.

Lei Zhang School of Trade Negotiations, WTO Chair Institute-China Shanghai Center for Global Trade and Economic Governance Shanghai University of International Business and Economics WTO Chair-China Xiaowen Tan Shanghai University of International Business and Economics WTO Chair Institute-China Pinguang Ying School of Trade Negotiations, WTO Chair Institute-China Shanghai Center for Global Trade and Economic Governance Shanghai University of International Business and Economics WTO Chair-China

iii

List of Contributors Federica Monti

Political Science, Communication and International Relations Department, University of Macerata, Macerata, Italy

Hui Chen

Department of Law, Faculty of Law, University of Hong Kong, Hong Kong, China

Jie Zheng

Shanghai Institute of International Organizations and Global Governance, Shanghai University of Finance and Economics, Shanghai, China

Kailun Zheng

Centre of Private and Economic Law, Vrije Universiteit Brussel, Brussel, Belgium

Laura Marchegiani University of Macerata, Macerata, Italy Li Chen

Faculty of Law, Fudan University, Shanghai, China

Qi Lu

School of Trade Negotiations, Shanghai University of International Business and Economics, Shanghai, China

Xiya Ye

Financial Law Institute, Ghent University, Ghent, Belgium

Current and Future Developments in Law, 2023, Vol. 3, 1-21

1

CHAPTER 1

A Legal Analysis of the Photovoltaic Subsidy Under The WTO Trade Regime Kailun Zheng1,* 1

Centre of Private and Economic Law, Vrije Universiteit Brussel, Brussel, Belgium Abstract: The pursuit of greenhouse gas reduction objectives by major economies has led them to increase their share of renewable energy. Energy subsidies are crucial but are fraught with controversy under WTO law. For renewables such as photovoltaics, the focus on production subsidies makes them an easier target of WTO cases. The photovoltaic industry requires technological innovation, which is rarely addressed in WTO law. Therefore, there is a need to reform the relevant rules to support the development of renewable energy.

Keywords: Fossil fuel energy subsidy, Photovoltaic, Renewable energy subsidy, Technology subsidy, WTO. INTRODUCTION The accelerating climate change necessitates abatement in greenhouse gas (GHG) emissions to mitigate the devastating consequences of rising temperatures. Therefore, both the European Union (EU) and China have introduced a future climate and energy framework as their responses. Considering their ambition to reduce GHG emissions, much of the work lies in curtailing the production and consumption of fossil fuels, which requires that a higher share of energy come from renewable sources. Among all the options, solar energy is regarded as the cornerstone of the new EU energy system (Commission, 2020), as technological innovation has helped solar energy to become more reliable and economical. Similarly, solar energy has been prominent in China’s energy market. China has been the most prolific origin of photovoltaic (PV) module shipment since 2010. (IEA, 2020) The rapid growth of the PV industry is deemed to support China’s 2060 carbon neutrality formulation. However, parallel environmental attempts do not always generate cooperation. In 2012, a trade dispute concerning solar panels arose between the EU and China. Address correspondence to Kailun Zheng: Centre of Private and Economic Law, Vrije Universiteit Brussel, Brussel, Belgium; E-mail: [email protected]

*

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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The EU imposed the first period of anti-dumping and anti-subsidy measures, requested by the EU solar panel producer representative, on imported Chinese solar panels for two years. China remonstrated with the EU and lodged a complaint at the World Trade Organization during the dispute, claiming that EU solar policies and regulations are inconsistent with Most-Favoured-Nation treatment (MFN) and constituted prohibited subsidies under the Agreement on Subsidies and Countervailing Measures (SCM Agreement) (WTO, 2012). A trade war was imminent when China increased the duties on European polysilicon and wine products in retaliation. Fortunately, the two parties forbore to escalate the dispute by reaching a settlement after China’s exporters agreed on a price undertaking at the parlous juncture. These restrictions were eventually ceased in 2018, when the European Commission (EC) did not initiate another investigation to extend the measures, claiming that such a decision is a balance between different parties in the solar panel market. It has been another decade since the China-EU solar panel dispute, during which PV technology has been subject to continuous innovation, and PV enterprises both in China and the EU are growing less dependent on subsidies, as is partially revealed by the continuous reduction of the subsidy amounts. Given that PV electricity is approaching a complete zero-subsidy era, it is worth reviewing the subsidy issues within the WTO trade regime and discerning the potential risks in China-EU photovoltaic products trade based on the existing rules. Under this context, this article seeks to examine domestic PV policies under the WTO trade regime. It consists of five parts: Part two examines the history and present of the PV and renewable energy policies in China and the EU, and it bridges them with the WTO rules, and with the SCM Agreement in particular. Part three invokes the technology subsidy rulings of the EU Aircraft dispute to provide an analysis regarding potential PV cases. Part four discusses the drawbacks existing in current WTO rules that hamper the introduction of technology support in the PV sector. Part five looks ahead to the direction of WTO reform to promote the development of the PV industry. PV AND RENEWABLE ENERGY SUBSIDIES UNDER THE UMBRELLA OF THE WTO An Ebbing Subsidy in the Chinese PV industry The Chinese PV industry has experienced the conceptual stage, the subsidy stage and the post-subsidy stage. In the early conceptual stage, solar panels were not profitable due to the immaturity of the technology, while the industry escaped this predicament in the following subsidy stage. The introduction of the Germany Renewable Energy Sources Act (EEG) indicated the commencement of this stage.

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Current and Future Developments in Law, Vol. 3 3

The Renewable Energy Law of China stipulates that grid companies should purchase the total electricity generated by renewable energy. Since then, the Chinese PV industry’s development has kept increasing rapidly, making China the leading exporter of PV modules. However, such development was not balanced since the size of the domestic market was not comparable to the growth of production, resulting in an export surge since 2006 and a slight improvement in import performance (Groba & Cao, 2015). The production surplus is the fundamental cause of the 2012 EU-China solar dispute, since the EU was the main export market for Chinese PV panels, which meanwhile caused an additional fiscal burden when the amount of the PV subsidy kept rising. To reduce the surplus of PV modules and components production, the Chinese government adjusted the energy pricing policies, continuing to attenuate financial support towards the PV industry. Furthermore, the requirements to get financial support were substantially changed. At the early subsidy stage, financial support was based on equipment installations. The types of financial stimulants included low-interest policy loans and export credit subsidy programmes, according to European PV producer representative ProSun. Such an installation-oriented pattern did encourage new PV establishments but neglected that new installation does not necessarily generate new electricity. Therefore, energy policy reform elevated the threshold to get support by altering it from new installation to electricity generation, when investment swarmed into the PV industry since it was effortless to get the subsidy from the government, despite the fact that some PV plants are built to low-quality standards. Meanwhile, the Chinese government has been dampening the amount of support. In this process, a landmark regulation is a notice on matters relevant to PV power generation in 2018, bringing in a comprehensive reduction of the PV subsidy. The first change concerns the PV subsidy catalogue. Grid companies shall purchase the PV electricity generated by the companies in the catalogue according to Chinese PV pricing policies. It guaranteed the incomes of PV industries but was abruptly terminated by the new regulation that no longer incorporates all the ordinary solar power plants built in 2018. The second change is the extensive drop in the subsidy amount. The government promised a peak subsidy amount of 0.8 yuan/kWh in 2010 and reduced it over time. In the 2018 regulation, the National Development and Reform Commission further reduced the subsidy for solar power projects to about 0.05 yuan/kWh, about one-sixteenth of the 2010 level. (Mo, 2020) The Chinese PV market anticipates that such support is about to halt, and the industry is approaching the post-subsidy stage.

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EU Renewable Energy Policies As part of its renewable energy regulations, the EU’s PV policies consist of an EU-wide channel and a Member State channel, while the former determines the objectives for the share of renewable energy in their domestic market, and the latter defines the instruments and modalities. Member States have chosen quota and Feed-in schemes to support their renewables. In a quota system, a particular party in the supply-chain (grid company or consumer) is required to purchase electricity from renewable energy, as those shares are stipulated in the national energy plan. Such requirement is composed of two steps: Generators sell electricity at a market price while they receive certificates for renewables that can be regarded as the actual support instruments since they are tradeable in the certificate market. Quota schemes encourage new installation of renewables, as valuable certificates are issued in light of the production. Unlike quotas, feed-in schemes offer direct support to the energy producers by collecting the power at a fixed price and a guaranteed purchase quantity. Electricity sales and government support are merged as they happen simultaneously, so producers are exempt from the risk of finding a market. Feedin schemes create stability for renewable energy production and encourage competitive behaviour, since they give developers an incentive to reduce costs in order to increase their margins and profits (Groba & Cao, 2015). Both systems have promoted the growth of renewable energy in member states, but what probably contradicts the intuition is that feed-in schemes are more economically efficient as they assure certainty for both market and production. From a theoretical perspective, quotas call for lower financial expenditures, as they do not present a selling channel to renewables. However, this ostensible advantage is undermined by the fluctuating certificate price, and the intrinsic stability of feed-in systems appears to be a key element for success (Resch et al., 2007). Subsidy rules in the SCM Agreement Context: A Three-step Linear Identification Process Even though the stance of the WTO toward environmental protection as well as energy subsidies has been questioned, WTO rules are more trustworthy in energy subsidy disputes than other environmental treaties, given their methodical and mandatory subsidy regulations to constrain government behaviours (De Bièvre et al., 2017). As one of the Doha round negotiation outcomes, the SCM Agreement

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Current and Future Developments in Law, Vol. 3 5

aims at facilitating international trade through disciplining government subsidies, mainly by cleaving to the principle of non-discrimination, which is neither potently phasing out fossil fuel use nor promoting environmental-friendly energy use in view of global warming, owing to its trade-based subsidy regulations. Accordingly, in the context of the SCM Agreement, the fossil fuel subsidy does not differ from the renewable energy subsidy since its classification does not take energy into account, which fails to explain the distinction between the number of the related measures being challenged concerning those two types of subsidies. In general, features listed in the SCM Agreement to define an illegal subsidy follow a linear and cumulative order instead of meeting simultaneously. First, there exists a financial contribution within a member’s jurisdiction. Secondly, such a contribution bestows benefits. Thirdly, the subsidy shall be specific (Espa & Marín Durán, 2018). As for the first step, a subsidy under the scope of the SCM Agreement is manifested in obtaining financial contribution from the government if it involves: (i) a direct transfer of funds, for example, lower interest loans to the energy industry; (ii) government revenue foregone or uncollected; (iii) the purchase of goods or services outside the scope of general infrastructure; or (iv) a mechanism funded by a government to carry out the support listed above. As for step two, these measures shall confer benefits to recipients in a member’s jurisdiction. Under the existing SCM Agreement, controversy exists over deciding the benchmark price contingent on a member’s energy importing and exporting conditions, even if the related benefits bestowed are prominent in amount and widespread in range (Moerenhout, 2019). It is convincing to use the importing price as the benchmark for an energy-importing country, since there will be a price gap between the international price and the subsidised retail price. The case is more sophisticated, however, for an energy-exporting member country, where the international price is not reliable and accurate enough to be a benchmark since the country’s energy production overwhelms imports. Subsidies and support granted by the energy exporting governments are generally in miscellaneous types, thus, comprehensive statistics are needed to reveal the number of benefits in a member’s jurisdiction. When deemed to be financial contributions that confer benefits, subsidy behaviours enter the third step and are classified into prohibited subsidies and actionable subsidies. Prohibited subsidies are governmental support that is either export-oriented, whether entirely or not, or requires local content. By contrast, actionable subsidies are forbidden if they are specific, meaning that they specialised in an enterprise, industry, group of enterprises or industries within a member’s jurisdiction; and render adverse effects, which appear in three forms: (i) an injury to the domestic industry of another member, (ii) a nullification or

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impairment of benefits received under GATT 1994, or (iii) a severe prejudice to the interests of another Member. Photovoltaic Subsidy Plight In WTO: A Sector Faced With Unfair Competition Renewable energy, including PV, is competing in one energy market with fossil fuel energy, judging by their similar end use. It is necessary for WTO members to establish at least a fair environment of competition for PV energy within their territories if they are pursuing a less carbon-intensive economy. Nonetheless, this can be challenging under the current SCM regime, which addresses production subsidies and consumption subsidies differently. Energy subsidies under the SCM Agreement manifest in two forms: production subsidies and consumption subsidies, which focus on the production side and consumption side, respectively. The SCM Agreement establishes a complete legal structure to identify the former that follows a three-step process. Firstly, various forms of government support could constitute financial contributions, among which tax expenditures account for a 70% proportion, including consumption taxes, tax credits and tax refunds. Governments directly transfer funds to energy companies when they collect consumption taxes to support the industry. In contrast, the tax credit is a typical form of revenue foregone by exempting companies from duties. Secondly, such contribution confers benefits to certain enterprises, as it increases their competitiveness compared to those who do not receive such support. Thirdly, subsidies could be considered specific on the production side, since energy production is concentrated in a limited number of enterprises, and thus is feasible to identify. In contrast, the SCM Agreement strictures are incompetent in constraining consumption subsidies that are not evident in export performance. For example, German industries, especially in energy-intensive sectors that have a large need for energy consumption, benefited from the largest share of subsidies towards the hard-coal industry, amounting to 53% of total subsidies in 2016, according to a G20 peer-review report in 2017. Those subsidies came in the form of an electricity tax advantage that compensated for the energy costs of manufacturing. The financial support was expedient to the fossil fuel industry and probably evaded the capture of SCM rules since it was not specific or focused on certain enterprises but was applied throughout the economy instead. Identification of an energy consumption subsidy is more ambiguous if members implement dual pricing policies within their territories. A dual energy pricing strategy happens when a government intervenes in its energy market to stabilize the domestic energy price. It keeps the domestic energy price lower than the

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international one, and thus creates a competitive advantage for manufacturing industries, energy-intensive sectors in particular. Dual price schemes are conducted through subsidies on the consumption side, for example, tax advantages for companies or certain manufacturing procedures. Those subsidies are problematic to distinguish as it requires copious evidence to testify to their inconsistency in a WTO case. Governments maintain a dual price structure so that domestic consumers obtain energy at a lower price than international ones. It provides domestic industries with energy at a price lower than the world market price, which causes an unfair advantage to the energy-intensive industries of the subsidizing countries (Asmelash, 2015). Nationwide, energy prices are reduced for both individual consumers and factories, creating a gap in prices between domestic and international levels, yet this squarely falls short of the specificity requirements under the SCM Agreement. Moreover, the WTO trade regime regulates subsidies that affect export or import performance. Subsidies in consumption do not immediately affect international prices, so it is arduous to validate the connection between consumption subsidies and trade. Admittedly, although a dual pricing policy consequently would influence trade statistics by improving the competitiveness of certain enterprises, it is controversial to stretch the definition of trade impact to encompass consumption subsidies. Governments provide both production subsidies and consumption subsidies to fossil fuel, but mainly the latter, in contrast with PV subsidies which are mostly granted on the production side. Feed-in-Tariffs and Fit-in-Premiums are the common forms of subsidies in both China and the EU, where PV energy producers can concentrate on adding more generating capacity without working about expenses, marketing and revenues as governments provide a complete supporting system. In the Feed-in-Tariff regime, governments mandate grid companies to purchase renewably generated electricity at a fixed price, meaning that new renewable energy electricity production equals new profits. Under the Fit-in-Premium subsidy, renewable energy electricity producers receive an additional fee on top of the market price when they sell the electricity. Under the context of the SCM Agreement, these types of subsidies are more likely to challenge the SCM Agreement rules since they occur in the production sector on the one hand, and they fall within the description of “a group of enterprises or industries” in Article 2 of the SCM Agreement on the other hand. The PV energy sector is, therefore, naturally more specific than the energy industry as a whole. Fossil fuel subsidies and PV subsidies are faced with differing fates in WTO jurisdiction. While fossil fuel subsidies have yet to be challenged, PV subsidies have been the subject of a few disputes, including China-US solar panel, China-

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EU solar panel, etc. In Canada – Renewable Energy, the first PV case in the WTO, the EU joined the Japan-Canada dispute as a third party concerning the renewable energy FIT program introduced in the province of Ontario. Under this scheme, the Ontario government offered a guaranteed price to purchase electricity derived from wind or solar power. Ontario’s target was to add more renewable energy capacity, so equipment producers received most of the subsidy amount. The FIT program requires PV and wind facilities to utilise a certain proportion or amount of Ontario-originated equipment, which was claimed by the complaint to be inconsistent with Article III of the GATT 1994 and Articles 3.1(b) and 3.2 of the SCM Agreement. In this case, both the Appellate Body and the Panel found the Canadian government provided financial support by purchasing certain goods, as listed in Article 1.1 (a) (1) (iii) SCM Agreement. In addition, the Appellate Body overturned the Panel’s finding on how to decide on the conferring of benefits in a FIT scheme. It argues the relevant market should be within the PV or wind power industry rather than the general energy department because they are not competing in the identical market considering the subsidies they have received and other supporting policies. However, the Appellate Body did not answer if the measures at issue have bestowed benefits due to a lack of “factual basis”. The SCM Agreement regulations have presented solutions to this predicament by requiring members to disclose their subsidy conditions as a rule of transparency, which is not implemented enough by members to identify illegal subsidies due to a lack of a sanction system. The Appellate Body’s report based the legal decision on the discriminatory essence of the local content requirement according to Article III of the GATT, ignoring the benchmarks submitted by the complainants to determine the adverse effects. This case should have become a guideline for PV subsidy cases under the WTO, since it allows the WTO Dispute Settlement Body (DSB) to clarify all the core elements in the process to identify an illegal renewable energy subsidy. However, with the absence of such work, it did not facilitate resolving similar cases if they are filed and reviewed under the SCM Agreement rules in the future. It is worth noting that even if the Appellate Body fails to judge solely by the SCM Agreement rules, renewable energy measures are more apt to violate the WTO rules than fossil fuel energy measures since the former affect trade more prominently. Despite their environmentally-friendly nature, renewable energy subsidies cannot elude the WTO strictures given the rules’ focus on correcting trade distortion. The underlying reason for the predicament is the impact on trade, a hidden requirement above all of the three-step process, although the SCM Agreement does not explicitly record such a provision. The definition under the

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SCM Agreement constrains the scope of subsidies to those originating from government interference that is trade-distorting, while disregarding other domestic measures that hamper the industry and the environment, whether in the short or long term (De Bièvre et al., 2017). Consequently, this led to the incompetence of the SCM Agreement when the DSB was handling certain types of energy subsidies that would not boost trade performance immediately. Therefore, though being liable to be inconsistent with the WTO rules judging by the empirical evidence, PV energy subsidies are failing to receive complete guidance from the DSB, so that members can be conscious of the legal boundary for the energy subsidies. Prospects For Photovoltaic Industry: Technology Subsidy Matters FIT subsidies used to be a crucial issue when China and the EU were at the negotiation table in 2012, but they will be less controversial in the coming days since both parties are considering an energy framework without the support they used to provide. For example, as the leading EU country in solar energy, Germany will gradually terminate the FIT for the older version of PV plants as their 20-year payment period expires. However, these plants will continue to supply power at levelized costs that undercut all other fossil fuel and renewable energy sources due to low operating costs and zero fuel costs (Wirth, 2021). When reviewing the progress of photovoltaic energy, it can be seen that the process of the Chinese PV industry mirrors the whole world’s PV history, which developed slowly in the early days but then ushered in explosive growth when technological innovation enabled PV to evolve into a competitive energy source within no more than two decades. Among all the technological upgrades of PV components, the technology to improve solar energy’s conversion rate into electricity is the most decisive. Such technological improvement is disruptive for the PV industry since it swells PV panels’ efficiency and provides electricity at a lower price, so that the cost to produce new panels will dwindle substantially. In other words, the marginal cost of PV production will continue to lessen, given continuous technology innovation. Being conscious of the forthcoming post-subsidy era, PV companies are adopting both short-term and long-term solutions to alleviate the impact. As for the shortterm solution, for instance, PV electricity sellers may sign a power purchase agreement with the purchaser to predetermine the purchase price, amount and period in order to hedge against price fluctuations in the electricity market. And for a long-term resolution, PV enterprises will need to continue innovating their technologies. It should be noted that the crystalline silicon technology PV panels are using, considered to be first-generation technology, is outdated compared with

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the latest third-generation technology (Sinke, 2019), which is designed to be more efficient and reduce costs (Conibeer, 2007). Although the commercial application of the third-generation technology is not qualified to generate electricity reliably, it indicates the promising prospects of R&D output in the PV industry. The prospect that WTO rules may become friendly to PV technology or R&D support is not promising in regard to its production subsidy aspects. However, cogent evidence is lacking for any assertion that WTO rules have shut the door. The next section of this paper discusses the WTO rules in conjunction with technology innovation and subsidies. Given the absence of PV technology cases in the WTO, the essay will invoke related disputes and sectors to discover the possibilities and hurdles to promoting technology support within the WTO’s jurisdiction. THE INTERSECTION OF TECHNOLOGY INNOVATION AND THE WTO SUBSIDY Technological innovation is the central element in PV competition. Explicitly speaking, the technological prospect of the PV cells is the core component in a PV system that determines the possible trajectories of these cells to help the companies in the sector to anticipate strategic scenarios, thus facilitating the decision-making process (Vasconcelos Sampaio et al., 2020). The DSB has paid scant attention to technology issues in renewable energy-related cases since subsidy and discriminatory measures were the points at issue, yet having said that, technology subsidies are stipulated in the SCM Agreement and discussed in related disputes. According to the three-step linear process under the SCM Agreement, subsidies are illegal and actionable when they are specific and have caused adverse effects. However, three forms of subsidies are exempted in Article 8.2, including (1) subsidies assisting research activities in firms, higher education or research establishments as long as they are limited to a certain proportion of the research cost; (2) subsidies focusing on disadvantaged regions; (3) subsidies to encourage existing facilities’ adaptation to new environmental requirements. These subsidies are referred to as non-actionable subsidies, which were halted to provide exemptions as those rules would only apply for a period of five years (SCM Agreement, Article 31). Thus, the technological subsidies for PV have lost a feasible safe harbour. The WTO Committee on Subsidies and Countervailing Measures did not extend this article, but the reasons are seen as unclear (Yamaguchi, 2019). This section will discuss the cause of such termination.

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Meanwhile, the DSB has expressed opinions regarding technology subsidies in the EU-US disputes over large civil aircraft, in which SCM Agreement rules are interpreted to be inimical to R&D subsidies. The dispute originated when the US raised consultations against the EU regarding the subsidies for Airbus, which has been a debate since 1989 when the EU began subsidising the launch of the Airbus A-350, a 600-seat jumbo airplane about one and a half times larger than the Boeing 747 (Tyson, 1993). Responding as a parallel case to the Airbus dispute, the EU sued the US about several domestic bills introduced by Washington state that are claimed to favour Boeing over its competitors. Technology subsidies, also referred to as R&D subsidies, were considered to support technological innovation, which was applied to the launch aid for new Airbus models. This section will comprise a study concerning the technology subsidies in the aircraft case to demonstrate the prospects when photovoltaic R&D supporting policies are claimed to challenge WTO subsidy rules. Article 8.2 of the SCM Agreement: A Once Existing Safe Harbour For Technology Subsidies Article 8 of the SCM Agreement did provide a theoretical framework to boost the R&D input for PV technology. However, such a technology subsidy exemption was not instrumental for PV technology innovation in the subsidy stage, as the main constraints were the fiscal limitations and the dilemma of choosing winners and losers in early-stage R&D. (Wu, 2015). However, having attenuated the amounts of PV subsidies, governments could regain the ability to support photovoltaic R&D, if there is a need. The European Economic Community (EEC) first introduced a concept similar to the R&D subsidies exemption in the Uruguay Round Negotiations. In its statement, the EEC described it as structural adjustment subsidies, which are given to enterprises to assist them to restructure business with the purpose of restoring economically justified activities and facilitating the structural adjustment of production and export operations (MTN.GNG/NG10/W/7). Structural adjustment subsidies could be substantially broad enough to cover technology subsidies since the requirements are not difficult to fulfill. Several other countries upheld the EEC’s proposal and R&D subsidy, a narrower and more targeted term, was formulated in the SCM Agreement texts to substitute for structural adjustment subsidy (Lester, 2011). The technology subsidy exemption in Article 8 of the SCM Agreement is not the only rule pardoning certain domestic measures that would have been claimed illegal, as GATT Article XX also includes a list of general exceptions. Nevertheless, the SCM Agreement Article 8 and Article 9 expatiate the

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procedures of applying such rules. When invoking the technology exemption, a member needs to notify the SCM Committee about its implementation in advance, which would then be reviewed to determine whether it qualifies as a nonactionable subsidy in the WTO context. The WTO Secretariat will report its findings to the Committee after reviewing the notification from the members intending to subsidise R&D activities. Then the Committee makes the determination. Additionally, members who request a technology exemption shall guarantee the accuracy of their notification and provide yearly information updates to the Committee and other members so they can evaluate the consistency and trade impact of certain technology subsidies. (SCM Agreement, Article 8.3). A disquieting risk arises if members invoke non-actionable subsidy as a pretext for protectionism, albeit members are privileged when the Committee recognises their requests, those grants are not permanent and irreversible. Even if the subsidising member is in line with all the criteria in Article 8, other members could challenge the subsidy and request consultations with the subsidising member if they believe the subsidy has caused serious damage, which is difficult to repair. The consultations provide an opportunity for both parties to draw up a mutually acceptable solution. If they fail to solve the dispute, members can refer the issue to the Committee, which will review the facts and evidence to decide if the claimed adverse effects exist. Based on its review, the Committee will recommend the subsidising member to remove the effects, and if it fails to follow the recommendations, the Committee may authorise the requesting member to take appropriate counter measures. The technology subsidy exemption in the SCM Agreement should have been a safe harbour for countries that value PV investment, but developed members were much more enthusiastic than developing members, a vital defect leading to its expiration. The concept was introduced by the EEC and supported by other developed countries, including Canada, Switzerland, Japan, and the Nordic countries (Wu, 2015). The United States opposed EEC’s proposal at first since the new Clinton administration believed special R&D rules would promote its economy (Doane, 1995). Developing members claimed that such rules only benefit developed countries and requested a modification. One of the suggested proposals was to include subsidies that incorporate local content requirements among the non-actionable subsidies, which is too controversial to be viable since it challenges the essential national treatment of the WTO. Such a request reflected that the divide between developing and developed members was huge and was impossible to bridge.

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Technology Subsidies in WTO Large Aircraft Cases In the US-EU aircraft dispute, research and technological development funding, also referred to as a technology subsidy, has been one of the central points for both the United States and EU’s claims at issue. Both Airbus and Boeing accused each other of receiving technology subsidies from their governments to innovate related technologies, which were later utilised in their new aircraft models. The DSB expresses its attitudes and views towards technology subsidy in the cases, which is a valuable reference for PV technology subsidies since neither PV nor PV technology is a major topic in the WTO context. Characteristics of the Technology Subsidy As illustrated in the aircraft cases, technology subsidy is at variance with ordinary subsidies in two respects. First, technology subsidy does not necessarily reduce the price of a product. On the contrary, the product might even become more costly if the subsidy has supported the application of new technology in the product, assisting it in improving its quality or gaining new functions and features. For example, PV batteries using Hereto-Junction with Intrinsic Thin Layer (HJT) are deemed likely to supplant the prevailing ones with Passivated Emitter and Rear Cell (PERC) in the future, not because of the price, but the efficiency. Technology subsidy is more sophisticated than solely financial support because, for one thing, it complicates the identification of a technology subsidy that the comparison between prices might be impracticable. For another, it is more challenging to reverse the adverse effects using the remedies in the SCM Agreement. When competition is based mainly on price, subsidies provide a competitive edge to certain products by lowering their costs, which can be effectively erased if governments withdraw the support. By doing so, products receiving subsidies raise their prices and their competitors recover their market shares. However, this is not the case for competition based on technology, like the large aircraft market or PV market. When a new technology innovation was already conducted owing to the technology subsidies, the inferiority of the competitor’s products cannot be reversed even if the subsidising member “withdraws the subsidy without delay”, since the technological advancement cannot be removed even if the governments have terminated all the support altogether. Consequently, the competitor cannot recover market share until it has introduced another innovation (Kennedy, 2020). Second, the adverse effects could be incommensurate with the subsidy amount in the case of technology subsidies. For ordinary subsidies like tax credits or refunds, a benchmark can always be found to calculate how much contribution a government has provided since the adverse effects are limited by the scope of the

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subsidy amount. However, this process does not always work for technology subsidies. In US-Boeing, the EU argued that the technology subsidy assisted the Boeing engineers to acquire “knowledge, experience and confidence” from the R&D contracts funded by NASA and Department of Defence programmes, which has an additional multiplier benefit that is crucial in accelerating the design of Boeing’s new aircraft model. In its second written submission to the DSB, the EU states that the technical support far exceeds the simple money value of the subsidy itself and is not commercially available. Nevertheless, the United States dissents from the opinions of the EU concerning the knowledge, experience, and confidence at issue by claiming such technological advancement is a natural result of R&D activities rather than an outcome of the technology subsidy (Panel, 2011). The Panel partly answered the question by indicating that the effects of tax subsidies and of technology subsidies should not be aggregated as they operate through entirely distinct causal mechanisms (Panel, 2011). To summarise, in the US-Boeing, there is an additional effect stemming from R&D activities, which only exists in the case of a technology subsidy, although the causal link between it and the subsidy is not entirely testified. The Causation Analysis of the Adverse Effects Despite having unique characteristics, the identification of technology subsidies is obliged to follow the linear three-step process mentioned above since there is no further classification for different forms of subsidies in the SCM Agreement. The linear three-step process works as usual for the case of technology subsidies. To wit, the financial contribution, the benefit bestowed, and the specificity for technology subsidies should be located the same way as for any other subsidies. Additionally, there is a particular issue regarding the causation analysis of the adverse effects of a technology subsidy within the scope of Article 6.3 of the SCM Agreement. Subsidies without technology effects bestow a competitive advantage towards certain products or industries when they transfer the subsidies into the price effects, which could be traced if given sufficient evidence. By contrast, the causation has a distinct mechanism in the case of a technology subsidy, since it operates differently. An ideal frame to establish the causal link of adverse effects between financial support and market phenomena (assumed to be the outcome of the support) is to discover them separately and determine whether there is a linkage. The Panel utilises this two-stage approach in US-Boeing, where the financial support refers to the price effects on Boeing of the subsidies, and the market phenomena refer to the subsidies’ impact on Boeing’s competitor (Boeing, 2012). The two-stage approach would be cogent to analyse adverse effects, but it might be demanding to complete the first stage in technology subsidy cases since technology subsidies do not mainly target reducing the price. In other words, the

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price effects of technology subsidies are not evident enough to identify. As the Appellate Body states, some market phenomena are difficult to ascertain without considering their causing subsidies (Airbus, 2011). Therefore, the Appellate Body prefers the unitary method to identify the causal link, which aggregates the two stages into one unitary approach. In this approach, identifying the adverse effects (including price effects and the market phenomena) is conducted simultaneously with the analysis regarding whether there is a causal link between those effects and the challenged subsidies. As opposed to the twostage approach, the unitary method could include any factors relevant to the causation analysis without categorizing them into causes or effects. This could be crucial in technology cases since it would be too complex to classify some technology effects, as the EU accepts in EC-Airbus that technological experience and production efficiencies from the earlier research are important to assess the causation analysis (Airbus, 2011). However, they are neither subsidies nor subsidy effects. Despite the difficulties of isolating the adverse effects from the causal link, the counterfactual nature of the causation analysis in subsidy cases is the fundamental reason why the unitary approach is more appropriate in causation analysis, even if both are acceptable, according to the Appellate Body. The counterfactual characteristic refers to the logic of the causation analysis, which first assumes the challenged subsidies to be absent, followed by the analysis concerning whether the market phenomena would still exist. For example, the technology subsidies are accused of accelerating the development of Boeing’s new aircraft model. This causal link is established based on the assumption that the technology subsidies did not exist, leading to the conclusion that Boeing would not then have been able to introduce the new model so early as to cause serious prejudice to Airbus (Boeing, 2012). Such logic requires the Panel and the Appellate Body to see all the factors that influence the causation as a whole, thus there is no point in deciding each element to be a price effect or a market phenomenon. Both approaches follow the counterfactual way of carrying out the analysis, but the unitary method is more in line with this logic. After the causation was demonstrated, the technology effects might be examined again to determine if the technology subsidies have caused serious prejudice. In EC-Airbus, the Appellate Body accepts that technology subsidies support Airbus in developing new features and aspects of its aircraft, which, in other words, admits the existence of the causation link. However, those technological effects do not provide a competitive advantage because they fail to be reflected in the aircraft models or make the production process more efficient (Airbus, 2011). The reason for further examination is that the technology subsidy form is absent in the

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SCM Agreement, so the technology effects must be converted to those effects stipulated in the Agreement to make it fall within the mandate of the DSB. This could be a reasonable way to handle technology subsidy cases because, for one thing, the DSB has to limit the technology effects in the scope of its jurisdiction, and for another, not all the technological innovations that come from subsidies would advance competitiveness. Nevertheless, the requirement of conversion for technology subsidies does not solve all the technology issues. The innovation of technology is an incessant process, and new technologies deemed not to be applicable today might be important in the future. For example, HJT was developed years ago as a new technology for PV batteries, but battery companies are still using the PERC technology for its lower costs. This does not mean the HJT technology will not contribute to the PV battery’s innovation. Additionally, with unique technology effects and a distinct causation mechanism, technology subsidies already work as an independent and complete form of subsidy. Converting it to other types of subsidies will distort the internal logic since a new subject, whether the technological innovation has improved the production or features of the new products, would be added at the end of the technology analysis process, which should have been accomplished after the causation analysis was done. THE DEFICIENCIES IN THE TECHNOLOGY SUBSIDY RULES As this article has stated, the subsidy mechanism in the SCM Agreement is built on the price effect analysis, which starts with financial support and ends with the causation of the adverse effects. This means technology subsidies functioning on technology effects have to adapt to the rules envisaged for price effects. In this sense, some technology subsidy measures will not be disciplined in the context of the SCM Agreement when they elicit consequences that are potentially beneficial to the products’ competitiveness, as long as those consequences are not listed in the SCM Agreement. In contrast, some other technology effects might be exaggerated in the subsidy analysis to aggravate the suspicion of the challenged measures violating WTO disciplines, even if they do not fall within the scope of the SCM Agreement. The Technological Risks Examination In Technology Subsidy Loans The preferential loan has been a representative form of subsidy. Although the SCM Agreement stipulates those loans are illegal only if they consist of direct or potential governmental transfers of funds, the DSB is likely to examine further since the governmental support will not be shown on the surface. Other than loans with below-market interest rates, preferential loans could involve particular conditions to support some enterprises. In EC-Airbus, the United States accuses

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the launch aid and member State financing (LA/MSF) programmes of providing loans to Airbus with back-loaded repayment schedules and extended or forgiven provisions to offset the risks of an insufficient quantity of aircraft sales (Airbus, 2011). Such preferential lending is more likely to be considered as a governmental contribution, because the fundamental rationale for companies to get funds from the capital market is that the greater the risks of the loan use, the less favourable would be the conditions provided. This is the reason why the United States asserts that the high technological risks, but preferential conditions of the Airbus project indicate those loans to be non-market activities, which makes them more likely to be considered as a governmental contribution. Therefore, technological risk could be one of the indicators to measure how much the government has influenced the technology loan subsidies, though it is not included in the SCM Agreement. The technological risk has been mentioned in assessing the technology subsidies. In EC-Airbus, the risk premium is a criterion to estimate the risk level of Airbus projects. The United States proposes a project-specific risk premium as the “outer limit” for Airbus to pay the lenders in the capital market, which is accepted by the Panel (Airbus, 2011). It believes the funds directed to Airbus were conducted above the reasonable risk premium, implying a high likelihood of governmental interference. The Appellate Body does not support all of the Panel’s findings but still claims that the EU has understated the risk level (Airbus, 2011). Based on the general methodology of the actionable subsidy, the DSB analyses the technology subsidy by following the instructions of the SCM Agreement but ignoring its particularity compared with other actionable subsidy forms. Governmental support is a sufficient condition that leads to a competitive advantage in the logic of the general actionable subsidy, which is dubious about applying to technology subsidies because they follow a distinct mechanism. With the absence of available technology subsidy rules, the risk examination falls into a paradox that both the positive and the negative judgements could make sense. On the one hand, technology subsidy is claimed to be impactful on trade by having technology effects that come from technological innovation, but the technology subsidy is not a sufficient condition for technological innovation. Other factors, like technology accumulation, are significant in developing new technologies and attenuate the risk level of the innovation. Given the absence of those elements in the analysis of the DSB, it may overestimate the risk level of the technology subsidy. However, on the other hand, reverse logic could also be persuasive. Technology subsidy can never guarantee to realize an innovation. It assists a recipient who is ready to pick up technological improvements, but no one knows what the market will need and buy (Kennedy, 2020). This particular

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uncertainty will reduce the expectation of investment income, thus increasing the risk level. The Difficulty In Calculating Research Benefits In general subsidy cases, the adverse effects can be effectively removed by withdrawing the subsidy measures since they are where the competitive advantages originate from. Being reflected on the market, the price effects can be calculated and form the basis to implement the remedy process. Yet such a remedy method is incompetent to remove the technology effects because, as this article has already stated, the effects may exceed the amount of the technology subsidy. In the context of the SCM Agreement, the price effects are examined within the period when the subsidy comes into force in the market. Therefore, the remedy would only cover the losses of the competitors in that period. If a technology subsidy is viewed as illegal according to the SCM Agreement, this type of remedy will not be sufficient to compensate the impacts of pre-competitive research. This can be reflected in the example of photovoltaic cells that we have given. The new battery technology is temporarily unavailable due to cost reasons, but if this technology is to be used in the future, companies that have completed preresearch will gain a competitive advantage. This does not mean that pre-research subsidies are legal in the WTO context, but in cases where pre-research and other subsidies are reviewed together, it is difficult to determine pre-research subsidies because they may not be the core issue of the case. LOOKING FORWARD For the PV industry, where technology will play a progressively greater role, the importance of technology subsidies will continue to increase. Though it is an industry of great significance to environmental protection, the traditional subsidies towards PV are about to end, but fossil fuel energy subsidies will still exist. In this sense, it is reasonable to keep a safe harbour to uphold the development of the PV industry and to lower its trade impacts to an acceptable extent. Technology effects work as the conduit in the existing structure of technology subsidy analysis. Technology subsidies must be converted into technology effects, and those effects will be examined to determine how much they would be seen as price effects, which would be the basis of the remedies. However, due to the lack of available regulations, the analysis of the technology effects largely depends on the discretion of the DSB. The discretion of the DSB is helpful in a way, as it adds more opinions and knowledge in this area, but it can never be adequate for

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technology subsidy cases because of their complexity. Additionally, as discussed in this article, the DSB has already showed some inconsistency in using different criteria (risk analysis) to analyse the technology effects in their reports. New rulings centering around technology effects can be conducted in different ways. The first is a conservative path. This requires the DSB to add more examinations of the technology effects instead of just mentioning them. The DSB has full authority to complete it without any obstacles, but this method can only attenuate the plight and cannot adapt to new changes in technology subsidies. The DSB would still largely review technology subsidy disputes case by case eventually. A proactive method is to view the technology effects independently from other general subsidies. The root cause of the problems encountered by technology subsidy is that although it has its own independent operating mechanism, it has to convert itself to apply other subsidies’ rules. The DSB still has the authority to implement it through a special section in its report. This will greatly solve the problem of technology subsidy but has a stronger trade impact. Moreover, there is also an aggressive way to introduce an exemption for technology subsidy through reinterpreting WTO rules. Since Article 8.2 of the SCM Agreement has expired, there is a need to refer to the preamble of the WTO, where protecting and preserving the environment are listed among the main targets of the WTO. CONCLUSION The PV dispute between China and Europe illustrates the controversial nature of renewable energy subsidies under the WTO trade regime. According to the history of subsidy policies in China and the EU, energy subsidies manifest themselves in two forms: production subsidies and consumption subsidies. This essay finds that energy subsidies towards consumption, although imposing substantial trade impacts in the long term, are arduous to recognise as illegal under WTO regulations. However, PV subsidies are liable to violate WTO obligations since governments primarily grant PV subsidies on the production side. It should be noted that, with both China and the EU constantly pursuing PV financial support termination, there will be fewer chances for them to file a PV complaint or initiate countermeasures solely towards subsidies. Nevertheless, this does not mean the end of PV conflicts. The existing PV subsidy rules are too rigid to facilitate the development of this industry effectively. For the PV industry’s growth, it is necessary to reinterpret the rules in order to support PV research activities.

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CONSENT FOR PUBLICATION Not applicable. CONFLICT OF INTEREST The author declares no conflict of interest, financial or otherwise. ACKNOWLEDGEMENT Declared none. REFERENCES Airbus. (2011). European Communities and Certain Member States – Measures affecting trade in large civil aircraft (WT/DS316/AB/R). Airbus Available from: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx? filename=Q:/WT/DS/316ABR.pdf&Open=True. Asmelash, H.B. (2015). Energy Subsidies and WTO Dispute Settlement: Why Only Renewable Energy Subsidies Are Challenged. Journal of International Economic Law, 18(2), 261-285. [http://dx.doi.org/10.1093/jiel/jgv024] Boeing. (2012). United States – Measures Affecting Trade in Large Civil Aircraft (Second Complaint) (WT/DS353/AB/R) Available from: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/WT/ DS/353ABR.pdf&Open=True Commission, E. (2020). Solar power is a safe and cost-competitive renewable energy source. Retrieved February 2, 2022 from. https://energy.ec.europa.eu/topics/renewable-energy/solar-power_en. Conibeer, G. (2007). Third-generation photovoltaics. Materials Today, 10(11), 42-50. [http://dx.doi.org/10.1016/S1369-7021(07)70278-X] De Bièvre, D., Espa, I., Poletti, A. (2017). No iceberg in sight: on the absence of WTO disputes challenging fossil fuel subsidies. International Environmental Agreements: Politics, Law and Economics, 17(3), 411425. [http://dx.doi.org/10.1007/s10784-017-9362-0] Doane, M.L. (1995). Green light subsidies: technology Syracuse J. Int’l L. & Com., 21, 155. Espa, I., Marín Durán, G. (2018). Renewable Energy Subsidies and WTO Law: Time to Rethink the Case for Reform Beyond Canada – Renewable Energy/Fit Program. Journal of International Economic Law, 21(3), 621-653. [http://dx.doi.org/10.1093/jiel/jgy031] Groba, F., Cao, J. (2015). Chinese Renewable Energy Technology Exports: The Role of Policy, Innovation and Markets. Environmental and Resource Economics, 60(2), 243-283. [http://dx.doi.org/10.1007/s10640-014-9766-z] IEA. (2020). Solar PV module shipments by country of origin, 2012-2019. Available from: https://www.iea.org/data-and-statistics/charts/solar-pv-module-shipments-by-country-of-origin-2012-2019. Kennedy, M. (2020). The adverse effects. World Trade Review, 19(4), 511-530. [http://dx.doi.org/10.1017/S1474745619000326] Lester, S. (2011). The problem of subsidies as a means of protectionism: Lessons from the WTO EC‘Aircraft case’. SSRN Electronic Journal, 12(2), 97-124. [http://dx.doi.org/10.2139/ssrn.1966786] Mo, K. (2020). The state of solar: Bracing for a post-subsidy era in China. The Paulson Institute. Available

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from: https://www.paulsoninstitute.org/green-finance/green-scene/the-state-of-solar-bracing-for-a-postsubsidy. Moerenhout, T.S.H. (2020). Energy Pricing Policies and the International Trade Regime. Journal of International Economic Law, 23(1), 119-141. [http://dx.doi.org/10.1093/jiel/jgz026] Panel. (2011). United States – Measures affecting trade in large civil aircraft (Second Complaint) (WT/DS353/R). Available from: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/WT/ DS/353R-01.pdf&Open=True. Resch, G., Ragwitz, M., Held, A., Faber, T., Haas, R. (2007). Feed-in tariffs and quotas for renewable energy in Europe. CESifo DICE Report, 5(4), 26-32. Sinke, W.C. (2019). Development of photovoltaic technologies for global impact. Renewable Energy, 138, 911-914. [http://dx.doi.org/10.1016/j.renene.2019.02.030] Tyson, L.D.A. (1993). Who’s bashing whom?: trade conflict in high-technology. Peterson Institute. Vasconcelos Sampaio, P.G., Aguirre González, M.O., Monteiro de Vasconcelos, R., Santos, M.A.T., Jácome Vidal, P.C., Pereira, J.P.P., Santi, E. (2020). Prospecting technologies for photovoltaic solar energy: Overview of its technical-commercial viability. International Journal of Energy Research, 44(2), 651-668. [http://dx.doi.org/10.1002/er.4957] Wirth, H. (2021). Recent facts about photovoltaics in Germany. Available from: https://www. ise.fraunhofer.de/en/publications/studies/recent-facts-about-pv-in-germany.html. WTO. (2012). European Union and Certain Member States – Certain measures affecting the renewable energy generation sector. Available from: https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename= Q:/G/TRIMS/D34.pdf&Open=True. Wu, M. (2015). Re-examining ‘green light’ subsidies in the wake of new green industrial policies (Strengthening the global trade and investment system for sustainable development, Issue. I. C. f. T. a. S. D. (ICTSD). Available from: https://e15initiative.org/wp-content/uploads/2015/09/E15-Industrial-Polic-Wu-Final.pdf. Yamaguchi, S. (2019). Greening regional trade agreements: Subsidies related to energy and environmental goods (OECD Trade and Environment Working Papers 2020/01. Available from: https://www.wita.org/wpcontent/uploads/2020/02/7e1fe8ed-en.pdf.

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CHAPTER 2

Corporate Social Responsibility: The Experiences of China, Japan and Bhutan. A Comparative Approach Federica Monti1,* Political Science, Communication and International Relations Department, University of Macerata, Italy 1

Abstract: The concept of corporate social responsibility (CSR) has its roots in the United States, between the 1930s and 1950s. Following the first definition proposed by Howard Bowen, who is today considered the father of CSR, it soon became a concept of great interest to the scientific community. Over the decades, this community has gradually shifted its interest from a definition of CSR to its implementation. Nevertheless, in today’s highly globalized and pluralized economies, affected as they are by new social issues, deficiencies in the theorization and conceptualization of CSR are still considered significant and pending challenges, which need to be resolved before there can be a univocal and global understanding of CSR. In this context, culture plays an important and distinctive role: the more global and de-territorialized a corporate’s activities, the wider the differences to which its CSR approach is exposed. Consequently, when applied to a pluralized and globalized market service, the more difficult the theorization and conceptualization of CSR become. The experiences of Japan and China, both deeply touched by Confucianism over time, represent two interesting examples of special dimensions of CSR from which Western countries can learn much. The CSR approach of Bhutan offers another interesting perspective. Recognising that the objective identification of corporate duties is extremely complex, and that it is equally complex to identify criteria, on the basis of which a corporate practice may be considered to conform to the principles of CSR, the chapter wants to stimulate debate around the question: Does CSR need to be regulated and defined, as ‘something’ new in corporates’ management experience, or is it perhaps something that has always existed, and in some situations, is self-regulating and therefore it translates only in a tool for competition?

Keywords: Comparative law, CSR, Culture, Eastern – southern asian countries, European union, United nations. Corresponding author to Federica Monti: Political Science, Communication and International Relations Department, University of Macerata, Italy; E-mail: [email protected] *

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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INTRODUCTION Nowadays, corporate social responsibility (CSR) has become a concept of crucial importance, resounding louder than it ever did in the past. Among the questions that emerge most frequently within debates on the topic are: ‘What is the best definition of CSR?’, ‘What does CSR really stand for and what does it imply?’, ‘Does a univocal definition of CSR really exist?’ Other debates may include ‘CSR as a sustainable choice and as an integrative part of corporate governance models’ and ‘CSR as an external strategy of management to increase a corporate’s value.’ However, it is significant that, over time, reflections on the theorization and conceptualization of CSR have generally remained at the edge level, and there has been greater debate on their possible application. It is to be noted that during recent decades, we have witnessed a shift in the interest expressed in the scientific literature: by the early noughties, scientific contributions had moved away from theoretical research and on to empirical investigation (Carroll, 2008). However, the huge proliferation of attempts at clarification and explanation, although not oriented towards achieving a univocal concept of CSR, must not be interpreted as an indication of the inefficiency of the system but, on the contrary, as an index identifying the specificity of certain systems (legal, economic, cultural, etc.) and of the countries of origin, and consequently confirming the need to search for a CSR identity. You can consider China and its version of CSR—created and reshaped with Chinese characteristics (qiye shenhui zeren, 企业社会责任 )—in contrast to the Western-centric CSR, or you can think of the Japanese interpretation of CSR (kigyō shiyakuwai sekinin, 企業社會責任 ), which is shaped according to the managerial philosophy of Kaizen (改善) and other business precepts, such as the Kyosei ( 共生), which expresses the concept of co-living. Another very special CSR-related concept is that of a Gross National Happiness (GNH) based economy, such as that in Bhutan, where the GNH is considered to be of greater importance than the Gross Domestic Product (GDP). Consistent with these adaptations of CSR, the definition proposal for CSR, which probably expresses the greatest truth, is that suggested by Votaw (1973), in whose opinion: ‘The term [CSR] is a brilliant one; it means something, but not always the same thing, to everybody’.

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The Origin And The Development Of CSR: A Brief Overview For a better understanding of CSR, and in an attempt to pinpoint its essence, it is useful to go back to its origins: CSR has its roots, mainly in the United States, between the 1930s and the 1950s. Investigated by both economic and legal sciences, CSR was systematically analysed and adopted as a new business model. This was supported by growing interest from the scientific community and built on the milestone ‘definition’ as proposed by Howard Bowen (1953), who is still today considered the ‘father of CSR.’ ‘The term social responsibilities of businessmen will be used frequently. It refers to the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society. This definition does not imply that businessmen, as members of society, lack the right to criticize the values accepted in society and to work toward their improvement. Indeed, in view of their great power and influence, they may well have an obligation to do so. It is assumed, however, that as servants of society, they must not disregard socially accepted values or place their own values above those of society (Bowen, 1953). As mentioned above, during the 1930s, prominent authors such as Berle and Means (1932), Barnard (1938), Clark (1939), and later, Kreps (1940) started to develop a new concept for corporations, in which sensitivity towards human beings and their social problems, together with behavioural practices inspired by moral values, should direct an executive body in its management operations. Later, prominent studies involving CSR pushed toward a theorization of the concept. This process was continued and strengthened by the contributions of Frederick (1960), Davis (1967) and Sethi (1975), who latter stated: ‘the concept of social responsibility is prescriptive in nature,’ continuing that it ‘implies bringing corporate behavior up to a level where it is congruent with the prevailing social norms, values, and expectations of performance; later it continued to be explored thanks to Drucker’s (1984) thoughts on CSR as being a way ‘to turn a social problem into economic opportunity.’ Drucker had already been preceded by Carroll (1979) with his innovative three-dimensional conceptual model, taken as the fundamental premise for the concept of pyramidal CSR. Despite its centrality, a definition of CSR has never been shared or made official, either at the international level, or at the macro-regional level (by scholars, by institutions, through countries’ self-regulation codes where present, and so on), with the inevitable result that there are several, independent definitions, which are not coordinated or in line with each other, and consequently, often interpreted with profound differences. Furthermore, most of the scientific literature on the

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topic is focused on an analysis of CSR-related aspects in Western democracies, and mostly in the developed countries, with little consideration for Eastern countries’ experiences of CSR, from which the theorisation of the CSR concept might well benefit. Attempts to theorise CSR from the Asian perspective have essentially been sporadic. The concerns of those countries in relation to CSR are all pretty recent, and they have generally been out of step with Western countries, so that when they manifested interest, scholars elsewhere were already focused more on the practical implementation of CSR, and no longer on its conceptualization, which still remains vague. In contrast, the growing interdependence between global economic development corporate globalisation, globalisation, internationalisation) and global social challenges (for example, ‘Agenda 2030,’ better known as the Sustainable Development Goals [SDGs], as defined by the United Nations [UN]) pushes to overcome the neoclassical concept of the corporate (as compared to the institutionalist concept) as an environment with a closed economy and a selfinterested organization. Instead, there is a need to consider a sensitive completion when doing business, with an embedding of exogenous elements and an invitation (or maybe pressing?) of corporations to take into account a whole new range of factors. From this movement, synonyms and new terms linked with CSR have been appearing, enlarging the business vocabulary. Examples of these new terms and references include corporate accountability, corporate citizenship, responsible business conduct (RBC; European Commission [EC], 2011), creating shared value (CSV) or, reverting to Bowen’s terms, public responsibility, social obligations and business morality. Issues of nomenclature aside, the choice will depend on personal perceptions, sometimes more focused on the humane and ethical aspects, and other times, assuming the importance of transparency in doing business. All these are linked by the same fundamental principle: the call to be more sustainable, with a view to promoting public welfare, and therefore, not only being guaranteed by the State (by means of focused CSR legislation) but also pursued by actors from the private sector of the economy. In this way, the concept of CSR has been extended to include not only purely economic aspects but also other disciplines, such as political science, sociology, the law, and ethics. Consequently, corporates’ responsibilities are now being extended beyond the more traditional economic or, in some cases, legal duties (that is, the maximization of their profits, thereby fulfilling the expectations of corporate ownership) to include the encompassing of ethics and discretionary and voluntary

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factors. When aimed at a univocal and final definition for CSR, the Western literature on CSR and the current debate are focused on the contrast between the neoclassical theory of (Smith 1776) and shared by the Nobel-prize winning economist, Milton Friedman (1962), ‘[…] every individual necessarily labours to render the annual revenue of the society as great as he can. […] led by an invisible hand to promote an end which was no part of his intention. […] By pursuing his own interest, he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good (Smith, 1776). ‘[…] a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud (Friedman, 1962) and the institutionalist theory of (Freeman 1984), who intended the corporation as a societal institution and as such, has to be concerned with its stakeholders (in terms of the company’s relationship with society in general) and with the public welfare. ‘ […] changes have occurred in the external environment of a business which necessitates changes in the way that executives think about their organizations and their jobs. In particular, I have suggested that shifts in traditional relationships with external groups such as suppliers, customers, owners and employees, as well as the emergence and renewed importance of government, foreign competition, environmentalists, consumer advocates, special interest groups, media and others, mean that a new conceptual approach is needed. […] the new approach, called “the stakeholder approach,” […] is on how executives can use the concept, framework, philosophy and processes of the stakeholder approach to manage their organizations more effectively (Freeman, 1984). In brief, the long-lasting dialogue concerning in whose interests a corporate should be managed, can be summed up by contrasting terms in the historical CSR debate concerning “shareholders’ theory” versus “stakeholders’ theory”.

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CULTURAL FACTOR

VARIABLES

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AS

THE

MAJOR

DISCRIMINATING

From the preceding discussion, it emerges that, by adopting the stakeholdertheory model, CSR becomes a set of responsibilities that are in addition to the corporate’s traditional responsibility, namely, profit-making. In relation to this, this chapter considers experiences from certain Eastern and Southern Asian countries, which have developed very different dimensions in their CSR, even though these often remain out of the limelight. Among these, Japan, China and Bhutan serve as interesting examples for the comparison. Each of these has been chosen because of its specific characteristics: while at a cultural level, China and Japan have a similar cultural heritage (Confucianism), their different government-corporate relationships and the different balancing of interests (government vs. corporate vs. stakeholders), led to their similar cultural values being interpreted and implemented in different ways. This will also affect their implementation of CSR concepts. The special features of Japanese and Chinese CSR are due to the fact that the managerial and juridical cultures of both countries have been profoundly permeated by the Confucian doctrine, and its influence can be clearly identified in their CSR applications. Bhutan, on the other hand, represents a completely unique experience in which the sustainable development of the country is approached from a holistic view of ‘progress’, in which factors that are not strictly economic, but are linked to the well-being of the community, are recognized as being of equal importance to those of a clear economic matrix. In particular, the Bhutan experience warrants investigation because of its GNH metric, used as an alternative benchmark for the measurement of development, within the frame of Buddhist society. For Bhutan, as Prime Minister Tshering Tobgay, stated in 2018, ‘Buddhism [has] influenced critically both the governance and its leadership in our country, and through these two institutions affected human development. In the case of Bhutan, Buddhism has moulded our citizens’ attitude to the environment and animals. Bhutan is one of the world’s smallest countries, but it has undertaken one of the world’s heaviest commitments to conservation. Bhutan is a biological hotspot’. These differences are so evident that to wonder where the borderline exists between business ethics and CSR becomes almost meaningless in those contexts. However, this in no way means that these Asian countries, taken here as our reference, have perfectly sustainable and inclusive systems (One has only to think of the decades-long problems linked to the pollution that afflict China!). However, it does mean they are complex countries (or maybe extremely simple?) set up around a constellation of refined logics (which are not only due to their

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government system or leadership) and founded on a special basis, which makes both CSR and business ethics take on different functions and meanings. Hence, one of the most common questions in debates on CSR concerning what the choices of management and of the governance body should be guided by (whether by their ethics or by what is good for the corporate ownership and/or stakeholders?), would have different answers in different countries. The more globalized and de-territorialized the corporates’ activities are, the wider the cultural differences will be to which the CSR is exposed, and consequently, the more difficult it will be to apply the theorization and conceptualization of CSR to their pluralized and globalized market service. It is not by chance that the need to distinguish between business ethics and CSR is a common Western issue, but not an Asian one, as the latter find it hard to even keep the two concepts separate. In the West, CSR is, at least on paper, on a voluntary basis for corporations, although it is practically a choice of obligation, especially in relation to competition-linked factors (apart from reputational ones, among others). The same can be said of business ethics, when considering the common understanding of the culture of legality as being based on ethical values. In contrast, in China and in Japan (and generally in all countries touched by Confucianism, although they vary in this regard), CSR has always been intrinsic to business practices, which are guided by ethical values that act as the primary driver towards CSR, although without any culture of legality behind them (morality comes first, the legal code second). The fact that the objective of corporates’ responsibilities is identified in relation to other factors, and according to a precise balancing of interests, and therefore with a precise top-down prioritising of interests to be protected (as will be seen with reference to China) is another matter. Nevertheless, the gradual adoption of CSR in the Western manner seems to be happening in the East, in some instances without affecting the existing system (as in China), and in other situations generating considerable disorientation (as in Japan). To focus briefly on Japan: there are many crucial terms in the Japanese language that tells us much about Japanese cultural traditions, and it is useful here to conduct a comparison of the Nipponese experience of CSR with that of Western countries. The giri

undoubtedly comes first. This derives from the Chinese yili

, and it refers to the milestone principle, which exercises its influence in different contexts and relationships, but never identifies itself with a rule at the base of relationships themselves. The giri principle has permeated the Japanese

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legal experience over time, making the law perceived as being not necessary for society. As Noda (1976) states this, ‘Japanese do not like law. This means that you cannot study the Japanese approach to CSR without reading it through the giri lens, which entails (contrary to the Western view) an intrinsic and not a prescribed set of responsibilities towards stakeholders. Interesting findings come from a survey conducted by Yoshimori (1995) which reported that 97.1% of Japanese managers who were asked to identify themselves with one of two proposed options for answering the question ‘Whose company is it?’ selected the option ‘a company exists for the interest of all stakeholders’, versus the only 2.9% who selected the option ‘shareholder interest should be given the first priority’. It is to be emphasised that this survey was conducted in the mid-nineties, before the introduction of CSR in Japan, and it represents clear evidence for why Japanese governance corporations were identified as already being structured on the ‘stakeholder-model’ principle, even at a time when they did not yet acknowledge CSR principles. It becomes obvious that this placing of stakeholders at the centre of corporate attention, even though it is more inclusive, makes the search for a definition of CSR, from a global perspective, still more difficult. The expectations and orientations of stakeholders’ are not the same all over the world, and not even within the context of the same continent or country, since they will depend on many factors. As has been observed, the objective identification of corporate duties in the light of CSR principles, is extremely complex, and it is equally complex to identify the criteria on the basis of which it can be stated whether a corporate practice is considered to be adjusted to the principles of CSR. Even if there is a desire to individuate, list, select and monitor all possible stakeholders of a corporate, the pluralisation of our economies is now extremely variable (both in terms of typology and aspirations), and this means that it is no longer possible for corporations to control their respective interlocutors. Therefore, is it really necessary to intervene from the outside, by ruling the CSR for example, or would it be better to intend that CSR should be an intrinsic and self-regulating dimension of a corporate (wherever it is located)? As touched on briefly in the Japanese reference, this question can be answered by using the comparative method and looking at experiences other than the Western one, which can exemplarily underline the natural adaptation of CSR to ‘nonspecific variables’ (Melis, 1999), such as the pertaining legal system, the political background and the cultural values of a particular social community. Among the definitions previously mentioned, the most significant one seems to be that of

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Votaw, since this is the only one that includes the relevance of CSR to individuals’ feelings and, indirectly, to their cultures. Most Western literature on CSR, although it considers the effects of culture on CSR, does not pause long enough to consider this aspect in any depth, nor does it attempt to understand how much the local culture has influenced and still influences certain countries’ experiences of CSR, how much culture may influence the theorization of CSR in general, and consequently, what are (if any) the consequences for the market. The interdependence and influence of cultures in law-making, policy-making, communication, business ethics and practices are obvious. To this end, Francesco Carnelutti (a prominent Italian jurist, 1879–1965) stated, ‘Whoever knows only the law does not even know the law’, thus emphasising the importance of knowing the culture before one can have an authentic knowledge of the law. This statement actually references all the aforementioned variables. It has been shown in the literature, for instance, by Kats et al. (2001) and Williams et al. (2008), how expectations and orientations affect corporates’ practices in relation to stakeholders from different cultures and with different value sets, how these will vary, and how, due to these variations, the concept of CSR acquires different dimensions. Essentially, this logic is aligned to the one underlying the Global (good) Corporate Citizenship or the Extended view of Corporate Citizenship concepts, which might also represent the alter ego or an improved extension of CSR in the era of pluralization and globalization in modern society, in which corporates have to be responsive and reactive in responding to the challenge of cross-cultural attitudes. So, accepting the elusive nature of CSR, especially when intending it as a culturelinked concept, yet not giving up on the attempt to define it, this analysis wants to take advantage of a comparison between the dimensions of CSR as experienced in certain Eastern and Southern Asian countries, such as China, Japan and Bhutan, due to the fact that they are deeply permeated by their important cultural heritages (recognising that they are not the only ones). These cultural heritages make their social life and their political and government dynamic essentially self-regulating, inspired by moral values and, in some instances, by spirituality. DIMENSIONS OF CSR IN EASTERN AND SOUTHERN ASIA COUNTRIES: CHINA, JAPAN, AND BHUTAN Before the analysis of selected countries, a premise is to be done. It should not be forgotten that CSR was essentially a ‘Western creation’, and it is

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not something typical of Eastern countries (in general), despite the implementation or adoption of CSR principles within their systems, over time. This process has occurred through a transplantation of Western-style CSR principles, at least in its early stages, and this has clearly shown CSR to be a fluid concept, adapting to the social and cultural contexts where it has been integrated, each time bringing new and distinctive meanings, and yet not without negative effects. The adaptive nature of CSR is not a new feature, although previously, it emerged in a less evident manner due to the less-evident differences between Western countries, especially when they are considered from an internal perspective in the light of Western culture. Most of the extensive literature on the topic is focused on the experiences of the United States and European countries and, despite a few studies on CSR in Asia (by Western scholars), and although there are more of these than in the past, the ‘Western paradigm’ (Tang & Li, 2009) still represents the baseline for the conceptualization of CSR. This is not necessarily a negative criticism, but it does suggest a method that cannot guarantee it will arrive at a global and inclusive vision for CSR. As Stohl, Stohl and Townsley (2007) envision it, ‘A global CSR is responsive to the multiple cultures, value sets, and communicative practices of different nations while recognizing that (inter)organizational contexts are no longer bounded by the nation-state. Western countries, more confident and familiar with juridical tools (especially in comparison to countries like China or Japan), tend to instruct and direct corporations’ operations, or even force them to be certified according to certain international standards. One has only to think of a large number of indirect accountability tools, such as the International Organization for Standardization (ISO), the ISO 14000 family of certifications regarding the enhancement of the environmental performance of a corporation, or the ISO 26000 family, which provides guidance, helping business organizations to translate CSR principles into effective action and sharing best practices, globally. Comparing these trends with the Asian experience, it is probably enough to comment that, already in 2004, the Chinese central government totally rejected the idea of adopting the SA8000 as national labour protection standards, considering them inappropriate. Corporate Social Responsibility in the People’s Republic of China The Influence Of Confucianism And Other Socio-political And Philosophicalreligious Movements Several elements of traditional Chinese cultural heritage should be considered

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when exploring the country’s experience of CSR, which is undoubtedly unique in its genre and yet still involved in a search for its own identity as one with Chinese characteristics and echoing Chinese characteristics that distinguish the Chinese system as a whole. What is today called ‘Confucianism’ is not the only element that has affected the Chinese interpretation of CSR (Mohism, Daoism and Buddhism all play important roles, as well), and although Confucianism is not unique to the Chinese tradition, it must be said that it has played a central role in the re-shaping or adapting of the CSR concept to the Chinese context. Over time, the influence of Confucianism on CSR has spread to other countries, although the extent of its influence has varied. Korea, Japan and Vietnam were all permeated by Confucianism, and in their cultural contexts, it acquired new forms and partially, new meanings in its further development. This is why distinctive features are found in Korean and Japanese Confucianism, even though, to be more precise, what really became dominant in those contexts was Neo-Confucianism. The periodization of Confucianism differs depending on the method followed by scholars in interpreting the relationship between Confucianism and history over time. It can be said that it went through two major stages after its creation: The first can be referred to as the renaissance and decline period (960–1911), and Neo-Confucianism is located within this period, while the second stage is the modern transformation period (1912–today). This differentiation underlines how deep the roots of the cultural heritage of China and Japan are, which still remain alive today in their values. To understand how, today, Confucianism emerges and manifests itself in the form that CSR has assumed in China, there is a series of terms that perfectly highlight its essence. Confucianism has always paid attention to ethical virtues and moral principles, both interpreted as the driving forces of human beings’ potential: ren (

, humaneness, benevolence), yi (

, rightness), li (

, ritual propriety),

cheng ( , sincerity), zhi ( , wisdom), xin ( , trustworthiness), and xiao ( , filial piety), among others. What Confucianism preaches is that if all members of a certain community cultivate their own characters and act and behave with respect for ethical virtues and moral principles, society will live in peace and harmony. To achieve this aim, you must reserve space for the Dao ( ), which is another crucial key-word. This is a cluster of concepts, often translated as the Way, even though it is an extremely variable concept, and which has been interpreted differently over time by Chinese intellectuals. The Dao has been expressed by various translators as the Way, but also as the Road, Path, Course,

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Speech and/or Method. Through the Dao, human beings are directed toward right behaviour within society in relation to ethical and moral values. In this way, Confucianism contributed to shaping the structure of Chinese society, of the entire community, and of family groups, by representing the inspiration and aspirations of the people as standards, norms and ideals (a kind of soft-law) in most parts of East Asia. The Chinese culture experienced interactions with other socio-political and philosophical-religious movements in addition to Confucianism (which, while important, is not sufficient to explain the interpretation of CSR in China), examples being Mohism, Daoism (Taoism) and Buddhism. Among these, Mohism, which comes from the thoughts of Mozi, preached the concept of jianai ( , ‘universal love’), which is close to the concept of philanthropy that forms the ideological root of CSR, and which is more unselfish than the Confucian love of humanity. While Patrick and Liong (2012) point out that ‘Confucian leadership is significantly aligned and in support of the concept of corporate social responsibility’ (p. 112), on the other hand, Daoism preaches that humans live in harmony with nature, and they should practice the art of wu wei ( , which literally means no action), in allowing nature to take its own course. Here too, Daoism, seems to be extremely close to the concepts of CSR in leading human beings to avoid materialism (profit-making activities) at the expense of nature, and especially, the environment. Aligning this view is Buddhism. This advises its disciples not to be self-centred and encourages them to focus on and practice love and compassion for others. ‘Practicing altruism is the real source of compromise and cooperation; merely recognizing our need for harmony is not enough’ (Dalai Lama). It summarizes its ideas as instinctive altruist CSR (as expressed by psychology researcher, Felix Warneken) but in mature adults. A CSR with Chinese Characteristics In analyzing the CSR concept in China, two features of the Chinese system should not be neglected: the first concerns the composition of the country’s economic fabric, in terms of the ownership structure of the economy. There is a need to understand into which hands fall—in reality—the management of Chinese corporates, and consequently, in whose interest the management system runs. The second feature concerns culture, and how values, embedded into the Chinese culture as a result of the Confucian influence, have affected Chinese business

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ethics and the Chinese interpretation of CSR, in a cause-effect relationship. With reference to the ownership variable, and as provided by the Constitution of the People's Republic of China (in article 11), it should be noted that the Chinese economy includes a non-public sector of the economy ( which you can deduce that there is also a public sector (

), from ).

An aspect of special importance, which emerges when analyzing the evolution of the country, is that the aforementioned article 11 of the Chinese Constitution has, over the years (from the early 1980s until today, although with a major emphasis at the end of the 1990s) undergone significant change regarding the greater role that the private sector of the economy (

,literally private economy)

plays at the expense of the public sector and of the State ( , literally state economy, also called , that is the economic sector under the ownership of the whole population). Even though the reference is to the ‘private economy’ as a sector apart from the ‘state economy’ one, the intention is not here to compare the entire non-public sector of the Chinese economy with the entire public sector (to which article 11 makes reference, and which are both in a genus-species relationship respectively with the private and state ones). Instead, it must be observed that it is mainly the private sector of the Chinese economy and the entire non-public sector that are being ‘encouraged, supported and guided in [their] development’. Looking at the most recent statistical data released by the National Bureau of Statistics of China, precisely with reference to the Number of corporate enterprises by [region and] the status of holdings (dated 2019, but with reference to 2018), you can see that state-holdings amounted to 325,800 enterprises, collective-holdings accounted for 249,946 enterprises, while, decisively higher, the number of private-holding enterprises amounted to 16, 204, 143. Despite what was said above and even conversely to the aforementioned statistical data, it is naïve to minimize the role of the public sector in the Chinese economy, and to think that it has almost lost its importance in the Chinese economic scene. The Chinese economy, in fact, although it is no longer dependent on the public sector, still remains fully under the control of the state. That is, the Communist Party of China retains the power to guide the country in its development. Its role is central, making the distinction between what is private and what is public difficult, with the results not always being clear.

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To this end, it is worth recalling Article 19 of the Company Law of the People’s Republic of China ( ), an often-ignored article in spite of its importance, which is very meaningful, and which states: ‘The Chinese Communist Party may, according to the Constitution of the Chinese Communist Party, establish its branches in companies to carry out activities of the Chinese Communist Party. The company shall provide necessary conditions to facilitate the activities of the Party.’ According to this article, there are several companies in China, especially those informally labelled State Owned Enterprises (SOEs) and those whose actual control is ascribed to the state, but not excluding private companies, that have their own Chinese Communist Party (CCP) branch, or CCP representative members within their own governance system. With reference to the control of the CCP over the private sector of the economy, it should be noted that its presence within non-public enterprises, to which those seen as private belong, is a key element of the CCP effort to carry out its principles and policies. Moreover, in recent years, CCP branches embedded into the corporate governance of private enterprises have not only grown in number, but they have strengthened their role in the management and human resources, as well. Despite the fact that in the post-economic reform (in 1978), China adopted a gradual transition to a market economy (giving progressively back to individuals the freedom to initiate economic activities in the market), there are clear and explicit (and legally established) signs of the actual control by the CCP over all sectors of the country’s economy. When we want to categorize enterprises in China in relation to their ownership structures, we can distinguish between state, collective and private enterprises. However, this categorization does not strictly represent the control structures of those enterprises. Although, in fact, they seem to be independent divisions, in reality, the control of the State is inescapable and is over the private enterprises, as well. The main and basic task of the country, for years, has been to concentrate all efforts on social modernization and on the path of building a socialism with Chinese characteristics ( ). This is the result of the Chinese economy reaching a turning point in the early 1980s, under the paramount leadership of Deng Xiaoping, when the main target of the government became the profit maximization of corporations, with a huge focus on the private sector, which passed from being a mere complement to the socialist economy to becoming an important sector in it. Still reflecting on the role of the CCP in the governance of Chinese corporates, it is clear that it does not represent a juridical contradiction of the renovated Chinese

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system, but rather acts as a support and driver for corporations. In detail, in public enterprises (such as SOEs and collective enterprises), the CCP acts as a guarantor and supervisor of the correct implementation of the CCP’s principles and the policies of the State. It controls the correct exercise of functions at shareholders’ meetings, on boards of directors and boards of supervisors (or, in some cases, the managers and directors). In non-public enterprises, it realizes the CCP’s principles and policies, acts as the leader in guiding and supervising the enterprises’ observance of laws and regulations, safeguards the legitimate rights and interests of all stakeholders, and contributes to the healthy development of all enterprises. In brief, the CCP spreads its influence even without being the owner, and it must be said that this is a key element of President Xi Jinping’s leadership. According to a statement issued by Xinhua, the Chinese State news agency (on October 24, 2017), the 19th Party Congress ‘unanimously’ agreed that the leadership of the CCP is ‘the fundamental feature and the greatest advantage of socialism with Chinese characteristics.’ It added, ‘Party, government, military, civilian, and academic, east, west, south, north, and center, the party leads everything.’ The duties of CCP members were, and remain, mainly two: to help economic organizations to gain revenues and to maximize their profits, and to fulfill the obligations provided by the CCP Constitution (as revised and adopted at the 18th CCP National Congress on Nov 14, 2012). In this regard, particular attention is addressed to article 3, which states, ‘Party members must fulfill the following duties: To adhere to the principle that the interests of the Party and the people stand above everything else.’ However, at least two questions arise: How should the reference to ‘the Party’s and people’s interests’ be interpreted? And Are those interests in line with CSR principles and values? Compared to the Western experience, CSR has been practised in the Chinese context for a relatively short time of just under thirty years, during which three important steps have enabled its gradual adaptation. • The first period: CSR was almost absent from 1984 to 1994, during the era of Deng’s leadership, which was oriented toward the recovery of the Chinese economy. As has been seen, the freedom to run individual economic activities was given back to all Chinese citizens; new regulations on private enterprises (at different levels) were issued, and the maximisation of their profit became not only

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the main aim of the government, but also the main responsibility of the economic organisations of the time. For instance, Article 2 of the Provisional Regulations on Private Enterprises (1988) stated that ‘for the purpose of these Regulations, the term “private enterprise” shall refer to a privately funded economic entity which employs at least eight persons’. The English-language translation of this article may be only partly useful, since it hides an important nuance. The original version of this law reveals that in defining private enterprises, the Chinese legislator used the expression “ ”, which can be translated as ‘economic organisation with a profit-earning aim’. Thus, it appears that the main aim of all private economic organisations in China – and which they had to embrace if they were to be labelled in this manner – was (and still be) to be profit-oriented. This is not surprising since, in revamping the private sector, the Party’s and people’s interests were set as the maximisation of profit for the wellbeing of society. Besides, the Party’s and people’s interests naturally tend to change over time and follow (or even anticipate) the country’s needs. During this first period, in fact, the country suffered several problems as consequences of Mao’s long leadership (1945 1976), among them the alarming unemployment rate and the enormous gap between rich and poor. Despite China’s total lack of experience with CSR, a few social initiatives close to the aim of CSR were launched. In 1994, for example, the first China Guangcai Program ( ) was promoted, initiated and implemented by Chinese private employers to alleviate poverty in response to the Eighth Seven-Year Poverty Alleviation Plan. The China Society for Promotion of the Guangcai Program (CSPGP, ) was formally established in 1995 upon approval from the Ministry of Civil Affairs. Today, upholding the core concept of ‘prioritizing social responsibility while seeking profits’, it still aims to eliminate poverty in povertystricken areas, mainly through investment by private enterprises, so as to achieve overall development. ●

The second period can be dated to the early 2000s. During this ‘CSR learning period’ in China (Wang & Juslin, 2009), the need to investigate CSR was noted in the Chinese government’s agenda, resulting in the 2003 proposal of ‘the scientific development concept’ ( ), and, later (2006), in the call for the construction of a harmonious society ( ), under President Hu Jintao’s leadership (2003 – 2013), which can both be read as signals of changes

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in government priority, from economic growth to societal balance and harmony. ●

Last but not least, the third step, from 2004 to the present, represents the turning point in China’s experience of CSR. CSR began to be considered an economic driver, even if it was initially adopted in a merely passive form and as a passive effect of foreign purchasers’ requests (Zhou, 2006). Simultaneously, in fact, foreign investors from the West, mainly from Europe and United States, started to adopt global CSR standards in their operations in China (Lin, 2010). During this most recent phase, the Chinese government has been actively working in two directions. First and foremost, it has been searching for its own CSR identity with Chinese characteristics. Chinese corporate management bodies have always struggled to accept the Western CSR paradigm, since it has been considered inappropriate for China, being too Western-centric and not paying sufficient respect to pluralistic values and cultures. Second, the government has worked hard to strengthen the country’s legal system and legal framework, standardising and amending laws and regulations and issuing new juridical tools inspired by CSR values.

During the first period of the CSR experience in China (1984 – 1994), there were already traces of prescriptions akin to CSR principles, even if not clearly oriented toward it. In the first version of the Chinese Company Law ( ) of 1993, the concept of CSR was embedded in the Articles 14–16[1] and was thus present before the amendment of 2005, which almost totally rewrote the law. Although considerable changes were made, Article 5 of that law states that: ‘when conducting business operations, a company shall comply with the laws and administrative regulations, social morality, and business morality. It shall act in good faith, accept the supervision of the government and general public, and bear social responsibilities. (…) The legitimate rights and interests of a company shall be protected by laws and may not be trespassed.’ The reference to business ethics ( ( ) is clear.

) and social

responsibilities

Moreover, following the issuance of the Company Law of 1993 and its amendment in 2005, something similar happened to The Code of Corporate Governance for Listed Companies in China ( ) of 2002 (Article 86), which had recently been invalidated by the China Securities Regulatory Commission, which issued the New Code of Corporate Governance of Listed Companies in 2018. The later version of the New Code dedicates, among

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other provisions, the whole of Section VIII (Articles 83–87) to ‘Stakeholders, Environmental Protection and Social Responsibilities’ (

).

As already stated in the introduction to the present paragraph, in order to understand the dimensions CSR has been acquiring in China, the cultural variable

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must be considered alongside and as part of ownership structure. It is not an independent variable, since culture permeates everything, particularly in Asian countries. Just think how, in the Chinese experience (among others) Confucianism has deeply affected relationships between individuals in the community and within each family group, to the extent that it has also influenced the way in which law is used to govern society. China, like Japan, has always had a conflictual confidence in the law, given its strong belief in a self-regulated society through the process of self-regulation toward the self-cultivation and refinement of one’s character (Tu, 1998). All great Western comparatists, such as René David, Konrad Zweigert, have, in fact, found the culture to be the trait d’union of all Asian countries’ experiences with the law. As proof of this, the current Chinese five-year plan to build the rule of law (2020 2025) offers a concept of law with Chinese characteristics, which contains much of Confucianism. Concordantly, Professor Cohen (2021), a globally famous Chinese academic, asked whether the government is under the law or the law under the government or, in other words, whether there should be the rule of law or rule by law. In posing the choice, which is leading China toward the building of its rule of law system, a strategy of the Party is to ‘[…] broaden its appeal by invoking a selective version of Confucianism to serve, like the legal system, as another instrument of political control’ (Cohen, 2021). Two aspects clearly emerge. The first concerns the continuous revival of the cultural aspect, which also permeates political choices (as cultural values which the government truly shares or those it merely uses to strengthen general consent); the second, more intrinsic, factor concerns the influence that Confucianism has had in gradually redesigning the function of the essence of the CCP, over time, with the result that CCP became a conscious victim of cultural tradition. This is what the political philosopher Yang (1995) called the “integration of politics and religion/education” ( ), interpreted by modern Chinese scholars as Confucianist political theory. This interpretation is confirmed by the brilliant vision of the current direction of Chinese policy shared by Guo (2016), who argues the CCP is attempting to re-anchor political norms and institutions in cultural roots, benefitting from them and reinforcing their legitimacy. In brief, what CCP leaders are doing is not only justifying China’s political system (understood to encompass political values and the development model), but acting in the light of ancient Chinese traditions. Thus, coming back to the rooted Chinese attitude, which seeks a self-regulated society, Confucius’s reply to one of his disciples should be recalled: ‘The one thing needed first [to rule a state] is the rectification of names’(Fung, 1966). This

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reply summarises what was later named the “rectification of names doctrine” ( ), in the light of which each class of things should be given a name to which certain responsibilities and social implications correspond, in order to rule society and achieve order, peace and harmony. The organisational structure of Chinese civil society and the way in which relationships between individuals are self-regulated are, in fact, extremely important and interesting; above all, however, it is worth reflecting here on how the same structure and self-regulation ability can be traced in Chinese corporations and their management. The comparison with the West still serves as a means of interpretation and a useful (and necessary) key to grasp the dimensions of Chinese CSR. In Western countries – at least, all Western democracies – state, economy and society are in parallel, ordered on a horizontal plane. Conversely, in China the structure is pyramidal, hierarchical and, therefore, ordered on a vertical plane. The Chinese CSR notion is similarly conceived: government (CCP), corporation management, shareholders and stakeholders are ordered hierarchically. Their roles are defined according to the five-cardinal or multi-level relationship order ( , Wulun), through which Confucius described the ‘Great Harmony’, which was the ancestral concept of the harmonious society. Fan (2000) described perfectly the order and principles of Wulun, which must govern the following relationships: 1) between sovereign and subjects (basic principle: loyalty and duty; today, this relationship can be read as the relationship between the state and corporations); 2) between the father and the son (basic principle: love and obedience; today’s relationship between customers and corporations); 3) between husband and wife (basic principle: obligation and submission; to be read today as a relationship between company and employees); 4) between elder and younger brothers (basic principle: seniority and modelling subject; the modern relationship between managers and ordinary employees); and 5) between friend and friend (basic principle: trust; today’s relationship between corporations and their trade partners). When the Wulun order was first applied to management, it led to the birth of a paternalistic management style in both China and Japan (Hsaio, Jen & Lee, 1990). There is no doubt that the first relationship is the most important, in the light of the immanent presence of the CCP, which acts as the Junzi ( ), which, for Confucianism, is the man – here metaphorically intended – endowed with superior virtues (in contrast to the xiao ren , or what we might call “little man”), and who, for this reason, is at the top of the hierarchical pyramid. CSR in

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China can, in fact, play a leading role in all levels of relationships, but it must always answer to the Party’s interests, that is, the same interests of which Article 3 of the CCP Constitution speaks and which bring in the interests of the people. To conclude our analysis of how CSR has been implemented in China, we can make two reflections. First, even if most communications between government and corporates take the form of guidelines ( ), guides ( ) and opinions ( ), as seen above, and are therefore not expressly coercive in form (they are never labelled “policies” ( ) or “regulations” ( )), they assume a mandatory value in practice, since the government recognises Western-style CSR as a strategic tool of competition in the global market. From this point of view, the country is not so distant from Western countries. Second, as some authors (Marquis & Qian, 2014) have found, a great difference can be observed between corporations in terms of their accuracy in compiling CSR reports. Tendentially, the higher the likelihood of government monitoring of a corporation, the more accurate and substantive the content in the report will be (in the case of bureaucratic embeddedness, that is, when a CEO has experience as a government official). The same applies in connection to whether the area of activity and/or its localisation (headquarters) is/are more or less exposed to government control. This situation is further and tangible proof of, first of all, pressure (the mandatory effect of apparently non-coercive government communication) and second, the use as one’s convenience of CSR prescriptions, factually used in terms of easier access to financial resources, maximization of their profit, and better chances in national (or global) competition. What results is that the Chinese characteristics, which feature in the implementation of Western CSR in China, have safeguarded the country from inconvenient consequences and have increased the internal legitimacy of the CCP, which continues to grant the protection of (Party’s and) all people’s interests. Resorting to metaphor, one could compare the CCP to the ‘invisible hand’spoken of by Adam Smith: an immanent presence and guide in society that acts within the market (with Chinese characteristics!) in accordance with one’s own interest (to be read as the interest of the CCP, at the service of the country and in the interest of society as a whole), bringing the entire economic system into a general equilibrium. Japanese CSR and the “Reverse Effect Of Thinking Kaizen”. A Brief Analysis Of The Most Common Japanese Business Terms In describing the relationship between Chinese corporations and the government,

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one can use two concentric circles, with the inner one representing the CCP cell in any corporate governance structure. In describing the same in Japan, one could image a zipper-shaped relationship made up of two parallel lines (interlinked) which are driven by the same goal (the implementation of CSR). In contrast to those in China, Japanese corporations are linked with the government in a sort of partnership relationship: they collaborate in designing and implementing CSR plans. This does not mean, however, that the Japanese government does not interfere at all in corporations’ activities. Nevertheless, it must be said that the reason for its influence on CSR is different from that in China, and its presence is also less oppressive, as its functions are limited to corporate guidance. In confirmation of this, the Japanese style of government influence not only takes the ostensible form of guidelines but remains guidelines in the substance, unlike what happens in China. In the Japanese business culture, this attitude toward the creation of a feedback loop, which is decisive in exploring opportunities for continual improvement throughout the system, is called gemba ( ), a term not normally used to refer to the relationship between the government and corporations. The term literally means the actual place where a certain event happens or a certain activity takes place. With a micro-vision, management commonly uses gemba to refer to the place where value is created (for example, the sales floor or the factory division of a manufacturing company) and, in particular, the activity that takes management to the front lines, where it can gain an intimate understanding of all relevant issues, leading to the improvement of the entire system. Here, gemba serves as a metaphor referring to government control aiming at better implementation of the CSR framework and to a mechanism which, it is worth underlining, relates to the common practice of Japanese corporate management. Although the Japanese and Chinese government–corporation relationship points of view are misaligned, their file rouge remains the effect of Confucianism on their culture, even though different results are ultimately achieved (Paramore, 2016). As in China (as already seen in the analysis of CSR there), (neo-) Confucianism has played an important role in shaping traditional Japanese culture and affecting Japanese CSR. The concept of giri, mentioned above (section 2), is an example of the different roles played by the legal culture in Japan, which favours anti-formalism.

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To understand the Japanese concept of CSR, one can start from the analysis of certain and very significant key terms (with a clear neo-Confucian imprint) which have been absorbed by the Japanese business vocabulary. This method reveals how Japanese corporations commonly use cultural and informal mechanisms to manage and govern corporate activities. If Japanese CSR-linked watchwords are to be ranked in order of importance, the first position must be reserved for the concept of Kaizen ( , also known as the “Toyota model”, being one of the core principles of the Toyota Production System, from which the author of the Kaizen concept took inspiration). The Japanese path toward the notion of Kaizen was relatively long. As already seen, the common values of the stakeholder model, although not conceived in relation to CSR, were already taking root in Japan during the so-called Meiji Jidai ( , 1868–1912), which saw important juridical reform toward modernising society overall. As happened in China, Japan started to be inspired by European juridical models (in particular the French and English ones in the first instance, and later the German) (Yoda, 1976). With the Meiji Restoration (1868 – 1889), Japan passed from having mainly variable, inconsistent and ultimately ossified economic health (Bevacqua, 2005) to being a more stable economy, which was further pushed by the introduction of capitalism, spearheaded by Eiichi Shibusawa, who is today known as “the father of Japanese capitalism” (Shibusawa Eiichi, n.d.). Shibusawa was a leading figure in the development of Japan’s modern society, having served the national government in different posts (from 1869 until his resignation in 1873); he contributed to the first Japanese Code of Commerce, and, during his tenure as Minister of Finance, he launched the idea that economic practices should not be divorced from ethical values. His proposals were shared by many politicians of the time; the use of ethics in business conduct even started to be considered a tool to foster and accelerate the modernisation of the country, and it was felt that individual profit should not be separated from concern for the community. Shibusawa is also credited with introducing the first corporate codes of conduct, which are the precursors of today’s ethical codes. During the 1890s, after the Meiji Restoration period, another important step in the intrinsic Japanese CSR attitude was taken, which was, again, differently conceived, adopted and/or implemented to Western-created CSR. What springs to mind in particular is the publication, in 1930, of The Spirit of Mitsubishi: The Three Principles, edited by the then-president of the Mitsubishi company, Koyata Iwasaki.

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It was only in 1956, as highlighted by Lanna (2009), that the notion of CSR appeared for the first time as conceived in the common Western meaning (called kigyō shiyakuwai sekinin, ). It arrived as a reaction to the translation in Japanese (1960) of the milestone book on CSR edited by Howard Bowen (1953), in conjunction with the response of the Japanese Association of Corporate Executives (Keizai Doyukai, founded in 1946), and the first document it issued on the awareness and practice of CSR, which underlined the institutional role of all corporates. During the 1960s, Japan witnessed important economic growth, which had the direct effect of weakening the feeling of collectivism in the community, leaving space for growing individualism; the pursuit of personal interests even started to become people’s primary aim. The concern for the community long preached by politicians and corporations also seemed to suffer from the dramatic growth of the Japanese economy. One of the main reasons for the changing economic scenario of the country was, in fact, the introduction of the concept of Kaizen, formulated for the first time in 1986 by Masaaki Imai (the author of Kaizen: The Key to Japan’s Competitive Success, from which the Kaizen methodology was derived) to describe the managerial philosophy of creating high-quality items at very low prices, which brought Japan unprecedented success. The 1993 edition of the New Shorter Oxford English Dictionary recognised the word Kaizen as an English word. Imai’s (2015) defined Kaizen as ‘continuous improvement of working practices, personal efficiency, etc., as a business philosophy’. In fact, Kaizen means “change for the better” (from kai = change/improvement and zen = good, better/for the better) and expresses the concept of a gradual and unending continuous improvement. It has a particular link with CSR, even though ‘thinking Kaizen’ can be practised in all aspects of life. There is no single Kaizen but several, as Kaizen can, by nature, change and adapt to the environment where it is adopted. Moreover, it is not necessarily or totally voluntary, since its shape strongly depends on the form it takes in a specific context. For present purposes, what is important is its cultural logic (once more linked to cultural traditions) and singular influence on Japanese CSR. Brunet and New (2003) identified three main features of Kaizen: it is continuous, being ‘both the embedded nature of the practice and also its place in a neverending journey towards quality and efficiency’; it is incremental in nature; and it is ‘participative, entailing the involvement and intelligence of the work force, generating intrinsic psychological and quality of work-life benefits for employees’. It is also linked to the gemba concept, as the place where the value,

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to be read as improvement, is created (Imai, 2015). The Kaizen concept remains a foundation of corporate management today and is also used in CSR practice, as being Kaizen, you are more sustainable. This is because Kaizen implies, in the short term, small but constant improvements (at all levels), which, long term, might become consistent ones. The participative factor within the notion of Kaizen seems to be the most interesting, especially from the CSR perspective. In fact, it translates as a dualforce concept: into a centrifugal force, with a spirit of improvement in how corporations behave toward the community by taking charge of social responsibilities; but also – and more importantly – into a centripetal force generated by the participation in the improvement process of the stakeholders (workforce, but also ordinary individuals), to the benefit of the corporates. This attitude, which is strongly influenced by Confucian ethics (and which somehow recalls the collaborative spirit between government and corporations), highlights two interesting aspects that have been generated over time: the loyalty of an individual towards society and/or a group of belonging (for example, to the Japanese Nippon Keidanren (the Japan Business Federation)), but also the sense of duty of all stakeholders (at different levels) towards the corporation, thus generating what is here called the “reverse effect of thinking Kaizen”. This important reverse effect ultimately overturns the CSR logic in Japan, as not only do corporations feel concerned for society, but stakeholders feel a sense of duty toward corporations, which is, again, a typical Confucian value. The ‘Need for Co-existence’ slogan, launched by the President of Keidanren in the period 1990–1994, serves as food for thought for another interesting business term in the Japanese language, and one which has deeply influenced the implementation of CSR in Japan: the concept of Kyosei ( ). One possible translation of Kyosei is ‘spirit of co-living’ (the term is comprised of kyo = ‘co’ and sei, = ‘living’, literally meaning “co-living” or what the Chinese would call gongsheng , translated as “symbiosis”). Some authors (Kaku, 1997) prefer to define it as ‘spirit of cooperation’, which may better render how Kyosei has connections with CSR (and Kaizen as well), if read as a tool to establish a harmonious relationship between corporations and stakeholders. It was not until the twentieth century that Kyosei began to be applied in business management. As seen, collectivism started to be abandoned, leaving space for individualism, and the Japanese stakeholder model (section 2) underwent gradual transformation because of both domestic (the financial crisis of the early 1990s) and overseas

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factors. CSR started to acquire growing importance in Western countries and for Western economies; consequently, the demand to be (or feel) aligned with international trends pushed Japan to embrace CSR. This change was tackled by a return to traditional cultural values, which had been challenged for a while by an uncommon – for Japanese society – move toward innovation and personal interest as primary aims. It can be observed that the most interesting descriptions of how the term Kyosei has taken form in the management of corporations come not from the academic literature, but from managers, who described how, over time, (Confucian) cultural values were adopted in corporate governance systems. This is a clear signal of how what we call Kyosei is not, in fact, a business superstructure (as could be seen in the CSR system) but, rather, an intrinsic value to which a name has been given (taken from the country’s cultural heritage). It is worth recalling the experience of Kyosei shared by Ryuzaburo Kaku, the Chairman of Canon (1977–1989), who pursued success for Canon by introducing the Kyosei view into its structure. He defined Kyosei as the ‘[…]‘spirit of cooperation’ in which individuals and organizations live and work together for the common good. A company that is practicing kyosei establishes harmonious relations with its customers, its suppliers, its competitors, the governments with which it deals, and the natural environment (…). It was in 1987 that I introduced the concept of kyosei, which blended Canon’s technological leadership with the belief that we could work with others to improve the world’(Kaku, 1997). Later, at the beginning of the 1990s, a similar position can be seen in a statement by Gaishi Hiraiwa, who, before he became Chairman of Tokyo Electric Power Company (1999–2007), suggested that Japanese corporations should have sought a symbiotic relationship with the international community, within Japan itself and with citizens, with this ‘symbiosis’ being a clear reference to the Kyosei concept (Boardman & Kato, 2003). To sum up, the Kyosei concept embeds the essence of the ethical virtues and moral principles preached by Confucius, in particular benevolence, to be read as reciprocity, rightness, in respect of relationships, by balancing between one’s own interest (corporate and/or individual) and altruism (which also recalls the image of centrifugal and centripetal forces, like Kaizen), and wisdom, that is thinking of oneself as part of a whole and contributing to reaching harmony; acting properly with each other. Professor Kenneth Goodpaster (1996) reflected on the Kyosei concept thus: ‘Kyosei takes us beyond the conventional business thinking (markets and laws) to a comprehensive aspiration for happiness, justice and cooperation. In practice, we

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must assume, this means tempering individual, organizational and even national self-interest by concern from embracing the‘ common good’ and tempering the assertation of narrower entitlements by concern for more basic rights (e.g., liberty and equality) in a just society’. The second part of Goodpaster’s (1996) thoughts is particularly illuminating. Still, managerial experiences can confirm that CSR should perhaps not be led by laws, but by values and culture. Nevertheless, as seen a few lines above, the choice to embrace CSR in Japan was not really a free one, but a reaction to outside pressure, which has led to managers feeling uncomfortable. As reported by Tanimoto (2017), one interviewed manager stated that, ‘honestly speaking, we thought CSR was not necessarily a must in management and were not willing to do anything unnecessary at that time. We were also not able to estimate the risks of failing to respond to it’. In recent years, the tendency of Japanese corporations seems to be toward gradual adaptation to the Western concept of CSR (rather than seeing it as part of strategic management). However, this leads to all the defects consequent on what is defined ‘mimetic isomorphism’ of the CSR institution (a disorientation effect), in particular relating to lack or inefficiency in corporate–stakeholder communication or the clear individuation of objects of social responsibility. For many corporations, CSR in the Western style continues to represent only a cost, not a necessity. Confucius would have said: ‘He who exercises government by means of his virtue may be compared to the north polar star, which keeps its place and all the stars turn towards it. (…). If the people be led by laws, and uniformity sought to be given them by punishments, they will try to avoid the punishment, but have no sense of shame. If they be led by virtue, and uniformity sought to be given them by the rules of propriety, they will have the sense of shame, and moreover will become good […]’. The Kingdom of Bhutan As part of this contribution, alongside the two great giants of the world economy, the experience with CSR of Bhutan has been individuated as worthy of analysis as well. Even if it was characterised by a completely different economic scenario, its unique approach towards sustainable development within the frame of a Buddhist society makes this little country an interesting element of comparison. Bhutan has captured the attention of scientific literature infrequently, probably due to its marginal presence in the world market; a banal quantitative approach to

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the existing scientific and/or academic bibliography is sufficient to confirm this trend. With a population of 787,535 (equal to 0.01% of the world population as of May 3, 2023) and a Gross Domestic Product (nominal) of 2.528 billion US dollars (data updated to 2023, May 3), the democratic constitutional monarchy of Bhutan, after centuries of confinement, opened its borders, albeit with caution, to foreign investments and multinational companies only in the late 1990s. Nevertheless, under the leadership of His Majesty the Third Druk Gyalpo (King of Bhutan from 1952–1972), Bhutan became the 128th member of the United Nations in 1971. The main characteristic of the country is undoubtedly the adoption of Gross National Happiness (GNH) as an alternative measure of the country’s development, and, by this side, it suggests possible similarities with CSR principles. The concept of GNH was formulated in 1972 by His Majesty Jigme Singye Wangchuck, the Fourth King of Bhutan (his Kingdom lasted from 1972 to 2006), who firmly believed that happiness was an indicator of progressive development, even of greater importance, than the GDP. This represented the real aspect that has made GNH an attractive object of analysis by the existing literature on Bhutan, but only a few questioned the possible correlation between GNH and CSR. The embedded logics within the concept of GNH imply, the adoption of a holistic approach towards sustainable development, giving importance not only to economic (material) factors, but also to non-economic (spiritual) aspects of wellbeing, that is, reserving attention to non-material aspects of spiritual, cultural, societal and environmental (essentially, those referred to the balance of so-called four pillars of GNH, recalled below). By this path, the beneficial development of human society takes place when material and spiritual development occurs side by side. This holistic view of the country’s development, which takes much of the traditional values of the Mahāyāna Buddhist religion (the cultivation of compassion, stemmed from this ancient wisdom), has led the country in 2012 to establish the Gross National Happiness Centre of Bhutan (GNHCB), an observatory that represents nowadays ‘a tribute’ to take forward the vision and philosophy of GNH at the global level as well.

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As observed by Givel & Figueroa (2014), in fact, ‘Happiness policy in early Bhutan promoted a view of a wise ruler providing governmental support so citizens may become enlightened due to Mahāyāna Buddhism. Happiness policy in Bhutan has evolved from an early Buddhist focus to a range of factors that maintain Mahāyāna Buddhist traditions balanced with modern societal requirements’. It was already stated in the Bhutanese code of law, dated 1629 (known in the Dzongkha language, with the name of Cha Yig Chenmo): ‘if the government cannot create happiness for its people, then there is no purpose for the government to exist’, stressing that Bhutanese laws must contribute to promoting happiness. With an eye to the past, you can see that the policy based on happiness, launched by the Fourth King of Bhutan through the theorization of GNH, occurred in a precise step in Bhutan history. From the mid-sixties onward, following the end of the First Five-Year Plan (1961–1966) – which laid the foundation of the country’s development – the country started to know a growing economic development, mostly due to the efforts to endow the country of hydropower plants (especially from the early seventies) to which, immediately after, followed the business of energy export to India (the key of country’s rebirth). So, when the GNH concept was coined in 1972, Bhutan was in the full “explosion” of its economy, only virtual up to a few years before, and the formulation of GNH has represented an intervention tool to balance the pressure of capitalism and modernization with the values and heritage of Mahāyāna Buddhism. Nevertheless, until the Tenth Five-Year Plan (2008–2013), the formalization of the GNH remained for a long time only a noble aspiration. In 2008, the country embraced democracy and the Constitution of the Kingdom of Bhutan marked the passage from an absolute monarchy to a democracy constitutional monarchy. Article 9, comma 2 and comma 20 of the Constitution, titled ‘Principles of the State’, states: ‘The State shall strive to promote those conditions that will enable the pursuit of Gross National Happiness. […]. The State shall strive to create conditions that will enable the true and sustainable development of a good and compassionate society rooted in Buddhist ethos and universal human values’. So, only from that moment did the GNH become quantifiable and use as a

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reference tool for government policy. As clearly explained by the GNHCB, in the GNH have been individuated four pillars (for the first time described in the Ninth Five-Year Government Plan 2003–2008) which are ‘economic growth and development; preservation and promotion of cultural heritage; preservation and sustainable use of the environment; and good governance’. Besides the four pillars, nine domains of GNH were introduced later with the Tenth Five-Year Government Plan and served as a measure to operationalize the governance policy. The nine domains are: ‘psychological wellbeing, health, time use, education, cultural diversity and resilience, good governance, community vitality, ecological diversity and resilience, and living standard.’ The nine domains include both conventional aspects of development (such as standard of living, health and education) and unconventional aspects (such as psychological wellbeing, community vitality, cultural diversity and time use). Moreover, there are 33 indicators (further disaggregated into over 120 variables) ‘distributed’ within each of the nine domains and individuated, taking into consideration national public opinion surveys for an assessment of national wellbeing as reflected in the nine domains. Besides, with the Eleventh Five-Year Plan identified, 16 National Key Result Areas (NKRA, then incremented up to 17 with the Twelfth Five-Year Plan), which are closely aligned to the SDGs. Four pillars and nine domains are weighted equally; the GNH seeks to measure the nation’s wellbeing, starting with each person’s achievements in each indicator. People and related data are then subdivided into four different groups: unhappy, narrowly happy, extensively happy and deeply happy. However, it is to be said that the concept of happiness in Bhutan differs from the Western one. Bhutanese happiness is, in fact, a multidimensional concept whose meaning emerged clearly from the New Development Paradigm (NDP) creation: ‘genuine happiness is understood to arise from a deep abiding sense of harmony with the natural world, of compassion, contentment and joy. It also acknowledges that basic needs like clean air and water, good health, decent living conditions, knowledge, peace, security and justice, meaningful relationships, and other dimensions of well-being are essential preconditions for human beings to flourish and

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achieve true happiness’. In 2012, Ban Ki-moon, Secretary-General of the United Nations, gave the Royal Government of Bhutan (RGoB) the task of creating an NDP, marking both a turning point in the global scene, urging the need for a revolution of thinking, but also a milestone in Bhutan’s involvement, in defining a new global development agenda. The main aim of that task was to address the new economic, ecological and social challenges facing our word. ‘The old model is broken. We need to create a new one. In this time of global challenge, even crisis, business as usual will not do. Clearly, we must unite around a shared vision for the future - a vision for equitable human development, a healthy planet, an enduring economic dynamism'. Only a few months later, the RGoB completed and issued a report titled “Happiness: Towards a New Development Paradigm”. GNH & CSR: Is There Any Common Ground? The private sector of the Bhutanese economy remained overshadowed until the beginning of the 1990s, when, as a result of the Fifth Five-Year Plan, the government promoted gradual development, starting with the privatization of many state-owned enterprises into the new private shifted ownership. From that moment onward, the government has continued to stress the importance of the private economy for the overall development of the country’s economy. Most updated data, released by the National Statistics Bureau of Bhutan (the reference used is the ‘Economic Census of Bhutan 2018’), about the situation of the private sector suggests that currently, the private sector in Bhutan is predominantly characterized by small-scale enterprises in trade, industry and services, numbered around 14,000 establishments. Specifically, the intersection between GNH and CSR must be observed: ●

First, the influence of culture seems to have played and continues to play a relevant role in the community and in business activities. These are led, in fact, mainly in respect of moral values, imprinted in the society, although GNH does not factually affect the business practices, remaining – from this point of view – purely a virtuous index for the measurement of the country’s development progress and an indicator, mainly, for government policies. The cultural heritage and the culture of happiness, derived from Buddhist precepts, have been vivid in the community since the seventeenth century, as seen above, and so before the creation and the formalization of the GNH concept. This means that Bhutanese

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entrepreneurs strike business decisions, making a balance of different priorities, putting them in order on the basis of their morality and not in consideration of GNH pillars and/or domains. Substantially, people/stakeholders might come first, but without excluding for others different priorities (like a less altruistic aim, for example, in securing of one’s family wellbeing). Second, then, what, of the GNH, possibly recalls CSR is its four pillars, already cited: economy; preservation of cultural heritage; environment; and good governance. Crossing these pillars, with the shared values at the bottom of CSR, for example, taking as a reference CSR conceptualization attempts proposed by Freeman or later by Carroll (section 1.2), we can say the two concepts almost corresponding, except for the pillar related to cultural heritage (to be read preservation of cultural values and ethics). Possibly, Carroll (1991) has individuated the ethical responsibility and the philanthropic responsibilities, which could appear in assonance with the GNH preservation of culture, although they are not exactly synonyms. Whereas ethic responsibilities respond to the personal judgement of what is right and fair and what is wrong and unfair and philanthropic responsibilities respond to altruism, preservation of culture responds to several values (being in service of the community, being loyal, being balanced, being compassionate, and so on). Third, as proof of what above said, with an eye at the Companies Act 2016 of Bhutan, we can find only one reference to the GNH (article 163) within the Chapter on Director and on the Section on Code of Conduct. That article states: ‘The Regulatory Authority shall establish a Code of Conduct for the governance of companies which shall promote those conditions that will enable the pursuit of Gross National Happiness in accordance with Article 9, section 2 of the Constitution of the Kingdom of Bhutan’.

Contrarily, references to CSR are greater in number, although limited in any case. In particular, the adoption of a ‘Code of Conduct’, among other policies, is also recommended for a Company’s CSR policies (article 164); the maintenance of a CSR fund, administrated by the Company Board (article 165). Even most important, is prescribed, ‘There shall be attached to the annual accounts laid before the annual General meeting, report of its Board of Directors, with respect to: […] policy on corporate governance and Corporate Social Responsibility.’ In conclusion, there is no common ground between traditional CSR and GNH. The Bhutanese cultural heritage, values and ethics represent the key components of the country’s development (in happiness) and key elements to incorporate, possibly, into a CSR, the essence of which is destined to go greatly beyond the

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traditional CSR in Western style. THE INTERNATIONAL AND EUROPEAN TENDENCY, THROUGH SHARED CSR DEFINITIONS: A MACRO OVERVIEW The analysis of international and European tendencies related to CSR, which serve as further elements of comparison, is of great importance, even if it is only briefly traced here to support and complete the description above of the Chinese, Japanese and Bhutanese experience of CSR. To that end, we should recall certain definitions of CSR proposed at the international level. Let us start with the definition shared by the United Nations Industrial Development Organization (UNIDO, n.d.), the specialised UN agency that promotes industrial development for poverty reduction, inclusive globalisation and environmental sustainability, which states: ‘Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives (‘Triple-Bottom-Line- Approach’), while at the same time addressing the expectations of shareholders and stakeholders.’ This definition should not sound totally new for the reader, since it represents the essence or a sort of evolution of that already given by Gro Harlem Brundtland (1987), the former President of the World Commission on Environment and Development (WCED) of ‘sustainable development’. As already seen, a multitude of definitions of CSR exists, not always aligned with each other, since each attempt to shape the CSR identity of a specific context. One example of misalignments among CSR explanations can be found by comparing the international definition to that given at European Union (EU) macro-regional level, which seems substantially different. Initially, the EU shared a similar definition of CSR within the Green Paper focused on ‘Promoting a European framework for Corporate Social Responsibility’ (Commission of the European Communities [CEC], 2001), where CSR was defined as: ‘[…] a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis. Being socially responsible means not only fulfilling legal expectations, but also going beyond compliance and investing “more” into human capital, the environment and the relations with stakeholders’.

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The above definition essentially presents CSR as a mere possibility, separate from the prime responsibility of a corporation, which remains generating profits (CEC, 2021). Essentially, it was a moulding of the international definition, except for the relevant choice in not grasping the word ‘management’. What results is that the comparison of the two definitions is not immediate. Hence, it is not possible to compare the two definitions, for at least three reasons: ●

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The definition provided at the international level is unequivocal: the lexicon used and the definition itself leave no room for extensive interpretation, whereas the EU one is more evocative and partially generic (CEC, 2001). The two definitions represent the results of a different grade of perceptions respectively assumed by the two authorities: a new management trend versus a call to corporations to provide welfare services, besides – or in place of – national governments or providers. Finally, the two definitions, thus conceived, describe two different functions which CSR aims to carry out.

Under the international view, CSR is explicitly observed from the management perspective, even being defined as a ‘management concept’. In other terms, the accent seems to be on a socially-oriented modus operandi of the management body of a corporation, in line with executive body policies and values. At the same time, it could consist of a proper business model, discretionally adopted by the ownership (shareholders and/or partners). Hence, CSR ends up being ‘the means’ toward ‘the end’, where the end is a concern for the interests of stakeholders and owners: profit-making. In brief, it seems to refer to a new form of corporate governance or to an integral part of the traditional corporate governance models stated by a juridical system, which will consider, with different modalities and levels of appreciation (mono or multi-stakeholders), the rights and duties of the corporation, as well as the rights of its stakeholders, in reducing the potential negative consequences of management operations. This summarises what philosopher-politicians have introduced as, and what the literature calls (Donaldson, 1982; Donaldson & Dunfee, 1994; Sacconi, L., 1997); Laterza, Dunfee & Donaldson, 1999), the contractual or neo-contractual approach, supposing the existence of an implicit or hypothetical social contract between the corporation and society (Donaldson, 1982), wherein the latter authorises corporations, in organising themselves (as corporations), to promote social wellbeing. The social contract represents the moral legitimacy corporates need. To this regard, Donaldson (1982) stated: ‘To achieve a complete moral picture of a corporation’s existence, we must consider not just its capacity to produce wealth, but rather the full range of its effects upon society: its tendencies to

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pollute or to harm workers or, alternatively, its tendencies to help employees by proving jobs and other benefits for society’. The EU level in the new definition of CSR of 2011 (recalled below) seems to be closer to the contractual approach than that of the UN or the EU in 2001. However, to escape from the sphere of the hypothetical, it is necessary to formalise a commitment by the corporation, which brings scholars face to face with a problem which is difficult to solve and already analysed in section 2: the interest of stakeholders is variable, and it is difficult to identify CSR-related duties with some degree of objectivity. In 2011, the EU departed from its previous position, perceiving the need for a ‘new definition’ (EC, 2011). Currently, it defines CSR as the ‘responsibility of enterprises for their impact on society’, adding that ‘companies can become socially responsible by integrating social, environmental, ethical, consumer, and human rights concerns into their business strategy and operations following the law’ (Corporate Social Responsibility & Responsible Business Conduct, n.d.). From the European point of view, the definition of 2011 moves our attention further along: CSR seems, in fact, to fall within the range of institutional responsibilities of a corporation, both in terms of possible consequences (on the administrative, civil, criminal or simply reputational level) for its negative societal impact, or in consideration of the violation of voluntary (not binding) codes of conduct and, as a synonym of commitment, toward the corporate (internal dimension), stakeholders and community as a whole (external dimension) and in terms of the social commitment of a corporation. In other words, CSR (here, the term “responsibility” deserves particular attention), even without abandoning the social contract approach, ends up a special responsibility (special in terms of source) for the lack of compliance with mandatory or discretional provisions, such as the integration into the business strategy of concerns for stakeholders’ interests, going beyond mere profit-making activity. Accordingly, the European definition seems to share much more with institutionalist theory than the international one does. To understand the rationale underlying the basis of these two different positions, the European and the international one, one should reflect on what inspired the UN and what led the EU to re-think the CSR definition differently. Alongside this question, one must consider the institutional role that the UN, on the one hand, and the EU, on the other, respectively, play. In consideration of the evidently relative and multidimensional nature of CSR, the definition given by the UN (in accordance with the shared values of ‘Peace, dignity and equality on a healthy planet’) can only and reasonably accommodate all possible forms of CSR adopted

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by the acceding countries. This face would also seem to be confirmed by Art. 1 of the UN Charter, according to which ‘The Purposes of the United Nations are: […] to be a center for harmonizing the actions of nations’. At the international level, therefore, CSR was born from a consideration of companies as the backbone of the market economy, capable of dictating the rules of the game. Already, Bowen was convinced that companies were centres of power, capable of determining society, although not properly considering ethical aspects. At the EU level, companies take on an institutional and support role to act alongside the state in contributing to social well-being. It is not surprising if the definition is keener, being a synthesis of traditional values shared in the EU rather than comprehensive ones. To complete this brief synthesis of the tendencies at the international and European level, it is worth pointing out that on 23rd February 2022, the Proposal for a Directive on Corporate Sustainability Due Diligence and Annex was published. This Directive will, among other actions, ‘improve corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks; avoid fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability; increase corporate accountability for adverse impacts, and ensure coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct; and improve access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour. Moreover, being a horizontal instrument focusing on business processes, it will complement other measures in force or proposed, which directly address some specific sustainability challenges or apply in some specific sectors, mostly within the Union’. CONCLUDING REMARKS Corporate Social Responsibility has been a topic of discussion in the literature for a hundred years, yet without arriving at an agreement concerning either the concept or its theorization. After some initial attempts to define CSR, the focus moved away from a theoretical discussion to an empirical investigation of hypotheses, theories of application and possible legal consequences. Attention thus shifted towards problems of a different nature which, although interesting and stimulating, were established around a concept that was not yet clearly understood, or at least not understood in the same way by all. Confucius would remind us that ‘each class of things should be given a name to

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which certain responsibilities and social implications correspond, in order to rule society and achieve order, peace and harmony.’ This implies a common understanding by all people. Yet, very few of the proposed definitions of CSR consider (or else they consider only marginally) the cultural variable as a major discriminant in the conceptualization of CSR, one which is essential before it can be widely implemented. However, in our globalized and highly pluralized economy, with its multidimensional soul, such consideration would appear fundamental to creating an open and universal perspective. This chapter attempts an analysis based on reflections in which, in contrast to the literature, culture is placed at the centre. This was done in an attempt to understand if and how the cultural component could play a decisive role in the conceptualization and qualification of CSR. To this end, China, Japan and Bhutan were chosen for investigation, all according to a very precise logic. First, all three have a strong cultural (and, in the case of Bhutan, religious) heritage. China and Japan, both world economic powers, share a Confucian tradition, although it has been worked out differently within their respective borders. Bearing in mind the words of the Chinese historian, Gu Jiegang, in 1920, that ‘Every age has its own Confucius’, this should not surprise too much. Bhutan has a unique cultural dimension of great charm, where the nation’s interest lies not in data relating to its GDP, but in its GNH, a metric of gross national happiness. This alternative system for measuring the progress and development of the country attracted the attention of the United Nations and inspired a ‘global revolution of thinking’, culminating in a New Development Paradigm, in which the model of economic development is based on global happiness. The analysis of the development and implementation of CSR in China and Japan, on the one hand, confirmed the central role of a country’s cultural heritage in shaping its institutions’ identity. On the other hand, it showed how, in these countries, the concept of CSR ultimately translates into nothing more than a competitive tool, enabling institutions to maintain their role as active competitors in the global market, but certainly not essential for the nobility of its values. The reactions of China to the introduction of the concept of CSR, are eloquent: they accepted it, but, despite their apparent participation in the challenge of moving towards CSR, they see it as substantially irrelevant to themselves. China has always followed a Smithian-inspired developmental model, under the guidance of the CCP, and it is naive to think that the logic inherent to the CSR, born as it was in the United States, would change their orientation. It all depends on the balance of interests, who makes the decisions and what is ‘good’ for the

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stakeholders. Japan has, intrinsically, always owned the values embedded in CSR (although they were not inspired by it), but here we are now, witnessing a significant disorientation. Like China, Japan is adapting to market demands by adopting governance models inspired by CSR; however, Japan is struggling to understand the different logics and, therefore, to make it more than just a competitive tool. The experience of Bhutan, on the other hand, is unique: materiality, understood as the centrality of purely economic aspects, has never played a major role in the country. Being a small economy, the implementation of CSR for competitive purposes does not seem particularly relevant, and it is perhaps this different approach that could give CSR the opportunity to become a truly noble CSR, which goes well beyond western-style CSR. Ultimately, the cultural variable is undoubtedly a significant factor, which needs to be applied before there can be any theorization around the concept of CSR. This chapter aimed to stimulate debate around the question: Does CSR need to be regulated and defined, as ‘something’ new in corporates’ management experience, or is it perhaps something that has always existed, and in some situations, is self-regulating and therefore translates only into a tool for competition? CSR does not need rules, as understood in the technical sense; it probably doesn't even need to be defined. Any definition would, of itself, become a rule, which would mark outlines, margins and specific characteristics, and therefore, would run contrary to the need for inclusiveness. While offering a competitive advantage would seem currently to be its main functional trait, the implementation of regulations might well reduce this. If CSR is not submitted to cultural judgment, the risk is that it will only cultivate an illusion of being sustainable and inclusive, while in reality, it will just continue to aim for a competitive advantage. It is possible that CSR is not something new at all, or if it is, it could well be superfluous and in the near future (when it has lost its evocative power), be called by a different name. The Japanese experience is proof of this. CSR is not really useful in guiding corporates towards responsible behaviour; at best, it enables the creation of a reputational judgment, therefore translating itself, once again, into a mere instrument of competition. The cultural variable is the only self-regulating or soft-law tool that would be able to regulate CSR, as it is fluid and changeable, participatory and capable of going beyond the perceptions

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that individual countries may have of a formalized institution CONSENT FOR PUBLICATION Not applicable. CONFLICT OF INTEREST The author declares no conflict of interest, financial or otherwise. ACKNOWLEDGEMENT Declared none. REFERENCES Angle, S.C., Tiwald, J. (2017). Neo-Confucianism. A philosophical introduction. Polity Press. Barnard, C.I. (1938). The functions of the executive. Harvard University Press. Berle, A.A. (1932). Modern Corporation and Private Property. William S. Hein & Company. Boardman, C.M., Kato, H.K. (2003). The Confucian roots of business Kyosei. Journal of Business Ethics, 48(4), 317-333. [http://dx.doi.org/10.1023/B:BUSI.0000005799.31770.57] Bowen, H.R. (1953). Social responsibilities of the businessman. Harper. Brunet, A.P., New, S. (2003). Kaizen in Japan: an empirical study. International Journal of Operations & Production Management, 23(12), 1426-1446. [http://dx.doi.org/10.1108/01443570310506704] Carroll, A.B. (1979). A three-dimensional conceptual model of corporate performance. Academy of Management Review, 4(4), 497-505. [http://dx.doi.org/10.2307/257850] Carroll, A.B. (1991). The pyramid of corporate social responsibility: Toward the moral management of organizational stakeholders. Business Horizons, 34(4), 39-48. [http://dx.doi.org/10.1016/0007-6813(91)90005-G] Carroll, A.B. (2008). A history of corporate social responsibility: Concepts and practices. In: Crane, A., Matten, D., McWilliams, A., Moon, J., Siegel, D.S., (Eds.), The Oxford handbook of corporate social responsibility Oxford University Press 19–46. [http://dx.doi.org/10.1093/oxfordhb/9780199211593.003.0002] China Society for Promotion of the Guangcai Program. Available from: http://www.cspgp.org.cn China Textile Economic Information Website Available from: http://english.ctei.cn Clark, J.M. (1939). Social control of business. McGraw Hill. Clarkson, M.B.E. (1995). A stakeholder framework for analyzing and evaluating corporate social performance. Academy of Management Review, 20(1), 92-117. [http://dx.doi.org/10.2307/258888] Cohen, J.A. (2021). “Rule of law” with Chinese characteristics: Evolution and manipulation. International Journal of Constitutional Law, 19(5), 1882-1887. [http://dx.doi.org/10.1093/icon/moab085] Commission of the European Communities. (2001). Green Paper (COM(2001) 366 final). European

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Scherer, G.A., Palazzo, G. (2008). Handbook of Research on Global Corporate Citizenship. Edward Elgar. [http://dx.doi.org/10.4337/9781848442924] Sethi, S.P. (1975). Dimensions of corporate social performance: An analytic framework. California Management Review, 17(3), 58-64. [http://dx.doi.org/10.2307/41162149] Shiwusawa Eiichi Memorial Foundation. Available from: https://www.shibusawa.or.jp/english/ Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Printed for W. Strahan and T. Cadell. Social Accountability International. Available from: https://sa-intl.org Stanford Encyclopedia of Philosophy. Available from: https://plato.stanford.edu State Council of People’s Republic of China. Available from: http://english.www.gov.cn Stohl, C., Stohl, M., Townsley, N. (2007). A new generation of global corporate social responsibility. In: May, S., Cheney, G., Roper, J., (Eds.), The debate over corporate social responsibility. Oxford University Press. ,30–44. Subba, M.B. (2018). Buddha’s teachings on ethics have direct relevance to human development.Kunsel. Available from: https://kuenselonline.com Tang, L., Li, H. (2009). Corporate social responsibility communication of Chinese and global corporations in China. Public Relations Review, 35(3), 199-212. [http://dx.doi.org/10.1016/j.pubrev.2009.05.016] Tanimoto, K. (2017). The implementation of CSR management and stakeholder relations in Japan. Stages of Corporate Social Responsibility. CSR, Sustainability, Ethics & Governance. Springer.Idowu, S., Vertigans, S. (2017). 223-241. [http://dx.doi.org/10.1007/978-3-319-43536-7_11] The analects of confucius. Available from: https://chinatxt.sitehost.iu.edu The Economist. (2005). The way of the merchant Corporate social responsibility in Japan. Available from: http://graphics.eiu.com The Oxford English Dictionary. Available from: https://www-oed-com Tu, W.M. (1999). Humanity and self-cultivation: essay in Confucian though. Cheng & Tsui Co. United Nation. Available from: https://www.un.org/en USC Libraries. Available from: https://libguides.usc.edu/ Votaw, D. (1973). The corporate dilemma: Traditional values versus contemporary problems. Prentice Hall. Wang, L., Juslin, H. (2009). The impact of Chinese culture on Corporate Social Responsibility: the harmony approach. Journal of Business Ethics, 88(S3), 433-451. [http://dx.doi.org/10.1007/s10551-009-0306-7] What is CSR?. UNIDO. Available from: https://www.unido.org Williams, G., Zinkin, J. (2008). The effect of culture on consumers’ willingness to punish irresponsible corporate behaviour: applying Hofstede’s typology to the punishment aspect of corporate social responsibility. Business Ethics: A European Review, 17(2), 210-226. [http://dx.doi.org/10.1111/j.1467-8608.2008.00532.x] Yang, Y. (1995). Study of the Chinese traditional idea of politics and religion/education in one. Tianjin Social Sciences, 6, 51-57. [in Chinese]. Yao, X. (2013). The Encyclopedia of Confucianism: 2-volume set. Routledge. Yoshimori, M. (1995). Whose company is it? The concept of the corporation in Japan and the west. Long

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Range Plann, 28(4), 2-44. [http://dx.doi.org/10.1016/0024-6301(95)00025-E] Zhou, W.D. (2006). Will CSR work in China? Leading perspectives. CSR in the People's Republic.

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CHAPTER 3

AI, Corporate Governance And Sustainability Laura Marchegiani1,* 1

University of Macerata, Macerata, Italy Abstract: Since the beginning of this century, information technologies have been characterized by impressive advancements that have offered us powerful tools such as distributed ledger technologies, blockchain, machine learning algorithms and smart contracts. Corporate law has not been immune from this rapid evolution; in 2014, the news that an algorithm named “Vital” had been appointed to a board of directors of a Hong Kong-based venture capital firm caused a sensation in the business environment and among corporate law scholars. In fact, this algorithm did not assume the legal role of a board member; rather it operated as an advisor of the board of directors aimed at protecting the firm from risky (as well as overpriced) investments. A similar use of technology at the board level has been noticed as a starting point from which it is conceivable (and desirable) to develop unique tools to overcome humans’ cognitive biases and improve board monitoring function as well as boost businesses’ productivity. The crucial role of Corporation Technologies in reducing agency costs and promoting the disintermediation of organizational structures has been further emphasised in connection with the corporate social responsibility discourse. In fact, the economist Milton Friedman’s traditional assumption that ‘the only social responsibility’ of the corporation is ‘to increase its profit so long as it stays within the rules of the game’ has been vigorously re-discussed. In the Anglo-American corporate debate, as well as in the European debate, the sustainability of businesses is among the top item in the agendas of leading corporations and policy makers, increasingly so after the pandemic has exposed the vulnerability of economic structures to systemic risks. In view of the intersection between corporate governance and sustainability, the international debate has identified shareholders’ long-term interests as a point of convergence of private business models and social and environmental values. In other words, private companies are invited to assume a societal role and to design appropriate strategies for managing their impact on the environment and the society as a whole. The colours of 21st -century corporate law are blue for corporate technologies and green for environmental policies. The prospect of algorithmic governance in contemporary corporate law systems could be a desirable tool as long as it serves to pr* Address correspondence to Laura Marchegiani: University of Macerata, Macerata, Italy; E-mail: [email protected]

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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omote the sustainable development of firms integrating management models inspired by IEL general principles but not compromising their competitiveness.

Keywords: Artificial intelligence, Corporate governance, Sustainability. INTRODUCTION Since the beginning of this century, information technologies have been characterized by impressive advancements that offer powerful tools such as distributed ledger technologies, blockchain, machine learning algorithms and smart contracts. The breath-taking technical advances we have witnessed in recent years have been included in the field of artificial intelligence, or AI, generally defined as ‘the science and engineering of making intelligent machines’ (McCarthy, 2007). Recently, the European Commission has defined artificial intelligence as referring ‘to systems that display intelligent behaviour by analysing their environment and taking actions – with some degree of autonomy – to achieve specific goals’ (European Commission, 2018). The OECD AI Principles, adopted by OECD Member States in 2019, provide, in turn, a functional concept of artificial intelligence as ‘a machine-based system that is capable of influencing the environment by producing an output (predictions, recommendations or decisions)’ and ‘that uses machine and/or human-based data and inputs to formulate options for outcomes designed to operate with varying levels of autonomy’ (OECD, 2019). Artificial intelligence is thus a set of multipurpose tools and techniques created to stimulate processes that mimic human decision-making and involve the computer in performing traditionally human tasks. The definition mentioned initially is the only one general enough to be universally agreed, but the expression ‘AI’ is rather considered an ‘umbrella term, comprised by many different techniques’, including many services we use every day for improving our smartphone experience, like autocorrect features (Calo, 2017; Gruner-Csikszentmihalyi, 2018). The function of imitating human behaviour is not, however, essential in the development of AI and there is a widespread belief that the machine could overcome the cognitive capacity of human beings through the development of a form of artificial general intelligence, completely separate from human intelligence. Already today, however, intelligent machine systems can show key cognitive abilities which comprise a mix of classification, prediction, and decision-making processes, which have demonstrated a large range of applications in corporate governance, business management and investment decision-making.

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Corporate law has not been immune from this rapid evolution. In fact, in 2014, the news that an algorithm named ‘Vital’ had been appointed in the board of directors of a Hong Kong-based venture capital firm caused a sensation in the business environment and among corporate law scholars. The media has heavily echoed this announcement suggesting that starting from this experiment on AI and corporate governance, it would be possible to introduce artificial intelligence to the boardroom in the very near future. In the ‘Vital’ case, the algorithm did not assume the legal role of board member; it operated as an advisor of the board of directors that aimed to protect the firm from risky (as well as overpriced) investments. In fact, the board could not make investment decisions without the approval of the algorithm, which formed its opinion by scanning prospective financing of target companies, analysing clinical trials of products (operating the target in the pharmaceutical sector) and examining other relevant data, such as intellectual property rights and previous funding rounds. Another attempt to applicate an ‘algorithmic entity’ to corporate management was made by an Information Technology company based in Helsinki, Tieto (now named Tietoevry due to the merger with the Norwegian company Evry), which announced in October 2017 that it had appointed artificial intelligence as a member of the leadership team of a new data-driven business unit (Petrin, 2019). A similar use of technology at the board level has been noticed as a starting point from which it became conceivable (and desirable) to develop unique tools to overcome humans’ cognitive biases, improve board monitoring functions, and boost businesses productivity. Advanced machine-learning algorithms, which possess the autonomous abilities to adapt and learn, offer appealing opportunities to increase business performance. They could lead to a fundamental change in society and vastly impact job opportunities across a wide variety of professional fields. Routinised jobs and jobs that do not require creative thinking skills and instead depend upon the ability to perform diverse kinds of cognitive labour would be highly affected by the increasing reliance on artificial intelligence (Brynjolfsson-McAfee, 2014; Markoff, 2015). In addition to the huge impact on the labour market and the predictable transformation of society in general, at least in the long term, increasing the use of digital solutions in business organizations has significant implications for corporate law and corporate governance. The concept of CorpTech includes all solutions based on distributed ledger technologies, blockchains and smart contracts on the one hand, and big data analytics, artificial intelligence and machine learning on the other (Enriques &

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Zetzsche, 2019). Both categories promise to offer interesting developments to business organisations; however, the latter remains in the spotlight, because it is capable of supporting boards of directors and allowing for humans to be replaced in discretionary decisions on the allocation of resources: this means that assisted and augmented decision-making processes could become the ordinary way to perform corporate functions at the board level. Regarding the first aspect, nevertheless, of which the actual utility is in doubt (except for executive compensation, because it could prevent ‘backdating’ phenomena, or for other decisions that do not imply the exercise of discretion), it is worth to point out that DLTs are supposed to provide an efficient model for decentralized autonomous organizations. An example of this model has been the DAO Project, a full-disintermediate and horizontal organization where token holders had the power to assume directly relevant decisions and monitor autonomously the management of business, eliminating the board of directors (Jentzsch, 2016; Hassan & De Filippi, 2021). The crucial role of corporation technologies in reducing agency costs and promoting the disintermediation of organizational structures has been further emphasized in connection with the corporate social responsibility discourse. In fact, Milton Friedman’s traditional assumption that ‘the only social responsibility’ of the corporation is ‘to increase its profit so long as it stays within the rules of the game’ has been vigorously re-discussed. In the Anglo-American corporate debate, as well as in the European debate, the sustainability of businesses is among the top items in the agendas of leading corporations and policy makers, increasingly so after the pandemic has revealed the vulnerability of economic structures to systemic risks. It is worth noting that corporate social responsibility has a longstanding history, in the Asian landscape. In 2002, Article 86 of the Chinese Corporate Governance Code emboldened listed companies to ‘be concerned with the welfare, environmental protection and public interest of the community’ and ‘to pay attention to the company’s social responsibilities’. Also, Article 5 of the Chinese Company Law, which went into effect on 1st of January 2006, provides that ‘in its operational activities, a company shall abide by laws and administrative regulations, observe social morals and commercial ethics, persist in honesty and good faith, accept supervision by the government and the public, and assume social responsibility’ (emphasis added). This has established a progressive approach to CSR under company law (Lin, 2019). The new Article 86 of the 2018 Corporate Governance Code goes further, providing that listed companies should ‘actively implement the concept of green

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development, integrate ecological and environmental protection requirements into the development strategy and corporate governance process, actively participate in the construction of ecological civilization, and play an exemplary role in pollution prevention, resource conservation, and ecological protection’. The draft of the revised PRC Company Law issued in December 2021 is also purpose-oriented, stating in Article 19 that ‘companies should fully consider the interests of the company's employees, consumers and other stakeholders, as well as ecological and environmental protection and other social public interests, to assume social responsibility. The State encourages companies to participate in social welfare activities and publish social responsibility reports’ (Puchniak, 2022). The India’s Companies Act, promulgated at the end of August 2013, consolidated a stakeholder approach yet evident in the corporate governance system, imposing, inter alia, at Section 135, paragraph 5, the obligation for large companies to spend ‘at least two percent of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy’. Last, but not least, Japanese Prime Minister Kishida Fumio has launched the slogan of ‘new capitalism’: he suggests that Japanese economy must recover the attention to the different stakeholders that is part of its entrepreneurial tradition and that has been neglected by the recent shareholder-focused approach, thus contributing to overcome the global challenges of inequality and climate emergency (Hoshi, 2023). The colours of 21st-century corporate law are blue for corporate technologies and green for environmental policies. Starting from a comprehensive overview of AI in the corporate context, the chapter will analyse the prospect of algorithmic governance in contemporary corporate law systems and demonstrate that pursuing sustainable development of firms invariably requires human intelligence and sensitivity in the exercise of discretion at the board level. MANAGEMENT FUNCTIONS AND AI Given the corporate board’s apical role in the decision-making process, one might expect a detailed description of the general and specific tasks it performs. This is not the case in U.S. jurisdiction, where the leading statute, Delaware General Corporation Law, in § 141 (a), states that ‘the business and affairs of every corporation shall be managed by or under the direction of a board of directors’. Some European company law texts are more explicit and describe in a more accurate way the contents of board member obligations. For example, in the UK Companies Act, Section 172 deals with the directors’ duty to promote the success of the company for the benefit of shareholder as a whole stating that ‘a director of

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a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to: a) the likely consequences of any decision in the long term; b) the interests of the company's employees; b) the need to foster the company’s business relationships with suppliers, customers and others; c) the impact of the company’s operations on the community and the environment; d) the desirability of the company maintaining a reputation for high standards of business conduct, and e) the need to act fairly as between members of the company’. Article L225-35 of the French Code de Commerce, states that ‘le conseil d’administration détermine les orientations de l’activité de la société et veille à leur mise en oeuvre, conformément à son intérêt social, en prenant en considération les enjeux sociaux, environnementaux, culturels et sportifs de son activité’. Moving towards sustainability, European legal texts largely make use of general clauses to outline the objective of directors’ duties; however, managerial tasks are not specifically described. In Germany, where a two-tier model of corporate governance is mandatory, ‘the management board (Vorstand) is to manage the affairs of the company on its own responsibility’, according to Section 76 of the Stock Corporation Act 1965 (AktienGesetz). On the other hand, the supervisory board (Ausifchtsrat) is to serve as a Kontrollgremium (i.e., an overseeing body), which has the responsibility to advise, supervise and monitor the activity of the management (whose members are appointed and removed by it) but cannot make any executive decision or address binding operating instructions to it. It is widely recognised worldwide that large business organizations that assume the form of public companies cannot be managed by the board as a whole. Management is, in fact, constituted by a considerable number of tasks that, to a large extent, are entrusted to full-time executives. The latter is committed to carrying out the daily running of the business and taking on relevant responsibilities along the hierarchical corporate structure (Bainbridge, 2008), while the board of directors assumes mainly a monitoring role, which remains its supreme role. In addition to monitoring, the board could assume a ‘relational’ function, by guiding information exchange and maintaining constructive communications with shareholders and other relevant stakeholders (de Zwart, 2015).

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Corporate governance discourse has often identified the monitoring model as the standard. This result has been achieved through several steps that have progressively increased the component of independent directors appointed to the board. In the era of ‘managerial capitalism’, boards of directors were mainly composed of corporate insiders who were asked to direct management efforts towards the fulfilment of the public interest, not solely to the achievement of shareholders’ objectives. Beginning in the 1970s, conversely, with the dawn of the age of financial capitalism and the dominance of economic analysis of law, the monitoring component has become the principal responsibility of the board of directors. The oversight of management by a decision-making body, in which independent directors play a relevant role, aims to reduce agency costs brought about by the separation of ownership and control. The latter is an opportunity for managers’ opportunisms to arise, but it was also recognised, according to the neoclassical approach, as a strong engine of efficiency in running a business (Hovenkamp, 2014). The role of independent directors is crucial in corporate governance mechanisms, regardless of whether the legal system provides for a one- or twotier board structure: nearly all jurisdictions of OECD, G20 and Financial Stability Board members that adhere to G20/OECD Principles of Corporate governance require or recommend a minimum number or ratio of independent directors (OECD, 2021). The monitoring role is at the centre of these Principles where various key functions of the board of directors are pointed out, among which the task of ‘reviewing and guiding corporate strategy, monitoring implementation and corporate performance monitoring the effectiveness of the company’s governance practices selecting, compensating, monitoring and, when necessary, replacing key executives monitoring and managing potential conflict of interest of management, board members and shareholders overseeing the process of disclosure and communications’ (OECD, 2015). It has been shown that the importance of the monitoring role delineates in a particular way other directors’ duties, such as defining a company strategy, overseeing risk management, supervising compliance and governance systems, in addition to the obligation to deal with conflicts of interest between managers and the corporation’s interest (Enriques & Zetzsche, 2019). In other words, the board of directors is involved in the highlevel supervision of executives’ strategy and plays a central role in framing, setting and monitoring values and culture expressed by the organisational structure, as well as in ensuring that business decisions are conducted ethically, fairly and in compliance with regulatory standards. There is a widespread opinion

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that the effectiveness of a board of directors’ efforts towards achieving a successful organizational performance is based on these pillars (Tricker, 2015; Mallin, 2007). On the side of the complex system of interconnections between shareholders, boards of directors and corporations that the Anglo-American model offers to businesses, there are other corporate governance models that shall be considered as well, as they represent a valid alternative to the first model, especially in order to favour the transition of business organisations towards sustainability. Also, on the basis of these examples, we can glimpse the shape of a global corporate governance machine that is evolving fast as the world recovers from the COVID-19 pandemic and other systemic or idiosyncratic crises, such as global and local climate emergencies as well as geopolitical crisis, conflicts and wars. A good corporate governance system is essential to promoting ‘stronger, cleaner and fairer economic growth’; it is crucial to fostering the competitiveness of business and to support the management of ‘environmental, social and governance risks and better harness the contributions of different stakeholders, be it shareholders, employees, creditors, customers, suppliers or adjacent communities, to the longterm success of corporations’ (OECD, 2021). In this context, the duties of directors, the performance of various tasks that the board is to fulfill, is a valuable tool to implement corporate aims that can be dramatically enhanced by artificial intelligence. In this regard, it has been argued that the duty ‘to act honestly and in good faith’ which is based on a purely humanistic and subjective state and an ‘anthropocentric’ model of conduct, cannot properly be carried out by a robodirector (Möslein, 2019). This opinion cannot be fully shared because every concrete assessment of directors’ duties tends to be based on objective parameters, using evaluation’s standards and constructing models of reasonable behaviour that activate the safe harbour of business judgment rule. It is important to consider what kind of decision and what management tasks the board of directors takes within the corporate governance system and to consider whether and how different types of AI can assist or replace the actions of its members.

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Today, machine learning algorithms in the form of ‘supervised machine learning models’ are able to offer enterprises effective solutions to increase productivity, make strategic decisions, manage consumer profiling and support recruitment and selection of employees. At the corporate leadership level, artificial intelligence can be used to ensure compliance with laws, implement accurate systems of risk monitoring and fulfill disclosure obligations. It is worth pointing out that risk-monitoring tasks are at the centre of the evolution of corporate governance systems, and risk management has been subjected to an impressive advancement due to the development of market regulations during the last few years. According to the OECD Factbook (OECD, 2021), ‘provisions for companies to assign a risk management role to board level committees have grown from 62% of jurisdictions in 2015 to 90% by the end of 2020’. The growth of provisions for internal control and risk management systems has been even stronger, marking an increase from 62% to 96% since 2015. Taking into account the differences between the national jurisdictions that propose alternative models of board structures, we can consider that the direction and supervision of corporate management is an essential boards’ task for the majority of corporate management systems, that rely on a one-tier model, wherein the board retains for itself high-level managerial responsibilities and entrusts to its non-executive members the overseeing and monitoring functions. In the systems that provide for the two-tier model, among which there are very important jurisdictions and economies such as the Chinese and the German systems, the crucial monitoring role and other multi-faceted tasks, which consist of supervising strategic objectives, overseeing investment plans, setting performance targets, reviewing risk management policies and procedures, lie in the hand of a separate supervisory board. Despite this structural diversity, the core tasks remain unchanged and, above all, regardless of the body that put them in place, the function of providing advice and guidance to management is carried out in a collective body, which operates through an informed decision-making process oriented to realise the sustainable success of the company. The procedural feature of monitoring tasks, the collective nature of corporate bodies involved in performing them, recalls the corporate law and corporate governance areas where AI systems can be deployed: decision-making processes and monitoring and compliance checks (European Commission, DirectorateGeneral for Justice and Consumers, 2021). In fact, when the board of directors is involved, monitoring and compliance obligations tend to assume the characteristics of judgment work, that is, decision-making that requires ‘creative, analytical and strategic skills’ (Kolbjørnsrud et al., 2016).

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It is well known that the contribution of artificial intelligence to decision-making can present varying degrees of autonomy from humans. A widespread classification scheme lists three levels of artificial intelligence (Kerrigan, 2022): they move from assisted AI aimed at performing a predominantly ancillary role, then through advisory AI, then to futuristic autonomous AI. The first level of AI develops the role of an assistant who is able to perform limited functions, thus increasing productivity; however, it does not make any decisions and cannot substitute human action, nor can it seem to act as a human. In a business environment, assisted AI could perform administrative work such as scheduling meetings, preparing reports, monitoring quantitative key performance indicators or managing customer relations. In this multi-faceted scenario, which encompasses a wide range of tasks managed by non-directors in running businesses, one of the main perspectives is AI’s instrumental role in the corporate reporting process. In fact, it has been suggested that artificial intelligence can respond to crucial challenges for the effectiveness and transparency of corporate reporting activity: it can intervene by enhancing efficiency in processing highly complex data and transforming them into accounting and management information; it is able to improve assurance processes aimed at ensuring credibility and trust of annual reports; and finally, it is a powerful tool for communication with corporate information consumers, especially institutional investors, who already employ ML techniques to boost investment analysis. It is believed that in the coming years, even small companies will use artificial intelligence systems to fulfill their corporate reporting obligations and meet compliance requirements. It has been proposed that by 2044 the natural language generation systems will be able to draw up annual reports autonomously (Financial Reporting Council, 2019). At this time, however, as the aforementioned report also points out, the main and most interesting role that artificial intelligence is able to play within the corporate machine, is an advisory one. General artificial intelligence (general AI) is still rudimentary and has not achieved the ambitious goals to which its developers aim, namely, to equip machines with the integrated ability to fully simulate human reasoning. An entirely autonomous AI, or its further development in super AI, in which the algorithm is able to pass the Turing test, is still far away; thus, we can estimate that the most important contribution that technology can make to the board of directors’ tasks is represented by the increased potential to boost productivity by supporting decision making processes in more complex scenarios. This is the field

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of judgment work, where the necessity for sophisticated predictions and multifaceted provisions rises greatly (Chiu & Lim, 2021) and integration between artificial intelligence and human judgment could be useful to produce high-quality decisions made by an in-depth ponderation of a large amount of options, relevant data and prospects analyses. A well-informed study on corporate management in the AI era (Petrin, 2019), has shed light on the disintermediation of organisational structures as the core function of AI techniques, supporting the conclusion that, at the present state of the art, the role of the board of directors cannot be completely overcome by machines. In other words, the component of discretionary tasks within the monitoring function and other managerial powers retained by directors can be adequately performed with the advice of AI and by the fruitful integration of human capabilities with the computing power of machines. Human beings will remain at the centre of decision-making processes, using their experience, insights, values and emotional intelligence in exercising business leadership. The boundaries between the various categories of artificial intelligence are flexible, and the evolution of AI from one stage to another is rapid and continuous. Even without considering of the future challenges of autonomous AI or the future prospects of super AI, narrow AI can already encompass a number of different techniques and easily serve an advisory function. In this model, directors’ duties are intended to be fulfilled by a sophisticated human-machine mechanism that, through a mix of actions, is able to supplement human beings’ capacity to consider large amounts of data, various factors and massive amounts of relevant information, raising the question of how company law could be used to reshape the model of regulation of agency problems. RETHINKING CORPORATE PURPOSE: WHAT A ROLE FOR AI? As we have already discussed, the debate on the purpose of large corporations and the consequent need to redefine the board of directors’ role and function in the pursuit of balancing the various interests at stake is widespread over the world. It is the consequence of the emergence of a broader concept of corporate purpose in management and economic theories to the extent that corporate social responsibility and stakeholder approach has been increasingly integrated with the corporate governance framework. Although company law systems tend to comprehend the concept of purpose in the company’s interest definition, using a flexible and multi-faceted expression in which egoistic and social values can be differently mixed and matched at the enterprise level, we can observe interesting developments in legislation currently in force.

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Some examples in company law refer directly to an enlightened shareholder value approach or introduce multi-stakeholder nuances of meanings into directors duties, such as Article L 225-35 of the French Code de Commerce and Section 172 of the UK Companies Act cited above. The Italian Corporate Governance Code, released in January 2020, provides that the board of directors must pursue the sustainable success of the company, which consists of ‘creating long-term value for the benefit of the shareholders, taking into account the interests of other stakeholders relevant to the company’. With a view to safeguarding directors’ discretionary powers, Germany was the first European country to introduce the American principle of the business judgment rule. Section 93 of the German Stock Corporation Act provides that a member of the management board cannot be held responsible for an infringement of fiduciary duties if his action ‘in taking entrepreneurial decision, was within his rights to reasonably assume that he was acting on the basis of adequate information and in the best interest of the company’ (emphasis added). The enterprise’s best interest paradigm is the criterium that must inspire the supervisory board and management board members in its action of managing and monitoring listed German companies. The Deutscher Corporate Governance Codex, published in 2018 according to the principles of social market economy, highlights the obligation of corporate bodies to consider the interests of the shareholders, the enterprise’s workforce, and other stakeholders, which are essential drivers of the continued existence of the enterprise and its sustainable value creation. Governing bodies are also required to support the sustainable success of the enterprise, recognising the role of the latter in the community and its social and environmental responsibilities. Looking at Asian examples, it is worth pointing out that Article 86 of the Chinese Code of Corporate Governance for Listed Companies expresses a pluralistic conception of social interest, holding that ‘while maintaining the listed company’s development and maximizing the benefits of shareholders, the company shall be concerned with the welfare, environmental protection and public interests of the community in which it resides, and shall pay attention to the company’s social responsibilities’. The Japanese Corporate Governance Code, released on the 11th of June 2021, explains in its second Principle that ‘companies should fully recognize that their sustainable growth and the creation of mid- to long-term corporate value are brought as a result of the provision of resources and contributions made by a range of stakeholders, including employees, customers, business partners, creditors and local communities. As such, companies should endeavour to appropriately cooperate with these stakeholders’.

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The Indian Companies Act 2013 states in Section 166, paragraph 2 that directors ‘shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment’. In view of the intersection between corporate governance and sustainability, the international debate, and especially the harmonization efforts pending at the EU level (Roe et al. 2021), have identified shareholders’ long-term interests as a point of convergence of private business models and social and environmental values. In other words, private companies are invited to assume a societal role and to design appropriate strategies to manage their impact on the environment and the society as a whole. International environmental law, starting from the 1972 Stockholm Declaration and Action Plan for the Human Environment, has performed the challenging task to establish the fundamental principles underlying the relationship between firms and the environment. In more recent years, the OECD Guidelines for Multinational Enterprises, together with numerous legal instruments developed at the international level, have been taken as a model for vigorous proposal of new legislation, including the last Proposal of the European Commission for a Directive on Corporate Sustainability Due Diligence (European Commission, 2022). Remained uncertain, however, along the path, if environmental law should be considered as a discipline aiming to preserve the narrow constituency of human environment or the environment should be regarded as a non-anthropocentric relevant stakeholder, whose interests would be pursued among others whitin the scope of corporate accountability. The influence of international environmental law principles, that have been variously receipted in regional and statal law, and above all the principle of integration of environmental concerns into decision-making processes, has exerted a strong market pressure on businesses. The monumental goals of environmental protection, social-solidarity and inclusive development tend to become driver of competitiveness and growth. Rethinking corporate purpose is the conceptual key to integrate these goals in corporate management structure and corporate law theory. The new definition of corporate purpose, which should be – in the view of supporters of strong sustainable company law – to ‘produce profitable solutions to the problems of people and planet’ (British Academy, 2021) sets the scene for a scenario wherein the management board should run the company by aiming to reconcile the complexity of the sustainability objectives with the profit purpose, considering the good of the enterprise, its stakeholders, environmental issues and the common good.

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Artificial intelligence is thus a perfect solution toolbox: by including AI in the boardroom, agency costs could be reduced, and it would be easier to make decisions in which different and varied interests are involved. Increasing board intelligence by combining different systems already in use could allow companies to efficiently deal with a high degree of complexity and a multiplicity of goals established by a various range of stakeholders, thus preventing phenomena that undermine board independence, such as acting in a conflict of interests or under the suggestion of groupthink (Kamalnath, 2020). It is, therefore, necessary to consider how the current corporate law regulating directors’ decision-making could respond to the adoption of artificial intelligence techniques. ANCILLARY ALGORITHMS: DIGITAL CORPORATE GOVERNANCE AND DIRECTORS’ LIABILITY The promise of algorithms to allow corporate constituencies to participate effectively in the corporate governance mechanism and the pledge of AI to efficiently manage the complexities underlying the corporate purpose and social interest pose the question of how functions of human beings in a boardroom can be integrated with machines and how directors’ liability could be reshaped by the adoption of algorithmic governance. Today, electronic agents are able to support the process of financial and sustainability reporting. It is expected that within 20 years, reporting obligations can be fully fulfilled by artificial intelligence and without human intervention. In the same way, given the absolute superiority of analytics tools in data collection and the ability to use this information to predict future scenarios in a probabilistic way, AI could provide decisive support in gathering and analysing a huge amount of information and data required for consideration in decisionmaking processes. It could, consequently, facilitate the fulfillment of the monitoring obligations of management that corporate governance systems entrust to non-executive directors. If the aim of automated governance is the effectiveness of the management system, the pursuit of the sustainable success of the company can benefit from a computational analysis of data that could facilitate the information of directors and, more generally, can help to establish more effective risk prevention mechanisms, considering both idiosyncratic and systemic exposures along the value chain. The model in which AI maintains an ancillary and instrumental function with respect to directors’ tasks offers the considerable advantage of not diminishing the directors’ duties or responsibilities, as the task of adopting basic value choices and

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determining the point of balancing among diverse interests, which is aimed at achieving the enterprise’s sustainable success required by most legal systems, remains in the hands of the collective body. The integral replacement of the human component does not lead to a desirable result in terms of efficiency, as the augmentation of the administrative and judicial work of human directors represents the maximum gain in terms of corporate value creation, allowing for the balance of short- and long- term perspectives and the adaptation of decisions to the business organisation background and the company’s history and culture. Analysing this issue from the point of view of directors’ duties, it has been questioned whether directors have the obligation to delegate decisions to an artificial intelligence system or if they remain free to exercise their discretionary power to recur to an algorithm for fulfilling the obligation to act on an informed basis, which is an essential component of the duty of care (Möslein, 2018). It can also be assumed that the introduction of electronic agents in an advisory role is necessary to fulfil the general obligation to ensure an adequate organisational structure of the corporation, considering the size and the kind of activity of the undertaking. It is worth noting that delegation of decision powers cannot involve key functions of the board of directors so that ‘the core management decisions must always remain with the board of directors’ and ‘even if decision rights are delegated to machines, human directors must always maintain the ultimate management function themselves’ (Möslein, 2018). If the board, while remaining the ultimate decisionmaker, decides to rely on AI’s judgment, which could diagnose complex scenarios within the intersection of heterogeneous interests and recommend balanced solutions, it would assume a discretionary decision about how best to apply algorithmic agents. Here emerges a factor that is not always adequately considered in the literature: the production costs of an algorithm with sufficient accuracy, particularly if the company does not have an adequate proprietary dataset to carry out high-quality training. Without prejudice to the principle that the objective of the directors cannot but be a reasonable return on capital (success) in view of the preservation of the undertaking, its community and the environment (sustainable), there may be cases in which the non-adoption of AI systems, both internal and provided by thirdparty software manufacturers, is not only possible but also necessary. Therefore, it is within the (organisational) discretion of the directors to introduce an electronic agent that does not limit its tasks to carrying out compliance functions and supporting the fulfillment of disclosure obligations, but that

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intervenes in the decision-making process and contributes to forming the collective body decisions about strategic goals of the company. If the board opts to introduce algorithms in the decision-making process or in the performance of monitoring functions within the managerial responsibilities of the board, it will be necessary to consider the professional skills of the non-executives and possibly to establish a special tech committee. As we have pointed out above, the breath-taking advancements in expert decisions supported by digital technology have created the impression that artificial intelligence could be able to specifically resolve those critical decisions in which great skills in balancing opposing interests are required, notably in the case of inclusion of pluralistic purposes in the articles of incorporation, as we can see in the case of benefit corporations that must pursue a general public benefit and may opt to pursue one or more specific public benefit purposes in addition to the lucrative goal. This could be the case with corporations that adheres to ethical codes which aim at guaranteeing and balancing, beyond mere compliance with laws and with articles of incorporation, rights and interests of all stakeholders involved in business activity, like consumers, employees, shareholders, suppliers and society at large, including future generations with their environmental justice demands (Huang P.H. & Wu H.M., 1994). These are the resolutions that are defined by interference of interests for which an explanation of the grounds of decision is needed, as, for example, Italian company law provides in Artt. 2391, 2391 bis and 2497 ter of the Civil Code. But beyond the existence of a legal provision, it is necessary, in light of the adoption of an adequate organisational model, to provide a justification of the resolution that allows the audience adherence to the decision (Perelman & Olbrechts-Tyteca, 1969) and to allow them to carry out a check of reasonableness in order to formulate a judgment on the resolution validity and on the directors’ liability. It is worth pointing out that decisions assumed under an increased discretionary power could be joined, as critical issues, to those susceptible to interfering with directors’ interests, such as in cases of self-dealing, and circumstances where the algorithm intervention should neutralise the opportunistic behaviour of human beings. There is, however, a widespread opinion that artificial intelligence weaknesses lie in the opaque nature of the machine learning algorithm: understanding how AI makes its decision is often very difficult to do. The so-called black box is not easy to open, and the resolution justification may remain unknown. The model created

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to make the decision may not be easily interpretable, contrary to what could be done with an older-generation algorithm. This explains why, in the first instance, administrative law limited digital decision-making to the areas of bound activity, assuming that, in this case, the decision is based on the logical axioms of the conditional judgment representing a syllogism. This assumption is questionable in two respects. First, the distinction between tied and discretionary activity has neither a heuristic value nor an unavoidable legal basis, since even in the case of a discretionary resolution, an algorithm is able to independently evaluate and scale the inputs that activate its action that may be, in the case of corporate management, in addition to accounting and sustainability information, the analysis of the best practices available in some decision-making area, the previous decisions assumed in the same field ranked by performance as well as by compliance with the strategic purposes set by the board. Second, the black box problem can be overcome by new technical methods that have been developed in recent years to make AI decisions more transparent, explainable and interpretable (Erasmus et al. 2020). AI explainability techniques could be tailored to a range of stakeholders, from expert users, as company directors would be, to regulatory agencies, to the Courts called to determine liability for harm caused by an AI-augmented decision-making process. If these methods cannot provide normative explanations in a philosophic sense, as justifications that ‘offer good reasons for a belief, decision or action’, they can, conversely, ‘provide causal and logical explanations’, offering ‘some understanding as to how a prediction is generated by the ML model’(McDermid et al., 2021). The explainability method can point out which features in the data lake have been charged with a greater impact by the model, allowing the determination of the effect of a feature on the resolution or its relevance in the algorithmic model of decision. However, it is worth pointing out that this assignation of weight, and therefore the normative component of the final output, depends on ‘the feature’s success in producing accurate results in the training phase’ and the ‘reasons given for the importance of a certain feature must refer back to human decision-making during the training of the model’ (McDermid et al., 2021). As a consequence, it is possible to overcome the intrinsic opacity of computational processing and a logical and causal explanation of the algorithmic decision-making process is achievable, notwithstanding the fact that humans and not just machines remain ‘answerable for decisions made in the ML development life cycle’ (McDermid et al., 2021).

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Erroneous classifications or inaccurate predictions can determine an error in the algorithmic decision, and it is necessary to consider if the liability of directors would be a suitable regime to regulate the consequences of the use of electronic agents in board decision-making processes. The genesis of the AI-generated errors could be twofold: it could occur due to a programming defect or an inappropriate data lake, because an illogical and unreasonable result can depend on the quality of the training data used. It could also be determined in the human decision, when the collective body incorrectly interprets the (correct) output provided by the machine. In both cases, it is in the field of directors’ liability that a judgment will most likely be pronounced on the conduct that has, as a result of the error, caused damages to the company, creditors or third parties due to a breach of their duties. Even if technology-driven changes could introduce the first robo-directors by 2025 (Möslein, 2018), the technical rule regulating the algorithm is still an administrative rule built by humans and not by machines. This implies that administrative discretion is exercised at the time and by the way of processing the digital tool; directors need to perform the ex ante role of composition and balancing of interests by means of testing, updating and adjusting algorithms, especially in the case of deep learning. The adoption of AI in board decision-making processes is, in other words, a way of exercising administrative power that shifts upstream the area of discretion and the judgment of liability for damages and losses that may have resulted from the negligent handling of machine-learning mechanisms and from the errors that these mechanisms may have generated. The directors are responsible for the choice of the algorithm an the constant monitoring of data lake quality to assure that information upon which it bases simulation of scenarios and formulation of provisions (as support to the decision) is reliable. Directors also maintain the ultimate power to interpret the results produced by artificial intelligence and to deviate from the solution proposed by the algorithm (if this is in the interest of the corporation) within the safe harbour of the business judgment rule. This latter does not cover the decision of the algorithm, which can always be the subject of full knowledge by the judge, with the support of a technical consultant, making it possible to assess whether errors or bias have led to unfair outcomes. From this perspective, both the specific professional skills of the directors and the appointment of a tech committee with appropriate monitoring tasks will once again become important.

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CONCLUSION Any conclusion on the subject of governance through algorithms can only be provisional. We are facing a full and disruptive evolution scenario capable of redesigning the basic anatomical structures of corporate law. What can be emphasised as state of the art is that artificial intelligence does not represent, at least for the present and the near future, a real alternative to the human component of the directors’ collegial body. Artificial intelligence is already and will increasingly be able to provide decisive support to the solution of complex problems and decisions that require the solution of articulated questions and simulation of scenarios by forecasting, estimating and making predictions, as is typical in board activity, when it comes to balancing opposing interests or weighing the incidence of idiosyncratic and systemic risks. This form of artificial intelligence is defined as augmented precisely because it is based on the combination of robotic and human intelligence and, therefore, on the introduction of elements of judgment based on emotional intelligence and creativity that the machine cannot, for the moment, imitate. Human intelligence, in its emotional, creative and innovative component, is an essential factor for the leadership of large corporations, as confirmed by the G20/OECD Principles. Principle VI.E.A. recommends considering measures that ‘enhance gender diversity on boards and in senior management’, recognizing that ‘ability of the board to ensure strategic guidance of the company depends in part on its composition, which should include directors with the right mix of background and competencies’ (OECD, 2021). This could be considered as a request for a multifactorial diversity of directors, thus declining collegiality in a humanistic sense and anchoring the quality of decision-making processes not only to specific professional skills, which technology can more easily imitate, but also by the balancing skills of different visions of the varied interests involved. In fact, even in the era of information technologies, the ability to innovate belongs to human directors, and so the strength to deviate from previous choices does too, creating discontinuity with the past. These are solutions that artificial intelligence, structurally conservative and retrospective by nature, cannot ensure. CONSENT FOR PUBLICATON None Declared.

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Current and Future Developments in Law, 2023, Vol. 3, 89-112

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CHAPTER 4

The Global Competition For Issuing Central Bank Digital Currency (‘CBDC’) And The Design Of Its Regulatory Framework - A Review Of The Development of CBDCs In China Qi Lu1,* and Xiya Ye2 School of Trade Negotiations, Shanghai University of International Business and Economics, Shanghai, China 2 Financial Law Institute, Ghent University, Ghent, Belgium 1

Abstract: By 2021, over two-thirds of countries across the globe were exploring the way to issue a CBDC, among which China has taken the lead. The Chinese CBDC – DCEP has been on trial in various cities and areas, which heralds its general application in the near future. However, by elaborating on the main features of the DCEP, this paper discerns several challenges that the DCEP may have to face owing to the special regulatory design – setting the reserve rate for the DCEP at 100% – to cater to the need of the internationalization of the Renminbi (‘RMB’). This paper maintains that this approach cannot achieve the goal as contemplated. Instead, it would invoke the severe issue of narrow banking. To prevent this negative externality, as well as to stave off the risk of a systemic bank run, this paper proposes to adopt differentiated treatments for various types of digital wallets holding the DCEP.

Keywords: Bank run, Central bank digital currency (‘CBDC’), DCEP, Digital wallets, Reserve rate. INTRODUCTION In recent years, the financial market across the globe has witnessed the emergence and prosperity of digital currencies, which were mainly issued by nongovernmental institutions or based upon distributed ledger systems. In light of their rapid development and the enormous potential that digital currencies bear, the monetary authorities in an increasing number of countries have started to take an interest in exploring central bank digital currencies (‘CBDC’). Amid the outbreak of Covid-19, this trend has been reinforced due to the growing demand Corresponding author to Qi Lu: School of Trade Negotiations, Shanghai University of International Business and Economics, Shanghai, China; E-mail: [email protected]

*

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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for cashless payment (Boar & Wehrli, 2021). According to the report by the Bank for International Settlements, by 2020, 86% of the countries around the world had set about working on the design of CBDC, among others, the largest economic entities, the US and Europe (Boar & Wehrli, 2021; European Central Bank, 2020; Board of Governors of the Federal Reserve System, 2023) A number of the countries went one step further, by either carrying out various forms of experiment or even by commencing pilot arrangements. By 2021, The Bahamas and the eastern Caribbean have already issued their CBDC, respectively (Yi, 2023). Since 2014, China has been researching and seeking to issue its CBDC. As of 2020, the CBDC has been tested in several cities (J. Yang & Dou, 2021). This test has gradually been expanded to more cities and areas, as well as to more application situations, which heralds the general application of the CBDC across the country in the short term (Y. Yang, 2023). The CBDC is expected to bring considerable changes to the current payment landscape, especially in the context of cross-border payment. Accordingly, particular attention has been paid to the role that the CBDC would play in facilitating the internationalization of the RMB (PBOC, 2021). Against this backdrop, it would be conducive to taking stock of the development and status quo of the CBDC in China before its general application. As the CBDC is a new invention for which there is not much successful experience, it can be imagined that the Chinese CBDC in test at present reveals certain insufficiencies and will encounter challenges that need to be dealt with in its design. This paper seeks to discern these challenges by canvassing the main features of the Chinese CBDC, and on this basis, propose possible solutions to them. As such, this paper will be structured as follows: after the introduction, Section II briefly analyzes the reasons why the issuance of a CBDC is becoming a trend by elaborating on its necessity and merits. Subsequently, it defines the CBDC and demonstrates its possible models. Based on this concept clarification in general, Section III depicts the essential features of the Chinese CBDC, whereby the challenges that this digital currency would encounter are illustrated. Building upon this, possible responses to these challenges are proposed. Section IV concludes. THE REASONS FOR ISSUANCE OF CLARIFICATION, AND POSSIBLE MODELS

A

CBDC,

CONCEPT

The Necessity And Merits Of Issuing A CBDC As demonstrated by the trend, more and more countries have seen an increasing

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need to issue CBDCs. With technological advances, society is more digitalized than ever in history. A variety of digital currencies have emerged in recent years, including those decentralized cryptocurrencies represented by Bitcoins and the stablecoins such as Diem (previously known as Libra) issued by Facebook. These digital currencies, in particular the Diem, which is conceived as a super-sovereign currency, have drawn great political and public concern (Callens, 2021). Besides, digital payment has gradually become the prevalent payment method, substituting to a large extent for the traditional means. Companies offering such services have grown to gigantic sizes. Building upon the large sum of the funds to be managed under the payment services, these internet-based giants, for instance, Alibaba and eBay, also seek to expand their business to financial services, at times even by circumventing the regulations on traditional financial institutions given the loopholes in the regulatory framework lagging behind technological development (Peng, 2021). This may pose a threat to the stability of the entire financial system, not to mention when these companies further plan to issue coins. On the other hand, however, the increasing digitalization of the economy calls for more efficient payment methods other than the traditional ones, especially in crossborder transfer. Moreover, the impact is not only one-way. It is also expected by certain countries and areas that the application of a more efficient digital payment method will facilitate the digitalization of the financial sector, and further, the broader economy, as revealed by a report issued by the European Central Bank (European Central Bank, 2020). The function of current digital payment methods, such as Alipay in China or Pay-TM in India, demonstrates that the digitalization of payment means is facilitative to financial inclusion (McKinsey Global Institute, 2016). Yet, these payment methods do not enable payment in scenarios where both transaction parties are offline. Thus, a more resilient payment method backed up by the central bank, with offline access to both transaction parties, which can be employed even in tail risks, would be even more conducive to financial inclusion. On top of these, the Covid-19 pandemic has reinforced the need for cashless payment. Before the pandemic outbreak, the role of physical cash was already declining. The fear of virus transmission through cash has propelled several countries to accelerate their development of CBDCs (Chen & Ming, 2023). The issuance of CBDC also incorporates specific policy considerations as it represents the transmission of monetary policies. Through choices of features, such as whether the CBDC provides remuneration to its holders, the monetary authority may use it as a tool to influence consumption and investment at a macroeconomic level. Further, the phenomenon of ‘dollar hegemony’ (Cao, 2016) has prompted countries such as China to seek to bypass the control and influence of the dollar through the issuance of digital currencies, which could be more

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efficiently used in international settlements and contribute to the maintenance of the country’s monetary sovereignty. In addition, governments may also feel ‘peer pressure’ when their peers have placed the issuance of a CBDC on the agenda in succession. Falling behind may lead to unfavourable substitution for their currencies with other more convenient equivalents and thereby even bring about a foreign exchange risk to the country (European Central Bank, 2020). This issue is particularly important for the European Union (‘EU’), where the Euro is used in a number of countries with respective sovereignty. Also, the European Central Bank has recognized the significance of an efficient digital currency to the economic autonomy of the EU and its role in a global context (European Central Bank, 2020). Besides, from the ecological perspective, wider application of digital currency instead of physical cash could be more cost-effective and environmentally friendly, which accords with the decarbonization appeal and trend across the globe (Rochemont, 2018). Definition of CBDC – with Comparison to Other Digital Currencies The CBDC is generally understood as a fiat currency issued by a central bank in digital form (Shen & Hou, 2021). It is not an uncontentious concept. As submitted by Shen & Hou, deposits and reserves that are ‘digitalized’ respectively in the account balances of commercial banks and the central bank could also be deemed digital currencies (2021). Nonetheless, unlike the CBDC representing the holders’ direct claim against the central bank, deposits merely embody their claim against the commercial bank (Auer et al., 2021). The reserves, albeit also existent in digital form, primarily exhibit the functionality of the currencies as a guarantee for the deposit. Their usage is somewhat limited, whereby individuals are not covered. In addition, it is generally believed that the CBDC is created to substitute for and complement cash. We cannot say that deposits and reserves have the substitutable features and functions of cash. Thus, both forms fall outside the scope of this paper. As a type of digital currency, the CBDC shares specific characteristics with other digital currencies issued by private actors. However, the definition and understanding of ‘digital currency’ are not uniform in all contexts (Wu et al., 2020). In a broad sense, ‘digital currency’ covers all types of currencies in digital form, including e-money, which is a payment method denominated in fiat currency, such as Alipay and WeChat Pay in China (Liu, 2021; Adrian & Mancini-griffoli, 2019; He et al., 2016). By contrast, in a narrow sense, it only comprises the types that do not have physical attributes and rely on other currencies as a unit of account (Liu, 2021). Accordingly, only virtual currencies such as Bitcoin, Ethereum, and the so-called stable coins, and the CBDC, falls under this scope. In this paper, we take the narrow definition while excluding e-

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money from the scope of discussion, as e-money essentially constitutes a payment mechanism under which the monetary value is presold to the payment service provider in exchange for payment services (D. Yang & Chen, 2018). The e-money itself does not contain an intrinsic value, whereas the payment merely represents a certain amount of fiat currency backstopped by the state credit (D. Yang & Chen, 2018). The definition of virtual currency is also not uniform. According to the EU lawmakers, it refers to a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically’ (Directive (EU) 2015/846 of the European Parliament and of the Council, 2015). In Japanese legislation, virtual currency is interpreted as an asset value which is neither legal tender nor denominated in legal tender, but can be used to settle debts between unspecified entities through electronic information systems (D. Yang & Chen, 2018). Despite the disparities in the wording, both definitions preclude legal tenders from their scope, whereby other currencies in digital forms, except for the e-money above, do not seem to be ruled out. In fact, scholars also maintained that virtual currencies like Bitcoin do not have intrinsic value, as their value is determined by the law of supply and demand, not by utility or liability deriving from the currency itself vis-à-vis an institution (Callens, 2021). To put it another way, the holder of these currencies cannot claim redemption of their interests merely on the basis of the currency against an institution if the trading market for such currencies is no longer existent. Different from these cryptocurrencies, however, the stablecoins issued by a private entity, for instance, the Diem issued by Facebook, should be deemed as incorporating intrinsic value (Callens, 2021). Here, we refrain from assessing whether such an approach to taxonomy is justified. Yet, from this analysis as well as the supra definitions, we could also observe the differences between virtual currencies and the CBDC. The foremost difference is that the CBDC, issued by the central bank, represents, in essence, its liability to whoever holds the currency, whereas the virtual currencies derive their functionality or value either on the basis of common agreement in the community where the currency is traded and transferred, or of the commitment by the issuers as in the case of stablecoins. As the CBDC enjoys legal tender status, its usage cannot be refused by the receiving party. Although the value of virtual currencies may be anchored at or denominated in legal tenders, they are, after all, not legal tenders. As such, virtual currencies do not

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have this compulsory feature in payment for transactions. Further, despite the fact that both categories of currencies adopt distributed ledger technology, the CBDC incorporates, in any case, a certain degree of centralized design, while the virtual currencies are, for the most part, purely decentralized. Hitherto, the CBDC is still merely a concept in most countries, and more precisely, an evolving concept with the progressive deepening of the research on and experiments with it. Given the different requirements made, technologies applied to and potential risks sought to be prevented by the issuance of the CBDC, there could be various models for its design. Possible Models of CBDC According to the features that define a CBDC, this new form of fiat currency could be classified into various types. From the way the CBDC circulates, it can be divided into wholesale and retail CBDC: While the former is applied in the settlement between financial institutions, the latter is issued to individuals and companies (Liu, 2021). On the basis of the latter type, the issuance of the CBDC can be further categorized into direct and indirect forms. In the direct form, the central bank will directly issue CBDCs to the public, whereby the central bank is also involved in the transactions between companies and individuals. By contrast, the indirect form, also known as two-tier architecture, employs intermediation between the central bank and the public. Although the CBDC is still a direct liability of the central bank, consumer-facing activities are assigned to financial institutions and other non-bank payment service providers (Bank for International Settlements, 2021). Depending on the payment method, the CBDC can have two forms – the accountbased and the token-based CBDC (Qinggang Wang & Zhao, 2021). In an account-based CBDC system, a third party will be involved to verify the authenticity of the accounts of the payer and payee and the validity of the transaction, and make changes to the balances of both parties accordingly (European Central Bank, 2020). This third party would generally be the central bank. However, the account-based system is only accessible in online circumstances. Where any of the three parties is offline, it is possible to send the transaction data to the third party for such a confirmation and balance update (European Central Bank, 2020). On the contrary, the functionality of a tokenbased CBDC system is not affected even offline, as this system does not verify the accounts’ authenticity. Instead, the system only assesses whether the tokens to be transferred are true, similar to cash transactions (Qinggang Wang & Zhao, 2021). That means a transaction will not be recorded and supervised by a third party – whether the central bank or a commercial bank. Regulations can only be imposed

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at the level of payment devices (European Central Bank, 2020). On top of these, other considerations, for instance, whether a CBDC should offer remuneration, or whether the underlying infrastructure adopts a decentralized or centralized ledger system, would also influence and shape the design of a CBDC. These will be elaborated in more detail in the following part with the Chinese CBDC as an illustrative example. THE CHINESE CBDC—DCEP Elements And Models Of The Chinese CBDC In Testing China is among the first countries to explore the path of issuing a CBDC. Its research on the CBDC can be dated back to 2014, when a task force specifically dedicated to this was established by the central bank – the People’s Bank of China (‘PBOC’) (J. Yang & Dou, 2021). In 2016, the issuance of a CBDC was determined in a symposium, after which the State Council of China ratified this project in the subsequent year (J. Yang & Dou, 2021; (Shen & Hou, 2021). In 2020, the PBOC announced the experimental application of the CBDC – named the DCEP – in three municipalities: Shenzhen, Suzhou and the Xiong’an New Area in Beijing; it has since been expanded to 11 municipalities and areas, including the Beijing Winter Olympic Games (Y. Yang, 2023). The gradual expansion of the experimental application heralds the general application of the DCEP across the country in the near future. Synthesis Of Account-Based And Token-Based Two-Tier System The issuance of the current DCEP is modeled after that of physical cash, in which the commercial banks are not circumvented so as not to invoke the issue of financial disintermediation (Shen & Hou, 2021; People’s Bank of China, 2016). As such, it is built upon a two-tier system, to wit, the PBOC issues the DCEP through commercial banks, from which individuals receive the DCEP. By this means, it is also expected that the involvement of the commercial banks could also promote the acceptance and usage of the DCEP among the public (Shen & Hou, 2021). Under the current circumstances, this is not an unchallenging task as the public has gotten used to private payment methods such as Alipay and WeChat Pay, as well as the mobile payment provided by commercial banks. The change of customers’ habits is not, or at least, not only, subject to administrative orders or regulations. Further, such private payment methods as Alipay are usually based upon a platform that provides services ancillary to the payment; for instance, the funds transferred will be kept in custody by the platform for a certain period in case the transaction is revoked (Hou, 2021). The involvement of commercial banks could be conducive to the circulation of the CBDC in its

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competition with these payment methods. From the adoption of the two-tier system, we can see that the DCEP primarily functions as a retail CBDC, which also confirms the initial idea of categorizing it as M0, like the physical cash by the designer (Fan, 2016). Accordingly, the issuance of DCEP has to be backed up by sufficient reserves, the rate of which accounts for 100%, as contrast to 8.4% for the physical cash by December 2021 (Hou, 2021; People’s Bank of China, 2021). The high reserve rate is believed to draw upon the rationale underlying stablecoins, the value of which is anchored by legal tenders or other valuable goods such as gold or petroleum to ensure its stability. For instance, one Tether is alleged to be guaranteed by one US dollar, although the scandal of the large gap in its guarantee in legal tenders has called the trustworthiness of such allegations into question (Hou, 2021). Similarly, the 100% reserve rate is also set to ensure the stability of the DCEP’s value, which is of particular significance to the internationalization of the Renminbi (Hou, 2021). To internationalize the Renminbi and strengthen its international role against the backdrop of ‘dollar hegemony’ and the increasing tension between China and the US is also part of the impetus that drives the research on the DCEP and its creation. Rather than adopting a purely account-based or token-based system (or ‘valuebased system’), the approach taken by the DCEP is a synthesis of both. In fact, according to the White Paper on the Latest Progress of the Research and Development of the DCEP by the PBOC, the DCEP furthers a third form – the quasi-account-based form (2021). However, the PBOC refrains from elaborating on the definition of this form. From the present experimental application of the DCEP, it can be inferred that the quasi-account-based form refers to anonymous digital wallets. Depending on the quota of the transaction amount, the PBOC offers various types of digital wallets (iResearch, 2021). Where the transaction is in a small amount, the DCEP holder may open an anonymous wallet for the payment to ensure the entire anonymity of the transaction. Besides, there are other ways of categorizing the wallets in accordance with various criteria: For instance, there are the software wallet and hardware wallet, incorporating respectively the features of the account-based system and the tokenbased system. While the DCEP in the software wallet can be only used online, it is also payable with the hardware wallet where both transaction parties are offline. As such, payment from the hardware wallet resembles a cash payment, where payment equals settlement. The receiver merely verifies the authenticity of the DCEP at the time of payment. However, slightly different from the cash payment, whenever the payment device is connected to the Internet, the transaction

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information will be uploaded to the commercial bank to make the balance change accordingly (Qian Wang & Dai, 2021). In this sense, although certain features of the token-based system could be seen in the application of the hardware wallet, the underlying technological logic still seems to be the account-based system. Instead of fully realizing the saying ‘payment equals settlement’ and thereby being analogous to a cash payment, this form of offline payment with the hardware wallet of DCEP is more like an IOU to be settled later whenever the device is connected to the Internet. Besides, a traditional problem in the general settlement may arise here, namely the ‘doublespending’ issue (Chohan, 2018): It is not excluded that a DCEP will be paid twice offline, while this can only be realized at the time of settlement. Nonetheless, the PBOC does not disclose how this issue has been or will be dealt with in its White Paper. ‘One Currency, Two Vaults, Three Centres’ On the whole, the DCEP has adopted a controllable, anonymous authentication approach, which is built upon the so-called ‘One Currency, Two Vaults, Three Centres’ structure (Xia, 2021) (in Chinese phonetic alphabets: Yi Bi, Liang Ku, San Zhong Xin, also translated as ‘One Coin, Two Addresses, Three Centres’ by Peters et al., 2020). ‘One Currency’ refers to the DCEP itself; ‘Two Vaults’ means the databases run respectively by the PBOC and the commercial banks; and ‘Three Centres’ are composed of the Authentication Centre (also known as the ‘Identification Centre’), Registration Centre (also known as the ‘Record Centre’) and Big Data Analytics Centre (Peters et al., 2020; iResearch, 2021; Shen & Hou, 2021). The ‘Two Vaults’ function in the way that the PBOC issues DCEP to commercial banks, which will be stored in encrypted data strings in the database run by the commercial banks. In return, commercial banks have to transfer the same amount of money to the PBOC as reserves, which will be deposited in the issuance database of the PBOC (Xia, 2021). Similarly, as indicated by their names, the ‘Three Centres’ also assume different roles: The Authentication Centre controls and manages the users’ identity information, while the Registration Centre registers the ownership and transfer of each DCEP, recording its creation, circulation, inventory verification as well as destruction (Xia, 2021). The Big Data Analytics Centre processes the transaction data generated by the use of the DCEP and analyzes, based upon this, the payment pattern and regulatory parameters to ensure the safety of the transaction and to prevent misconduct, such as money laundering (Xia, 2021). Through such functional division, the users’ identity information is only stored at the Authentification Centre, which, on the basis of this information, yields a

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private key to the digital wallets (Xia, 2021). The Registration Center, instead of recording the transfer of DCEP between the identities of users, only registers the changes to the balance sheets of the digital wallets. As such, the users’ identities remain anonymous to the Registration Center, whereby the information stored at the Authentication Centre is only accessible to the PBOC and the users (Hou, 2021). This renders the design of controllable anonymity possible (Xia, 2021). Together with the anonymous wallet which remains even undisclosed to the PBOC, the objective of ‘anonymous transaction in small amounts’ (in Chinese phonetic alphabets: Xiao E Ni Ming, PBOC, 2021) can be realized. This objective, or according to the White Paper of the PBOC –this ‘principle’, has another half-sentence, namely ‘legally traceable transaction in large amounts’ (in Chinese phonetic alphabets: Da E Yi Fa Ke Su, PBOC, 2021). Under the present ‘Three Centres’ scheme, the Registration Centre and the Authentication Centre do not exchange data with each other. However, in order to enable traceability of the transactions in certain circumstances such as money laundering, tax evasion or terrorist financing, and thereby combat these delinquencies more efficiently, as well as to avoid the data island effect, the data at both institutions are accessible to the Big Data Analytics Centre (Xia, 2021; Shen & Hou, 2021). By this means, ‘transaction in large amounts’ can be ‘legally traceable’. Through such an elaborate system, a balance is sought between protecting the privacy and security of the DCEP users and fighting against illegal activities (Xia, 2021; Shen & Hou, 2021). Yet, given the lack of sufficient information in relation to the design of the structure disclosed by the PBOC, assessing whether this goal has been achieved or can be achieved at this stage would be too reckless. Remuneration Or Not? Whether remuneration should be provided to the DCEP has been fiercely discussed by central banks and policymakers which intend to issue a CBDC (Bank for Settlements, 2021; European Central Bank, 2020). Both approaches – whether affirmative or opposing to this question – would have merits and downsides. On the one hand, remuneration can be used as an instrument to apply and adjust monetary policy; on the other hand, positive remuneration could cause competition between the CBDC and other payment methods as well as deposits (European Central Bank, 2020). As a result, deposits at commercial banks may be significantly reduced, leading to the unfavourable situation of financial disintermediation. It may be argued that the CBDC deposited at commercial banks could have the same function as conventional deposits. However, in the Chinese context, this will not be the case; at least, the function that the CBDC deposits have is somewhat limited, as the reserve rate for the CBDC is 100%. The money multiplier generated under such a high reserve rate would be much lower

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than the traditional scheme (Hou, 2021). Accordingly, the role that a commercial bank can play in the financial market would be further weakened. It is also submitted that the remuneration for a CBDC could be set at a negative rate so as to stimulate the economy in a recession or financial crisis (Bindseil, 2019; European Central Bank, 2020). Nonetheless, this view is not uncontentious: A negative interest rate would bring about the issue of ‘financial repression’ and ‘expropriation’ of the saver, which through limitations under the traditional regime have sought to avoid (Bindseil, 2019). In order not to invoke competition between the CBDC and deposits as supra illustrated, the DCEP does not provide remuneration to its holders. As a substitute for cash, the DCEP should also have the features of the latter except for its physicality. In this sense, however, it is no longer possible to apply the DCEP as an instrument of monetary policy. Other Features Of The DCEP As our physical wallets may have an upper limit for carrying cash, the capacity of a digital wallet is also capped (PBOC, 2021). Yet, the cap is not uniform for all categories of digital wallets. Depending on whether the real name can be identified under the transaction, the cap varies insofar as anonymous wallets have a much lower limit than non-anonymous ones (PBOC, 2021). This also conforms to the principle of ‘anonymous transaction in small amounts, legally traceable’ transaction in large amounts. Further, for each category of digital wallets, not only the remaining sum in the wallet is capped, but also the amount of each transaction, daily transaction and annual transaction by the users (PBOC, 2021). The DCEP is a legal tender. Therefore, in principle, it cannot be refused as a payment in China. This has been confirmed by the laws. Pursuant to Art. 16 of the Law on the PBOC and Art. 3 of the Regulations on the Administration of Renminbi, ‘No entity or individual may reject the RMB payment for any public or private debt within the territory of the People's Republic of China (‘PRC’)’. However, as the payment via DCEP relies on technical devices, Hou maintained that this might undermine the DCEP’s position as a legal tender for the payee may easily reject the payment of DCEP due to the lack of a necessary device (2021). On this basis, he proposed to modify these legal statutes by taking this feature of the DCEP into account (2021). Although a modification of the legal statutes is laudable, the author believes that also under the current regulation, DCEP’s position as a legal tender cannot be challenged. The word ‘reject’ in these provisions should be interpreted as ‘subjectively reject’ rather than ‘reject owing to objective reasons’. In daily transactions, it is not seldom that the payee refuses

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to accept certain bills in large denomination because they do not have sufficient change for the bill. We cannot say that these payees have violated the law. Likewise, rejection on account of lacking the necessary infrastructure shall not be interpreted as falling under the scope. Most cryptocurrencies are based upon the distributed ledger system. Although the DCEP has also adopted this system to a certain extent within its elaborate framework, it is essentially built upon a centralized system where all transaction data is stored in a central ledger. According to the PBOC, this route choice is attributed to the fact that the capacity of the distributed ledger system is relatively limited, so that it is unable to process ssuch a large amount of data simultaneously as in the case of payment via DCEP countrywide with stability and resilience. Challenges That The DCEP May Encounter Paradoxes Between The Narrow Banking Issue And Facilitation Of DCEP’s Wide Use Narrow Banking Issue The narrow banking issue depicts a scenario in which the lending function performed through deposit financing by the commercial banks is limited. It can occur where the reserve rate is set at 100%, which is exactly the case with the DCEP (Shen & Hou, 2021). Fixation of the reserve rate at 100% means that the commercial banks have to transfer all their deposits to the central bank. Throughout the process, it seems that the commercial banks merely play the role of an intermediary between the central bank and the depositors, whereby the deposited money cannot be used for lending business and the bank money creation through the money multiplier would be eliminated (supra). Scholars advocating such a narrow banking system believe that by virtue of this, the financial instability caused by run on a bank in financial crises would be diminished (Fischer, 1935). Not to question the solidity of this argument, such a narrow banking system has a much more profound adverse influence. Without an easily obtainable fund supply through deposits, the capital financing costs could be much higher. In addition, a study has demonstrated that in the long run, the less active role of these financial intermediation institutions does not lead to increased substitutive capital financing through equity funding, but to overall abandoning of investment, and further to reduced economic growth (Merkel, 2020). Such a disintermediation effect of the commercial banks could cause negative externalities. The most direct and significant impact is that the banking industry may considerably shrink, thereby leading to depression and mass unemployment among commercial banks. On the other hand, individuals and entities seeking

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funds may find themselves being deprived of a reliable and low-cost financing channel. As a result, the depressing effect could also be spread to other industries. Therefore, the designers of the DCEP also sought to fend off the financial disintermediation and the narrow banking issue. To this end, the DCEP is conceived as not providing remuneration to its holder. As illustrated in the previous section, this may mitigate the disintermediation effect of the DCEP to a certain extent. Competition With Other Cashless Payment Methods Nonetheless, provided that the total amount of money is fixed, any increase in the use of DCEP would lead to a decrease in other payment methods or even deposits in financial institutions. It can be argued that the DCEP is or should be conceived as a substitutive method for payment, not for deposits. As such, the DCEP’s impact on deposits should be rather limited. On top of this, to further reduce the impact, Shen & Hou submitted that the deposit interest for the DCEP should be set lower than that for the traditional currency so that thoughtless rushing into the DCEP from deposits of traditional currency would be discouraged (2021). Besides, to avoid disincentivizing the use of the DCEP excessively, Shen & Hou proposed to set a higher interest rate for DCEP reserves than that for the deposit of traditional currency (2021). By this virtue, the commercial banks would also be more willing to promote the application of the DCEP. Again, yet, this reserve rate should not be too high, otherwise the commercial banks would recklessly convert their money into the DCEP (Shen & Hou, 2021). From the proposal we may also glimpse the dilemma that the DCEP is caught in: the use of DCEP should be promoted but not promoted too much, namely not at the costs of the traditional deposits. This reveals, to a certain extent, that the crowding-out effect of the DCEP on the deposits may not be as limited as expected. Although it has been advocated that the DCEP functions or should function as a alternative payment method to the existing types, instead of substituting for traditional deposits, the line of demarcation between a payment method and bank deposits may not be that clear, at least in a practical sense under the present interlinked and intricate payment system. With respect to payment, the DCEP can be viewed as a competitor of other cashless payment methods by commercial banks and other third-party payment institutions. Regardless of the method of cashless payment by commercial banks, the payment is made by deducting money directly from the users’ deposits. This also applies to a large majority of third-party payment. Contemporarily, thirdparty payment comprises two forms: 1) Users may draw money from their bank deposits and fill it into their accounts at the third-party payment institution. On

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this basis, they pay with the account, on which the balance change is directly made (Shen & Hou, 2021; Hou, 2021); 2) The account at the third-party payment institution is linked with the user’s account at the commercial bank. When the users pay with their accounts at the third-party payment institution, the transaction data will be sent through the institution to the commercial bank, where the change to balance is ultimately made. In this sense, the third-party payment institution serves as a bridge between the users and the commercial bank. Since 2018, a fourth party named NetsUnion Clearing Corporation (‘NetsUnion’) has been involved in the payment chain, whereby the transactions made at the third-party payment account will be cleared at the NetsUnion, which functions as an intermediary interlinking the commercial banks and the institution (Shen & Hou, 2021; Hou, 2021). However, this does not change the payment model, in essence, under which money is still, in the end, transferred between the deposit accounts by the users at the commercial bank. As aforementioned, the DCEP should be expected to substitute for the other payment methods. Under the current system and the scenario of third-party payment, which constitutes the most prevalent payment model in China (Yuan, 2021), this seems to mean that the DCEP is anticipated to replace the role that the third-payment institution plays. For the avoidance of the narrow banking dilemma, the DCEP is prevented from becoming a store of value. As such, the expectation of substituting the DCEP for other cashless payment methods could only be achieved in such a way that the digital wallets of the DCEP are connected with the deposit account at the commercial banks as third-party payment accounts. Hence, payment through the DCEP would have to work via the same model as in the third-party payment. Both forms become competitors to each other, whereas third-party payment institutions such as Alipay have salient firstmover advantages vis-à-vis the DCEP (Caldwell & Liu, 2021). Intension Between Narrow banking Issue And Wide Use Of DCEP Whether such a payment model connecting the DCEP and traditional deposit accounts is technically viable, still needs to be further analyzed. Even if it is possible, this means that money on the deposit account must first be transferred to the DCEP, through which the payment will be made. By this means, the process, at least the back-end settlement process of the payment, appears to be complicated, which could impair the efficiency and bring unnecessary burdens to the system. Apart from these, also under such a scenario, the narrow banking issue is, though possibly mitigated, still unavoidable. As at each time of payment, the traditional deposits would have to be converted into DCEP, the degree of narrow banking effect depends on how well the DCEP is accepted as a payment method. On the one hand, the wide acceptance of the DCEP as a payment means

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will lead to decreased lending capacity of the commercial banks, given its reserve rate of 100%. On the other hand, it seems that to limit such a narrow banking effect, the DCEP shall not be too much promoted as a payment method, which, however, will put the existence and necessity of the DCEP in doubt. One possible solution to such a dilemma could be to encourage the payee to convert the DCEP back to traditional currency after receiving the DCEP, which turns the payment through such a detour of DCEP superfluous, especially in the case of bank payments. This would otherwise create a peculiar scenario: The payer’s bank first converts the money on his deposit account into the DCEP and then makes payment through the digital currency, which is received by the payee in the same form. Yet, upon receipt, so as not to pay reserve for the DCEP, the payee’s bank encourage the payee to convert the DCEP back to deposits, after which the DCEP will be recycled by the central bank. So as to illustrate the payment chain, the author draws a picture as below Fig. (1). For the avoidance of excessive complexity, a simplified scenario of payment between thes same commercial bank is taken as the example. Payer’ s bank

Deposit of traditional currency

Deposit of traditional currency

DCEP

Central Bank DCEP

Payee’ s bank Front-end payment

Fig. (1). Payment Chain Via Non-Deposited DCEP.

In light of the DCEP’s reserve rate of 100% and its substitutability for other payment methods, it seems that the two goals of preventing the narrow banking issue and promoting the DCEP as a payment means are contradictory to each other, whereby a balance is difficult to strike.

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Offline Payment Of DCEP – An Example Of The Intension Upon discussion of the supra application scenario, questions may arise as to what the advantage of the DCEP is vis-à-vis other payment methods and why people would choose to shift from more familiar methods, such as Alipay and WeChat Pay, to the DCEP. In fact, it is a discussion that has never faded away since the DCEP came into public view. Despite the first-mover advantage of the existing cashless payment methods, there is one distinct advance of the DCEP that other payment methods are have not hitherto made, namely that it enables payment also in scenarios where both transaction parties are offline. However, not to mention its implication for the narrow banking issue, its attractiveness in promoting a wide use of the DCEP should not be exaggerated. As demonstrated above, the offline payment of the DCEP works in a similar way to physical cash: one withdraws DCEP from his DCEP deposit account or converts the money in the traditional deposit account into DCEP, and stores it in the hardware digital wallet just like putting cash in a physical wallet. At the time of payment, the DCEP holder only has to scan his token in the wallet, whether online or offline. Nonetheless, also like physical cash, the DCEP does not pay remuneration, meaning that the DCEP stored in the hardware wallet does not generate any interest, while the money deposited at commercial banks or thirdparty payment institutions does. It is understandable that the designers did not want to encourage the phenomenon of reckless conversion into DCEP by the users and therefore chose to mitigate the narrow banking issue. However, it may lead to the lack of incentive for the use of the DCEP. Further, although such a payment method with both parties offline is only available via DCEP at present, it is, technically, not excluded to adopt similar technology for the existing forms of cashless payment. In fact, Alipay applied for a patent for this so-called ‘dual offline payment’ technology in October 2019, which has passed the substantive examination by the patent authority in China and is pending its final decision (Patent Application Number: CN201911042786.2). Therefore, even in this respect, the gap between the DCEP and the existing cashless payment methods is narrowing down. Internationalization Of Renminbi (‘RMB’) One significant function that the DCEP serves is to facilitate the internationalization of RMB. It is anticipated that the mobile feature of the DCEP could enhance the efficiency of cross-border payment and settlement. Currently, cross-border payment is dominated by the US dollar, and the system built the Society for Worldwide Interbank Financial Telecommunications (‘SWIFT System’) (Bu & Ma, 2023). In recent years, owing to the increasing tension

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between China and the US, the US has threatened at times to shut China out of the SWIFT System (Ni & Liu, 2021). Thus, China had been seeking to build its own financial settlement system. In 2015, the Cross-border Inter-bank Payment System (‘CIPS’) was established (Bai & Ge, 2021). On the basis of the CIPS, the use of DCEP in international settlements could be more easily promoted, thereby the internationalization process of the RMB. At present, the majority of countries across the globe have been engaged in the research or development of CBDC. In this respect, China is so far in the lead. As the international market has witnessed rapid growth and incomparable efficiency of cross-border payment, it is not excluded that China, as the front-runner in this field, would have some first-mover advantages. To gain such advantages, China has been very active in building or exploring supportive mechanisms for the development and use of the DCEP, in particular in the context of international settlement. In January 2021, the PBOC has set up a company named Cross-border Financial Information Services Co., Ltd, together with SWIFT and several other Chinese institutions for clearing (Bu & Ma, 2023). This company was established to explore solutions for cross-border payment of DCEP. Besides, the PBOC also participated in the project m-CBDC bridge initiated by the Hong Kong Monetary Authority and the central bank of Thailand. This project aims to provide convenience for payment versus payment of cross-border settlement and currency exchange in cross-border trade scenarios under the DCEP (Ba & Yao, 2021). Aside from the efforts or investment in the infrastructure for cross-border payment of the DCEP, the PBOC also conceived a special design to promote the public’s confidence in digital currency. As supra demonstrated, reportedly for this purpose, the reserve rate of the DCEP is set at 100%. It is expected that such an arrangement would ensure the stability of the DCEP and thereby promote its acceptance in international markets. Nonetheless, the high rate of the reserve may also incur the issue of narrow banking. In addition, the acceptance of the DCEP relies primarily on the acceptance of the RMB in international markets. It is less relevant whether the RMB is in digital form or not. Undoubtedly, the DCEP has the aforementioned advantage in efficiency. However, this merit is not brought by the 100% reserve rate. Internationalization of the RMB still has a long way to go, although the currency has gained increasing importance in international settlement. In December 2021, RMB took for the first time the fourth place in cross-border payment, surpassing the Japanese Yen (Lubbers & Tanzi, 2023). Nevertheless, compared to the dominating market share of the US dollar at 41% during the same time, RMB

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merely accounted for 2.7%, which is not as impressive as it appears at first sight (Lubbers & Tanzi, 2023). It is not uncontentious that a digital currency with a reserve rate of 100% could considerably change the situation. At present, the value of RMB is pegged to the foreign exchange reserve, and primarily to the holding of US dollars. Change to the digital form would not affect this fundamental feature. Therefore, it seems elusive to back up the digital form of the DCEP with a sufficient amount of the traditional form of the currency so as to ensure the stability of its value. Undeniably, the high reserve rate of the DCEP could limit the supply of money in the market, and thereby lower the inflation expectation and raise confidence in the currency. However, this presupposes that the total amount of money supply is predetermined and little adjustment will be made afterwards. But in that case, stability could be ensured by controlling the money supply at the source, whereby the predetermined amount should not fluctuate too much from year to year. This approach appears to be more direct and effective than a high reserve rate. In addition, with the increasing role of RMB in cross-border settlements, it is likely that in the event of a trade deficit, the influx of a substantial amount of RMB from foreign traders would also bring inflation risks to the domestic market, whereas the reserve rate could be employed as a buffer or instrument for monetary policy. By setting the reserve rate at 100%, there is no room left for exercising this function. Another argument for such a high reserve rate could be that it can prevent the risk of a bank run in a crisis situation (Shen & Hou, 2021). As the DCEP can be withdrawn in a few seconds with an app and simultaneously across the globe, the risk of systemic runs on banks would be much higher. Besides, it could take place in a much shorter time so that the commercial banks and regulators do not have sufficient time to respond and control the adverse impact. Nonetheless, setting the reserve rate at 100% may not be the only solution to this problem. Possible Responses to the Challenges – Differentiated Treatment for Different Types of Digital Wallets Setting the reserve rate at 100% may not be able to achieve the contemplated objective, and may cause other issues, such as narrow banking. Therefore, this does not seem to be the most appropriate approach if the only function it can exert is to prevent a run on banks. To counter the issue of bank runs, as well as to avoid turning the account of DCEP into a store of value, it was proposed that a tiered remuneration system should be applied (Bindseil, 2019). Accordingly, an interest rate higher than that on traditional deposits was advocated for DCEP deposits up to a certain limit, whereas beyond that limit, the interest rate should be unattractive to discourage

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the public to transfer all their deposit to DCEP (Bindseil, 2019). However, before rushing to adopt such a mechanism, an issue needs to be clarified, namely whether DCEP deposits can be used by commercial banks for lending business just like traditional deposits. The PBOC did not give a clear answer or reveal its attitude in this regard in the relevant policy documents. DCEP has the fundamental features of cash. It is created with a unique code, and its circulation is traceable. Although the PBOC has not elaborated on whether the DCEP deposits are presented in a number as in the traditional deposits or in their specific form with unique codes, we can see from the current experimental application that the policymakers are more inclined to the latter. The code attached to each DCEP functions like an identity number of the currency. As the DCEP is represented by the string of code, having this code seemingly implies that the depositor still owns this DCEP even after opening an account with the commercial bank. By contrast, in the deposit of physical cash, after receiving the currency, the commercial bank would have the ownership of the physical cash while the depositor is the creditor of the bank to the amount of his deposits according to the principle of ‘possession is nine-tenths of the law’ for money. In the case of the DCEP, the account that the depositor opens at the bank resembles a safe box rented at a commercial bank, whereby the ownership of the deposited goods is not transferred. Hence, the commercial bank is not allowed to use the DCEP deposits for lending or investment purposes. The bank may also obtain the right to dispose of the DCEP by signing a loan contract with the depositor. However, in that case, the code of the DCEP will change from time to time as the specific DCEP owned by the depositor has been put into circulation by the bank. As such, the effect of DCEP’s traceability would be undermined. Given that the experimental use of the DCEP does not match such presumptions, it is inferable that the deposited DCEP cannot be used by the commercial bank for lending business at present. This will further reinforce the disintermediation of commercial banks that could have been caused by the high reserve rate. The narrow banking issue would be even more severer given their restricted capacity to conduct lending business: To receive DCEP deposits, commercial banks have to deposit the same amount of money in traditional form with the central bank as the reserve. That means this part of their money cannot be used for lending business. By this means, commercial banks could take the same amount of DCEP as a deposit, while according to the inference in this paper, it cannot be lent out as well. In this sense, the lending capacity of commercial banks has been restricted twice. The question would then arise as to whether such restrictions are necessary. Undoubtedly, the presentation of DCEP’s identity number in the account is

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significant to the traceability of the digital currency. This could be conducive to combating crimes such as money laundering. However, as the transactions between accounts are digitalized and recorded, the currently available nonphysical payment methods can already meet the requirement of traceability. Thus, it does not seem necessary to differentiate between DCEP deposits and traditional deposits. After all, DCEP is merely the digital form of physical cash. As the physical cash is not deposited in a safe box filled with banknotes received from the depositors, we also do not have to keep the DCEP in its original form. Otherwise, the depositor will have to choose between the DCEP account and the traditional account and decide which account to pay with. This would unnecessarily complicate the payment procedure. One account where the deposits - whether of DCEP or of physical cash - are digitalized, without specific reference to the identity of each currency, should suffice. However, it is worth noting that the designers have conceived a type of anonymous digital wallet, whereby traceability to the account may fall short of detecting and preventing misconduct. Thus, as for this type of digital wallet, the specification of identity numbers of the DCEP would be necessary and favourable to fighting against crimes. Nonetheless, given the restrictions on the holding and transaction amount with this type of digital wallet, it can be imagined that its impact on narrow banking would also be rather limited. These all refer to the scenarios of software digital wallets that can only be made use of online. With regard to the hardware digital wallet, as the check of the DCEP's authenticity relies on the verification of the specific digital features of each DCEP, the account in the hardware digital wallet can only function with a specification of each currency. However, the hardware digital wallets are supposed to work in a way similar to a physical wallet, where the money is not deposited with the commercial bank. Besides, since the DCEP does not provide remuneration according to the current design, it is less likely that the public will transfer a large amount of money from the deposit to the hardware digital wallet only for the sake of offline payment. Thus, the adverse impact of this form of DCEP on the intermediation function of commercial banks would also not be neglectable. A more compelling concern in relation to the hardware digital wallet is the systemic run on banks. As previously illustrated, one of the purposes of the high reserve rate is to prevent this risk. However, given the substantial negative externality, it would invoke, this does not seem to be the most suitable approach. A more effective and direct way that incurs less externality could be a limitation on the holding of the hardware digital wallet and the daily transaction with the account as in other forms of digital wallets and the withdrawal of physical cash at

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an ATM. While a straightforward prohibition of holding or transaction above the limit might be too restrictive, commercial banks may nudge depositors away from withdrawing an excessive amount of DCEP at a time by charging an unattractive service fee when the amount exceeds a certain threshold. By this means, the bank run risk could be limited within an acceptable scope. As for the software digital wallets, we have to differentiate between the real-name wallet and the anonymous wallet. In this paper, we propose not to specify the identity number of each DCEP in the real-name digital wallet so as not to restrict the commercial banks’ function and capacity of intermediation. Thus, the DCEP deposit would also be presented in a number indicating the deposit amount, which does not demonstrate any difference from a deposit of traditional currency. Accordingly, it is also not necessary to apply a disparate interest rate for the DCEP deposit from that for the conventional form. By contrast, since the risks for Internet-based crimes using the anonymous digital wallet may be higher, the need to increase the traceability of the DCEP in these wallets, instead of the accounts, would be more pronounced. Therefore, it is advisable to identify the specific code of each unit of DCEP in this type of digital wallet. CONCLUSION In light of the increasing digitalization of the economy across the globe and the merits of a digital currency, more and more countries have commenced to develop their own CBDC. The CBDC refers to a fiat currency issued by a central bank in digital form, which represents the liability of the central bank to the holders of the currency. Although the development of this form of currency is mostly still at the stage of proof-of-concept or experimental use in limited areas, various models have been envisaged. According to how the currency circulates, the CBDC can be categorized into retail and wholesale forms. Depending on the payment method, it is further to be divided into account-based and token-based CBDC. China is among the pioneers in terms of developing a CBDC. Since 2020, the Chinese CBDC – DCEP – has been put into experimental use in certain areas. The issuance of DCEP has adopted a two-tier system, which combines the accountbased and token-based models. Besides, a so-called ‘One Currency, Two Vaults, Three Centres’ structure is implemented, to perform controllable anonymous authentication. Accordingly, there are various forms of digital wallets, whereby the DCEP can be held both under an anonymous account and a real-name account. Further, offline payment is also viable with the hardware digital wallet. In addition, the DCEP does not provide remuneration to its holders, and the reserve rate of this digital currency is set at 100%.

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The application of the DCEP may encounter certain challenges. Given the high reserve rate, the money multiplier would be reduced to 1, leading to paradoxes between the narrow banking issue and the facilitation of the wide use of the DCEP. On the other hand, the contemplated purpose of the high reserve rate to promote internationalization of the RMB may miss the target. Therefore, this paper proposes not to set such a high reserve rate. In order to avert the risk of bank runs, which is also expected to be achieved through the high reserve rate, this paper proposes to adopt differentiated treatment for different types of DCEP digital wallets: as for the hardware digital wallet, a quota should be set on the daily withdrawal amount, whereby unattractive service fees are to be charged when this quota is exceeded. With regard to the software digital wallets, while deposits under the real-name account should be presented in the same form as traditional deposits, identification of each unit of the DCEP should be identified in the anonymous accounts. CONSENT FOR PUBLICATION Not applicable. CONFLICT OF INTEREST The authors declare no conflict of interest, financial or otherwise. ACKNOWLEDGEMENT Declared none. REFERENCES Adrian, T., Mancini-griffoli, T. (2019). The Rise of Digital Money; IMF FinTech Note No. 19/01; by Tobias Adrian and Tommaso Mancini-Griffoli. Auer, R., Frost, J., Gambacorta, L., Monnet, C., Rice, T., Shin, H. S. (2021). Central bank digital currencies: motives, economic implications and the research frontier (Issue 97). Ba, S., Yao, S. (2021). Influence of construction of central bank digital currency system on financial system. Finance Forum, 4, 3-10. [http://dx.doi.org/10.16529/j.cnki.11-4613/f.2021.04.001] Bai, J., Ge, H. (2021). DCEP gives RMB opportunity of internationalization. China Economic Weekly, 111112. Bank, E. C. (2020). Report on a digital euro Bindseil, U. (2019). Controlling CBDC through tiered remuneration. SUERF Policy Note, 95, 1-11. Boar, C., Wehrli, A. (2021). Ready, steady, go? - Results of the third BIS survey on central bank digital currency. [http://dx.doi.org/10.4324/9780429200427-13] Bu, X., Ma, Q. (2023). Cross-border flow of digital Research on Rule of Law, 1, 91-101. Caldwell, C., Liu, J. (2021). Dominance of WeChat Pay and Alipay in the Chinese Digital Payments Industry.

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Available from: https://www.focusfinance.org/post/dominance-of-wechat-pay-and-alipay-in-the-chinesedigital. Callens, E. (2021). Financial instruments entail liabilities: Ether, bitcoin, and litecoin do not. Computer Law and Security Review, 40(July 2020), 105494. [http://dx.doi.org/10.1016/j.clsr.2020.105494] Cao, L. (2016). Currency wars and the erosion of the Dollar hegemony. Michigan Journal of International Law, 57, 1-77. Chen, W., Ming, Y. (2023). Central bank digital currency: from theory to practice. Chinese Social Sciences Today, 1-2. China, P. B. (2016). China’s road to legal digital China Finance, 17, 45-46. Chohan, U.W. (2018). The Double Spending Problem and Cryptocurrencies. SSRN Electronic Journal. [http://dx.doi.org/10.2139/ssrn.3090174] Fan, Y. (2016). Theoretical basis and framework choice of China’s legal digital China Finance, 17, 10-12. He, D., Habermeier, K., Leckow, R., Haksar, V., Almeida, Y., Kashima, M., Kyriakos-saad, N., Oura, H., Sedik, T. S., Stetsenko, N. (2016). Virtual Currencies and Beyond: Initial Considerations. [http://dx.doi.org/10.5089/9781498363273.006] Hou, L. (2021). Digital R lement. Nanjing University Law Journal, 1, 132-150. [http://dx.doi.org/10.13519/b.cnki.nulr.2021.01.009] iResearch. (2021). Research report on the Development of China’s digital Renminbi. Liu, R. (2021). Japan’s CBDC System Design and Policy Considerations. Japan Study, 4, 83. Lubbers, P., Tanzi, A. (2023). Yuan’s Popularity for Global Payments Hits Highest in Six Years Bloomberg. Available from: https://www.bloomberg.com/news/articles/2023-01-20/yuan-s-popularit-for-global-payments-hits-highest-in-six-years. McKinsey Global Institute. (2016). Digital finance for all: powering inclusive growth in emerging economies.. McKinsey Global Institute. Merkel, S. (2020). The Macro Implications of Narrow Banking: Financial Stability versus Growth. Available from: https://scholar.princeton.edu/sites/default/files/merkel/files/narrow_banking.pdf. Ni, H., Liu, Y. (2021). How hard is it to build an independent financial settlement system. Global Times. PBOC. (2021). White Paper on the Latest Progress of the Research and Development of the DCEP. Peng, X. (2021). Central Bank Digital Currency: Incentive for issuance and observation of principles. Economist, 10, 51-60. [http://dx.doi.org/10.16158/j.cnki.51-1312/f.2021.10.006] People’s Bank of China. (2021). The People’s Bank of China decided to lower the reserve ratio for financial institutions on December 15, 2021 Available from: http://www.pbc.gov.cn/goutongjiaoliu/113456/113469 /4407661/index.html. Peters, M.A., Green, B., Yang, H. (2020). Cryptocurrencies, China’s sovereign digital. Educational Philosophy and Theory, 1-7. [http://dx.doi.org/10.1080/00131857.2020.1801146] Rochemont, S. (2018). A Cashless Society - Benefits, Risks and Issues. Settlements, B. (2021). BIS Annual Economic Report 2021. Shen, W., Hou, L. (2021). China’s central bank digital currency and its impacts on monetary policy and payment competition: Game changer or regulatory toolkit? Computer Law & Security Review., 41, 105577. [http://dx.doi.org/10.1016/j.clsr.2021.105577] System, B. of G. of the F. R.. (2023). Money and Payments: The U.S. Dollar in the Age of Digital

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Transformation. Wang, Qian (2021). ‘Hardware wallet’ is coming, is ‘double offline payment’ far off? Faren Magazine, 12, 62-64. Wang, Qinggang (2021). The Central Bank Digital Currency: Concept, FunctionS, Risks and Responses. Communication of Finance and Accounting, 24, 124-127. [http://dx.doi.org/10.16144/j.cnki.issn1002-8072.2021.24.026] Wu, T., Li, J., Chen, M. (2020). The theoretical basis and operation mechanism Guizhou Social Science, 3, 139. [http://dx.doi.org/10.13713/j.cnki.cssci.2020.03.019] Xia, M. (2021). In search of the perfect coin: china’s approach towards cryptocurrency and its own central bank digital currency. Banking & Finance Law Review, 36(3), 419-456. Yang, D., Chen, Z. L. (2018). Legislation on virtual currecny: Japanese experiences and lessons for China. Securities Market Herald, 69-78. Yang, J., Dou, Y. (2021). Technological Evolution and Practical Exploration of the Central Bank Digital Currency in China. New Economy Weekly, 3, 50. Yang, Y. (2023). Application scenarios of the DCEP are popping up everywhere. Rural Financial Times. Yi, Y. (2023). Review of the Research Progress of the Central Bank Digital Currency across the Globe in 2021. China Money, 11, 70. Yuan, Z. (2021). Study on innovative compliance regulation on DCEP. Jianghuai Tribune, 6, 126.

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CHAPTER 5

Refinement of Commercial Mediation Systems In The Greater Bay Area: From The Perspective Of Hong Kong’s Experience And Implications For The Mainland Hui Chen1,* 1

Department of Law, Faculty of Law, University of Hong Kong, Hong Kong Abstract: Commercial mediation is regarded as one of the most significant parts of diversified dispute resolution mechanisms, since it has unique advantages compared with “adversarial” dispute resolution mechanisms, such as litigation and arbitration, particularly in cross-border disputes. With the support of official guidelines and the implementation of local governments, it is observed that mediation has become a popular alternative dispute resolution method applied by more and more citizens in the GBA. In addition, China became a member state of the Singapore Mediation Convention in 2019, which demonstrates that China attaches great importance to mediation mechanisms, with both academics and professionals recognizing the unique role of mediation in the process of dispute resolution. Against this backdrop, this article focuses on the implications of the Hong Kong experience to the development of commercial mediation in the Mainland, which revolves around four aspects: voluntariness of mediation activities, confidentiality rules, the enforceability of mediated settlement agreements and capacity building of mediators. Due to the great disparity in the development of commercial mediation in different GBA regions, particularly in terms of rule frameworks and patterns of mediation, this article argues that the future development in the GBA of commercial mediation can refer to the Hong Kong experience in the following four respects. Firstly, the principle of voluntariness should be enhanced in the conduct of commercial mediation; Secondly, provisions of confidentiality and detailed provisions for breaching the confidentiality principle should be formulated in commercial mediation; Thirdly, a uniform rule framework to govern the mutual recognition and enforcement of commercial mediated settlement agreements across the GBA should be provided. Last but not least, a uniform mediator evaluation system and a mediator qualification certification platform should be established in the Mainland.

Keywords: Commercial mediation, Greater bay area, Hong kong, Mainland. Corresponding author Hui Chen: Department of Law, Faculty of Law, University of Hong Kong, Hong Kong; E-mail: [email protected] *

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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INTRODUCTION The “Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Greater Bay Area” was signed by the National Development and Reform Commission and the local governments of Guangdong, Hong Kong and Macao in 2017, setting out the objectives and principles for the regional cooperation and development of the Greater Bay Area (GBA) (Hong Kong Government 2017). The GBA consists of nine municipalities in Guangdong Province and two Special Administrative Regions (i.e., Hong Kong and Macao). The nine municipalities refer to Guangzhou, Shenzhen, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing in Guangdong Province, which are also called “the nine Pearl River Delta municipalities” (hereinafter the nine PRD municipalities). Among all the cooperation goals, it is noteworthy that Hong Kong was set to play the role of “a centre for international legal and dispute resolution services in the Asia-Pacific Region” (Hong Kong Government 2017). Two years later, the “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” (hereinafter the Outline Development Plan) was issued by the CPC Central Committee and the State Council (Hong Kong Government 2019). For the purpose of creating a globally competitive business environment, the Outline Development Plan provides that the international commercial dispute resolution mechanism should be refined to “support exchanges and cooperation among arbitration and mediation organisations” and “provide arbitration and mediation services to the economic and trade activities” in the GBA (Hong Kong Government 2019). With the support of the official guidelines and the implementation of local governments, it is observed that mediation has become a popular alternative dispute resolution method applied by more and more citizens in the GBA (Ministry of Justice of PRC 2021a). From the perspective of Guangdong, the nine PRD municipalities contributed to 1,628 mediation cases (with the value of the objects reaching $217 million) in 2020, of which 1,377 cases have been resolved (Ministry of Justice of PRC 2021a). By the end of 2020, Guangdong had built 13 commercial mediation organizations and one mediation cooperation platform to attract high-level legal professionals to act as mediators and coordinate foreignrelated mediation cases (Ministry of Justice of PRC 2021a). In June 2021, the Shenzhen Commercial Mediation Association (China’s first commercial mediation association) was established in Shenzhen to develop rules for the conduct of commercial mediation and promote the market opening of the mediation industry (Ministry of Justice of PRC 2021b). Since the GBA comprises three different legal systems, represented by the Mainland legal system in the nine PRD municipalities, the Common Law System

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in Hong Kong and the Civil Law System in Macao, the legal departments of the GBA established the “GBA Legal Departments Joint Conference (hereinafter the GBA Joint Conference)” to facilitate regular exchanges and collaborations in legal matters (Hong Kong Government 2021). The GBA Joint Conference further endorsed the establishment of the “GBA Mediation Platform” in 2020. The GBA Mediation Platform is built to provide unified standards and rules for the promotion of mediation in the GBA, including “qualification, accreditation and other relevant standards for mediators”, “establishment of a local panel of qualified GBA mediators” and “best practices for cross-border mediation rules and mediators’ code of conduct (Hong Kong Government 2021). In this regard, the development of the GBA and the state policies on the construction of a diversified dispute resolution mechanism provide great opportunities for the development of commercial mediation in China. In August 2019, China became a member state of the United Nations Convention on International Settlement Agreements Resulting from Mediation (hereinafter the Singapore Mediation Convention) (Ministry of Commerce of China 2019). The adoption of the Convention in China demonstrates that China attaches great importance to mediation mechanisms, with both academics and professionals recognizing the unique role of mediation in the process of dispute resolution (Zhao, 2020). However, the successful implementation of the Singapore Mediation Convention also relies upon the legal reform direction and the promotion of commercial mediation in China (Zhao, 2020). In this context, the promotion and development of commercial mediation in the GBA have become one of the major focuses for China to bring its mediation rule framework in line with the international standard. RESEARCH SCOPE OF COMMERCIAL MEDIATION There is currently no uniform definition for mediation in domestic and foreign academia. According to Cambridge Dictionary, the word “mediation” refers to “the process by which someone tries to end a disagreement by helping the two sides to talk about and agree on a solution” (Cambridge Dictionary 2021). The Singapore Mediation Convention defines the conduct of (international commercial) mediation as “a process, irrespective of the expression used or the basis upon which the process is carried out, whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a third person or persons (“the mediator”) lacking the authority to impose a solution upon the parties to the dispute.” (UNCITRAL 2019). As for commercial mediation, it is an alternative dispute resolution method conducted between two parties to resolve commercial disputes through negotiation coordinated by a neutral third party (mediator) (Fan, 2020). Commercial mediation represents a comprehensive

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dispute resolution system consisting of mediation organizations, rules, procedures and methods to resolve commercial disputes (Fan, 2020). In reference to the Singapore Mediation Convention and the recent development trend, commercial mediation does not involve the intervention of adjudicative powers (judicial powers) of the courts, while the mediator (or multiple mediators) would play the role of helping the parties reach a settlement for the common good (Chan, 2018). According to article 1.2 of the Singapore Mediation Convention, the commercial disputes defined in the Convention do not include consumer, family, inheritance and employment disputes. Settlement agreements approved or concluded in judicial proceedings, as well as those recorded as arbitral awards, are not deemed as commercial mediated settlement agreements as per article 1.3 of the Singapore Mediation Convention. For accommodation to the latest international development of commercial mediation, this article mainly focuses on commercial mediation according to the definition of the Singapore Mediation Convention. Commercial mediation is regarded to be one of the most significant parts of diversified dispute resolution mechanisms, since it has unique advantages as compared with “adversarial” dispute resolution mechanisms, such as litigation and arbitration, particularly in cross-border disputes (Liao, & Duan 2018). Specifically, the comparative advantages of commercial mediation include the following aspects. First, compared with the expensive costs of international litigation and arbitration, commercial mediation can greatly save time costs for dispute resolution. Second, the principle of confidentiality in commercial mediation can effectively protect the disclosure of trade secrets, while the business reputation is not affected by dispute resolution since the outcome of mediation is not open to the public. Third, the amicable dispute resolution environment in commercial mediation would be conducive to maintaining business relations between the disputants and reducing internal resource consumption due to the dispute resolution. COMMERCIAL MEDIATION SYSTEMS IN THE MAINLAND AND HONG KONG Development of Mediation in China In ancient China, the mediation system was introduced as a product of an agricultural society that pursued a peaceful life and work, which reflects the Confucian idealism of “less litigation”

and “harmonious community”

. Throughout history, mediation has played a significant role in stabilizing society, maintaining harmony with neighbors, and stabilizing social order in China (Zeng, 2009). The mediation system is still cherished in contemporary

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China, as it still plays an irreplaceable role in the stability and development of society. The mediation system embodies the wisdom of the ancient Chinese and its universal significance for the resolution of disputes in human society, since the common philosophy of human society embodied in the mediation tradition is to live in harmony, “seeking common ground while preserving small differences.” The Chinese mediation system contributes to a system that provides the ideological basis of an alternative dispute resolution mechanism for the international academic community (Zeng, 2009). The traditional mediation system in contemporary China consists of several types of mediation, including People’s Mediation, Judicial Mediation, Administrative Mediation and Arbitration Mediation (Zhao, 2016). Judicial Mediation is the only ‘in-court mediation’ among the four types, and refers to the mediation conducted by the courts to resolve disputes when the courts hear civil cases and minor criminal cases. Judicial Mediation shall be conducted in accordance with the principles of voluntariness and legality, and a judgment shall be made in a timely manner if a mediated settlement agreement fails to be concluded. People’s Mediation refers to the mediation activities conducted by the People's Mediation Committee to actively facilitate the parties to reach a mediated settlement agreement under the principles of equality and voluntariness. Administrative Mediation refers to a mediation system in which the parties to civil disputes or minor criminal cases voluntarily reach an agreement to resolve disputes through persuasion and education conducted by grassroots governments (Tai & McDonald, 2012). Arbitration Mediation is carried out by the arbitration tribunal prior to giving an arbitration award if both parties voluntarily seek mediation. With the development of the economy and trade, other types of mediation have emerged as alternative dispute resolution methods to litigation against the background of the Grand Mediation Policy, such as industry mediation and commercial mediation (Hu & Zeng 2015). Industry mediation is conducted by the mediation agencies/platforms established by industry associations/organizations to facilitate communication and dispute resolution between the parties through their professional advantages. For example, in disputes between consumers and business operators, the consumers can file disputes with the China Consumers’ Association for industry mediation. China has been actively promoting diversified dispute resolution platforms and the application of commercial mediation. It is notable that a series of official guidance, opinions and policies have been introduced to enhance the commercial mediation system in China. For example, “Several Opinions of the Supreme People's Court on Establishing and Improving a Mechanism for Resolving Contradictions and Disputes Connecting Litigation and Non-litigation” was

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introduced in 2009, which incorporated Commercial Mediation as one of the major forms of mediation (coupled with People's Mediation, Judicial Mediation, and Administrative Mediation), and established judicial confirmation procedures for a commercial mediated settlement agreement (National People’s Congress of China 2009). In 2016, the “Opinions of the Supreme People's Court on Further Deepening the Reform of the Diversified Dispute Resolution Mechanisms of the People's Courts” further enhanced the collaborative mechanism between litigation and commercial mediation (China Securities Regulatory Commission 2018). Two years later, “Opinions on the Establishment of ‘Belt and Road’ International Commercial Dispute Resolution Mechanisms and Institutions” was introduced to provide guidance on enhancing diversified dispute resolution platforms to resolve “Belt and Road” international commercial disputes through mediation, arbitration and other ADR mechanisms (Central Government of China 2018). Admittedly, these official documents and judicial interpretations have promoted the development of commercial mediation in China, but the lack of a systemic legislative framework for the application of commercial mediation also raises further problems in practice (Yang, 2020). The lack of systematic rule frameworks for commercial mediation would affect the predictability and consistency of the conduct of mediation to resolve disputes, and also lead to the imbalanced development of commercial mediation institutions in China (Yang, 2020). As a long-term objective, it is argued that a “Commercial Mediation Law” should be enacted by the Standing Committee of the National People's Congress after the ratification of the Singapore Mediation Convention, which could provide a solid and systemic legal framework for commercial mediation (Yang, 2020). The experience of Singapore to ratify and implement the Singapore Mediation Convention could be referred to, as Singapore introduced domestic legislation, namely the Singapore Convention On Mediation Act 2020, to stipulate the substantive and procedural rules of recognition and enforcement of international settlement agreements by the High Court (Singapore Statutes Online 2020). Before the promulgation of the Commercial Mediation Law, the principled provisions on (both international and domestic) mediation settlement agreement could be stipulated in the “Civil Enforcement Law” (currently under legislative procedures), and then specific rules could be set up on the implementation of the Singapore Mediation Convention in the form of judicial interpretations (Liu, 2021). Alternatively, it is suggested that the legislature could legitimate (or authorize judicial authorities to recognize) the provisions of the Singapore Mediation Convention (except for reservations to the Convention) as an “executable legal document” under the framework of the civil procedure law (article 224) (Sun, 2021). Although the two-track legislation mode has been raised, i.e., separate legislation to regulate international and domestic mediation settlement agreements, the two-track mode would be prejudicial to the

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development of commercial mediation system in China in terms of linking up with international standards and further enhancing the rule framework (Sun, 2021). The Mediation System in Hong Kong Hong Kong maintained its common law system inherited from the UK after returning to China under the principle of ‘one country, two systems’, which leads to the distinct legal frameworks for mediation under both systems (Chan, 2015). Hong Kong borrows mediation experience and regimes from the Western approach (Chan, 2015), thus excluding the application of People’s Mediation, Judicial Mediation and Administrative Mediation. Compared with the Mainland mediation system, the distinct features of the Hong Kong mediation regime include the self-determination of the mediation process and the facilitative (not evaluative) role of mediators (Lai, 2021). In Hong Kong, the conduct of mediation is separated from court proceedings, and the judge shall not serve as the mediator for the same case (Lee, 2013). Even for court-annexed mediation, where the parties to the dispute have already filed the case in court, the mediation would be outsourced to community mediators (Family and Community Mediation) or private mediation organizations (Private Sector Mediation) in Hong Kong (Lee, 2013). After the Civil Justice Reform, Hong Kong introduced new procedural rules to allow the judges to facilitate and intervene in the mediation process, but the principle of self-determination/voluntariness in mediation remains intact (Lee, 2013). Despite being strongly affected by the western approach, it is also noted that the mediation development in Hong Kong has been profoundly affected by the Chinese cultural heritage (particularly in family disputes) (Sullivan, 2005), while evaluative mediation has also been advocated for some areas (such as construction mediation) (Leung & Hui, 2020). In an effort to promote the application of mediation and the establishment of a mediation rule framework, the Secretary for Justice’s Working Group on Mediation (hereinafter the “Working Group”) was set up to review the current development of mediation and provision of mediation services in Hong Kong (Department of Justice of Hong Kong 2010a). The Working Group issued the 2010 Report of the Working Group on Mediation and promulgated the Hong Kong Mediation Code. On the one hand, the 2010 Report of the Working Group provides recommendations on the regulatory framework for mediation, guidelines for the training and accreditation of mediators, as well as publicity and public education for the promotion of mediation (Department of Justice of Hong Kong 2010a). On the other, the Hong Kong Mediation Code provides a common standard for mediation service providers in Hong Kong and specifies the

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responsibilities of mediators (Department of Justice of Hong Kong 2010b). Hong Kong has introduced a series of legislation, policies and measures to promote the use of mediation. The establishment of the 2007 Working Party on Mediation and the implementation of the 2009 Civil Justice Reform collectively contribute to the increase in the application and effectiveness of mediation in Hong Kong (Lai, 2009). The “Mediation Ordinance 2012 (Cap. 620)”, “Apology Ordinance 2017 (CAP. 631)” and “Arbitration and Mediation Legislation (Third Party Funding) (Amendment) Ordinance 2017 (hereinafter Amendment Ordinance)” were introduced to enhance the legal framework of mediation in Hong Kong. The Mediation Ordinance protects the confidential nature of mediation communications and stipulates the structured process of mediation, including identifying the issues in dispute, exploring and generating options, communicating and reaching a mediated settlement agreement for dispute resolution. The Apology Ordinance specifically provides the definition of apology and its applicable proceedings. Hong Kong continues to draw on the western approach to mediation (e.g., international arbitration institutions in Australia, England and Wales) to introduce its ‘light touch’ regulatory approach for thirdparty funding arbitration and mediation (Rooney, 2017). After consulting with local stakeholders, the Code of Practice for Third Party Funding of Arbitration and the New Arbitration Ordinance Provisions were enacted in 2019. EMERGING PROBLEMS IN PROMOTING COMMERCIAL MEDIATION IN THE GBA

The Principle of Voluntariness in Mediation Given the definition and the conduct of commercial mediation, the principle of voluntariness should be ensured throughout the process of mediation. Voluntariness not only means that no authority should impose a solution upon the parties to the dispute in a settlement agreement (article 2.3 of Singapore Mediation Convention), but also that the laws and regulations should provide sufficient flexibility to ensure the voluntariness to be achieved in good faith (Smith, 1998). This standard of voluntariness, however, is different from that in the Mainland, particularly in Judicial Mediation and People’s Mediation, as the judge or People’s mediator can intervene in the mediation process. As for the future trend of mediation development on the issue of voluntariness, ‘the Opinion Concerning the Establishment of the Belt and Road International Commercial Dispute Resolution Mechanism and Institutions’ (hereinafter the Opinion) provides for ‘the principle of party autonomy’ in cross-border dispute resolution, and stresses that ‘the rights of the parties in adopting different methods of dispute

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resolution and choosing domestic or foreign laws familiar to them’ should be respected, while international treaties and customs to protect legitimate rights and interests of all parties should be applied (CPC Central Committee & State Council 2017). Thus, as an essential part of BRI development and a dispute resolution hub, the GBA should also accommodate the international standard of voluntariness in the conduct of commercial mediation. The Principle of Confidentiality of Mediation The principle of confidentiality is one of the major reasons why mediation is gaining popularity all around the world (Zhao, 2011). The confidentiality principle of commercial mediation differentiates it from the conduct of judicial proceedings in civil disputes (Al, 2017). For example, in the Mainland, the principle of an open trial is stipulated in article 134 of the Civil Procedural Law. That means the People's courts shall hear civil cases in public unless they involve state secrets, personal privacy or as otherwise provided for by law. The principle of confidentiality is reflected in at least three aspects. First, the mediation process is not open to the public. That means the information disclosed during the conduct of mediation should not be accessible to any persons or organizations other than the necessary participants of mediation, i.e., the parties and the mediator of the case (sometimes the case may involve legal consultants, experts and witnesses). The persons or organizations involved in the mediation process shall not disclose any information unless otherwise agreed by the parties. Second, the information disclosed and the opinions expressed by the parties and mediators in the mediation process, as well as the mediated settlement agreement, cannot be used as evidence in other dispute resolution procedures, such as litigation proceedings and arbitration. Third, if the mediation process does not resolve the case, then the mediator can no longer serve as a witness, expert, lawyer, arbitrator or other relevant participants in the same dispute (Liao, 2020). However, the principle of confidentiality in mediation allows exceptions for the disclosure of information. The exceptions to confidentiality could be derived from the agreement of the parties to the dispute, or provided for by the laws and regulations, which include the necessary disclosure of information for the enforcement of a mediated settlement agreement, and the considerations of public policies (Leatherbury & Cover, 1993). For example, article 23 of “Opinions of the Supreme People's Court on the People's Courts’ Further Deepening the Reform of the Diversified Dispute Resolution Mechanism” (the Opinions) provides that “in litigation procedures, except for those involving national interests, social public interests, and the legitimate rights and interests of others, the parties do not need to provide evidence on undisputed facts that have been confirmed during the mediation process.” In comparison, the US lists the statutory exceptions of

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confidentiality in Section 6 of the Uniform Mediation Act (710 ILCS 35/), including (a) as agreed by all the parties and evidenced by a record; (b) in case of a threat or statement of a plan to inflict bodily injury or commit a crime of violence; (c) when sought or offered to prove or disprove a claim or complaint of professional misconduct or malpractice filed against a mediator (Illinois Compiled Statutes 2004). Likewise, article 8(2) of the Hong Kong Mediation Ordinance (Cap. 620) also elaborates the specific circumstances for the exceptions to confidentiality (Hong Kong Government 2013). It is argued that the exceptions to the confidentiality principle shall depend on the statute or rule that bars or permits such exceptions (e.g., the Uniform Mediation Act) (Widman, 2006). Since the understanding and standards of public policies may vary in different countries, the exceptions of confidentiality provided in the domestic laws and regulations may bring uncertainty to the mediation process (Zhao, 2011). The Singapore Mediation Convention does not provide specific exceptions for confidentiality principles, since it is difficult for countries to reach a consensus on the scope of confidentiality. However, for compliance with the international standard of mediation and the implementation of the Singapore Mediation Convention, it is expected that Mainland legislation could provide rules of confidentiality in mediation to clarify the scope of confidentiality and its exceptions (Zhao, 2020). Enforceability of Mediated Settlement Agreements Before the analysis of the enforceability of mediated settlement agreements, the meaning of the term ‘mediated settlement agreement’ needs to be clarified. ‘Mediated settlement agreement’ refers to the agreement ultimately reached by the two parties to resolve the dispute after mediation, and it is easy to be confused when comparing it with another similar concept – “mediation agreement”, which means the agreement reached by the two parties to the dispute that represents the willingness to resolve the case through the conduct of the mediation (Zhao, 2013). In the Chinese language, the two concepts are often misused and interchangeable since they are generally referred to as ‘mediation agreements’, while Chinese scholars and practitioners would distinguish the two concepts with the dragons of ‘settlement agreement’( ) and ‘mediation agreement’( ) (Sun & Shen, 2021). In Hong Kong Mediation Ordinance, the two concepts are distinguished as ‘mediated settlement agreement’(reaching an agreement after mediation) and ‘mediation agreement’(the manifestation of intention to resort to mediation for dispute resolution). This article focuses on the analysis of the enforceability of Mediated Settlement Agreement. According to the latest development of commercial mediation, the international community has been promoting global recognition and direct international enforcement of mediated settlement agreements (Chua, 2015). The benefits of

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promoting direct international enforcement of mediated settlement agreements include providing equity amongst parties from different countries and reducing dispute resolution costs (Chua, 2015). However, it is difficult for countries to reach a consensus over a mediation convention for direct international enforcement of mediated settlement agreements, since the validity and the procedural rules of enforcement of mediated settlement agreements may vary greatly in different countries (Koo, 2017). For example, the EU has adopted the approach of direct enforcement of mediated settlement agreements as per article 20 of Directive 2008/52/EC on Certain Aspects of Mediation in Civil and Commercial Matters, “the content of an agreement resulting from mediation which has been made enforceable in a Member State should be recognized and declared enforceable in the other Member States in accordance with applicable Community or national law” (European Parliament 2008). In other words, direct enforcement of mediated settlement agreement means that the domestic mediation legislation explicitly provides the enforceability of mediated settlement agreements. By comparison, the Mainland adopts an indirect approach to enforcement of mediated settlement agreement, and deems the mediated settlement agreement to be the same as a civil contract in terms of legal validity, which means that the mediated settlement agreement can only be enforced after going through certain legal procedures, such as judicial confirmation and notarization (Sun & Shen, 2021). The Mainland has yet to introduce specialized domestic legislation on commercial mediation and legal provisions on the enforceability of commercial mediated settlement agreements. The only specialized mediation legislation in the Mainland is the People’s Mediation Law. Article 31 of the People’s Mediation Law stipulates that a mediated settlement agreement reached by the parties through People's Mediation shall be legally binding, and article 33 further clarifies that both parties may jointly apply to the People’s Court for judicial confirmation, and the People’s Court shall review the mediated settlement agreement in a timely manner. Article 194 of the Civil Procedure Law (2017 edition) also echoes Article 33 of People’s Mediation Law, which provides that both parties shall jointly submit an application to the Basic People’s Court where the mediation organization is located within 30 days of the effective date of the mediated settlement agreement in accordance with the People’s Mediation Law and other laws. However, considering the disparity between People’s Mediation and commercial mediation (as mentioned in the section on The Development of Commercial Mediation in Mainland China), the provisions in People’s Mediation Law and Civil Procedure Law are not enough to regulate the commercial mediation and the enforceability of commercial mediated settlement agreements. Given the lack of domestic legislation to regulate commercial mediation and the

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enforceability of commercial mediated settlement agreements, “Opinions of the Supreme People's Court on the People's Courts to Further Deepen the Reform of the Diversified Dispute Resolution Mechanism” was introduced in 2016 and provides that the judicial confirmation procedures for all types of mediation (including commercial mediation) shall be improved. If an agreement with the nature of a civil contract is reached through commercial mediation, the parties may apply to the Basic People's Court or People's Court where the mediation organization is located to confirm its validity (China Securities Regulatory Commission 2018). In 2018, the Rules of Procedure of the International Commercial Court of the Supreme People's Court (for Trial Implementation) was issued and further provides the judicial confirmation procedures for a commercial mediated settlement agreement, in which article 24 stipulates that the International Commercial Court shall prepare and issue a mediation statement after review of the mediated settlement agreement reached through the designated expert committee or the international commercial mediation agencies; if the parties request a judgment, the International Commercial Court may prepare and issue a judgment (China International Commercial Court 2018). Thus, the Mainland adopts an indirect approach to the enforcement of commercial mediated settlement agreements, and puts commercial mediation in a subordinate position to civil litigation (Sun & Shen, 2021). Capacity Building of Mediators The People's Mediation Law is currently the only mediation law in the Mainland, and other types of mediation, including the rules and code of conduct for the mediators, are all developing in reference to the People’s Mediation Law. People’s Mediation refers to the mediation activities conducted by the People's Mediation Committee in the forms of persuasion and diversion to prompt the parties to voluntarily reach a mediated settlement agreement on the basis of equal consultation (article 2 of People's Mediation Law). Chapter III of People's Mediation Law also provides the eligibility (article 13 and 14), code of conduct (Article 15) and privilege (article 16) of People’s mediators. However, commercial mediation and its mediators are quite different from People’s Mediation. People's mediators shall be members of the People's Mediation Committee and personnel appointed by the People's Mediation Committee (article 13). The People's Mediation Committee is a self-governing mass organization established in accordance with the law (article 7) by the Committee of Villagers, Committee of Residents, enterprises and public institutions (article 8) for the purpose of mediating civil disputes. The People's Mediation Committee shall not charge any fees (article 4). In comparison, commercial mediation calls for independent mediators acting as neutral third

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parties to provide professional knowledge and skills in commercial dispute resolution, and it takes special training and working experience to provide eligible commercial mediators. Currently, there is a lack of special laws and rules to regulate the training and accreditation of commercial mediators, let alone the establishment of commercial mediation institutions for the training of mediators and a code of conduct for commercial mediators (Yang, 2020). The training provided by the self-governing mass organizations (such as the Committee of Villagers, the Committee of Residents, enterprises and public institutions) is not capable of providing commercial mediators. In addition, the nature of commercial disputes determines that the development of commercial mediation needs to comply with the demand of markets, which means that the legal service provided by commercial mediators needs to charge fees. The ‘free of charge’ pattern of People’s Mediation would hinder the healthy competition and development of legal service markets in commercial mediation (Yang, 2020). The role of commercial mediators in dispute resolution is also different from that in other types of mediation in the Mainland. According to the orientations and strategies applied in mediation, Riskin argues that mediation could be broadly divided into two categories, i.e., facilitative mediation and evaluative mediation (Riskin, 1994). In facilitative mediation, the mediators should play the role of facilitators in the communications of the parties (e.g., clarification and encouraging the communications), instead of directly providing opinions and suggestions on how to resolve the disputes (Riskin, 1994). By comparison, evaluative mediators are expected to provide directions and proposals based on their professional expertise so that a mediation settlement agreement could be reached (Riskin, 1994). Hong Kong leans more towards the pattern of facilitative mediation as reflected in the mediation legislation and practice (To, 2018). The Mainland primarily applies evaluative mediation in the traditional types of mediation activities, particularly in People’s Mediation, Judicial Mediation, Administrative Mediation and Arbitration Mediation. However, a recent trend of the Mainland’s commercial mediation reflects the application of both facilitative and evaluative mediation approaches, while the application of facilitative mediation approaches would be more in line with international standards as provided in the Singapore Mediation Convention (Lai, 2021). THE HONG KONG EXPERIENCE AND IMPLICATIONS FOR THE REFINEMENT OF GBA MEDIATION SYSTEM In the Mainland, commercial mediation can be applied to civil, commercial and maritime disputes (e.g., trade, finance, intellectual property, shipping, etc).

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However, the Mainland has yet to introduce separate legislation to regulate the conduct of (international and domestic) commercial mediation, but provides the rules of mediation in various laws (e.g., “Civil Procedure Law”, “Contract Law”, “The Property Law”, “Company Law”, etc.) and regulations (e.g. 2020 Guangdong Free Trade Zone Cross-border Commercial Dispute Mediation Rules) (Deng, 2021). By comparison, Macao has been undergoing the legislative procedures for passing the draft of a Civil and Commercial Mediation Law (Department of Justice of Macao 2019), while Hong Kong has introduced “Mediation Ordinance 2012 (Cap. 620)” and “Apology Ordinance 2017 (CAP. 631)” to regulate the conduct of the mediation. In addition, bilateral agreements between the Mainland and the two Special Administrative Regions (SARs), such as the “Mainland and Hong Kong/Macao Closer Economic Partnership Arrangement (CEPA)” (Ministry of Commerce of China 2006) and “the Supreme People's Court's Arrangement on the Mutual Entrustment of the Service of Judicial Documents and the Collection of Evidence by the Courts of the Mainland and Macao on Civil and Commercial Cases” (The Supreme People’s Court of China 2020), have provided corresponding rules for mediation in resolving commercial disputes. As reflected in the practice of Council for the Promotion of International Trade/China Chamber of International Commerce (CCPIT/CCIC), Shanghai Commercial Mediation Center and “One Belt One Road International Commercial Mediation Center”, The Mainland-Hong Kong Joint Mediation Centre, The Belt and Road International Commercial Litigation-Mediation Connecting Centre of Qianhai (Qianhai Centre), the future development direction of commercial mediation would be to separate commercial mediation (with more application of facilitative mediation approaches) from comprehensive forms of mediation (e.g., judicial/arbitration mediation in commercial cases) and emerging commercial mediation (e.g., mediation provided by the China Consumers Association for consumer disputes) (Fan, 2020). From the perspective of the recent development of commercial mediation in the GBA, the development pace of commercial mediation is not consistent in Guangdong, Hong Kong and Macao. On the one hand, some cities in Guangdong still prefer People’s Mediation to deal with civil and commercial disputes (Fan, 2020). On the other hand, the emerging commercial mediation institutions established in Hong Kong and the free trade zones of Guangdong have represented the future trend of cross-border commercial mediation development to serve the GBA and the Belt and Road Initiative (Chan, 2018). Despite the establishment of emerging mediation institutions across the GBA, such as the Mainland-Hong Kong Joint Mediation Centre (MHJMC) built in Hong Kong, the Belt and Road International Commercial Litigation-Mediation Connecting Centre

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of Qianhai, the pre-litigation mediation Office in Qianhai Cooperation Zone People’s Court (Qianhai Court), the pre-litigation mediation Office in Nansha District Court (Nansha Court), Hengqin New Area Guozhong Civil and Commercial Mediation Center and Hengqin New Area Court (Hengqin Court), the GBA still lacks a uniform (or steering) organization to coordinate the development and cooperation of different commercial mediation institutions (Chan, 2018), let alone a common set of rules to regulate commercial mediation across the GBA (Deng, 2021). Against this backdrop, the analysis in the previous section indicates that the mediation system in the GBA should be refined in at least four respects, i.e. voluntariness, confidentiality rules, the enforceability of mediated settlement agreements, as well as uniform accreditation standards and organization. Voluntariness and Self-Determination of Mediation Activities Judging from the existing mediation legislation and rule framework, one of the most significant differences in terms of the mediation model between Hong Kong and the Mainland is the self-determination of the result of mediation. The People's Mediation Committee can provide mediation in the forms of persuasion and diversion to prompt the parties to reach a mediated settlement agreement (article 2 of People's Mediation Law), while the Hong Kong practice in mediation would focus on coordination instead of offering personal opinions (e.g. what is right and just) towards the contested issues. For example, the Hong Kong Mediation Code stipulates that the role of the mediator shall not include the following conduct: (a) giving legal or other professional advice to any Party; or (b) imposing a result on any Party; or (c) making decisions for any Party (Department of Justice of Hong Kong 2010b). In other words, the mediator shall be neutral and impartial, and only assist the parties to attempt to resolve the dispute in the forms of (a) systematically isolating the issues in dispute; (b) developing options for the resolution of these issues; and (c) exploring the usefulness of these options to meet their interests and needs (Department of Justice of Hong Kong 2010b). In this sense, People’s Mediation tends to be regarded as evaluative mediation while the Hong Kong model of mediation tends to be facilitative mediation (Lai, 2021). Compared with evaluative mediation, facilitative mediation is considered to be more conducive to the realization of the voluntariness principle of mediation for the parties to the dispute, and is more in line with the requirements of the Singapore Mediation Convention (Zhan, 2021). For example, Article 2.3 of the Singapore Mediation Convention stipulates that mediation is a process whereby parties attempt to reach an amicable settlement of their dispute with the assistance of a mediator lacking the authority to impose a solution upon the parties to the dispute. Thus, the elements embodied in evaluative mediation, such as the

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persuasion, education and personal opinions towards the judgment of right and wrong, as well as the analysis for parties over their commercial interests, would not necessarily be in compliance with the stipulation of the Singapore Mediation Convention in terms of ‘not imposing a solution upon the parties to the dispute’. Although it is widely accepted that the parties should be the ultimate decisionmakers for the outcome of mediation, particularly in commercial mediation, it is difficult to draw the line between ‘offering suggestions to facilitate the settlement’ and ‘not imposing solutions to force the settlement’ for the mediators in practice. In the training practice of Hong Kong, some international commercial mediation training institutions adopt a compromise approach, which gives consent to the conduct of providing suggestions to the parties over the settlement of the dispute, but also provides restrictions and skills requirements. For example, the mediators shall seek consent from the parties at the beginning of mediation over offering a suggestion (ensuring that only one suggestion is provided), and whether or not to accept the suggestion is determined by the parties. In this way, the mediator could provide suggestion according to the consent of the parties, which does not run contrary to the principle of voluntariness and self-determination (Lai, 2021). Confidentiality Rules in Mediation Based on the previous analysis, foreign countries and regions usually deem the issue of confidentiality in mediation as one of the significant aspects of mediation legislation, albeit with different scopes of confidentiality stipulated in their respective domestic mediation laws. The scope of confidentiality provisions in mediation laws may include a series of issues, such as the confidentiality clause in the mediation agreement, the identities of the mediator and the parties, the confidential information disclosed in unilateral meetings, whether a mediated settlement agreement is reached and the content of the agreement, whether the mediator needs to testify in court, etc. (Zhao, 2020). The scope of confidentiality provisions is directly related to the information that the domestic courts can have access to when reviewing a mediated settlement agreement to determine its enforceability (Zhao, 2020). Since the Singapore Mediation Convention does not provide uniform confidentiality provisions for the participating countries (as mentioned previously, it is difficult to reach a consensus over the confidentiality provisions), it is inevitable that the domestic courts may still have to deal with confidentiality issues when ruling on the enforceability of a mediated settlement agreement, particularly in the context of cross-border commercial mediation (Zhao, 2020). Thus, it is necessary to provide relevant mediation legislation to clarify the scope of confidentiality for the implementation of the Singapore Mediation Convention in the Mainland.

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The Mainland mediation legislation does not provide a specified list for the scope of confidentiality provisions and detailed provisions for the breach of the principle of confidentiality in mediation. For example, article 15 of People's Mediation Law stipulates that a People’s Mediator shall not disclose the personal privacy and business secrets of the parties to the dispute, otherwise the mediator will be disqualified. As mentioned in the section on the ‘Principle of Confidentiality’, article 23 of the Opinions provides the parties do not need to provide evidence collected from mediation in judicial proceedings, unless the evidence runs contrary to the national, public and other legitimate interests. In 2019, the Supreme People's Court further introduced the “Opinions on Taking Advantage of the Chamber of Commerce to Promote the Construction of a Diversified Resolution Mechanism for Disputes in the Private Economy Sector”, and mentioned in article 6 that the conduct of commercial mediation should pay attention to the privacy and business secrets of the parties to strengthen its standardization and credibility (The Supreme People’s Court of China, 2019). However, the existing legislation and regulations in the Mainland lack the specific provisions to govern the scope of confidentiality in mediation and the liability of the mediator in the breach of the confidentiality principle. Instead, the principle of confidentiality in practice is more inclined to be deemed as an ‘exception’ rather than a ‘principle’, since the information collected from the mediation process shall serve the purpose of dispute resolution in litigation, and the access to mediation information is justified with the clause of protecting the national, public or individual interests (Zhan, 2021). In comparison, Hong Kong’s mediation legislation provides the principle of confidentiality, and the court proceedings shall not override the principle, unless it is specifically listed otherwise. Article 6 of ‘Practice Direction – 31 (Mediation)’ in Hong Kong ‘In all contexts the Court cannot compel the disclosure of or admit materials so long as they are protected by privilege in accordance with legal principles, including legal professional privilege and the privilege protecting without prejudice communications.’ (Judiciary of Hong Kong 2014). Article 8(2) of Hong Kong Mediation Ordinance (Cap. 620) provides the list of exceptions to the confidentiality principle, including ‘the consent of the parties or other persons who made the information’, ‘lawful information disclosure to the public’, ‘there are reasonable grounds to believe that the disclosure is necessary to prevent or minimize the danger of injury to a person’, etc. At the operational level, the scope of confidential information, the level of confidentiality of information, and the application of confidentiality rules should be further clarified in Commercial Mediation Law or other domestic mediation legislation (Liao & Duan, 2018). In reference to the international legislation standard, as well as the practice of Hong Kong, the Mainland could draw from the

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existing legislative model to provide rules to ensure confidentiality in commercial mediation. First, the mediation legislation on confidentiality rules should clarify the persons or institutions that are subject to the obligations of the confidentiality principle in mediation, such as the mediator, parties to the dispute, legal counsels or representatives, experts or witnesses in the mediation, etc. Second, the exceptions for the confidentiality principle should be specified or listed, such as when the disclosure is made with the consent of the parties, other persons, or institutions that legally hold the information; when the mediation communication is information that has already been legally made available to the public; when the disclosure is necessary to prevent or minimize the danger of injury to a person; when the mediation process is inconsistent with the domestic laws or rules of the Mainland, and the dispute shall not be resolved through mediation; when enforcing or challenging a mediated settlement agreement; when a complaint of professional misconduct is made against a mediator or any other person who participated in the mediation in a professional capacity, etc. Third, the enforcement of the confidentiality principle in commercial mediation should be expressed explicitly in legislation, since trade secrets and personal privacy are deemed of greater value in commercial mediation than other forms of mediation (e.g., People’s Mediation and Judicial Mediation) in the Mainland. Fourth, the breach of confidentiality rules shall be punished with specific sanctions to ensure the implementation of the confidentiality principle, such as the compensation obligations related to contractual and monetary liability. Enforceability of Mediated Settlement Agreements Hong Kong takes a similar position in dealing with the enforceability of mediated settlement agreements to that of the Mainland. The mediation practice in Hong Kong also regards the mediated settlement agreement as a legally binding contract, but does not provide direct or special enforceability for the agreement through mediation legislation. The Recommendations of the Report of the Working Group on Mediation also mention that the Mediation Ordinance in Hong Kong does not include any provision to confer direct enforceability on mediated settlement agreements, and the experts in the Working Group deem that “it is not necessary to include in the Proposed Mediation Ordinance a statutory mechanism for enforcing mediated settlement agreements. Where necessary, enforcement of mediated settlement agreements can be left to the court as in ordinary cases of enforcement of contracts.” (Department of Justice of Hong Kong 2013). The issue of the enforceability of mediated settlement agreements also involves the balance between substantive justice and dispute resolution. The Singapore Mediation Convention provides the signatories with ‘consistent standards on the cross-border enforcement of international settlement agreements resulting from

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mediation’ (UNCITRAL 2018). Since China has become a member of the Singapore Mediation Convention, it is argued that China should enact relevant mediation legislation to provide direct enforcement of mediated settlement agreements for the implementation of the Singapore Mediation Convention (Sun & Shen, 2021). However, it is concerned that the promotion of mediation does not necessarily contribute to access to justice, as the conduct of mediation attaches more importance to voluntariness, flexibility and problem-solving than to substantive justice (Genn, 2012). In other words, the outcome of mediation would be more of a settlement that both parties ‘can live with’ than outcome fairness that ‘distinguishes right from wrong’ (Waldman & Ojelabi, 2016). The balance between substantive justice and dispute resolution is important because it may involve the problems that take place in the conduct of mediation, such as unequal bargaining positions between the parties to the dispute. Unequal bargaining positions between the parties (such as in a commercial dispute between a business tycoon and a small company that relies on the technical assistance of the tycoon) may not violate the domestic legislation or public interests of the signatories to the Singapore Mediation Convention, and thus be directly enforceable according to the Convention. In such a context, the role of mediators is important to maintain the balance between substantive fairness and dispute resolution, and the rules on the liability and the code of conduct of mediators would urge them to perform their duties (Zhao, 2020). However, the lack of uniform legislation or rules on enforceability also leads to the problem of enforcing the commercial mediated settlement agreement across the GBA. In other words, there is a lack of legal basis for recognizing and enforcing Mainland mediated settlement agreements in the judicial courts of Hong Kong and Macao, and vice versa (Yuan, 2021). The existing judicial assistance arrangements across the GBA do not provide mutual recognition or enforcement of mediated settlement agreements. For example, article 4 of the “Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region”(hereinafter the Arrangement between the Mainland and Hong Kong) provides that “ the ‘judgment’ referred to in this Arrangement includes, in the case of the Mainland, any judgment, ruling, conciliatory statement or order of payment, but does not include a ruling concerning preservation measures; in the case of the HKSAR, includes any judgment, order, decree or allocator, but does not include anti-suit injunctions or orders for interim relief (Department of Justice of Hong Kong 2019).” The ‘conciliatory statement’ in the Chinese version of the Arrangement between the Mainland and Hong Kong is equal to ‘mediated settlement agreements’(Department of Justice of Hong Kong 2019). That means mediated settlement agreements can only be enforced in the Mainland but not in the courts of Hong Kong as per article 4 of the Arrangement

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between the Mainland and Hong Kong. In the case of Macao, article 2 of ‘Arrangements of the Supreme People's Court on the Mutual Recognition and Enforcement of Civil and Commercial Judgments between the Mainland and the Macao Special Administrative Region’ (hereinafter the Arrangement between the Mainland and Macao) states that “the term ‘judgment’ in this arrangement includes: judgments, rulings, decisions, mediation documents, and payment orders in the Mainland; in the Macao Special Administrative Region, it includes: judgments, rulings confirming settlements, decisions or instructions of judges.” (Department of Justice of Hong Kong 2019). Similar to the case of Hong Kong, there is a lack of legal basis to enforce the Mainland mediated settlement agreements in Macao, too. Thus, maximizing the effectiveness and promoting the application of commercial mediation to resolve cross-border disputes calls for a uniform rule to govern the mutual recognition and enforcement of commercial mediated settlement agreements across the GBA. Uniform Accreditation Standards and Organization The professional reputation, knowledge and practical skills of commercial mediators are crucial for gaining the trust of customers and promoting mediation as an alternative dispute resolution method, and these factors are related to the accreditation standard of mediators (Yuan, 2021). Currently, the GBA has yet to establish a uniform platform or standardized rules for the accreditation of mediators. Given that the standardized accreditation of mediators would affect the confidence of the parties to commercial mediation, the GBA could learn from other countries and regions with advanced experience in promoting assessment systems for and accreditation of mediators. In this regard, the GBA could learn from the experience of regions and countries where commercial mediation is developed to establish a mediator evaluation system and a mediator qualification certification platform. Those who pass the assessment will become “certified mediators” in the Greater Bay Area, and a roster of joint mediators will be established to realize the interconnection of legal and dispute resolution expert resources in the Guangdong-Hong Kong-Macao Greater Bay Area. For example, the National Mediator Accreditation Standards (NMAS) in Australia could be learned from to establish a uniform accreditation standard for GBA commercial mediators. Alternatively, the GBA could build upon the basis of the accreditation system in Hong Kong and apply it to all the GBA mediators. According to the accreditation system provided by the Hong Kong Mediation Accreditation Association Limited (“HKMAAL”), candidates who have at least 3 years of full-time working experience and have completed the 40-hour General Mediator Training Course

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organized (or co-organized) by the Hong Kong Mediation Centre (HKMC), need to pass the course-end assessment for accreditation, and successful accreditation will lead to the qualification of “General Accredited Mediator” (Hong Kong Mediation Centre 2021). Considering that Hong Kong has a relatively more advanced accreditation system for mediators than Guangdong and Macao, the GBA could adopt the ‘Hong Kong model’ in terms of mediators’ assessment, training courses and accreditation for nurturing more commercial mediators with professional knowledge and practical skills. CONCLUSION As one of the significant dispute resolutions approaches for building a rule-of-law business environment, a more effective commercial mediation system across multiple jurisdictions should be established in the GBA. In this context, Hong Kong has contributed a valuable rule framework and practical experience in terms of developing international commercial mediation, which provides a solid foundation for further refinement in the GBA. For strengthening collaborations between the three GBA regions in developing a uniform commercial mediation system which complies with international standards, e.g. the rules provided in the Singapore Mediation Convention, it is necessary to summarize and learn from the Hong Kong experience in international commercial mediation. This article focuses on the implications of the Hong Kong experience for the development of commercial mediation in the Mainland, which revolves around four aspects: voluntariness of mediation activities, confidentiality rules, the enforceability of mediated settlement agreements and capacity building of mediators. Due to the great disparity in the development of commercial mediation in different GBA regions, particularly in terms of rule frameworks and patterns of mediation, this article argues that the future development direction for the GBA commercial mediation can make reference to the Hong Kong experience and the rules of the Singapore Mediation Convention. Firstly, the Mainland commercial mediation system should make adjustments to adopt the pattern of facilitative mediation, since facilitative mediation is considered to be more conducive to the realization of the voluntariness principle of mediation compared with evaluative mediation. Secondly, the Mainland mediation legislation should provide a specified list for the scope of confidentiality provisions and detailed provisions for breaching confidentiality principles in commercial mediation. In addition, specific clarifications should be provided in the Commercial Mediation Law or other domestic mediation legislation for the operation of preserving confidentiality in commercial mediation activities. Thirdly, it is necessary to establish a uniform rule framework to govern the mutual recognition and enforcement of commercialmediated settlement agreements across the GBA, which would be beneficial for

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maximizing the effectiveness and promoting the application of commercial mediation to resolve cross-border disputes. Last but not least, the uniform accreditation of mediators across the GBA calls for a uniform mediator evaluation system and a mediator qualification certification platform. It is also suggested that the GBA could build upon the basis of the accreditation system in Hong Kong and apply it to all the GBA mediators. CONSENT FOR PUBLICATION Not applicable. CONFLICT OF INTEREST The author declares no conflict of interest, financial or otherwise. ACKNOWLEDGEMENT Declared none. REFERENCES Al, D. (2017). The principle of confidentiality in mediation and the role of confidentiality in commercial mediation. Afro Eurasian Studies Journal, 6(1), 15-32. Cambridge Dictionary. (2021). Mediation Available from: dictionary/english/mediation (Accessed on: December 31, 2021).

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CHAPTER 6

A Diversified Dispute Resolution Mechanism for Settling International Commercial Disputes in China Jie Zheng1 and Li Chen2,* Shanghai Institute of International Organizations and Global Governance, Shanghai University of Finance and Economics, Shanghai, China s Faculty of Law, Fudan University, Shanghai, China 1

Abstract: Globalization and international trade call for dispute resolution service competitions among various nations. China is building a Diversified Dispute Resolution Mechanism (DDRM) to connect litigation with alternative dispute resolution methods to enhance the efficiency and flexibility of its dispute resolution system and improve the legal environment for foreign investment. This Chapter demonstrates China’s latest development in international commercial dispute resolution from three perspectives: the construction of the Chinese International Commercial Court under the Belt-and-Road Initiative, arbitration reforms in FTZs, and the development of commercial mediation in China with the impact of the Singapore Mediation Convention on Mediation. These judicial reforms and legal practices prove that China is moving towards the modernization of its commercial dispute resolution system, but further legislative and judicial reforms are required. Structure: The structure of this chapter consists of five sections. Section I summarizes the concept of a diversified dispute resolution mechanism (DDSM) in the background of China’s further integration into the world market and embracing international rules of commercial dispute resolution. Section II to IV demonstrates the framework of the DDSM from three perspectives: international commercial court, arbitration, and commercial mediation. Section II focuses on China’s International Commercial Court with emphasis on its jurisdiction, expertise in foreign law ascertainment, procedural reforms, and the construction of a one-stop international commercial dispute resolution platform. Section III concentrates on international arbitration reforms in the context of free trade zones. The FTZs serve as a judicial experiment for allowing foreign arbitration institutions to administer international commercial disputes in China, with practical challenges, such as the legality concern of foreign arbitration institutions, the scope of foreign-related disputes, and judicial support for the arbitration proceedings administered by foreign arbitration institutions. Section IV discusses the mediation legal framework in China, focusing on judicial mediation and commercial mediation, with a light touch on the impact of the Singapore Convention on China’s mediation deCorresponding author Li Chen: Faculty of Law, Fudan University, Shanghai, China; E-mail: [email protected] *

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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velopment. Section V concludes with current challenges to China’s development in a diversified dispute resolution mechanism and provides recommendations for the future development of the DDRM.

Keywords: Amendment of the arbitration law, Commercial mediation, Diversified dispute resolution mechanism, International commercial court. INTRODUCTION: BACKGROUND

THE

DESIGN

OF

THE

DDRM

AND

ITS

Diversified Dispute Resolution Mechanism (Duo Yuan Jiu Fen Jie Jue Ji Zhi, hereinafter DDRM) refers to a combination of litigation and alternative dispute resolution methods (including without limitation to negotiation, mediation, and arbitration) to promote efficient, convenient, and flexible dispute resolution in China. According to the Annual Working Report of the Supreme People’s Court (SPC) in 2009, the number of cases that the peoples’ courts handled in 2008 was 19.5 times the number of cases in 1978, while the number of judges only increased by 1.68%. Due to this sharp increase of cases and the limited availability of judicial resources, the SPC has issued Certain Opinions on the Establishment and Improvement of a Dispute Resolution Mechanism through a Combination of Litigation and Non-litigation in 2009 (“the 2009 ADR Opinions”). The 2009 ADR Opinions address a wide range of ADR mechanisms and emphasize the interplay between court proceedings and ADR mechanisms to provide greater flexibility and efficiency in dispute resolution. Moreover, the SPC in 2016 implemented the Opinions on Further Deepening the Reform of the Diversified Dispute Resolution Mechanism of the People’s Courts (“the 2016 ADR Opinions”) to further promote the establishment of a legal regime that connects litigation and non-litigation. The SPC’s 2016 ADR Opinions recognize various ADR mechanisms and grant the judicially ratified mediated settlement agreements with enforceability. Moreover, the 2016 ADR Opinions seek to promote the internationalization of the DDRM and strengthen international cooperation in judicial authorities, arbitration institutions, and mediation institutions between China and other countries. The White Paper of the People’s Court on the Reform of the Diversified Dispute Resolution Mechanism (DDRM White Paper) synthesized both legislative and practical development of the DDRM in China from 2015 until 2020. It covers both civil and commercial disputes. From the DDRM White Paper, the scope of mediation has been expanded from people’s mediation and judicial mediation to commercial mediation as well. The DDRM reform is led by the Supreme People’s

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Court in China, followed by local people’s courts at different levels. At the national level, the people’s court has established an online mediation platform integrating mediation with judicial adjudication. At the local level, for example, Zhejiang People’s Court (where the Chinese tech giant Alibaba is located) has also established a dispute resolution platform to facilitate dispute resolution via mediation and litigation. With the launch of the Belt and Road Initiative and the Free Trade Zone (FTZ) policies, China needs to be armed with a set of dispute settlement regimes for disputes arising from international commercial and trade disputes. Taking this background into account, various dispute resolution mechanisms have been constructed. First, in respect of the court system, the Supreme People’s Court of China (SPC) has endeavored to improve international commercial dispute resolution by setting up Chinese International Commercial Courts (CICC). A onestation commercial dispute resolution platform has also been established by the CICC. Second, reforms have taken place in several free trade zones in China to welcome international arbitration and mediation institutions. There is a need to reform the Arbitration Law of the PRC, which has not been amended ever since its promulgation in 1994. Third, the rise of commercial mediation has distinguished it from people’s mediation and judicial mediation systems in China, providing services for business parties in international trade and commercial disputes. THE CONSTRUCTION OF THE CICC IN CHINA UNDER THE BELTAND-ROAD INITIATIVE The Belt and Road Initiative (BRI Initiative) was proposed by Chinese President Xi Jinping in 2013 during his visit to Central and Southeast Asia to promote policy, coordination, connectivity of infrastructure, facilities, trade, and finance among the countries alongside the Belt and Road. The Opinions on Establishing BRI Initiative Dispute Settlement Mechanism and Institutions designate the establishment of China’s International Commercial Court (CICC) with two locations (one in Shenzhen and the other in Xi’an). Shenzhen municipality is located within the Guangdong-Hong Kong-Macau Greater Bay Area, while Xi’an municipality is the starting point of the China-Europe Railway and the silk road. By setting up its two international commercial courts in these two strategic spots, the CICC aims to facilitate international commercial disputes arising from the BRI projects by means of the DDRM. CICC is the permanent court designated by the SPC specifically to adjudicate international commercial disputes. Following the steps of the SPC, local courts have also endeavored to establish specialized international commercial courts for handling foreign-related commercial disputes.

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On 1st July 2018, the Supreme People’s Court (SPC) promulgated provisions on several issues regarding the establishment of the International Commercial Court (SPC’s Provisions on Setting up the CICC). The CICC is designed to serve international commercial disputes related to BRI and offer a one-stop dispute resolution platform offering services of international commercial arbitration, mediation and litigation. Jurisdiction of the CICC Under Article 2 of the SPC’s Provisions on Setting up the CICC, there are three types of jurisdictions, respectively consensual jurisdiction, transfer jurisdiction, and subject-matter jurisdiction. First of all, parties can agree on the CICC’s jurisdiction to adjudicate first-instance international commercial disputes with claims of at least 300 million RMB (equivalent to 46.4 million USD). However, there is also a pretext under consensual jurisdiction, which is the actual connection between the disputes and the court. In accordance with Article 35 of the Civil Procedure Law of the PRC (CPL), the court chosen by the parties needs to be located either: (1) where the defendant is domiciled; (2) where the contract was performed; (3) where the contract was signed or performed; (4) where the plaintiff is domiciled; (4) where the subject matter of the claim is located; (5)where there exist other connections with the disputes. Secondly, the CICC could also take the first instance cases that the Higher People’s court considers appropriate for the SPC to handle with the approval of the SPC. Thirdly, the CICC also accepts other types of international commercial disputes, such as firstinstance cases of national-wide significant impact, cases involving applications to the SPC for preservation measures in arbitration proceedings, and applications for setting aside or enforcing the international commercial arbitral awards of the arbitration institutions that are designated in the one-stop international commercial dispute resolution platform, and lastly other cases that the SPC considers appropriate. Compared with other international commercial courts, such as the Singapore International Commercial Court and Dubai International Financial Center Courts, the CICC’s jurisdiction is still limited in scope for at least three reasons. Firstly, the close connection requirement in consensual jurisdiction limits cases with no direct connection with China but in which the parties agree to submit the dispute to the CICC. This draws special significance in BRI-related cases where the dispute involves large stakes of Chinese parties. Secondly, the subject matter jurisdiction of the CICC is limited to international commercial and civil matters, excluding investor-state disputes or inter-state trade disputes. With regard to the international element of the CICC’s jurisdiction, Article 3 of the SPC’s Provisions on the CICC applied the old three elements approach (parties, subject matter, or

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the facts that are relevant to the disputes) in assessing whether the disputes are foreign-related. Although the traditional three-tiered approach provides a welldefined scope of disputes that can be submitted to the CICC, scholars have challenged this approach, the main criticism being that the three-tiered approach limits the parties’ freedom to choose the CICC. Instead, Article 1 of the Judicial Interpretations of the SPC on Several Issues Concerning Application of the Law of the PRC on Choice of Law for Foreign-related Civil Relations (I) has added a non-exclusive category to the foreign-related elements, including other disputes which have a substantive connection with a foreign jurisdiction. Nevertheless, the jurisdiction scope of the CICC is quite limited by the three-element approach, limiting the influence and effect of the CICC. Lastly, another puzzling issue of the CICC’s jurisdiction is the lack of clarity in determining the types of cases that can be transferred to the CICC by Peoples’ High Courts and other types of cases the CICC considers appropriate to take. Although this could be left to the internal communications between Peoples’ High Courts and the SPC, the standard should be disclosed to the parties to increase the transparency and the predictability for the parties. Enhanced Expertise in Adjudicating Foreign-Related Commercial Disputes Compared with other Chinese local courts, the CICC has been equipped with enhanced expertise in adjudicating foreign-related commercial disputes. Firstly, there are currently fourteen judges in the CICC adjudicating international commercial disputes, among whom, most hold a jurist’s doctoral degree and have former experience in handling foreign-related commercial disputes. Each case of the CICC will be handled by a collegial panel composed of at least three judges. The final decision will be made by a simple majority vote, allowing dissenting opinions to be published in the judgment. Unlike normal civil cases allowing a single-judge or people’s juror to participate in the collegial panel, the CICC has a more experienced collegial panel to ensure the quality of its judgment. Secondly, the CICC has established an International Commercial Expert Committee (ICEC) to enhance the international legal background of the CICC. Most members of the ICEC are either famous scholars in international commercial law or prestigious lawyers in the field. Currently, there are 53 expert members, among whom 29 are from foreign countries, including Mexico, Uganda, Nigeria, Egypt, Singapore, and Kazakhstan, and 24 are Chinese. There are two major functions of the ICEC. Firstly, they may serve as mediators in outof-court mediation proceedings. Upon the application of the parties, the mediated settlement agreement that the expert members have made can be transformed into conciliation statements or judgments of the CICC. Secondly, they may provide professional legal opinions regarding the application of international conventions,

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international commercial rules, and foreign laws during CICC proceedings. This can be viewed as a supplement for the lack of international legal background of the CICC judges. Thirdly, the CICC has adopted a Foreign Law Ascertainment Mechanism to assist the court to find out the applicable rules. Depending on the applicable laws, the CICC may apply international conventions, international usages, or international trade rules agreed upon by the parties during the proceedings. The Foreign Law Ascertainment Mechanism consists of a wide range of sources for foreign-law ascertainment, including foreign legal experts, foreign law ascertainment service providers, ICEC members, and foreign governments that have judicial cooperation with China. Although the CICC endeavors to enhance its expertise in international commercial disputes through the ICEC and Foreign Law Ascertainment Mechanism, a gap still exists between the CICC and other international commercial courts regarding the internationalization of the court. Unlike the practice of the Singapore International Commercial Court embracing foreign judges, the CICC collegial panel is strictly reserved for Chinese judges. The effect of the ICEC is also limited, as the expert members cannot directly get involved in the adjudication and judgment-forming process. Streamlined Procedural Reforms and Advanced Evidentiary Rules One of the most prominent procedural reforms of the CICC is the finality of its judgment, which is subject to no appeal. As the CICC is the highest level of the Chinese People’s Court, it is technically impossible to have the judgment reviewed by a higher-level court. Moreover, the one-trial-only procedure can increase the efficiency and speed of court proceedings. Unlike the common law jurisdictions, in which the appeal proceeding is limited to errors of law, in civil law jurisdictions, the appellate jurisdiction includes both a de novo review of facts and law. Even if the CICC does not allow the appeal, the parties may nevertheless apply for a retrial by the SPC, including situations where (1) evidence which was unknown to the parties may overturn the judgment; (2) major evidence is insufficient and has no evidentiary value; (3) the main facts on which the judgments were based have changed or revoked; (4) a wrong application of the law was made; (5) procedural unfairness has occurred). The possibility of allowing parties to overturn the judgment error in law and merits may bring uncertainty and challenges to the finality of the CICC judgment in the enforcement proceedings. Another procedural design element is the inclusion of the pre-trial meeting before hearings to coordinate with the court proceedings. The pre-trial meeting procedure

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has been established since the Amendment to the Judicial Interpretation on the Applicable of the CPL in 2015 to enhance the efficiency of the procedure. The idea of a pre-trial meeting is brought by the common law jurisdiction to ascertain and fix the issues of the disputes. During the pre-trial meeting procedure, the court can arrange the procedural matters of the disputes, including evidence preservation, foreign law ascertainment, judicial mediation, translation, etc. The court will assist the parties to ascertain their pleadings, exchange evidence, and fix the pleadings during the pre-trial procedure. The third procedural reform is to allow non-notarized evidence in court. Before, if the evidence was taken from abroad, the people’s court only recognized the evidence that had been notarized and legalized. In addition, upon the agreement of the other party, the evidence submitted by one party in the English language does not need extra Chinese translation, whereas, in the Civil Procedure Law, it is a mandatory requirement. These can be seen as showing the CICC’s positive attitude towards procedural flexibility and reducing the evidentiary burden of the parties. Despite admitting evidence in the English language, the court proceedings are still conducted in the Chinese language, thus reducing the attractiveness of the CICC in cross-border disputes. The One-step International Commercial DDSM Platform The idea of setting up a one-stop international commercial dispute resolution platform was reflected in Article 11 of the SPC’s Provisions on Setting up the CICC but was not brought into operation until 21st July 2021. It aims to provide the parties with a basket of diversified dispute resolution choices for settling their international commercial disputes. The parties have several routes to settle their disputes over the CICC one-stop DDSM platform (Fig. 1). The first and most common option is to try the amicable mediation procedure, either by appointing the members of the International Commercial Expert Committee or choosing mediation institutions listed by the platform. If the parties can reach a settlement agreement during the mediation procedure, the parties could jointly ask the CICC to transfer the settlement agreement into a conciliation statement or a judgment with binding effect. If the mediation fails, the parties could continue to initiate the court proceedings with the CICC. Alternatively, the parties could directly choose to settle their disputes via arbitration or litigation without participating in mediation beforehand.

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Flow Chart

Log in Litigation

Mediation

Pleadings submission

Materials submission

Review

Materials review

Case Registration

Mediate with Member of International Commercial Expert Committee

Hearing

Success

Decision

CICC Conciliation Statement or Judgment

Arbitration

Arbitration institution

Mediate with mediation institution

Application for setting aside arbitral awards & Other Applications

Failure

Litigation

Fig. (1). Procedural flowchart of the one-stop DDSM, extracted from the CICC website.

The one-stop DDSM platform mainly serves four functions. First of all, when a dispute arises between the parties, the platform will offer a list of mediation institutions, mediators from the International Commercial Expert Committee, and arbitration institutions for the parties to choose from to start an alternative dispute resolution mechanism. In 2018, the CICC embraced five arbitration institutions and two mediation institutions in its DDSM basket. Moreover, 53 expert members of the International Commercial Expert Committees also serve as mediators over the DDSM platform. Secondly, the platform offers the parties foreign ascertainment services to clarify the applicable laws of the disputes. Thirdly, the platform provides judicial assistance for the arbitration proceedings (including preservation measures for assets, evidence, or injunctions) and judicial review of arbitral awards rendered by the arbitration institutions that are listed by the platform. Lastly, the platform allows parties to make electronic filings to the CICC via SPC’s litigation e-portal. This is owing to the digitalization transformation of the peoples’ courts in China. From 1 January 2020 to 31 May

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2021, 12.19 million cases were filed online, accounting for 28.3% of the total number of cases filed. The design of the one-stop international commercial DDSM is imprinted with the Chinese characteristics of dispute settlement for harmonization and integrating social resources under the framework of the CICC. From the structure of the DDSM platform, it is clear that the CICC is dedicated to providing the parties with a diversified list of dispute settlement options, but it fails to integrate foreign commercial and mediation institutions. In addition, the platform does not build any connection between mediation and arbitration processes, although the practice of med-arb procedure could serve as an alternative to the med-litigation procedure. The fact that the ICEC members can participate in pre-trial mediation provides a practical convenience for the parties to decide whether to opt for litigation at the CICC or arbitration at a later stage. Another potential problem is the diffusion between commercial mediation by the third-party mediation institutions before the case is opened and judicial mediation by judges during pretrial meetings. Although they are conducted at different stages of the proceedings, parties may be confused by their different functions and spend extra time going through various mediation proceedings delaying the whole settlement process. RECENT ARBITRATION REFORMS IN CHINA IN SHANGHAI FTZS On 27 July 2019, the State Council of the People’s Republic of China (the “PRC”) issued the Lin-gang Framework Plan for the new Lin-gang Special Area of China (Shanghai) Pilot Free Trade Zone (the “FTZ”). The policies of FTZ (the “FTZ Policies”) have traditionally been used as an effective way to provide foreign investors with a more economically liberal environment in various FTZs located in different regions of China and to attract foreign investment without having to make immediate reforms at the national level. The FTZ Policies implement measures for a limited period of time within a specified area, namely the FTZ, and can thus be viewed as a testing ground for easing restrictions on foreign investment. The idea is that once the measures taken in the FTZ have proven to be effective and operational, the same measures will be applied to the whole country. This is also the case for arbitration, as China uses the FTZs as an experiment for future arbitration law reforms. The Lin-gang Framework Plan now welcomes qualified foreign arbitration institutions to register with local judicial authorities to set up legal entities in the Lin-gang Special Area and to have their operation branches administer foreignrelated civil and commercial cases with a seat in China. Article 6 of the Implementation Measures set out which foreign arbitration institutions are allowed to administer arbitration proceedings through their own legal branches

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registered in the Lin-gang Special Area of Shanghai FTZ. There are three conditions for the qualification of a foreign arbitration institution to establish a business office in the Lin-gang Special Area: (i) the institution must have been legally established overseas for more than five years; (ii) it must have conducted substantial arbitration activities overseas and have a high international reputation; (iii) the person in charge of the business office must not have been subject to criminal punishment for a willful offense. Article 14 of the Implementation Measures defines the scope of activities that the registered foreign arbitration institutions are now allowed to perform. It mentions “(I) Acceptance, trial, hearing and awarding of cases; (II), Case management and services; (III) Consultancy, guidance, training and seminars”. Previously, foreign arbitration institutions could only conduct liaison and marketing activities through their representative offices in China. These Chinese-based representative offices were not allowed to administer arbitrations. The Supreme People’s Court in 2013, however, seemed to crack the door to foreign-administered arbitration in what was labeled by many as a milestone case. In the case of Longlide Packaging and Printing Co. Ltd v. BP Agnati S.R.L. (the “Anhui Longlide case”), the Supreme People’s Court confirmed the validity of an arbitration clause that provided for ICC arbitration with its seat in Shanghai, China. This case most certainly was a careful demonstration of China’s increasing openness towards international arbitration, but it did not take away the ambiguity surrounding the nationality of arbitral awards conducted by foreign arbitration institutions seated in China. Nationality of Foreign Administered Awards Seated in China It is uncertain how to assess the nationality of a foreign institution administered award with a seat in Shanghai. As explained above, the nationality of an arbitral award is, however, of utmost relevance to determine the lex arbitri, the law applicable to recognition and enforcement, and the courts that have jurisdiction to decide on a potential annulment of an arbitral award. In the international arbitration arena, the seat of arbitration traditionally determines the nationality of the award. Chinese law uses a standard that deviates from the common standard in international arbitration to classify awards. As reflected in Article 1(2) of the UNCITRAL Model Law, the seat of arbitration is the standard that is commonly used to determine whether an award is domestic or foreign. Domestic awards are set aside, recognized and enforced pursuant to the rules set out in the lex arbitri: domestic courts cannot set aside foreign awards and foreign awards are typically subject to a different regime for recognition and enforcement than domestic awards.

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The scope of application of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) with its 165 state parties attests to this in its Article I. The New York Convention defines its scope of application and the nationality of an award by relying on two criteria. First of all, there is the territoriality criterion that has a wide international appeal and that points to the seat of arbitration. On the basis thereof, the New York Convention applies to awards made in the territory of a state other than the state where the recognition or enforcement of such awards is sought. Secondly, there is the ‘nondomestic’ criterion that needs to be fleshed out at a local and national local level and that encompasses awards that are not considered domestic in the enforcement state. In other words, the New York Convention applies to foreign arbitral awards and awards that fall in the category of ‘non-domestic awards’; the recognition and enforcement of purely domestic awards remain a matter of national arbitration law. This brings us to another notable distinction between national and international arbitration. Some countries, such as France, follow a dualistic approach and apply different rules to national and international arbitration; other countries follow a monistic approach and accept that the same lex arbitri applies to arbitrations with a seat in their territory, independent of the nature of the dispute and the nationality of the parties involved. The Arbitration Law of the PRC follows a different course. A similar distinction is made in China as in the dualistic system, except that the terms national and international or ‘non-domestic’ in the New York Convention, are replaced by domestic and foreign-related arbitration. Also, a clear distinction is made between the regime that applies to foreign awards in the context of recognition and enforcement, and Chinese (domestic and foreign-related) awards. As mentioned above, there is, however, a notable distinction between China and other countries: China does not employ a territoriality requirement to determine the nationality of the award, and thus the regime is applicable to the recognition and enforcement of an arbitral award and other forms of judicial review. It is, in other words, it is not the seat of arbitration that matters in this context. It is, in the first instance, the place where the institution administering the arbitration is registered. Article 283 of the Civil Procedure Law, for instance, stipulates that an award that is rendered under the auspices of a foreign arbitration institution should be recognized and enforced in accordance with “an international treaty concluded or acceded to by the People’s Republic of China or under the principle of reciprocity.” Although this provision does not make this explicit, Chinese literature qualifies such an award as “foreign”. In a second instance, and in order to distinguish between what is called ‘domestic’ and ‘foreign-related’ arbitration,

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the internationality, as opposed to purely Chinese nature of the dispute, plays a role. Article 237 of Civil Procedure Law and Article 58 of Arbitration Law sum up a number of substantive and procedural grounds to refuse the enforcement of “an arbitral award without foreign elements made by a Chinese-mainland-based arbitral institution”; Article 274 of the Civil Procedure Law and Article 70 of the Arbitration Law of the PRC provide for four procedural grounds upon which the enforcement should be refused of “a foreign-related arbitral award made by an arbitral institution based in Mainland China”. Different rules also apply to judicial review of awards with a seat in Mainland China, depending on the two criteria mentioned above. Domestic awards can be set aside on the basis of the procedural rules set out in Article 58 Arbitration law, whereas Article 70 Arbitration Law stipulates that the setting aside of a foreign-related award is justified when one of the procedural grounds listed in Article 274 Civil Procedure Law is proven. Awards rendered by tribunals administered by foreign institutions are not subject to judicial review. It is clear that the standard of application used under Chinese law is very different from the international arbitration practice that relies on the territoriality criterion. This dichotomy may lead to issues with regard to the recognition and enforcement of arbitral awards administered by foreign institutions, even when made in China. This is illustrated by a Letter of Reply issued by the Supreme People’s Court in 2004 concerning the nationality of an arbitral award rendered by an ICC arbitral tribunal with a seat in Hong Kong, in which it considered that the arbitral award was a French arbitral award, given that it was administered by the ICC Court of Arbitration. The Supreme People’s Court held that the ICC Court of Arbitration is an institution established in France, and therefore, the nationality of the award should be treated by Chinese courts as a foreign arbitral award to be recognized and enforced under the New York Convention. The Supreme People’s Court, in its 2004’s Letter, thus used the standard of ‘place of arbitral institution’ to determine the nationality of the arbitral award. According to this criterion, a foreign-administered arbitration, even when the seat of arbitration is in China, results in a foreign arbitral award. As a consequence, chances are that arbitrations with a seat in China that are administered by foreign institutions will be considered foreign awards from a Chinese point of view as well as from the point of view of countries that adopt the territoriality standard. That means that the award will find itself between a rock and a hard place in the context of settingaside proceedings as well, since there the nationality of the award determines the courts’ jurisdiction. That is why many Chinese scholars and practitioners alike have criticized this ‘place of institution’ criterion.

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Validity of Arbitration Agreements with the Designation of Foreign Arbitration Institutions According to article 16 of the Arbitration Law of the PRC, an arbitration agreement should contain three elements, namely: an expression of the parties’ intention to submit their dispute to arbitration; the matters subject to arbitration; and a designated arbitration commission. The first and second elements, respectively deal with party autonomy and the arbitrability of the arbitration agreement. A question arises as to what is meant by the third element, namely the designated arbitration commission, and whether an arbitration clause is valid when it refers to a foreign arbitration institution. There is a series of judgments that deal with the validity of arbitration agreements that designate foreign institutions. In Züblin International GmbH and Wuxi Woke General Engineering Rubber Co., Ltd., the Supreme People’s Court’s Letter of Reply to Jiangsu People’s High Court (“Züblin”) held that the arbitration agreement which only stipulated “ICC Rules, Shanghai” did not sufficiently meet the third condition stipulated in Article 16 of the Arbitration Law. In other words, an award resulting from such arbitration was not considered valid and enforceable. The Supreme People’s Court based this decision on the argument that no specific arbitration institution was designated in the arbitration agreement, which therewith, evaded the issue of the legitimacy of foreign institutions that administer the arbitration in China. Around that time, the Supreme People’s Court also gave guidance on the validity of an arbitration agreement in what is referred to as the “PRC’s Judicial Interpretation of the Arbitration Law.” Article 3 of this Interpretation stipulated that in case the arbitration institution is not specified in the arbitration agreement, it is sufficient that it can be inferred from the agreement that an arbitration institution is selected by the parties. In the Reply Letter to a question posed concerning the case of Anhui Longlide Packaging Co. Ltd. v. BP Agnati S.R.L., the Supreme People’s Court equally recognized the validity of an arbitration agreement that designated a foreign arbitration institution, namely the ICC, for the administration of arbitration with a seat in mainland China. The Supreme People’s Court’s Letter of Reply in the Anhui Longlide case and the Judicial Interpretation of the Application of the Arbitration Law of the PRC indicate that the Court’s attitude towards arbitration administered by foreign institutions seated in China is becoming increasingly welcoming. In the more recent case of BNB v. BNA, the Shanghai No. 1 Intermediate People’s Court confirmed its support of foreign institution-administered arbitration seated in China. The party, in this case, sought to confirm the validity of an arbitration clause in a Takeout Agreement stipulating that “the disputes shall be submitted to the Singapore International Arbitration Centre (SIAC) for

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arbitration in Shanghai.” In the absence of an agreed-upon lex arbitri, the Court applied the law of the seat of arbitration and thus, Chinese law to determine the validity of the arbitration agreement. One of the critical issues also here was whether the arbitration agreement was valid under Article 16 of the Arbitration Law given that the parties referred to a foreign arbitration institution (i.e., the SIAC). The Shanghai No. 1 Intermediate People’s Court held that the scope of the term ‘arbitration commission’ in Article 16 of the Arbitration Law should be understood to include foreign arbitration institutions. It justified its decision by referring to a clear trend that can be discerned both from the judgments of the people’s courts on this topic and by the judicial interpretations issued by the Supreme People’s Court. Both these instruments indicate growing support for international commercial arbitration in China and make up for the legislative ambiguities regarding the meaning of the concept ‘designated arbitration commission’. These recent decisions and opinions all seem to suggest that a reference to a foreign arbitration institution is sufficient to satisfy the third element of the validity requirement in Article 16 of the Arbitration Law. In other words, it seems that the PRC’s courts are opening up the gate for foreign institutions to administer arbitrations with a seat in China. Some foreign arbitration institutions have already jumped on the bandwagon and opened representative offices in the Shanghai FTZ for marketing and promotion purposes. The recent admission of foreign institutions to register in the Lin-gang Special Area of Shanghai FTZ further broadens the Chinese door for arbitration services from institutions all over the world by allowing these institutions to register and conduct arbitration activities in the Lin-gang Special Area of Shanghai FTZ. Capacity Building of Mediators The People's Mediation Law is currently the only mediation law in the Mainland, and other types of mediation, including the rules and code of conduct for the mediators, are all developing in reference to the People’s Mediation Law. People’s Mediation refers to the mediation activities conducted by the People's Mediation Committee in the forms of persuasion and diversion to prompt the parties to voluntarily reach a mediated settlement agreement on the basis of equal consultation (article 2 of People's Mediation Law). Chapter III of People's Mediation Law also provides the eligibility (article 13 and 14), code of conduct (Article 15) and privilege (article 16) of People’s mediators. However, commercial mediation and its mediators are quite different from People’s Mediation. People's mediators shall be members of the People's Mediation Committee and personnel appointed by the People's Mediation

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Committee (article 13). The People's Mediation Committee is a self-governing mass organization established in accordance with the law (article 7) by the Committee of Villagers, Committee of Residents, enterprises and public institutions (article 8) for the purpose of mediating civil disputes. The People's Mediation Committee shall not charge any fees (article 4). In comparison, commercial mediation calls for independent mediators acting as neutral third parties to provide professional knowledge and skills in commercial dispute resolution, and it takes special training and working experience to provide eligible commercial mediators. Currently, there is a lack of special laws and rules to regulate the training and accreditation of commercial mediators, let alone the establishment of commercial mediation institutions for the training of mediators and a code of conduct for commercial mediators (Yang, 2020). The training provided by the self-governing mass organizations (such as the Committee of Villagers, the Committee of Residents, enterprises and public institutions) is not capable of providing commercial mediators. In addition, the nature of commercial disputes determines that the development of commercial mediation needs to comply with the demand of markets, which means that the legal service provided by commercial mediators needs to charge fees. The ‘free of charge’ pattern of People’s Mediation would hinder the healthy competition and development of legal service markets in commercial mediation (Yang, 2020). The role of commercial mediators in dispute resolution is also different from that of other types of mediation in the Mainland. According to the orientations and strategies applied in mediation, Riskin argues that mediation could be broadly divided into two categories, i.e., facilitative mediation and evaluative mediation (Riskin, 1994). In facilitative mediation, the mediators should play the role of facilitators in the communications of the parties (e.g., clarification and encouraging the communications), instead of directly providing opinions and suggestions on how to resolve the disputes (Riskin, 1994). By comparison, evaluative mediators are expected to provide directions and proposals based on their professional expertise so that a mediation settlement agreement could be reached (Riskin, 1994). Hong Kong leans more towards the pattern of facilitative mediation as reflected in the mediation legislation and practice (To, 2018). The Mainland primarily applies evaluative mediation in the traditional types of mediation activities, particularly in People’s Mediation, Judicial Mediation, Administrative Mediation and Arbitration Mediation. However, a recent trend of the Mainland’s commercial mediation reflects the application of both facilitative and evaluative mediation approaches, while the application of facilitative mediation approaches would be more in line with international standards as provided in the Singapore Mediation Convention (Lai, 2021).

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The Need for a Thorough Breakthrough in the Amendment of the Arbitration Law of the PRC The new Framework Plan of Lin-gang Special Area in the Shanghai FTZ provides a commendable judicial experiment for foreign institutions to administer arbitration seated in China. This is fully in line with a range of initiatives that aim at promoting arbitration as a preferred means of dispute resolution – especially in the context of the Belt and Road Initiative – and at opening up the Chinese arbitral market for international players. The greatest virtue of the Framework Plan is the fact that it welcomes international arbitration institutions to register with the local judicial authority in Shanghai so as to administer arbitrations as legal entities. We agree that these are all praiseworthy initiatives necessary to boost confidence and enhance the attractiveness of China for foreign investors. However, a lot of work still needs to be done to foster the credibility of China as an international arbitration forum. These can be traced back to the unique nature and structure of Chinese arbitration law that differs substantially from the standard international practice inspired by the UNCITRAL Model Law. Hence, we believe that the Lingang Framework Plan will only live up to its ambitions and reach its full potential, provided that the Arbitration Law of the PRC is further reformed. A first big step forward would be to adopt the seat criterion in lieu of the nationality of the arbitration institution. COMMERCIAL MEDIATION DEVELOPMENT IN CHINA Commercial mediation in China is still in its infancy stage, but owing to the dispute resolution demands of the BRI initiative and under the influence of the Singapore Mediation Convention, it is foreseeable that a more progressive and radical reform will take place with respect to international commercial mediation. Mediation in China from a Historical Perspective People’s Mediation With Chinese Characteristics While ADR has been a recent development for several decades in the western world, ADR has its foundation in China, and can be traced back to the West Zhou Dynasty. However, “Tiao Chu” ( ), which was the term used in ancient China as a replacement for “Tiao Jie”, has a different context to what “mediation” means in the modern world. “Tiao Chu” in ancient China was not based completely on the parties’ consent but on a coercive element. The legal culture in ancient China was characterized by the essence of “He” (“ ”, harmonization) in human relationships, “Yan Song” (“ ”, litigation aversion) and “Wu Song” (“ ”,

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no litigation). Confucianism was the prevailing philosophy ruling the feudal society of ancient China. The rulers used Confucianism to prevent people from bringing disputes in court by using “Tiao Chu” instead to settle civil disputes or even small criminal cases. “Tiao Chu” can either be used by government authorities or honorable representatives from the family clan or the neighborhood to mediate cases. People’s mediation is an outcome of the caseload explosion. Since 2002, due to an overload of court cases, the Chinese legislature has restored the role of mediation and established a diversified dispute resolution mechanism connecting litigation with the ADR mechanism. The post-Maoism mediation method has rediscovered the traditional cultural value of compromise and integrates this value into the new construction of people’s mediation. The people’s mediation committee has a wide range of sources, including residential committees and villagers’ committees established nationwide in urban and rural areas, and other local communities. It provides a good setting to develop a diversified dispute resolution mechanism proposed by the government for social governance. Unlike Maoist mediation, the mediation during the third stage emphasized the voluntariness of the parties to mediation. This can be proved by the relationship between litigation and mediation, in which the mediation needs to be mutually agreed by the parties, and no longer serves as a pre-condition to litigation. The People’s Mediation Law of the PRC was finally enacted in 2010 and came into effect in 2011. It established the legal framework for people’s mediation in China and bestowed mediated settlement agreements with binding effect. The parties could apply to the people’s court to ratify the settlement agreements mediated by the people’s mediation committee. A mediated settlement with judicial ratification could be enforced against the other party in case of nonexecution. In its latest amendment in 2023, the Civil Procedure Law of the PRC has enlarged the scope of mediation types that can apply for judicial ratification. Before the amendment, only parties of the mediation conducted by the people’s committee and the mediation institutions registered with the people’s court could apply for judicial ratification. Owing to the judicial reform of separation of cases into simple cases and complicated ones, the people’s court now also allows parties of the mediation conducted by other types of mediation institutions (including commercial mediation) to apply for judicial ratification to have the settlement agreement enforced if the other party fails to execute the agreement. In 2018, the people’s court established a national online mediation platform, establishing the connection between litigation and out-of-court mediation. According to the statistics, there are 33,000 mediation institutions and 165,000 mediators. Although people’s mediation has been widely adopted to settle small

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claim civil disputes, the people’s jurors are usually ordinary citizens without expertise. Moreover, there is a lack of codes of ethics to regulate the people’s jurors and liabilities for their misbehaviors. After the establishment of the online mediation platform by the people’s courts, the SPC also issued Online Mediation Rules to regulate online mediation procedures. For the first time, the Online Mediation Rules allow the people’s court to invite qualified foreigners, citizens from Macau, Taiwan, and Hong Kong to participate in mediating civil and commercial disputes involving foreigners, foreign entities, and those from Macau, Taiwan, and Hong Kong. It also requires mediators to disclose any information that could affect their impartiality and neutrality to improve the procedural fairness of the mediation. Lastly, the Mediation Rules of the people’s court have specifically indicated the negative legal consequences of fake mediation that can impair the interest of any third parties in Article 23. It can be concluded that the Online Mediation Rules of the People’s Court have improved the procedural requirements of mediation. Judicial Mediation As A Solution To Tackle Case Overload Judicial mediation refers to the process wherein the judge conducts mediation during the process of litigation to see if parties can reach a settlement agreement rather than asking for a judgment. The court could mediate most types of civil and commercial disputes except for divorce cases and other cases that involve confirmation of identity relationships. It was proposed by the former president of the SPC, Justice Wang Shengjun, in 2010 to establish a Grand Mediation System including people’s mediation, administrative mediation, sectoral mediation, judicial mediation, etc. Mediation has also been seen as an effective way to maintain stability and promote social harmony and has therefore been integrated into court proceedings since the 2010s. The percentage of judicial mediation among first-instance level cases surged significantly from around 38.9% in 2008 to 65.29% in 2010. The judicial mediation is different from the western courtannexed mediation in that the judicial mediation is itself part of the litigation process and conducted by the judges in China rather than by an external mediator appointed by the court, as in the west. This has been criticized by scholars due to an internal conflict between the adjudicative and neutral role of a judge and the facilitative role of a mediator. Although in-trial mediation is a necessary mechanism in China, it should focus on ensuring parties’ procedural rights, including whether or not to participate in mediation. The revision of the Civil Procedure Law in 2012 contained a whole chapter, especially for mediation and emphasized the voluntary nature of in-trial mediation. The Central Committee of the Chinese Communist Party and the State

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Council jointly issued Opinions on Further Improving the Diversified Dispute Resolution Mechanism in December 2015 to regulate judicial mediation under the rule of law. Firstly, the SPC has created a specially-invited mediation mechanism inviting external mediators to participate in pre-trial mediation sessions or in-trial mediation sessions. This is to reduce the concerns of the parties that the judge plays both the role of the adjudicator and the mediator. The invited mediation institutions or mediators are required to register with the people’s court to ensure their qualifications. Secondly, the facts accepted by a party as compromises during mediation sessions shall not be used against the party in court proceedings, unless explicitly agreed by the parties. This is to separate in-trial mediation proceedings from court proceedings. Lastly, party autonomy should be respected both in initiating the mediation and during the mediation so that parties can walk away from mediation immediately at any stage of the proceeding. Development of Commercial Mediation in the Shadow of Law In the absence of uniform law on commercial mediation, the current Chinese legislation on commercial mediation is intricately bound up with People’s Mediation Law, Civil Procedure Rules, and judicial interpretations of the SPC with regard to the DDRM (ADR Opinions in 2009 and 2016). The same intricacy exists in the attitudes of the courts towards the legal position of commercial mediation in China, without a clear delimitation between people’s mediation and commercial mediation. In the following section, we will discuss firstly the increasing institutionalization of commercial mediation in China, secondly the blurring boundaries between people’s mediation and commercial mediation, and finally, the enforceability of commercial mediated settlement agreements in China. Institutionalization and the Rise of Commercial Mediation in China Commercial mediation is a more amicable and cost-effective dispute resolution method for BRI initiatives, as it preserves the consent-based business relationship between parties while not, like adjudicative dispute resolution methods, imposing a solution that may put a foreign party in a disadvantaged position. With the further development of the BRI initiative and Free Trade Areas, there is a rise in the number of commercial mediation institutions in China. According to Long Fei, there are two types of commercial mediation institutions in China: the first type being independent commercial mediation institutions, the second type being the mediation institutions that are derived from existing dispute resolution service providers.

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The Belt and Road Initiatives Mediation Center (BNRMC) was established in 2016 as a mediation service provider, aiming to resolve international commercial disputes between parties involved in BRI projects. BNRMC has published its own mediation rules and set up an online mediation platform providing mediation services. Shanghai Commercial Mediation Center (SCMC) was established in 2011 to provide commercial mediation services. It has set up a co-mediation mechanism with the EU Intellectual Property Office in respect of intellectual property disputes. The parties can choose mediators both from the SCMC list and EU Intellectual Property Office’s expert list. In 2021, SCMC accepted 402 cases with claims amounts totaling 11.6 billion RMB, among which the mediation success rate is 70.84%. Moreover, a non-government international dispute resolution organization has recently been established in China to promote regional cooperation in dispute resolution along the BRI. The International Commercial Dispute Prevention and Settlement Organization (ICDPASO) was established by the China Council for the Promotion of International Trade (CCPIT) on 15th October 2020 to provide international dispute resolution services primarily for BRI-relevant disputes and to promote the construction of international dispute settlement mechanisms. ICDPASO now has 51 members, including domestic and foreign dispute resolution service providers, academic institutions, think tanks, etc. ICDPASO also provides international arbitration and mediation services on itss own. In addition, existing arbitration institutions also extend their services to mediation. For example, the Beijing Arbitration Commission and the Shenzhen International Arbitration Commission have both established mediation centers to meet the demands of the parties to settle international commercial disputes via mediation. The institutionalization of commercial institutions in China demonstrated a rise in commercial mediation services in China after the BRI initiatives and the necessity for future development in legalization of commercial mediation. Boundaries Between People’s Mediation And Commercial Mediation Although there is a specialized law on people’s mediation, commercial mediation in China is left outside of legislation. In this part, we will make a comparison between people’s mediation and commercial mediation in seven aspects to demonstrate how their differences may affect their social function and, therefore why separate legislation should be put in place for commercial mediation (Table 1). First of all, the scope and parties of the disputes are quite different between people’s mediation and commercial mediation. The social value of people’s

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mediation is to resolve civil disputes between community members, such as family disputes, neighborhood disputes, and housing disputes. The function of commercial mediation is to resolve commercial disputes between business people, involving higher value and business interests of the enterprises. Secondly, in commercial mediation, there is usually a set of mediation procedural rules and a mediator’s code of conduct to ensure a fair process. In people’s mediation, there are no such rigid procedural rules, and the mediation process is arranged more casually. Thirdly, the mediators in commercial mediation are usually professionals in law, commercial and finance sectors, who have a good knowledge of the legal issues in the disputes. There is no such requirement for people’s jurors. Fourthly, commercial mediation is highly dependent on service fees from clients, while people’s mediation is free or low-cost, deriving from the government’s funding support. Table 1. Comparative table between people’s mediation and commercial mediation. Comparison

People’s mediation

Commercial mediation

Scope of disputes

Family disputes, neighborhood disputes, housing disputes

Trade disputes, financial disputes, intellectual property disputes, maritime disputes

Parties of the disputes

Grassroots

Businessmen

Procedural requirement Low standards with no procedural rules

High standards with procedural rules, codes of ethics

Expertise of mediators

Trustworthy community workers, no special knowledge

Professionals

Funding sources

Government’s allocation

Service fee

Fees

Low/Free

High

Legislation

People’s Mediation Law

Civil Procedure Law; 2009 & 2016 ADR Opinions

Lack Of Legal Certainty Regarding The Enforceability Of International Mediated Settlement Agreements The Singapore Convention on Mediation is intended to promote cross-border enforcement of settlement agreements from international commercial mediation. China was among the 46 states that signed the Singapore Convention on Mediation on 7th August 2019. However, as of 12th September 2021, the effective date of the Singapore Convention on Mediation, China has not yet ratified the convention. The major concern is the lack of a domestic commercial mediation act to lay down procedural rules for the judicial review and enforcement of international mediated settlement agreements.

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Firstly, Chinese parties do not trust mediation, and even if they use it, they prefer to have the mediated settlement agreement ratified by the people’s court to gain binding effect. The parties have misinterpreted the value of mediation, making it rather an enforcement substitute for judgment than an alternative dispute settlement. Indeed, in the case of CICC, despite the fact that the parties have reached a settlement agreement via mediation, the SPC’s Provisions on Setting up the CICC allow parties to turn such a settlement agreement into a conciliation statement or a judgment made by the CICC via joint applications. This demonstrates the parties’ lack of confidence in the enforceability of mediated settlement agreements in China. Secondly, there is a lack of procedural rules in China to implement the crossborder recognition of international mediated settlement agreements. The Singapore Convention on Mediation itself does not provide procedural rules to enforce a mediated settlement. Both Articles 3 and 5 of the Singapore Convention on Mediation emphasize the procedural rules of the member state in determining the grounds for refusal and enforcement. The Singapore Convention on Mediation only addresses the phase before execution and leaves the enforcement procedure to be decided by the relevant member state. Except for the judicial ratification of domestic mediated settlement agreements, there are no procedural rules for the review and enforcement of a settlement agreement from international commercial mediation. Thirdly, the mediators in China are neither regulated by a uniform code of conduct nor are remunerated fairly. Currently, the mediators for commercial disputes are not distinguished from people’s jurors for civil disputes. Therefore, the entry-level qualification for Chinese mediators is quite low. Moreover, the codes of conduct for mediators derive from each mediation institution and may vary from each other. Another problem for the development of high-quality mediators is the low remuneration for mediators due to a lack of mediation service charge standards at the national level. At the local level, a settlement agreement that is mediated by competent mediation institutions that are legally established can be submitted for judicial ratification by the people’s court to obtain an enforceable effect. Nevertheless, the amended Civil Procedure Law does not specify such a qualification requirement for mediation institutions, and it is unknown whether the mediation institutions stipulated also include international mediation institutions, but at least the onestop international commercial DDRM only includes two domestic mediation institutions. In the future, China needs to decide if the domestic judicial ratification procedure should be integrated with the judicial review and

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enforcement of international commercial mediated settlement agreements under the Singapore Convention on mediation. China shall seize the opportunity to develop commercial mediation institutions and provide detailed procedural rules to support the enforcement of international commercial mediated settlement agreements upon joining the Singapore Convention on Mediation. CONCLUSION: FUTURE DEVELOPMENT OF THE DDRM This chapter analyses the recent development of the DDRM, including the international commercial court, arbitration law reforms, and commercial mediation, which demonstrates China’s positive attitude towards a more internationalized, transparent, and efficient dispute resolution governance. In the future, China will invite more international arbitration and mediation institutions into the Chinese market to enhance its international commercial dispute resolution capacity and establish a more international and fairer legal environment to support the development of the DDRM. The Fourteenth Five-Year Plan (2021-2025) of China has stressed the importance of social governance, promoting citizens’ access to justice via DDRM. The three aspects of dispute resolution development in this chapter demonstrate China’s determination to improve the internationalization and professionalism of its international dispute settlement devices. With respect to the judicial reforms in the court system, the CICC demonstrates that the SPC has endeavored to improve the expertise and streamline the procedural rules of commercial dispute resolution. Nevertheless, the jurisdiction scope and the nationality composition of judges are still quite limited and do not exceed the requirements of existing laws. This showed a compromise between judicial sovereignty and the modernization of Chinese commercial adjudication. Legal reforms have also been made in arbitration in the Free Trade Zones, welcoming foreign arbitration institutions to register and practice. The real effect of this policy still needs to be realized by a more profound reform in the Arbitration Law of the PRC. Finally, commercial mediation has shown its special social value and distinguished itself from people’s mediation and judicial mediation. The traditional legal culture of harmonization provides a sound basis for the development of commercial mediation in China. Nevertheless, China still faces challenges due to the lack of a legal framework for commercial mediation and a shortage of professional mediators with expertise and international visions. In order to improve the utilization and attractiveness of commercial mediation in China, both commercial mediation institutions and legislators should work together to improve the expertise and remuneration of mediators, and to bring enforcement procedural rules on the enforcement of

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mediated settlement agreements in place to align with the Singapore Convention on Mediation. CONSENT FOR PUBLICATION Not applicable. CONFLICT OF INTEREST The authors declare no conflict of interest, financial or otherwise. ACKNOWLEDGEMENT Declared none. REFERENCES Belohlavek, A.J. (2015). Seat of arbitration and supporting and supervising function of courts. Czech (& Central Europea ) Yearbook of Arbitration: Interaction of Arbitration and Courts, 21-48. Cappelletti, M. (1989). The judicial process in comparative perspective.. Clarendon Press. Chaisse, J., Qian, X. (2021). Conservative Innovation: The Ambiguities of the China International Commercial Court. American Journal of International Law, 115, 17-21. Clarke, D.C. (1991). Dispute resolution in China. J. Chinese L., 5, 245. de la Rasilla, I. (2021). ‘Sharp Ears to Hear a Thunderclap’? The rise of mediation in the international dispute prevention and settlement system of the belt and road initiative. Asia Pacific Law Review, 29(1), 167-188. [http://dx.doi.org/10.1080/10192557.2021.2013664] Huo, Z., Yip, M. (2019). Comparing the international commercial courts of China with the Singapore international commercial court. International & Comparative Law Quarterly, 68(4), 903-942. [http://dx.doi.org/10.1017/S0020589319000319] Kaufmann-Kohler, G., Kun, F. (2008). Integrating mediation into arbitration Journal of International Arbitration, 25(4). Li, Y., Kocken, J., Van Rooij, B. (2016). Understanding China’s court mediation surge: insights from a local court. Law Soc. Inq., 1-24. Ng, K.H., He, X. (2014). Internal contradictions of judicial mediation in China. Law Soc. Inq., 39(2), 285312. [http://dx.doi.org/10.1111/lsi.12034] Pappas, B.A. (2015). Med-arb and the legalization of alternative dispute resolution. Harvard Negotiation Law Review, 20, 157. Qian, X. (2020). The legal legitimacy of the China International Commercial Court: history, geopolitics, and law. Asia Pacific Law Review, 28(2), 360-379. [http://dx.doi.org/10.1080/10192557.2020.1856310] Qiu, X. (2013). Retrospect & Prospect of Mediation.. China Political Science and Law Publisher. Schnabel, T. (2019). The Singapore convention on mediation: a framework for the cross-border recognition and enforcement Pepperdine Dispute Resolution Law Journal Masthead, 19, 1. Sun, W., Willems, M. (2015). Arbitration in China: A Practitioner’s Guide.. Kluwer Law International.

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Sun, X. (2020). A Chinese Approach to International Commercial Dispute Resolution: The China International Commercial Court. Chinese Journal of Comparative Law, 8(1), 45-54. [http://dx.doi.org/10.1093/cjcl/cxaa015] Sunderland, E.R. (1937). The Theory and Practice of Pre-Trial Procedure. Michigan Law Review, 36(2), 215. [http://dx.doi.org/10.2307/1282055] Wei, X., Li, Q. (2013). The Confucian value of harmony and its influence on Chinese social interaction. Cross-Cultural Communication, 9(1), 60. Zhang, H. (2013). Revisiting people’s mediation in China: practice, performance and challenges. Restore Justice, 1(2), 244-267. [http://dx.doi.org/10.5235/20504721.1.2.244] Zhang, S. (2020). China’s International Commercial Court: Background, Obstacles and the Road Ahead.. Oxford University Press.

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163

SUBJECT INDEX A

B

Accreditation system 132, 134 Activities 35, 36, 69, 94 consumer-facing 94 economic 35, 36 social welfare 69 ADR mechanisms 118, 139, 154 Agreement 2, 9, 117, 121, 122, 123, 124, 128, 130, 144, 150, 154 power purchase 9 on subsidies and countervailing measures 2 AI-augmented decision-making process 81 Algorithm 65, 66, 67, 73, 74, 78, 79, 80, 81, 82, 83 adjusting 82 machine learning 65, 66, 73, 80 intervention 80 older-generation 81 Alibaba 91 Alipay and WeChat pay 92, 95, 104 Ancillary algorithms 78 Anglo-American corporate debate 65, 68 Anonymity, controllable 98 Arbitration 113, 114, 116, 117, 118, 120, 121, 125, 138, 139, 140, 141, 145, 146, 147, 148, 149, 150, 151, 152, 153, 160 third-party funding 120 agreement 150, 151 and mediation legislation 120 institutions 139, 141, 145, 150, 153 law 139, 140, 148, 149, 150, 151, 153, 160 mediation 117, 125, 152 proceedings 138, 141, 145, 146 processes 146 reforms 138 Arrangement on reciprocal recognition and enforcement 131 Artificial intelligence 66, 67, 72, 73, 74, 75, 78, 79, 80, 82, 83 systems 74, 79 techniques 78

Bhutanese laws 50

C Capitalism 44, 50, 71 financial 71 managerial 71 Carbon neutrality formulation 1 Cash transactions 94 CCP’s principles 36 Chinese 31, 32, 34, 35, 36, 37, 38, 40, 41, 42, 46, 58, 68, 98, 115, 117, 138, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 151, 153, 155, 156, 159, 160 ancient 117 arbitration law 153 based representative offices 147 communist party (CCP) 35, 36, 40, 41, 42, 58, 155 company law 38, 68 context 32, 36, 98 economy 34, 35, 36 international commercial courts (CICC) 138, 140, 141, 142, 143, 144, 145, 146, 159, 160 law 147, 149, 151 legislation on commercial mediation 156 mediation system 117 PV industry 2, 32, 33 system 32, 33 tradition 32 Civil 118, 123, 126, 141, 144, 148, 149, 154, 155, 158 enforcement law 118 procedure Law 118, 123, 126, 141, 144, 148, 149, 154, 155, 158 Cognitive 66, 67 abilities 66 labour 67

Lei Zhang, Xiaowen Tan and Pinguang Ying (Eds.) All rights reserved-© 2023 Bentham Science Publishers

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Commercial 92, 94, 95, 97, 98, 99, 100, 101, 102, 103, 104, 106, 107, 108, 109, 115, 116, 125, 126, 131, 132, 133, 139, 140, 152, 155, 158, 159 banks 92, 94, 95, 97, 98, 99, 100, 101, 102, 103, 104, 106, 107, 108, 109 disputes 115, 116, 126, 131, 139, 140, 155, 158, 159 mediators 125, 132, 133, 152 Communist party 34 Company law 35, 38, 68, 75, 76, 126 Confidentiality rules 113, 122, 127, 129, 130, 133 Confucian 33, 58 influence 33 leadership 33 tradition 58 Consumption 1, 7, 19, 116 reducing internal resource 116 Corporate 25, 57, 69, 71, 77, 78 accountability 25, 57, 77 governance mechanisms 71, 78 law theory 77 social responsibility policy 69 Covid-19 pandemic 72, 91 Crisis 52, 72, 106 geopolitical 72 situation 106 Cross-border inter-bank payment system 105 Cryptocurrencies 22, 29, 31, 38, 43, 47, 49, 93, 100 CSR 22, 29, 31, 38, 43, 47, 49 approach 22 framework 43 principles 22, 29, 31, 38, 49 system 47

D DCEP’s 107, 108 authenticity 108 traceability 107 Decision-making processes 10, 66, 68, 69, 73, 75, 77, 78, 80, 81, 82, 83

Zhang et al.

algorithmic 81 augmented 68 Defect, programming 82 Deposit financing 100 Digitalization transformation 145 Digital wallets 65, 69, 78, 89, 96, 98, 99, 102, 104, 106, 108, 109, 110, 154, 160 Dispute resolution 114, 116, 117, 120, 121, 122, 125, 129, 130, 131, 138, 139, 140, 152, 153, 157, 160 commercial 125, 138, 152, 160 mechanism 139, 140 platform 140 procedures 121 services 114 system 116, 138 Domestic legislation 118, 123, 131

E Ecological 52, 69 civilization 69 diversity 51 protection 69 Economic 33, 38, 51, 52, 71, 72 analysis 71 dynamism 52 fabric 33 growth 38, 51, 72 Economic development 25, 50, 58 global 25 growing 50 Employees, company’s 69, 70 Energy 1, 5, 6, 7, 9 consumption 6 industry 5, 7 production 6 solar 1, 9

F Financial support 3, 6, 8, 13, 14, 16 Fit-in-premium subsidy 7 FIT 8, 9

Subject Index

program 8 subsidies 9 Fossil fuel energy 6

G GBA 113, 125, 132, 134 mediation system 125 mediators 132, 134 of commercial mediation 113 Governance 27, 35, 38, 53, 65, 69, 78, 83, 154, 160 algorithmic 65, 69, 78 automated 78 efficient dispute resolution 160 social 154, 160 Governance 35, 71, 72 risks 72 systems 35, 71 Government 5, 9, 43 influence 43 interference 9 revenue 5 Grand mediation system 155 Greenhouse gas 1 Gross domestic product (GDP) 23, 49, 58

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corporate governance code 76

J Japan 8, 46 business federation 46 Canada dispute 8 Japanese 28, 29, 43, 44, 45, 59, 69 business vocabulary 44 corporate management 43 cultural traditions 28 economy 45, 69 experience 59 governance corporations 29 Judicial confirmation procedures 124 Jurisdictions 16, 69, 71, 73, 90, 91, 95, 101, 102, 104, 105, 108, 109, 138, 141, 147, 149 civil law 143

L

Hong Kong 129 Monetary Authority 105, 127 practice in mediation 127 Hong Kong’s mediation legislation 129

Law 77, 121, 123, 142, 143 environmental 77 foreign 121, 143 international commercial 142 national 123 Legal culture 43, 153, 160 traditional 160 Legal framework(s) 38, 118, 119, 120, 138, 154, 160 distinct 119 systemic 118

I

M

Intellectual property rights 67 Intelligence 45, 75, 83 emotional 75, 83 Intrinsic thin layer 13 Investment income 18 Italian 76, 80 company law 80

Machines, global corporate governance 72 Macroeconomic level 91 Mahāyāna Buddhist 49, 50 religion 49 traditions 50 Market 2, 35, 42, 58 global 42, 58

H

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solar panel 2 Market economy 35, 57, 76 social 76 Measures 8, 9, 11 domestic 9, 11 fossil fuel energy 8 Mediation legislation 120, 123, 125, 128, 129, 130, 131, 133, 152 domestic 123, 129, 133 Milestone principle 28

N National mediator accreditation standards (NMAS) 132

O Obligations, compensation 130 OECD Factbook 73

P Pandemic outbreak 91 Payment 90, 91, 93, 95, 97, 101, 102, 104, 105, 108, 109 cashless 90, 91, 101, 104 cross-border 90, 104, 105 digital 91 mobile 95 offline 97, 104, 108, 109 services 91, 93 system 101 third-party 101, 102 Payment methods 91, 92, 94, 96, 98, 101, 102, 103, 104, 108, 109 cashless 101, 102 digital 91 efficient digital 91 non-physical 108 PERC technology 16 Photovoltaic energy 9 Policies, solar 2

Zhang et al.

Power 4, 8, 34, 57, 59, 68, 75 computing 75 evocative 59 solar 8 Private 25, 34, 35, 36, 37, 52, 65, 77, 129 companies 35, 65, 77 economy sector 129 employers 37 enterprises 35, 36, 37 sector 25, 34, 35, 37, 52 Protection, environmental 4, 18, 39, 68, 69, 76, 77 PV technology innovation 11

R Reform, post-economic 35 Regime 99, 139 legal 139 traditional 99 Renewable energy 1, 2, 3, 4, 6, 8 policies 2, 4 regulations 4 Resources 42, 139, 146 financial 42 judicial 139 social 146 Risk 19, 73, analysis 19 management systems 73 Rule frameworks 113, 118, 119, 127, 133 systematic 118

S Scenarios 74, 77, 78, 82, 83, 91, 100, 102, 103, 104, 105, 108 cross-border trade 105 disruptive evolution 83 multi-faceted 74 SCM 6, 12 Committee 12 regime 6 rules 6

Subject Index

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SCM agreement 2, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16, 17, 18, 34, 35, 57 regulations 8 rules 7, 8, 11 Sectors 6, 7, 10, 34, 35, 57, 91 economic 34 energy-intensive 6, 7 financial 91 public 34 Securities regulatory commission 38, 118, 124 Singapore 150, 151 International Arbitration Centre (SIAC) 150, 151 International Commercial Court 143 Skills 67, 83, 125, 152 balancing 83 creative thinking 67 Social problems 24 State owned enterprises (SOEs) 35, 36 Stock corporation act 70 Subsidies, tax 14 Subsidy effects 15 Sustainability 54, 81 environmental 54 information 81 Sustainable 25, 66, 69 development goals 25 development of firms 66, 69 SWIFT system 104, 105 Systems 23, 31, 42, 43, 66, 73, 74, 78, 79, 93, 94, 98, 100, 102, 104, 117, 119 economic 42 electronic information 93 intelligent machine 66 natural language generation 74

third-generation 10 Technology subsidy 16, 18 analysis 18 loans 16 Terrorist financing 98 Third party funding 120 Toyota production system 44 Traditional deposits 101, 102, 106, 107, 108, 110

T Tasks, risk-monitoring 73 Technology 1, 2, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 65, 67, 74, 80, 83, 94, 104 digital 80 subsidies 1, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19

W WeChat Pay 92, 95, 104 Welfare 25, 26, 55 public 25, 26 services 55 Wellbeing 37, 49, 51, 55 national 51 social 55 Western economies 47 World commission on environment and development (WCED) 48, 54 economy 48 Worldwide interbank financial 104 telecommunications 104