International Investment and Dispute Settlement

Understanding the China–European Union Comprehensive Agreement on Investment

Chunlei Zhao

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000595130
• Edition: 1
• Topic: Commerce
• Subtopic: Droit des affaires

This book analyzes the dispute settlement mechanisms under the EU-China Comprehensive Agreement on Investment (CAI), including the already established mechanisms for general state-to-state dispute settlement and the Mechanism to Address Differences for investment and sustainable development issues.

When China and the EU, two of the biggest players in international investment, announced the completion of the China-European Union CAI negotiations, the dispute settlement system remained incomplete. While they reached an agreement on state-to-state dispute settlement, the controversial investor-state dispute settlement is subject to ongoing negotiations. This book explores the possible procedural design of investor-state dispute settlement mechanisms under the EU-China CAI, including potential proposals, issues, and solutions. In addition, this work analyzes the separation, connection, and combination of state-to-state and investor-state dispute settlement, all with a mind to ensuring the function and operation of diverse mechanisms and establishing a comprehensive system for successful investment dispute settlement.

Focusing on the complete dispute settlement system under the EU-China CAI, this book will be a valuable resource for students, academics, and policymakers working in the areas of international dispute resolution, international investment law, international economic law, and comparative law.

1IntroductionChina, the EU, the EU-China Comprehensive Agreement on Investment, and International Investment Dispute Settlement

DOI: 10.4324/9781003226352-1

1 Introduction

China¹ and the EU² are two of the biggest players in international investment. In the past five years, the foreign direct investment inflows and outflows in China and the EU were among the top five in the world.³ In the past decades, China’s position in international investment continues to improve, from being purely a destination for global foreign investment inflows to being a State with both strong investment inflows and outflows.⁴ According to UNCTAD World Investment Report 2021, in 2020, China was the second largest recipient of foreign direct investment in the world, attracting $149 billion inflows. It was in first place with regard to outflows, with an amount of $133 billion.⁵ On the side of the EU, since 2009, the Union handles foreign direct investment policies on behalf of its Member States.⁶ Now, the EU is the world’s largest exporter and importer of foreign direct investment.⁷ By 2019, the EU’s FDI inward and outward stocks have reached 11,068,983 and 12,573,803 million dollars respectively.⁸

Since 1986, EU investment in China has increased more than 25-fold and, in 2000, the EU became the principal investor in China.⁹ Recent years also witnessed a rapid increase of Chinese investments in the EU.¹⁰ In fact, Chinese investments in Europe have been much more resilient than investments in other parts of the world.¹¹

The development of the legal framework for the international investment relationship between China and the EU can be divided into two stages based on the entering-into-force of the Lisbon treaty in 2009. Before 2009, in the pre-Lisbon period, the competence in international investment is shared by the Union and EU Member States, and in fact both of them concluded economic agreements with China. The Lisbon Treaty brought about the transfer of competence from EU Member States to the Union in this regard. After that, since 2013, China and the EU have been working towards a Bilateral Investment Treaty (hereinafter “BIT”). Finally, on 30 December 2020, China and the EU announced the conclusion of the negotiations on an EU-China Comprehensive Agreement on Investment (hereinafter “EU-China CAI”), arguably opening a new era in their legal investment relationship.

For building a necessary basis for the analysis in the following chapters on the dispute settlement system under the EU-China CAI, the present introductory chapter gives a brief introduction of China’s and the EU’s international investment treaty practice, as well as an overview of the development of the China-EU investment relationship. In particular, considering the theme of the present book, namely, the EU-China CAI, the last section of this chapter will briefly explore the impact and future of the EU-China CAI.

2 An Overview of China’s and the EU’s International Investment Treaty Practice

China and the EU are two of the world’s biggest players in the area of international investment. Besides the large volumes of foreign direct investment inflows and outflows, both of them have been active in negotiating and concluding international investment agreements. These treaties provide diverse investment protection as well as mechanisms for addressing the disputes arising therefrom.

2.1 China’s International Investment Treaty Practice

As of June 2021, China has signed 145 BITs (107 in force) and 24 other investment agreements (19 in force), and the most recent one is the Regional Comprehensive Economic Partnership (RCEP) signed on 15 November 2020. Along with these international agreements on investment, China has also adopted four Model BITs in 1984, 1989, 1997, and 2010 respectively.

With regard to investment dispute settlement mechanisms under these treaties, most of them provide mechanisms for both State-to-State dispute settlement (hereinafter “SSDS”) and Investor-State dispute settlement (hereinafter “ISDS”). For SSDS, a hybrid approach combining diplomatic consultations and ad hoc arbitration has been consistently adopted in China’s Model BITs and in most of its concluded investment agreements. By examining the SSDS mechanisms in China’s investment treaties chronologically, it is noted that, first, the treaties concluded at a later date often contain more detailed procedural rules. Second, reliance on certain diplomatic elements in the earlier treaties disappear from those concluded at a later stage, which can be taken as evidence of China’s increasing confidence in international adjudication. In addition, China’s most recent treaty practice shifts from this hybrid approach to a quasi-WTO dispute settlement panel proceedings model, which in fact has been the practice in SSDS mechanisms under its Free Trade Agreements.

Regarding ISDS, both the China Model BITs and its concluded investment treaties bore witness to changes in China’s approach over time. These changes are particularly evidenced by the attitude towards Investor-State arbitration: in the first stage (1982–1996), there was no acceptance of Investor-State arbitration or only acceptance of international arbitration for disputes about the amount of compensation for expropriation; in the second stage (1997–2009), an overall acceptance of Investor-State arbitration was the choice; in the third stage (2010–), the acceptance of Investor-State arbitration is being carefully revised. In addition, since signing the International Centre for Settlement of Investment Disputes Convention (hereinafter “ICSID”) in 1993, it has become China’s normal practice to incorporate ICSID arbitration for ISDS into its international investment agreements. Detailed procedural designs of the mechanisms for ISDS in China’s investment agreements vary, which shows China’s flexibility and open attitude.

Under these investment agreements, there are cases raised both by Chinese investors and against the Chinese government. In fact, China and Chinese investors’ increasing involvement in the playground of Investor-State arbitration has contributed to the emergence of China-related investment arbitration jurisprudence. As of 2 July 2021, there are 15 treaty-based investment arbitrations initiated by Chinese investors against foreign host States,¹² and seven arbitrations initiated by foreign investors against China.¹³ Compared to its large number of international investment agreements and ever-increasing investment flows, this number is relatively small. Possible underlying reasons for this include the Chinese government’s preference for the amicable settlement of investment disputes to preserve harmony and its political image as a friendly host State, together with foreign investors’ worries about the Chinese government’s retaliation and the lucrativeness of the Chinese market. In addition, China has joined the worldwide ongoing reform of ISDS, presenting its perceptions on specific issues in different international fora and adopting new practices in its international investment agreements. In brief, China’s practice in both SSDS and ISDS resonates with some of its legal cultural characteristics in dispute settlement, such as the preference for amicable settlements and confidentiality in the dispute settlement process, as already practised at its domestic level. However, at the same time, from accepting the jurisdiction of an international adjudication body to actively participating in discussions on the reform of international dispute settlement, it is also clear that China has increasingly recognized the function of international adjudication in SSDS and ISDS. China’s practice in ISDS, which informs the design of ISDS under the EU-China CAI, is separately and examined in detail in Chapter 5, infra.

2.2 The EU’s International Investment Treaty Practice

As mentioned earlier, due to the shift in the competence in foreign direct investment agreements from the EU Member States to the Union, the analysis of the EU’s international investment agreements network is not straightforward.

Before the Lisbon Treaty entered into force, the competence for international investment issues was shared by the Union and its Member States. This was with the exception that, with regard to single market access, the establishment of new foreign investment agreements formed part of the Union’s exclusive competence,¹⁴ and therefore the investment agreements signed by the Union only covered the pre-establishment phase of foreign investment but did not cover post-establishment investment protection.¹⁵ EU Member States enjoyed exclusive competence in relation to the post-establishment treatment of investments,¹⁶ and thus, by and large, the EU Member States’ international investment agreements covered investments that had already been established in host States.¹⁷ As a result, the majority of the international investment agreements that are currently in place were concluded by EU Member States, while others involve the Union only or both the Union and its Member States. In particular, rules on investment dispute settlement were in the hands of the EU Member States and are mainly found in their international i...