It is impossible to predict the time and progress of revolution. It is governed by its own laws. – Vladimir Lenin
Those who have knowledge, do not predict. Those who predict, do not have knowledge. – Lao Tzu
China has eyed investment treaties with suspicion and caution for many decades. By the end of 2017 however, the Middle Kingdom has reached a stage at which it is ready to release to the public one of the largest bilateral investment treaties the world has ever known. The China-EU BIT is likely to emerge as a pioneer of a new generation of Chinese investment treaties, in a radical change from China’s successive generations of treaties that have shaped China’s inbound and outbound FDI since March 1982, when China concluded its first BIT (with Sweden).
The negotiations of the China-EU BIT have been conducted under an impenetrable wall of confidentiality, worthy in the discipline of its keeping perhaps only of the well-guarded secrets of the USSR.
Despite the secrecy of the negotiations, the latest treaty-making trends, in particular in multilateral treaties in the Asia-Pacific region, offer a credible platform for predictions of what the China-EU BIT might look like. These trends include environmental carve-outs, safeguards of the States' regulatory space in the area of public health and security, links to customary international law when it comes to guarantees of fair and equitable treatment of investments and full protection and security standards, expanded scope of the dispute resolution clause, transparency provisions, possibilities of a standing bilateral investment tribunal, and a number of other forward-looking trends.
The obvious caveat to the predictions is that, while China is the negotiator of the Treaty, it was not involved in the negotiations of the TPP. China appears to be less environmentally cautious than the TPP member-States, or in any event, the Middle Kingdom does not appear to be prepared to cripple its heavy industries through environmental carve-outs in its treaties. Thus, many of the TPP traces that are visible in the RCEP drafts – such as the environmental carve-outs in particular - might not be present in the China-EU BIT.
- Negotiations History and Key Data
The China-EU BIT
In 2012, at the outset of EU's and China's "great leap forward" in their trade relationship, the parties jointly announced their desire to open the Treaty negotiations in their "Strategic Agenda for Cooperation for 2020." The China-EU Investment Treaty was given particular prominence in the agenda:
Negotiate and conclude a comprehensive EU-China Investment Agreement that covers issues of interest to either side, including investment protection and market access. The EU-China Investment Agreement will provide for progressive liberalisation of investment and the elimination of restrictions for investors to each other's market. It will provide a simpler and more secure legal framework to investors of both sides by securing predictable long-term access to EU and Chinese markets respectively and providing for strong protection to investors and their investments. It should replace the existing bilateral investment treaties between China and EU Member States with one single comprehensive agreement covering all EU Member States.
In early 2013, the European Commission published a document entitled "EU-China Investment Relationship – draft impact assessment." In that document, the EU-China Investment Task Force concluded that the existing bilateral relationships between China and a number of EU member-states do not facilitate trans-boundary FDI flows and thus, disadvantage the trade relationship between China and EU as trading blocks.
In October 2013, the Council adopted the negotiating mandate for the Commission and in November 2013, the launch of negotiations was announced at the 16th EU-China Summit. The first round of talks was held in January 2014.
In September 2016, the EU and China held its 12th round of negotiations of the Treaty. The discussions centred on the Treaty's definitions, fair and equitable treatment standard, the minimum standard of treatment requirement and expropriation. Other challenging topics included domestic regulation, sustainable development, the EU proposals on State-owned Enterprises, and on the Treaty's dispute settlement mechanism. This was followed by several rounds of negotiations throughout 2017. The China-EU negotiations continue at the time of writing, with no end in sight.
The Regional Comprehensive Economic Partnership Agreement (‘RCEP’) is a free trade agreement between the ten ASEAN member-states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam) and the six states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea, and New Zealand).
The RCEP, once it enters into force, will become one of the world's largest and most sophisticated free trade agreements. In its scope, it will exceed the TPP magnitude in a wide range of indicators. RCEP will expand the ASEAN market from 600 million people to 3.5 billion.
While RCEP is at the advanced negotiations stages at the time of writing, it is far from being finalised. A number of iterations of RCEP's investment chapter have been leaked to the public over the past few years, including with China's annotations on the drafts. Thus, the RCEP – where China's negotiations position is much more visible – is one of the very few credible sources at predicting what the China-EU BIT might be like.
TPP-inspired FET and FPS standards in the RCEP and potentially in the China-EU BIT
The Fair and Equitable Treatment (‘FET’) standard in investment treaties has been a controversial issue in investment law for decades. The frequency with which foreign investors attempt to engage the host State's liability under investment treaties with reference to the breaches of the FET standard is as astounding as the success rate of the claimants' FET claims. Tribunals have interpreted the capacious wording of the FET standard in the treaties to include the host State's obligations to act consistently, transparently, reasonably, without ambiguity, arbitrariness or discrimination, in an evenhanded manner, to ensure due process in decision-making and respect investors’ legitimate expectations, at time with an additional obligation to ensure that no denial of justices occurs. In essence, the FET standard is designed to cover everything that does not fall under the auspices of more precise treaty standards, such as expropriation.
This generous coverage has resulted in the States' greater exposure to treaty claims, which is particularly taxing on developing and least-developed states. The backlash against the generous interpretative practices of the FET standard has generated a more balanced wording in contemporary investment treaties. This balanced wording links the FET standard to customary international law and more specifically, to the minimum standard of treatment of aliens, thus reducing the State's exposure to liability under investment treaties for FET breaches only to those acts that are "shocking" and "egregious".
Article 9.6(2) of the TPP clarifies that the applicable standard of FET for covered investments is the 'customary international law minimum standard of treatment of aliens', thus limiting the TPP states exposure to FET claims.
The TPP's approach to FET and its explicit link to customary international law has found its way to the October 2015 iteration of RCEP's investment chapter, which provides, in article 12.1, that:
'[t]he concepts of 'fair and equitable treatment' and 'full protection and security' do not require treatment in addition to or beyond that which is required under customary international law.'
China's annotated version of the RCEP investment chapter goes beyond a simple reference to the customary international law. It clarifies, in detail, what the FET standard in the RCEP is intended to mean:
3. The concept of "fair and equitable treatment" and "full protection and security" do not require treatment in addition to or beyond that which is required by that standard [customary international law], and do not create additional substantive rights. The obligation in paragraph 1 to provide:
- Fair and equitable treatment refers to the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process of law and;
- Full protection and security refers to the requirements one each/a Party to provide the level of police protection required under customary international law.
With a fair degree of probability one may assume that this limited standard of FET, with a clear linkage to customary international law, will find its way to the China-EU BIT.
TPP-inspired expropriation provisions in the RCEP and potentially in the China-EU BIT
Protection from illegal expropriation is by far the main substantive protection that is awarded to foreign investors under investment treaties. On the basis of expropriation provisions of investment treaties, foreign investors are entitled to bring treaty claims against their host States for conduct attributable to the States that constitutes either direct taking of property, or has the effect of substantially depriving the investment of its value, or depriving the investor if its ability to manage use, or control its investment in a meaningful way.
While direct expropriation appears relatively straightforward, indirect expropriation has posed a number of conceptual issues in the investment community. The latest controversy has arisen out of the concept of the States' right to regulate matters of public concern, such as environment, health, and security, within their own territories. Such regulatory measures often negatively affect foreign investment and thus expose the host States to treaty claims.
Contemporary investment treaties, and in particular regional free trade agreements such as the TPP( CPTPP), contain carefully-drafted carve-outs that exclude the States' regulatory measures intended to regulate matters of public concern from the scope of expropriation provisions.
Item 3 of the TPP Expropriation Annex does just that:
[n]on-discriminatory regulatory actions that are designed to protect legitimate public welfare objectives [...] do not constitute indirect expropriations, except in rare circumstances.
Expropriation Annex of RCEP’s Investment Chapter [October 2015] traces that wording and excludes regulatory measures from the scope of its expropriation provisions:
non-discriminatory regulatory measures by a Party or measures or awards by judicial bodies of a Party that are designed and applied interest or public welfare objectives, such as public health, safety, and the environment, shall not constitute expropriation/s under this Article.
The Chinese annotated version of the RCEP draft goes beyond that simple carve-out and provides that:
[expropriation] is intended to reflect customary international law concerning the obligation of States with respect to expropriation.
Chances are that China, a heavily regulated jurisdiction, will continue the trend of regulatory carve-outs and insist on including a qualified carve-out in the China-EU BIT, as well as a clear link to the expropriation standard to customary international law.
TPP-inspired balancing provision in the RCEP and potentially in the China-EU BIT
The latest generation of investment treaties and free trade agreements, in their attempts to safeguard the States' regulatory space, have conceived what is known to be a "balancing provision" that specifically allows the States to regulate matters of environment and health within their territory without being exposed to the risks of expropriation claims.
Article 9.16 of the TPP's Investment Chapter provides that:
Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.
The RCEP Investment Chapter 2.1.3 [October 2015] reproduces this wording almost verbatim, with a number of variations:
Nothing in this Chapter shall be interpreted to restrict the rights of a Party to formulate, modify, amend, apply or revoke its laws, regulations and policies. Each Party retains the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters, including discretion regarding allocation of resources and establishment of penalties.
Interestingly, the Chinese annotated version of the RCEP Investment Chapter does not contain a similarly worded balancing provision. It remains to be seen whether the RCEP balancing provision will negotiate its way to the final version of the China-EU BIT.
In 2013, in its Impact Assessment Report on the EU-China Investment Relations, the European Commission outlined five possible scenarios according to which the parties' trade relationship might evolve:
- No policy change; China and the EU will continue to operate on the patchwork of individual bilateral investment treaties between China and the European Union member-States;
- China and EU will implement a stand-alone Bilateral Investment Treaty;
- China and EU will implement a separate agreement combining investment protection with market access;
- China and EU will integrate investment protection and market access regimes into the currently ongoing negotiations of the Partnership and Cooperation Agreement; or
- China and EU will sign a comprehensive free trade agreement.
Numerous policy and negotiations rounds later, towards the end of 2017, it is apparent that the second option – a China-EU Bilateral Investment Treaty – is the only option that survived. In the years to come, having discarded the remaining four scenarios, the world will see one of its largest bilateral investment treaties – the China-EU BIT. The Treaty emerges as an example of intricate, elaborate, complex negotiations and drafting process run by two equally powerful negotiators.
In light of China’s active and vocal role in the RCEP negotiations, it transpires that China might be prepared to move away from its traditional treaty practice and negotiate a treaty that will inform a new generation of Chinese BITs. The more detailed textual predictions are that the China-EU BIT will contain at the very least:
- An RCEP- inspired expropriation provision that links the standard of expropriation to customary international law and carves out from the scope of the expropriation provision the parties' regulatory measures intended to protect matters of public policy such as environment, health, and public safety and security;
- A RCEP- inspired FET standard that is linked to customary international law and is described as limited to the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process of law; and
- Potentially a balancing provision that safeguards the states regulatory space.
Winston Churchill said at a conference in Cairo on 1 February 1943, that he “always avoids prophesying beforehand, because it is a much better policy to prophesy after the event has already taken place”. And yet, with China’s active role in the RCEP negotiations, and the relative transparency of the RCEP negotiations process, the predictions of the main features of the China-EU BIT might be made with a degree of certainty.