Coronavirus-related US lawsuits against China risk a further worsening of relations, and could backfire

The passage of the Justice Against Sponsors of Terrorism Act in 2016 and its impact offer a glimpse into the possible knock-on effects of US lawsuits against China over its handling of the Covid-19 outbreak

Angela Huyue Zhang

Published: 1:00am, 11 May 2020

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A flurry of complaints have been filed against China in US federal courts seeking enormous damages caused by China’s mishandling of the coronavirus outbreak. These include class actions filed on behalf of individuals and businesses from at least five different states, as well as a lawsuit by the state attorney general from Missouri, while Mississippi has also said it will file a case.

Plaintiffs from other countries are following suit. China has slammed this spontaneous order of litigations as “absurd”. Global Times, a state-run Chinese newspaper, responded by calling these litigations a political strategy to divert public anger away from the Trump administration’s ineptitude in handling the pandemic.

As a general principle of international law, foreign governments cannot be sued except under limited circumstances. This is based on the doctrine of reciprocity. If the United States permits lawsuits against other sovereigns, this could prompt other countries to take reciprocal measures, exposing US citizens and businesses to legal risks abroad. For this reason, many legal experts expect these lawsuits to fail.

Parallel to these lawsuits, Republicans are in the midst of proposing bills that will modify the Foreign Sovereign Immunities Act in an effort to strip China of its immunity from being challenged in US courts for Covid-19 damages. If Congress grants such a proposal, it could add new momentum to these litigations.

Missouri Attorney General Eric Schmitt speaks in front of the US Supreme Court in Washington on September 9, 2019. On April 21, Schmitt filed a lawsuit against the Chinese government, the Community Party of China and others, alleging that the hiding of information and other actions at the outset of the coronavirus outbreak led to loss of life and significant economic damage in Missouri. Photo: AP

This course of action is not new. In 2016, Congress adopted the Justice Against Sponsors of Terrorism Act (JASTA), which allows lawsuits to be filed against foreign governments for sponsoring acts of terrorism. The enactment of the bill has enabled victims of 9/11 to move forward with their long-standing lawsuits against Saudi Arabia, notwithstanding the absence of clear evidence of the Arab state’s involvement in the terrorist act.

It is difficult to assess whether Congress will adopt any new bill to enable lawsuits against China. But the political climate in which JASTA was adopted is a reminder that the passing of such a bill could happen.

Despite then US president Barack Obama’s stern objection to JASTA, Congress cast a decisive vote to override the president’s veto for the first and only time during his presidency. Obama condemned the override as a “political vote”, as no lawmakers wished to be accused of being unsympathetic to the victims of 9/11 just before the 2016 presidential election.

US President Donald Trump, on the other hand, recently indicated during a White House briefing that his administration might seek damages from China.

But even if Trump hopes to resolve the dispute with China through diplomatic engagement, he may not be able to stop these lawsuits as they are driven by a large decentralised group of plaintiffs’ lawyers and state attorneys general. These private litigations, once initiated, can take on a life of its own.

Meanwhile, a former Trump administration official has suggested that China’s US$1.1 trillion worth of US Treasury bonds be confiscated and used to pay for the Covid-19 damages. For now, this seems to be mere cheap talk. But if Congress amends its law to strip China of its immunity, this would pose a more credible threat.

Investors have already long fretted about the possibility that China might dump its massive piles of US Treasury bonds as a weapon during the trade war. However, many believe that China would only use this “nuclear option” as the last resort, as it would severely devalue China’s own holdings of US debts, cause significant turmoil in the global financial market and have a far-reaching impact on the Chinese economy.

But, when push comes to shove and China feels that its investment is in jeopardy, it may have no choice but to sell off its holdings.

A pedestrian looks at an electronic stock board displaying a graph of the US 10-year Treasury yield outside a securities firm in Tokyo, Japan, on January 4, 2019. Photo: Bloomberg

Indeed, upon the imminent approval of JASTA, Saudi Arabia lobbied intensively and threatened to sell US$750 billion in Treasury securities and other assets in America. The Saudis’ threat appeared to be effective, as the final bill passed by Congress was significantly watered down, making it nearly impossible for plaintiffs to compel a foreign sovereign to pay any damages. The law, as some legal experts put it, is largely symbolic and toothless.

Despite this, JASTA has cast a long shadow over the Saudi-US alliance and caused Saudi Arabia to shun the US capital market. When Aramco, Saudi Arabia’s state-owned oil giant was planning its initial public offering last year, its lawyers advised against New York as a potential listing venue, precisely because of the high litigation risks including the 9/11 claims.

On account of JASTA, other Arab states, fearing that they might become the next target after Saudi Arabia, began to reconsider whether they should invest in the United States.

A Saudi broker monitors the stock market at the Arab National Bank in the Saudi capital Riyadh on December 11, 2019. Saudi Aramco’s shares soared on their debut on the domestic stock exchange, becoming the world’s largest listed company, worth US$1.88 trillion after a record-breaking IPO. Photo: AFP

Researchers have long found that people can give excessive weight to the worst-case scenario when confronting a low-probability catastrophic event. Even if these Covid-19 litigations might only pose a very low risk to China, they could still force the Chinese government to rethink its strategy of holding US assets.

Moreover, many of the largest Chinese state-owned national champions are listed on the New York Stock Exchange. A potential judgment against China could erode investors’ confidence in these companies, which may cause the Chinese firms to delist from the US stock market.

If China chooses to retaliate, US businesses will be in peril, given their significant investments in the country and will cause them to reduce their presence in China or even leave the market altogether.

The legal uncertainties weighing on these Covid-19 litigations could therefore pose a further decoupling risk for the two largest economies in the world. Congress must think twice before adopting any bill to enable these lawsuits against China.

Angela Huyue Zhang is director of the Centre for Chinese Law and associate professor of law at the University of Hong Kong

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