China, the EU and International Investment Law

Reforming Investor-State Dispute Settlement

Yuwen Li, Tong Qi, Cheng Bian, Yuwen Li, Tong Qi, Cheng Bian

• Editorial: Routledge
• Año: 2019
• ISBN:
  9781000704891
• Edición: 1
• Categoría: Business
• Categoría: Diritto societario

This book provides an original and critical analysis of the most contentious subjects being negotiated in the China–EU Comprehensive Agreement on Investment (CAI). It focuses on the pathway of reforming investor-state dispute settlement (ISDS) from both Chinese and European perspectives in the context of the China–EU CAI and beyond. The book is divided into three parts. Part I examines key and controversial issues of the China–EU CAI negotiations, including market access, sustainable development and human rights, as well as comparing distinct features between the China–EU CAI and the China–US BIT. Part II concentrates on the institutional reform of investor-state arbitration with an extensive analysis of the EU's approach to replacing the private nature of investment arbitration with the public nature of an investment court. Part III addresses the core substantive and procedural issues concerning ISDS, such as the role of domestic courts in investment dispute settlement, the status of state-owned enterprises (SOEs) as investors, transparency and the protection of victims in investment dispute resolution.

This book will be of interest to scholars and practitioners in the field of international investment and trade law, particularly investment dispute settlement.

1 Introduction

Opportunities and challenges towards a China–EU Comprehensive Agreement on Investment

Yuwen Li and Cheng Bian

1.1 China–EU investment flows and policy implications

The most striking development in China–European Union (EU) investment relations is the rapid growth of Chinese outbound foreign direct investment (FDI) into the EU over the past decade. Based on information from the Chinese Ministry of Commerce (MOFCOM), Chinese FDI in the EU started at a rather low level, with a recorded flow of around USD 0.18 billion in 2005.¹ However, MOFCOM recorded about USD 2.9 billion in 2009, and this amount rose to USD 5.9 billion in 2010 and USD 10.2 billion in 2017,² indicating an annual average increase rate of about 40% from 2005 to 2017.

1 Ministry of Commerce of China (MOFCOM), ‘2006年度中国对外直接投资统计公报’ (Chinese Outbound FDI Bulletin 2006), <http://pic.tradeinservices.mofcom.gov.cn/upload/2009/04/10/1239340712359_10087046.pdf>, last accessed on 30 January 2019, p. 30. It should be noted that the accuracy of the official data from MOFCOM may not be entirely reliable. Nevertheless, in the absence of other reliable detailed sources, the figures cited from MOFCOM are deemed as illustrative.

2 MOFCOM, ‘2017年度中国对外直接投资统计公报’ (Chinese Outbound FDI Bulletin 2017), <http://img.project.fdi.gov.cn/21/1800000121/File/201810/201810301102234656885.pdf>, last accessed on 30 January 2019, p. 59.

European investment in China has also grown at a considerable pace since the 1990s. According to MOFCOM, EU FDI in China was recorded at around USD 2.1 billion in 1995 and increased to USD 4.1 billion in 1997. The amount remained in the range of USD 4–6 billion from 1997 to 2012, and reached USD 8.7 billion in 2016, and USD 8.2 billion in 2017,³ indicating an annual average increase rate of about 6% from 1995 to 2017.

3 MOFCOM, ‘中国外资统计公报2018’ (Statistics on FDI in China 2018), <http://img.project.fdi.gov.cn/21/1800000121/File/2018file/%E4%B8%AD%E5%9B%BD%E5%A4%96%E8%B5%84%E7%BB%9F%E8%AE%A12018.pdf>, last accessed on 30 January 2019, p. 44.

Despite the robust growth in Chinese FDI in the EU, its proportion in the total inbound FDI remains low. According to the EU, in the period 2009–2015, aggregated Chinese FDI stock in the EU was recorded at EUR 34.9 billion, accounting for only 0.6% of total inbound FDI stock in the EU. In comparison, as the largest home state of FDI in the EU, the United States (US) invested a total of EUR 2,380.9 billion in the EU in the period 2009–2015, which accounted for about 41% of total inbound FDI stock in the EU.⁴

4 Eurostat, ‘Archive: Foreign Direct Investment Statistics’, April 2017, <https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Archive:Foreign_direct_investment_statistics>, last accessed on 25 December 2018.

In the same vein, the proportion of EU FDI in China also remains marginal. According to the EU, the EU’s total stock of outbound FDI in China accounted for only 1.8% of the EU’s global outbound investment stock in the period 1993–2013.⁵ According to MOFCOM, from 2007 to 2017, annual FDI flow from the EU in China stalled at around 5% of global inbound FDI in China.⁶ As China and the EU are the second and the third largest economies respectively in the world, the potential to increase FDI in each other’s economy can be anticipated.

5 European Commission, ‘Staff Working Document Impact Assessment Report on the EU-China Investment Relations’, 23 May 2013, SWD (2013) 185 final, <http://ec.europa.eu/smart-regulation/impact/ia_carried_out/docs/ia_2013/swd_2013_0185_en.pdf>, last accessed on 29 January 2019, p. 7.

6 MOFCOM, supra note 3, p. 44.

Various factors contribute to underdeveloped China–EU investment flows. Some European businesses complain that they face a multitude of restrictions and competitive disadvantages in both the pre-establishment and the post-establishment phases in China. Although China has introduced a series of measures to liberalize market access to foreign investors, implementation of these measures remains problematic due to the long-standing practice of strictly controlling foreign investment with a case-by-case approval system. Moreover, foreign takeovers of Chinese enterprises remain subject to the strict approval system. Other key barriers often cited by foreign investors include the compulsory transfer of technology, lack of protection of intellectual property rights, and the monopoly of Chinese state-owned enterprises (SOEs) in strategic sectors, all of which preclude the creation of a level playing field for foreign investment.

Chinese investors by no means find their outbound investment in the EU smooth sailing. Even though the proportion of Chinese FDI in the EU still remains marginal, Chinese investments in the EU mostly take the form of mergers and acquisitions rather than greenfield investment, which ‘creates the perception of a strategic takeover by Chinese companies’.⁷ A few high-profile and contentious Chinese takeovers, such as those of the Greek Port of Piraeus, the British Hinkley Point nuclear plant, the German Kuka Robotics, and the German Leifeld Manufacturing, have resulted in mounting concerns in Europe about losing control of the EU’s critical infrastructure and cutting-edge technology.

7 European Commission, supra note 5, p. 18.

In response to Chinese takeovers, some EU member states have tightened their national law on foreign investment review systems,⁸ and the ‘Regulation (EU) Establishing a Framework for the Screening of Foreign Direct Investments into the Union’ entered into force on 10 April 2019.⁹ Although the EU remains a popular destination for Chinese investment because of its open policy, Chinese investors can be expected to face increasing regulatory barriers in the EU.

8 For instance, Germany revised its national security review law in December 2018 to cover foreign takeovers of above 10% shares of a German company in prescribed sensitive sectors, as opposed to 25% in the past. Naboth van den Broek et al., ‘EU and Germany Move to Further Tighten FDI Screening Process’, Mondaq, 27 December 2018, <http://www.mondaq.com/germany/x/767868/Inward+Foreign+Investment/EU+and+Germany+Move+to+Further+Tighten+FDI+Screening+Process>, last accessed on 30 January 2019.

9 European Commission, ‘EU Foreign Investment Screening Regulation Enters into Force’, 10 April 2019, <http://europa.eu/rapid/press-release_IP-19-2088_en.htm>, last accessed on 30 April 2019.

1.2 Incentives and context in making the China–EU Comprehensive Agreement on Investment (CAI)

The signing of bilateral investment treaties (BITs) was originally incentivized by a perception that BITs would promote FDI between the two contracting states. Despite a dearth of evidence to prove the correlation between the conclusion of BITs and the promotion of FDI, the proliferation of international investment agreements (IIAs) on a global scale since the 1990s illustrates states’ commitment to using these instruments to promote investment relations. There are now approximately 2,970 BITs and 383 treaties with investment provisions signed worldwide.¹⁰ More particularly, since the 2010s, the emergence of the world’s ‘mega-regional’ trade and investment agreements reflects strong competition among key economies in leading and reshaping the rule-making of international trade and investment. The Agreement on Trans-Pacific Partnership (TPP) and its subsequent Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the United States-Mexico-Canada Agreement (USMCA) as a new version of the North America Free Trade Agreement (NAFTA), and the ongoing negotiations of the Regional Comprehensive Economic Partnership (RCEP) are major free trade agreements (FTAs) with chapters on investment that reflect substantial advancement in most recent treaty-making.

10 UNCTAD, ‘Investment Policy Hub, International Investment Agreements’, <https://investmentpolicyhub.unctad.org/IIA>, last accessed on 30 January 2019.

On the EU side, the EU has been active in negotiating with key economic partners on FTAs with chapters on investment since 2010. The EU-US negotiations on the Transatlantic Trade and Investment Partnership (TTIP) received overwhelming scepticism internationally due to the EU’s bold 2015 proposal on creating an international investment court system to replace ad hoc investor-state arbitration (ISA). Despite the deadlock of TTIP, the EU’s approach to the investment court has been integrated into the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the EU-Vietnam Investment Protection Agreement (IPA), and the EU-Singapore IPA. Moreover, the United Nations Commission on International Trade Law (UNCITRAL) Working Group III has responded to the EU’s proposal for reforming the investor-state dispute settlement (ISDS) by establishing a permanent multilateral investment court (MIC), eventually replacing the investment court system on a bilateral level.¹¹ The EU and Canada are the front runners in advocating an MIC.

11 European Commission, ‘Submission of the European Union and its Member States to UNCITRAL Working Group III, Establishing a Standing Mechanism for the Settlement of International Investment Disputes’, 18 January 2019, <http://trade.ec.europa.eu/doclib/docs/2019/january/tradoc_157631.pdf>, last accessed on 30 January 2019.

China’s treaty-making practice is also notable, reflecting its policy to protect growing outbound investment resulting from the Belt and Road Initiative, and to meet external pressure to further open up the Chinese market. Since 2008, China has resumed BIT negotiations with the US, in which China has agreed to relax market access by introducing a new system of national treatment at the pre-establishment stage with a negative list. In response to the uncertainty of ISDS, China has adopted domestic measures to provide possibilities for settling such disputes in China. The Shenzhen Court of International Arbitration in 2016 and the China International Economic and Trade Arbitration Commission in 2017 introduced new rules to extend their jurisdiction to admit investor-state disputes. In 2018, two new international commercial courts were established by the Supreme People’s Court, which mainly deal with large commercial foreign-related cases, including investment contractual disputes.

Against this background, the China–EU CAI is bound to transcend what traditional BITs include and shift the paradigm towards a global new generation investment agreement.¹² The EU has identified three main objectives in negotiating the China–EU CAI: (a) to improve market access conditions for both Chinese and EU investors; (b) to preserve the host state’s regulatory space in pursuing its legitimate public policy objectives, most notably in relation to the protection of the environment and labour rights; and (c) to allow for an effective investment dispute settlement mechanism by proposing an investment court system.¹³ China shares some of the EU’s concerns, but it may not agree with the EU on some concrete specific ambitions. This edited volume examines the ambitious yet contentious key issues involved in the China–EU CAI. It can be predicted that even though the future treaty will address most of these issues, it may not bring about consensus on some of them because the different positions on these issues are systemic and deeply rooted in the complex of institutional settings. In this context, the CAI cannot be expected to create a level playing field between Chinese and foreign investors in the near future, though any step forward in that direction is desirable.

12 Wenhua Shan and Lu Wang, ‘The China–EU BIT and the Emerging “Global BIT 2.0”’, ICSID Review, Vol. 30 Issue 1 (2015), pp. 260–267.

13 European Commission, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China, Final Report’, November 2017, <http://trade.ec.europa.eu/doclib/docs/2018/may/tradoc_156862.pdf>, last accessed on 26 December 2018, pp. 27–29.

With regard to ISDS, it is the EU’s consistent policy to promote an investment court system in its bilateral trade and investment negotiations, although the notion of such a court needs to be further elaborated so as to achieve the EU’s goal of a fair and efficient dispute settlement system and to gain support from more states. China has its own policy concerns, and thus has taken a cautious attitude towards the EU’s approach. China may think it is not the right time or place to adopt an investment court system in the CAI. At the same time, China has swiftly introduced innovative reform measures to pave the way for allowing investment dispute settlement through arbitration in China. Given China’s position as the second largest economy in the world, its favour of multilateralism and its determination to be a responsible state, it can be expected that China will take a proactive stance in building a fair, efficient and transparent investment dispute settlement regime. As China shares mutually fundamental interests with the EU in international investment governance, the CAI will become China’s first attempt at demonstrating its proactivity in ISDS reform.

1.3 Structure of this book

This book provides a comprehensive analysis of the most contentious subjects in the China–EU CAI negotiations from both Chinese and European perspectives, with a focus on the pathway of ISDS reform. The central theme of this book is how the investment dispute settlement mechanism in the China–EU CAI might and should be designed. To provide a profound understanding of the negotiations of the CAI, this book is divided into three parts.

Part I presents an overview of key and contentious issues in negotiating the China–EU CAI.

In Chapter 2, Axel Berger assesses the key rationale and the motivations of China and of the EU, and he analyses several highly contentious issues in the China–EU CAI negotiations. He first gives an updated ov...