Host state regulation of transnational corporate damages: a Chinese perspective on challenges and responses

When a massive global company causes harm in a foreign country—polluting a river, injuring workers, or damaging a community's health—the question of who is responsible and how to fix it becomes a tangled knot. The country where the damage happened, known as the host state, has the primary duty to protect its own people and enforce its laws. However, these nations often face a double bind. Domestically, their legal systems are designed to handle local problems, but the companies causing the trouble are part of vast international families with headquarters in distant, wealthy nations. This makes it hard for local courts to reach the powerful parent companies that set the rules. Internationally, a system of treaties designed to protect foreign investors often acts as a shield, allowing those same companies to challenge local regulations as unfair barriers to trade. For decades, the prevailing idea has been that the home countries of these corporations, or international courts, must step in to save the day when local systems fail. But this view often overlooks the capacity of the host nations themselves to build their own solutions.

A new analysis by Xinchao Liu, a scholar at Shanghai Jiao Tong University, challenges this assumption by looking at the situation through the eyes of China. As a major destination for foreign investment that has gradually opened its markets, China offers a unique window into how a developing nation navigates these complex waters. The paper argues that relying on foreign courts or international treaties to fix local problems is not a complete solution; it can only ever be a backup plan. The real work must be done by the host state itself, but to do so, it must overcome specific structural hurdles. Liu examines how China has handled these challenges, particularly in cases involving environmental disasters and corporate negligence, and proposes a two-part strategy to strengthen the ability of host nations to hold transnational corporations accountable.

The study begins by dismantling the idea that foreign lawsuits are a reliable safety net. While it is true that victims sometimes sue parent companies in their home countries, such as in the United States or the United Kingdom, these cases are unpredictable. Courts in wealthy nations often hesitate to take on cases that happened abroad, citing a lack of connection or the idea that the local courts should handle it first. When they do take a case, the outcome depends heavily on political factors and the specific relationship between the countries involved, rather than a consistent set of legal rules. Furthermore, international agreements meant to protect human rights often lack teeth, and the powerful mechanisms designed to protect investors can actually punish host states for trying to regulate. If a country tries to fine a foreign company for pollution, that company might sue the government in an international tribunal, claiming the fine hurts their investment. This creates a "regulatory chill," where governments are afraid to enforce their own laws for fear of being sued and forced to pay massive compensation.

China's experience provides a concrete look at how these abstract problems play out in the real world. The paper points to the 2011 oil spill from the Penglai 19-3 offshore field as a key example. In this incident, a US-based company's Chinese subsidiary caused a major spill that damaged fisheries and the marine environment. The Chinese government stepped in quickly, ordering the company to stop operations and negotiate a settlement. While this administrative approach secured a payment of 2.3 billion renminbi for restoration and compensation, it also created a new problem. The settlement agreement, negotiated between the government and the company, effectively set the boundaries for who could get paid. When hundreds of fishermen later tried to sue in court for additional damages, the courts largely accepted the limits set by the government deal. This showed a gap in the system: the administrative branch, focused on speed and stability, had overshadowed the judicial branch, which is better suited for independent fact-finding and ensuring fair compensation for all victims. The paper notes that relying too heavily on government deals can leave victims without a full remedy and can prevent the courts from developing the legal precedents needed to handle future cases.

Beyond the balance of power between government agencies and courts, the paper identifies deep legal gaps that make it hard to hold parent companies accountable. In Chinese law, a parent company is generally not responsible for the mistakes of its subsidiary unless there is a specific reason to "pierce the corporate veil," a high legal bar that is rarely met. Unlike some Western legal systems that have developed a "duty of care" concept—where a parent company can be held liable if it knew about risks and failed to act—Chinese tort law does not yet clearly establish this obligation for transnational cases. This creates a situation where victims face a maze of confusing rules about which country's laws should apply and whether the parent company can be sued at all. Additionally, even if a Chinese court were to rule in favor of the victims, enforcing that judgment against a foreign parent company is incredibly difficult. Without a strong network of treaties to recognize and enforce foreign court orders, a winning judgment can remain just a piece of paper if the company has no assets in China.

To address these issues, the paper proposes a two-track approach that China and other developing nations can adopt. The first track focuses on fixing the domestic system. This involves creating a better balance between administrative agencies and the courts. Administrative bodies should handle emergency responses and damage control, but the courts must take the lead in determining legal liability and setting compensation standards to ensure fairness. The paper suggests that China needs to update its laws to explicitly recognize that parent companies have a duty to oversee their subsidiaries, similar to the "duty of care" found in other legal systems. This would allow courts to hold the powerful parent companies accountable for the actions of their local branches. It also calls for clearer rules on which laws apply in cross-border cases, ensuring that victims are not disadvantaged by technical legal arguments.

The second track involves changing the international landscape. The paper argues that host states must stop accepting a system where they are only allowed to defend themselves and not pursue claims against investors. Future investment treaties should include "reciprocity," meaning that if a company can sue a government, the government should also be able to sue the company for damages in the same forum. This would level the playing field. Furthermore, as nations negotiate a new global treaty on business and human rights, developing countries should push for language that explicitly recognizes the legal obligations of corporations, rather than just their voluntary responsibilities. The goal is to shift the global conversation so that protecting a country's right to regulate its own environment and people is seen as a legitimate act of sovereignty, not a violation of trade rules.

The analysis concludes that while the challenges are significant, they are not insurmountable. The idea that developing nations are too weak to regulate global capital is a misconception that ignores their potential to build robust legal systems. By strengthening their own courts, clarifying their laws, and demanding fairer rules in international agreements, host states can reclaim their authority. The paper does not claim that this will happen overnight or that every country has the same resources to do it, but it insists that the path forward lies in empowering the host state to be the primary guardian of its own people, rather than waiting for a rescue from abroad. The experience of China shows that with careful institutional design and a coherent strategy, it is possible to build a system where transnational corporations are held accountable for the harm they cause, ensuring that justice is not just a distant possibility but a reachable reality.