In a world where commerce and sovereignty increasingly overlap, international law must preserve that delicate balance, jurisdiction for market participation and immunity for sovereign authority.
In the 20th century, the ideological boundary between socialism and capitalism seemed firm: in one, the state owned; in the other, it merely regulated. In the 21st century, that line has collapsed. Today the state does not just regulate or legislate; it invests, competes, and sanctions. It is the market’s most aggressive and often invisible participant. Sovereigns are no longer distant referees of the market; they are active players within it.
This transformation has come with a central legal dilemma. When a state, or an enterprise it owns, acts in the marketplace as a commercial actor, jurisdiction may properly be established. But when either carries out sovereign or regulatory functions, even through entities with commercial form, immunity remains intact. The test is functional, not formal: the nature of the act, not the identity of the actor, determines the reach of the law.
In a world where commerce and sovereignty increasingly overlap, international law must preserve that delicate balance, jurisdiction for market participation, and immunity for sovereign authority.
From socialism to strategic capitalism
In socialist economies, state ownership was absolute and ideological. Enterprises were organs of public administration, serving social and political goals rather than economic efficiency. Their acts, such as production targets, pricing decisions, or trade agreements, were acts of the state itself and therefore immune from legal process. The question of jurisdiction was irrelevant because no real distinction existed between state and enterprise.
In liberal market economies, by contrast, state ownership was historically exceptional, invoked only to provide public goods or stabilize vital sectors. The market was presumed autonomous, the state’s duty was to protect its freedom, not to enter it.
Yet the globalization of production, finance, and technology has eroded this dichotomy. Across ideologies, states have rediscovered the utility of strategic ownership. The developmental states of East Asia used state enterprises to industrialize. Sovereign wealth funds from the Gulf, Scandinavia, and Asia now manage vast portfolios abroad. Even the United States and Europe have embraced industrial policy, funding key technologies and supply chains.
The ideological divide has collapsed, yielding a new form of statecraft we must call strategic capitalism, a pragmatic fusion where economic ends are inseparable from political power. The challenge for law is to keep up with this hybrid reality.
The new hybrid actors
State-owned enterprises and sovereign wealth funds now operate across borders with the scale and sophistication of multinational corporations. China National Petroleum Corporation, Rosneft, and Saudi Aramco are commercial giants, yet their operations serve geopolitical and national objectives. Norway’s Government Pension Fund Global or Singapore’s Temasek act as disciplined investors, but their strategies reflect national welfare considerations.
Even in the United States, long the exemplar of private enterprise, the government has entered markets as a strategic actor. The CHIPS and Science Act channels billions into semiconductor production, a policy choice framed as industrial security. The Intel–Brookfield partnership, structured around public incentives and private capital, exemplifies this blend: a commercial venture serving a sovereign purpose. The distinction becomes hopelessly blurred when entities like China Poly Group, which simultaneously executes commercial transactions and serves as a state procurement agent, enter foreign markets.
Legally, these activities are contractual, transactional, and profit-oriented, features that make them commercial in nature. Yet, politically, they advance public policy objectives. This hybrid character makes dispute resolution complex. When disagreements arise, are they to be treated as commercial controversies before courts and tribunals, or as matters of sovereign prerogative beyond judicial reach?
Jurisdiction in the grey zone
International law has developed a coherent answer through the restrictive theory of sovereign immunity, distinguishing between acts of government, known as acta jure imperii, and acts of commerce, known as acta jure gestionis. Under instruments such as the United States Foreign Sovereign Immunities Act and the United Kingdom State Immunity Act, sovereign immunity does not protect states when they engage in commercial transactions.
Ownership alone does not determine immunity. A state-owned enterprise does not automatically share the state’s legal shield; what matters is the function performed. If the entity acts as a merchant, signing contracts, selling goods, or borrowing funds, it is subject to the jurisdiction of foreign courts. But if it performs sovereign or regulatory tasks, executing state policy, enforcing laws, or carrying out sanctions, its actions remain immune. Yet the functional test itself founders when a state-owned defense contractor procures a dual-use technology: is the purchase of a common sensor an acta jure gestionis, or is its ultimate placement in a sovereign missile system an acta jure imperii? The truth is often both, and the restrictive theory offers no true solution for the hybrid act.
This approach reflects a mature legal consensus. The law respects sovereignty while ensuring accountability in commerce. It protects the equality of states, yet prevents them from misusing sovereign form to escape market responsibility.
Sanctions and the sovereign function
No issue illustrates the tension between commerce and sovereignty more vividly than economic sanctions. Sanctions employ financial and trade tools, asset freezes, export restrictions and transaction bans, but they are sovereign measures grounded in national legislation and foreign policy.
While sanctions operate through market channels, they are not acts of commerce. They express a government’s coercive authority and therefore remain beyond ordinary jurisdiction. Yet for private actors such as banks, shipping companies, insurers, and even state enterprises, sanctions are legally binding obligations with global consequences. This duality makes sanctions the modern symbol of law weaponized. They reshape global markets without a single court judgment, demonstrating how sovereign authority can operate through economic means with greater effect than any court order. In this sense, sanctions are the mirror image of state enterprise: one projects power through markets, the other pursues markets through power.
Extraterritoriality and long-arm lawfare
The reach of domestic law across borders has become another defining feature of the state-owned century. Through long-arm statutes and the emerging doctrine of secondary sanctions, major powers extend jurisdiction not merely to direct foreign actors but to any actor connected to their financial architecture.
This trend reflects an assertion that commercial behavior connected to a sovereign’s economy can be regulated, even when undertaken abroad. The United States Foreign Corrupt Practices Act, the European Union’s competition and subsidy rules, and global anti–money laundering standards are all manifestations of this approach.
While such measures uphold transparency and fairness, they also serve strategic objectives. When used against state-linked enterprises, they can blur the line between legitimate law enforcement and geopolitical leverage. Law in these instances becomes both a mechanism of justice and a tool of statecraft.
The balance to preserve
The coexistence of law and power demands discipline on both sides. International law must hold firm to its functional distinction. Commercial acts invite jurisdiction; sovereign functions retain immunity.
Immunity is not necessarily a privilege of ownership but of function. The state retains it when it governs, not when it competes. Courts should resist both extremes: treating every state-linked entity as beyond reach, or presuming all such entities are subject to suit. The principle of restrictive immunity remains sound if applied with functional precision and diplomatic restraint.
At the same time, states must act consistently. They should not invoke sovereignty as a shield for commercial failure, nor stretch jurisdiction to pursue strategic adversaries under the guise of law. The integrity of the international system depends on mutual restraint. Law must know its limits, and power must respect them.
Knowing where law ends and power begins
The 21st century has produced not a socialist world or a purely capitalist one, but a strategic economy, a system in which states invest, compete, and regulate all at once. This new reality requires renewed clarity in law’s boundaries.
When states and their enterprises act commercially, they must accept the jurisdiction and accountability that attach to participation in the market. When they act as sovereigns, through policy, regulation, or coercion, they must remain immune as equals among equals.
Sanctions, sovereign investment, and industrial policy all test this equilibrium, but they need not dissolve it. What is required is functional judgment, the capacity to distinguish between commerce and command, between market conduct and sovereign will.
The task is thus not to find a compromise between law and power, but to acknowledge that they have merged. The durability of the international system will be determined by whether legal systems can enforce accountability on hybrid actors without forfeiting the essential respect owed to sovereign authority.
Omer Er is an attorney and partner in the New York office of Michelman & Robinson LLP, specializing in cross-border matters for private and state-owned entities.
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