China-European Union Investment Relationships: Towards a New Leadership in Global Investment Governance? 978178897189 8

Based on original research, and bringing together expert contributors, this book provides a critical analysis of the cur

772 88 2MB

English Pages 328 [304] Year 2018

Report DMCA / Copyright

DOWNLOAD FILE

Polecaj historie

China-European Union Investment Relationships: Towards a New Leadership in Global Investment Governance?
 978178897189 8

Table of contents :
FrontMatter
Contents
Contributors
Abbreviations
Foreword
1. Toward a comprehensive EU-China investment agreement
PART I Drivers and issues of china-eu investment relationships
2. Negotiating an uncertain world: economic and political dimensions of the comprehensive agreement
3. The competence to conclude the EU’s new generation of free trade agreements: lessons from Opinio
4. EU-China economic relations: interactions and barriers
5. The potential role of sustainability impact assessment in the EU-China BIT Negotiations
PART II China-eu: towards innovation in rule-making?
6. FTZs: can they initiate a new round of reforms in china?
7. Refining the expropriation clause: what role for proportionality?
8. Investor nationality and the definition of investment: policy options to limit the practice of ‘
9. Emerging regulatory issues for financial services in the new generation of FTAs
10. OBOR in the context of China-EU FDI and China’s evolving economic diplomacy
11. Investment related provisions of EVFTA: implications for Vietnam’s policy reforms
12. Toward an EU-Taiwan bilateral investment treaty: a roadmap
PART III From investor-state arbitration to a permanent investment court?
13. How much of a court? The EU investmen
14. The inclusion of investment court system into the EU-China CAI: innovations, prospects and prob
15. The appellate option: promises and pitfalls

Citation preview

China-European Union Investment Relationships

M4644-CHAISSE_9781788971898_t.indd 1

11/10/2018 10:22

M4644-CHAISSE_9781788971898_t.indd 2

11/10/2018 10:22

China-European Union Investment Relationships

Towards a New Leadership in Global Investment Governance?

Edited by

Julien Chaisse Professor, Faculty of Law and Director, Center for Financial Regulation and Economic Development, The Chinese University of Hong Kong

Cheltenham, UK • Northampton, MA, USA

M4644-CHAISSE_9781788971898_t.indd 3

11/10/2018 10:22

© Julien Chaisse 2018 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2018958448 This book is available electronically in the

Law subject collection

DOI 10.4337/9781788971904

ISBN 978 1 78897 189 8 (cased) ISBN 978 1 78897 190 4 (eBook) Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

M4644-CHAISSE_9781788971898_t.indd 4

11/10/2018 10:22

Contents List of contributorsvii List of abbreviationsxiv Forewordxvii   1 Toward a comprehensive EU-China Investment Agreement Julien Chaisse

1

PART I DRIVERS AND ISSUES OF CHINA-EU INVESTMENT RELATIONSHIPS   2 Negotiating an uncertain world: economic and political dimensions of the comprehensive agreement on investment Duncan Freeman

15

  3 The competence to conclude the EU’s new generation of free trade agreements: lessons from Opinion 2/15 Eleftheria Neframi

32

  4 EU-China economic relations: interactions and barriers Pascal Kerneis   5 The potential role of sustainability impact assessment in the EU-China BIT negotiations Fernando Dias Simões

59

69

PART II CHINA-EU: TOWARDS INNOVATION IN RULE-MAKING?   6 FTZS: can they initiate a new round of reforms in China? Jiaxiang Hu

94

  7 Refining the expropriation clause: what role for proportionality?111 Catharine Titi

v

M4644-CHAISSE_9781788971898_t.indd 5

11/10/2018 10:22

vi

China–European Union investment relationships

  8 Investor nationality and the definition of investment: policy options to limit the practice of ‘treaty shopping’ Jorun Baumgartner   9 Emerging regulatory issues for financial services in the new generation of FTAs Federico Lupo-Pasini

131 156

10 OBOR in the context of China-EU FDI and China’s evolving economic diplomacy Donald J. Lewis

177

11 Investment related provision of EVFTA: implications fo Vietnam’s policy reforms Nguyen Binh Duong

193

12 Toward an EU-Taiwan Bilateral Investment Treaty: a roadmap Chien-Huei Wu

206

PART III FROM INVESTOR-STATE ARBITRATION TO A PERMANENT INVESTMENT COURT? 13 How much of a Court? The EU Investment Court System as a hybrid mechanism Joanna Jemielniak

226

14 The inclusion of investment court system into the EU-China CAI: innovations, prospects and problems Chi-Chung Kao

247

15 The appellate option: promises and pitfalls Matthew Hodgson and Vee Vian Thien

267

Index287

M4644-CHAISSE_9781788971898_t.indd 6

11/10/2018 10:22

Contributors Jorun Baumgartner is currently a research fellow at the University of Lausanne in Switzerland. Admitted to the bar in Germany, she previously worked as a corporate lawyer in Germany, as a legal adviser at the International Committee of the Red Cross in Geneva and as an economic policy officer at the International Investment Agreements section of the UN Conference on Trade and Development (UNCTAD). She holds a law degree from the University of Munich, as well as a LL.M. in international and European economic law and a Ph.D in international law (both from University of Lausanne). She has published in the fields of international investment law, international economic law, public international law and international criminal law. Julien Chaisse is Professor at The Chinese University of Hong Kong (CUHK), Faculty of Law. He is an award-winning scholar of international law with a special focus on the regulation and development of economic globalization. His teaching and research include international trade/investment law, international taxation, law of natural resources, and Internet law. Prior to joining CUHK in 2009, Dr Chaisse was a senior research fellow at the World Trade Institute (Switzerland). He also held an appointment as lecturer at elite school Sciences Po Aix (France) and served as a diplomat at the Embassy of France in New Delhi (India). Dr Chaisse is frequently invited to lecture at many academic institutions and leading universities around the world, including Columbia University (US), University of AixMarseille (France), University of Oxford (UK), Melbourne University (Australia), Tokyo University (Japan), and Tsinghua University (China). Dr Chaisse has published numerous well-regarded and widely-cited books and articles, such as China’s International Investment Strategy (2018); The Regulation of Global Water Services Market (2017); International Economic Law and Governance (2016); ‘Shareholder Protection Reloaded’, Stanford Journal of International Law (2016); ‘Navigating the Expanding Universe of International Treaties on Foreign Investment’, Journal of International Economic Law (2015); ‘Maintaining the WTO’s Supremacy in the International Trade Order’, Journal of International Economic Law (2013); and ‘Promises and Pitfalls of the European Union Policy on Foreign Investment’, Journal of International Economic Law (2012). In vii

M4644-CHAISSE_9781788971898_t.indd 7

11/10/2018 10:22

viii

China–European Union investment relationships

recognition of his outstanding academic performance, Dr Chaisse received the CUHK Vice-Chancellor’s Exemplary Teaching Award in 2015 and the CUHK Research Award in 2012. Dr Chaisse held the appointment of Director of the Centre for Financial Regulation and Economic Development at CUHK Law from 2013 to 2017, and has established forward-looking legal projects and events at CUHK, including the series of ‘Asia FDI Forum’, which has become the most prominent conference on foreign investment law and economics in Asia. Since September 2017, he has been the Director of the Law Faculty  Research Postgraduates Programme (Ph.D. and M.Phil.). Fernando Dias Simões is Associate Professor at the Faculty of Law of the Chinese University of Hong Kong. He holds a Ph.D. from the University of Santiago de Compostela (Spain), an LLM from the University of Glasgow (UK) and a Bachelor degree from the University of Coimbra (Portugal). He is Senior Research Fellow at the University Institute of European Studies – IUSE (Italy) and gLAWcal – Global Law Initiatives for Sustainable Development (UK). He was EU Commission Marie Curie Fellow at Beijing Normal University (China) in 2014 and 2015, and visiting scholar at the Faculty of Law of McGill University (Canada) in 2014 and Emory University School of Law (US) in 2015. Currently he is Principal Investigator in a research project at the University of Macau and Research Unit Coordinator in two research projects funded by the European Commission. His main research interests include International Arbitration, Contract Law, and Consumer Law. Duncan Freeman taught and carried out research on China’s economic and policy developments,  as well as on EU-China relations, at the Brussels Diplomatic Academy and at the Brussels Academy for China and European Studies, both at the Vrije Universiteit Brussels (VUB). Dr Freeman holds a BA in Politics and Modern History from the University of Manchester, an MSc in Chinese Politics from the School of Oriental and African Studies, London, a Postgraduate Diploma in Economic Principles from the University of London and a PhD from the VUB. Dr Freeman lived and worked in Beijing and Hong Kong for a total of 17 years and is fluent in Chinese. During his time in Hong Kong, he was the editor and publisher of several leading publications on the Chinese legal and tax systems for business. Matthew Hodgson specialises in international arbitration and is a partner at Allen & Overy. He has acted as counsel and advocate in commercial arbitrations under all major arbitral rules, including the HKIAC, ICC, LCIA, SCC and UNCITRAL rules. He has also represented clients in a

M4644-CHAISSE_9781788971898_t.indd 8

11/10/2018 10:22



Contributors ix

large number of investment treaty disputes worldwide under the ICSID and UNCITRAL rules. This has included successfully representing investors in ICSID claims against Sri Lanka and the Philippines, and representing the Governments of Azerbaijan, Kyrgyz Republic, Pakistan and Poland, including in several claims valued at over US$1 billion. Matthew has particular experience of disputes relating to energy and infrastructure / construction projects, joint ventures, distribution agreements, financial instruments (including derivatives) and post M&A matters. His clients are in a diverse range of industries, including financial institutions, energy and infrastructure, telecommunications, and life sciences and technology. Matthew has been recognised as a leading practitioner by independent legal directories since being identified as a ‘rising star’ in 2012 (Chambers Global). Most recently, Who’s Who Legal has listed him in their Future Leaders – Arbitration 2017 rankings, describing him as ‘a talented advocate with a big future ahead of him’. He has also been singled out for his investment treaty arbitration work, with Chambers (2014) noting that ‘[Matthew] continues to be highly regarded for his international arbitration work. Clients say: “He is an impressive arbitration lawyer with exceptionally solid insight into arbitrations involving investment treaties”’. Legal 500 has commented that ‘Matthew Hodgson is outstanding’ (2013), ‘sets the bar for others’ (2015), is ‘perfect for complex arbitrations’ (2016) and is ‘well regarded’ (2017). Matthew regularly lectures on international arbitration matters at practitioner conferences and universities worldwide. Jiaxiang Hu is a Professor at Koguan Law School, Shanghai Jiao Tong University. Professor Hu has focused his teaching and research in WTO legal system and international economic law. School of Law, the University of Edinburgh, UK (PhD in law), School of Law, Zhejiang University, P. R. China (Mphil in law), Foreign Language College, Hangzhou University, P. R. China (MA). Joanna Jemielniak is Associate Professor at the Faculty of Law, University of Copenhagen, Centre of Excellence for International Courts (iCourts). She specializes in international business law and arbitration, as well as in theory of legal discourse. Her current research focuses on transparency in trade and investment disputes; court-like mechanisms in investment dispute resolution; hybrid processes (combining arbitration and mediation); and on the use of comparative analysis in arbitral decision-making. Joanna Jemielniak graduated from Harvard Law School and from University of Warsaw (summa cum laude). She holds doctoral and habilitation degrees in juridical sciences and is also attorney-at-law.  She was also a Fulbright Fellow at Harvard Law School in 2004/05 and

M4644-CHAISSE_9781788971898_t.indd 9

11/10/2018 10:22

x

China–European Union investment relationships

subsequently held visiting appointments at UNIDROIT (2006), Harvard Law School (2007), University of California, Berkeley School of Law (2008) and Renmin Law School, Beijing (2013). She is a member of the Editorial Board of the International Journal for the Semiotics of Law and an International Collaborator to International Commercial Arbitration Practices: A Discourse Analytical Study. She is an author and editor of a number of books, including the monograph Legal Interpretation in International Commercial Arbitration (2014) and the most recent volume Establishing Judicial Authority in International Economic Law (2016); Joanna Jemielniak, Laura Nielsen and Henrik Palmer Olsen eds.). Her articles were published in,  inter alia:  European Business Law Review, Oxford Yearbook of International Law and Jurisprudence and  Uniform Law Review. Chi-Chung Kao is Associate Professor, Department of Ocean and Border Governance, National Quemoy University, Kinmen, Taiwan, ROC he holds a Ph.D in Law, University of East Anglia, UK and he is an Associate, Chartered Institute of Arbitrators, UK. Pascal Kerneis studied Law in France. He holds a Ph. D. in European Law. After two years as legal expert in the European Commission, Mr Kerneis joined the European Banking Federation (Brussels, Belgium) in 1990. During his stay at the Banking Federation, Mr Kerneis was closely involved in the WTO negotiations on financial services. Mr Kerneis was appointed Managing Director of ESF (European Services Forum) at the launching meeting of the organization in January 1999. ESF is a network of representatives from the European services sector committed to promoting actively the interests of European services and the liberalization of services markets throughout the world in connection with the GATS 2000 negotiations. ESF comprises now more than 30 major European service companies and 30 European service federations, representing 20 different services sectors. Mr Kerneis is a member of the Civil Society Dialogue’s Contact Group of the Directorate General Trade of the European Commission. Donald J. Lewis is an Adjunct Professor in the Department of Economics, Law and International Business, University of San Francisco (USF) School of Management. In 2017, Professor Lewis taught perhaps the first MBA course in the US on China’s Belt and Road (OBOR) Initiative: China’s Belt and Road Initiative, Regional Economic Integration, and International Trade Regulation for US Business. Professor Lewis is also an Expert and Member of the Public International Law Advisory Group (PILAG) based in Paris, France and a Visiting Professor at the University

M4644-CHAISSE_9781788971898_t.indd 10

11/10/2018 10:22



Contributors xi

of International Business and Economics (UIBE) School of Law in Beijing in 2017. Professor Lewis previously served as a Visiting Associate Professor of Law, Lecturer in Law, and Research Fellow at Stanford Law School where he taught courses on Chinese trade and investment law and Chinese dispute resolution. Prior to Stanford, he was an Associate Professor of Law at The University of Hong Kong (HKU) Faculty of Law in Hong Kong, China, for 23 years. Professor Lewis has served as a US Fulbright Law Professor in China at the law schools of Nankai University (Tianjin) and Zhongshan University (Guangzhou), and has also taught or lectured at Peking University and Tsinghua University law schools (Beijing). While at the HKU Faculty of Law, Professor Lewis acted as Director of the East Asian International Economic Law and Policy (EAIEL) Programme and was the first Academic Coordinator of the official World Trade Organization (WTO) Regional Trade Policy Course (RTPC) for the governments of Asia Pacific, including the Chinese government. Professor Lewis also acted as Director of the Microsoft ICT Research Network (ICTRN), a public law and policy scholarly network for the Asia Pacific region. He was previously a Consultant with White & Case, Hong Kong; an Adviser and Consultant to UNESCAP on international trade and investment issues, including trade facilitation; and in association with the Australian Government (AusAID), served as Trainer and Mentor for the Governments of Indochina on trade policy and WTO-related trade and regulatory reforms. Professor Lewis has lectured and spoken publicly around the world on contemporary Chinese law. He has been a Visiting Scholar in the East Asian Legal Studies program (EALS), Harvard Law School; Visiting Professor, University of Wisconsin-Madison School of Law; and Visiting Lecturer, University of Zurich Faculty of Law in Switzerland. He has acted as an expert witness in China- and Hong Kongrelated litigation and arbitration on four continents – in the US (2nd, 9th, 5th, and Federal Circuits), Canada, China, Australia, Hong Kong, and South Africa. His books include China’s Participation in the WTO (2005); The China Investment Manual (1998); PRC Joint Ventures: Drafting and Negotiating Contracts (1997); and The Life and Death of a Joint Venture in China (1996). His articles have appeared in the Hong Kong Law Journal, Studies in Trade and Investment, International and Comparative Law Quarterly, and Computer and Telecommunications Law Review, among others. He is the co-founder of the leading English language periodical on Chinese legal developments, China Law & Practice, and the China Law section of the Hong Kong Law Journal. Professor Lewis obtained his A.B. cum laude in international relations from the University of Southern California (1976); his J.D. from Emory University School of Law (1980); and his LL.M. from the University of London, School of Oriental and

M4644-CHAISSE_9781788971898_t.indd 11

11/10/2018 10:22

xii

China–European Union investment relationships

African Studies (SOAS) (1981). He is a Member of the State Bar of Georgia. Federico Lupo-Pasini is Associate Professor of Corporate and Commercial Law at Durham Law School. His expertise focuses on international finance and, more broadly, international economic law. He holds a Master in International Law and Economics from the World Trade Institute, and a PhD from the National University of Singapore. Before moving to the UK, he worked in South East Asia for a number of years. He has a long experience in advising governments and international organizations on international economic policy and finance law. Eleftheria Neframi joined the University of Luxembourg in June 2012 as a Professor of European Law. She has been ‘Professeur agrégé’ of Public Law at the University of Paris 13 since 2004. Nguyen Binh Duong is Lecturer and Researcher at the Foreign Trade University (Vietnam). She holds a PhD of Paris Nord University, Master in Economics of Paris 1 Pantheon-Sorbonne University (France). Vee Vian Thien is a registered foreign lawyer at Allen & Overy. She holds a LL.M., Harvard Law School (2010) and MA Hons., Cambridge University (2009). Catharine Titi is a Research Scientist at the French National Centre for Scientific Research (CNRS) and Member of the CREDIMI, Law Faculty of the University of Burgundy. She holds a PhD from the University of Siegen in Germany. Catharine has previously worked at the University Panthéon-Assas Paris II (CRED) and at the United Nations Conference on Trade and Development (UNCTAD). She has published extensively in international law journals, such as Arbitration International, European Journal of International Law, Journal du droit international, Journal of World Investment & Trade, Transnational Dispute Management, and contributed to edited volumes, such as the Yearbook on International Investment Law & Policy (2015). Her monograph The Right to Regulate in International Investment Law was published in 2014. In 2016, Catharine received the prestigious Smit-Lowenfeld Prize of the International Arbitration Club of New York for the best article published in the field of international arbitration. Chien-Huei Wu is currently Associate Research Professor in Academia Sinica, Taipei, Taiwan. He received his Ph.D degree in the European University Institute, Florence in 2009. Since then, he worked as Assistant Professor in National Chung Cheng University, Chiayi, Taiwan for a short period. Before pursing his doctoral degree in Florence, he worked for the

M4644-CHAISSE_9781788971898_t.indd 12

11/10/2018 10:22



Contributors xiii

Ministry of Justice in Taiwan as a district attorney. In 2011–12, he advised the Ministry on drafting prisoner transfer legislation in Taiwan with a view to facilitating prisoner transfers between Taiwan and China, and Taiwan and Germany. His research interests cover EU external relations law and international economic law. He follows closely EU-China and EU-ASEAN relations and pays particular attention to Asian regionalism and WTO-IMF linkage. He has just published a new book entitled WTO and the Greater China: Economic Integration and Dispute Resolution. He has been visiting fellow/professor to the World Trade Institute, University of Passau, and University of Cologne.

M4644-CHAISSE_9781788971898_t.indd 13

11/10/2018 10:22

Abbreviations AALCO Asia-Africa Legal Consultative Organisation AANZFTA Association of Southeast Asian Nations-Australia-New Zealand Free Trade Agreement ACIA Association of Southeast Asian Nations Comprehensive Investment Agreement ADR Alternative Dispute Resolution AEC Association of Southeast Asian Nations Economic Community AII Asian Infrastructure Investment Bank AIR ASEAN Investment Regime APEC Asia-Pacific Economic Cooperation APPI Association of Southeast Asian Nations Agreement for the Promotion and Protection of Investment ASEAN Association of Southeast Asian Nations BIT Bilateral Investment Treaty BRI Belt and Road CAI Comprehensive Agreement on Investment CETA Comprehensive Economic and Trade Agreement  ChAFTA China-Australia Free Trade Agreement  CJEU Court of Justice of the European Union CSR Corporation Social Responsibility DoB Denial of benefit DSU Dispute Settlement Understanding ECHR European Convention on Human Rights EctHR European Court of Human Rights EU European Union EPA Economic Partnership Agreement ECJ European Court of Justice FDI Foreign Direct Investment FET Fair and Equitable Treatment FTA Free Trade Agreement FTAAP Free Trade Area of the Asia-Pacific FTZ Free Trade Zone GATT General Agreement on Tariffs and Trade xiv

M4644-CHAISSE_9781788971898_t.indd 14

11/10/2018 10:22



Abbreviations xv

GATS General Agreement on Trade in Services  GDP Gross Domestic Product HKIAC Hong Kong International Arbitration Centre ICC International Chamber of Commerce ICJ International Court of Justice ICSID International Centre for Settlement of Investment Disputes IIA International Investment Agreements IFC International Financial Corporation  ILO International Labour Organisation IMF International Monetary Fund ISA Investment State Arbitration ISDS Investor-State Dispute Settlement LCIA London Court of International Arbitration MFN Most Favoured Nation MNE Multinational Enterprises MOFCOM Ministry of Commerce MOTIE Ministry of Trade, Industry and Energy NAFTA North America Free Trade Agreement NDRC National Development and Reform Commission NGO Non-governmental Organisation NPC National People’s Congress NT National Treatment OBOR One Belt One Road ODI Overseas Development Institute OECD Organisation for Economic Co-Operation and Development OIA Overseas Investment Act 2005 PRC People’s Republic of China PSC Production Sharing Contract  RCEP Regional Comprehensive Economic Partnership ROC Republic of China SAR Special Administrative Regions SCC Stockholm Chamber of Commerce SOE State-Owned Enterprise TAI Thai Arbitration Institute TEU Treaty of the European Union TFEU Treaty on the Functioning of the European Union TiSA Trade in Services Agreement TIVA Trade in Value-Added indicators TPP Trans-Pacific Partnership TRIMS Agreement on Trade-Related Investment Measures

M4644-CHAISSE_9781788971898_t.indd 15

11/10/2018 10:22

xvi

China–European Union investment relationships

TTIP UN UNCITRAL UNCTAD USD VLCT VCST WTO

Transatlantic Trade and Investment Partnership United Nations United Nations Commission on International Trade Law United Nations Conference on Trade and Development United States Dollar Vienna Convention on the Law of Treaties 1969 Vienna Convention on State Succession in Treaties World Trade Organization

M4644-CHAISSE_9781788971898_t.indd 16

11/10/2018 10:22

Foreword China’s outbound FDI in the EU has surged over the past years. This new phenomenon has triggered contentious responses among European policymakers, the business community, scholars and the society at large. On the positive side, there is a recognition that Chinese investment projects contribute to creating more jobs, generating needed tax revenues, and providing European companies with new market opportunities, etc. Nevertheless, some point out doubts and concerns on national security risks, the loss of technology leadership and industrial competitiveness, and even downgrading of European societal values. A few sensitive take-overs, such as Chinese company Midea’s acquisition of German robotics firm Kuka, and the China Ocean Shipping Company’s (Cosco) acquisition of Athens’ Piraeus Port, have heated up a public debate, and resulted in a number of European governments amending their legislations to strengthen foreign investment screening mechanisms. The EU is also speeding up its law-making process in introducing a regulation establishing a legal framework for screening of FDI into the EU. Despite these mixed responses, China’s outbound investment in Europe continues to grow and reached its record high in 2017. On the side of China, a number of liberalized FDI regulatory measures have been taken, demonstrating the Chinese government’s determination to relax its regulatory regime on foreign investment. Starting with the Shanghai Pilot Free Trade Zone set up in 2013, a new system of pre-establishment national treatment with a negative list is now implemented nation-wide. This fundamentally modified China’s case-by-case approval of foreign investment project – a system that was instituted and developed since the end of 1970s when China initiated its open-door policy. In 2016, the Sino-Foreign Equity Joint Venture Law, the Sino-Foreign Cooperative Joint Venture Law, and the Wholly Foreign-owned Enterprise Law were revised. As a result, the setting up of a foreign investment enterprise is no longer subject to the caseby-case approval; instead, a filing and registration-based regulatory system is introduced, unless an investment falls into the negative list. In 2018, China introduced its latest Negative List, which reduced the number of prohibited areas for foreign investment to 28 and restricted areas to 20. These institutional reforms have expanded foreign investor’s market access to China. xvii

M4644-CHAISSE_9781788971898_t.indd 17

11/10/2018 10:22

xviii

China–European Union investment relationships

Against such a background, the EU and China are currently engaged in their bilateral investment treaty negotiations formally launched in 2013. Both parties have agreed to work on an ambitious and comprehensive treaty that goes beyond traditional BIT coverage, with high standards of protection for foreign investors, and a balance between investors’ protection and state’s right to regulate. The treaty is named the China-EU Comprehensive Agreement on Investment (CAI), and is anticipated to have a pivotal role in the EU-China investment relationships, as well as a significant impact on the international investment treaty-making at the global level. The current deadlock of the EU-US TTIP negotiation, the China-US BIT negotiation, and the withdrawal of the US from the TPP, make the China-EU CAI negotiation a particularly interesting case in times of the modernization of international investment law. China-European Union Investment Relationships, edited by Professor Julien Chaisse, is a timely book that provides readers with comprehensive and updated information, as well as critical analysis on key issues in debate in the context of the current China-EU CAI negotiations. The book starts with a farsighted introduction chapter, which assesses the potential novelty of the CAI and presents a precise summary of the other fourteen chapters. These chapters are divided into three parts under the headings of drivers and issues of China-EU investment relationships, the anticipated innovation in the upcoming CAI, and reforming the investorstate dispute settlement mechanism in the context of the CAI. These excellent contributions will without doubt meet the curiosity of those who are interested, and enrich the body of knowledge regarding the topic of the China-EU relationships in general, and the China-EU connection on investment and trade in particular. Professor Yuwen Li Erasmus School of Law and Director, Erasmus China Law Center,  Erasmus University Rotterdam

M4644-CHAISSE_9781788971898_t.indd 18

11/10/2018 10:22

Toward a comprehensive EU-China Investment Agreement

1. Toward a comprehensive EU-China investment agreement Julien Chaisse AN INTRODUCTION On 20 February 2012, the European Union (EU) and the People’s Republic of China (PRC) decided to launch negotiations on a bilateral treaty addressing the promotion and protection of investment between the two parties. This book anticipates the forthcoming negotiations and examines the legal positions from which the parties will begin their negotiations. In so doing, the book provides stakeholders, such as policy makers, academics and the general public, with a roadmap to the issues raised in the forthcoming negotiations. The negotiation of a ­bilateral investment treaty (BIT) between the PRC and the EU is likely to be a watershed event in global investment treaty practice. Because of the size and importance of the PRC-EU bilateral investment ­relationship, and because of the leading role both parties have played in the global spread of BITs, the issues raised, and lessons drawn from the PRC-EU case will have ramifications well beyond China and Europe. States actively seek to attract foreign investment into their economies because high levels of foreign investment have long been associated with increased economic growth and prosperity.1 To put matters into global context, the United Nations (UN) estimates that in 2017 global inflows of foreign direct investment (FDI) amounted to 1.35 trillion USD.2 That figure represents capital moving from investors based in one state into investments located in another. In terms of stock, investors based in the EU invested approximately 118.1 billion Euros into investments in the PRC, while investors based in the PRC invested approximately 26.3 1   See Sachs, J., The End of Poverty: How We Can Make It Happen in Our Lifetime (London 2005). 2   See UNCTAD (2017) World Investment Report (New York and Geneva: United Nations).

1

M4644-CHAISSE_9781788971898_t.indd 1

11/10/2018 10:22

2

China–European Union investment relationships

­ illion Euros into investments in the EU.3 On the European side, investb ment from the PRC, while still relatively small in absolute terms (by the end of 2017 China was still not among the top ten investors in the EU-27), represents the fastest growing source of foreign investment into the EU.4 On the Chinese side, investment from the EU is only surpassed in amount by investment from the United States (US). For each party, therefore, it is a bilateral relationship of the highest order of importance. Investors, however, are free to invest where they choose and without legal instruments and mechanisms to protect investments abroad, investors may be reluctant to invest their resources in a foreign state. As a consequence of concerns with respect to differences in legal systems and differences in levels of legal infrastructure, over the past 25 years in particular, states have concluded more than 3,000 BITS to regulate the treatment of foreign investors and investments and to provide a mechanism for the resolution of disputes between foreign investors and host states. The result of this widespread practice by states, entering into thousands of treaties addressing similar subject matter but only in a bilateral manner, is what the UN has labelled a global ‘noodle bowl’ of BITs and investment-related treaties.5 By entering into a myriad of bilateral treaties, often similarly phrased but each a distinct treaty, states have developed a fragmented patchwork in an important area of international economic law. And this fragmentation has grown over time with a continuously increasing number of treaties, actors and fora addressing international investment issues.6 In the context of this global fragmentation, a BIT between the PRC and the EU (which negotiators have for now called ‘Comprehensive Agreement on Investment’) would be a seminal event in global investment treaty practice. A BIT between the PRC and the EU will cover the investment activity of two billion people, easily making it one the most

3   See Eurostat, 2017 [available at http://ec.europa.eu/eurostat/web/main accessed May 7, 2018.] 4   See Frank Bickenbach and others, The EU- China Bilateral Investment Agreement in Negotiation: Motivation, Conflicts and Perspectives, (Kiel Policy Brief, No. 95, 2015) 1, accessed May 7, 2018. 5   See Julien Chaisse and Christian Bellak, ‘Navigating the Expanding Universe of Investment Treaties – Creation and Use of Critical Index’ (2015) 18(1) Journal of International Economic Law 79–115; Julien Chaisse, ‘The Shifting Tectonics of International Investment Law – Structure and Dynamics of Rules and Arbitration on Foreign Investment in the Asia-Pacific Region’ (2015) 47(3) George Washington International Law Review 563–638. 6   See K. Sauvant ‘New Sources of FDI: The BRICS—Outward FDI from Brazil, Russia, India and China’ (2005) 6(5) Journal of World Investment and Trade 639.

M4644-CHAISSE_9781788971898_t.indd 2

11/10/2018 10:22



Toward a comprehensive EU-China Investment Agreement 3

influential international investment treaties in the world. The aim of the China-EU CAI is to substitute the present legal assemblage, which consists of 26 different bilateral treaties that the member states of the EU agreed, three decades ago with China. The two parties believe strongly that the new treaty would affect international investment flow by supplying legal security for existing investment in addition to opening a new market for foreign investors. China has taken a step forward in its most recent international investment agreements (IIAs) negotiated with countries from the Americas and Asia, in a bid to recalibrate the existing set of investment rules in order to pursue a better balance between foreign investors’ rights and the ability of host states to regulate FDI in the public interest, using the China-EU IIA as a perfect pivot. As a result, it has gained a lot of grounds in the EU, in light of its trade agreement to be finalised with Canada. In addition, the EU-China investment agreement will help immensely in building a coherent global investment era, which will aid in the improving the status of existing investment treaties on the ground of an EU-wide IIA with China, by replacing the investment treaties already in existence. If the investment treaties are not replaced, it would result in the complexity of the total system which could affect foreign investors who may decide to sue based on the old treaties that are favourable to them.7 The termination approach becomes the alternative for EU and China and other counties like South Africa or Indonesia who also terminated their IIA instead of renegotiating their terms of the agreement. A more coherent global investment governance will emerge if more countries adopt the EU’s ‘replacement approach’ which is geared towards regionalisation of investment rule-making. Furthermore, China has also been negotiating with the US with regard to an investment treaty with similar features to that of the EU-Chinese agreement. Also, a comprehensive investment charter may be established in the TTIP between the US and Europe. The legal framework being developed from this tripartite relationship will most likely be more stable compared to the treaty practiced in the past 50 years and is likely to provide a blueprint for IIAs to be emulated by other countries. The investment negotiations between the EU, the US, and China should include a process of global investment dialogue for it to be all-inclusive. The need for the EU and China to seek an ‘ambitious and comprehensive’ agreement on investment is based on series of tactical consideration and motivation. There is the likelihood that an EU-China agreement will

7   See W. Shan ‘EU Enlargement and the Legal Framework of EU–China Investment Relations’ (2005) 6(2) Journal of World Trade and Investment 237.

M4644-CHAISSE_9781788971898_t.indd 3

11/10/2018 10:22

4

China–European Union investment relationships

strengthen the EU-China comprehensive strategic partnership, better regulate Chinese investment flooding the EU, provide a level playing field for both investors, improve on the investment roles of the Asia continent, and increase EU and China competitiveness in the global economy. The above reasons are inexhaustive but vividly float on the negotiation table. The EU and China are expected to make frantic efforts to strike a deal that would reflect the relationship between EU and China and pave the way for a high-level free trade agreement (FTA) by meeting their domestic demands. Concluding the EU-China CAI will require coordination and agreement among the position of 28 states of differing legal, cultural, political and economic traditions. In the context of global investment treaty-making practice and the race in which all countries are engaged to attract FDI, the conclusions reached by the parties will have significant influence beyond China and the EU. Against this background, this introductory chapter examines the drivers and issues of China-EU investment relationships, the potential innovation in rule-making in the Comprehensive Agreement on Investment (CAI), and the possible reform of ISDS in the context of China-EU investment treaty.

DRIVERS AND ISSUES OF CHINA-EU INVESTMENT RELATIONSHIPS In order to explain the dynamics of China-EU negotiations, Part I presents the political, legal and economics drivers and issues of China-EU investment negotiations. The CAI will surpass the impact of an agreement that is narrowed down to bilateral cooperation. The future of the China-EU relation with regard to BIT will either strengthen their cooperation and improve their economic relationship that is mutually profitable to them or leading to a rivalry between them on who to have the biggest portion of the global market depending on other PTAs with a third-party state. For the EU, the negotiation of a BIT with the PRC comes at a singular moment of constitutional development. As of December 2009, and the entry into force of the Treaty on the Functioning of the European Union, exclusive competence for the negotiation and conclusion of BITs has been transferred from the EU member states to the EU itself.8 This means   See S. Woolcock, European Union Economic Diplomacy: the Role of the EU in External Economic Relations (Farnham: Ashgate, 2012). See also Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime’ (2012) 15(1) Journal of International Economic Law 51–84 and J. Kleinheisterkamp, (2013) 8

M4644-CHAISSE_9781788971898_t.indd 4

11/10/2018 10:22



Toward a comprehensive EU-China Investment Agreement 5

that the negotiation of a PRC-EU BIT will entail the replacement of the numerous existing BITs currently in force between the PRC and individual EU member states. The consequences of this (r)evolution in EU investment treaty-making practice are only gradually being revealed in official documents from the EU.9 What is clear, however, is that because the negotiations with the PRC come at such an early moment in the EU’s exercise of its new competence, the experience of the negotiations and the terms of a concluded treaty will have an substantial impact on the way in which the EU coordinates its investment treaty policy and negotiates investment treaties on behalf of its member states well into the next decade. The PRC stands in a particular position – it has been for the last decade the primary developing country recipient of foreign direct investment. As a capital exporter developing country, China also ranks amongst the world highest third.10 From this dual perspective, contemporary China’s interests lie in providing substantive protection for its investors abroad as well as opening new investment opportunities. At the same time, it undertakes to consolidate international obligations and internal reforms that are conducive to opening up the domestic market and creating a stable business environment. One could identify three generations of PRC investment agreements as stylised facts of the international investment ‘system’.11 A ‘first generation’ (1980s and 1990s) set of BITs focuses on the protection of foreign investors, albeit maintaining some important

‘International Investment Law and Its Intersection with EU Law and Policy’ in N.J.Calamita, et al (eds), The Future of ICSID and the Place of Investment Treaties in International Law (London: British Institute of International and Comparative Law) 364.  9   See N.J. Calamita, ‘The Making of Europe’s International Investment Policy – Uncertain First Steps’ (2012) 39(3) Legal Issues of Economic Integration 301. 10   The PRC’s outward direct investment has increased drastically from USD 1.9 billion in 2004 to USD 80.4 billion in 2017 as contained in the official statistics issued by the State Administration of Foreign Exchange (SAFE), which is an administrative agency of the People’s Republic of China. See Duncan Freeman, ‘China’s Outward Direct Investment in The Eu: Challenges of Rapid Change, In Eu-China Observer’, Exchanging Ideas on Eu-China Relations: An Interdisciplinary Approach, # 3.15, (2015) 5-10, 5, accessed May 7, 2018. 11   See A. Berger (2008) ‘China and the Global Governance of Foreign Direct Investment – The Emerging Liberal Bilateral Investment Treaty Approach’ (Bonn: Working Paper Deutsches Institut für Entwicklungspolitik) 42. See also S.W. Schill ‘Tearing Down the Great Wall: The New Generation Investment Treaties of the People’s Republic of China’ (2007) 73(15) Cardozo Journal of International & Comparative Law 76 and N. Gallagher and W. Shan W. Chinese Investment Treaties: Policies and Practice (Oxford: Oxford University Press, 2009) p. 592.

M4644-CHAISSE_9781788971898_t.indd 5

11/10/2018 10:22

6

China–European Union investment relationships

reservations on some key guarantees towards foreign investment, such as national treatment, measures against unlawful expropriation, and access to international arbitration. A ‘second generation’ (2000–10) of international agreements – embodied by a majority of BITs as well as investment disciplines adopted in some FTAs – provides broader and more substantive obligations in regard to the treatment of foreign investment. Post-establishment national treatment – albeit with sectoral reservations in some cases – and no substantial restrictions on the ability of foreign investors to challenge host-country measures in international arbitration are standard in this category. Recent model BITs and investment chapters of the growing number of FTAs represent a nascent ‘third generation’ of investment agreements. These agreements maintain the high standards on the protection of investments recognised in second-generation agreements while they seek to open new investment opportunities in foreign markets through national treatment in regard to entry rights – subject to sectoral exclusions in the forms of positive and negative. Interestingly, China’s ‘third generation’ investment agreements aim also at ensuring that the rights for foreign investors do not override domestic regulatory powers on other key policy areas. China’s interest in negotiating a BIT with the EU is twofold, as a leading capital-importing economy and the emerging leader in capital exports. Coping with the quickly evolving nature of the international investment law system and reaping the benefits of international agreements, while ensuring domestic regulatory capacity with a view to sustain its growing economy, will be a crucial challenge in the forthcoming negotiations. In Chapter 2, Duncan Freeman examines the Political Driver of the EU-China CAI. The EU-China treaty is being negotiated at a time of uncertainty in global economics and politics and also in the EU-China relationship. A key policy aim of the CAI is to increase investment flows between the EU and China, but it has the potential to reach beyond this basic goal in its significance. One aspect of wider importance for the CAI may be that the agreement itself could encompass innovations in the governance of FDI when compared to those contained in similar existing bilateral and regional agreements. In this sense, the CAI may be able to stake a claim to global leadership in the governance of FDI. But the economic and political context surrounding the agreement may determine how the possibility for leadership in the area of FDI governance will be realised. In Chapter 3, Eleftheria Neframi extends the analysis by looking at the legal driver of the EU-China CAI. The European Court of Justice opinion 2/15 addresses the question of the external competence of the EU to conclude a free trade agreement with Singapore (EUSFTA). The nature

M4644-CHAISSE_9781788971898_t.indd 6

11/10/2018 10:22



Toward a comprehensive EU-China Investment Agreement 7

of the EU’s competence determines the conclusion of an EU-only agreement, or a mixed agreement, jointly by the Union and its member states. The Court of Justice of the European Union held that the EU competence to conclude the EUSFTA is not exclusive, as long as provisions concerning non-direct investments and dispute settlement fall under the shared competence of the Union and its member states. The Court of Justice made valuable contributions to the interpretation of the scope of the Union’s competence in the field of common commercial policy, comprising sustainable development provisions, as well as to the interpretation of implied external competences, and clarified the status of non-substantive provisions. However, uncertainty remains as far as the meaning and the impact of a shared competence are concerned. In Chapter 4, Pascal Kerneis explores the economic driver of the EU-China CAI. He observes that market access barriers remain important in China in most of the listed sectors. And it has not been really possible to test the real political willingness of China to open further through bilateral or plurilateral trade and investment negotiations: China had expressed an interest in entering into negotiations in the Trade in Services Agreement (TISA). The TISA negotiations started in 2013 but are currently stalled due to the uncertainty created by the election of Donald Trump as President of the United States. China was also entering into the final phase of the negotiations of a bilateral investment agreement with the US, but they also have been stalled and it is not clear whether the new US administration will be willing to resume them both. As a result, the negotiations of the EU-China Comprehensive Investment Agreement are the real test for the Chinese authorities. The business community would aim at the removal of all equity caps, with negotiated exceptions. Business will also look at getting more commitments in professional services, which include lawyers, auditors and accountant, architects and engineers, etc., in telecommunication services, in postal and express services, and in the various financial services sectors (banking, asset managements, insurance). For instance, it is expected that the negotiators will try to remove or reduce these following existing equity caps and joint venture requirements: so far, foreign stakes are limited to 50 per cent in value-added telecom services (excepting e-commerce); 49 per cent in basic telecom enterprises; 50 per cent in life insurance firms and 49 per cent in security investment fund management companies. In Chapter 5, Fernando Dias Simões discusses the role of sustainability impact assessment in the EU-China BIT negotiations. Impact assessment studies are a well-established instrument to inform trade and investment negotiators and steer their decision-making processes. The European Union’s trade Sustainability Impact Assessment programme offers an

M4644-CHAISSE_9781788971898_t.indd 7

11/10/2018 10:22

8

China–European Union investment relationships

opportunity for stakeholders in both the European Union and its partner countries to share their views with policymakers. This chapter examines the level of stakeholder involvement in the Sustainable Impact Assessment study currently underway in support of the negotiations for a Bilateral Investment Treaty between the EU and China. It argues that several factors seemingly reduce the opportunity for some stakeholders to share their views with negotiators, raising doubts about their potential contribution to the policymaking process. Public consultation mechanisms have been criticised by some sectors of European Civil Society. The uniqueness of China’s civil society presents further challenges since the degree of stakeholder involvement and independence from government cannot be compared to the European context.

CHINA-EU: TOWARDS INNOVATION IN RULE-MAKING? Part II explores the potential innovations in rule-making in the CAI. Concluding a BIT between the PRC and the EU will require coordination and agreement among the positions of 28 states of differing legal, cultural, political and economic traditions. Only by examining the prior treatymaking practice of the PRC and EU member states, putting this practice into the specific context of PRC-EU investment relations, and considering global and regional trends with respect to the litigation of investor-state claims, will negotiators be able to identify the key issues between the parties. In certain areas, because of shared interest or historically similar treaty-making practice, agreement on key issues is likely to exist at the outset of negotiations. In other areas, differences in negotiating objectives and/or treaty-making approach may make agreement on text difficult. This research will provide a roadmap identifying these areas of likely agreement and disagreement and suggest possible solutions. The research plan anticipates a four-stage approach employing complementary methods of analysis. In Chapter 6, Jiaxiang Hu focuses on the issue of national treatment and free trade zones (FTZs). Unlike all the previous Special Economic Zones which, more or less, received some incentive policies and tax reductions from the central government, the Free Trade Pilot Zones have not been offered any preferential treatment in an economic sense. Instead, they are encouraged to experiment with new innovative measures in market access and administrative regulation. With the piloting reforms in the following years, these FTZs shall expedite the functional transformation of ­government through streamlining the administrative power, expand

M4644-CHAISSE_9781788971898_t.indd 8

11/10/2018 10:22



Toward a comprehensive EU-China Investment Agreement 9

the opening up of service sectors by releasing the limitations on market access, promote the reform of administrative regulation on foreign investment, develop the multinational corporation headquarter economy with more sophisticated facilities and try experiment with new trade forms. As such, experience hence gained shall serve nationwide with new ideas and approaches in the next round of economic reforms. In Chapter 7, Catharine Titi looks at the ways and means of refining the expropriation clause, in particular by including a proportionality test. The role of proportionality in international investment law is largely conditioned on whether proportionality is considered a general principle of law or an element of material law, applicable only when explicitly or implicitly incorporated into a given set of rules. The chapter explores proportionality in relation to the expropriation standard in light of new investment treaty formulations and with a particular reference to the context of the EU-China investment negotiations. It discusses the dual approach to proportionality, as a general principle of law and as an element of substantive law. To better understand the function of proportionality, it establishes a comparative context, detailing the case law of the WTO’s adjudicative bodies, the CJEU and the ECtHR. It then turns to proportionality analysis in investment treaty arbitration, its explicit incorporation in IIAs, it addresses some related criticisms and argues that proportionality can be a useful tool for balancing competing interests. In Chapter 8, Jorun Baumgartner assesses states’ policy options to limit the practice of treaty shopping in new IIAs, focusing on the definitions of investor and investment. To this end, after defining the relevant scenarios of treaty shopping, exploring the reasons for its occurrence (section 2) and explaining the relevance of refined investor and investment definitions in a prospective China-EU BIT (section 3), this contribution will address the legal issues arising with respect to the investor and investment definitions, discuss relevant arbitral practice and examine EU and Chinese IIA practice in this regard (section 4). It will show that careful treaty drafting, containing more clarity as to the key definitions, can go a long way toward ensuring that only those investors and investments contemplated by the negotiating parties will benefit from treaty protection. In Chapter 9, Federico Lupo-Pasini explores the emerging regulatory issues for financial services in the new generation of FTAs. Financial services are key components of modern FTAs. More than any other sectors, finance has undergone a process of regulatory and structural change over the last ten years. New methods of financial intermediation have emerged, and new regulatory instruments have been adopted to address the regulatory loopholes evidenced by the recent global financial crises. The regulatory framework applicable to trade in financial services

M4644-CHAISSE_9781788971898_t.indd 9

11/10/2018 10:22

10

China–European Union investment relationships

in FTAs has largely remained the same. However, the increase use of investment chapters in FTAs is changing the way financial services will be treaded soon. Investment law brings a completely new dimension to the regulation of financial services, as its discipline is much more likely to impact on the way finance is regulated in domestic law. In this chapter three issues that are particularly revealing of this trend are examined: the restructuring of sovereign debt securities; the resolution of a cross-border financial institution; and the use of international courts to challenge a domestic supervisory decision. In Chapter 10, Donald J. Lewis reviews the OBOR in the context of China-EU FDI. China’s OBOR Initiative is a bold, visionary, highly elaborated blueprint, with many inter-connected moving parts, that, on both theoretical policy and practical business levels, offers perhaps humankind’s main chance for 21st century prosperity on a global scale – and the achievement of the heretofore unattainable prospect of peaceful Eurasian and African economic integration. To accomplish such monumental geopolitical transformations will require not only China’s own gargantuan efforts, but also those of the other great powers, including Russia, the EU and the US. Wisely, China has generously formulated OBOR in such a way that it embraces inclusiveness. If cooperation can replace selfish rivalry, we may perhaps be on the cusp of a new, promising and affirming human epoch – what the Chinese are calling a ‘community of common destiny’. In Chapter 11, Nguyen Binh Duong looks at the EU-Vietnam FTA investment chapter which can be seen as a template for the EU-China CAI. On 2 December 2015, the negotiation of the EU-Vietnam Free Trade Agreement was officially completed. This is a new generation FTA with ​​ a very wide scope. One of the chapters considered to have direct impacts on Vietnam’s law is investment chapter. Chapter 11 aims to analyse investment related provisions of EVFTA and to indicate some incompatibilities between EVFTA investment provisions and Vietnamese law. Basing on these analyses, this paper proposes some recommendations for Vietnam to reform the legal system to improve the investment environment, to facilitate sustainable development and to benefit both domestic and foreign investors. In Chapter 12, Chien-Huei Wu reflects the consequences of the CAI for the Taiwan-EU relationships. In its latest trade strategy document, released in 2015, Trade for All, the EU declared that: ‘[B]uilding on the investment provisions under negotiation with China, the EU will explore launching negotiations on investment with Hong Kong and Taiwan.’ Such a proposal has been welcomed by Taiwan, but the road toward an EU-Taiwan bilateral investment treatment (BIT) is destined to be long

M4644-CHAISSE_9781788971898_t.indd 10

11/10/2018 10:22



Toward a comprehensive EU-China Investment Agreement 11

and tortuous. In view of these uncertainties, this chapter aims to probe the possible course of the EU-Taiwan BIT negotiations and outline a roadmap. This chapter first portrays current political and economic relations between the EU and Taiwan and then explores the possible form of the envisaged EU-Taiwan BIT by examining such critical issues as the contracting parties, the design of investor-State dispute settlement, the investment court proposal by the EU and the sequence in which the EU might conclude BITs with China and Taiwan.

FROM INVESTOR-STATE ARBITRATION TO A PERMANENT INVESTMENT COURT? Part III focuses on the management of investment disputes in the future CAI. There has been criticism on the EU-China investment treaty due to the inclusion of controversial investor state dispute settlement (ISDS) clauses which permit foreign investor to institute an action against host states before international tribunals without having recourse to their national legal system. The principle of fair hearing and equitable treatment have been hidden by the ISDS clauses which have led to its criticism in recent time and this has resulted in the negative influence on host governments’ ability to regulate in public interest. The inclusion of investment dispute in the TTIP which is a treaty entered between two industrialised countries with highly developed imperial legal system may not be needed since the EU-China treaty represents a case that is different. Although, the status quo is unsatisfactory, since most of the IIAs negotiations between China and practically all, except one EU member state, which contains unrestrained ISDS provisions and far-reaching substantive provisions, the EU-China IIA, would not create new sets of investment rules in comparison with TTIP. As a result, Chinese investors already have recourse to international arbitration/mediation to enforce their rights against European Governments. A typical example of this is a claim filed by the Chinese insurer Ping An, against the Belgian government in the awakening of the global financial crisis in 2012. In Chapter 13, Joanna Jemielniak analyses the EU Investment Court System as a hybrid mechanism. The concept of establishing a permanent adjudicatory body for investor-state disputes has become very close to political fulfilment. The European Commission has endorsed introduction of a permanent, court-like mechanism for investment disputes in several FTAs. A two-tier Investment Court System (ICS) has been accepted in the EU’s FTA with Vietnam (EVFTA) and in the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. This widely

M4644-CHAISSE_9781788971898_t.indd 11

11/10/2018 10:22

12

China–European Union investment relationships

publicised EU ICS project has been presented as a court, to be further promoted in forthcoming EU FTA negotiations, and multilateralised in the future. It has also been introduced to the public in opposition to the existing ISDS regime and as an original response to its shortcomings. This chapter examines, to what extent such a characterisation of the ICS is justified. For this purpose, historical context of investor-state dispute resolution is explored. In particular, former proposals of establishment of a permanent adjudicatory body in this area are examined. Against this background, public discourse on ICS is analysed in order to present the goals of the project and its aimed directions of development. In Chapter 14, Chi-Chung Kao reflects on the inclusion of investment court system into the EU-China CAI. The ICS is intended to improve ISDS with its procedural innovations. But the rules concerning the unilateral appointment of arbitrators by the states are problematic. The presumption that an investor-appointed arbitrator is biased in favour of the appointing investor is proven by empirical statistics as untrue; the allegation that party-appointed commercial arbitrators are not capable of handling claims involving public interest is equally unfounded. In addition, actual cases have demonstrated that the integrity of the arbitral proceedings can be effectively upheld by the challenge mechanism, under which a potentially partial or biased arbitrator can be removed. The deprivation of the investor’s right to appoint an arbitrator is a disproportionate measure in this regard. Finally, investors might lose their confidence in arbitration if arbitrators are pre-installed by the states. Investors might feel unwilling to have recourse to arbitration and turn to their home state for intervention instead. This could cause a setback in the depoliticisation of ISDS. There is nothing fundamentally wrong with the conventional approach of parties appointing arbitrators. The ICS’s rules in this regard jeopardise, rather than improve ISDS. If the EU-China BIA does incorporate the ICS, it would be better if the ICS is modified so the disputing parties retain their right to appoint arbitrators. In Chapter 15, Matthew Hodgson and Vee Vian Thien critically examine the appellate option. In arbitration, the finality of the award is typically prioritised over correctness, so that the parties enjoy the advantages of cost effectiveness and expedience. However, it is arguable that the balance should be re-assessed in relation to investor-state disputes as opposed to purely commercial arbitrations, as the former involve acts of government and questions of public interest. This chapter provides an overview of the perceived shortcomings of the present system, a summary of the EU’s proposed reforms and evaluates how far the introduction of an appeal mechanism would address concerns over ISDS such as predictability and consistency of awards.

M4644-CHAISSE_9781788971898_t.indd 12

11/10/2018 10:22



Toward a comprehensive EU-China Investment Agreement 13

This work is the result of considerable collective effort, which started with the Asia FDI Forum III held in Hong Kong on Mai 11–12, 2017, an event jointly organized by the CUHK Law Faculty,Columbia University Centre for Sustainable Investment (CCSI) and the World Economic Forum (WEF), which has been generously supported by the CUHK Faculty of Law and the WEF. The work has benefited immensely from contributions from many sources, both at the institutional as well as at the individual level. I am delighted at the final result and would sincerely like to express our gratitude to all who have contributed to this project in one way or the other. Thanks must also be extended to our research assistants Ms. Rachel Xu Qian and Mr. Keith Ji. I also want to express sincere thanks to the many members of the CUHK Law Faculty who have played an important role in bringing this volume to fruition, namely Christopher Gane (Dean of CUHK Law), Denis Edwards, Flavia Marisi, Lutz-Christian Wolff, Chao Xi, and Yan Xu. I am also sincerely thankful to Edward Elgar for their efficient preparation of the final text for publication.

M4644-CHAISSE_9781788971898_t.indd 13

11/10/2018 10:22

PART I

Drivers and issues of china-eu investment relationships

M4644-CHAISSE_9781788971898_t.indd 14

11/10/2018 10:22

2. Negotiating an uncertain world: economic and political dimensions of the comprehensive agreement on investment Duncan Freeman I. INTRODUCTION Since the 1980s international trade and investment flows have been central to the functioning of the world economy, and have been a fundamental element of what has generally been described as globalization. The emergence of the idea of global governance has been closely, but not exclusively, related to the development of the contemporary globalized economy which came into being after World War II, and is epitomized by financial organizations such as the International Monetary Fund (IMF) and World Bank, and the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) which have governed trade flows. Since the 1980s when globalization accelerated, the EU and China have been major contributors to these trade and investment flows, both as sources and destinations. On some measures the EU and China are the two largest economies in the world,1 and in the absence of a global investment regime, the negotiation of the EU-China Comprehensive Agreement on Investment (CAI) governing foreign direct investment (FDI) between them is potentially a significant event.2 A key policy aim of the CAI is to increase investment flows between the EU and China, but it has the potential to reach beyond this basic goal in   On a Purchasing Power Parity (PPP) basis, the GNI of China and the EU were both US$19.6 trillion in 2015, compared to US$18.5 trillion for the US (World Bank). 2   United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2015 (UNCTAD, Geneva, 2015) 1. See also Julien Chaisse and Christian Bellak, ‘Navigating the Expanding Universe of Investment Treaties – Creation and Use of Critical Index’ (2015) 18(1) Journal of International Economic Law 79–115. 1

15

M4644-CHAISSE_9781788971898_t.indd 15

11/10/2018 10:22

16

China–European Union investment relationships

its significance.3 One aspect of wider importance for the CAI may be that the agreement itself could encompass innovations in the governance of FDI when compared to those contained in similar existing bilateral and regional agreements. In this sense, the CAI may be able to stake a claim to global leadership in the governance of FDI. But the economic and political context surrounding the agreement may determine how the possibility for leadership in the area of FDI governance will be realized. In one simple sense, this is the result of the size of the investment flows involved, as it will be argued that FDI of the EU and China, and more specifically the EU-China investment relationship, despite the size of their economies is not very important. However, beyond this fact is a more complex set of factors that will affect how far the CAI will have a wider impact beyond bilateral investment facilitation. The CAI is being negotiated against a background of uncertainty where globalization appears to be under threat, both in its economic and political dimensions, which may create complications in the negotiations, but also may affect the potential wider impact of the agreement, especially given the difficulties that have been found in concluding other major trade and investment treaties that have come under attack from anti-globalization critics in the developed world. Governments have entered into bilateral investment treaties (BITs) in order to regulate the relationship between states and foreign investors. Underlying much of the debate concerning globalization and international trade and investment agreements are differing views of the role of the state and markets in the global economy. International agreements such as BITs, including the CAI, bring this discussion into focus. Even if immediate political controversies over the costs and benefits of globalization die down, the fundamental question of how states, trade and investment flows relate to each other will not disappear. On a bilateral level the CAI is itself at the centre of a contentious relationship between the EU and China which have differing views of the role of the state and markets in economic policy. This chapter discusses the context of the EU’s and China’s global and bilateral investment flows in which the CAI negotiation is taking place, and how it relates to the question not just of governance of investment flows between the two,   European Commission, Joint Communication to The European Parliament and The Council: Elements for a New EU Strategy on China (2016) 1; C. Malmström, The EU and China: Trade and Investment in the Global Economy (China Association, London 2016) 1. See also Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime’ (2012) 15(1) Journal of International Economic Law 51–84. 3

M4644-CHAISSE_9781788971898_t.indd 16

11/10/2018 10:22



Negotiating an uncertain world 17

but also wider policy issues of globalization and the role of the state and institutions. The state of globalization has come into question because the future path of its development is uncertain.4 The weakness of growth in international trade following the financial and economic crisis in the US and Europe which began to emerge in 2007 has suggested that this is no longer the driving force of globalization and economic growth that it once may have been. In 2016, in nominal terms global merchandise exports were US$16.1 trillion, compared to US19.1 trillion in 2014, and less than US$16.27 trillion at their pre-crisis peak in 2007 (World Bank). Less widely noted is the fact that FDI flows have declined dramatically over the same period. At their peak in 2007, global FDI outflows were US$3.19 trillion, whereas in 2016 they were only US$1.91 trillion (World Bank). At the same time as this apparent reversal, globalization has come under political attack. Multiple events such as the referendum vote in the UK on membership of the EU, the election of Donald Trump as US president, and the rise of explicitly anti-global politicians in Europe, manifested by the relative success of Marine Le Pen and the Front National in the French presidential election in 2017, are taken as evidence that support for globalization and its claimed benefits, which had become a unifying policy position across the political mainstream on both left and right in many countries, can no longer be simply taken for granted. The use of BITs or the inclusion of investment provisions in other wider agreements such as the Trans-Pacific Partnership (TPP) and Transatlantic Trade and Investment Partnership (TTIP) has grown with globalization. But such international agreements have themselves become the focus of debate over globalization and its benefits. In Europe, TTIP and the EU-Canada Comprehensive Economic and Trade Agreement (CETA) have come under sustained popular attack, and the TTP has been rejected and NAFTA threatened with renegotiation by the Trump administration on the grounds they do not sufficiently benefit US national interests. The EU and China have been major actors in the creation of the global system in which investment flows occur, but the EU-China relationship itself is complex and often fraught with difficulty, especially in its economic dimension in which trade disputes have often dominated the agenda. The CAI negotiation will address problems such as market   C. Constantinescu and others. ‘The Global Trade Slowdown: Cyclical or Structural?’, IMF Working Paper WP/15/6, IMF (2015) 1; IMF, World Economic Outlook: Legacies, Clouds, Uncertainties, World Economic and Financial Surveys (2014) 1; IMF, World Economic Outlook: Too Slow for Too Long, World Economic and Financial Surveys (2016) 1. 4

M4644-CHAISSE_9781788971898_t.indd 17

11/10/2018 10:22

18

China–European Union investment relationships

access that reflect fundamental differences between the two sides. The EU emphasis on an ‘ambitious agenda’ focusing on market access justified by the language of reciprocity will demand significant concessions from China, which nevertheless strongly defends its economic system and the benefits it provides to foreign investors. The CAI will be the object of interventions from interests of an economic and political nature in the EU and China. These interventions will cut across multiple divergent interests within both the EU and China as well as between them, and will add to the complexity of achieving agreement. In its initial stages, the negotiation of the CAI has taken place in relative isolation from the controversies that have attached to other agreements such as TTIP and CETA, and also bilateral EU-China issues such as Market Economy Status (MES). But, as the recent examples of the TTIP and CETA in Europe show, what were once relatively obscure technical negotiations have the potential to become the focus of fierce public political controversy. The flowing sections set out the global and bilateral investment context as well as the political background of the CAI negotiation. The chapter assesses the degree to which such factors will determine the wider impact of the CAI in light of the economic and political context of the negotiation, and how these may determine whether the CAI is able to exercise a leading role in governance of FDI.

II.  GLOBAL FDI, THE EU AND CHINA The EU and China are major global economic actors, although over a long period their relative positions in the world economy have been changing, albeit generally in opposite directions. The rise of China has been matched by the relative decline of the EU. China’s rise can be measured in many ways, for instance at the most basic level by the increase in its share of global GDP, trade and investment flows, which has been matched by declines in the shares of both the EU and US. The changing positions of the EU and China are closely related to the process of rapid globalization shown in the expansion of international trade and investment flows beginning in the 1980s. In the period after 2000 the changes have been profound, first through rapid expansion in global trade, especially that involving China, in the period up until 2008, followed by a period of decline and then weaker growth. Throughout this period China’s share of global trade flows has increased, including in the post-crisis period of slow growth, while that of the EU has declined. In nominal terms world merchandise trade exports were US$16.07 ­trillion in 2016, almost the same as at the pre-crisis peak of US$16.27 tril-

M4644-CHAISSE_9781788971898_t.indd 18

11/10/2018 10:22



Negotiating an uncertain world 19

lion in 2008, although the lack of growth also in part reflects price factors, especially falls in commodity prices, and changes in exchange rates. The weak trade growth has given rise to a debate over whether these trends are merely cyclical or structural, and represent a more fundamental long-term shift in the global economy that may be described as deglobalization.5 If anything, the position of FDI flows was even more dramatic. In 2007, global FDI outflows reached a pre-crisis peak of US$3.17 trillion, but fell to US$1.28 trillion in 2009 (World Bank). Since then investment flows have fluctuated, but have never come close to the peak in 2007, and in 2016 were only US$1.91 trillion. Recent developments have given new impetus to longstanding debates over globalization and the economic policies with which it is associated.6 At a time when globalization is under political attack, trade and FDI, two of its fundamental economic components, have no longer been expanding as they once did, and this forms the background to the negotiation of the CAI. During the 1980s, in the early period of the current phase of globalization, FDI was dominated by flows from, and generally between, developed economies. Thus, the US and Europe were the dominant sources and destinations of FDI. More recently, emerging economies, notably China, which had long been a major investment destination, have become significant sources of FDI. In 2016, EU FDI outflows were US$774.5 billion, or 40.7 per cent of the world total, this, however was well below the figure of US$2.0 trillion, 62.3 per cent of the world total, in 2007 (World Bank). China’s FDI outflows in 2016 were US$217.2 billion, and, although still only 11.4 per cent of the world total, they were more than 12 times the figure of US$17.2 billion in 2007 (World Bank). While European countries have been major global investors for many decades and were in large part responsible for the creation of the contemporary globalized economy since the 19th century, outward investment from China only began to emerge in 2005. Until then outward investment was tightly restricted through a system of approvals for projects and use of foreign exchange, a position that was only changed after the adoption of the ‘go-global’

 IMF, Changing Patterns of Global Trade (2011)1; Constantinescu and others. ‘The Global Trade Slowdown: Cyclical or Structural?’, IMF Working Paper WP/15/6, IMF (2015) 1; IMF, World Economic Outlook: Legacies, Clouds, Uncertainties, World Economic and Financial Surveys (2014) 1; IMF, World Economic Outlook: Too Slow for Too Long, World Economic and Financial Surveys (2016) 1. 6   D. Rodrik, ‘How Far Will International Economic Integration Go?’, (2000) 14(1) The Journal of Economic Perspectives 177–86; D. Rodrik, ‘Trading in Illusions’, (2001) Foreign Policy 1; J. Ostry and others, ‘Neoliberalism: Oversold?’, (2016) Finance & Development, IMF 1. 5

M4644-CHAISSE_9781788971898_t.indd 19

11/10/2018 10:22

20

China–European Union investment relationships

strategy in 2001. The subsequent gradual removal of controls on outward FDI was matched by policies intended to promote it.7 The changes in absolute amounts of outward investment have been matched by shifts in its importance as a share of GDP in the EU and China. One result of these changes has been that outward FDI flows from the EU have much become less significant in proportion to the size of its economy, while in China’s case the opposite has occurred. Nevertheless, despite the decline in the proportion in the EU, it remains greater than for China. Outward FDI was equivalent to 1.9 per cent of China’s GDP in 2016, compared to 0.5 per cent in 2007, while for the EU, it was 4 per cent in 2016 compared to 11.3 per cent in 2007. In contrast to outward FDI, China has long sought to encourage inward investment, beginning in the late 1970s with the promulgation of the first legislation on joint ventures. Significant FDI inflows to China began in the early 1990s. In 1993 inward FDI flows were US$27.5 billion, and they ­subsequently gradually increased to their pre-crisis peak of US$171.5 billion in 2008 (World Bank). Following a slight fall at the height of the crisis in 2009, they recovered, and fluctuated between US$240 billion and US$290 billion from 2010 to 2015, but fell to US$170.6 billion in 2016. Europe, like the US, has long been a leading destination for FDI and in 2007, inward investment to the EU reached a peak of US$1.7 trillion, but since then there has been a dramatic decline, with inflows of US$835.3 billion in 2016. In terms of their size relative to GDP, the importance of inward FDI flows to the Chinese economy were at their height in the 1990s and have declined since then from a peak of 6.2 per cent in 1993 to 1.5 per cent in 2016. The proportion of FDI relative to GDP in the EU has undergone a much more rapid decline, from 9.5 per cent of GDP in 2007 to 5.1 per cent in 2016. By comparison, in 2007 the world average was 5.2 per cent, and in 2016 it was 2.9 per cent. China is now less reliant on foreign capital than it was at earlier stages of its development, and also compared to the EU. In terms of the quantity of capital flows, the importance of inward FDI to the Chinese economy has declined, as China in recent years has increasingly become less reliant on foreign trade and investment for growth. Nevertheless, the economic importance of FDI is not only defined by the amount of capital flows, but is also related to transfers of ­technology, know-how and other factors, which remain important to the Chinese economy, especially from advanced economies such as the EU.

  D. Freeman, ‘China’s Outward Investment: Institutions, Constraints and Challenges’, (2013) 7(4) Brussels Institute of Contemporary China Studies, Asia (2013) 1. 7

M4644-CHAISSE_9781788971898_t.indd 20

11/10/2018 10:22



Negotiating an uncertain world 21

At the same time as FDI flows were increasing in the 1980s, European countries and China have participated in the global trend of signing BITs, and even taking a lead. In the case of China, the move to sign BITs coincided with early steps to internationalization of its economy. The Chinese government began concluding BITs in the 1980s, and among the first were agreements with European countries. The first BIT signed between China and another country was with Sweden in 1982. In 1983 West Germany signed a BIT with China, followed in 1984 by France, the Belgium-Luxembourg Economic Union, Finland, Norway, in 1985 by Italy, Denmark, and the Netherlands and the UK in 1986. The number of BITs concluded by China reached its height in the early 1990s, in 1992 China signed 15 BITs, and since then the number signed each year has declined. This pattern replicates the global trend in conclusion of BITs.8 In recent years most of those concluded by China have been renewals of earlier agreements, including several with EU member states. One explanation for why developing countries such as China concluded BITs is that they were seeking to mitigate risks for investors from developed ­countries.9 In this argument, the BITs created a substitute for weak domestic institutions, and gave greater certainty to investors. In the case of China, it is true that the greatest number of BITs were signed in the early period when it was attempting to attract foreign investment, although there is no evidence to suggest the agreements actually had any positive effect on inward investment flows.10 Other factors in both source and destination countries are held to determine investment flows, although the explanations offered are varied. While BITs have proliferated, investment flows have fluctuated, and in recent years have declined significantly. It

 8   United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2015 (UNCTAD, Geneva, 2015) 1.  9   Z. Elkins, T. Guzman and B. Simmons, ‘Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000’, (2006) International Organization 60. 10   J. Salacuse and N. Sullivan, ‘Do BITs Really Work? An Evaluation of Bilateral Investment treaties and Their Grand Bargain’, (2005) 46(1) Harvard International Law Journal 1; T. Ginsburg, ‘International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance’, Illinois Law and Economics Working Papers Series, Working Paper No. LE06-027 (2006) 1; A. Guzman, ‘Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’, (1997) 38 Virginia Journal of International Law 1; E. Neumayer and L. Spess, ‘Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties’, (2005) 33(10) World Development 1; J. Tobin and S. Rose-Ackerman, ‘Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties’, William Davidson Institute Working Paper, Number 587 (2003) 1.

M4644-CHAISSE_9781788971898_t.indd 21

11/10/2018 10:22

22

China–European Union investment relationships

may be that the CAI will have an impact on flows between the EU and China, but it will be only one of multiple factors. Paradoxically, at the time when globalization has come under the greatest political attack for many years some of its most basic elements have already been growing less rapidly than they once were, and arguably are even in retreat. On the surface, the global decline in investment flows, and the decline in relative importance of inward FDI for key economies such as the EU and China might indicate that de-globalization is occurring. Despite this, FDI flows remain important in the global economy, and increasingly so in the case of outward investment from China. Furthermore, although investment flows may have decreased, this does not mean that stocks of investment have declined, and their role in global business networks remains fundamental. Nevertheless, it remains a fact that the CAI is being negotiated at a time when not only have global investment flows declined, but a major reason for this has been a very significant decline in EU inward and outward FDI in absolute and relative terms, which has only been partially offset by the stronger FDI flows to and from China.

III.  BILATERAL FDI, THE EU AND CHINA Despite the fact that the EU and China are two of the most important economies in the world by size of GDP, and also by the overall amount of their goods trade and FDI flows, the investment flows between the two are comparatively insignificant in both bilateral and global terms, in contrast to the EU-China bilateral goods trade relationship which is one of the most important in the global economy.11 Whether based on EU or Chinese government statistics, official measures show the amounts of investment involved are small. Investment flows from China to the EU has grown rapidly in recent years, but there has been a decline in the flow of EU investment in China. Statistics from the EU show that the stock of EU investment in China has increased steadily in recent years, even at the height of the

11   It should be noted that there are many different measures of EU-China and global FDI flows and stocks, which give varying figures for the amounts involved, and all have their merits and demerits. Nevertheless, although some measures give larger amounts for the bilateral EU-China investment flows, the BOP statistics provide a consistent comparative measure, even if it is certain that they fail to capture the full extent of the flows. For instance the considerable flows through intermediaries such as tax havens to and from the EU and China will not be attributed to their real sources and destinations.

M4644-CHAISSE_9781788971898_t.indd 22

11/10/2018 10:22



Negotiating an uncertain world 23

crisis in Europe and the US, and was €181.2 billion in 2016, compared with the pre-crisis level of €54.7 billion in 2008.12 This however, is small compared to other destinations, for instance the EU had an investment stock of €2.7 trillion in the US in 2016, €264.6 billion in Canada and €976.7 billion in Switzerland. The stock of investment from China in the EU was only €45.1 billion in 2016, although it has increased rapidly from a low base, in 2008 being only €5.6 billion. Again, this is a small amount compared to the investment stock in the EU of €2.4 trillion from the US in 2016, €250.1 billion from Canada and €767.0 billion from Switzerland. Investment flows from the EU to China have varied considerably in recent years as a result of a number of factors including global economic conditions and those in the EU and China. According to EU balance of payment (BOP) statistics, investment flows to China reached a peak of €22.2 billion in 2013, but the annual flow fell sharply to €11.2 billion in 2014.13 On the face of it, this decline suggests that China had become a much less attractive destination for European investment. However, FDI is determined both by source and destination country factors. While EU FDI flows to China fell by 49.6 per cent in 2014, its total outward flows to the rest of the world fell by 84.5 per cent. China was thus outperforming other destinations for EU investment, suggesting the decline in flows was caused by source rather than destination country factors. In 2015, BOP statistics show that EU outward FDI flows to China fell further to €9.8 billion but increased again to €12.5 billion in 2016. Until 2005, China’s overseas direct investment (ODI) was rare, and close to zero in official statistics. While China sought to attract inward FDI from the beginning of its reform and opening, and adopted policies to this end, at the same time, it imposed strict restrictions on outward investment. This policy remained in place until after the adoption of the ‘go-global’ policy in 2001. Outward investment increased rapidly in the period after 2005, including to the EU. Nevertheless, investment flows to the EU remain small, even if they have increased rapidly and attract considerable media and political attention. In 2016, according to EU BOP statistics, Chinese FDI flows to the EU were €10.2 billion, which was less than the peak year of 2012 when the figure was €8.4 billion.14 The investment flows from China remain small compared to major investors such as the US, for which the figure was €55.7 billion in 2016.

  Eurostat (2017). http://ec.europa.eu/eurostat, accessed 7 July 2018.  Ibid. 14  Ibid. 12 13

M4644-CHAISSE_9781788971898_t.indd 23

11/10/2018 10:22

24

China–European Union investment relationships

The aggregate figures for the EU disguise the fact that there are huge differences between member states in their investment relationship with China. In general outward FDI to China is dominated by the larger EU member states, notably Germany, the UK and France, although others such as the Netherlands are important in large part because of the tax arrangements they provide. In 2016, Germany’s stock of investment in China was €71.5 billion, or 40.2 per cent of the EU total. This was followed by France with an investment stock of €24.1 billion in 2016, and the Netherlands which had €23.5 billion.15 These differences create clear imbalances in the weight of the relationships that member states in the EU have with China, and with it their interests. This is not merely a question of the amount of investment, but also the benefits. The BOP statistics show that Germany benefits greatly from its investment China. Germany’s primary income on direct investment in China was €10.6 billion in 2016, compared to only €962.0 million in 2006. Other member states have experienced similar increases in income from FDI in China, but the amounts are much smaller. In 2016, the figure for France was €2.4 billion, and the Netherlands €2.1 billion. As yet, given the small amount of its investment, the direct benefit to China of FDI in the EU in terms of income has been small. However, the benefits are not only measured in simple financial terms. One of the reasons for Chinese companies investing in the EU has been the acquisition of technology, or other advantages such as brands and distribution channels. Some acquisitions in the technology sector and infrastructure such as electricity distribution in particular have raised questions in Europe concerning the intentions of Chinese companies, especially those that are controlled by the state. This has led to discussion of restrictions or vetting of China investments. In 2017 the European Commission, at the instigation of Germany, France and Italy, made a proposal on investment screening, which while non-discriminatory in principle, has given rise to concerns in China that its companies will be discriminated against. Even more than the overall figures for global, EU and Chinese investment flows, the relatively weak bilateral investment relationship brings into question the wider importance of the CAI and whether it can have a significant global impact, especially in terms of effecting real change in investment flows. Apart from the small amount of FDI involved, the evidence from the EU-China relationship, and more widely from the research on FDI, would suggest that multiple source and destination country factors determine investment flows, and BITs are not significant among them.  Ibid.

15

M4644-CHAISSE_9781788971898_t.indd 24

11/10/2018 10:22



Negotiating an uncertain world 25

IV.  FDI, THE EU, CHINA POLICY AND POLITICS The CAI will be negotiated in an environment that places a considerable political burden on the agreement. Increased investment flows and better regulation are key goals, but the importance of the current negotiation of the CAI may go beyond these narrow policy and legal concerns, as it takes place in a context of wider bilateral and global political and economic considerations. The EU and China are central to the global economic system at a time when it is under challenge, and the outcome of the CAI negotiation consequently potentially has impacts that extend into the realm of how the system is ordered. Scholars have argued that one key justification for governments entering into BITs has been risk reduction. How this is achieved touches on the relationship of the state and the market which is central to current debates over globalization and the economic order. Douglass North argued that institutions, by which he meant rules of the game, are intended to mitigate risk faced by economic actors in an uncertain world.16 North focused his work on domestic institutions, but risk is probably greatest when a company ventures beyond the borders of its home state. Global, regional or bilateral investment agreements provide institutions that set the rules of the game as defined by North and mitigate risk beyond the borders of the home countries of investing companies. Thus, even global multinational corporations are not divorced from the states where they originate, since the states are important actors in advancing the interests of firms through such agreements. Agreements such as BITs do more than just set the rules of the game for companies, they also set parameters for the role and relationship of the state, by limiting its capacity to act and hence its sovereignty, and markets. The role of the state is at the centre of the controversy surrounding TTIP, CETA and other similar agreements. The question of the role of the state and markets, and by extension ­international a­ greements such as the CAI is not resolved, and will continue to be debated. Agreements such as BITs are one medium through which the international dimension of the debate is given reality. The CAI between the EU and China will be part of that debate, not just in relation to the immediate political debates over globalization and specific issues such as market access, but also the wider discussion of the role of the state and market in global investment flows. The EU has attempted to

  D.C. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press 1990) 1; D.C. North, ‘Institutions’ (1991) 5(1) Journal of Economic Perspectives 97–122. 16

M4644-CHAISSE_9781788971898_t.indd 25

11/10/2018 10:22

26

China–European Union investment relationships

frame this in terms of reciprocity, fairness and a level playing field both in the negotiation of the CAI and more broadly in its approach to perceived imbalances in its economic relationship with China. The negotiation takes place in a context where the benefits of international trade and investment are questioned in Europe and elsewhere in the developed world. Political events in Europe such as the referendum vote in the UK on leaving the EU in June 2016, the relative success of Marine Le Pen in the French presidential election of 2017, and the election of President Trump in the US in 2016, represent a challenge to the narrative of globalization. These events are in part manifestations of the rejection by significant constituencies, often described as the losers of globalization, of open economies and a globalized world where free trade and investment flows are considered as universally beneficial. In Europe, this has been expressed in political movements that often combine anti-EU and antiglobalization views with opposition to free trade and foreign investment, and advocacy of protectionist or economic nationalist positions with attacks on domestic and foreign financial institutions and multinational corporations. The most outspoken advocates of such policies in the EU have suffered a series of political defeats, but their support has not disappeared. At the same time, parties of the centre have in a number of cases adopted positions that echo these anti-global views. Thus, Emmanuel Macron, who was accused by his rival Marine Le Pen of being a globalist during the French presidential campaign, has repeatedly referred to the need for a Europe that is capable of defending itself, and since his election he has advocated stronger protectionist measures by the EU. Despite the political defeats of the more radical anti-globalists, the positions they have supported have influenced the mainstream. One aspect of globalization that has come under increased attack has been major trade and investment agreements. In Europe, this has focused on TTIP and CETA. Such agreements are seen as a manifestation of the negative aspects of globalization, notably loss of sovereignty and democratic control over economic policy, and the primacy of international corporate interests over those of citizens. The TTIP negotiation has been stalled as a result of lack of political support in both the US and EU, while CETA faced high levels of last-minute public opposition in the EU prior to its final ratification. These agreements were negotiated for many years before they became the object of public attention and political opposition, which emerged at a relatively late stage in their negotiation. The CAI is not an agreement on the scale of these, and has not been subject to similar levels of public attention beyond the actors directly concerned, but there is no guarantee that its current relative obscurity will continue.

M4644-CHAISSE_9781788971898_t.indd 26

11/10/2018 10:22



Negotiating an uncertain world 27

This problem may be intensified in the case of China. Despite the fact that formally a Comprehensive Strategic Partnership has existed between the EU and China since 2003, and there are many areas of successful cooperation, the view that the economic relationship is unbalanced in favour of China is widespread in Europe.17 In the past this view has focused on trade imbalances, but attention has shifted to other areas, especially FDI and market access for investment. Companies from the EU have been investors in China since the 1980s, but restrictions on the Chinese side have limited this investment. One key policy justification for the CAI on the EU side is to address the weak EU-China investment relationship by increasing FDI flows. From the EU point of view, the problem should be resolved specifically by addressing restrictions on market access in China through reciprocity, which would demand significant changes in the Chinese state’s role in determining inward investment flows in particular. By contrast, the relative openness of the EU to foreign investment means there is no real necessity for China to make similar demands for market access. Nevertheless, the increase in Chinese investment in the EU, starting from a low base, may begin to create an interest in China in the benefits of an EU-wide agreement to replace the existing BITs with 27 member states, especially when there is public and political reaction to Chinese investment that creates the risk of restriction on investments. This has been crystalized in the proposal from the European Commission on investment screening made in 2017.18 While the proposed screening is restricted to security, it nevertheless reflects wider concerns related to Chinese investment in the EU. In 2016, the EU-China economic relationship became highly politicized around the issue of MES, related to the treatment of China under the terms of its accession to the WTO. While not directly related, the problem is suggestive of the type of politicization that may impact of the CAI. In this discussion, China was widely portrayed as an economic threat as a result of unfair competition against which strong trade defence was needed. According to its opponents, the removal of non-market economy treatment in anti-dumping cases available under Article 15 of China’s WTO accession agreement would weaken EU defences. This discussion was combined with specific concerns in sectors such as steel overcapacity in China and its impact in the EU through Chinese exports. The MES   European Commission, Joint Communication to The European Parliament and The Council: Elements for a New EU Strategy on China (2016) 1. 18   European Commission, Proposal for a Regulation of The European Parliament and of The Council Establishing a Framework for Screening of Foreign Direct Investments into The European Union, {SWD(2017) 297 final}, September 13, 2017. 17

M4644-CHAISSE_9781788971898_t.indd 27

11/10/2018 10:22

28

China–European Union investment relationships

question had existed since China’s accession to the WTO in 2001, and for many years it was treated as a technical issue over which there was almost no dispute.19 For many years there was almost universal agreement that China would be automatically accorded MES. However, as the deadline of December 2015 approached the question became a public political issue in the EU, instigated by business interests which argued they would be threatened by the removal of protections provided by China’s lack of MES. In China, views of globalization and relations with the EU are less divided, but neither are they unified. China has emerged to be one of the major actors in the global economy, and a primary beneficiary of globalization as it has developed since the 1980s. Unlike in developed countries, there is little opposition to globalization as such, and in general the internationalization of China’s economy is viewed positively. Nevertheless, like their counterparts in the developed world, Chinese, and especially businesses, often demand that their government protect their interests in matters of trade and investment. Agreements that give concessions to foreign parties and are seen as failing to protect Chinese interests are likely to face criticism, even if public opposition is limited. The Chinese government defends its economic system, and rejects criticism based on the reciprocity argument that it is not a market economy or that foreign investors are unfairly treated. The EU and China agree that the CAI is important to their relationship, but they have very different views of the relative importance of the agreement. For the EU, the negotiation of the CAI has been its key goal in the relationship with China. This is increasingly framed in language focusing on the need for reciprocity, the underlying implication of which is that the relationship is unequal in favour of China.20 The emphasis on the CAI as a key priority reflects the business interests which are placed at the centre of EU policy on China. By contrast, while China recognizes the importance of the CAI, it is not a strategic priority. Since 2013 when it was first announced by President Xi Jinping, China has given priority to the One Belt One Road (OBOR) strategy or Belt and Road Initiative (BRI). The Chinese government has invested considerable political capital in promotion of the BRI as the vehicle for transformation of its global role, but also of EU-China relations. The BRI is an initiative that has

19   See Julien Chaisse and Luan Xinjie, ‘Why Will China Establish a GovernmentSponsored Response Mechanism in Countervailing Games?’ (2009) 10(2) Journal of World Investment and Trade 227–40. 20  Ibid.

M4644-CHAISSE_9781788971898_t.indd 28

11/10/2018 10:22



Negotiating an uncertain world 29

strategic importance for the Chinese leadership not just globally, but also bilaterally with the EU, where it is given higher priority than the negotiation of the CAI. The resulting mismatch in agendas in the EU and China, while it may not create insurmountable barriers to negotiation of the CAI, nevertheless suggests a divergent set of priorities that hinder the conclusion of the agreement. Notwithstanding these problems, the CAI has the potential to have more than mere bilateral importance in increased investment flows or economic rebalancing through reciprocity. In as far as the provisions of the CAI address problematic issues of investment governance between two globally important economies in a way that goes beyond existing BITs it will have a global significance for governance of FDI. But the CAI is also part of the bilateral and global economic and political context. While bilateral business interests such as market access are a central concern, the economic and political questions focusing on globalization that have risen to the top of the policy agenda in many countries potentially give the CAI an importance it would not otherwise have. The provisions of the CAI, including any on market access, are part of a much bigger global system. The EU and China claim they seek to sustain an open global economic system, and at a time when that system appears threatened by the possible defection of US through the actions of the Trump administration, its most important member, the CAI between two key actors may take on a greater significance than a purely bilateral investment agreement would otherwise have. The degree to which it reflects their commitment to sustaining the system will depend on whether the CAI can make this global dimension a reality, or whether it is defined by narrower bilateral interests. The policy questions raised by the governance of FDI through BITs are complex, but one fundamental aspect of the political and economic debates surrounding globalization and its impacts centres on the role of markets and the state.21 The widely accepted belief in globalization as a positive force argues for the primacy of markets. The ‘embedded liberalism’ which has dominated the relations of many major states since World War II presupposes that primacy.22 For the supporters of globalization, the state is generally considered a barrier to the trade and investment flows that are essential to the benefits of globalization, although the evidence to support this contention is contested. The underlying logic of   P. Evans, ‘The Eclipse Of The State?: Reflections on Stateness in an Era of Globalization’, (1997) World Politics 62–87. 22   J. Ruggie, ‘International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order’ (1982) 36(2) International Organization 379–415. 21

M4644-CHAISSE_9781788971898_t.indd 29

11/10/2018 10:22

30

China–European Union investment relationships

economic globalization through removal of barriers to trade and investment is to reduce the capacity of the state to intervene and control their flows. Nevertheless, the global system in which globalization takes place is dependent on states, even if they act through organizations such as the WTO or through regional or bilateral agreements. The use of BITs circumscribes the role of states by placing limits on their sovereignty. In traditional BITs this has been done through language on matters such as expropriation or repatriation of profits. But at the same time, BITs have also placed states at the centre of governance of investment. Because of this, regardless of whether the current intensity of political debate over globalization or the EU-China relationship is maintained, the CAI will continue to embody these important policy problems.

V. CONLUSION The negotiation of the CAI occurs at a crucial conjuncture for the EU-China relationship and the global economy. Both the EU and China claim that the CAI is key to their relationship, and that they are committed to the agreement. But the EU-China economic relationship is itself complex and sometimes divisive. Furthermore, it is far from clear that the two sides have the same priorities in their wider relationship, especially on the importance of the CAI and the substance of its contents. The CAI faces a fundamental paradox in that it is being negotiated at a time when global investment flows have declined, although the trends for the EU and China are very different. Perhaps more importantly, the bilateral flows between the EU and China that will be governed by the CAI are relatively insignificant both globally and bilaterally. In real investment terms the CAI may have a limited role in leading the way forward for governance of FDI either globally or bilaterally, regardless of whether the agreement itself breaks new ground in its legal provisions. The negotiation of the CAI coincides with a period of economic and political uncertainty. Since it was launched in 2013 this negotiation has so far been shielded from the direct political controversies and opposition of the kind that other agreements such as TTIP and TPP have attracted in Europe and the US. Nevertheless the CAI has the potential to be exposed to politicization, as some trade and investment agreements, but not all, have become the focus of public policy debate in the EU in particular. The wider political context where the benefits of trade and investment are questioned may expose the negotiation to similar pressures as other agreements such as TTIP and CETA, or elements in the EU-China relationship such as granting of MES.

M4644-CHAISSE_9781788971898_t.indd 30

11/10/2018 10:22



Negotiating an uncertain world 31

The political debate over globalization, international trade and investment may not continue with the same intensity, as much will depend on future economic performance, and the capacity of governments to address the problems that it raises. However, it is unlikely that the CAI will completely escape politicization. International economics, and the EU-China relationship are unlikely to be free of frictions. Beyond this, debates over fundamental policy questions of trade and investment will continue, and the CAI like other BITs will remain at the centre of these debates.

M4644-CHAISSE_9781788971898_t.indd 31

11/10/2018 10:22

The EU’s new generation of free trade agreements

3. The competence to conclude the EU’s new generation of free trade agreements: lessons from Opinion 2/15 Eleftheria Neframi* INTRODUCTION Opinion 2/15, delivered by the Court of Justice of the European Union (Court of Justice) on 16 May 2017,1 addresses a number of complex issues with regard to the nature and the scope of the external competence of the European Union (EU) to conclude a free trade agreement with the Republic of Singapore (EUSFTA). The importance of the Opinion goes beyond the envisaged agreement, as that agreement belongs to the socalled new generation of free trade agreements (NGFTAs), containing, in addition to classical provisions concerning the reduction of customs duties and non-tariff barriers to trade in goods and services, provisions on matters related to trade, such as intellectual property protection, foreign direct investment and investment protection, public procurement, competition, and sustainable development.2 The comprehensive EU-China investment agreement3 and a number of other bilateral agreements have the same scope and, consequently, the discussion of competence issues

*  All websites cited in the chapter were live as at 21 February 2018. 1   (Full Court) EU:C:2017:376. 2   James Harrison (ed.), The European Union and South Korea (Edinburgh University Press 2013). Nicolas Pigeon, ‘L’accord de libre échange EU-Viêtnam: Une hiérarchisation des objectifs de l’action extérieure au détriment de sa cohérence?’ (2016) 1 European Papers 691, . Antonio Segura Serrano, ‘From External Policy to Free Trade: The EU-Singapore Free Trade Agreement’, in Piet Eeckhout and Manuel Lopez Escudero (eds), The European Union’s External Action in Times of Crisis (Hart Publishing 2016) 483. 3   EU-China 2020 Strategic Agenda for Cooperation, . 32

M4644-CHAISSE_9781788971898_t.indd 32

11/10/2018 10:22



The EU’s new generation of free trade agreements 33

in Opinion 2/15 is valuable for the negotiation and conclusion of all NGFTAs.4 As the NGFTAs’ aim is to establish a free trade area and to liberalize and facilitate trade and investment between the parties, they could be viewed, according to a first approach, as falling within the scope of the common commercial policy (Article 207 of the Treaty on the Functioning of the European Union (TFEU)). However, the uncertainty as to the scope of the common commercial policy stems from the comprehensive approach, which incorporates various trade-related objectives.5 Such a comprehensive approach is explained by the reforms of the Lisbon Treaty, concerning, namely, the global approach to the Union’s external action objectives in Article 21 of the Treaty on the European Union (TEU),6 in view of the ultimate objective of making the Union a global international actor, in addition to the notion of trade and the scope of the common commercial policy, set forth in Article 207 TFEU and including foreign direct investments. Indeed, Article 207(1) TFEU states: The common commercial policy shall be based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade 4   Among the NGFTAs issues of competence are raised in the context of the Comprehensive Economic and Trade Agreement between the EU and Canada (CETA). David Kleimann and Gesa Kübek, ‘The Signing, Provisional Application, and Conclusion of Trade and Investment Agreements in the EU. The Case of CETA and Opinion 2/15’ EUI Working Papers RSCAS 2016/58 (2016), < http:// hdl.handle.net/1814/43948>. 5   Christine Kaddous, ‘The Transformation of the EU Common Commercial Policy ‘, in Eeckhout and Escudero (n 2), 429–40. 6   Article 21 TEU states especially in paras 2 and 3: 2.

The Union shall define and pursue common policies and actions, and shall work for a high degree of cooperation in all fields of international relations, in order to: (a) safeguard its values, fundamental interests, security, independence and integrity; (. . .) (d) foster the sustainable economic, social and environmental development of developing countries, with the primary aim of eradicating poverty; (. . .) (h) promote an international system based on stronger multilateral cooperation and good global governance. 3. The Union shall respect the principles and pursue the objectives set out in paragraphs 1 and 2 in the development and implementation of the different areas of the Union’s external action covered by this Title and by Part Five of the Treaty on the Functioning of the European Union, and of the external aspects of its other policies.

M4644-CHAISSE_9781788971898_t.indd 33

11/10/2018 10:22

34

China–European Union investment relationships agreements relating to trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, the achievement of uniformity in measures of liberalisation, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. The common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action.

The global approach to external action objectives gave rise to important questions as to the nature of the EU’s competence, on which depend the conclusion of an EU-only agreement, or a mixed agreement, jointly by the Union and its Member States. It should be noted that the Union’s external action, as well as its internal action, is dependent on the principle of conferral, according to which the Union can only act within the limits of its conferred competence.7 Concerning external action, it is established caselaw and practice, that an international agreement falling under the EU’s exclusive competence is to be approved by the Union alone.8 In contrast, if some provisions of the agreement fall under the shared competence of the Union and its Member States, or under the exclusive competence of the Member States, the agreement must involve the Member States, as a mixed agreement, unless the Union exercises its shared competence directly in the external field, provided the political will of the Member States to do so (see Part IV, infra). Given the serious difficulties that mixity entails (see Part IV, infra), it is in the interest of the Union and its international partners to prefer an EU-only agreement. The NGFTAs raise, thus, two main, interlinked questions. On the one hand, what is the nature of the external competence of the Union? And, on the other hand, should these agreements be mixed or concluded by the EU only? In Opinion 2/15, the Court of Justice dealt with the first question, although the dispute-settlement-related provisions could raise the issue of the compatibility of the envisaged agreement with EU law and the criterion of autonomy.9 The Court, thus, focused its analysis on the nature of the EU’s external competence, and assessed, more specifically, which provisions of the envisaged agreement fall within the Union’s exclusive competence, the Union’s shared competence or, ultimately, the Member 7   Article 5(1) TEU. The literature on EU external competences is extensive. See in particular, Fernando Castillo de la Torre, ‘The Court of Justice and External Competences After Lisbon: Some Reflections on the Latest Case Law’ in Eeckhout and Escudero (n 2), 129. 8   Alan Dashwood, ‘Mixity in the Era of the Treaty of Lisbon’ in Christoph Hillion and Panos Koutrakos (eds), Mixed Agreements Revisited (Oxford: Hart Publishing 2010) 356. 9   Opinion 2/15 (n 1), para. 301.

M4644-CHAISSE_9781788971898_t.indd 34

11/10/2018 10:22



The EU’s new generation of free trade agreements 35

States’ exclusive competence. The request for an opinion on whether the Union alone has the competence to sign and conclude the EUSFTA was submitted to the Court of Justice, on 10 July 2015, by the Commission, which had led the negotiations with the Republic of Singapore upon authorization of the Council.10 After a detailed analysis,11 the Court of Justice held that the competence of the EU to conclude the EUSFTA is not exclusive, as long as some of the provisions – that is, those concerning non-direct investments and dispute settlement – fall under the shared competence of the Union and its Member States. Although the Court of Justice found that the EUSFTA does not contain any provision falling within the exclusive competence of the Member States, it determined that some provisions of the EUSFTA cannot be approved by the Union alone. Of course, mixity can be avoided through the separation of the trade and investment provisions into different agreements12. It remains however unclear whether the Union can exercise shared competence directly in the external field and what exactly shared competence means. Through Opinion 2/15, the Court of Justice made valuable contributions to the interpretation of the scope of the Union’s exclusive external competence in the field of common commercial policy (Part I), as well as the competence of the Union following the theory of implied external competences (Part II), and concerning non-substantive provisions (Part III). However, Opinion 2/15 leaves the uncertainty, as 10   It could be noted that while the negotiating directives provided for the negotiation of a mixed agreement, the Commission negotiated the EUSFTA as an agreement between the EU and Singapore alone. However, the procedure for the conclusion of the agreement falls outside the scope of the questions submitted to the Court of Justice, which focused on the vertical division of competences between the Union and its Member States. 11   Marianne Dony, ‘L’avis 2/15 de la Cour de justice: un “jugement de Salomon”?’ (2017) 53 RTDE 525. Opinion 2/15 confirms that the conclusion of an EU-only or a mixed agreement still depends on a fragmented approach to the nature of the EU’s competence in the fields covered by the provisions of the agreement. As Advocate-General Sharpston noted in her opinion, EU:C:2016:992, para. 82:

the EUSFTA is a very heterogeneous agreement. That means that, of necessity, the analysis to establish competence and its (exclusive or shared) nature will need (depending on the context) to focus on an individual chapter or groups of chapters of the EUSFTA, on a part or parts of that agreement or, occasionally, on an individual provision. 12   On 13 September 2017, the European Commission presented the draft negotiating directives for the FTAs with Australia and New Zealand. That mandate, in line with opinion 2/15, covers only those areas falling under the EU’s exclusive competence. See COM(2017)472/F1 and COM(2017)469/F1.

M4644-CHAISSE_9781788971898_t.indd 35

11/10/2018 10:22

36

China–European Union investment relationships

far as the meaning and the impact of a shared competence are concerned, intact, although the Court of Justice gives some elements for clarification five months later (Part IV).

I. THE SCOPE OF THE UNION’S EXCLUSIVE EXTERNAL COMPETENCE IN THE FIELD OF COMMON COMMERCIAL POLICY Since common commercial policy is an exclusive EU competence,13 the conclusion of an EU-only agreement depends on the delimitation of the scope of Article 207 TFEU. Article 207(5) TFEU explicitly excludes transport from the field of the common commercial policy: ‘The negotiation and conclusion of international agreements in the field of transport shall be subject to Title VI of Part Three and to Article 218.’ The EUSFTA, due to its comprehensive approach to trade objectives, incorporates provisions the link of which to the common commercial policy is far from evident. The Court of Justice, on the one hand, confirmed the established definition of the scope of common commercial policy (1.A), but, on the other hand, it opted for a broad definition of trade-related objectives, allowing the common commercial policy to absorb provisions that could be assessed following different legal basis (1.B). A. Classic Approach to the Common Commercial Policy: Provisions having Direct and Immediate Effect on International Trade In Opinion 2/15 the Court of Justice followed the objective-oriented approach adopted since the entry into force of the Lisbon Treaty, according to which, provisions of an envisaged agreement fall within the common commercial policy if they specifically relate to trade with one or more third States, in that they are essentially intended to promote, facilitate or govern such trade and have direct and immediate effects on it.14 According to that

  Pursuant to Art. 3(1) TFEU, ‘(t)he Union shall have exclusive competence in the following areas: (. . .) (e) common commercial policy’. 14   Opinion 2/15 (n 1), para. 36. Case C-414/11 Daiichi Sankyo and SanofiAventis Deutschland EU:C:2013:520, para. 51. Case C-137/12 Commission v Council EU:C:2013:675, para.  57. Opinion 3/15 Marrakesh Treaty on access to published works EU:C:2017:114, para. 61. Case C-389/15 Commision v Council EU:C:2017:798, para 49. Laurens Ankersmit, ‘The Scope of the Common Commercial Policy after Lisbon: The Daiichi Sankyo and Conditional Access Services Grand Chamber Judgments’ (2014) 41 LIEI 193. 13

M4644-CHAISSE_9781788971898_t.indd 36

11/10/2018 10:22



The EU’s new generation of free trade agreements 37

approach, Article 207 TFEU does not cover non-direct investments or cross-border supply of transport services. 1.  Market access for goods and services The Court of Justice acknowledged without difficulty that the exclusive competence of the Union in the field of common commercial policy covers the EUSTA’s commitments relating to market access for goods, including measures to protect trade, the application of technical and sanitary standards, and customs legislation. Provisions relating to market access for services, including both cross-border supply and supply-by-establishment as well as the presence of natural persons,15 also fall within the common commercial policy, as they are intended to open up the Singapore market to EU service providers and vice versa. However, Article 207(5) TFEU explicitly excludes services in the field of transport from its scope (see infra). In that regard, the Court of Justice held that aircraft repair and maintenance services during which an aircraft is withdrawn from service, as well as services for the sale, marketing, or reservation of air-transport services, whether they are supplied by travel agencies or by other commercial service-providers, are not inherently linked to transport services, and, consequently, do not fall within the exception of Article 207(5) TFEU, and are, thus, covered by the exclusive competence of the Union. Finally, the Court determined that Article 207 TFEU covers provisions of the EUSFTA concerning market access in the sector of energy generation from sustainable non-fossil sources, as well as commitments on the principles of non-discrimination and transparency in procurement procedures for governmental purposes in the fields falling under the common commercial policy. 2.  Foreign direct investment The Court further held that the common commercial policy and, thus, the exclusive competence of the Union covers, since the entry into force of the Lisbon Treaty, the foreign direct investment provisions of the EUSFTA,16 which consist of ‘investments made by natural or legal persons of that third State in the European Union and vice versa which enable effective participation in the management or control of a company carrying out 15   The classification used by the World Trade Organisation (WTO) does not lead to a different conclusion as to the scope of the common commercial policy. 16   Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment: How will the New EU Competence on FDI Affect the Emerging Global Regime?’ (2012) 15 JIEL 51. Angelos Dimopoulos, EU Foreign Investment Law (OUP 2011) 65.

M4644-CHAISSE_9781788971898_t.indd 37

11/10/2018 10:22

38

China–European Union investment relationships

an economic activity’.17 The Court acknowledged that acts promoting, facilitating, or governing such participation will have direct and immediate effects on trade between Singapore and the EU18. Furthermore, Article 207 TFEU concerns both admission and protection of investments. The regulation of the protection of foreign direct investment through noless-favourable treatment and prohibitions against arbitrary treatment contributes to legal certainty for investors and has, in that sense, a direct and immediate effect on their decision to carry out the foreign direct investment and, consequently, on trade. It should be noted that the Court acknowledged that investment protection provisions may touch upon public order and public security requirements. However, it determined that the limitation of the discretion of the Member States is inherent in the conduct of international trade and does not constitute a ground for finding a Member State competence. 3.  Intellectual property protection The Court also found that the EUSFTA’s Chapter 11 provisions intended to guarantee entrepreneurs of both the EU and Singapore an adequate level of protection of their intellectual property rights, are essentially intended to promote, facilitate, or govern international trade and, consequently, they also fall within the commercial aspects of intellectual property, covered by the common commercial policy.19 The Court asserted that such provisions do not aim to harmonize the laws of the Member States, but to ensure a degree of homogeneity between the levels of judicial protection available to holders of intellectual property rights in the EU and Singapore20. Because of the direct effect on international trade criterion, intellectual property protection commitments are not to be viewed as non-substantive provisions absorbed by the substantive ones as far as the competence question is concerned (see 1.B infra). Rather, the Court found them to be substantive provisions falling within the enlarged, by the Lisbon Treaty, scope of the common commercial policy. 4.  Commitments concerning competition The Court found that the EUSFTA’s Chapter 12, which concern the obligations of the parties to ensure enforcement of their respective ­legislation   Opinion 2/15 (n 1), para. 82.  Ibid., para. 84. 19   Commercial aspects of intellectual property, in the sense of Art. 207 TFEU, display a specific link with international trade, as it is established in the recent case-law (n 14). 20   Opinion 2/15 (n 1), paras 123, 126. 17 18

M4644-CHAISSE_9781788971898_t.indd 38

11/10/2018 10:22



The EU’s new generation of free trade agreements 39

with regard to free and undistorted competition, form part of the liberalization of trade between the Union and the Republic of Singapore. Thus, these provisions too, fall within the field of the common commercial policy and not the field of the internal market.21 5.  Non-direct foreign investment Chapter 9 of the EUSFTA includes commitments relating to non-direct foreign investment. As acts concerning investments, that do not result in lasting and direct economic links, thereby enabling the investor’s effective participation in the management of a company, do not have direct and immediate effects on international trade, the Court found that Article 207(1) TFEU does not include them in the common commercial policy. Consequently, portfolio investments, which do not implicate managerial control, do not fall under exclusive external competence of the Union. 6.  Cross-border transport services According to Article 207(5) TFEU, the negotiation and conclusion of international agreements in the field of transport is to be subject to the TFEU’s Title VI of Part Three, which concerns the common transport policy. It should be noted that the Court did not follow the Commission’s argument, according to which only the cross-border supply of services should be excluded from the scope of Article 207(5) TFEU, finding instead that the wording of the provision excludes international agreements in the field of transport in their entirety.22 Furthermore, and following its established case-law, the Court concluded that the concept of services ‘in the field of transport (. . .) encompasses not only transport services in themselves, but also other services, provided, however, that the latter are inherently linked to a physical act of moving persons or goods from one place to another by a means of transport’.23. B. Absorption of Specific Provisions by the Common Commercial Policy: Sustainable Development Commitments While the scope of the common commercial policy with regard to provisions having direct and immediate effect on international trade stems from already established case-law, Opinion 2/15 gave the Court of Justice the opportunity to apply Article 207(1) TFEU’s requirement, according to

 Ibid., paras 134–135.   Ibid., para. 60. 23   Ibid., para. 61. 21 22

M4644-CHAISSE_9781788971898_t.indd 39

11/10/2018 10:22

40

China–European Union investment relationships

which ‘(t)he common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action’. The global approach to the external action objectives, following Article 21 TEU, in one agreement, is a characteristic of the comprehensive, new generation FTAs, in view of the ultimate objective to make the Union a global international actor.24 The EUSFTA, thus, contains provisions intended to ensure, that trade and investment relations are conducted in accordance with the objective of sustainable development, comprising: the preservation and improvement of the quality of the environment; the sustainable management of global natural resources; and the social protection of workers.25 Such a global approach to external action objectives is not necessarily incompatible with the broad scope of the exclusive external competence of the Union. It should, however, be noted that, according to established case-law, as far as an envisaged international agreement pursues different objectives, the legal basis corresponding to the competence to be exercised is determined according to the ‘main-purpose’ or ‘centre-of-gravity’ ­criterion.26 This fragmented approach to the objectives and competences of the Union may lead to the recognition of a shared EU competence, if the specific, non-trade objectives are recognized as autonomous components falling under specific legal bases. The Council and the Member States defended this position, in their observations to the Court in the context of Opinion 2/15, which position was followed by Advocate-General Sharpston.27 In Opinion 2/15, the Court of Justice could have applied the centreof-gravity test, and found that environmental and social objectives in the EUSFTA are only secondary with regard to the main international trade objective of the agreement. It could also have held, as argued by the Commission, that the sustainable-development-related provisions do not correspond to the exercise of EU competence, as they are not substantive provisions introducing new legislation. The sustainable development provisions are, indeed, the expression of conditionality, of an obligation

  Supra (n 2).   Gracia Marin Duran, ‘Innovations and Implications of the Trade and Sustainable Development Chapter in the EU-Korea Free Trade Agreement’, in Harrison (n 2), 124. 26   Stanislas Adam, ‘The Legal Basis of International Agreements of the European Union in the Post-Lisbon Era’ in Inge Govaere and others (eds) The European Union in the World; Essays in Honor of Marc Maresceau (Martinus Nijhoff 2014) 78. 27   A-G Sharpston (n 11), paras 498–499. 24 25

M4644-CHAISSE_9781788971898_t.indd 40

11/10/2018 10:22



The EU’s new generation of free trade agreements 41

to ensure respect of other international agreements from which they arise, and for which those other agreements provide their own compliance mechanism, such that the dispute-settlement mechanism of the EUSFTA does not aim to enforce those international agreements. The Court of Justice could have thus linked sustainable development provisions to the common commercial policy through the centre of gravity criterion or through the conditionality and absorption approach, simply by acknowledging that the EUSFTA does not introduce new sustainable development commitments, but it did not. On the contrary, the Court of Justice, in Opinion 2/15, chose to give full effect to the requirement – introduced by the Lisbon Treaty – that common commercial policy must be conducted in the context of the principles and objectives of the Union’s external action. As sustainable development objectives are external action objectives covered by Article 21 TEU, the Court pointed out that such objectives are absorbed by the trade objective of the common commercial policy.28 The Court of Justice, thus, adopted an approach aligned with the EU legal order’s claim of autonomy in relation to the international legal order and with the global approach to external action objectives. Instead of recognizing that the numerous objectives pursued by the EUSFTA correspond to different competences, some of them being shared, but absorbed by the common commercial policy as the central and the only substantive competence, the Court of Justice affirmed a broad interpretation of the trade objective. In other words, instead of accepting that the provisions falling under the exclusive competence of the Union should ‘absorb’ the provisions falling under shared EU competence, the Court recognized that the objective (international trade) corresponding to the common commercial policy is broad enough to ‘absorb’ other objectives, linked to sustainable development, because common commercial policy is to be conducted in the context of the principles and objectives of the Union’s external action. This broad concept of the international trade objective is the result of the global approach to external action objectives. Thus, the Court found in the second sentence of Article 207(1) TFEU and in Article 205 TFEU an obligation to integrate Union’s sustainable development objectives into the conduct of its common commercial policy.29 Furthermore, the Court recalled that, following Articles 9 and   Opinion 2/15 (n 1), paras 141–167.   Article 205 TFEU provides that the Union’s action on the international scene, pursuant to Part Five of the FEU Treaty, shall be guided by the principles, pursue the objectives and be conducted in accordance with the general provisions laid down in Chapter 1 of Title V of the EU Treaty. Stefanie Schacherer ‘The EU 28 29

M4644-CHAISSE_9781788971898_t.indd 41

11/10/2018 10:22

42

China–European Union investment relationships

11 TFEU, social and environmental protection are transversal objectives that the Union must take into account in defining and implementing its policies and activities.30 In Opinion 2/15 the Court of Justice avoided the risk of conflict of legal basis – and competence – by enlarging the concept of international trade. This enlarged concept of the Court constitutes an internal coherence mechanism that allows the Union to act alone, on the basis of its exclusive external competence in the field of common commercial policy. Sustainable development provisions are, thus, an integral part of the common commercial policy and not absorbed by it. The Court concluded that sustainable development provisions: are intended not to regulate the levels of social and environmental protection in the Parties’ respective territory but to govern trade between the European Union and the Republic of Singapore by making liberalisation of that trade subject to the condition that the Parties comply with their international obligations concerning social protection of workers and environmental protection31.

II. THE NATURE OF THE UNION’S IMPLIED EXTERNAL COMPETENCE The provisions of the EUSFTA, that do not fall within the scope of the common commercial policy must be approved by the Union or jointly by the Union and its Member States, in accordance with the division of competences in the relevant field. The provisions excluded from the scope of Article 207 TFEU are those concerning cross-border transport services and non-direct foreign investments. In both cases, the Union has an implied external competence that can be exclusive to the extent the criteria of Article 3(2) TFEU are met. According to that provision: The Union shall also have exclusive competence for the conclusion of an ­international agreement when its conclusion is provided for in a legislative act of the Union or is necessary to enable the Union to exercise its internal competence, or in so far as its conclusion may affect common rules or alter their scope.

as a Global Actor in Reforming the International Investment Law Regime in Light of Sustainable Development’ (Geneva Jean Monnet Working Paper, 1/2017). 30   Laurens Ankersmit, ‘Opinion 2/15: Adding Some Spice to the Trade & Development Debate’ (European Law Blog 15 June 2017), . Joris Larik, ‘Trade and Sustainable Development: Opinion 2/15 and the EU’s Foreign Policy Objectives’ Europe and the World, A Law Review Blog (2017), . 31   Opinion 2/15 (n 1), para. 166.

M4644-CHAISSE_9781788971898_t.indd 42

11/10/2018 10:22



The EU’s new generation of free trade agreements 43

The Court of Justice examined, more precisely and following the arguments advanced, the ‘affectation-of-common-rules’ criterion, in order to establish if the Member States are pre-empted from their external competence because the conclusion of the agreement by them could affect common rules or alter their scope. A. Implied External Competence with Respect to Cross-border Transport Services: Confirmation of a Broad Interpretation of the ‘Affectationof-common-rules’ Criterion The Court of Justice compared the cross-border transport services provisions of the EUSFTA (Chapter 8) to existing secondary EU law adopted on the basis of Article 91 TFEU concerning transport policy.32 It applied the well-established, since the ERTA judgment,33 criterion of an effect on common rules, according to which the Union can conclude an international agreement that is likely to affect common rules or alter their scope.34 This criterion has been codified in Article 216 TFEU, which refers to the competence of the Union to conclude international agreements,35 as well as in Article 3(2) TFEU, which refers to the Union’s exclusive external competence.36 The ‘affectation-of-common-rules’ criterion has been further specified in recent case-law.37 The Court of Justice followed a progressively broader   Regulation (EC) 4055/86 of 22 December 1986 applying the principle of freedom to provide services to maritime transport between Member States and between Member States and third countries [1986] OJ L378/1; Regulation (EC) 1071/2009 of 21 October 2009 establishing common rules concerning the conditions to be complied with to pursue the occupation of road transport operator [1999] OJ L300/51; Regulation N°1072/2009 of 21 October 2009 on common rules for access to the international road haulage market [1999] OJ L300/72; Regulation (EC) 1073/2009 of 21 October 2009 on common rules for access to the international market for coach and bus services [1999] OJ L300/88; Directive 2012/34/EU of 21 November 2012 establishing a single European railway area [2012] OJ L343/32. 33   Case 22/70 EU:C:1971:32. 34   Castillo de la Torre (n 7), 137, 157. Piet Eeckhout, EU External Relations Law (OUP, 2011) 70. 35   According to Art. 216(1) TFEU: 32

The Union may conclude an agreement with one or more third countries or international organisations where the Treaties so provide or where the conclusion of an agreement is necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties, or is provided for in a legally binding Union act or is likely to affect common rules or alter their scope.   On the relationship between the two provisions, see infra.   Case C-467/98 Commission v Denmark EU:C:2002:625; Opinion 1/03 (New Lugano Convention) EU:C:2006:81, para. 126; Case C-114/12 Commission v 36 37

M4644-CHAISSE_9781788971898_t.indd 43

11/10/2018 10:22

44

China–European Union investment relationships

interpretation, according to which it is not necessary for the areas covered by the international agreement and the EU legislation to coincide fully. The analysis must take into account the areas covered by the rules of EU law and by the provisions of the agreement envisaged, their foreseeable future development, and the nature and content of those rules and provisions, in order to determine whether the agreement is capable of undermining the uniform and consistent application of the EU rules and the proper functioning of the system that they establish. In Opinion 2/15, in line with its previous case-law, the Court conducted a detailed analysis of the EUSFTA’s provisions related to all methods of transport and confirmed that the scope of the common EU rules may also be affected or altered by international commitments where the latter fall within an area that is already covered to a large extent by those rules. Although Advocate-General Sharpston followed a more restrictive approach, and argued that the competence of the Union should be exclusive only with respect to those EUSFTA provisions concerning trade in rail and road transport services, and that the area of liberalization of maritime transport, air transport and transport by inland waterway services had not already been largely covered by common rules,38 the Court found that the Union’s competence to conclude all of the EUSFTA’s cross-border transport services provisions to be exclusive. It is interesting to note that the Court of Justice did not deny that some areas of the transport services field are not already covered by common rules. It pointed out, however, that cross-border transport services commitments should be analysed in a global way, such that there is no need to take account of the provisions of EUSFTA that are extremely limited in scope. Because the EU has exclusive competence to approve commitments relating to maritime, rail, and road transport, it has exclusive competence with respect to the entirety of EUSFTA’s Chapter 8.39 Finally, the ‘affectation-of-common-rules’ criterion led the Court of Justice to conclude that the commitments concerning public procurement in the field of transport also fall under exclusive EU competence, pursuant to Article 3(2) TFEU, as those commitments may affect or alter the scope of directives governing public procurement in the respective fields.40 Council EU:C:2014:2151, paras 68–70; Opinion 1/13 (Accession of third States to the Hague Convention) EU:C:2014:2303, paras 71–73; Case C-66/13 Green Network EU:C:2014:2399, para. 29; and Opinion 3/15 (Marrakesh Treaty on access to published works) EU:C:2017:114, paras 105–107. 38   AG Sharpston (n 11), paras 221–268. 39   Opinion 2/15 (n 1), para. 217. 40   Directive 2014/24 EU and Directive 2014/25/EU.

M4644-CHAISSE_9781788971898_t.indd 44

11/10/2018 10:22



The EU’s new generation of free trade agreements 45

B. Shared External Competence with Regard to Non-direct Foreign Investments: The Classic Approach of the ‘Affectation-of-commonrules’ Criterion The EUSFTA’s non-direct foreign investment provisions could not be assessed in relation to secondary EU law, as such rules do not exist. However, it is worth noting that the Commission advanced a new argument for to the ‘affectation-of-common-rules’ criterion. It suggested that exclusive competence pursuant to Article 3(2) TFEU stems from the overlap between the commitments contained in the EUSFTA and primary EU law, specifically the prohibition of restrictions on movements of capital and on payments between Member States and third States that is laid down in Article 63 TFEU. The Court of Justice, however, did not follow the Commission’s ­position41, which had already been rejected by Advocate-General Sharpston.42 Rather, the Court of Justice held that Article 63 TFEU cannot be viewed as a ‘common rule’ in the sense of Article 3(2) TFEU, as that qualification concerns cases in which the EU has exercised its internal competence by adopting secondary legislation. The Court underlined that, in light of the primacy of the EU Treaties over international agreements adopted on their basis, the latter cannot have an impact on the meaning and the scope of the EU Treaties’ provisions and cannot affect rules of primary EU law or alter their scope.43 Furthermore, it declared that Article 63 TFEU is not a legal basis for exercising competence, and, thus, the Court rejected the Commission’s argument, according to which it would not be necessary to identify a legal basis for exercising internal competence before the Union would be entitled to rely on Article 216(1) TFEU. A distinction must be made, in that regard, between the exercise of EU competence within the meaning of Article 216(1) TFEU and the exclusive nature of the EU’s external competence pursuant to Article 3(2) TFEU. In order to establish the exclusive nature of the EU’s external competence on the basis of Article 3(2) TFEU, it is first necessary to identify the legal basis of the internal competence. Exclusivity stems from: the criterion of the affectation of common rules adopted in the internal field; the necessity to enable the Union to exercise its internal competence; a specific provision in a legislative act. Any one of the three exclusivity alternatives is linked to the exercise of the EU internal competence and enables the EU

  Opinion 2/15 (n 1), paras 225–244.   AG Sharpston (n 11), paras 346–359. 43   Opinion 2/15 (n 1), para. 235. 41 42

M4644-CHAISSE_9781788971898_t.indd 45

11/10/2018 10:22

46

China–European Union investment relationships

to conclude alone an international agreement. In contrast, Article 216(1) TFEU concerns the exercise of the Union’s external competence, but not necessarily by the Union alone. Beyond the ‘affectation-of-common-rules’ criterion, Article 216(1) TFEU refers to the necessity to achieve one of the objectives of the EU Treaties. On the one hand, the objectives of the EU Treaties can be achieved through the conclusion of a mixed agreement, and in that sense, the competence of the Union pursuant to Article 216(1) TFEU does not need to be exclusive. On the other hand, the achievement of one of the objectives of the EU Treaties implies the need to identify the legal basis for the exercise of the Union’s competence. The nature of the Union’s competence exercised pursuant to the identified legal basis determines the nature of the external competence pursuant to Article 216(1) TFEU. Although the distinction between Articles 3(2) TFEU and 216(1) TFEU in not clear in Opinion 2/15, its existence is implied by the Court of Justice’s conclusions. More precisely, the Court held that the conclusion of international agreements that contribute to the establishment of free movement of capital and payments between Member States and third States on a reciprocal basis may be classified as necessary in order to fully achieve such free movement, which is one of the objectives of Title IV of the TFEU. The Court confirmed that Title IV TFEU falls within the shared competence relating to the internal market pursuant to Article 4(2) (a) TFEU, such that the Union’s competence pursuant to Article 216(1) TFEU with respect to the conclusion of an agreement which is ‘necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties’ is also a shared competence. In that way, the Court of Justice established the external competence of the Union with regard to portfolio investments on the basis of its internal competence with regard to the internal market, and confirmed its shared nature, rejecting arguments made by the Council and the Member States, that the Member States’ competence in that area was exclusive.

III. THE NATURE OF THE UNION’S EXTERNAL COMPETENCE WITH REGARD TO THE EUSFTA’S NON-SUBSTANTIVE AND INSTITUTIONAL PROVISIONS The nature – exclusive or shared – of the Union’s and Member States’ external competence must be determined on the basis of the substantive provisions of the envisaged agreement. Non-substantive provisions, – that is those that do legislate, but rather complement the substantive,

M4644-CHAISSE_9781788971898_t.indd 46

11/10/2018 10:22



The EU’s new generation of free trade agreements 47

legislative provisions, to ensure their effective implementation – do not require or rely on a separate competence basis. Instead, they are covered by the legal basis for the substantive competence, which is the case for the EUSFTA’s investment protection provisions (III.A), as well as its institutional provisions (III.B). Specific attention, however, must be paid to its dispute-settlement provisions, which cannot be viewed as ancillary (III.C), as well as its provisions regarding previous agreements of the Member States (III.D). A.  Investment Protection Provisions The Council argued that the EUSFTA’s investment protection provisions, even those concerning foreign direct investments, fell within the exclusive competence of the Member States, as they relate to questions beyond the scope of EU competence, such as public order, public security, taxation, expropriation, restrictions in case of criminal or penal offences. However, as the Advocate-General pointed out, the availability of the protection ‘has a direct and immediate effect on whether to carry out the foreign direct investment and on the enjoyment of the benefits of that investment’.44 Consequently, the Court determined that the EUSFTA’s investment protection provisions do not infringe the Member States’ prerogatives, such that they do not need a specific, separate legal basis.45 Provisions on protection of foreign direct investment, as well as derogations therefrom for overriding reasons relating to public order or public security fall under the scope of the common commercial policy: as they do not establish any international commitment in these fields, they do not need to mobilize the Member States’ competence. Accordingly, the EUSFTA’s provisions on the protection of non-direct investments fall under the shared competence of the EU and its Member States, not under the exclusive competence of the Member States. B.  Institutional Ancillary Provisions The EUSFTA also establishes various other complementary obligations and procedures, for example, exchange of information, notification, verification, cooperation and mediation, as well as certain decisionmaking powers. To implement its substantive provisions, it creates a specific institutional framework, consisting of various specialized committees. As the competence of the Union to enter into international

  A-G Sharpston (n 11), para. 336.   Opinion 2/15 (n 1), paras 94–109.

44 45

M4644-CHAISSE_9781788971898_t.indd 47

11/10/2018 10:22

48

China–European Union investment relationships

commitments includes the competence to couple those commitments with institutional provisions,46 the question is whether such institutional provisions fall within the EU’s exclusive competence. The Court of Justice acknowledged that such provisions and mechanisms ‘are intended to ensure the effectiveness of the substantive provisions of the envisaged agreement, by establishing, essentially, an organisational structure, methods of cooperation, obligations to exchange information and certain decision-making ­powers’.47 Consequently, the conclusion of such provisions does not require a specific legal basis. Institutional provisions are thus of an ancillary nature and therefore fall within the same competence as the substantive provisions which they accompany.48 It follows that the competence of the Union to conclude the EUSFTA’s institutional provisions is not exclusive, as some of its substantive provisions fall under its shared competence. The EUSFTA’s Chapter 14 provides that the parties guarantee transparency in adopting any measure of general application connected with a matter covered by the envisaged agreement, facilitate communication and guarantee effective judicial protection when the interests of the other party are affected. Certain Member States argued that the transparency rules oblige not only the authorities of the Union, but also those of the Member States, must both observe the principles of good administration and effective judicial protection. According to them, those provisions fall within the exclusive competence of the Member States. However, the Court of Justice did not adopt that reasoning; rather, it found that the EUSFTA’s transparency rules are intended to ensure the effectiveness of its substantive provisions and, as those rules are of an ancillary nature, they fall within the same competence as the substantive provisions to which they relate.49 The Court underscored that the transparency-related provisions cannot be regarded as encroaching upon the competences of the Member States alone, as they do not involve any commitment relating to the administrative or judicial organization of the Member States. However, the ancillary nature of such provisions implies that they cannot be concluded by the Union alone, either, as some of the substantive provisions fall under its shared competence.   Opinion 1/76, Agreement on the establishment of a European Laying-up Fund for Inland Waterway Vessels EU:C:1977:63, para.  5; Opinion 1/78, International Agreement on Natural Rubber EU:C:1979:224, para. 56; Case C-137/12 Commission v Council EU:C:2013:675, paras 70 and 71. 47   Opinion 2/15 (n 1), para. 275. 48  Ibid., para. 276. 49  Ibid., para. 282. 46

M4644-CHAISSE_9781788971898_t.indd 48

11/10/2018 10:22



The EU’s new generation of free trade agreements 49

C.  Dispute-Settlement Provisions Section B of the EUSFTA’s Chapter 9 provides for an investor-State dispute-settlement mechanism, meaning that if a dispute cannot be resolved amicably or by means of the consultations set forth in its Articles 9.12 or 9.13, the relevant investor may, in accordance with its Article  9.15, give notice of its intent, to submit the claim to arbitration.50 The envisaged agreement makes clear that the respondent in any such dispute can be the EU or the relevant Member State. Moreover, although the EUSFTA does not explicitly rule out the possibility of a dispute between a Singaporean investor and a Member State being brought before the courts of that Member State, it explicitly authorizes the disgruntled investor to force the dispute into arbitration, without the relevant Member State having any ability to oppose it. The Court of Justice stated that ‘such a regime, which removes disputes from the jurisdiction of the courts of the Member States, cannot be of a purely ancillary nature (. . .) and cannot, therefore, be established without the Member States’ consent’.51 It follows that the provisions at issue fall within the shared competence of the Union and the Member States. Chapter 15 of the EUSFTA establishes an external dispute-settlement mechanism for disputes between the Union and Singapore. First, the Court recalled that its Opinion 2/15 does not address the compatibility of that mechanism with the autonomy of the EU legal order.52 Rather,

50   Opinion 2/15 addresses only the question of competence with regard to that mechanism. Concerning the question of compatibility with the autonomy of the EU legal order see Christina Eckes, ‘International Rulings and the EU Legal Order: Autonomy as Legitimacy?’ in Marise Cremona, Anne Thies, Ramses Wessel, The European Union and International Dispute Settlement (Oxford Hart Publishing 2017) 161. Allan Rosas, ‘The EU and International Dispute Settlement’ (2017) 1 Europe and the World, A Law Review 7, 23; concerning the question of the allocation of responsibility, see Armin Steinbach, EU Liability and International Economic Law (Hart Publishing 2017) 133. 51   Opinion 2/15 (n 1), para. 292. See Cristina Contartese, ‘The Autonomy of the EU Legal Order in the ECJ’s External Relations Case Law: From the “Essential” to the “Specific Characteristics” of the Union and Back Again” (2017) 54 Common Market Law Review 1625, 1667. The question of removing jurisdiction of the domestic courts is also addressed, from the principle of autonomy perspective, in pending case ACHMEA. See Case C-284/16, Opinion of A-G Wathelet, EU:C:2017:699, paras 229–249. 52   The compatibility of the envisaged Investment Court System with EU law remains an open question. See, e.g., Hannes Lenk, ‘An Investment Court System for the New Generation of EU Trade and Investment Agreements: A Discussion of the Free Trade Agreement with Vietnam and the Comprehensive Economic

M4644-CHAISSE_9781788971898_t.indd 49

11/10/2018 10:22

50

China–European Union investment relationships

focusing on the competence question, the Court of Justice acknowledged that the dispute settlement regime is not liable to affect the jurisdiction of the Member States’ national courts, as it only relates to disputes between the Union and Singapore. But, because it forms part of the institutional framework for the EUSTA’s substantive provisions, it does not fall under the exclusive EU competence, as some of those substantive provisions fall under shared EU competence.53 D. Provisions Concerning Termination of Bilateral Agreements on Investments between the Member States and Singapore EUSFTA’s Article  9.10.1 provides that, upon its entry into force, the bilateral agreements on investments between the different Member States and Singapore (BITs) listed on its Annex 9-D will cease to have effect and be automatically replaced and superseded by the EUSFTA. According to the Council, several Member States, and Advocate-General Sharpston, the termination of existing BITs is an exclusive competence belonging to the Member States.54 Their argument is linked to the international law status of the various Member States: despite the existence of the EU, they remain autonomous parties to international agreements. From an international law perspective, the question of competence is irrelevant to the conclusion and termination of international agreements by the Member States. In other words, the status of the Member States as contracting parties is determined by international law and, thus, is not an EU-law question. On the one hand, for international agreements concluded by the Member States before the establishment of the Union or before their accession to it, Article 351 TFEU provides that, even in case of exclusive EU competence, the Member States remain parties to those agreements, subject only to their loyalty obligation, arising under Article 4(3) TEU, to eliminate any incompatibilities. On the other hand, when the Member States are contracting parties, together with the EU, to a mixed agreement, because of the absence of exclusive EU competence for the whole agreement, each Member State remains free under international law to terminate that agreement in accordance with whatever is the appropriate termination procedure according to the law of treaties.55 However, in the case of a and Trade Agreement with Canada’ (2016) 1 European Papers, 665, . 53   Opinion 2/15 (n 1), para. 303. 54   Opinion of A-G (n 11) paras 371–398. 55   Ibid., para. 77.

M4644-CHAISSE_9781788971898_t.indd 50

11/10/2018 10:22



The EU’s new generation of free trade agreements 51

bilateral mixed agreement, that creates conventional links between, on the one hand the Union and its Member States, on the other hand the third parties, the joint participation of the Union and its Member States is complementary: the Member States are parties to bilateral agreements because of their status as Members of the Union.56 But despite such complementarity in the management of mixity, the Member States are, from an international law perspective, autonomous contracting parties in the phase of conclusion and termination of the agreement, in the sense that they are expressing their own consent. It follows that the EUSFTA’s provision that states that the EU, acting alone, can terminate the agreements concluded by the Member States with Singapore, could be seen as incompatible with the general principle, expressed in Article 59(1)(a) of the 1969 Vienna Convention, which provides that international agreements may only be terminated by parties to them. As Advocate-General Sharpston suggested, the ability of the Member States to act independently, as actors under international law, is not affected by the fact that they may continue to be bound by an agreement concluded by the Union, or by the area of a mixed agreement concluded under EU competence, as the impact of their membership in the Union does not reflect international law, but EU law.57 However, in Opinion 2/15, the Court of Justice determined that the EUFTA’s Article 9.10.1 ‘cannot be regarded as encroaching upon a competence of the Member States, in so far as that provision relates to a field in respect of which the European Union has exclusive competence’.58 According to the Court, the Union’s competence to approve said Article 9.10.1 corresponds to that established with regard to substantive commitments on direct or non-direct investments.59 Furthermore, it held that there is no need to allow the Member States to respect the rights that the Republic of Singapore might wish in the future to derive from any existing bilateral agreements, as Singapore expresses its wish and understanding that those bilateral agreements will come to an end upon the EUSFTA’s entry into force.60

56   In the current context of Brexit negotiations, it is argued that the UK cannot remain party in mixed agreements after its withdrawal from the Union. European Council, Guidelines of 29 April 2017, EUCO XT 20004/17, para. 13. Guillaume Van der Loo and Steven Blockmans, ‘The Impact of Brexit on EU’s International Agreements’, (CEPS, 15 July 2016) . 57   A-G Sharpston (n 11), para. 77. 58   Opinion 2/15 (n 1) para. 247. 59  Ibid., para. 256. 60  Ibid., para. 254.

M4644-CHAISSE_9781788971898_t.indd 51

11/10/2018 10:22

52

China–European Union investment relationships

The Court of Justice’s determination can be explained on the basis of the distinction between the international law and EU law perspectives, advanced by the Advocate-General (although to reach the opposite conclusion). More precisely, the Court answered the question of the competence to conclude the relevant provision of the EUSFTA by distinguishing it from that regarding the termination of the BITs.61 According to the Court, the second question falls within the scope of international law, and it made clear that its Opinion 2/15 does not address the compatibility of the envisaged agreement with EU law,62 including respect for international law. The first question, however, falls within the scope of EU law and, from a division-of-competences perspective, the Court found that the EUSFTA’s Article 9.10.1 is not a substantive provision, as it does not affect the Member States’ competence and does not concern their obligation of loyalty to eliminate incompatibilities with EU law; rather, it only expresses the consequence of the conclusion of the EUSFTA by the Union, even if it takes the form of mixed agreement. In other words, the competence to conclude the provision concerning termination of BITs follows the competence to conclude the investment provisions, which provisions make termination of BITs necessary, regardless of the compatibility with international or EU law.63

IV. SHARED EXTERNAL COMPETENCE: MANDATORY MIXITY? Having established that the exclusive external competence of the Union does not cover the whole of the EUSFTA, the next question the Court tackled in

61   Jan Asmus Bischoff, ‘Just a Little BIT of Mixity? The EU’s Role in the Field of International Investment Protection Law’ (2011) 48 Common Market Law Review 1534. 62   It should be noted that Regulation 1219/2012 provides that bilateral investment agreements of the Member States signed before 1 December 2009 may remain in force or enter into force in accordance with that Regulation. The Court of Justice however held, in Opinion 2/15 (para. 250), that, as soon as an investment agreement between the Union and that third State enters into force, that authorization ceases to exist. 63   The Court of Justice has recognized that when the EU concludes with a third State an agreement relating to a field in respect of which it has acquired exclusive competence, it takes the place of its Member States. See Cases 21/72 to 24/72, International Fruit Company EU  :C  :1972  :115. Jan Willem Van Rossem, ‘The EU at Crossroads: A Constitutional Inquiry into the Way International Law is Received within the EU Legal Order’, in Enzo Cannizzaro and others (eds), International Law as Law of the European Union (Martinus Nishoff 2011) 59, 74.

M4644-CHAISSE_9781788971898_t.indd 52

11/10/2018 10:22



The EU’s new generation of free trade agreements 53

Opinion 2/15 is whether the conclusion of a mixed agreement is mandatory. As has been said, the lack of exclusive external competence requires in principle the conclusion of a mixed agreement jointly by the Union and its Member States, a position argued by the Council and all Member States in the EUSFTA context. While the internal shared competence can be exercised by the Union according to the principles of subsidiarity and proportionality and, thus, have pre-emptive effect on the Member States competence, in the external field, the Union, acting alone, can exercise its competence only under the conditions set in Article 3(2) TFEU and Article 216(1) TFEU.64 Mixity is thus imposed by the Court’s strict conception of the principle of conferral, despite the series of complex questions that it raises,65 the first such question being the need for ratification, not only by the Council of the Union, but also by all of the Member States’ national Parliaments.66 Moreover, because the division of competences between the Union and its Member States with regard to the provisions of the international agreements is not necessarily obvious to the third States, such obligatory joint participation raises issues regarding the appropriate division of responsibility, particularly within the dispute-settlement framework.67 That question, together with the question of the competence to negotiate or to express a position in the various bodies created by the international agreement, may undermine the objective of unity in the external representation of the EU.68 In order to balance the respect of the principle of conferral with the efficacy of the Union’s external action, the Court of Justice held that, in case of mixity, Member States are bound by the duty of close cooperation, stemming from the principle of sincere cooperation,69 to ensure unity in the external representation of the Union through adopting common positions and closely cooperating with the Commission.70

  Supra, II.B.   The literature on mixed agreements is extensive. See in particular, Joni Heliskoski, Mixed Agreements as a Technique for Organising the International Relations of the European Community and its Member States (Kluwer 2001); Hillion and Koutrakos (n 8); Eleftheria Neframi, Les accords mixtes de la Communauté européenne (Bruylant 2007). 66   It should be noted that the provisional application of NGFTA is envisaged. Kleimann and Kübek (n 4), 15. 67   Angelos Dimopoulos, ‘The Involvement of the EU in Investor-State Dispute Settlement: A Question of Responsibilities’ (2014) Common Market Law Review 51, 1671. Steinbach (n 49) 141. 68   Case -246/07 Commission v Sweden EU:C:2010:203. Marise Cremona, Case Comment (2011) 48 Common Market Law Review 1652. 69   Article 4, para 3, TEU. 70   Eleftheria Neframi, ‘The Duty of Loyalty: Rethinking its Scope through its 64 65

M4644-CHAISSE_9781788971898_t.indd 53

11/10/2018 10:22

54

China–European Union investment relationships

It goes without saying that a more effective way to ensure unity in the external action is to avoid mixity altogether, perhaps by splitting the envisaged agreement and separating provisions falling under the Union’s exclusive competence from those falling under the shared competence of the EU and its Member States.71 Alternatively, it has been suggested that mixity should not be imposed in cases of shared competence, but should only be used in the absence of EU competence, that is in case of exclusive Member State competence for a part of the agreement.72 The argument of facultative (and thus not compulsory) mixity is reinforced after the ruling of the Court of Justice in Germany v Council, where the Court clarified its finding in Opinion 2/15.73 However, uncertainty as to the obligation to have recourse to mixity stems from both what it means to exercise the external competence (IV.A) and what ‘shared competence’ means in the NGFTAs (IV.B). A.  The Exercise of the Union’s Shared External Competence As it found that the EUSFTA’s non-direct investment provisions do not fall within the exclusive competence of the Union, the Court of Justice also pointed out that such provisions, together with ancillary (concerning transparency) or dispute settlement between the parties provisions cannot be approved by the EU alone.74 This statement seems to reject the argument of facultative mixity,75 which argument might have been based on the apparent uncertainty in the case-law and the wording of the EU Treaties themselves. Indeed, in the MOX Plant case, the Court held that the Union exercised its shared external competence through the conclusion of the United Nations Convention on the Law of the Sea, a mixed ­agreement76. In that regard, Article 216(1) TFEU appears to give the Union the authority to conclude international agreements without its competence Application in the Field of EU External Relations’ (2010) 47 Common Market Law Review 323. 71   Supra n 12. See also Szilárd Gáspár-Szilágyi, ‘Opinion 2/15: May Be it is Time for the EU to Conclude Separate Trade and Investment Agreements’ (European Law Blog 20 June 2017), . 72   Opinion of A-G Wahl, Opinion 3/15, EU:C:2016:657, para. 122. 73   Case C-600/14, EU:C:2017:935. 74   Opinion 2/15 (n1) paras 244, 282, 304. 75   Castillo de la Torre (n 7), 180. Kleimann and Kübek (n 4), 8. See also Opinion of A.G Wahl (n 72). 76   Case C-459/03 Commission v Ireland EU:C:2006:345, para. 126.

M4644-CHAISSE_9781788971898_t.indd 54

11/10/2018 10:22



The EU’s new generation of free trade agreements 55

being exclusive. However, the same arguments can be advanced in order to defend mandatory mixity.77 More precisely, as mentioned above, in examining the ‘affectation-ofcommon-rules’ criterion with regard to portfolio investments, the Court of Justice implicitly distinguished Article 216(1) TFEU from Article 3(2) TFEU. It acknowledged that the exercise of the Union’s external competence pursuant to Article 216(1) does not suggest that the envisaged agreement be concluded by the Union alone, but that provision does permit the exercise of that competence through a mixed agreement. In other words, the Union’s ability to conclude an international agreement covers its conclusion of a mixed agreement. Furthermore, the Union’s exercise of its external competence through the conclusion of a mixed agreement does not mean that the Union exercised its competence with pre-emptive effect with regard to those provisions falling under its shared competence and, therefore, obliging mixity for said agreement. Arguably, the conclusion of a mixed agreement contains a mutual-though-implicit mandate, based on the principle of sincere cooperation, to both the Union and the Member States, to exercise the lacking competence at the stage of the conclusion of the agreement, without changing the ultimate division of competences for the implementation of the agreement.78 Such a position explains that the division of competences is an EU law question that does not involve the third State parties, unless the mixed agreement contains a declaration of competences (but even in such a case, the evolution of competences remains an internal EU law question).79 Advocate-General Sharpston defended such mandatory mixity in case of shared competence, acknowledging that mixity is not a political choice. ‘Should the Court decide that the European Union’s competence is shared with the Member States and should the EUSFTA therefore need to be concluded by both the European Union and the Member States’.80

77   Eleftheria Neframi, ‘Vertical Division of Competences and the Objectives of the European Union’s External Action’ in Marise Cremona and Anne Thies (eds), The Court of Justice of the European Union and External Relations Law – Constitutional Challenges (OUP 2014) 73, 85. Allan Rosas, ‘Exclusive, Shared and National Competence in the Context of EU External Relations: Do such Distinctions Matter?’, in Inge Govaere and others (eds) The European Union in the World; Essays in Honor of Marc Maresceau (Martinus Nijhoff 2014) 17, 23. 78   Eleftheria Neframi, ‘Mixed Agreements as a Source of European Union Law’, in Enzo Cannizzaro and others (eds), International Law as Law of the European Union (Martinus Nishoff 2011) 325, 342. 79   Joni Heliskoski, ‘EU Declarations of Competence and International Responsibility’, in Malcolm Evans and Panos Koutrakos (eds), The International Responsibility of the European Union (Hart Publishing 2013) 199. 80   AG Sharpston (n 11), para. 374.

M4644-CHAISSE_9781788971898_t.indd 55

11/10/2018 10:22

56

China–European Union investment relationships

However, in its ruling of December 5, 2017, Germany v Council,81 concerning the establishment of an EU position in a field falling under shared competence, in the framework of the Convention concerning International Carriage by Rail (COTIF), a mixed agreement, the Court of Justice clarified its finding in Opinion 2/15. It noted that, when it affirmed that some provisions of the EUSFTA cannot be approved by the Union alone, it had taken into account the political context and had assumed that the required majority would not be found in the Council for the EU to exercise its shared competences on its own.82 Consequently, the EU may exercise directly in the external field a shared competence, provided the political will to do so. This position of the Court of Justice raises however further uncertainty. According to Article 216(1) TFEU the Union may conclude an agreement where, while the conditions of exclusive competence of Article 3(2) TFEU are not met, the conclusion of the agreement is necessary in order to achieve, within the framework of the Union’s policies, one of the objectives referred to in the Treaties. The question is to know whether the objective justifying the exercise of the shared competence in the external field is only a policy objective (internal market and the prohibition of restrictions on movements of capital in the EUSFTA context), or whether the general objective of being an international actor may also be taken into consideration. The answer to this question depends on the meaning of ‘shared competence’. B. What is ‘Shared Competence’ with Regard to the Comprehensive NGFTAs When the Union concludes an international agreement, the concept of ‘shared competence’ has two senses. First, ‘shared competence’ means that some provisions of the agreement fall within the shared competence of the Union within the meaning of Article 2(2) TFEU.83 In other words, the relevant provisions, which reflect the exercise of the Union’s legislative competence, fall within a field in which the Union’s legislative action does

  Supra n 73.   Ibid., para. 68. 83   When the Treaties confer on the Union a competence shared with the Member States in a specific area, the Union and the Member States may legislate and adopt legally binding acts in that area. The Member States shall exercise their competence to the extent that the Union has not exercised its competence. The Member States shall again exercise their competence to the extent that the Union has decided to cease exercising its competence. 81 82

M4644-CHAISSE_9781788971898_t.indd 56

11/10/2018 10:22



The EU’s new generation of free trade agreements 57

not pre-empt the Member States’ competence to act, too. In case of implied external competence, it means that the provisions of the envisaged agreement do not impact or alter the scope of the internal EU law provisions and, consequently, pursuant to Article 3(2) TFEU, the Union’s implied external competence is not exclusive. With regard to the EUSFTA, as previously discussed, this sense of the Union’s shared competence relates to the envisaged agreement’s portfolio investments provisions. Shared competence, thus, is related to the nature of the normative competence of the Union, that is to say, its competence to legislate. Secondly, shared competence should also be understood with regard to the agreement as a whole. From this perspective, ‘shared competence’ means that some provisions of the agreement may fall outside the exclusive competence of the Union, which means that the provisions either fall under shared EU competence, in the sense of normative shared competence, or under the exclusive competence of the Member States. With regard to the EUSFTA, as noted above, this second sense of the Union’s shared competence relates to the Investor-State dispute settlement provisions. However, such provisions fall under the Member States’ exclusive competence and, consequently, the Union can exercise no competence with regard to them. It should be noted that, in Opinion 2/15, the Court of Justice considered that the EU cannot approve alone the EUSFTA provisions related to portfolio investments. Concerning the Investor-State dispute settlement provisions, the Court considered that; approval of Section B of Chapter 9 of the envisaged agreement falls not within the exclusive competence of the European Union, but within a competence shared between the European Union and the Member States.84

As a consequence, the clarification in Germany v Council does not concern the Investor-State dispute settlement provisions, which do not correspond to a policy objective and which require joint conclusion of the EUSFTA as a mixed agreement unless the latter is split. It follows that the question of mandatory or facultative mixity only applies to the first, normative sense of shared competence. The only way to avoid mixity in the case of the Member States’ exclusive competence concerning dispute-settlement provisions is to take them out of the envisaged agreement. However, an assessment of the dispute-settlement provisions from a division of competences perspective can still be done.

  Para. 293.

84

M4644-CHAISSE_9781788971898_t.indd 57

11/10/2018 10:22

58

China–European Union investment relationships

In EUSFTA’s case, the dispute-settlement provisions do not correspond to the division of legislative competences between the Union and its Member States; rather, they relate to the essential characteristics of the EU legal order, such as the implementing competence of the Member States’ national courts. The question, thus, is whether mixity can be avoided without affecting the Member States’ status as the masters of the Treaties. Even though the Court of Justice explicitly mentioned, in Opinion 2/15, that it would not address the question of autonomy, but only the question of competence, it should be noted that the autonomy perspective is the one perspective that can justify mixity without alienating the sense of ‘shared competence’. Indeed, international agreements that do not introduce new legislation, but have an impact on institutional provisions or concern the scope of application of EU law, are concluded as mixed agreements.85 In such cases, mixity can be avoided only upon a specific mandate from the Member States to the Union,86 as the specific characteristics and the scope of application of the EU legal order, i.e., the claim of autonomy, cannot be altered without the Member States’ consent. Moreover, such a case would raise an additional question: is the Member States’ consent even sufficient to mitigate a claim of autonomy? As Opinion 2/15 does not address the issue, the compatibility of the EUSFTA’s (and any other NGFTAs’) dispute settlement provisions remains an open question.

  For example the agreement on the European Economic Area [1994] OJ L1/3. Hernik Bull, ‘Mixity Seen from outside the EC but Inside the Internal Market’, in Hillion and Koutrakos (n 8) 320. 86   In the current context of the Brexit negotiations, it is considered that the Union has the mandate, pursuant to Art. 50 TEU, to negotiate and conclude alone the withdrawal agreement with the UK, without this specific competence affecting the division of competences between the Union and its Member States. Council of the European Union Directives for the Negotiation of an Agreement with the United Kingdom of Great Britain and Northern Ireland Setting out the Arrangements for its Withdrawal from the European Union of 22 May 2017, XT 21016/17, ADD 1 REV 2 BXT 24, para. 5. 85

M4644-CHAISSE_9781788971898_t.indd 58

11/10/2018 10:22

4. EU-China economic relations: interactions and barriers Pascal Kerneis I. INTRODUCTION This chapters looks first into the economic figures of trade and investment between the EU and China, before analysing the state of play of the ongoing negotiations of a bilateral investment agreement between the two parties.

II. INTERNATIONAL TRADE AND INVESTMENT IN SERVICES BETWEEN CHINA AND EU: FACTS AND FIGURES Trade and investment between the EU and China has increased dramatically in recent years. China has become the EU’s biggest source of imports and has become the EU’s fastest growing export market. Trade in goods largely dominate the trade relationship between the EU and China. Only 18 per cent of all EU exports to China in 2015 were from trade in services, which is significantly lower that the EU average with the world, where 26.9 per cent of EU trade comes from services. China’s exports in services to the EU were only 7 per cent, which is very low, and shows that the bulk of the exports to the EU are goods. Indeed, it exported 350.4 billion euros to the EU in 2015, with a huge net surplus of 180.3 billion euros. Trade in services is therefore an area that China should seriously improve on. 50.2 per cent of China’s GDP is made up of services. The country is steadily moving from manufacturing to a more service-orientated economy, but this is not yet transcribed into its exports to the EU. Services make up 74 per cent of EU GDP and provides 60 per cent of employment in the EU. EU trade in services balance with China in 2015 produced a surplus of 10.3 billion euro. This

59

M4644-CHAISSE_9781788971898_t.indd 59

11/10/2018 10:22

60

China–European Union investment relationships

was due to a surge in exports. Indeed, exports reached 36 billion euro while imports were 25.7 billion euro.1 The EU is by far the world’s biggest exporter of trade in services. According to the WTO Trade Statistical Review 2016, if intra- and extraEU trade are combined, the EU is responsible for 42 per cent of global export in services, thus making it by far the biggest exporter of services. If we take only extra-EU exports, the EU is still by far the biggest global exporter of services, with 915 billion euros in 2015, representing 24.9 per cent of world export. China is however a very important player also in trade in services, with total exports of 285 billion euros in 2015, ranking third after the US (690 billion euros). It is important to understand the role of trade in services in the world trade and in the EU-China relationship. The figures provided by the traditional method of the balance of payment inform us of the very large predominance of trade in goods. This is in total disconnect with the fact that the majority of the production (GDP) in the two economies are dominated by services. It is interesting to ask ourselves why that is. A possible answer to that question has been found by looking for another way to calculate international trade. There is indeed a completely different perspective if we use the traditional way of counting the volume of transactions at the border or if we use the new way, the Trade in Value-Added indicators (TIVA) which is a database compiled by the OECD and the WTO. It is primarily viewed to outline trade flows taking place within Global Value Chains (GVC’s). The TIVA database provides statistics on the value of trade by source of destination, analysing the supply of goods and services in the Global Value Chains, rather than counting trade in terms of volumes at the borders (Balance of Payments). It should be noted that the TIVA database only shows stats up to 2011 (the latest figures available so far with this new method).2 When we compare the Balance of Payments indicator and TIVA we see a stark difference in the data. EU exports in BOP in 2014 shows that 73.1 per cent in goods and 26.9 per cent in services. The TIVA indicator shows a different story. The 2011 statistics show that 58.4 per cent of the value of total exports are coming from services (including services around the exports of goods), and 39.9 per cent from goods. Although, the TIVA statistics only go up to 2011, it is still a more accurate portrayal of the results, and it provides a better understanding of the value of services in international trade. It is now providing a picture that is more conform to

  Source Eurostat 2015 (Data Explorer: bop_its6_det).   Source WTO Trade Statistics review 2016 – figures from 2015.

1 2

M4644-CHAISSE_9781788971898_t.indd 60

11/10/2018 10:22



EU-China economic relations 61

the fact that services contribute to 70 per cent of the national GDPs, but also to 60 per cent of external trade. When it comes to China, the BOP statistics show that China’s trade is heavily influenced by goods (91.2 per cent). This is true, but if you look at the TIVA database for China in 2011 it shows that 41.9 per cent of the value of all exports of China is coming from services. This again is a stark difference form the BOP stats which only shows 8.8 per cent in services. There is a difference of 33.1 per cent which is very significant. The TIVA database is crucial for the service sector and gives a more accurate portrayal of the statistics. For China, it shows that a large part of their economy is already orientated in services. To properly grasp the importance of services in international trade relationship, one must also apprehend the importance of foreign direct investment (FDI) for services providers who want to reach consumers in other than their home market. An international trade and/or investment agreement are a tool to open and secure the market to services suppliers in foreign markets. Services commitments in trade agreements are directly linked to investment and must be seen as FDI commitments. Indeed, a large part of market access commitments for the services providers in trade agreements are about mode 3 (commercial presence abroad) commitments. Hence, this explains why a large part of the FDI figures are from services sectors. In 2014, 58.6 per cent of total EU outward FDI stocks are invested in services. And, 87.3 per cent of EU inward FDI stocks are invested into services. Which means that the vast majority of FDI coming to the EU are invested in services sectors. But China still invests heavily in manufacturing. An agreement on trade and investment with the EU should create the conditions for China to increase investment in services. And pushing this logic, one can estimate that the EU companies would invest much more into services activities abroad, should the markets be open. But that is often not the case, and this is particularly true in China as we will see it later in this chapter. The EU is by far the biggest investor and recipient of FDI in the world: in 2015, the EU FDI inward stock was 7.72 trillion $US, while the EU FDI outward stock was 9.34 trillion $US.3 China is also a major investor (1.22 trillion $US inward stock) and recipient of FDI (1.01 trillion $US outward stock in 2015). But unfortunately, it doesn’t seem that much of these FDI are between EU and China. As of 2015, China only received 2.4 per cent of EU FDI. And more importantly, only 0.6 per cent of inward FDI in   UNCTAD, World Investment Report 2016 – Annex Table 2, p. 200.

3

M4644-CHAISSE_9781788971898_t.indd 61

11/10/2018 10:22

62

China–European Union investment relationships

the EU was coming from China.4 This is another clear indication that a trade and investment agreement between the EU and China could greatly benefit the two parties. It is worthwhile analysing the mood in the bilateral investment relationship between EU and China and try to identify what are the recent trend, although it is always difficult and risky to take any conclusion from the short-term trend to the long-term. It is true that in the recent years, China investment to the EU has increased, growing from 18.5 billion euros in 2011 to 34.9 billion euros in 2015 (+88per cent), but itis true also that the EU investment to China has significantly increased in the same period, growing from 103 billion euros to 168.4 billion euros (+64 per cent). So why do we seem to have much information about a decrease of EU investment in China? There are a lot of experts talking about the decrease of the Chinese economy. It is said that this decrease is becoming the ‘new normal’. It is true that the Chinese economy showed a growth in 2014 of 7.5 per cent and in 2016 it dropped to 6.7 per cent, but while this reduction of 0.8 per cent. is a significant reduction, the growth rate of 6.7 per cent is still very impressive. It is only second to India which had a growth of 7.5 per cent in 2016. It would be misleading to say that the Chinese economy’s attractiveness is decreasing. It is merely slightly slowing down and concentrating on more domestic policies like environmental issues, housing, and its ageing population.5 It is true however that China has made unconvincing new government measures with regard to eliminating some of its trade and investment restrictions, and investors are looking carefully at the forthcoming reforms. The announcement of the setting up of Free Trade Zones (FTZ), with the first pilot project in Shanghai, let foreign direct investors believe that China would finally, although only gradually, open up its market to investors. But, unfortunately, there were no real new openings and a lack of persuasion of efficiency of new FTZ. Despite the positive statements about China opening up its markets, little actual progress has been made. China has effectively introduced a negative list approach, and re-grouped existing restrictions, but the restrictions list is still very broad. There is a clear lack of coordination between the various levels of central, regional and local authorities, which is creating confusion and hence lack of clarity

4   See Eurostat Foreign direct investment statistics 2017 – Top 10 countries as extra EU-28 partners for FDI stocks, EU-28, end 2012–2015 (billion EUR). 5  See accessed 8 July 2018, national bureau of statistics of China.

M4644-CHAISSE_9781788971898_t.indd 62

11/10/2018 10:22



EU-China economic relations 63

and certainty, which are the two main elements that investors are looking for. Furthermore, China is introducing worrying new localisation requirements under the umbrella of ‘cyber security’. This includes insurance, banking and IT sectors. The internet censorship measures are directly hurting the daily activities of foreign companies trying to do and expand business in China, in particular for the Research and Development centres, in which, paradoxically, China is calling for more investment. These measures are becoming more and more incompatible with the modern digital economy. Depriving investors of the control of their digital strategy and of their data is perceived as a major impediment to foreign companies. Localisation restrictions can play a negative role in growth, preventing investors to take maximum optimisation of the digital strategy. E-commerce is a major contributor to job growth and these restrictions can inhibit that. If we look at the other way around, i.e., the trend of foreign direct investment (FDI) coming from China to the EU, it seems that many report that Chinese FDI into the EU has been increasing significantly in the recent years. It is true that China has invested in some flag ship manufacturing operations which attracted much media attention. It has notably invested in German robotics, in semi-conductors in Sweden, in Greek harbours and in various other projects. However, despite these high-profile projects, investment by China in the EU remains overall very low as we show in the figures above. Many questioned whether these projects and others from Chinese investors were led by politics and not really by business wisdom or profit driven, but there is no clear evidence of that.

III. EU-CHINA COMPREHENSIVE INVESTMENT AGREEMENT (CIA): WHAT’S IN IT? Let us now look at whether an agreement between the authorities between these two economic giants could improve the investment environment. Let us first have a brief overview of the timeline of the negations: the Council of the EU trade ministers authorised the European Commission to initiate negotiations for a comprehensive EU-China investment agreement on 18 October 2013. Negotiations this investment agreement were formally launched at the EU-China Summit of 21 November 2013 in Beijing. The aim of this agreement is to remove market access barriers to investment and provide a high level of protection to investors and investments in EU and China markets. There have now been 13 rounds of negotiations between the EU and China, with the last round having taken place on

M4644-CHAISSE_9781788971898_t.indd 63

11/10/2018 10:22

64

China–European Union investment relationships

the week of 15 May 2017. The 14th round of negotiations took place in Brussels in the week of 11 July 2017, but it is not clear whether progress were achieved and so far no date is set for the next round. It is worth underlining that, should the negotiations succeed, the new agreement would replace the 26 existing bilateral investment treaties (BITs) between 27 individual EU Member States and China with one single comprehensive investment agreement. So far, only Ireland does not have a BIT with China (and with any other countries in the world). In early 2016, the EU and China negotiators reached clear conclusions on an ambitious and comprehensive scope for the EU-China investment agreement and established a joint negotiating text. So, what could be the content of the EU–China Bilateral Investment Agreement? Ideally, the business community would welcome that the negotiators would aim at a ‘deep and comprehensive Investment Agreement’, which would encompass everything but trade in goods related issues. Before going any further it should be explained here that China has in many occasions asked the EU to open full-fledged trade and investment negotiations covering all issues in trade agreements, but the EU has repeatedly replied that, in the current sensitive trade environment in Europe vis-à-vis China (anti-dumping measures, steel overcapacity, market economic status and the on-going discussion in WTO, etc.), it was not politically possible to enter in tariffs reduction discussion with China. The negotiations will therefore cover all issues that are linked to investment activities. In regard to services, this would cover market access issues which are linked to investment, i.e., not only the commercial presence abroad (mode 3 of the GATS), but also the movement of people linked to the investments, i.e., intra-corporate transferees (ICT) who will come and work in the subsidiaries and joint-ventures.6 There are still questions whether copyrights, patents, and data flows, etc. which are linked to the investment will be covered by the agreement. It would seem logical to cover the intellectual property that is linked to the FDI. Similarly, the flows of data from headquarters and other subsidiaries to the Chinese subsidiaries are in today’s digital economy an integral part of an activity of that entity, and without that access, the investors might decide not to invest, or not in the same way. Although the business community would argue in favour of it, government procurement is not part of the EU-China negotiations on

6   See Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime’ (2012) 15(1) Journal of International Economic Law 51–84.

M4644-CHAISSE_9781788971898_t.indd 64

11/10/2018 10:22



EU-China economic relations 65

a future comprehensive investment agreement. The parties also excluded from the scope of the talks regulatory disciplines and cooperation. On the other hand, the negotiators agreed that the agreement will include a ‘Sustainable Development Chapter’, which is EU jargon to indicate that it will includes rules on labour and rules on environment. It is not clear however at this stage whether it will include any sanctions, and whether these rules will apply also to the numerous ‘state-owned companies’. In addition to the negotiations of pre-establishment market access, the agreement will then of course adopt rules and disciplines on postestablishment protection. This section will include the traditional rules on fair and equitable treatment, etc. As for the investor to state dispute settlement (ISDS), it is not clear at this stage what it will be. Due to major public attention driven by strong opposition of civil society organisations to a ‘private’ arbitration system, the EU developed a new Investment Court System (ICS) which significantly differ from the traditional arbitration system invented by the European countries themselves in the end of the fifties and put into place through the ICSID (International Centre for Settlement of Investment Disputes). The ICSID is an international arbitration institution established in 1965 for legal dispute resolution and conciliation between international investors. The ICSID is part of and funded by the World Bank Group, headquartered in Washington, D.C., in the US.7 This chapter will however not expand on the content of this. We will then focus on the market access part of the investment agreement, which is a key pillar in the ongoing negotiations. The current legally bidding level for China is its Schedule of Commitments that it undertook upon its WTO accession in 2001 under the GATS framework. So far, it therefore covers only the services sectors. It does not cover the primary sectors (agriculture, aquaculture and fisheries, mining and quarrying, other raw material and commodities) and the secondary sectors (all the manufacturing sectors). Opening investment opportunities in these two areas will then be discussed for the first time between the two parties. The parties have decided that for the scheduling of market access and national treatment commitments, they will be using a negative list approach. This means that instead of listing positively the sectors and subsectors which will be open for investment – and consequently all sectors which will not be listed remain closed, or at least uncommitted in the

  See Julien Chaisse and Rahul Donde, ‘The State of Investor-State Arbitration-A Reality Check of the Issues, Trends, and Directions in Asia-Pacific’ (2018) 51(1) The International Lawyer 47–67. 7

M4644-CHAISSE_9781788971898_t.indd 65

11/10/2018 10:22

66

China–European Union investment relationships

agreement – the two parties will use a system where by default all sectors are open, except those which are listed as restricted, and then the restrictions are precisely described. This is the EU’s industry preferred choice. The negative list approach is preferred so as to ensure a good readability and comparability of the various parties’ commitments. Such a method obliges the negotiators to review together all service sectors and produce greater liberalisation results and greater clarity, since it is much easier for businesses to assess whether their sector is covered or not and what the limitations are. But of course, everything will depend on the content of the list. China has started to use this system of negative list some years ago, in the 12th Five Years Plan for ‘Utilisation of Overseas Capital and Investment Abroad’ initiated by the China National Development and Reform Commission (NDRC) in 2012. It was also mentioned in the Third Plenum of the 18th Party Congress in November 2013. These crucial policy documents have mentioned very promising steps for reforms and opening up of markets, and expectations by potential foreign investors in China were high. But long-awaited promises have not been fulfilled thus far. In 2015, a revised Catalogue has lifted restrictions on FDI in several areas, including in the manufacturing sector, but has made limited progress in services, agriculture and infrastructure, which are sectors where European investors are eager to get access. According to the NDRC, the catalogue reduces the number of restricted industries from 79 to 38, with direct sales and insurance brokerage companies among the beneficiaries. It limits the number of sectors for which Chinese-controlled joint ventures were required from 44 to 35. It also reduces the number of industries requiring joint ventures with Chinese partners, but allowing foreign control, from 43 to 15, including real-estate developments. All of these announcements are more than welcomed, and it is hoped that these promises will effectively implemented on the ground and that they will be transcribed into the bilateral investment agreement. If we focus on the services sectors in particular, one can see that the 12th FYP for ‘Utilisation of Overseas Capital and Investment Abroad’, issued by NDRC in 2012 encourages foreign investment in production services such as modern logistics, software development, engineering design, vocational skill training, information consulting, technology, and intellectual property services. It is also argued that it will ‘steadily open up’ banking, securities, insurance, telecom, fuel and logistics industries, guides foreign capital to enter healthcare, culture, tourism, home services and it also encourages foreign capital to enter creative design. In practice however, the Chinese government largely failed to fully deliver this programme. The

M4644-CHAISSE_9781788971898_t.indd 66

11/10/2018 10:22



EU-China economic relations 67

13th FYP was expected in the fall of 2017, and foreign investors will carefully monitor the intentions of the government in the sectors listed above. Indeed, market access barriers remain important in China in most of these listed sectors. And it has not been really possible to test the real political willingness of China to open further through bilateral or plurilateral trade and investment negotiations: China had expressed an interest in entering into negotiations in the Trade in Services Agreement (TISA). The TISA negotiations started in 2013, but are currently stalled due to the uncertainty created by the election of Donald Trump as President of the United States. China was also entering into the final phase of the negotiations of a bilateral investment agreement with the US, but they also have stalled and it is not clear whether the new US administration will be willing to resume them both. So the negotiations of the EU-China Comprehensive Investment Agreement are the real test for the Chinese authorities. The business community would aim at the removal of all equity caps, with negotiated exceptions. Business will also look at getting more commitments in professional services, which include lawyers, auditors and accountant, architects and engineers, etc., in telecommunication services, in postal and express services, and in the various financial services sectors (banking, asset managements, insurance). For instance, it is expected that the negotiators will try to remove or reduce these following existing equity caps and joint venture requirements: So far, foreign stakes are limited to 50 per cent in value-added telecom services (excepting e-commerce); 49 per cent in basic telecom enterprises; 50 per cent in life insurance firms and 49 per cent in security investment fund management companies. Another example of obstacle to do business for foreign investors are the existing citizenship requirements, where for instance in the accounting and auditing sectors, the chief partner of a firm must be a Chinese national. There are many other examples of this nature. The bilateral investment agreement will be an opportunity to negotiate the removal of concrete market access barriers. Furthermore, these negotiations are also seen by foreign investors as a unique occasion to improve the business environment in China. Companies often cite a long list of significant challenges to establishing and operating businesses in China. These challenges include: ●● ●● ●● ●●

rising costs, difficulty in finding qualified human resources unclear and inconsistent enforcement of laws and regulations corruption at various level of the authorisation and licensing procedures opaque and selectively enforced investment approval procedures

M4644-CHAISSE_9781788971898_t.indd 67

11/10/2018 10:22

68 ●● ●●

China–European Union investment relationships

licensing barriers that favour domestic firms. unreliable legal system, lacking effective administrative and legal resources. Forced transfer of technology and new barriers on crossborder data flows. There is a draft counter terrorism law, which imposes onerous requirements on foreign technology firms. There is an intrusive national security mechanism, and this could be used to hinder or block FDI.

More than half of the US and EU companies – surveyed by the American Chamber of Commerce known as AmCham and by the EU China Chamber of Commerce (EUCCC), expressed the view that foreign businesses are less welcome in China than before. This survey was conducted in 2014. It is hoped that the negotiations of the EU-China Comprehensive Investment Agreement will reached an ambitious and balanced conclusion that will contribute to restore a positive business environment and trust in both parties, to allow trade and investment to strive.

M4644-CHAISSE_9781788971898_t.indd 68

11/10/2018 10:22

5.  T  he potential role of sustainability impact assessment in the EU-China BIT Negotiations Fernando Dias Simões I. THE NEW AGE OF TRADE AND INVESTMENT IMPACT ASSESSMENT Over the past years, impact assessment studies became a regular feature of trade and investment policymaking processes.1 These studies collect quantitative and qualitative information on the connexion between proposed policies and their likely positive or negative consequences.2 The ex ante assessment of proposals offers data that negotiators can integrate into the negotiation process in order to address public concerns.3 Moreover, the ex post appraisal of policies provides policymakers with figures on   Lisa Alf and others, ‘Towards a Transatlantic Dialog on Trade and the Environment: A Comparison of Approaches to Environmental Impact Assessments of Trade Agreements in the US and EU’ (2008) School of Advanced International Studies, Henry Luce Foundation, EcoLogic 45 accessed on May 7, 2018; Clive George and others, ‘Sustainability Impact Assessments Applied to Regional Integration’ in Philippe De Lombaerde and others (eds), The Regional Integration Manual: Quantitative and Qualitative Methods (Routledge, 2011) 247; Stephen White and Jakub Koniecki, ‘How Informed Should Decisions be?’ in Anneke von Raggamby and Frieder Rubik (eds) Sustainable Development, Evaluation and Policy-Making: Theory, Practise and Quality Assurance (Edward Elgar, 2012) 129. 2   Colin Kirkpatrick and Clive George, ‘Assessing the Sustainability of Trade Policies and Agreements’ in Organisation for Economic Co-Operation and Development (ed) Conducting Sustainability Assessments (Organisation for Economic Co-Operation and Development, 2008) 120; Clive George and Colin Kirkpatrick, ‘Creation of Processes: Sustainability Impact Assessments’ in Diana Tussie (ed) The Politics of Trade: The Role of Research in Trade Policy and Negotiation (Republic of Letters, 2009) 56. 3   See Clive George and Colin Kirkpatrick, ‘Trade and Development: Assessing the Impact of Trade Liberalisation on Sustainable Development’ (2014) 38(3) Journal of World Trade 441. 1

69

M4644-CHAISSE_9781788971898_t.indd 69

11/10/2018 10:22

70

China–European Union investment relationships

their actual effectiveness4 This enables negotiators and governments to weigh the advantages and drawbacks of trade and investment policies and reshape them when they are not adequate. Finally, impact assessment studies may help to manage the expectations of varied stakeholders and reduce dissatisfaction with the regime.5 Trade impact assessment studies have been conducted over the last years by different entities – national governments, international organisations, non-governmental organisations – with diverse scopes and under different designations.6 Within the European Union (EU) there are two types of studies concerning the impact of trade policies: Impact Assessments (IAs)7 and Sustainability Impact Assessments (SIAs).8 IAs are prepared by the European Commission services and accompany the decision by the College of Commissioners to request a negotiating authorisation from the European Council, together with the draft negotiating directives to be issued by the latter.9 Once the Commission receives the negotiating mandate, a trade SIA is launched. While IAs are conducted before the negotiating mandate is granted, and analyse whether action should be taken; trade SIAs take place after the negotiation process has been initiated, discussing what actions to implement and their likely consequences.10 Another difference is that IAs are undertaken by Commission services,11   George, Iwanow and Kirkpatrick (n 1) 247.   Susan Franck, ‘Managing Expectations: Beyond Formal Adjudication’ in Roberto Echandi and Pierre Sauvé (eds), Prospects in International Investment Law and Policy: World Trade Forum (Cambridge University Press, 2013) 371–2.  6   See, e.g., United Nations Environment Programme, ‘Reference Manual for the Integrated Assessment of Trade-Related Policies’ (2001) accessed on May 7, 2018; Asian Development Bank, ‘How to Design, Negotiate, and Implement a Free Trade Agreement in Asia’ (2008) accessed on May 7, 2018; Organisation for Economic Co-operation and Development, ‘Guidance on Sustainability Impact Assessment’ (2010) accessed on May 7, 2018.  7   See European Commission, ‘Impact Assessment Guidelines’ (2009) accessed on May 7, 2018.  8   See European Commission, ‘Handbook for Trade Sustainability Impact Assessment, 2nd ed.’ (2016) accessed on May 7, 2018.  9   Ibid., 7. 10   European Commission (n 8) 11. See also Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime’ (2012) 15(1) Journal of International Economic Law 51–84. 11   Ibid., 7.  4  5

M4644-CHAISSE_9781788971898_t.indd 70

11/10/2018 10:22



The potential role of sustainability impact assessment 71

while SIAs are carried out by external consultants,12 with the Commission commenting on their findings via so-called ‘position papers’.13 The European Commission has been carrying out SIAs on all trade agreements negotiated since 1999.14 By the end of 2017, 26 SIAs had been completed and two were ongoing.15 SIAs are defined by the European Commission as ‘a trade-specific tool developed for supporting major trade negotiations conducted under the aegis of the EU Commissioner for Trade. SIAs are a key tool for the conduct of sound, evidence-based and transparent trade negotiations’.16 They complement the initial IA conducted by the Commission before negotiations are launched.17 Despite the use of the term ‘sustainability’, SIAs go beyond the mere assessment of environmental impact, also gauging the economic, social, and human rights consequences of trade agreements, thereby offering important inputs on the nexus between these different dimensions.18 Furthermore, these studies calculate the effect of trade agreements not only in the EU, but also in the partner country and in developing countries,19 thereby making a significant contribution to regional and global governance.20 The SIA mechanism signals an effort by the European Commission to adopt a new policymaking process that pursues diverse goals simultaneously: ‘evidence-based policymaking’, ‘better governance’, ‘sustainable development’, and the need to ‘act globally’.21   European Commission (n 8) 5, 6 and 9.   Ibid., 13, 30. 14   Ibid., 4. 15   European Commission, ‘Sustainability Impact Assessments’ accessed on May 7, 2018. 16   European Commission (n 8) 4. 17   Ibid., 3 and 14. 18   Markus Gehring and others, ‘Sustainability Impact Assessments as Inputs and as Interpretative Aids in International Investment Law’ (2017) 18(1) Journal of World Investment and Trade 163, 165. 19   European Commission (n 8) 5. 20   Colin Kirkpatrick and Clive George, ‘Methodological Issues in the Impact Assessment of Trade Policy: Experience from the European Commission’s Sustainability Impact Assessment (SIA) Programme’ (2006) 24(4) Impact Assessment and Project Appraisal 325. 21   Clive George and Colin Kirkpatrick, ‘Sustainability Impact Assessment of World Trade Negotiations: Current Practice and Lessons for Further Development’ (2003) Impact Assessment Research Center Working Paper no 2, 2–3 accessed on May 7, 2018. According to the European Commission (n 8, 6), SIAs are inspired by six key principles: they are ‘integrated, independent, evidence-based, transparent, participatory, and proportionate’. 12 13

M4644-CHAISSE_9781788971898_t.indd 71

11/10/2018 10:22

72

China–European Union investment relationships

Trade SIAs are an instrument for cooperation between an enlarged number of actors with an interest in the trade and investment policymaking process. According to the European Commission, three main players are involved in the conduct of SIAs: consultants, stakeholders, and the Commission’s services.22 While trade SIAs are carried out by external consultants, these should not be perceived as true stakeholders but rather as policy actors.23 This is acknowledged by the Commission itself when it expressly distinguishes between SIA players and SIA stakeholders.24 The trade SIA programme offers an opportunity for stakeholders in both the EU and its partner countries to share their views with negotiators and policymakers. The European Commission states: Transparency is a central element of SIAs. By relying on a genuine, wideranging and continuous consultation of stakeholders, SIAs contribute to fulfilling the Commission’s commitment to ensure transparent trade negotiations. They are a prime opportunity for stakeholders to inform EU negotiators of their views on the potential economic, social, human rights and environmental consequences of ongoing trade negotiations.25

Trade SIAs can shed light on relevant issues that are frequently overlooked during negotiations.26 Such open, all-inclusive debate about the consequences of international trade and investment policies might help policymakers to integrate societal concerns such as sustainable development more fully into trade policies.27 Furthermore, these studies inform the general public about the potential effects of projected policies by including mechanisms for public participation and consultation.28 Public   European Commission (n 8) 10.   However, the actorness of external consultants should not be overstated as they have limited influence on the policymaking process – see Fernando Dias Simões, ‘External Consultants as Actors in European Trade and Investment Policymaking’ (2018) 48 Netherlands Yearbook of International Law 2017 (forthcoming). 24   European Commission (n 8) 10. 25   Ibid., 5. 26   Markus Gehring and Marie-Claire Cordonier Segger, ‘Overcoming Obstacles with Opportunities: Trade and Investment Agreements for Sustainable Development’ in Stephan Schill and others (eds), International Investment Law and Development: Bridging the Gap (Edward Elgar, 2015) 103. 27   Kirkpatrick and George (n 2) 120; George and Kirkpatrick (n 2) 58; Kirkpatrick and George (n 20) 327; Clive George and Bernice Goldsmith, ‘Impact Assessment of Trade-related Policies and Agreements: Experience and Challenges’ (2001) 24(4) Impact Assessment and Project Appraisal 254. See also Hussein Abaza and Robert Hamwey, ‘Integrated Assessment as a Tool for Achieving Sustainable Trade Policies’ (2001) 21(6) Environmental Impact Assessment Review 481. 28   Kirkpatrick and George (n 2) 120; Clive George and Colin Kirkpatrick, 22 23

M4644-CHAISSE_9781788971898_t.indd 72

11/10/2018 10:22



The potential role of sustainability impact assessment 73

participation is a key element of the process,29 enhancing the credibility of the study by ensuring that all costs and benefits are taken into account30. It also performs an educative role, helping to build public political support.31 This chapter examines the level of stakeholder involvement in the SIA currently underway in support of the negotiations for a Bilateral Investment Treaty (BIT) between the EU and China. Based on an analysis of the publicly available information, it is argued that several factors seemingly reduce the opportunity for some stakeholders to share their views with negotiators, thus raising doubts about their potential contribution to the policymaking process.

II. IMPACT ASSESSMENT ON THE EU-CHINA INVESTMENT AGREEMENT In May 2010 the European Commission and the Chinese Ministry for Trade agreed to launch a Joint EU-China Investment Taskforce to study the options for enhancing bilateral investment and evaluate the desirability and feasibility of potential negotiations of an EU-China investment agreement.32 An Impact Assessment Steering Group was set up comprising a wide range of Directorates-General and services, with the  Directorate General for Trade (DG Trade) as the lead service.33 The goal of the study was to analyse ‘the underlying problems in the current EU-China investment relationship, the different options to address these and their respective ‘Sustainability Impact Assessment of Trade Agreements: From Public Dialogue to International Governance’ (2008) 10 Journal of Environmental Assessment Policy and Management 67, 68; Gerald Berger, ‘Sustainability Impact Assessment: European Approaches’ in Organisation for Economic Co-Operation and Development (ed) Conducting Sustainability Assessments (Organisation for Economic Co-Operation and Development, 2008) 19. 29   Gehring and Cordonier Segger (n 26) 103. 30   Andrew Stoeckel and Hayden Fisher, ‘Policy Transparency – Why does it work? Who does it best?’, Rural Industries Research and Development Corporation and the Centre for International Economics (2008) 57–8, accessed on May 7, 2018. 31   Ibid., 58. 32   European Commission, ‘Commission Staff working document: impact assessment report on the EU-China investment relations accompanying the document recommendation for a Council Decision authorising the opening of n ­ egotiations on an investment agreement between the European Union and the People’s Republic of China’ (2013) 2 accessed on May 7, 2018. 33  Ibid.

M4644-CHAISSE_9781788971898_t.indd 73

11/10/2018 10:22

74

China–European Union investment relationships

impacts’.34 An external consultant was retained to support the work with key inputs, data and economic analysis on the EU-China investment relation, including quantitative and qualitative analysis of foreign direct investment flows, barriers to investment and the situation regarding investment protection.35 Several consultations with stakeholders and experts were conducted to ‘ensure that all interested parties could contribute to the policy decision making process’.36 A special session informing and consulting social partners was organised in the context of the regular Liaison Forum with Social Partners,37 as well as two Civil Society Dialogues on the future EU-China investment relationship.38 A public consultation on the EU-China future investment relationship was conducted in 2011, open to all stakeholders, both within the EU and in third countries.39 An online questionnaire was posted on DG Trade’s website and advertised on the ‘Your voice in Europe’ website as well as on the Directorate-general for Enterprise and Industry’s European Small Business Portal.40 The questionnaire contained 34 questions covering three main topics: investment environment in China, investment environment in the EU, and the potential impacts of an EU-China investment agreement.41   European Commission (n 32) 2.   Ibid. See Copenhagen Economics, ‘EU-China Investment Study. Final Report’ (2012) accessed on May 7, 2018. 36   European Commission (n 32) 3. 37  Ibid. 38   Ibid. See also European Commission, ‘Meetings: Civil Society Dialogue meeting on Public consultation on possible EU-China investment agreement’ accessed on May 7, 2018; European Commission, ‘Civil Society Meeting: Future EU-China Investment Relationship’, accessed on May 7, 2018; European Commission, ‘Meetings: EU-China investment relations’ accessed on May 7, 2018; European Commission, ‘Civil Society Meeting: EU-China Investment Relationship – Update of State of Play’ accessed on May 7, 2018. 39   European Commission, ‘Consultations: Public Consultation on the future investment relationship between the EU and China’ accessed on May 7, 2018. 40   European Commission (n 32) 3. 41   For the written version of the questionnaire, see European Commission, ‘Public Consultation on the Future Investment Relationship Between the EU and China’ accessed on May 7, 2018. 34 35

M4644-CHAISSE_9781788971898_t.indd 74

11/10/2018 10:22



The potential role of sustainability impact assessment 75

In all, 57 usable answers were received from a wide range of respondents, including private companies, trade associations, trade union, governmental authorities and NGOs.42 Among the respondents 59 per cent were companies, 26 per cent were trade associations, 9% per cent were governmental or regulatory authorities, 4 per cent were trade unions, and one was an NGO.43 The on-line consultation exercise made clear that all contributions would be published unless respondents expressed their opposition.44 The external consultants also conducted a business survey directed at identifying specific barriers to European investments in China.45 Approximately 1,000 companies were contacted, and 203 answers were received.46 The external consultants and DG Trade also conducted a fact finding mission to China during which they informally interviewed around 20 European companies based in Beijing as well as the EU SMEs’ centre and representatives of SMEs in China.47 The Impact Assessment Report, concluded in March 2013, analyses and compares the different policy options that have been considered by the European Commission: continuing with the status quo; the negotiation of a standalone investment protection agreement; the negotiation of an agreement combining investment protection with market access; modifying the existing negotiating directives for the Partnership and Cooperation Agreement (PCA) to include investment protection; and seeking a comprehensive Free Trade Agreement with China rather than pursuing a sectoral agreement.48 Still, the report stresses: the Commission’s possible legislative initiative subject to the analysis of this impact assessment would be a recommendation to the Council to authorise negotiations and adopt negotiating guidelines. Such guidelines in their final form express objectives but do not prejudge the outcome of a negotiation and thus grant some inbuilt flexibility as to the precise negotiated outcome.49

Furthermore, the Impact Assessment Report underlines the central role that trade SIAs play during the negotiation process: ‘[trade SIAs] have   European Commission’s Directorate General for Trade, ‘Summary of­contributions to the European Commission’s public consultation on “The future investment relationship between the EU and China”’ (2011) 2, accessed on May 7, 2018. 43   Ibid., 3. 44   European Commission’s Directorate General for Trade (n 42) 3. 45   European Commission (n 32) 4. 46  Ibid. 47  Ibid. 48   Ibid., 22–56. 49   Ibid., 22. 42

M4644-CHAISSE_9781788971898_t.indd 75

11/10/2018 10:22

76

China–European Union investment relationships

been applied to all the EU’s major multilateral, regional or bilateral trade negotiations since 1999. (. . .) DG Trade will assess how best to ensure that the negotiations on investment [w]ith China are properly supported by ongoing policy and analysis’.50 This statement is in line with the function that SIAs play in the EU’s trade impact assessment system: they complement the initial IA conducted by the Commission before negotiations are launched.51

III.  SUSTAINABILITY IMPACT ASSESSMENT The European Commission and China agreed to start discussing a BIT during the 14th EU-China Summit held in Beijing in early 2012.52 In October 2013 the European Commission received authorisation from the European Council to launch negotiations.53 The first round of negotiations took place in Beijing in January 2014.54 In November of the same year the European Commission launched a call for tenders for a contract to provide a trade SIA in support of the negotiations.55 The purpose of the study was described as follows: The SIA shall assess how the investment provisions under negotiations could affect economic, social, human rights and environmental issues in the EU and in China. Furthermore, it shall make recommendations to maximize the   Ibid., 56.   European Commission (n 8) 3 and 14. 52   European Commission: ‘Press Release: Commission proposes to open negotiations for an investment agreement with China’ (2013) accessed on May 7, 2018. 53   European Commission: ‘Press Release: EU and China begin investment talks’ (2014) accessed on May 7, 2018. 54  Ibid. 55   European Commission, ‘Terms of Reference related to a Contract to provide a Trade Sustainability Impact Assessment (SIA) in support of an investment agreement between the European Union and the People’s Republic of China, Multiple Framework Contract TRADE2014/01/01; request for services TRADE2015/B2/ B02’ acce­­ ssed on May 7, 2018. As recalled in the Impact Assessment Report (n 32, 56), a trade SIA had already been conducted in the framework of the Partnership and Cooperation Agreement (PCA) between China and the EU, which was never attained. See European Commission, ‘Trade Sustainability Impact Assessment of the Negotiations of a Partnership and Cooperation Agreement between the EU and China. Final Report’ (2008) accessed on May 7, 2018. 50 51

M4644-CHAISSE_9781788971898_t.indd 76

11/10/2018 10:22



The potential role of sustainability impact assessment 77 benefits of the agreement and prevent or minimize potential negative impacts. This assessment is necessary to enable the EU to pursue an approach which brings the greatest overall welfare gains, thereby helping the EU to meet its objective of creating economic growth, enhancing social inclusion and promoting sustainable development throughout the world. Assessing the economic, social, human rights and environmental impacts of the proposed investment agreement also contributes to the design of the right accompanying policies.56

The study comprises three main parts: an overall analysis of the sustainability impacts arising from the negotiations of an investment agreement between the EU and China,57 a sectoral SIA for the investment agreement between the EU and China with detailed analysis of specific sectors,58 and a consultation process.59 As regards the latter, it aims at complementing the contractor’s quantitative and qualitative analysis with representative inputs from stakeholders. In the words of the Commission, ‘[c]onsultations are key to ensuring the transparency, quality, credibility and legitimacy of SIAs by providing a dynamic and robust framework for interaction and dialogue with all relevant stakeholders’.60 The consultation process is meant to ‘actively engage with all interested parties in order to reflect their experience, priorities and concerns (. . .), contribute to the transparency of the SIA analysis’ and ‘help to identify priority areas and key issues relating to the possible economic, social, environmental and human rights impacts in the negotiations’.61 So as to ensure ‘dynamic and continuous interactions with civil society and all other relevant stakeholders throughout the conduct of the SIA’,62 the terms of reference require that the contractor create a SIA dedicated website and email, newsletters, and Twitter accounts.63 Potential contractors were also required to establish a consultation plan proposing how the SIA would be carried out. This plan should: [in particular (. . .) identify key stakeholders and affected people to be consulted in the EU and China, map the nature of civil society, identify any risks (e.g. non-attendance by major stakeholders, lack of representation, lack of balance between the interests represented or constraints on freedom of association) and   European Commission, ‘Terms of Reference’ (n 55) 4.   Ibid., 4–9. 58   Ibid., 9–10. 59   Ibid., 10–14. 60   Ibid., 10. 61  Ibid. 62   Ibid., 11. 63   Ibid., 11–12. 56 57

M4644-CHAISSE_9781788971898_t.indd 77

11/10/2018 10:22

78

China–European Union investment relationships how these risks will be addressed to ensure constructive dialogue and useful inputs from stakeholders. Consultation means and activities foreseen shall also be described in detail.64

In December 2015, DG Trade awarded a contract to conduct the trade SIA to a consortium between Ecorys, TNO, Oxford Intelligence and Reichwein China Consult.65 The consultation process includes the conduction of interviews, meetings, and questionnaires.66 These activities aim at receiving ‘detailed and specific input from selected stakeholders and experts’.67 Interviews are conducted during the interim and final phases of the study so as to ‘encourage detailed discussions on the negotiations and the potential sustainability impacts of the investment agreement’.68 When possible and deemed relevant, members of the consortium of consultants also attend external conferences and other events.69 These meetings enable the external consultants to present their findings to a ‘wider public but also to hear the opinion of different stakeholders and to engage in discussion with them.’70 The contractor also made use of a stakeholder survey as a ‘way of posing specific and tailored questions to selected recipients’.71 The survey was available, in both English and Chinese, from July 2016 to May 2017.72 Albeit open to all interested stakeholders, certain questions were targeted at specific stakeholders to obtain detailed information on certain matters.73   Ibid., 10–11.   European Commission, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China. Final Inception Report’ (2016) 7, 11–12 accessed on May 7, 2018; European Commission, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China. Draft Interim Report’ (2017) 9 accessed on May 7, 2018; 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’ (2017) 17–18 accessed on May 7, 2018. 66   European Commission, ‘Terms of Reference’ (n 55) 12. 67   European Commission, ‘Draft Final Report’ (n 65) 213. 68  Ibid. 69   Ibid., 214. 70  Ibid. 71   Ibid., 215. 72   Ibid, 215 and n 640. 73   Ibid., 215. 64 65

M4644-CHAISSE_9781788971898_t.indd 78

11/10/2018 10:22



The potential role of sustainability impact assessment 79

The survey was shared via a personal link with all stakeholders in the consultant’s mailing list and through social networks.74 An open link to the survey was also posted on the project website, the EU Trade Newsletter and the DG Grow Enterprise Europe Network.75 The consultant also requested large stakeholder organisations to share the survey among their members.76 A central part of the consultation process relates to meetings with civil society. According to the terms of reference, the contractor is required to: (. . .) present ongoing work to interest stakeholders, giving them the opportunity to provide direct inputs. In particular, three meetings shall take place in Brussels with civil society in the framework of the DG Trade’s Civil Society Dialogue. (. . .) The meetings shall be organized to discuss the draft reports (inception, interim and final). The draft reports are made public within a reasonable time limit ahead of the public meetings and shall be finalised taking into account contributions provided during the Civil Society Dialogue as well as through other consultation channels.77

Civil Society Dialogue meetings took place in Brussels after the online publication of the draft inception, draft interim and draft final reports.78 In these meetings the consultant presented the SIA methodological approach and findings, held open discussions with interested stakeholders, and gave them the opportunity to provide feedback.79 The first Civil Society Dialogue meeting took place on 26 May 2016,80 the second on 30 May 2017,81 and the third on 2 October 2017.82 74   Ibid. A total of 460 stakeholders received a personal email and link to fill out the survey – ibid, n 641. 75   Ibid., 215. 76  Ibid. 77   European Commission, ‘Terms of Reference’ (n 55) 13. 78   European Commission, ‘Draft Final Report’ (n 65) 215. 79  Ibid. 80   European Commission, ‘Civil Society Dialogue: Meeting on the Trade SIA in Support of an Investment Agreement between the European Union and the People’s Republic of China, Draft Inception Report’ (2016) accessed on May 7, 2018. 81   Ecorys, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China, Draft Interim Report, Civil Society Dialogue meeting’ (2017) accessed on May 7, 2018. 82   Ecorys, ‘Presentation and meeting report of third CSD’, accessed on May 7, 2018. 83   European Commission, ‘Terms of Reference’ (n 55) 13. 84   European Commission, ‘Draft Final Report’ (n 65) 216. 85   Ecorys, ‘Sustainability Impact Assessment (SIA) in support of an Investment Agreement between the European Union and the People’s Republic of China. Stakeholders workshop in Brussels, Belgium – Report’ (2016) accessed on May 7, 2018. See also European Commission, ‘Draft Final Report’ (n 65) 216. 86   Ecorys, ‘SIA Website EU China’, accessed on May 7, 2018. See also European Commission, ‘Draft Final Report’ (n 65) 207–8. 87   accessed on May 7, 2018. According to the consultant: [t]he email address is used to disseminate newsletters and invitations for the Civil Society Dialogues, but also to receive questions, comments, feedback or input from stakeholders concerning the study. The consultation team maintains a log of all the emails received as well as the outgoing emails (. . .). Since the beginning of the study the consultation team has been compiling a mailing list. This list is non exhaustive and will be continuously expanded during the course of the study. Stakeholders can email or otherwise contact us to be included on this list. European Commission, ‘Draft Final Report’ (n 65) 209. 88   In the words of the consultant, ibid: [t]he newsletters are also an important tool for dissemination. The aim of the newsletters is to: update stakeholders about the timeline and progress of the study; inform stakeholders about upcoming Civil Society Dialogues; inform stakeholders about the publication of the (draft) reports; request stakeholders for input and/or feedback (e.g. the survey).

M4644-CHAISSE_9781788971898_t.indd 80

11/10/2018 10:22



The potential role of sustainability impact assessment 81

published.89 Furthermore, the contractor created accounts on Facebook,90 Weibo,91 Twitter,92 WeChat,93 and LinkedIn94. Finally, the terms of reference required the contractor to attend meetings with European Commission officials, including meetings with the SIA Steering Committee, throughout the trade SIA process.95 In terms of outcomes, the consultant is required to produce three selfstanding reports: the inception report, the interim report, and the final report.96 The Inception Report was published in June 2016.97 This study was conducted in close consultation with an Inter-service Steering Group that, besides DG Trade, included a wide variety of Commission services.98 The Draft Interim Report was made public in March 2017.99 The Draft Final Report was published online in September 2017.100 Pursuant to the terms of reference, the trade SIA should be made available well in advance of the end of the negotiations so that its findings can be incorporated in the decision-making process.101

IV.  CONSULTATION RISKS AND LIMITATIONS The goal of trade SIAs is to calculate the probable positive or negative consequences of a selection of alternative measures.102 This information may contribute to adjust existing policies, generate new ones, or change the way problems are identified and policies are formulated.103 External consultants present proposals for policy recommendations covering   See Ecorys, ‘Downloads’ accessed on May 7, 2018.  90   European Commission, ‘Draft Final Report’ (n 65) 210–11.  91   Ibid., 210, n 636.  92   Ibid., 211–12.  93   Ibid., 212.  94   Ibid., 213.  95   European Commission, ‘Terms of Reference’ (n 55) 14.  96   Ibid., 15–17.  97   See European Commission, ‘Final Inception Report’ (n 65).  98   Ibid., 12.  99   European Commission, ‘Draft Interim Report’ (n 65). 100   European Commission, ‘Draft Final Report’ (n 65). 101   European Commission, ‘Terms of Reference’ (n 55) 4, 17. 102   Tom Bauler, ‘The Commission’s Impact Assessment Process: Handling the External Dimensions of Sustainability’ in Marc Pallemaerts and Albena Azmanova (eds), The European Union and Sustainable Development: Internal and External Dimensions (Brussels University Press, 2006) 278. 103   See Ivan Scrase and William Sheate, ‘Integration and Integrated Approaches  89

M4644-CHAISSE_9781788971898_t.indd 81

11/10/2018 10:22

82

China–European Union investment relationships

enhancement and prevention/mitigation measures.104 Recommendations are put forward both in terms of the EU’s negotiating positions and of non-investment-related (accompanying) measures.105 The consultant may suggest priorities to be given to any specific sectors and specific actions on horizontal and cross-cutting issues, with the Steering Committee being consulted on draft recommendations prior to their finalisation.106 Trade SIAs play an important role in the definition and refinement of proposed policies. The consortium of consultants claims to be: aware of the important role of this study for the negotiation process as it will provide direct inputs for the negotiators as well as recommendations and proposals for flanking measures to maximise the benefits of the proposed agreement and prevent or minimise potential negative impacts of the future agreement. Ecorys closely consults with the European Commission on the planning and scope of this study to ensure optimal input in the negotiation process.107

Consultation is at the heart of the process. In fact, the adoption by the European Commission of trade SIAs was a strategic political decision aimed at reducing civil society opposition to trade liberalisation policies.108 From this angle, it can be argued that SIAs have a positive impact since they engage civil society in a process of consultation and dialogue, thereby contributing to a greater consideration by the Commission of the impact of trade policies.109 The Commission comments on the findings of these studies through ‘position papers’ defining points of agreement, responding to disagreements, and considering further actions to be implemented.110 Civil society groups and parliamentarians in both the EU and its partner countries also make use of the findings of SIAs in their

to Assessment: What do they Mean for the Environment?’ (2002) 4 Journal of Environmental Policy and Planning 275. 104   European Commission, ‘Terms of Reference’ (n 55) 14. 105   Ibid., 14-15. 106   Ibid., 15. 107   European Commission, ‘Final Inception Report’ (n 65) 7; European Commission, ‘Draft Interim Report’ (n 65) 9. 108   Clive George and Colin Kirkpatrick, ‘Political Challenges in Policy-Level Evaluation for Sustainable Development: The Case of Trade Policy’ in Anneke von Raggamby and Frieder Rubik (eds), Sustainable Development, Evaluation and Policy-Making: Theory, Practise and Quality Assurance (Edward Elgar, 2012) 84–5. 109   Ibid., 85. 110   Clive George, Tomasz Iwanow and Colin Kirkpatrick, ‘EU Trade Strategy and Regionalism: Assessing the Impact on Europe’s Developing Country Partners’ in Philippe De Lombaerde and Michael Schulz (eds), The EU and World

M4644-CHAISSE_9781788971898_t.indd 82

11/10/2018 10:22



The potential role of sustainability impact assessment 83

submissions to governments, thus seeking to influence the negotiation process.111 These studies are also receiving increasing attention from the European Parliament.112 By offering opportunities for greater transparency and public dialogue, these studies help to build capacity and increase cooperation, thus enhancing the credibility and legitimacy of trade and investment agreements.113 According to the terms of reference, there is a vast group of stakeholders to be consulted, including non-governmental organisations, businesses, social partners, academia and national administrations.114 Experts from both parties as well as from appropriate international organisations should also be involved.115 Consultation and dissemination activities should take place both in the EU and in China, and directly feed into the various phases of the SIA.116 The terms of reference voice two main concerns regarding the consultation process. First, the identification of target groups that run the risk of being excluded. In the words of the European Commission: [t]he Contractor shall identify target groups that run the risk of being excluded. There might be differences between stakeholder groups regarding their access to consultations or in the availability of resources they can dedicate for participation in consultations. The Contractor shall make specific efforts to ensure that all relevant stakeholders are both aware of and able to contribute to the consultation. The Contractor shall clearly specific the consultation tools and activities it intends to deploy in order to ensure that Chinese civil society’s views are given genuine consideration in the SIA.117

Second, the trade SIA should ‘ensure a balanced coverage of all relevant interests among identified stakeholders’.118 The contractor is required to:

Regionalism: The Makability of Regions in the 21st Century (Routledge, 2016) 74–5. 111   Ibid., 84. 112   Ibid., 75. 113   Rok Zvelc, ‘Environmental Integration in EU Trade Policy: the Generalised System of Preferences, Trade Sustainability Impact Assessments and Free Trade Agreements’ in Elisa Morgera (ed), The External Environmental Policy of the European Union: EU and International Law Perspectives (Cambridge University Press, 2012) 191–2. 114   European Commission, ‘Terms of Reference’ (n 55) 11. 115  Ibid. 116   European Commission, ‘Draft Final Report’ (n 65) 11. 117   European Commission, ‘Terms of Reference’ (n 55) 11. 118  Ibid.

M4644-CHAISSE_9781788971898_t.indd 83

11/10/2018 10:22

84

China–European Union investment relationships clearly explain how and why these stakeholders have been invited to participate in the process. The Contractor shall also consult with the European Commission services and the European Economic and Social Committee to identify key stakeholders. The consultation plan is presented to and discussed at the meetings of the Civil Society Dialogue as well as at the meetings with the SIA Steering Committee.119

The Draft Interim Report acknowledges that ‘given the stakeholder landscape in China, the stakeholder consultations in this study require even more attention than they do in most other Trade SIAs, as potential risks to the plan are higher’.120 The contractor presents several potential consultation risks and puts forward measures to mitigate them. First, there is the risk of ‘not developing the consultation process sufficiently in general and thus running a risk of lack of legitimacy of the study’.121 The consortium of consultants argues that it has ‘extensive experience’ in ‘raising interest from and actively involving civil society, including through the use of social media’, adding that ‘[l]ocal experts, co-operation with some key stakeholders and electronic communication play a key role in the process.122 Second, the risk of ‘a limited outreach to Chinese stakeholders due to Chinese stakeholder landscape’.123 The consultant states that it has a local consultation team in China ‘in order to ensure sufficient outreach and consultation in China as well. Additionally we will make use of Chinese social media that are equivalent to Facebook and Twitter’.124 Third, there is the risk of ‘an unbalanced mix of stakeholders’.125 The consortium of consultants acknowledges that ‘civil society and particular certain segments of civil society (e.g. social partners) as well as the concept of (genuine) stakeholder consultations are relatively different in China from the “Western approach”’.126 Since it is probable that certain groups of stakeholder groups will be under-represented, the contractor pledges to ‘make sure to keep a close eye on the composition’ of the stakeholder database and ‘make extra efforts’ if confronted with an imbalance in representation of different groups.127

  Ibid., 11.   European Commission, ‘Draft Interim Report’ (n 65) 178. 121  Ibid. 122  Ibid. 123  Ibid. 124  Ibid. 125  Ibid. 126  Ibid. 127  Ibid. 119 120

M4644-CHAISSE_9781788971898_t.indd 84

11/10/2018 10:22



The potential role of sustainability impact assessment 85

Finally, the consultant identifies the risk of ‘not receiving a sufficient large response rate to the stakeholder survey, which would reduce the significance of the results’.128 Again, the contractor builds on its ‘extensive experience’ in this regard, promising to share the invitation and link to the survey through different social media tools, as well as via the consultant based in China to ‘maximise outreach’.129 Other initiatives include asking other organisations to share the survey with their members and sending out reminders.130 As regards stakeholder identification, the external consultant states: [i]n order to have a balanced list of stakeholders, we identified stakeholders in the areas of business, labour and social issues, human rights, environmental issues, and other relevant areas (e.g. academia). The stakeholder list thus includes e.g. government representatives, businesses, trade unions, NGOs, academia and think tanks. As stakeholder identification is an ongoing process our stakeholder list has continuously been updated (. . .). The consultation team aims to create a stakeholder list that is balanced and includes all different types of stakeholders.131

However, according to the Draft Final Report, the majority of stakeholders identified comes from the EU (284), with only 150 coming from China.132 Furthermore, there is a prevalence of business organisations (182 in the EU and 82 in China) when compared with other institutions (social, human rights, environmental, academia / think tanks and other).133 A similar concern may be expressed regarding interviews, since interviewees are drawn from the same list of stakeholders.134 The consultant states: [t]he consortium will conduct at least 40 interviews or one-to-one meetings in order to encourage detailed discussions on the negotiations and the potential sustainability impacts of The Investment Agreement. Conducting interviews is a useful way to obtain more detailed and focused input from stakeholders. As not all potential impacts of The Investment Agreement can be assessed by modelling, the interviews will complement the quantitative analyses. The interviews are balanced out over the different analyses, i.e. overall economic analysis, overall social analysis, human rights analysis, environmental analysis,

  Ibid., 179.  Ibid. 130  Ibid. 131   European Commission, ‘Draft Final Report’ (n 65) 207. 132  Ibid. 133  Ibid. 134  Ibid. 128 129

M4644-CHAISSE_9781788971898_t.indd 85

11/10/2018 10:22

86

China–European Union investment relationships and the sectoral analyses. While conducting these interviews the consortium will strive to create a balanced representation of stakeholders and topics covered. This includes inter alia representatives of the selected sectors, human right organisations, international organisations, relevant Ministries, or major NGOs. The interviews will be held both in the EU and in China. Having a local consultation team on the ground in China has the advantage of also conducting interviews with Chinese stakeholders that are not fluent in English.135

Until the presentation of the Draft Final Report, 56 organisations had been contacted and 36 interviews had taken place.136 The consultant describes such interviews as follows: they: covered all parts of the analysis: overall economic, SMEs, consumers, social, human rights, environment, and specific sectors. The interviews in the EU have been conducted by the researchers themselves, either face to face or via telephone. The interviews in China have been conducted by our local consultant, also face to face or via telephone.137

During the third Civil Society Dialogue, the European External Action Service (EEAS) posited that a list of social and human rights stakeholders that were interviewed would be useful.138 The consultant answered that many of the Chinese stakeholders interviewed replied on an anonymous basis.139 EEAS also voiced concern regarding the representativeness of trade unions and of bodies/mechanisms on gender and human rights.140 The consultant answered that it was aware of such issues, adding ‘a word of caution’ on the ‘effectiveness of the mechanisms’, which ‘depends on the independency of the organisations’.141 The external consultant noted that ‘existing mechanisms can be used’ and that ‘recommendations will be further clarified in the final version of the SIA report’.142 Another source of apprehension is the lack of receptiveness demonstrated by some respondents. The Draft Final Report states:

  Ibid., 213.  Ibid. 137  Ibid. 138   European Commission, ‘Civil Society Dialogue: Meeting on Sustainable Impact Assessment in Support of an Investment Agreement between the European Union and the People’s Republic of China’ (2017) 2 accessed on May 7, 2018. 139  Ibid. 140   European Commission (n 138) 2. 141  Ibid. 142  Ibid. 135 136

M4644-CHAISSE_9781788971898_t.indd 86

11/10/2018 10:22



The potential role of sustainability impact assessment 87 [s]takeholders have often indicated that they were not interested in talking with us or that it would be of no use. EU stakeholders told us that they were not focussing on the investment agreement at all (rather on the market economy status), or were not aware what the agreement would entail, and could therefore only make general remarks, but could not provide specific inputs for the sector analyses. All of the Chinese organisations that have been contacted indicated that they did not know what the agreement was about or had never heard of it. When contacting the overarching industry associations they often told us that their organisation is too big and diverse so it would be better to talk to their members. However, their members told us that for these kind of things we should talk with the overarching industry association. The industry associations also indicated that:  ●  They

felt it was not up to them to respond to our questions, but the task of the government;  ● They do not have information on EU related matters;  ● Information on FDI flows or destinations was secret;  ● They will not cooperate unless there is an official request from the EU. At the same time, EU organisations have, more often than Chinese organisations, rejected the request for interview or have not answered at all. This also explains why the table shows a rather unbalance in the number of interviews conducted in the EU and in China.143

Workshops are another useful tool to ‘allow a genuine and comprehensive consultation of stakeholders’.144 During the first Civil Society Dialogue, held on 26 May 2016, the International Federation for Human Rights asked whether there would be a workshop in China.145 The consultant replied negatively, saying that Chinese stakeholders would be consulted ‘through interviews and the survey with the help of the local partner in China’.146 The Commission added that the terms of reference for the trade SIA only made reference to a workshop to be organised in Brussels ‘as this was considered to be most useful for the study’.147 The Draft Final Report itself acknowledges the lack of active engagement from stakeholders in some of the meetings held.148 Doubts may also be expressed about the effectiveness of online tools employed by the consultant to raise awareness about the trade SIA. The consultant claims to use the website and social media platforms to ‘provide all interested stakeholders with updates on the study and to

  European Commission, ‘Draft Final Report’ (n 65) 213–14.   European Commission, ‘Terms of Reference’ (n 55) 13. 145   European Commission (n 80) 2. 146  Ibid. 147  Ibid. 148   European Commission, ‘Draft Final Report’ (n 65) 214. 143 144

M4644-CHAISSE_9781788971898_t.indd 87

11/10/2018 10:22

88

China–European Union investment relationships

disseminate the results of the analyses on the impacts of this SIA’,149 acknowledging that ‘[c]onsultations with civil society and the general public are a very important element of the SIA’.150 However, the trade SIA website does not even offer a Chinese version. Furthermore, by the presentation of the Draft Final Report, the website and email account were not very active.151 The consultant’s Facebook page also received little attention.152 Weibo (the Chinese version of Facebook) was also used because the latter is blocked in China and the consultant wanted to ‘reach Chinese stakeholders as well’.153 However, since additional registration and payment was needed to fully activate the account, and taking into account ‘the little knowledge and awareness’ about the BIT in China, the consultant decided not to pursue the additional registration requirements and payment to finalise the account.154 As for the Twitter account, it was no more effective.155 The consultant set up a WeChat account (the equivalent of Twitter) because the latter is blocked in China.156 It noted that ‘currently Chinese users of WeChat do not have access to WeChat official accounts registered outside of China. In contrast, non-Chinese WeChat users have access to both Chinese and non-Chinese official accounts’.157 Still, the consultant expressed hope that these social media tools might reach Chinese stakeholders.158 Finally, until the presentation of the Draft Final Report, the consultant had not received any comments or feedback from stakeholders via the LinkedIn account.159 The reduced effectiveness of online tools employed by the consultant may help to explain the low response rates to the surveys.160 Trade SIAs provide the European Commission with an in-depth analysis of the potential economic, social, human rights, and environmental consequences of ongoing trade negotiations, giving stakeholders in both the EU and partner countries a valuable opportunity to share their views with negotiators. However, the SIA process has been accused of not   Ecorys, ‘SIA Website EU-China, Introduction’ accessed on May 7, 2018. 150  Ibid. 151   European Commission, ‘Draft Final Report’ (n 65) 209. 152   Ibid., 211. 153   Ibid 210, n 636. 154  Ibid. 155   Ibid., 211. 156   Ibid., 212. 157   Ibid., 212. 158  Ibid. 159   Ibid., 213. 160   Ibid., 215. 149

M4644-CHAISSE_9781788971898_t.indd 88

11/10/2018 10:22



The potential role of sustainability impact assessment 89

a­llowing for sufficient consultation from non-corporate stakeholders and civil society organisations.161 The European Economic and Social Committee has lamented the ‘lack of clear rules regarding the identification and choice of key players consulted during the procedure’.162 Some authors believe that the choice of relevant stakeholders is selective, with those consulted frequently not having the necessary information to make their participation in an effective way.163 Public consultation mechanisms have been criticised by some sectors of European civil society for their alleged shortcomings. The uniqueness of China’s civil society presents further challenges.164 Indeed, the degree of stakeholder involvement and independence from government cannot be compared to the European context.165 While Chinese trade policy is traditionally portrayed as less transparent than that of other countries, some suggest that there is a trend towards greater transparency, with some areas of Chinese policy being subject to a public debate before implementation.166 As regards public discussion through the media, while it is normally subject to restrictions,167 the age of the internet and social media tools seems to have lead to greater transparency in policymaking processes.168 Some of the aforementioned risks and limitations may still be mitigated through diverse stakeholder consultation activities planned for the   See, e.g., Marc Maes, ‘Civil Society Perspectives on EU-Asia Free Trade Agreements’ (2009) 7 Asia Europe Journal 97. 162   European Economic and Social Committee, ‘Opinion of the European Economic and Social Committee on ‘Sustainability impact assessments (SIA) and EU trade policy’ [2011] OJ C218/03, para 2.7. 163   Fabiane Baxewanos and Werner Raza, ‘Human Rights Impact Assessments as a New Tool for Development Policy?’ (2013) Austrian Foundation for Development Research, 12 accessed on May 7, 2018. 164   See, in general, Karla Simon, Civil Society in China: The Legal Framework from Ancient Times to the ‘New Reform Era’ (Oxford University Press, 2013); Jessica Teets, Civil Society under Authoritarianism: The China Model (Cambridge University Press, 2014). 165   Marie Meixner and others, ‘China Investment Policy: Consequences for Workers’ (2016) European Trade Union Confederation 50 accessed on May 7, 2018. 166   Stoeckel and Fisher (n 30) xv. 167   See, for instance, James Scotton and William Hachten (eds) New Media for a New China (Wiley-Blackwell, 2010); Susan Shirk (ed) Changing Media, Changing China (Oxford University Press, 2011). 168   Stoeckel and Fisher (n 30) 44. See also Zixue Tai, The Internet in China: Cyberspace and Civil Society (Routledge, 2006). 161

M4644-CHAISSE_9781788971898_t.indd 89

11/10/2018 10:22

90

China–European Union investment relationships

remainder of the trade SIA.169 Furthermore, the consultant’s website will remain available for two years after the finalisation of the study.170 Thus, interested stakeholders still have an opportunity to voice their concerns. Naturally, this depends on the degree of public awareness about the existence of the EU-China trade SIA.

V. POTENTIAL CONTRIBUTION TO THE NEGOTIATING PROCESS The risks and limitations identified above may reduce the ability of the EU-China trade SIA to engage civil society, especially on the Chinese side. As recognised in the Draft Interim Report, potential risks surrounding stakeholder consultation are higher in this instance than in other cases.171 As a result, the trade SIA process may fall short of one of its main objectives – to contribute to a greater consideration by the negotiating parties of the potential impacts – economic, environmental, social, or as regards human rights – of a potential BIT between the EU and China. The uniqueness of the ‘Chinese stakeholder landscape’, the potential underrepresentation of some groups of stakeholders, and the restricted access of Chinese netizens to social media platforms may all hamper the ability of some stakeholders to share their views with negotiators, limiting their potential contribution to the policymaking process. Other factors may also lessen the aptitude of trade impact assessment studies to incorporate societal concerns into the decision-making process. These factors relate to the very nature of the trade SIA programme. There is no legal provision requiring negotiators to use their findings as basis for their policies. Thus, the incorporation of trade SIAs in negotiations is at their discretion.172 Trade negotiators are expected to participate actively in the SIA process by liaising with the external consultants, briefing them on the negotiations, and taking the results of the impact assessments into account in establishing the EU’s negotiation position.173 However, they are also bound by the mandate issued by the European Council as well as hierarchical orders and decisions. As a result, it is difficult to measure how SIAs are actually incorporated into the policymaking process.174     171   172   173   174   169 170

European Commission, ‘Draft Final Report’ (n 65) 216–17. Ibid., 208. European Commission, ‘Draft Interim Report’ (n 65) 178. Alf, Assmann, Bauer and Weinkopf (n 1) 48. Ibid., 7. Ibid., 7.

M4644-CHAISSE_9781788971898_t.indd 90

11/10/2018 10:22



The potential role of sustainability impact assessment 91

Impact assessment studies in general have been criticised for focusing on justifying the Commission’s proposals.175 Many European Commission officials believe that most of these studies are carried out in order to justify a policy choice already made.176 Trade SIAs are conducted in the context of a markedly political decision.177 Instead of being used by trade negotiators to develop and implement sustainable policies, trade SIA studies may simply provide an appearance of legitimacy that justifies pre-existing trade negotiations.178 From this perspective, trade SIAs are not designed to restrain the negotiation mandate but to secure public consent.179 SIA studies are an important tool because they gather information on the potential impact of trade and investment agreements on diverse dimensions and engage civil society in the discussion of that impact. They are probably best understood as a communication tool, demonstrating to critics that civil society’s concerns have been taken into account in a transparent and accountable manner.180 By conducting impact assessment studies, the European Commission shows that it accepts input from external stakeholders and communicates likely policy impacts to decision-makers and the wider public.181 These studies are used as a tool to disseminate the rationale for policy proposals, inside and outside the Commission.182 Trade SIAs can therefore also be seen as a political instrument rather than a knowledge tool.183 Civil society has been calling for measures to enhance the relevance of impact assessment studies in the negotiations process.184 While trade SIAs

175   The Evaluation Partnership, ‘Evaluation of the Commission’s Impact Assessment System. Final Report’ (2007) 5-6 accessed on May 7, 2018. 176   Ibid., 5. 177   Hernán Blanco, ‘Sustainability Impact Assessment of Trade Policy and its Application in the Context of Latin America’ (2006) 24(4) Impact Assessment and Project Appraisal 285, 286. 178   Baxewanos and Raza (n 163) 11. 179  Ibid. 180   Alf, Assmann, Bauer and Weinkopf (n 1) 8. 181   Ann-Katrin Bäcklund, ‘Impact Assessment in the European Commission – a System with Multiple Objectives’ (2009) 12 Environmental Science and Policy 1077, 1082. 182   Ibid. 1085. 183   Bäcklund (n 181) 1085. 184   Kirkpatrick and George (n 20) 326; Colin Kirkpatrick and Clive George, ‘The Influence of the European Union’s Sustainability Impact Assessment on Multilateral and Regional Trade Negotiations’ (2006) Impact Assessment Research Centre 3 accessed on May 7, 2018.

M4644-CHAISSE_9781788971898_t.indd 91

11/10/2018 10:22

92

China–European Union investment relationships

are a valuable instrument, they could and should be improved, namely through the creation of a proper legal framework establishing specific procedures for public participation.185 The European Economic and Social Committee, for instance, has suggested the creation of a civil society monitoring mechanism including actors from business, trade unions, NGOs, academia and others.186 Impact assessment studies contribute to raising public awareness about the broader consequences of policies. The European Commission’s system has at least the merit of exposing the economic, social, and environmental aspects that are implicated in trade and investment negotiations.187 Impact assessment studies force policymakers to collate and evaluate evidence as they make decisions and to produce a statement to explain their options. SIAs allow for a discussion between a broad range of stakeholders about a diversity of issues that would not be included in a traditional trade agenda.188 Despite all of its flaws, this mechanism might contribute to a greater consideration by the negotiating parties of the potential impacts – economic, environmental, social, or as regards human rights – of a future BIT between the EU and China.

185   Gehring, Stephenson and Cordonier Segger (n 18) 188. See also Ingmar von Homeyer and others, ‘Improving Public Participation in Sustainability Impact Assessment of Trade Agreements’, in Paul Ekins and Tancrède Voituriez (eds) Trade, Globalization and Sustainability Impact Assessment: A Critical Look at Methods and Outcomes (Earthscan, 2009) 189. 186   European Economic and Social Committee, ‘Opinion of the European Economic and Social Committee on the Role of Civil Society in the Free Trade Agreement Between the EU and India’ (2011) 9–10 accessed on May 7, 2018. 187   Elisabeth Bonanomi, Sustainable Development in International Law Making and Trade: International Food Governance and Trade in Agriculture (Edward Elgar, 2015) 94. 188   James Harrison, ‘Human Rights Impact Assessments of Trade Agreements: Reflections on Practice and Principles for Future Assessments’ (2010) 16 accessed on May 7, 2018.

M4644-CHAISSE_9781788971898_t.indd 92

11/10/2018 10:22

PART II

China-eu: towards innovation in rule-making?

M4644-CHAISSE_9781788971898_t.indd 93

11/10/2018 10:22

6. FTZs: can they initiate a new round of reforms in China? Jiaxiang Hu I. FREE TRADE ZONES AND THEIR PROGRESSIVE LIBERALIZATION On 28 September 2013, the Chinese government announced to the world that the Shanghai Free Trade Pilot Zone (SFTPZ) was officially in operation.1 The SFTPZ is built on the four existent customs supervision zones including Shanghai Waigaoqiao Bonded Zone, Waigaoqiao Bonded Logistics Zone, Yangshan Bonded Port and Shanghai Pudong Airport Comprehensive Bonded Area, totalling up to an area of about 28 square kilometres. Shortly after that, Guangdong Free Trade Pilot Zone, Tianjin Free Trade Pilot Zone and Fujian Free Trade Pilot Zone were approved on March 1, 2015. Meanwhile, the SFTPZ was expanded to 120 square kilometers, covering almost one-tenth of the Pudong New District. Stimulated by the success of those FTZs, another seven free trade zones of Liaoning, Henan, Zhejiang, Hubei, Chongqing, Sichuan and Shanxi joined this group on August 31, 2016. Geographically, the current 11 free trade zones are located in the most economically dynamic areas of China. Nevertheless, they will focus on different priorities for their trials. Besides the modal of Shanghai Free Trade Pilot Zone, the FTZs of Guangdong, Tianjin and Fujian are also given the mission to further integrate their local economies with that of Hong Kong, Taiwan and Beijing and Hebei respectively. The newly approved seven FTZs have already been the economic centres in their local areas, but they are expected to take further steps in this way. Specifically, the Liaoning FTZ will experiment on the transformation   The official title of this place is ‘The China (Shanghai) Pilot Free Trade Zone’. The general requisition of the SFTPZ is to implement a national strategy aimed at expediting the functional transformation of government, exploring the administrative innovation, stimulating the trading and investment facilitation, and accumulating the experience on achieving a more open Chinese economy. 1

94

M4644-CHAISSE_9781788971898_t.indd 94

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 95

of those State-owned enterprises with the adjustment of stock rights including the transfer of some stock rights to their employees. Henan province is located in central China. Its FTZ will further this function of logistics and distributions with the remote target as the connecting point from the Pacific Ocean to the New Silk Road. Zhejiang FTZ is the only one built on the islands, which will become a distributing and processing centre of energy products. Hubei FTZ will make use of the high technology produced by its local universities and the location connecting the Yangtze River and Beijing-Guangzhou Railway to develop into the economic centre in Central China. Sichuan and Chongqing are located in the hinterland of China. There are still some underdeveloped counties within their territories. Both FTZs may try some innovative measures to speed up the development of their local economies through more liberalized market access. Shanxi province is the source of Chinese civilization. Its FTZ will initiate the new Silk Road and foster an exchange centre for different cultures. Unlike the previous Special Economic Zones which, more or less, received some incentive policies and tax reductions from the central government, the current FTZs have not been offered any preferential treatment in economic sense. Instead, they are encouraged to experiment with more streamlined measures in administration. They have chosen to regulate investment under the pre-establishment national treatment plus a negative list, i.e., providing the same market access to both domestic and foreign investors except in those sectors listed.

II.  FTZS AND THE NEGATIVE LIST Generally, the FTZs seek to fulfil the following objectives: during the course of two to three years of piloting reforms, they shall expedite the functional transformation of government through streamlining the administrative power, expand the opening-up of service sectors by releazing the limitations on market access, promote the reform of administrative regulation on foreign investment, develop the multinational corporation headquarter economy with more sophisticated facilities and try to experiment with new trade forms. Specifically, the FTZs shall explore to increase the convertibility of the Renminbi under the current regulations of capital account items, advance the opening-up of financial services, and improve the supervision efficiency of the Customs Office. Meanwhile, they shall create a framework to support the investment and innovation activities to cultivate an internationalized business environment.

M4644-CHAISSE_9781788971898_t.indd 95

11/10/2018 10:22

96

China–European Union investment relationships

With these aforementioned goals, the FTZs shall apply the standards practiced in many developed countries. More particularly, the FTZs shall offer convenient administrative approval procedures for investment and trading, full convertibility of currencies, effective and efficient supervision for goods circulation, and an investor-friendly regulatory environment. As such, experience gained from the FTZs shall serve a national purpose of contributing new ideas and approaches to the next round of China’s opening up of its economy and strengthening the national economic and political reform.2 From the international law perspective, a free trade zone has no independent legal status. It is different from a free trade area (FTA) or a customs union (CU) that is normally formed by two or more countries or separate customs territories, which impose lower or zero tariffs on the imports from the constituent members.3 The relevant international rules on FTAs and CUs can be derived from Article XXIV of the General Agreement on Tariffs and Trade (GATT), which provides that the provisions of the GATT shall not prevent the formation of a CU or of a FTA or the adoption of an interim agreement necessary for the formation of a CU or of a FTA provided that: (a) with respect to a customs union, or an interim agreement leading to a formation of a customs union, the duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be; (b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be. 2   See, ‘The China (Shanghai) Pilot Free Trade Zone, accessed January 26, 2018. 3   See Julien Chaisse and Mitsuo Matsushita, ‘Maintaining the WTO’ Supremacy in the International Trade Order – A Proposal to Refine and Revise the Role of the Trade Policy Review Mechanism’ (2013) 16(1) Journal of International Economic Law 9–36 and Julien Chaisse, ‘Deconstructing the WTO Conformity Obligation: A Theory of Compliance as a Process’ (2015) 38(1) Fordham Journal of International Law 57–98.

M4644-CHAISSE_9781788971898_t.indd 96

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 97

The FTZ is a special economic zone delineated by the Chinese government. China has no international obligation to implement any specific regulations and policies within the FTZs. Neither does it have to keep its regulations compatible with any international agreement. It is China’s ­prerogative to decide which law should be suspended from application within the FTZs, and whether or when the suspension should be withdrawn. In this regard, it is impractical for China to sign a free trade agreement with other countries, which applies only to the FTZs. Neither are investors from other countries entitled to enjoy the preferential treatment derived from a free trade agreement which is only applicable in the FTZs. In 2013, the national legislature of China (the Standing Committee of the People’s Congress), for the first time, authorized the SFTPZ to suspend the implementation of the administrative approval procedure provisions contained in its ‘Sino-Foreign Equity Joint Ventures Law’, ‘Sino-Foreign Contractual Joint Venture Law’, and ‘Wholly Foreign-Owned Enterprise Law’ for three years. This authorization was meant to equalize the treatment of investment regardless of its source. This changed the prevalent practice adopted outside the SFTPZ, which approves the application of foreign investors to set up businesses in China only within the sectors listed.4 Both foreign investors and domestic investors in the SFTPZ are accorded the same treatment for the establishment of their businesses. Within the time period of the authorization,5 the SFTPZ is expected to develop a set of new measures, which will be replicated elsewhere in the country in due time. In this sense, the SFTPZ can be regarded as the engine to launch a new round of reforms through free trade zones in China. One fundamental difference between the SFTPZ and the previous special economic zones is the market access for foreign investment. The SFTPZ performs as a pioneer in regulating the market access with a negative list in which all the industrial sectors prohibited to receiving foreign investment are clearly listed. This is referred to as the ‘pre-establishment national treatment’, which means that foreign investors and their domestic counterparts are granted the same market access to establish their businesses. In this way, foreign investors will have a better understanding on which sectors are open to them. On September 3, 2016, the Standing Committee of the National People’s Congress amended the three laws before the deadline of its authorization,

4   In this way, many more sectors have not been listed, which means that foreign investors are not permitted to enter therein. 5   The authorization came into force on October 1, 2013 and lasted for three years.

M4644-CHAISSE_9781788971898_t.indd 97

11/10/2018 10:22

98

China–European Union investment relationships

replacing the approval system with the registration system within the whole country. In spite of this, the negative list practised in the FTZs is still different from that of other areas. The negative list practised in the FTZs was first made in the SFTPZ with 190 sectors in the list. It has been cut down to 95 sectors.6 In contrast, the negative list available for other areas contains 328 sectors which is more or less the same extent of market access under the positive list referred to in the Guideline of Industries for Foreign Investment which was jointly revised by the National Development and Reform Commission and the Ministry of Commerce in 2012. Only the industrial sectors listed in this Guideline are open to foreign investment. The national treatment conferred upon the foreign investment, in this regard, is referred to as the ‘post-establishment national treatment’, which means that foreign investors can enjoy the same treatment in relation to market access as their domestic counterparts only in the limited sectors listed by the host country. The negative list is the direct consequence of the pre-establishment national treatment, which is the reverse practice of the positive list. In the case of the negative list, the host country lists all the industrial sectors which are prohibited from receiving foreign investment. More often than not, those enumerated in the negative list are limited to a small number of sectors. Conversely, in the case of the positive list, the host country tends to list a small number of industrial sectors open to foreign investment while keeping most sectors unlisted. Since the introduction of market access restrictions means heavier responsibility placed on the regulators, there has been a lack of endogenous motivation for the regulators to increase the number of sectors on the positive list. Based on the 20 industries presently identified by the National Bureau of Statistics,7 12 industries have been listed in the Guideline as considerably open to foreign investment. The current Guideline excludes the following six industries, including: architecture and construction; finance; real estate; lodging and catering; information transit and services for software and information technology; and housekeeping and maintenance. Compared to the Guideline of Industries for Foreign Investment, the negative list adopted by the FTZs has opened up two more industries to foreign investors and removed some restrictions that apply to the rest of the industries.8   The sectors included in the negative list practiced in FTZs have been reduced to 139, 122 and 95 in 2014, 2015 and 2017 respectively. 7   ‘Public Management, Social Security and Social Institutions’ (S) and ‘International Organizations’ (T) are the two categories of industries not open to foreign investment. 8   The two industries completely open to foreign investors are ‘Lodging and Catering’ and ‘Housekeeping and Maintenance’. 6

M4644-CHAISSE_9781788971898_t.indd 98

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 99

Unlike FTAs, the FTZ is a test ground which has been requested by the central government to experiment with new administrative regulations. The Chinese government has no international obligations to keep the negative list unchanged, neither is it required to be influenced by any external factors on the selection of the sectors open to foreign investment. Since one of the objectives of the FTZs is to increase access to foreign investment, the negative list is expected to become shorter with the decreasing of restrictions. Before China adopts a uniform negative list, the FTZs are still free to modify the current regulations, or even withdraw the negative list if its impact becomes beyond control. This has nothing to do with State responsibility or international obligations as in the case of a breach of the commitments imposed by international agreements. With the further reduction of sectors in the negative list adopted by the FTZs, investors can now establish companies in sectors that are not included in the negative list. Unlike the current practice outside the FTZs where many sectors are still not open to investors without the approval of the administrative agencies, the registration of a company in the FTZs in most sectors will almost be approved automatically since the function of the administration has changed from one of granting ‘approvals’ to one of securing ‘registrations’. Among the factors which propelled the Chinese government to select the FTZs as the test ground for its future reform, two of them are the most relevant. One comes from the internal political and economic developments, while the other comes from external changes. For a long time, government officials in China have been used to the practice of approving investment without undertaking the necessary supervision afterwards. This has led to inefficient regulations and even corruption. On the other hand, some WTO Members are negotiating either in global or regional forums more preferential regional trade regimes under which they will further the market access over those committed by WTO Members and set higher thresholds for trading in terms of the environment and labor standards. Obviously, China is aware of the potential challenges and discrimination from other WTO Members. The FTZs have cherished the dreams of the new generation of Chinese leaders who wish, through the experience gained in the FTZs, to promote new ideas and strategies for future national economic and political reforms. This  is  the historical mission of the FTZs and what the word ‘pilot’ implies.

M4644-CHAISSE_9781788971898_t.indd 99

11/10/2018 10:22

100

China–European Union investment relationships

III. CHALLENGES CHINA IS FACING IN THE POST-WTO ERA Since China amended its Constitution in 1993,9 thereby changing the economic pattern from a planned economy to a socialist market economy, great changes have taken place. More and more non-public enterprises have become market participants. They have received investment from both Chinese investors and foreign investors. These non-public enterprises need to be treated the same way as State-owned enterprises in market access and given more autonomy in their development. A major part of law made in the recent years has been associated with the maintenance of market order and the provision of protection for the market participants. After 30 years of continuing efforts, the Chinese legal system has finally been established.10 On the other hand, various departments of the government have become accustomed to exercising their power under the current administrative approval procedures. Due to the lack of efficient supervision, some officials have even abused their power.11 Thus, many young Chinese regard working in a government department as their first career choice after graduating from university. To combat the abuse of power by government officials, the central government has implemented several fundamental reforms, including the major attempt to merge or reduce administrative departments and agencies promoted by Premier Zhu Rongji in 1998. However, these efforts have achieved little success. The number of civil servants in all levels of government has not decreased as expected. The government has accumulated greater power in manipulating the market with the proliferation of departments and agencies, which has reduced the efficiency of administration and increased the national budget. With the strengthened dominant position of the State-owned enterprises, the non-public enterprises are finding it increasingly difficult to compete with them. All these have led to the people’s dissatisfaction with the government and will jeopardize the foundations of the ruling party. One of the objectives for the FTZs is to streamline the administrative approval procedure by reducing the departments involved and ­restricting   The amendment was passed at the Eighth National People’s Congress.   See Jiaxiang Hu, ‘The Role of WTO Law in the Construction of the Chinese Legal System’ (2012) 4(2) Yonsei Law Journal 1. 11   Although the government administrative approval has been regulated by the Administrative Permission Law since 2004, the various administrative departments are still enjoying much power in issuing the permit. See Articles 12, 14, 15 and 16 of Administrative Permission Law.  9 10

M4644-CHAISSE_9781788971898_t.indd 100

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 101

the administrative power. One major step is to replace the approval procedure with the registration procedure, by which most applications will be approved automatically. This change indicates that the administrative power has been reduced significantly and the threshold for business in the FTZs has been lowered greatly. With the continuing reduction of the numbers in the negative list, the sectors open to foreign investment in the FTZs will grow. Besides these internal factors, pressure for administrative reforms also comes from outside China. By the end of 2016, China had passed the two deadlines connected with the extra restrictions imposed upon it as a WTO Member. Paragraph 1 of Article 16 of China Accession Protocol to the WTO provides that: In cases where products of Chinese origin are being imported into the territory of any WTO Member in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products, the WTO Member so affected may request consultations with China with a view to seeking a mutually satisfactory solution, including whether the affected WTO Member should pursue application of a measure under the Agreement on Safeguards.

If consultations do not lead to an agreement between China and the WTO Member concerned within 60 days of the receipt of a request for consultations, the WTO Member affected shall be free, in respect of such products, to withdraw its concessions or otherwise to limit imports only to the extent necessary to prevent or remedy such market disruption. This is the so-called ‘Special Safeguards’ available to other WTO Members to keep out the products from China. What distinguishes these safeguard measures from those provided in Article XIX of the GATT and the Agreement on Safeguard Measures is the consequence of the imports. In the case of the ‘Special Safeguard Measures’, the consequence is ‘market disruption’, whereas under normal circumstances, it is ‘serious injury’. Market disruption is an arbitrary judgment which can be interpreted in a broad sense. It may include a decline in the national income, a change of consumers’ taste or the mismanagement of domestic businesses. The consequence of a ‘serious injury’ is normally assessed against objective criteria. In the event that there are no similar products produced in the importing country, it is difficult to identify the ‘serious injury’ in the similar industries. Therefore, it is comparatively easier for the importing Member to find an excuse to restrict the imports from China with those ‘special safeguard measures’. According to paragraph 9 of Article 16 of the Accession Protocol, application of the special safeguard measures shall be terminated 12 years after the date of China’s accession to the WTO.

M4644-CHAISSE_9781788971898_t.indd 101

11/10/2018 10:22

102

China–European Union investment relationships

Another deadline is provided in Article 15 of China Accession Protocol. This is concerned with the conditions on which other WTO Members may use the surrogate country while calculating the cost of imports from China in an anti-dumping investigation. The reasoning behind this arrangement is that the market economy status of China is determined according to the domestic laws of WTO Members. Before December 11, 2016: The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.

The importing WTO Member has to follow the provisions of Article VI of the GATT 1994 and Anti-Dumping Agreement after that. The issue of non-market economy is not a legal one defined under the multilateral regime. The text of the GATT 1947 was silent on this issue because none of the 23 original signatories adopted the non-market mechanism. Therefore, the GATT system was presumably based on the market mechanism. With the addition of new entrants and in some of which ‘the centrally planned economy’ was dominated by State enterprises, the GATT contracting parties later adopted Ad Article VI which provides that: it is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.12

No further guidance from the GATT contracting parties has been given on the application of the above provision. Article 2.7 of the Anti-Dumping Agreement acknowledges the validity of this supplementary provision.13 WTO Members have generally taken advantage of this provision to reject 12   See GATT BISD, Vol. IV, at 64. This provision dates from the 1954–55 Review Session of the GATT and has its origins of consideration of issues relating to the Working Party on the Accession of Poland. 13   Article 2.7 of the AD Agreement provides that ‘this Article is without prejudice to the second Supplementary Provision to paragraph 1 of Article VI in Annex I to GATT1994’.

M4644-CHAISSE_9781788971898_t.indd 102

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 103

cost and price information provided by those countries considered to be non-market economies. Such a practice has been consolidated by Article 17.6(i) of the Anti-Dumping Agreement, which provides that: in its assessment of the facts of the matter, the panel shall determine whether the authorities’ establishment of the facts was proper and whether their evaluation of those facts was unbiased and objective. If the establishment of the facts was proper and the evaluation was unbiased and objective, even though the panel might have reached a different conclusion, the evaluation shall not be overturned.

Since most WTO Members did not recognize China as a market economy before China acceded to the WTO, they may, in the calculation of price and cost of imports from China, use a methodology different from that required in GATT Article VI and Anti-dumping Agreement.14 It may select the price and cost of a third country as the comparable factors to decide whether dumping exists. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.15 The special safeguard measures clause and China’s non-market economy status have degraded China as a ‘second-class’ Member in the WTO as its exports are more likely to be penalized by the importing Member country. As a matter of fact, among all the 15 complaints brought by China to the WTO Dispute Settlement Body so far, 13 of them are related to these two issues.16 With these two deadlines coming to an end, China may look forward to better treatment of its exports. This is China’s expectation in the post-WTO era. After almost four decades of opening up to the world, China has achieved magnificent progress in its economic development. China’s gross domestic production and foreign trade volume have been ranked second in the world after the US. The Gross National Income per capita has risen from $220 in 1980 to $7,900 in 2015, raising China’s economic status as a low-income country to an upper-middle-income country.17 The accession to the WTO has contributed much to this progress. It is only natural that China will expect to achieve more from the multilateral trade system when the additional restrictions are released in the coming years.

  Article 15(a)(ii) of the Accession Protocol of China.   Article 15(d) of the Accession Protocol of China. 16   The relevant cases include DS252, DS368, DS379, DS397, DS399, DS405, DS422, DS437, DS449, DS452, DS471, DS515 and DS516. 17   See ‘The World Bank’, accessed March 2, 2016 14 15

M4644-CHAISSE_9781788971898_t.indd 103

11/10/2018 10:22

104

China–European Union investment relationships

However, this may not become true as China’s important trading partners like the US and the EU seem to have moved their interests from the multilateralism to the regionalism. What is more is that they are still reluctant to recognize China as a market economy.18 This arises from the dissatisfaction of the US with the multilateral trade system under the auspices of the WTO and the EU’s worries about the rising position of China in the Asian-Pacific area. Although President Trump has declared that the US will withdraw from the TTP, it seems unlikely that it will terminate the undergoing negotiations of the Transatlantic Trade and Investment Partnership (TTIP) with the EU. The proliferation of regional agreements is a double-edged sword. On the one hand, more preferential regional cooperation will lay the foundations for future global integration. On the other hand, they will lead to the fragmentation of the multilateral trade system and make subsequent negotiations more difficult due to potential conflicts of the groups’ interests. This will eventually undermine Members’ trust in the WTO rules, especially when the Doha Round of Negotiations is in a deadlock.19 One of the significant features in these regional cooperation negotiations is the high threshold for accession including the non-reservation requirement to the high levels of labour standards and environment protection. The issues of labour standards and environment protections have long been debated within the multilateral structure.20 During the Uruguay Round Negotiations, developed countries tried to address these issues through trade regulation but encountered strong resistance from developing countries. As a compromise, part of these issues has been addressed in the Agreement on the Application of Sanitary and Phytosanitary Measures and Agreement on Technical Barriers to Trade, while the key issues are still left undecided. These regional agreements will fill up the lacuna. These ongoing regional agreements have brought China into another dilemma. On the one hand, it is obviously too early for China to join those agreements like the TPP since most of its domestic industries and enterprises cannot meet the environment-protection and energy-saving

18   So far, none of the three most important trading partners, US, EU and Japan, has recognized China as a market economy. 19   The recently concluded Bali Ministerial Conference shed some light on the Doha Round. The Ministerial Declaration adopted on 7 December 2013 contains an ambitious package of decisions, which includes the issues of trade facilitation, agriculture, cotton and the least-developed countries. 20   Jiaxiang HU, WTO and Its Dispute Settlement Mechanism: From a Developing Country Perspective, (Chapter Three, Zhejiang University Press, 2005).

M4644-CHAISSE_9781788971898_t.indd 104

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 105

r­ equirements. On the other hand, China is also leading some of the regional co-operations like the Free Trade Area of the Asia-Pacific (FTAAP).21 Back in the 1980s, one of the motivations for China to resume its GATT contracting party status is to normalize its trade relations with the western world under the most-favoured-nation clause.22 When China began to rely on its exports for economic development, it realized the importance of trading opportunities with those developed countries. The western world, however, seemed reluctant to give these opportunities to China unconditionally. They conditioned their most-favoured-nation treatment on the improvement of human rights in China and exchanges with other political requests. This became more relevant after the Tian An Men Square Incident in 1989. In order to cover up this embarrassment, the Chinese government quickened its steps for negotiations, first with the GATT contracting parties, then with the WTO Members. After 16 years of tough negotiations, China became the 142nd Member of the WTO in 2001. The formation of these regional regimes under the TPP, TTIP and the potential isolation from them will slow down China’s progress in its globalization strategy and reduce the significance of China as a WTO Member. The current situation China is encountering is quite similar to that before China’s accession to the WTO. The set-up of FTZs is part of the national strategy for the Chinese government to streamline its administration and further the opening of its market. All these efforts are the warm-up exercises for the next stage of China’s integration into the world economy, either ­globally or regionally.

IV.  FTZS: HOW FAR CAN THEY GO? Although the newly revised Regulations of the People’s Republic of China on Administration of Foreign-funded Banks and Rules for Implementing the Regulations of the People’s Republic of China on Administration of Foreign-funded Banks have ensured that the juridical-person banks with

21   In the 2014 APEC Summit held in Beijing, Chinese president XI Jinping proposed the construction of the Free Trade Area of the Asia-Pacific. 22   When the GATT was used to replace the still-born International Trade Organization, China was one of its original signatories. Although the Nationalist Party decided to withdraw from the GATT in the early 1950s after it retreated to Taiwan, the Beijing government never accepted this decision. Therefore, China insisted on the resumption of its original status in the GATT. Unfortunately, China’s efforts failed before the GATT was replaced by the WTO in 1995.

M4644-CHAISSE_9781788971898_t.indd 105

11/10/2018 10:22

106

China–European Union investment relationships

foreign funds can receive the national treatment as that of their Chinese counterparts, they still contain some restrictions on the business of foreign bank branches.23 Therefore, the essence of the objectives set for the FTZs is to phase out the restrictions on market access for trade in financial services and build Shanghai as one of the regional financial centres. This liberalization process will be achieved in conformity with China’s commitments under the GATS plus China’s own incentive policies. The extent of liberalized sectors of the GATS depends on the specific commitments of each Member. The World Trade Organization does not prevent its Members from liberalizing faster than they have promised in their schedules. GATS commitments are basic guarantees of WTO Members. The absence of such guarantees does not mean that access to a particular market is denied.24 A Member like China may choose to open more sectors than scheduled when it considers appropriate. Even so, China still retains a large degree of freedom with respect to the framework of domestic regulations in its financial market, and the reform in this area will be conducted in a coherent way with its overall economic strategy. Since the accession to the WTO in 2001, China has followed its commitments to open the banking sector to foreign-funded banks by phasing out restrictions on their business in China.25 China has released geographic restrictions on foreign currency business to foreign-funded banks on the date of its accession. As for the local currency business, China had removed all geographic restrictions before the end of the transitional period, i.e., December 11, 2006. In regard to the clients of foreign-funded banks, China has extended them from Chinese enterprises to all individuals. Meanwhile, China has lifted the ban on the local currency debt of foreign-funded banks in no more than 50 per cent of their foreign currency debt and raised the percentage for foreign-funded banks to absorb foreign currency savings in China. China has not made a substantial step further forward on the financial market access ever since it fulfilled the scheduled commitments. The idea of establishing the FTZs has generated a lot of excitement and ­imagination

  See Jiaxiang Hu, ‘Market Access or Market Restrictions’ (2009) 1 (3) Goettingen Journal of International Law 417–38. 24   See Aaditya Mattoo, ‘China’s Accession to the WTO: The Services Dimension’, (2003) 6(2) Journal of International Economic Law 301. 25  See Report of the Working Party on the Accession of China (Schedule CLII – The People’s Republic of China: Part II – Schedule of Specific Commitments on Services, List of Article II MFN Exemptions), Part II (Specific Commitments): Banking and Other Financial Services (excluding insurance and securities), WT/ ACC/CHN/49/ADD.2 (distributed on October 1, 2001). 23

M4644-CHAISSE_9781788971898_t.indd 106

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 107

about accelerating China’s economic reforms, increasing financial market access for foreign investment, providing more flexible capital account convertibility and quickening the steps of RMB currency internationalization. The innovative measures which some FTZs are currently trying are stepping stones leading to the deeper changes for China’s future development, which will shift from a closed capital market to an open one. Rhetoric and excitement aside, however, no one is asking the fundamental question of whether the incentives for various local stakeholders are compatible with this ambitious project. This is the single most important issue in determining whether the FTZs can play as the catalyst to deepen China’s structural reforms. As one analyst observed, the FTZs will not be a game changer until the incentive problem is resolved.26 In other words, the success of the FTZs will be assessed, to a great extent, on the opening of China’s financial market which is full of risks in management. Unlike the previous SEZs which were operated either with tax breaks or other incentive policies which benefited the local economy with the substantial increase of foreign investment and government revenue, the FTZs have not received any preferential treatment in the economic sense but are encouraged to experiment on the release of government control and test the risks after further opening the market. The local governments have not gained any material benefits from the FTZs. Instead, they are prone to the risks in testing those innovative measures. After more than four decades of fast economic development, a new class consisting of the wealthy and intellectuals has emerged in China. Many of the vested interest groups that used to support economic reforms are becoming suspicious of radical changes as deeper reforms will take away their rent-seeking opportunities. The incentive incompatibility problem will haunt the development of the FTZs. Many Chinese intellectuals have lost their ideals and pioneering spirit as they possessed in 1980s and early 1990s.27 They have realized that the upward mobility is almost always capped and any promotion one manages to gain through hard work, or even at the cost of taking a risk like the early days of 1980s, can be taken away by the elite group. Therefore, most of them are turning away from

26   See Chi Lo, ‘China’s FTZs, Structural Reforms & RMB Convertibility’, The SWIFT Institute, accessed March 24, 2014. 27   There have been two massive waves of Chinese intellectuals leaving the governments to do business in the recent years. The former lasted the whole of the1980s when many of them migrated to the special economic zones. The latter occurred in 1992 after the former Chinese leader Deng Xiaoping delivered his famous speech in Shenzhen, indicating his strong support to the market economy.

M4644-CHAISSE_9781788971898_t.indd 107

11/10/2018 10:22

108

China–European Union investment relationships

the reforms with the suspicion that more reforms would only benefit the elite. In addition to this incompatibility issue, a more technical one deserves questioning: are the policies to liberalize capital account and internationalize RMB currency designed to make Shanghai a regional financial centre? Some emerging economies may find it necessary to internationalize their local currencies in order to successfully construct regional financial centres and attract foreign capital flow on to their soil. This strategy works sometimes, but currency internationalization does not inevitably lead to the establishment of a financial centre within the boundaries of the issuing country. For instance, in the case of euro, a fully developed international financial centre is located neither in Frankfurt nor in Paris although Germany and France are the two important engines of EU economy. Instead, London deals with a large share of cross-border financial transactions in euros. This pattern may not change a lot even though UK has formally withdrawn from the EU.28 Capital account liberalization is the most difficult issue and the last stage of financial market opening in China. Compared with its commitments in finance sectors under the GATS, China’s decision in this regard is really a bold one. Since its effect on the national economy remains unknown, it is necessary for the FTZs like Shanghai to weigh up the benefits and costs of capital account deregulation before embarking on currency internationalization. Potential capital flight is the single most important obstacle for the Chinese government to permit fund flows between the FTZs and the outside world. This is because, by allowing free access to the FTZs from other regions, China would effectively open up its capital account and risk massive capital outflow. Unlike the practice in many other countries, finance is a heavily protected sector in China. Nearly all banks are dominated by State capital, which has led to less competition and inefficient supervision. The worsening of China’s over-invoicing problem may be indicative of an everincreasing incentive for capital flight if the floodgates were opened. If such a hypothesis becomes a reality, the consequence will be beyond anybody’s imagination. When over-invoicing, a Chinese firm inflates its import bill by charging the import price of some commodity much higher than the actual cost. By reporting an inflated import bill to the Chinese customs,   See Yung Chul Park and Kwanho Shin, ‘Internationalization of Currency in East Asia: Implications for Regional Monetary and Financial Cooperation’, working paper for BoK/BIS seminar on currency internationalization: lessons from the global financial crisis and prospects for the future in Asia and the Pacific (Seoul, Korea, March 10–20, 2009). 28

M4644-CHAISSE_9781788971898_t.indd 108

11/10/2018 10:22



FTZs: can they initiate a new round of reforms in China? 109

this allows the passing of capital overseas, with the foreign (exporting) entity crediting the excess amount into its Chinese counterpart’s bank account outside of China. Establishing rules for financial institutions to supervise capital flow in the FTZs is complicated in the face of this loophole, which will be aggravated by the incentive incompatibility among the FTZ’s stakeholders. To play safe, China will likely keep its asymmetric stringent control on the capital outflow, which is to allow capital to come into the country much more easily than allowing it to escape. At the current stage, the Shanghai FTZ is likely to be a restrictive experiment zone for onshore RMB currency convertibility and capital account liberalization. This practice is meant to minimize the possibility of massive capital flight that could destabilize China’s financial system.29 It is clear that the Chinese leaders are fully aware of these potential risks. This is why the current liberalization of capital account is strictly limited within the ring-fenced Shanghai FTZ. However, if the regulators are able to completely segregate the financial market in Shanghai FTZ from the outside, it will just be an isolated laboratory with a limited impact on the drive towards national structural reforms. The relevance of the Shanghai FTZ to other places will be reduced significantly. The best example in this regard is Hong Kong, which is a de facto free trade zone of China since its reversion to the motherland in 1997. Hong Kong has already developed a world class financial system, which runs on the rule of law with a high level of credibility and integrity. It has a fully convertible capital account and currency, and its economy is running on free market principles. All these are exactly what the FTZs are trying to emulate right now. But Hong Kong is ring-fenced from the rest of China with limited free flow of investment and capital.30 In contrast to Hong Kong, Singapore’s well-known non-internationalization policy tells another story that currency internationalization is not a necessary condition for the development of a financial centre. Shortly after its independence, the Singaporean government began to provide special regulatory and tax treatment for foreign commercial banks to promote offshore deposits. The Singaporean government, however, realized the size of the Singapore’s economy was too small compared to the rapidly growing volume of foreign currency deposits and unable to meet

  See n 25.   Since 17 November 2014, Shanghai Stock Exchange and Hong Kong Stock Exchange have been buying a certain amount of stocks from each other every day as a trial to open the currency market. 29 30

M4644-CHAISSE_9781788971898_t.indd 109

11/10/2018 10:22

110

China–European Union investment relationships

the demands of currency in emergent situations. Since Singapore used the exchange rate as a benchmark policy instrument, its government was especially concerned about the possibility of speculative attacks on the Singaporean dollar. It believed that, by restricting the international use of the domestic currency, the Singaporean dollar could be protected from speculative attacks.31 To open or not to open, this is a question for China. On the one hand, it is a bold policy for the Chinese government to further liberalize its markets including that of the capital account at the time when its supervision is not fully-fledged and the whole national economy is still unstable. On the other hand, however, it will be very difficult for China to upgrade its economic development if the current government still discourages the capital flow and restricts the currency convertibility, especially at the moment that China is the second largest economy and has the largest reserve of foreign currency. With the Chinese products becoming less competitive in the world market and the continuing sluggishness of domestic consumption, China urgently needs to replace the production-driven economy with a service-driven economy. An efficient capital market is essential to achieving this. Therefore, the issue of how far the FTZs can go actually depends on how farsighted the Chinese government can be.

31   See Chow, H.K., ‘Managing Capital Flows: The Case of Singapore’, Asian Development Bank Institute Discussion Papers, No.86 (Tokyo).

M4644-CHAISSE_9781788971898_t.indd 110

11/10/2018 10:22

7. Refining the expropriation clause: what role for proportionality? Catharine Titi* INTRODUCTION In a 2012, the Dutch Ministry of Economic Affairs, Agriculture and Innovation convened a roundtable bringing together seasoned investment treaty negotiators, academics and arbitrators. A vote was passed by a show of hands and the majority of participants concurred that Article 1 of the First Protocol to the European Convention on Human Rights (ECHR) provides a useful model for ‘balanced’ expropriation provisions in international investment agreements (IIAs). As a corollary, it was agreed that the European Union (EU) should include such clauses in its IIAs.1 A noteworthy feature of this provision is that it is buttressed by the jurisprudence of the European Court of Human Rights (ECtHR) and its proportionality analysis. But despite the apparent acquiescence on the desideratum of such a clause for international investment law, similar provisions have not been inserted in IIAs; and this despite the continuing overhaul of international investment law. Singularly, a clause redolent of Article 1 of the First Protocol to the ECHR was included in Norway’s never-adopted 2007 model bilateral investment treaty (BIT).2 The newer 2015 Norwegian draft model BIT has combined this provision and expropriation clauses found in new IIAs.3 And yet newer investment treaties, particularly those of Canada and now also of the EU, appear willing to embrace some form of proportionality. Whether this new proportionality, established on different terms, is the same or different from proportionality as we know it from human rights law is an open question. *  The author would like to thank Attila M. Tanzi for his useful comments. 1   This was a roundtable on ‘The Right to Regulate’ organised in The Hague by the Dutch Ministry of Economic Affairs, Agriculture and Innovation on 13 July 2012. 2   See Art. [6] of the Norwegian Draft Model BIT (2007). 3   Art .[6] of the Norwegian Draft Model BIT (2015). 111

M4644-CHAISSE_9781788971898_t.indd 111

11/10/2018 10:22

112

China–European Union investment relationships

Proportionality has a long pedigree as a legal and philosophical concept.4 In its modern form, it was especially developed in German administrative and constitutional law, first as a means of assessing interference by the administration with civil liberties, then in order to impose checks on the legislator.5 The dispute settlement organs of the World Trade Organization (WTO), the Court of Justice of the European Union (CJEU), and the ECtHR, all resort to some form of proportionality analysis.6 Proportionality also plays a role in general public international law, such as in the context of countermeasures,7 in ius ad bellum and ius in bello.8 The essential idea underlying proportionality is that individual freedom of action should only be limited to the extent that it is necessary for the public interest.9 In its simple form, proportionality means that a state measure must be commensurate with the objective pursued.10 In its more elaborate form, proportionality involves a three-prong examination: an analysis of the suitability (or appropriateness) of the challenged measure to achieve the goal pursued; a necessity test to verify whether the measure was necessary in light of available alternatives; and a stricto sensu assessment of proportionality to ascertain that the benefit of realising the measure’s objective outweighs the harm it causes, viz., that the effect of the measure is not ‘disproportionate’ or excessive when compared to the interests affected.11   Proportionality is considered an ‘ideal’ since antiquity. E.g., see Aristotle, ‘Nichomachean Ethics’, Book V, Chapter 5. On proportionality in Plato and Cicero, see Thomas Poole, ‘Proportionality in Perspective’, LSE Law, Society and Economy Working Papers 16/2010.  5   Mads Andenas and Stefan Zleptnig, ‘Proportionality: WTO Law: in Comparative Perspective’, (2007) 42 Texas International Law Journal 382; Bernhard Schlink, ‘Proportionality in Constitutional Law: Why Everywhere but Here?’ (2012) 22 Duke Journal of Comparative & International Law 296.  6   Schlink, ibid., p. 296.  7   E.g., see Art. 51 of the International Law Commission’s (ILC) Articles on the Responsibility of States. See further ICJ, Gabčíkovo-Nagymaros Project (Hungary/Slovakia), ICJ Reports 1997, para. 85. See further Michael Newton and Larry May, Proportionality in International Law (OUP, 2014) 181 et seq. For another occurrence of proportionality considerations in the ILC Articles on the Responsibility of States, see Art. 35 of the Articles (Restitution).  8  ICJ, Military and Paramilitary Activities In and Against Nicaragua (Nicaragua v. United States of America), Merits, Judgment, ICJ Reports 1986, p. 14, paras 176, 194. For an in-depth analysis of proportionality in this context, see Newton and May (n 7).  9   Andenas and Zleptnig (n 5), p. 383. 10   Newton and May (n 7), p. 15. 11   Andenas and Zleptnig (n 5), pp. 386 et seq.; Valentina Vadi, Analogies in International Investment Law and Arbitration (CUP, 2016) 196.  4

M4644-CHAISSE_9781788971898_t.indd 112

11/10/2018 10:22



Refining the expropriation clause 113

Sometimes a fourth step is added, an evaluation of the legitimacy of the measure’s objective.12 In the present chapter, I consider proportionality in light of new formulations of the expropriation clause in international investment law and with a particular reference to the context of the EU-China investment negotiations. The remainder of this chapter proceeds as follows. First, I address the dual approach to proportionality, as a general principle of law and as an element of substantive law.13 Second, I establish a comparative context, considering proportionality in the case law of the WTO’s Appellate Body (AB), the CJEU and the ECtHR. Then I turn to proportionality analysis in investment treaty arbitration, before exploring proportionality in recent EU and Chinese IIAs. Subsequently, I consider some criticisms of proportionality. In the final section, I draw some general conclusions and revert to the question of the status of proportionality as a general principle of law or as an element of substantive law.

I. PROPORTIONALITY: AN ELEMENT OF SUBSTANTIVE LAW OR GENERAL PRINCIPLE OF LAW? There are two ways to view proportionality. One is to regard it as a general principle of law; the other is to consider that proportionality is an element of material law, applicable only when explicitly or implicitly incorporated into a given set of rules. There is no consensus among scholars as to this issue,14 and some relevant critiques will be visited at the end of this chapter. Proportionality is not present in all domestic legal systems.15 This by itself would not impede its recognition as a general principle of law.   Caroline Henckels, Proportionality and Deference in Investor-State Arbitration (CUP, 2015) 24. Cf. Stoke-on-Trent, Case C-169/91 [1992] ECR I-6625, para. 15, where the measure’s legitimacy seems to be separate from proportionality; Newton and May (n 7), pp. 37–8. 13   The chapter does not examine whether proportionality is part of customary international law. 14   E.g., Andrew D. Mitchell, Legal Principles in WTO Disputes (CUP, 2008) 190; Andenas and Zleptnig (n 5), p. 373; Thomas Cottier and others, ‘The Principle of Proportionality in International Law’, NCCR Trade Working Paper No. 2012/38 (2012) 21–2; M. Sornarajah, Resistance and Change in the International Law on Foreign Investment (CUP, 2015) 367–8. 15   E.g., proportionality is not present in US constitutional law, see Mosche Cohen-Eliya, ‘American Balancing and German Proportionality: The Historical 12

M4644-CHAISSE_9781788971898_t.indd 113

11/10/2018 10:22

114

China–European Union investment relationships

General principles can be relevant exclusively under international law without a parallel in municipal legal systems.16 In practice, application of proportionality varies widely. For instance, the notion of the ‘fair balance’ that must be struck between the contested measure’s objective and the impact on the individual is especially present in the stricto sensu proportionality test of the ECtHR,17 and it is also used in the jurisprudence of the CJEU.18 By the same token, the less-restrictive alternative means test employed in WTO law is generally absent from the case law of investment tribunals, as is the ECtHR doctrine of the margin of appreciation, relating to the intensity of review of the contested national measure.19 Proportionality is closely linked to the margin of appreciation doctrine which does not claim the status of a general principle of law, as it is also related to another concept, or principle, that of reasonableness. Like reasonableness, it relies on a relativistic, case-by-case application: ‘what is reasonable and equitable in any given case must depend on its particular circumstances’,20 and ‘must be assessed in each case according to its special features’.21 This discrepancy in the application of proportionality in different legal contexts reveals that its status as a general principle is questionable, but Origins’, (2010) 8(2) International Journal of Constitutional Law 263–86. Cf. Mitchell (n 14), pp. 186, 203. 16   Although this proposition appears prima facie to contradict the wording of Art. 38(1)(c) of the Statute of the ICJ, which requires that the principles be ‘recognized by civilized nations’, it is said to stem in part from the narrow definition of customary international law, that leaves outside its scope many a rule of international law. The phrase ‘recognized by civilized nations’ is understood in this respect to refer to an attitude adopted by the international community, and so, by inference, by states. Giorgio Gaja, General Principles of Law, Max Planck Encyclopedia of Public International Law, (2013) (online version), paras 17–19, 32. See further Hugh Thirlway, ‘The Sources of International Law’, in M. Evans (ed.), International Law (4th ed., OUP, 2014) 105. Cf. Attila Tanzi, Introduzione al diritto internazionale contemporaneo (5th ed., Wolters Kluwer and CEDAM, 2016) 115; Anastasios Gourgourinis, ‘General/Particular International Law and Primary/ Secondary Rules: Unitary Terminology of a Fragmented System’, (2011) 22(4) European Journal of International Law 1008–9. 17   Andenas and Zleptnig (n 5), p. 390. 18   See below. 19   Gebhard Bücheler, Proportionality in Investor-State Arbitration (OUP, 2015) 232. 20   Interpretation of the Agreement of 25 March 1951 between the WHO and Egypt, Advisory Opinion, ICJ Rep 1980, 96, para. 49; Continental Shelf (Tunisia/ Libyan Arab Jamahiriya), ICJ Rep 1982, para. 72. 21   Wemhoff v. Germany [ECtHR], Judgment of 27 June 1968, Series A, No. 7, para. 10.

M4644-CHAISSE_9781788971898_t.indd 114

11/10/2018 10:22



Refining the expropriation clause 115

also that further qualification is needed in relation to how multiplicity of use and application can affect general principles. Authors who consider that proportionality is a general principle sometimes recognise that it has ‘permutations according to the specific area in which it operates’.22 But the concept of permutation conveys the idea of an incorporation into substantive law, rather than proportionality’s presence as a general principle. If proportionality is a general principle, sometimes found embedded in the applicable law, the question emerges whether it must be applied qua embedded in the law, i.e., infra legem (as a lex specialis). Sometimes general principles can appear as abstractions from customary international law norms, they can coincide with customary international law, or they can be embodied in conventional law.23 And if proportionality is not a general principle, recourse to it when it is not couched in the treaty text can be seen to  clash with the application of equity (ex aequo et bono adjudication).24  Pursuant to Article 42(3) of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), which mirrors Article 38(2) of the Statute of the International Court of Justice (ICJ), equity requires the specific consent of the disputing parties. Of course, not all equitable considerations are tantamount to a decision ex aequo et bono and the adjudicator may exercise ‘discretion in applying rules of law on the basis of justice and fairness’.25

II.  PROPORTIONALITY IN WTO LAW Proportionality balancing in WTO law is especially discussed in relation to public policy exceptions in Article XX of the General Agreement on 22   Emily Crawford, Proportionality, Max Planck Encyclopedia of Public International Law, (2013) (online version), para. 1. 23   Gaja (n 16), paras 18, 24. 24   Francesco Francioni, Equity in International Law, Max Planck Encyclopedia of Public International Law, (2013) (online version), paras 18 et seq.; Juan Felipe Merizalde, ‘Proportionality, Contributory Negligence and Other Equity Considerations in Investment Arbitration’, in Ian A. Laird et al. (eds) Investment Treaty Arbitration and International Law (2015) 314 et seq., 319; Gaja (n 16), para. 16. 25   Christoph H. Schreuer and others, The ICSID Convention: A Commentary (2nd ed., 2009, CUP) 636. See also Francioni (n 24), para. 18:

If, as often occurs, the circumstances of the case dictate that application of equity must lead to the determination of an amount of compensation that is less than the market value of the property taken, is this equity contra legem or equity within the law?

M4644-CHAISSE_9781788971898_t.indd 115

11/10/2018 10:22

116

China–European Union investment relationships

Tariffs and Trade (GATT) and in Article XIV of the General Agreement on Trade in Services (GATS). There it comes into play in the interpretation of the chapeau (for example, see the AB’s reasoning in US-Shrimps26 which resembles a proportionality test),27 and in particular the ‘necessary to’ nexus requirement. Proportionality is also used in relation to positive obligations, such as those in the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), and in the suspension of concessions under the Dispute Settlement Understanding (DSU).28 With respect to the necessity test, in Korea-Beef, the AB reasoned that several aspects need to be taken into account when evaluating whether a measure is necessary: One is the extent to which the measure contributes to the realization of the end pursued, the securing of compliance with the law or regulation at issue. The greater the contribution, the more easily a measure might be considered to be ‘necessary’. Another aspect is the extent to which the compliance measure produces restrictive effects on international commerce. [. . .] [D]etermination of whether a measure, which is not ‘indispensable’, may nevertheless be ‘necessary’ within the contemplation of Article XX(d), involves in every case a process of weighing and balancing a series of factors which prominently include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports.29

This line of reasoning was confirmed in other cases.30 In Brazil – Retreaded Tyres, the AB took account of the measure’s trade restrictiveness: In order to determine whether a measure is ‘necessary’ within the meaning of Article XX(b) of the GATT 1994, a panel must assess all the relevant factors, particularly the extent of the contribution to the achievement of a measure’s

  United States – Import Prohibition of Certain Shrimps and Shrimp Products, WT/DS58/AB/R, 12 October 1998, para. 159. 27   Cottier and others (n 14), p. 16. 28   Ibid. p. 13; Andenas and Zleptnig (n 5), pp. 405 et seq. 29   Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/ DS161/AB/R and WT/DS169/AB/R, 11 December 2000, paras 163–164. 30   EC – Measures Affecting Asbestos and Asbestos-Containing Products, WT/ DS135/AB/R, 12 March 2001, para. 170; Thailand-Restrictions on the Importation of and Internal Taxes on Cigarettes, DS10/R-37S/200, 7 November 1990, para. 75; United States-Standards for Reformulated and Conventional Gasoline, WT/DS2/R, 29 January 1996, para. 6.25; United States-Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, 7 April 2005, paras 305 et seq. 26

M4644-CHAISSE_9781788971898_t.indd 116

11/10/2018 10:22



Refining the expropriation clause 117 objective and its trade restrictiveness, in the light of the importance of the interests or values at stake. If this analysis yields a preliminary conclusion that the measure is necessary, this result must be confirmed by comparing the measure with its possible alternatives, which may be less trade restrictive while providing an equivalent contribution to the achievement of the objective pursued.31

In China – Publications and Audiovisual Products, the AB held that an alternative measure may be considered not to be reasonably available ‘where it is merely theoretical in nature, for instance, where the responding party is not capable of taking it, or where the measure imposes an undue burden on that Member, such as “prohibitive costs or substantial technical difficulties”.’32 With respect to the burden of proof in relation to ‘reasonably available alternatives’, the AB considered that the responding party does not have to ‘demonstrate that there are no reasonably available alternatives that would achieve its objectives’ but that it suffices to show that ‘the alternative is not “reasonably available”, in the light of the interests or values being pursued and the party’s desired level of protection’.33 With respect to substantive obligations, Article 2(2) of the SPS Agreement provides, inter alia, that any sanitary or phytosanitary measure that the WTO members adopt is applied ‘only to the extent necessary to protect human, animal or plant life or health, is based on scientific principles and is not maintained without sufficient scientific evidence’. In Japan – Apples, the panel had concluded that for a measure to be maintained ‘without sufficient scientific evidence’ within the meaning of this article, there must be ‘no “rational or objective relationship” between the measure and the relevant scientific evidence’ and that in casu the contested measure was ‘clearly disproportionate’.34 The AB agreed with the findings of the panel.35 Article 5(6) of the SPS Agreement states that: [. . .] when establishing or maintaining sanitary or phytosanitary measures to achieve the appropriate level of sanitary or phytosanitary protection, Members shall ensure that such measures are not more trade-restrictive than required to

  Brazil – Measures Affecting Imports of Retreaded Tyres, WT/DS332/AB/R, 3 December 2007, para. 156. 32   China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/AB/R, 21 December 2009, para. 318. 33   Ibid., para. 319. 34   Japan – Measures Affecting the Importation of Apples, WT/DS245/AB/R, 26 November 2003, para. 147. 35   Ibid., para. 160. 31

M4644-CHAISSE_9781788971898_t.indd 117

11/10/2018 10:22

118

China–European Union investment relationships

achieve their appropriate level of sanitary or phytosanitary protection, taking into account technical and economic feasibility.

A footnote to this article specifies that ‘a measure is not more traderestrictive than required unless there is another measure, reasonably available taking into account technical and economic feasibility, that achieves the appropriate level of sanitary or phytosanitary protection and is significantly less restrictive to trade.’36 Further language making indirect reference to proportionality is found in the Agreement on Technical Barriers to Trade (TBT),37 and in the Agreement on Safeguards.38 In short, although proportionality as a principle is not unanimously part of WTO law, a certain measure of proportionality obtains through its incorporation in specific provisions.

III.  PROPORTIONALITY IN EU LAW Proportionality is a principle of EU law,39 where it started life as an unwritten principle, but is now expressly included in the European Treaties. Article 5 of the Treaty on European Union (TEU) states that use of the EU’s competences is ‘governed by the principles of subsidiarity and proportionality’,40 and specifies that: Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.   The institutions of the Union shall apply the principle of proportionality as laid down in the Protocol on the application of the principles of subsidiarity and proportionality.41

Article 36 of the Treaty on the Functioning of the European Union (TFEU) provides that: 36   For an interpretation of this provision, see further Australia – Measures Affecting Importation of Salmon, WT/DS18/AB/R, 20 October 1998, paras 180 et seq. 37   Art. 2.2 of the TBT Agreement. 38   Art. 5(1) of the Agreement on Safeguards. 39   E.g., Case C‑343/09, Afton Chemical Ltd v. Secretary of State for Transport, EU:C:2010:419, para. 45; Case C-92/09, Volker und Markus Schecke GbR and Case C-93/09 Hartmut Eifert v. Land Hessen, EU:C:2010:662, para. 74; Case C331/88 R v Minister of Agriculture, Fisheries and Food and Secretary of State for Health, ex parte: Fedesa and others [1990] ECR I4023, para. 13. 40   Art. 5(1) of the TEU, emphasis added. 41   Art. 5(4) of the TEU.

M4644-CHAISSE_9781788971898_t.indd 118

11/10/2018 10:22



Refining the expropriation clause 119 The provisions of Articles 34 and 35 shall not preclude prohibitions or restrictions on imports, exports or goods in transit justified on grounds of public morality, public policy or public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property. Such prohibitions or restrictions shall not, however, constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.

In interpreting whether prohibitions or restrictions are allowed under Article 36 of the TFEU, the CJEU proceeds to a proportionality ­analysis.42 Proportionality in this context means that national legislation that restricts, or that may restrict, intra-EU trade must be proportionate to the objective pursued and that less trade-restrictive measures should not be available.43 More generally, and according to settled case law of the CJEU, the principle of proportionality requires that Union acts be appropriate to achieve the objective pursued and that they do not exceed the limits that are necessary to attain the same.44 When several appropriate measures are available, ‘recourse must be had to the least onerous and the disadvantages caused must not be disproportionate to the aims pursued’.45 In other words, the proportionality test developed by the CJEU resorts to the   Bücheler (n 19), p. 68. See also Julien Chaisse, ‘Demystifying Public Security Exception and Limitations on Capital Movement-- Hard Law, Soft Law and Sovereign Investments in the EU Internal Market’ (2015) 37(2) University of Pennsylvania Journal of International Law 58–-646. 43   Robert Schütze, An Introduction to European Law (2nd edition, 2015, CUP) 244. 44   Case C-92/09 Volker und Markus Schecke GbR and Case C-93/09 Hartmut Eifert v. Land Hessen, EU:C:2010:662, para. 74; Case C‑343/09, Afton Chemical Ltd v. Secretary of State for Transport, EU:C:2010:419, para. 45; Cases C‑581/10 and C‑629/10, Emeka Nelson and Others v. Deutsche Lufthansa AG and TUI Travel plc and Others v. Civil Aviation Authority, EU:C:2012:657, para. 71; Case C‑283/11, Sky Österreich GmbH v. Österreichischer Rundfunk, EU:C:2013:28, para. 50; Case C‑101/12, Herbert Schaible v. Land Baden-Württemberg, EU:C:2013:661, para. 29; Case C-293/12, Digital Rights Ireland Ltd v. Minister for Communications, Marine and Natural Resources, Minister for Justice, Equality and Law Reform, EU:C:2014:238, para. 46. 45   Cases C‑581/10 and C‑629/10 Emeka Nelson and Others v. Deutsche Lufthansa AG and TUI Travel plc and Others v. Civil Aviation Authority, ibid., para. 71; Case C‑343/09, Afton Chemical Ltd v. Secretary of State for Transport, ibid., para. 45; Case C‑283/11, Sky Österreich GmbH v. Österreichischer Rundfunk, ibid., para. 50; Case C‑101/12, Herbert Schaible v. Land Baden-Württembergibid., para.  29; Case C331/88 R v Minister of Agriculture, Fisheries and Food and Secretary of State for Health, ex parte: Fedesa and others (n 39), para. 13 42

M4644-CHAISSE_9781788971898_t.indd 119

11/10/2018 10:22

120

China–European Union investment relationships

three-prong examination of the challenged measure and requires that the measure be suitable to achieve the objective pursued, necessary to achieve this same objective, and that it should not be disproportionate to it.46 The CJEU has accorded the Union a wide margin of appreciation.47 This has of course its limits, as displayed in the Kadi case, where the property-restricting measures taken against the applicant suspected of terrorist activities were considered to constitute an unjustified restriction of the applicant’s right to property.48 The CJEU held that it must determine if a: fair balance has been struck between the demands of the public interest and the interest of the individuals concerned. In so doing, the Court recognises that the legislature enjoys a wide margin of appreciation, with regard both to choosing the means of enforcement and to ascertaining whether the consequences of enforcement are justified in the public interest for the purpose of achieving the object of the law in question.49

In addition, the Charter of Fundamental Rights of the European Union spells out that ‘[s]ubject to the principle of proportionality, limitations may be made only if they are necessary and genuinely meet objectives of general interest recognised by the Union or the need to protect the rights and freedoms of others’.50 The Chapter also provides for the related but distinct51 principle that any limitation on the exercise of fundamental rights and freedoms must ‘respect the essence of those rights and freedoms’.52

IV. PROPORTIONALITY AT THE EUROPEAN COURT OF HUMAN RIGHTS Proportionality analysis is a well-established feature of the jurisprudence of the ECtHR. It is particularly relevant to the ECtHR’s examination

  See further Schütze (n 43), pp. 204–5. Cf. Andenas and Zleptnig (n 5), p. 389, with citations; see further Newton and May (n 7), pp. 37–8. 47   Schütze (n 43), p. 205. 48   Cases C-402/05 P and C-415/05 P Kadi and Al Barakaat International Foundation v. Council and Commission, EU:C:2008: 461, paras 355–371. 49   Ibid., para. 360. 50   Art. 52(1) of the Charter of Fundamental Rights of the European Union. 51  E.g., Case C-293/12, Digital Rights Ireland Ltd v; Minister for Communications, Marine and Natural Resources, Minister for Justice, Equality and Law Reform, EU:C:2014:238, compare paras 39-40 and paras 45 et seq. 52   Art. 52(1) of the Charter of Fundamental Rights of the European Union. 46

M4644-CHAISSE_9781788971898_t.indd 120

11/10/2018 10:22



Refining the expropriation clause 121

of the rights in Articles 8–11 of the ECHR, but it is also relevant to the protection of property under Article 1 of the First Protocol to the ECHR. This provision states: Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.   The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

In applying Article 1 of the First Protocol to the ECHR, the ECtHR considers that ‘there must be a reasonable relationship of proportionality between the means employed and the aims pursued’, the challenged measure must not impose ‘an unreasonable burden’ on the individual and must strike ‘a fair balance between the various interests involved’.53 Otherwise put, state interference must be ‘reasonably proportionate’ to the aim pursued and a balance must be found ‘between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights’, while the person concerned cannot bear ‘an individual and excessive burden’.54 Article 1 of the First Protocol to the ECHR grants legislatures ‘a wide margin of appreciation both with regard to the existence of a problem of public concern warranting measures of control and as to the choice of the detailed rules for the implementation of such measures’.55 In Mellacher v. Austria, the ECtHR famously held that it would ‘respect the legislature’s judgment as to what is in the general interest unless that judgment be manifestly without reasonable foundation’.56 The Court added that: The possible existence of alternative solutions does not in itself render the contested legislation unjustified. Provided that the legislature remains within the bounds of its margin of appreciation, it is not for the Court to say whether   N.K.M. v. Hungary, 14 May 2013, para. 42; Mellacher and Others v. Austria, 19 December 1989, Series A No. 169, para. 48. 54   Stefanetti and Others v. Italy, 15 April 2014, para. 52; Jahn and Others v. Germany, 30 June 2005, paras 81–94; Sporrong and Lönnroth v. Sweden, 23 September 1982, Series A no. 52, paras 69–74; Stoke-on-Trent, Case C-169/91 [1992] ECR I-6625, para. 15. 55   Mellacher and Others v. Austria, 19 December 1989, Series A No. 169, para. 45. 56  Ibid. 53

M4644-CHAISSE_9781788971898_t.indd 121

11/10/2018 10:22

122

China–European Union investment relationships

the legislation represented the best solution for dealing with the problem or whether the legislative discretion should have been exercised in another way.57

By way of a final consideration, the protection of property in the ECHR is broadly similar to the protection against expropriation in IIAs but it is emphatically not coterminous with it. The differing rationales of the two systems, the fact that protection under the ECHR may be concurrent with protection under IIAs and most notably the differences in the wording of the respective provisions must be kept in mind: Article 1 of Protocol One of the ECHR contains a balancing of interests that is not present in traditional IIAs.58 This fact among others has elicited the statement that ‘investors’ rights to legitimate expectations in their property may be the most effectively protected “human” right that there is’.59

V. PROPORTIONALITY IN INVESTMENT ARBITRATION Proportionality has been evoked in investment arbitration, not only in relation to the expropriation standard, but also with respect to fair and equitable treatment,60 non-discrimination,61 as a requirement under applicable national law,62 and in the context of exceptions clauses. And yet, proportionality does not often carry forward into the reasoning of investment tribunals. Since most investment treaties do not incorporate references to it, there is nothing astonishing about this fact. Indeed, it could even be questioned to what extent tribunals, in the absence of any particular wording to that effect, should undertake a proportionality analysis, both in light of the persisting uncertainty as to the status of proportionality as a general principle and in light of states’ so-far reluctance

  Ibid., para. 53.   See in general José E. Alvarez, ‘The Public International Law Regime Governing International Investment’, The Hague Academy of International Law (2011) 57 et seq. 59   Ibid., p. 74. 60   E.g., see Occidental Petroleum Corporation Occidental Exploration and Production Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, passim; MTD Equity SDN and MTD Chile SA v. Chile, ICSID Case No. ARB/01/7, Award, 25 May 2004, para. 109. 61   Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para. 368. 62   Autopista Concesionada de Venezuela, C.A. (Aucoven) v. Venezuela, ICSID Case No. ARB/00/5, Award, 23 September 2003, para. 338. 57 58

M4644-CHAISSE_9781788971898_t.indd 122

11/10/2018 10:22



Refining the expropriation clause 123

to incorporate provisions modelled on Article 1 of the First Protocol to the ECHR. The present discussion will focus on the expropriation standard and a particular application of proportionality in the context of exceptions clauses. Determination of the expropriation standard in arbitral case law has been dominated by two competing approaches, the sole effect doctrine and the police powers doctrine. The first one is famously agnostic about the purpose of the host state measure and only examines the effect it has on the investor. In Santa Elena v. Costa Rica, which however concerned a direct expropriation, the tribunal reasoned that: Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.63

Contrarily, the police powers doctrine considers that what belongs to the sphere of the host state’s police powers cannot constitute an indirect expropriation. The Saluka tribunal held that ‘the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are “commonly accepted as within the police power of States” forms part of customary international law today’.64 New generation investment treaties tend to expressly include the police powers doctrine or a ‘mitigated’ police powers doctrine which allows for a balancing of interests, taking into account both the purpose of the host state measure and its effect on the investor.65 Only rarely do investment tribunals name proportionality. Even more rarely do they actually proceed to the three-step proportionality analysis. The Tecmed tribunal is an exception, often cited for expressly invoking proportionality. The tribunal considered that ‘in addition to the negative financial impact’ that host state measures had on the investor, it should also consider ‘whether such actions or measures are proportional to the public interest presumably protected thereby and to the protection legally granted to investments’.66 It added that:   Compañia del Desarrollo de Santa Elena, S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Final Award, 17 February 2000, para. 72. 64   Saluka Investments BV v Czech Republic, UNCITRAL, Partial Award, 17 March 2006, para. 262. 65   See the next section. 66   Técnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para. 122. 63

M4644-CHAISSE_9781788971898_t.indd 123

11/10/2018 10:22

124

China–European Union investment relationships

[t]here must be a reasonable relationship of proportionality between the charge or weight imposed to (sic) the foreign investor and the aim sought to be realized by any expropriatory measure. To value such charge or weight, it is very important to measure the size of the ownership deprivation caused by the actions of the state and whether such deprivation was compensated or not.67

While paying lip service to proportionality analysis, the tribunal seemed inclined to rely on the effect of the measure. The same tribunal had previously found: no principle stating that regulatory administrative actions are per se excluded from the scope of the Agreement, even if they are beneficial to society as a whole – such as environmental protection –, particularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever.68

In Azurix v. Argentina, the tribunal referred to the findings of the Tecmed tribunal and the ECtHR and considered that proportionality offers ‘useful guidance for purposes of determining whether regulatory actions would be expropriatory and give rise to compensation’.69 In Burlington Resources v. Ecuador, the tribunal considered that the measures taken by Ecuador were appropriate and ‘proportionate as the means employed were suited’ to the end pursued.70 Several references to proportionality are also found in Philip Morris v. Uruguay.71 An aspect that is not generally mentioned concerns how proportionality plays out in relation to the quantum of expropriation. It is sometimes assumed that, although in human rights law proportionality applies not only when deciding if there has been an expropriation but also when determining the amount of compensation,72 in investment law an all-ornothing approach is adopted. While the public purpose of a state measure and its non-arbitrary and non-discriminatory nature are elements of the lawfulness of an (indirect) expropriation, that do not do away with the requirement to compensate the investor, proportionality of a state meas  Ibid., emphasis added.   Ibid., para. 121. 69   Azurix Corp. v. Argentina, ICSID CASE No. ARB/01/12, Award, 14 July 2006. 70   Burlington Resources Inc. v. Ecuador, ICSID Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 504. 71   Philip Morris Brands Sàrl, Philip Morris Products S.A. and Abal Hermanos S.A. v. Uruguay, ICSID Case No. ARB/10/7, Award, 8 July 2016, passim. 72   E.g., see Newton and May (n 7), p. 51. 67 68

M4644-CHAISSE_9781788971898_t.indd 124

11/10/2018 10:22



Refining the expropriation clause 125

ure when inserted in IIAs (e.g., CETA below) means that the state measure cannot be qualified as indirectly expropriatory, and no compensation is due. A parallel may be drawn with the secondary rule of Article 27 of the International Law Commission’s (ILC) Articles on State Responsibility, which is without prejudice ‘to the question of compensation for any material loss’. A de lege ferenda consideration would be to introduce proportionality as an element of compensation.73 As in the case of WTO law, proportionality can be seen to be present in the interpretation of an exception with a chapeau or in a necessity test. In some of the Argentine crisis disputes, the essential security interests exception in Article XI of the Argentina-US BIT led some tribunals to interpretations that include some elements of proportionality. The LG&E tribunal, the only one among the first four Argentine crisis tribunals to give effect to the exception, introduced a certain measure of proportionality in its reasoning. It stated: With respect to the power of the State to adopt its policies, it can generally be said that the State has the right to adopt measures having a social or general welfare purpose. In such a case, the measure must be accepted without any imposition of liability, except in cases where the State’s action is obviously disproportionate to the need being addressed. The proportionality to be used when making use of this right was recognized in Tecmed, which observed that ‘whether such actions or measures are proportional to the public interest presumably protected thereby and the protection legally granted to investments, taking into account that the significance of such impact, has a key role upon deciding the proportionality’.74

The Continental Casualty tribunal, which interpreted the exception’s nexus requirement following WTO jurisprudence,75 an aspect not discussed here, proceeded to a balancing of interests. It held that: not every sacrifice can properly be imposed on a country’s people in order to safeguard a certain policy that would ensure full respect towards international obligations in the financial sphere, before a breach of those obligations can be considered justified as being necessary under this BIT. The standard of reasonableness and proportionality do not require as much. 73   The Indian Model BIT of 2015 takes a prima facie step in this direction, although its ‘mitigating factors’ can only be used to reduce compensation (see Arts 5.6 and 5.7). 74   LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, para. 195. 75  E.g., Continental Casualty Co. v. Argentina, ICSID Case No. ARB/03/9, Award, 5 September 2008, para. 192.

M4644-CHAISSE_9781788971898_t.indd 125

11/10/2018 10:22

126

China–European Union investment relationships

  [. . .] there are limitations to the use of property in the public interest that fall within typical government regulations of property entailing mostly inevitable limitations imposed in order to ensure the rights of others or of the general public (being ultimately beneficial also to the property affected). These restrictions do not impede the basic, typical use of a given asset and do not impose an unreasonable burden on the owner as compared with other similarly situated property owners. These restrictions are not therefore considered a form of expropriation and do not require indemnification, provided however that they do not affect property in an intolerable, discriminatory or disproportionate manner.76

Finally, it is however debatable whether exceptions clauses with a chapeau and exceptions’ nexus requirements (here as in WTO law) genuinely introduce proportionality in the interpretation of substantive standards. Their purpose, at least that of the chapeau, is to ensure that the exception is applied in accordance with proportionality, while proportionality in the ECHR or in Article 36 of the TFEU functions itself as an ‘exception’ in relation to the substantive norm.

VI. PROPORTIONALITY IN NEW EU AND CHINESE IIAS Although proportionality is a profoundly European principle, traditional EU member state BITs did not make any reference to it, nor did they encourage arbitrators to take proportionality into account.77 Of course, if proportionality were conceded to be a general principle of law, such reference would not be necessary. But drafting attitudes towards proportionality have been changing. An initial proposal of the EU in the Draft CETA Investment Chapter of 7 February 2013 offers an interesting, albeit eventually abandoned, example. According to this clause: Subject to the principle of proportionality, non-discriminatory measures of general application taken by a Party that are designed to protect legitimate public policy objectives do not constitute indirect expropriation if they are necessary and are applied in such a way that they genuinely meet the public policy objectives for which they are designed.78   Ibid., paras 227, 276.   For a criticism, see Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment—How Will the New EU Competence on FDI Affect the Emerging Global Regime?’ (2012) 15(1) Journal of International Economic Law 67–8. 78   Para. 3, Annex on expropriation proposed by the EU in the Draft CETA Investment Text of 7 February 2013 (emphasis added). 76 77

M4644-CHAISSE_9781788971898_t.indd 126

11/10/2018 10:22



Refining the expropriation clause 127

The finalised CETA introduces a different provision: For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.79

A similar clause is inserted in the EU-Singapore FTA, in the EU-Vietnam FTA, and in the EU proposal for the Transatlantic Trade and Investment Partnership (TTIP). The provision uses negative phrasing to enjoin the adjudicator to consider that a state measure does not constitute an indirect expropriation unless it is disproportionate to the objective pursued. A recent pre-CETA version of the Canadian model BIT includes quasiidentical language to the one now used in CETA.80 This is also reflected in Annex B.10, paragraph 3, of the Canada-China BIT of 2012, which includes a broader proportionality standard. According to this provision: Except in rare circumstances, such as if a measure or series of measures is so severe in light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, a non-discriminatory measure or series of measures of a Contracting Party that is designed and applied to protect the legitimate public objectives for the well-being of citizens, such as health, safety and the environment, does not constitute indirect expropriation.81

Besides such provisions more or less directly pointing to proportionality, other elements in new IIAs require a balancing of interests when determining indirect expropriation. For example, CETA’s annex on expropriation provides that to decide whether a measure or series of measures constitutes an indirect expropriation the adjudicators must take into account, among other factors: (1) the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Party has an adverse effect on the   Annex 8-A, para. 3 of CETA, emphasis added.   Annex B.10, para. c, of the Canadian model BIT (version of 6 July 2012):

79 80

[E]xcept in rare circumstances, such as when a measure or a series of measures is so severe in the light of its purpose that it cannot be reasonably viewed as having been adopted and applied in good faith, a non-discriminatory measure of a Party that is designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, does not constitute indirect expropriation.   Emphasis added.

81

M4644-CHAISSE_9781788971898_t.indd 127

11/10/2018 10:22

128

China–European Union investment relationships

economic value of an investment does not establish that an indirect expropriation has occurred; (2) the duration of the measure or series of measures of a Party; (3) the extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations; and (4) the character of the measure or series of measures, notably their object, context and intent.82

Similarly, recent Chinese treaties, such as the Canada-China BIT of 2012 (above), and the China-Uzbekistan BIT of 2011, seem to include a measure of proportionality in their expropriation provisions. The China-Uzbekistan BIT provides among others that the determination of whether a measure constitutes an indirect expropriation needs to take into account a number of elements, including the economic influence of a measure, although the sole adverse effect of the measure on the economic value of an investment does not mean that there has been an indirect expropriation, and whether the measure ‘is in appropriation (sic) to the purpose of expropriation’.83 It further establishes that, measures adopted in pursuance of legitimate public welfare objectives do not constitute an indirect expropriation, except ‘in exceptional circumstances, such as [when] the measures adopted severely [surpass] the necessity of maintaining corresponding reasonable public welfare’. 84

VII.  SOME CRITICISMS OF PROPORTIONALITY Proportionality is absent from some domestic legal systems, and its usefulness at the international level is not universally conceded. An often-formulated criticism is that proportionality requires a balancing of subjective or incommensurable values that cannot be ranked objectively.85 According to Jürgen Kurtz, with proportionality analysis, the adjudicative organ ‘becomes responsible for assessment of relative values [. . .] rather than national legislatures. Yet, this form of weighting often involves complex value-laden and empirical judgments. It is highly doubtful that [adjudicators], in general, are better assessors of values and empirical questions than elected representatives’.86 Indeed, it is sometimes argued that proportionality creates a risk of judicial or arbitral lawmak  Annex 8-A, para. 2 of CETA.   China-Uzbekistan BIT (2011), Art. 6(2). 84   Ibid., Art. 6(3). 85   Judith Gardam, Proportionality in International Law (Oxford Bibliographies, 2017); Vadi (n 11), p. 206; Henckels (n 12), p. 27 et seq.; Bücheler (n 19), p. 66. 86   Jürgen Kurtz, ‘Adjudging the Exceptional at International Law: Security, Public Order and Financial Crisis’ (2008) 45, . 82 83

M4644-CHAISSE_9781788971898_t.indd 128

11/10/2018 10:22



Refining the expropriation clause 129

ing contrary to the traditional separation of powers.87 In the words of Alec Stone Sweet and Jud Mathews, ‘balancing can never be dissociated from lawmaking: it requires judges to behave as legislators do, or to sit in judgment of a prior act of balancing performed by elected officials’.88 Another difficulty in applying proportionality is revealed in the oft-cited statement of the Prosecutor at the International Criminal Tribunal for the Former Yugoslavia, according to whom the main problem with proportionality: is not whether or not it exists but what it means and how it is to be applied. [. . .] It is much easier to formulate the principle of proportionality in general terms than it is to apply it to a particular set of circumstances because the comparison is often between unlike quantities and values.89

A specific accusation of proportionality was articulated in the context of international investment law, by M. Sornarajah. In a 2015 monograph, Sornarajah inveighed against proportionality. Taking particular exception to the use of proportionality when it is not couched in the treaty text, he described it as a creative interpretation whose purpose is to limit the scope of explicit treaty exceptions.90 He appeared to take into account proportionality in the application of exceptions, although not in the application of substantive standards. He argued: At a time when states have rediscovered customary principles such as regulatory expropriation and the necessity defence and have introduced regulatory rights into the new balanced treaties, the introduction of the proportionality principle to assess the appropriateness of a state exercising its right to protect the public interest against the interests of the foreign investor would give a new lease of life to investment arbitration. [. . .] It proves the tenacity of arbitrators and academic supporters to ensure the viability of investment treaty arbitration. As the regulatory space advances and the scope for review of state measures diminishes, the relevance of investment arbitration is maintained through the discovery and application of the proportionality rule. [. . .] Its status as a general principle of international law is doubtful. Its only significance is its possible capacity to rescue the relevance of investment arbitration. Its significance to the right to property is limited. [. . .] There are also legitimacy issues that arise. One is whether an arbitration tribunal sitting away from the socio-political and cultural situation in which the dispute arose should arrogate to itself the right   Bücheler (n 19), p. 62-66; Cottier et al. (n 14), p. 19; Vadi (n 11), p. 204.   Alec Stone Sweet and Jud Mathews, ‘Proportionality Balancing and Global Constitutionalism’, Yale Law Faculty Scholarship Series (2008) 11. 89   Final Report to the Prosecutor by the Committee Established to Review the NATO Bombing Campaign Against the Federal Republic of Yugoslavia, para. 48. 90   Sornarajah (n 14), pp. 365–6. 87 88

M4644-CHAISSE_9781788971898_t.indd 129

11/10/2018 10:22

130

China–European Union investment relationships

to settle the issues in the dispute using a balancing test [. . .] when it may not be able to sufficiently appreciate the context of the situation.91

While Sornarajah blamed tribunals for applying proportionality to limit the state’s regulatory power, he did not acknowledge proportionality that in combination with the police powers doctrine has contributed to increased regulatory flexibility. His ultimate judgment on the issue, despite the above ‘acceptance’ of balanced treaties, was that ‘balanced treaties or the introduction of a proportionality test [. . .] are not the answers to the problems that have been created’.92 He advocated instead that states terminate their investment treaties and withdraw from arbitral institutions.93

CONCLUSION Whatever one thinks of this antipathy towards proportionality, the latter can be a useful tool for balancing competing interests. Although the absence of consensus and of a homogeneous application of proportionality argues against its status as a general principle of law, general international law is fluid and evolutionary, and proportionality is certainly not all to the bad. The contribution of proportionality’s explicit incorporation in IIAs largely depends on whether it is recognised as a general principle of law. Until such time as it indisputably is, the dual approach to its status (as a concrete instruction to the adjudicator enshrined in the IIA or as a general principle) must be kept in mind. If proportionality is not a general principle of law, references to it in new generation IIAs should be interpreted in their own terms. If it is a general principle, its explicit incorporation is not necessary. Finally, it is worth exploring a not much-researched topic, the introduction of proportionality in relation to compensation. Compensation is at the heart of investment disputes, and it may be useful to envisage proportionality analysis not (only) in relation to the application of an investment protection standard (in this case, if the measure is deemed to be proportional the application will be rejected) but in order to assess the quantum. This could eventually both provide guidance for the assessment of damages and avoid a black-and-white approach to compensation.

  Ibid., pp. 367–8.   Ibid., p. 388. 93  Ibid. 91 92

M4644-CHAISSE_9781788971898_t.indd 130

11/10/2018 10:22

8. Investor nationality and the definition of investment: policy options to limit the practice of ‘treaty shopping’ Jorun Baumgartner* 1. INTRODUCTION Over the past years, many States have started to reform their networks of international investment agreements (IIAs) to align them better with their national development objectives and make them more sustainable development-friendly. This has resulted in the drafting and adoption of modern Model BITs, the negotiation of new IIAs and, increasingly, the modernization of existing ‘old-generation’ IIAs. Whether for negotiating future/new IIAs or modernizing existing IIAs, the definitions of investor nationality and investment remain key elements in a treaty to which States should pay particular attention, as they determine the personal and material scope of beneficiaries to whom the benefits of the treaty accrue. This is particularly important in view of the practice of ‘treaty shopping’, also called nationality planning, corporate (re)structuring or corporate manoeuvring.1 Depending on the breadth of investor and investment definitions contained in an IIA (or the IIA network) of the host State, the latter

*  The author would like to thank Elisabeth Tuerk and Melinda Kuritzky for valuable comments. All errors are mine. The views expressed in this chapter are those of the author alone and are not necessarily those of the United Nations. All websites cited in the chapter were live as at 14 July 2018. 1   See Jorun Baumgartner, Treaty Shopping in International Investment Law (OUP 2016) 7–12; Tania Voon, Andrew Mitchell and James Munro, ‘Legal Responses to Corporate Maneuvering in International Investment Arbitration’ (2014) 5 JIDS 41; Julien Chaisse, ‘The Issue of Treaty Shopping in International Law of Foreign Investment-- Structuring (and restructuring) of investments to gain access to investment agreements’ (2015) 11(2) Hastings Business Law Review 225–306. 131

M4644-CHAISSE_9781788971898_t.indd 131

11/10/2018 10:22

132

China–European Union investment relationships

becomes more easily exposed to treaty shopping practices by the putative investor-claimant to obtain standing under an IIA to which it would otherwise not have had access. Many States have learned this lesson the hard way, having been respondents to investor-State dispute settlement (ISDS) claims brought by investor-claimants engaging in these practices. As a consequence, limiting claims involving treaty shopping has figured as one of the key policy concerns of many policymakers in recent years.2 More recently, several States have also voiced their intention to reform their IIAs with a view to closing loopholes that enable treaty shopping.3 The aim of this contribution is to assess States’ policy options to limit the practice of treaty shopping in new IIAs, focusing on the definitions of investor and investment. To this end, after defining the relevant scenarios of treaty shopping, exploring the reasons for its occurrence (section 2) and explaining the relevance of refined investor and investment definitions in a prospective China-EU BIT (section 3), this chapter will address the legal issues arising with respect to the investor and investment definitions, discuss relevant arbitral practice and examine EU and Chinese IIA practice in this regard (section 4). It will show that careful treaty drafting, containing a higher degree of clarity as to the key definitions, can go a long way toward ensuring that only those investors and investments contemplated by the negotiating parties will benefit from treaty protection.

2.  WHAT IS TREATY SHOPPING? To say that the practice of treaty shopping has become pervasive in international investment law is probably true, even though it is hard to quantify.4 This is so for several reasons.

2   See e.g., EU Commission, ‘Investment in TTIP and beyond – the path for reform’, Concept paper (5 May 2015) available at http://trade.ec.europa.eu/doclib/ docs/2015/may/tradoc_153408.PDF 3   E.g., Montenegro and Mongolia, see UNCTAD’s Investment Policy Hub, available at http://investmentpolicyhub.unctad.org/Upload/Documents/Montene​ gro-%20No%20speaker-%20Plenary%20session%20Longer%20version.pdf and htt​ p://investmentpolicyhub.unctad.org/Upload/Documents/State%20Secre​tary%20 Statement_Mongolia_%20IIA%20conference%202017.pdf. 4   For one attempt see Eunjung Lee, ‘Treaty Shopping in International Investment Arbitration: How often has it occurred and how has it been perceived by tribunals)’ LSE Working Paper Series 2015 (No.15-167), available at http:// www.lse.ac.uk/internationalDevelopment/pdf/WP/WP167.pdf. UNCTAD found in its World Investment Report (WIR) 2016 that of 254 known treaty-based ISDS cases initiated between 2010 and 2015 by corporate claimants, about one-third of

M4644-CHAISSE_9781788971898_t.indd 132

11/10/2018 10:22



Investor nationality and the definition of investment 133

For one, there is a lack of authoritative definition of what the notion of ‘treaty shopping’ encompasses. Aside from the already mentioned practices of corporate (re)structuring, it could arguably encompass practices with treaty shopping effect, e.g., accessing more favourable treaties through the use of the MFN clause or even through the use of conflict of norms techniques.5 Second, even though it presents various policy concerns and is increasingly frowned upon (also as a consequence of increasing public contestation of the IIA regime as a whole),6 corporate structuring as such is not a prohibited practice and indeed has only been limited by arbitral tribunals under certain circumstances. This line-blurring inevitably creates difficulties in distinguishing between unobjectionable and objectionable cases of treaty shopping, with the attendant problems of classification and quantification. Why does treaty shopping occur at all in international investment law? This is due to several system-inherent reasons. First, the fragmented nature of the IIA system (made up of more than 3,300 individual IIAs and the absence of a multilateral system), with IIAs even within one country’s network presenting at times important variations, gives an incentive for foreign investors to ‘cherry-pick’ the most advantageous treaty before bringing an ISDS claim. Second, treaty shopping would not be of interest to foreign investors if IIAs did not provide for the possibility to sue the host State directly. Indeed, nearly all of today’s IIAs grant access to ISDS against the host State.7 Third, treaty shopping is greatly facilitated because of the protection of indirect investments in virtually every IIA, which enables foreign investors to incorporate vehicles of convenience in national jurisdictions that have favourable IIAs with the host country. And finally, the (relative) ease of incorporation of mailbox companies in

claims for which relevant information was available were field by claimant entities that are ultimately owned by a parent in a third country (i.e., not party to the treaty on which the claim is based) or in the respondent State, see UNCTAD, World Investment Report (WIR) 2016 – Investor Nationality: Policy Challenges (United Nations 2016) 171 (figure IV.27). 5   Alejandro Faya Rodriguez, ‘The Most-Favoured-Nations Clause in International Investment Agreements – A Tool for Treaty Shopping?’ (2008) 25 J Intl Arb 89; Wolfgang Alschner, ‘Regionalism and Overlap in Investment Treaty Law: Towards Consolidation or Contradiction?’ (2014) 17 JIEL 271, 292–7. 6   See e.g., John Lee, ‘Resolving Concerns of Treaty Shopping’ (2015) 6 JIDS 1. 7   See however a very recent trend by a few countries to omit ISDS in IIAs in view of the increasing controversy surrounding ISDS, see e.g., 2012 AustraliaMalaysia Free Trade Agreement (FTA); 2016 Brazil-Angola Comprehensive Facilitation and Investment Agreement (CFIA); 2016 Brazil-Mozambique CFIA. See also the recently terminated negotiations of the EU-Japan FTA.

M4644-CHAISSE_9781788971898_t.indd 133

11/10/2018 10:22

134

China–European Union investment relationships

many jurisdictions and the fungibility of shareholdings constitute further key factors influencing the occurrence of treaty shopping.8 To assess countries’ policy options to curb treaty shopping through more careful treaty drafting, it is therefore useful to examine the typical scenarios that give rise to ISDS claims involving treaty shopping, as well as their legal implications. The ‘key ingredient’ for corporate structuring/restructuring is the mailbox (or shell) company, and the archetypical treaty shopping scenario is the incorporation of such mailbox company in a home State jurisdiction that has a favourable IIA with the host State and, for multinational corporate structures, its insertion into the corporate chain. When an ISDS claim is brought involving this scenario, legal discussions typically revolve around the definition of investor, and, specifically, the question of whether a mailbox company qualifies as an investor under the invoked IIA or whether the arbitral tribunal must ‘pierce the corporate veil’ and search for the ‘real’ investor to whom the benefits of treaty protection accrue. Moreover, since treaty shopping implies the strategic use of multiple nationalities to access a favourable IIA, treaty shopping can also occur through the invocation of dual (or multiple) nationalities by natural persons. The rationale of treaty shopping being to obtain treaty protection where none would otherwise exist (or not in similarly favourable terms), this scenario often also presents issues of (ultimate) ownership and control, in particular the question of whether ultimate control effectively reverts to a host State or a third State national not entitled to treaty ­protection. Moreover, instead of artificially creating an entity that qualifies as investor, it is also possible to shift qualifying assets under the ‘target’ IIA to an entity within the corporate chain that already ­possesses the required nationality. This then raises questions with respect to the definition of investment under the invoked IIA (as well as under the ICSID Convention for claims brought under ICSID Arbitration Rules). Finally, either of the above-mentioned operations may be undertaken at a moment when the dispute in question is already ‘afoot’. This raises ­questions as to when a dispute exists and the scope of temporal jurisdiction, but will not be subject of this contribution.9   See more in detail Baumgartner, (n 1) 20–32.   For an in-depth discussion see Jorun Baumgartner, ‘The Significance of the Notion of Dispute and its Foreseeability in an Investment Claim involving a Corporate Restructuring’ (2017) 18 JWIT 201–31; see also Duncan Watson and Tom Brebner, ‘Nationality Planning and Abuse of Process: A Coherent Framework’, (2017) ICSID Review 1–28. 8 9

M4644-CHAISSE_9781788971898_t.indd 134

11/10/2018 10:22



Investor nationality and the definition of investment 135

The definitions of investor and investment thus take on a crucial importance for treaty design if States want to curb treaty shopping.

3. RELEVANCE OF REFINED INVESTOR/ INVESTMENT DEFINITIONS IN A PROSPECTIVE CHINA-EU BIT Though of interest to most if not all countries nowadays, refined scope and definition clauses may also be of relevance for a prospective China-EU BIT. Negotiations for a comprehensive (pre-establishment) BIT between China and the EU have been ongoing since 2013 and, as of the end of 2017, the parties had concluded 16 negotiation rounds.10 Which approach China and the EU will take toward scope and definition clauses in the future China-EU BIT is at this point unknown, as no negotiating drafts have been made public at the time of writing. However, as commentators have remarked, it would not be surprising if the negotiating parties used the opportunity to take a ‘reform-oriented’ approach toward these questions.11 Both the EU and China have been undergoing important developments in terms of IIA drafting. The Treaty of Lisbon, which entered into force in 2009, transferred competence in the area of foreign direct investment (FDI) to the EU as part of its exclusive competence under the Common Commercial Policy.12 To date, the EU has signed only few IIAs with third countries (Republic of Korea and Canada), although negotiations with others have been finalized (Singapore, Vietnam, Japan) and negotiations of many more are ongoing.13 These IIAs, up to now mostly comprehensive Free Trade Agreements with integrated investment chapters, have to a great extent incorporated sustainable development-oriented reform features such as refined scope and definition clauses, more circumscribed substantive protections and reformed ISDS.14 This is in line with the  http://trade.ec.europa.eu/doclib/docs/2017/december/tradoc_156520.pdf.   Wenhua Shan and Lu Wang, ‘The China-EU BIT and the Emerging “Global BIT 2.0”’, (2015) 30(1) ICSID Review 260. 12   Arts 207 and 3(f) Treaty on the Functioning of the European Union (TFEU). On the question of EU competence for portfolio investment (and ISDS) see below. 13   E.g., with Mexico, MERCOSUR, India and Indonesia, see EU Commission, ‘Overview of FTA and other trade negotiations’ (updated January 2018), http:// trade.ec.europa.eu/doclib/docs/2006/december/tradoc_118238.pdf. 14   See e.g., the ‘full score’ mapping of CETA for sustainable developmentoriented treaty elements in UNCTAD, World Investment Report (WIR) 2017 – Investment and the Digital Economy (United Nations 2017) p. 121. 10 11

M4644-CHAISSE_9781788971898_t.indd 135

11/10/2018 10:22

136

China–European Union investment relationships

request by the EU Parliament in its resolution on European international investment policy to include clear definitions of investor and investment in future EU IIAs, while excluding speculative investments and limiting ‘abusive practices’ in relation to the notion of foreign investor.15 China’s approach towards IIAs has also undergone important changes over the last decades. Scholars divide the evolution of China’s IIA network into up to three generations.16 While China’s first-generation treaties of the 1980s and 1990s are described as ‘restrictive’, typically containing only a limited number of substantive protections and narrow dispute settlement clauses, the second generation of Chinese BITs, from 1998 onwards, is said to coincide with the increasing encouragement of Chinese outward FDI as part of its ‘Going Global’ policy.17 Accordingly, Chinese BITs started to include unrestricted access to international arbitration, comparable to treaties found in OECD countries as well as a number of stronger substantive treaty protections (including national treatment).18 Finally, a third generation of Chinese BITs, as of 2008 onwards, has started to include more balanced, Statefriendly provisions as well as more detailed dispute settlement provisions.19 All in all, it is undoubtable that investment protection has become as important for China as investment promotion. For the EU-China context, this can also be seen from recent FDI statistics. In 2015, EU outward FDI stock to China amounted to over €168 billion, with €35 billion of FDI stock coming from China into the EU.20 Both the EU and China

  European Parliament resolution of 6 April 2011 on the future European international investment policy (2010/2203 (INI)), paras 11 and 14, http://www. europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P7-TA-20110141+0+DOC+XML+V0//EN; see also Marc Bungenberg, ‘The Scope of Application of EU (Model) Investment Agreements’ (2014) 15 JWIT 402–21. 16   See e.g., Marc Bungenberg and Manjiao Chi, ‘Chinese Investment Law’, in Marc Bungenberg, Jörn Griebel and August Reinisch (eds), International Investment Law: A Handbook (C.H. Beck and Hart Publishing 2015) paras 12–18. 17   Bungenberg and Chi, ibid., paras 13–17; Alex Berger, ‘China’s New Bilateral Investment Treaty Programme: Substance, Rational and Implications for International Investment Law Making’, German Development Institute, pp. 7ff,  https://www.die-gdi.de/uploads/media/Berger_ChineseBITs.pdf; Stephan Schill, ‘Tearing down the Great Wall: The New Generation Investment Treaties of the People’s Republic of China’, (2007) 15 Cardozo J Int’l & Comp. L 73, 89–91. See also Julien Chaisse and Mitsuo Matsushita, ‘China’s “Belt and Road” Initiative: Mapping the World Trade Normative and Strategic Implications’ (2018) 52(1) Journal of World Trade 163–86. 18   Berger, ibid. 19   Bungenberg and Chi (n 16) para. 18. 20   EU-China: Foreign Direct Investment, Statistics, http://ec.europa.eu/trade/ policy/countries-and-regions/countries/china. 15

M4644-CHAISSE_9781788971898_t.indd 136

11/10/2018 10:22



Investor nationality and the definition of investment 137

have thus both offensive and defensive interests, which has an obvious impact on the design of treaty clauses on the definition of investor and investment. With the EU and China IIA and FDI regimes in mind, the following sections will discuss the treaty clauses of relevance for curbing the practice of treaty shopping, including key arbitral jurisprudence on the questions at issue and treaty practice by China and the EU in recent IIAs.

4.  DEFINITION OF INVESTOR As mentioned, both natural and legal persons may engage in treaty shopping practices, which is why States may wish to design the definition of investor accordingly so as to minimize the potential of the IIA being target of such practices. a.  Natural Persons Treaty shopping by natural persons is admittedly less frequent than treaty shopping by legal persons. Indeed, a strategic change of nationality is normally much more difficult to perform in the case of natural persons than in the case of legal persons, as natural persons usually must fulfil different and more stringent requirements to obtain a specific nationality, contrary to the relatively rapid process of incorporation or constitution of legal persons.21 Treaty shopping by natural persons thus typically plays out through the invocation of an already existing dual (or multiple) nationality. Often, investors bringing ISDS claims based on dual or multiple nationality also hold host State nationality. International law, in principle, does not bias against multiple nationalities. Indeed, Article 6 of the 2006 ILC Draft Articles on Diplomatic Protection allows diplomatic protection by the State(s) in favour of their national (if needed jointly). However, diplomatic protection by a State of nationality is not possible against another State if the national also holds that nationality and it is the predominant one.22 In other words, ­international law does not allow diplomatic protection claims against a host State if the national in whose favour diplomatic protection is sought also holds (predominantly) host State nationality.

  Although certain countries have ‘citizenship-by-investment programs, see e.g., https://www.henleyglobal.com. 22   Art. 7 of the ILC Draft Article on Diplomatic Protection. 21

M4644-CHAISSE_9781788971898_t.indd 137

11/10/2018 10:22

138

China–European Union investment relationships

Whether such ‘host State bias’ also applies (if only impliedly) in international investment law is a question with which some arbitral tribunals have had to grapple. When facing claims by investors with dual (host State) nationality, respondents have indeed often argued that the claimed nationality was not the ‘effective and dominant’ one or that the investor lacked a ‘genuine link’ with the claimed nationality. However, arbitral tribunals have so far unanimously refused to read an unwritten ‘genuine link’ or ‘effective and dominant nationality’ requirement into the definition of investor of the invoked IIA (and this both in cases of single and of dual nationality) because of the lex specialis nature of international investment law vis-à-vis customary international law.23 This means that in the absence of a treaty-based ‘effective and dominant nationality’ requirement or the explicit exclusion of claims by host State nationals in the IIA, ISDS claims brought by dual nationals also holding host State nationality remain possible in principle, as a recent arbitral decision found.24 Such an explicit exclusion of host State nationals can be found in Article 25(2)(a) of the ICSID Convention, which means that for ISDS claims brought under ICSID Arbitration Rules, dual (host State) nationality will be prejudicial, and, as confirmed by recent arbitral practice, this even in the case where a locally incorporated investor has brought the claim under Article 25(2)(b), second sentence, of the ICSID Convention, but is found to be (effectively) controlled by a host State national.25 By contrast, since other arbitration rules (UNCITRAL, ICC, etc.) do not contain this inherent ‘host State bias’, ISDS claims brought under those rules by dual (host State) nationals do not seem to be precluded as a matter of principle26 and could be an explanation for the recent surge in ISDS cases brought under UNCITRAL Arbitration Rules by dual nationals against ‘their’ host State.27 The inclusion of an ‘effective and dominant nationality’ requirement   See e.g., Siag and Vecchi v Arab Republic of Egypt, ICSID Case No. ARB/05/15, Decision on Jurisdiction (11 April 2007) para 198; Pey Casado v Chile, ICSID Case No. ARB/98/2, Sentence Arbitrale (8 May 2008) para 241; see more in detail Baumgartner, Treaty Shopping (n 1) 93–9. 24   García Armas v Bolivarian Republic of Venezuela, UNCITRAL, PCA Case No. 2013-3, Decision on Jurisdiction (15 December 2014). 25   Burimi SRL and Eagle Games SH.A v Republic of Albania, ICSID Case No. ARB/11/18 Award (29 May 2013) para 121; National Gas v Arab Republic of Egypt, ICSID Case No. ARB/11/7, Award (3 April 2014) paras 140, 146. 26   For a different opinion see Javier García Olmeda, ‘Claims by Dual Nations under Investment Treaties: Are Investors Entitled to Sue Their Own States?’ (2017) 8 JIDS 695–727. 27   See e.g., Sergei Viktorovich Pugachev v Russian Federation, UNCITRAL; 23

M4644-CHAISSE_9781788971898_t.indd 138

11/10/2018 10:22



Investor nationality and the definition of investment 139

and/or the explicit exclusion of claims by host State nationals in the IIA seems therefore advisable in order to exclude claims brought by natural persons that also hold the nationality of the host State. Recent treaty practice shows that the EU has started to include a ‘dominant and effective nationality’ requirement in its IIAs. For example, Article 8.1 of the Canada-EU Comprehensive Economic Trade Agreement (CETA) stipulates for the definition of natural person that ‘a natural person who is a citizen of Canada and has the nationality of one of the Member States of the European Union is deemed to be exclusively a natural person of the Party of his or her dominant and effective nationality’.28 Chinese IIA practice with respect to prescribing dual (host State) nationality of natural persons varies. While the Chinese Model BIT does not deal with dual/multiple nationality,29 several Chinese BITs have excluded (dual) host State nationals from the scope of protected investors.30 By contrast, none of the recent, publicly available Chinese BITs contain a ‘dominant and effective nationality’ requirement. However, from a policy perspective, both the ‘dominant and effective nationality’ requirement and the explicit exclusion of host State nationals from the scope of protected investors fulfil a similar purpose. b.  Legal Persons As mentioned above, the most common scenario of treaty shopping is the incorporation of a mailbox company in a domestic jurisdiction having a favourable IIA with the host State and its insertion into the corporate chain. Indeed, the ease with which legal entities can be constituted in some jurisdictions and the fact that many countries attribute standing to legal entities under IIAs on the mere basis of incorporation make it easy for legal persons to qualify under certain IIAs. Where a corporate group has subsidiaries in several national jurisdictions (as multinational enterprises often do), several (or all of them) may potentially qualify as investor-claimants provided the existence of applicable or plurilateral IIAs.

Dawood Rawad v Mauritius, UNCITRAL, PCA Case No. 2016-20; Mohamed Abdel Raouf Baghat v Egypt, UNCITRAL, PCA Case No. 2012-07. 28   However, neither the EU-Singapore nor the EU-Vietnam FTA (in its currently publicly available form) seem to contain a ‘dominant and effective nationality’ requirement. 29   Wenhua Shan and Norah Gallagher, ‘China’ in Chester Brown (ed.) Commentaries on Selected Model Investment Treaties (OUP 2015) 153. 30   See e.g., China-Iran BIT (2000); Australia – China BIT (1988); China – Colombia BIT (2008); Canada-China BIT (2012).

M4644-CHAISSE_9781788971898_t.indd 139

11/10/2018 10:22

140

China–European Union investment relationships

A parent company seeking to bring an investment claim may thus have one of its subsidiaries, incorporated in a jurisdiction that has a favourable IIA with the host State, bring the claim. If no subsidiary exists in this national jurisdiction, the parent company may decide to incorporate one in that jurisdiction and insert it into the corporate chain, if only for the sake of holding the (qualifying) investment and bringing the claim. This raises various questions, including whether this legal entity should be recognized on formal grounds or whether the tribunal can choose to ignore it, looking instead for the ‘real’ investor.31 In the absence of explicit treaty-based requirements providing for more ‘substantive’ links with the home State, arbitral tribunals have overwhelmingly endorsed a formal, consent-oriented approach toward mailbox companies bringing claims, refusing to read unwritten requirements into the invoked IIA.32 This also applies to arbitrations brought under ICSID Arbitration Rules. While the drafters of the Convention did not define the nationality criterion in Article 25(2)(b) ICSID Convention because of lack of consensus,33 arbitral tribunals – in keeping with the Convention’s approach to grant the widest possible latitude – will normally accept any ‘reasonable’ criteria for defining (corporate) nationality under an IIA, with incorporation, seat or control all constituting reasonable nationality criteria.34 From the foregoing follows that States have in essence two policy options if they wish to exclude mailbox companies from the scope of protection of an IIA: they can either (1) prescribe a more substantive link requirement than mere incorporation or, (2) alternatively, include a denial of benefits (DoB) clause that enables them to deny benefits to   A similar question may arise where a host State-incorporated investor brings a claim under Art. 25(2)(b) second clause ICSID Convention and the arbitral tribunal is asked to decide whether the investor-claimant is under qualifying ‘foreign control’. Also in this case, there may be several layers of interposed legal entities, which may be ultimately controlled by a host State or third State national, see e.g., TSA Spectrum Argentina v Argentine Republic, ICSID Case No. ARB/05/5, Award (19 December 2008). 32   See e.g., Tokios Tokeles v Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction (29 April 2004); Rompetrol Group v Romania, ICSID Case No. ARB/06/3; KT Asia Investment Group v Kazakhstan, ICSID Case No. ARB/09/8, Award (17 October 2013). 33   Aron Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of other States’, Académie de droit international (1972) 136 Recueil des Cours 359–60. 34   Christoph Schreuer, Lorena Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (OUP 2009) ‘Article 25’ para. 723. 31

M4644-CHAISSE_9781788971898_t.indd 140

11/10/2018 10:22



Investor nationality and the definition of investment 141

an investor/investment that does not have substantial business activities (SBA) in its home country and is controlled by an investor of a third and/ or host State. The inclusion of more substantive requirements (such as a seat and/or a SBA requirement) in the IIA is an advisable first step for States wishing to curb the practice of treaty shopping, and indeed, empirical evidence suggests that States today increasingly include such additional nationality requirements. For instance, while a mere 14 per cent of mapped BITs signed between 1959 and 2010 contain an SBA requirement, 45 per cent of mapped BITs signed between 2011 and 2017 now contain such a requirement.35 While this policy recommendation seems in principle increasingly settled, the question is when these requirements are actually fulfilled, and how they have been interpreted by arbitral tribunals. 1.  Seat requirement The seat requirement has been advocated for by some authors as an adequate treaty-based tool to prevent mailbox companies.36 Indeed, from a policy point of view, because the seat theory seems to require a more ‘genuine’ link with the State of operation, it may be able to reduce treaty shopping practices. On the other hand, transfers of seat lead to changes in nationality, thus furthering legal insecurity. In addition, it may be difficult to determine the seat in the case of multinational companies. The seat requirement may be found in various formulations in IIAs: it may be referred to as ‘siège social, ‘business seat’, ‘real seat’, ‘principal place of business’, ‘central administration’, etc. Arbitral interpretation of the notion of seat has not always been entirely consistent as to whether it should mean ‘statutory seat’ or the ‘real seat’. ‘Statutory seat’ is commonly thought to constitute a less stringent test than ‘real seat’ and is often synonymous with ‘registered office’ or ‘head office’ (the latter typically associated with the i­ncorporation theory).

  UNCTAD IIA Mapping project, available at http://investmentpolicyhub. unctad.org/IIA/mappedContent#iiaInnerMenu. Based on a total of 2,573 mapped IIAs. According to this mapping, 343 out of 2,428 BITs signed between 1959 and 2010 and 50 out of 110 BITs signed between 2011 and 2017 contain a SBA requirement. 36  Addison-Agyei, Nationality Planning und Treaty Shopping im internationalen Investitionsrecht (Peter Lang 2012); M. Sornarajah, ‘Good Faith, Corporate Nationality, and Denial of Benefits’, in Andrew Mitchell, M. Sornarajah and Tania Voon, Good Faith and International Economic Law (OUP 2015). 35

M4644-CHAISSE_9781788971898_t.indd 141

11/10/2018 10:22

142

China–European Union investment relationships

Indeed, several arbitral tribunals have interpreted the term siège social/ seat as referring to the ‘real seat’, in other words the place of ‘effective management’,37 while another tribunal recently interpreted it as referring to the ‘statutory seat’.38 In Tenaris and Talta v Venezuela I, the tribunal had to interpret the terms of siège social and seat found in the BLEU-Venezuela BIT and the Portugal-Venezuela BIT, respectively. Relying on the principle of effet util interpretation, it held that the notion of seat had to mean something different than SBA39 and also something different than the incorporation theory.40 This led it to consider the other well-accepted meaning of the term, i.e., ‘effective management’, implying ‘some sort of actual or genuine corporate activity’, which it confirmed by examining the object and purpose of both BITs.41 With respect to Luxemburg’s and Portugal’s respective treaty practice, it found nothing ‘sufficiently conclusive to undermine’ the conclusion at which it had arrived, but acknowledged that this was only a supplementary source of interpretation and that ‘ultimately (. . .) each?treaty? has to be interpreted on its own account, on the basis of its own context and objects and purposes’.42 Despite finding that the term siège social or seat in the BITs under examination had an autonomous (international) meaning, as the clauses did not contain an explicit renvoi to municipal law, the tribunal nevertheless examined Luxemburg and Portuguese corporate law to confirm its conclusion of the meaning of siège social/seat as the place of effective management.43 The Tenaris tribunal also provides valuable information on the criteria used to confirm whether there was effective management. Starting with a rebuttable presumption that the real seat in principle coincided with the   Tenaris and Talta (I) v Venezuela, ICSID Case No. ARB/11/26, Award (29 January 2016); CEAC Holdings Ltd v Montenegro, ICSID Case No. ARB/14/8, Award (26 July 2016), but see the dissenting opinion of William Park, paras 18–20; Société Immobilière de Gaëta v Guinée, ICSID Case No. ARB/12/36, Award (21 December 2015); Alps Finance and Trade v Slovakia, UNCITRAL, Award (5 March 2011). 38   Orascom TMT Investments v Algeria, ICSID Case No. ARB/12/35, Award (31 May 2017). 39   Tenaris and Talta (I) v Venezuela (n 37) para. 143: ‘presumably less than “real economic activities” as in Article 1(1)(b) of the Switzerland-Slovak Republic BIT’. 40   Ibid., para 148: ‘neither “siège social” nor “sede” can mean simply “registered office” or “statutory seat” in a purely narrow and formal sense, since neither term would then have any effective meaning’. 41   Ibid., paras 150–153. 42   Ibid., paras 158–160. 43   Ibid., paras 165–195. 37

M4644-CHAISSE_9781788971898_t.indd 142

11/10/2018 10:22



Investor nationality and the definition of investment 143

statutory seat, it discussed various criteria indicative of effective management, such as the fact that the office in Luxemburg and in Portugal, respectively, was the only one worldwide; that annual general shareholder meetings and Board of Directors’ meetings took place in Luxemburg (as confirmed by the minutes) and that the Board members were present at each shareholder meeting; that books and records being kept at the registered office in Luxemburg; that the financial auditors did the auditing in Luxemburg and in Portugal, respectively; that tax returns were filed with the Portuguese tax authorities; that SEC filings revealed the company as a ‘trading and holding company’ incorporated in Portugal, etc.44 In the recent award in Orascom TMT v Algeria, by contrast, the tribunal interpreted a similarly worded siège social requirement in the BLEUAlgeria BIT as meaning ‘statutory seat’.45 It arrived at this conclusion by rejecting the effet util interpretation by the Tenaris tribunal of the similarly worded siège social requirement in the BLEU-Venezuela BIT, not finding any necessary difference between incorporation and the seat requirement. However, like the Tenaris tribunal, it also understood the term as having an autonomous meaning under international law and not subject to a renvoi to domestic law.46 It considered the BIT’s definition to express the two prongs of the standard test under customary international law, namely constitution and registered office, to identify a corporate entity’s nationality, drawn from the ICJ’s holding in Barcelona Traction.47 It confirmed its interpretation by recourse to supplementary means of interpretation, comparing both English and French language versions of other BLEU treaties, and taking into account the travaux préparatoires of the BLEU-Algeria BIT.48 The finding of an autonomous legal meaning of the term siège social/seat in Tenaris and Orascom stands again in contrast to the finding of the arbitral tribunal in Capital Financial Holdings Luxemburg v Cameroon.49 In that case, the arbitral tribunal also had to interpret the notion of siège social contained in the BLEU-Cameroon BIT and, based on the fact that the first part of the nationality test required ‘constitution in accordance with’ home State laws, decided in favour of a renvoi to domestic law.50 Examining Luxemburg law, the tribunal noted, on the one hand, that domestic law referred to ‘statutory

  Ibid., paras 175, 208–215, 224.   Orascom TMT v Algeria (n 38). 46   Ibid., paras 276–278. 47   Ibid., paras 286–290 48   Ibid., paras 299–313. 49   Capital Financial Holdings Luxemburg SA v République du Cameroun, ICSID Case No. ARB/15/18, Award (22 June 2017). 50   Ibid., para. 211. 44 45

M4644-CHAISSE_9781788971898_t.indd 143

11/10/2018 10:22

144

China–European Union investment relationships

seat’ for the siège social; yet, after in-depth inquiry into Luxemburg law, it concluded in favour of the ‘real seat’ test.51 It also tested this finding against an autonomous meaning of siège social under international law and confirmed its opinion of ‘real seat’ based on an effet util interpretation, finding that, otherwise, the notion of siège social would be ‘superfluous’.52 The tribunals’ diverging findings suggest that a uniform interpretation of the meaning of the term siège social/seat may not be possible. First of all, its meaning will arguably depend on whether the term as contained in the IIA must be construed as having an autonomous meaning under international law or whether it is to be interpreted by renvoi to the applicable domestic law.53 Second, whether seat/siège social is to mean something ‘other’ than incorporation or SBA (‘more than incorporation and less than SBA’) seems an intuitive canon of treaty interpretation,54 but will need to be tested in each case in accordance with the requirements of treaty interpretation contained in Article 31(1) of the VCLT. In a similar vein, (similar or identical) wordings contained in IIAs concluded by the home State with third countries arguably have a limited interpretative value and should only be used as supplementary means of treaty interpretation to confirm an unclear interpretative finding.55 The foregoing shows that the seat requirement has so far given rise to uncertainty in arbitral interpretation. From a policy perspective, this suggests that it is only an effective tool against mailbox companies if the IIA clarifies whether seat is to mean ‘real seat/place of effective management’ or not. Interpretation as mere statutory seat implies a less stringent test than the real seat test (which requires effective management) and would not seem to constitute an effective bar against purely formal legal constructions. As for EU IIAs, neither CETA nor the EU-Vietnam FTA have incorporated a seat requirement. By contrast, the EU-Singapore FTA requires incorporation and registered office, central administration or principal place of business in its home country jurisdiction, with ‘central administra  Ibid., paras 219–237.   Ibid., paras 252–254. 53   On the possible different approaches towards renvoi to municipal law see e.g., Monique Sasson, Substantive Law in Investment Treaty Arbitration (Kluwer 2010) xxi–xxxii. 54   On the principle of effectiveness or ‘effet util’ in treaty interpretation see e.g., Romesh Weeramantry, Treaty Interpretation in Investment Arbitration (OUP 2012) paras 5.74 ff. 55   See also Andrew Mitchell and James Munro, ‘Someone Else’s Deal: Interpreting International Investment Agreements in the Light of Third-Party Agreements’ (2017) 28(3) EJIL 669–95. 51 52

M4644-CHAISSE_9781788971898_t.indd 144

11/10/2018 10:22



Investor nationality and the definition of investment 145

tion’ being defined as the ‘head office where ultimate decision-making takes place’.56 The EU thereby continues the definitional ambiguity, equating the term of ‘head office’ (typically associated with statutory seat) with the requirement of ultimate decision-making (itself associated with the real seat). As for Chinese BITs, some of them include a seat requirement.57 2.  SBA requirement To date, arbitral interpretation of SBA clauses is limited. This may create uncertainty as to how ‘substantial’ business activities must be and whether holding companies, often in the form of a mailbox company, fulfil this test or not. An early interpretation of the meaning of ‘substantial’ can be found in the Limited Liability Company AMTO v Ukraine case, in which the arbitral tribunal interpreted the SBA requirement of Article 17(1) Energy Charter Treaty (ECT). Recalling that that article’s purpose was to exclude from ECT protection ‘investors which have adopted a nationality of convenience’, it opined that ‘“substantial” in this context means “of substance, and not merely of form”. It does not mean “large”, and the materiality, not the magnitude of the business activity is the decisive question’.58 As for proof of (substantial) business activities, the tribunal in Alps Finance and Trade v Slovakia looked at various factors and found that: [t]he 2007 tax return [indicated] a quite modest turnover and nothing [was] exhibited for the outstanding years. The Claimant was unable to establish number and type of its clients, type of its operations, kind of contracts it enters into, quantity and type of personnel, nature and composition of its managing bodies. It even admitted that it has no employees.59

In Pac Rim Cayman v El Salvador, the arbitral tribunal had to decide whether the claimant, a holding company (which had come into the ownership structure of the investment at issue through a ‘time-sensitive’ corporate restructuring), had ‘substantial’ business activities within the meaning of Article 10.12.2 DR-CAFTA in its home jurisdiction, the 56   EU-Singapore FTA, Investment Chapter, Art. 9.1(4). However, should the investor only have its registered office or central administration in its home jurisdiction, then the investor must additionally show substantive business operations there, see below. 57   See e.g., China-Switzerland BIT (2009). 58   Limited Liability Company AMTO v Ukraine, SCC, Arbitration No. 080/2005, Final Award (26 March 2008), para. 69. 59   Alps Finance and Trade v Slovakia (n 37) para. 219.

M4644-CHAISSE_9781788971898_t.indd 145

11/10/2018 10:22

146

China–European Union investment relationships

United States. In essence, the tribunal distinguished between ‘active’ and ‘passive’ holding companies, positing that: [g]enerally, such?traditional? holding companies are passive, owing all or substantially all of the shares in one or more subsidiary companies which will employ personnel and produce goods or services to third parties. The commercial purpose of a holding company is to own shares in its group of companies, with attendant benefits as to control, taxation and risk-management for the holding company’s group of companies. It will usually have a board of directors, board minutes, a continuous physical presence and a bank account.60

Acknowledging that a holding company could in theory have substantial business activities, it nevertheless found that the claimant did not ‘actively?hold? shares in subsidiaries’, but rather was ‘more akin to a shell company with no geographical location for its nominal, passive, limited and insubstantial activities’.61 Although not examining an SBA requirement, but rather the question of whether the claimants fulfilled the ‘effective management’ test discussed above, the tribunal in Tenaris and Talta (I) v Venezuela is instructive on how traditional holding companies may qualify under the seat requirement, but not necessarily under the SBA requirement. Examining whether the claimants had effective management in their home countries, the tribunal found that: [i]n so far as either entity is no more than a holding company, or a company with little or no day-to-day operational activities, its day-to-day ‘management’ will necessarily be very limited, and so will its physical links with its corporate seat. Put another way, it would be entirely unreasonable to expect a mere holding company, or a company with little or no operational responsibility, to maintain extensive offices or workforce, or to be able to provide evidence of extensive activities, at its corporate location. And yet holding companies, and companies with little or no operational responsibility, have ‘management’, and are certainly not excluded from the Treaties in this case. Indeed, countries such as Luxembourg and Portugal clearly consider it to their respective benefit to attract such companies, and to maintain a corporate regulatory regime that allows for them.62

Two interim conclusions can be drawn from these reviewed decisions: first, not having to date a sufficiently established meaning, SBA is a concept that is open to diverging interpretations. The inclusion of 60   Pac Rim Cayman LLP v Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections (1 June 2012) para. 4.72. 61   Ibid., para. 4.75. 62   Tenaris and Talta (I) v Venezuela (n 37) para. 199.

M4644-CHAISSE_9781788971898_t.indd 146

11/10/2018 10:22



Investor nationality and the definition of investment 147

i­ndicative criteria in an IIA to clarify SBA and guide arbitral interpretation may therefore make sense.63 Second, the afore-mentioned quote from Tenaris v Venezuela shows that the inclusion of a seat requirement, even if interpreted as the more stringent ‘effective management’ test, may not be sufficient to exclude certain corporate structures (in particular holding companies) that tend to be involved in treaty shopping practices and that host countries may wish to exclude from the scope of protection. So far, only few countries have included such clarifications of the SBA requirement in their IIAs.64 The EU, in its desire to exclude ‘abusive practices’ by foreign investors, has opted in its recent IIAs for the inclusion of a ‘substantial business operations’ requirement to ensure that only foreign investors with sufficiently strong links to their home countries benefit from protection.65 To give shape to this clause, EU IIAs refer as guidance to the ‘effective and continuous link’ requirement under Article 54 of the TFEU.66 A few Chinese BITs have also included a SBA requirement (sometimes in combination with a seat requirement, see above).67 3.  DoB clause Finally, the inclusion of DoB clauses has also been advocated as a possible way to limit the treaty shopping potential of mailbox companies.68 Although these clauses may slightly differ in their wording, they commonly deny the advantages of the invoked treaty (or parts of it) to companies that do not have substantial business activities either in their home State (or other States party to the invoked treaty), and that are owned or controlled by persons who are nationals of the host State or third States not party to the invoked treaty. States have increasingly included such denial of benefits clauses into recent investment treaties. Thus, out of 2,428 BITs signed between 1959 and 2010 and mapped in UNCTAD’s IIA Mapping Database, only 92 BITs, or less than 1 per cent, contain a DoB clause with the SBA criterion. By contrast, out of 110 BITs signed between 2011 and 2017 and mapped

 UNCTAD, WIR 2016 (n 4) 180.   See e.g., COMESA Investment Agreement (2007). 65   See e.g., Art. 8.1 CETA; similar in the EU-Vietnam FTA Investment Chapter. For the ‘two-tier’ approach in the EU-Singapore FTA Investment Chapter see above. 66   See e.g., Rudolf Geiger, Daniel Khan and Markus Kotzur, European Union Treaties – A Commentary (C.H. Beck and Hart Publishing 2014) Art. 54. 67   E.g., China-Mexico BIT (2008); China-Uzbekistan BIT (2011). 68   See e.g., UNCTAD, WIR 2016 (n 4) 178–9. 63 64

M4644-CHAISSE_9781788971898_t.indd 147

11/10/2018 10:22

148

China–European Union investment relationships

in UNCTAD’s IIA Mapping Database, 51 BITs – or close to 50 per cent – now contain such a clause.69 DOB clauses have the benefit of providing for treaty-based limitations to potentially abusive treaty shopping practices by way of mailbox companies, giving expression to the Contracting Parties’ intentions and thus guiding an arbitral tribunal’s interpretive task to a considerable extent.70 However, the effectiveness of DoB clauses to curb treaty shopping hinges crucially on the question whether the right to deny benefits or advantages arising out of the invoked IIA must be exercised by the respondent State and, if so, whether this exercise only has prospective or also retroactive effect. It is clear that assigning prospective effect limits the usefulness of the DoB clause for curbing treaty shopping. This question continues to be answered by arbitral tribunals in inconsistent ways. Essentially, there are two strands of arbitral practice: one assigning only prospective effect to the exercise of the DoB clause and another accepting retroactive effect. Thus, all cases brought so far under the Energy Charter Treaty (ECT) have rejected any retroactive effect,71 but a few cases brought under other IIAs have also taken this stance.72 These decisions typically highlight the promotion of the long-term cooperation and legal security in the energy field as one of the objects and purposes of the ECT, to which a retroactive application of the DoB clause would run counter.73 Also, tribunals have interpreted a notification requirement from the use of the word ‘reserve the right to deny’, which implies that ‘to reserve a right, it has to be exercised in an explicit way’.74 69   UNCTAD IIA Mapping project, http://investmentpolicyhub.unctad.org/ IIA/mappedContent#iiaInnerMenu. 70   In this sense also Mark Feldman, ‘Setting Limits on Corporate Nationality Planning in Investment Treaty Arbitration’ (2012) 27 ICSID Review 281, 293 ff. 71   See e.g., Plama Consortium Ltd v Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction (8 Feb 2005); Yukos Universal Ltd v Russian Federation, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility (30 November 2009); Liman Caspian Oil B.V. and NCL Dutch Investment B.V. v Republic of Kazakhstan, ICSID Case No. ARB/07/14, Award (22 June 2010); Isolux Infrastructure Netherlands v Kingdom of Spain, SCC Case No. 2013/153, Award (21 January 2016). 72   See e.g., Pan American Energy LLP and BP Argentina Exploration Company v Argentine Republic, ICSID Case No. ARB/03/13, Decision on Preliminary Objections (27 July 2006); Ampal-American Israel et al v Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction (1 February 2016). 73   Liman Caspian v Kazakhstan (n 71) para. 225; Yukos v Russia (n 71) paras 456–459. 74   Liman Caspian v Kazakhstan, ibid., para. 224.

M4644-CHAISSE_9781788971898_t.indd 148

11/10/2018 10:22



Investor nationality and the definition of investment 149

Some commentators have criticized this line of argumentation as rendering the DoB clause de facto meaningless, the host State often not even being aware if and when an investment has been made, let alone the nationality of the investor and/or its underlying owners or controllers.75 Others have argued that the mere presence of a DoB clause in the invoked IIA should put the investor on notice and prevent it from building up legitimate expectations for the protection of its investments (and in particular if the invoked IIA post-dates the making of the investment).76 Other arbitral tribunals have accepted retroactive effect of the exercise of the DoB clause (despite sometimes similar or identical formulations).77 This has been justified, e.g., on the grounds that the respondent ‘announced the denial of benefits (. . .) at the proper stage of the proceedings, i.e. upon raising its objections on jurisdiction’,78 or that the DOB clause had to be exercised ‘as early as possible’ and ‘no later than the expiration of the time limit fixed for the filing of the counter-memorial’.79 Another tribunal found that ‘whenever a BIT includes a DoB clause, the consent by the host State to arbitration itself is conditional and thus may be denied by it’.80 In view of the lack of predictability of arbitral interpretation on whether the exercise of a DoB clause will have only prospective or also retroactive effect, it is thus highly advisable that States explicitly clarify that the right may be exercised at any time, even after the commencement of arbitration proceedings, when drafting a DoB clause for inclusion in an IIA.81 Chinese treaty practice has been varied with respect to DoB clauses. Recent BITs that have included DoB clauses designed to deny benefits to mailbox companies owned or controlled by third State or host State nationals include: the China-Japan-Korea Trilateral BIT (2012) and the   Anthony Sinclair, ‘Investment Protection for “Mailbox Companies” under the 1994 Energy Charter Treaty’, (2005) 2 Transnational Dispute Management 5. 76   Stephen Jagusch and Anthony Sinclair, ‘Part II, Denial of Advantages under Art. 17(1)’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (Juris Publishing 2008) 17, 39. 77   Empresa Electrica del Ecuador Inc v Republic of Ecuador, ICSID Case No. ARB/05/9, Award (2 June 2009); Ulysseas Inc v Republic of Ecuador, UNCITRAL, Interim Award (28 September 2010); Pac Rim v El Salvador (n 60); Guaracachi America Inc. and Rurelec plc v Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17, Award (31 January 2014). 78   Empresa Electrica del Ecuador v Ecuador, ibid.,71. 79   Pac Rim v El Salvador (n 60) para. 4.85. 80   Guaracachi v Bolivia (n 77) para. 372. Similar Pac Rim v El Salvador, ibid. para. 4.90. 81  UNCTAD, WIR 2016 (n 4) 178–9; UNCTAD, Investment Policy Framework for Sustainable Development (IPFSD) (United Nations 2015) 95 (policy option 2.2.2). 75

M4644-CHAISSE_9781788971898_t.indd 149

11/10/2018 10:22

150

China–European Union investment relationships

China-Uzbekistan BIT (2011), although the latter without any clarification until when the DoB may be exercised in an ongoing proceeding. By contrast, the Canada-China BIT (2012) was one of the first IIAs to include this innovative treaty formulation. The EU has taken a different approach, excluding mailbox companies by virtue of its SBA requirement as part of the investor definition82 (and reserving the use of DoB clauses, e.g., to avoid the circumvention of economic sanctions83). This approach has the advantage of bypassing the controversial question of prospective or retroactive effect altogether.

5. DEFINITION OF INVESTMENT AND OWNERSHIP AND CONTROL Although less known, the definition of investment and, closely linked to it, the notion of ownership and control, are key provisions/definitions that have a role to play in designing treaties that are less prone to treaty shopping practices.84 a.  Definition of Investment As is well known, IIAs commonly include broad definitions of investment, defining the scope of material protection either through (non-exhaustive or exhaustive) asset-based lists or through an enterprize-based definition (in particular Canadian IIAs or NAFTA). Shareholding qualifies under virtually any IIA as protected investment and numerous arbitral tribunals have held that the mere (passive) ownership respective to holding of shares qualifies in principle as protected investment.85 Moreover, many tribunals have considered minority shareholdings, including non-controlling, as protected investments.86 Shareholdings play an important part in treaty   See above.   See e.g., CETA, Art. 8.16. 84   The objective of this section is, of course, not to discuss all and any aspects of the definition of investment, which would be beyond the scope and focus of this contribution. Only those aspects that are relevant for limiting the practice of treaty shopping will be discussed. 85   See e.g., CMS Gas Transmission Co v Argentine Republic, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction (17 July 2003) para 56; Teinver SA Tranportes de Cercanias SA and Autobuses Urbanos del Sur SA v Argentina Republic, ICSID Case No. ARB/09/1, Decision on Jurisdiction (21 December 2012). 86   See e.g., CMS v Argentina, ibid., para. 51; Enron Corporation and Ponderosa 82 83

M4644-CHAISSE_9781788971898_t.indd 150

11/10/2018 10:22



Investor nationality and the definition of investment 151

shopping because they are typically highly fungible and may thus be easily shifted or transferred to corporate entities in other jurisdictions. However, treaty shopping would arguably not reach its full effect without the protection of indirect investments. In particular, multinational companies may structure their shareholdings through several national jurisdictions (winding through to the actual investment) and thus extend its potential treaty protection considerably, with each and every entity within the corporate chain having potentially a separate standing of its own (provided the existence of an IIA between the respective home States with the host State). Indeed, virtually all IIAs protect not only direct, but also indirect investments. Even where the IIA under interpretation is silent on whether it protects indirect investments, arbitral tribunals have typically found in favour of protection, often based on the broad notion of investment contained in the IIA.87 Tribunals have also accepted that the investment may be structured through several corporate layers and have in principle not set any limits as to how ‘remote’ the investor may be from the investment in the host State.88 The fact that the passive holding of shares is typically recognized as a protected investment and that indirect investments by ‘upstream’ investors are often protected without any limitations means that it is relatively easy for a well-advised investor to incorporate a formally qualifying entity in one or several favourable jurisdictions and insert it into the chain between the parent company (or otherwise ultimate owner/controller) and the actual investment in the host State. However, more recently, several arbitral tribunals have also had to decide whether the shifting of a qualifying investment to a corporate entity holding the required nationality should be allowed or not. This raises in particular the question of whether the claimant has actually made a contribution to the investment, as is normally required for the notion of investment under Article 25 of the ICSID Convention as part of the so-called Salini criteria89 and also increasingly as part of the d ­ efinition Assets LP v Argentine Republic, ICSID Case No. ARB/01/3, Decision on Jurisdiction (14 January 2004) para. 49. 87   See e.g., Gas Natural SDG v Argentine Republic, ICSID Case No. ARB/03/10, Decision on Jurisdiction (17 June 2005) para. 34; Teinver v Argentina (n 85) paras 230–232. 88  E.g., Mobil and others v Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction (10 June 2010) para. 165; Siemens AG v Argentine Republic, ICSID Case No. ARB/02/8, Decision on Jurisdiction (3 August 2004) para. 137. 89   Salini Costruttori SpA and Autostrade SpA v Kingdom of Morocco, ICSID Case No. ARB/00/4, Decision on Jurisdiction (23 July 2001) para. 52.

M4644-CHAISSE_9781788971898_t.indd 151

11/10/2018 10:22

152

China–European Union investment relationships

of investment in the IIA.90 Some tribunals have in this respect found that ‘sham transactions’, such as transactions at a nominal price, or where the purchase of the assets were secured by a loan that was not intended to be paid back, did not qualify as contribution within the meaning of the ICSID Convention and/or the definition of investment under the IIA in the absence of any other (post-investment) contribution.91 For countries wishing to close possible loopholes for treaty shopping practices with respect to the definition of investment, several policy options are available. First, countries could decide to explicitly protect only direct investments. This would have the advantage of completely foreclosing any incentives for multi-tiered corporate structuring and ensure that the (direct) foreign investor effectively qualifies as beneficiary. However, this option may be perceived by negotiating partners as unduly reducing the protective scope of the IIA and thus be difficult to get through in a negotiation. Another option could be to exclude portfolio investments from the scope of protected investments.92 While this has the benefit of excluding speculative investments, which typically do not contribute in any way to the development of the host country, it is not an absolute guarantee against treaty shopping as many investments are structured through majority shareholdings (or at least minority shareholdings that do not constitute portfolio investments).93 This being said, in view of the European Court of Justice’s 2017 Opinion on the EU-Singapore FTA, holding that the EU did not have exclusive competence with respect to portfolio investments,94 the EU may very well decide to ‘carve out’ portfolio investments from future IIAs’ protective scope.95 Another option could be the exclusion of purely passive holding of the investment. The Draft India Model BIT (2015) contained such an exclusion, but was in the end not included in the adopted version.96 A   See e.g., Iran-Slovakia BIT (2016).   See e.g., Caratube International Oil Company (I) v Kazakhstan, ICSID Case No. ARB/08/12, Award (5 June 2012) para. 435; KT Asia v Kazakhstan (n 32) paras 181–187. 92   See e.g., UNCTAD, IPFSD(United Nations 2015) 94 (policy option 2.1.1). 93   On the definition of portfolio investments see e.g., M. Sornarajah, ‘Portfolio Investments and the Definition of Investment’ (2009) 24 ICSID Review 516. 94   ECJ Opinion 2/15 (16 May 2017), http://curia.europa.eu/juris/document/ document.jsf?text=&docid=190727&pageIndex=0&doclang=en&mode=lst&dir= &occ=first&part=1&cid=783302. 95   See also Anthea Roberts, ‘A Turning Tide against ISDS?’ EJIL: Talk! (19 May 2017), https://www.ejiltalk.org/a-turning-of-the-tide-against-isds/. 96   Draft India Model BIT, Art. 1.2.2, https://www.mygov.in/sites/default/ 90 91

M4644-CHAISSE_9781788971898_t.indd 152

11/10/2018 10:22



Investor nationality and the definition of investment 153

similar effect could be obtained by treaty language requiring an active link between the investor and the investment, as discussed below. Investment definitions that incorporate the Salini criteria are becoming more common and can be found both in new EU IIAs and in Chinese IIA.97 b.  Notion of Ownership and Control The notion of ownership and control, on the other hand, typically functions as a ‘connecting factor’ between the qualifying investor and the qualifying investment and is included in an IIA to ensure that an investor claiming protection is truly so entitled. In other words, it ensures that treaty benefits do not effectively accrue to third State or host State investors (in particular through the interposition of mailbox companies). Its inclusion in the definition of investment of the IIA also normally indicates whether both direct and indirect investments are deemed protected, as seen in the frequently found combined formulation ‘owned or controlled, directly or indirectly’ (emphasis added). Furthermore, it may give a hint on the question of the ‘quality’ or ‘intensity’ of the relationship required between the investment and the investor, in particular whether a purely passive holding of the investment is sufficient to qualify for treaty protection or whether instead an ‘active’ act of investing is necessary. While most (even recent) IIAs contain the classical formulation ‘owned or controlled (directly or indirectly)’,98 some IIAs require that the qualifying assets be ‘invested’99 or ‘owned or controlled, and invested’ by an investor of one Contracting Party in the territory of the host State.100 Depending on the formulation contained in the IIA, arbitral tribunals may be more inclined to read some kind of ‘active contribution’ requirement into the investment definition (with respect to the reference to the ‘investment of the investor’ in the dispute settlement clause).101 This would help lower the chances for purely passive holdings (in particular, of shares) files/master_image/Model%20Text%20for%20the%20Indian%20Bilateral%20 Investment%20Treaty.pdfqe.  97   See e.g., CETA, China-Colombia BIT (2008) and China-Uzbekistan BIT (2011).  98   See e.g., CETA, Art. 8.1; EU-Singapore FTA, Art. 9.1.  99   See e.g., China-Netherlands BIT (2001); ASEAN-China Investment Agreement (2009). 100   Argentina-Australia BIT (1995). 101  See Standard Chartered Bank v United Republic of Tanzania, ICSID Case No. ARB/10/12, Award (2 November 2012); Alapli Elektrik BV v Turkey, ICSID Case No. ARB/08/13, Award (16 July 2012).

M4644-CHAISSE_9781788971898_t.indd 153

11/10/2018 10:22

154

China–European Union investment relationships

by entities conveniently inserted into the corporate chain before bringing an ISDS claim. Finally, the notion of control also raises the question of whether control may be purely formal/legal or must be effective/de facto. This question is relevant because if the notion of control is to be understood as purely formal, then an (interposed) mailbox company somewhere along the corporate chain (in a home State whose IIA with the host State does not contain an SBA requirement) could establish the required link between the investment and the investor. By contrast, this is not the case if control is to be understood as ‘effective control’ by an investor of the other Contracting Party. ‘Effective’ control by a home State investor thus prevents host State or third State nationals from benefitting from treaty protection.102 Arbitral tribunals have answered this question in inconsistent ways, accepting (formal) control more readily in the case of majority shareholding, while tending to inquire into effective control in the case of minority shareholdings.103 This lack of predictability of whether the notion of control will be interpreted as formal or effective also makes it highly advisable to explicitly clarify that control should be ‘effective’ and to include criteria for defining ‘effective control’ so as to guide arbitral interpretation.104 While EU IIAs have not included any clarification on ‘effective’ control in recently negotiated IIAs, such clarification can be found, e.g., in the China-Colombia BIT (2008).

6. CONCLUSION Whether for negotiating new IIAs or modernizing existing IIAs, the definitions of investor and investment remain some of the key elements in a treaty that States should pay particular attention to as they determine

102   It should be noted that while the inclusion of a SBA requirement as part of the definition of investor does effectively preclude mailbox companies from treaty protection and ensure that only ‘real’ home State nationals benefit, it does not exclude the possibility that ultimate ownership or control lies with a host State or third State national. 103   See e.g., Mobil v Venezuela (n 88) paras 159–160; Yukos v Russia (n 71) paras 536–537; International Thunderbird Gaming Corporation v Mexico, UNCITRAL, Award (26 January 2006) paras 106–108. For an in-depth discussion see Baumgartner, (n 1) 123 ff. 104  UNCTAD, WIR 2016 (n 4) 177.

M4644-CHAISSE_9781788971898_t.indd 154

11/10/2018 10:22



Investor nationality and the definition of investment 155

the personal and material scope of beneficiaries to whom the benefits of the treaty accrue. They also play a crucial role in determining whether an IIA will be ‘treaty shopping-permissive’ or ‘treaty shopping-restrictive’. The good news is that careful treaty drafting can significantly curb treaty shopping practices by corporate (re)structuring or the invocation of dual nationalities. Indicative clarifications of key notions such as seat, SBA and control are highly recommendable to guide arbitral interpretation given past inconsistent arbitral practice.

M4644-CHAISSE_9781788971898_t.indd 155

11/10/2018 10:22

9. Emerging regulatory issues for financial services in the new generation of FTAs Federico Lupo-Pasini* I. EMERGING REGULATORY ISSUES IN FINANCIAL SERVICES In 1997, now 21 years ago, financial liberalization formally entered the world of multilateral trade. When in 1997 the WTO General Agreement on Trade in Financial Services (GATS) Annex on Financial Services (the Annex) was formally adopted, the world was very different from now.1 This regulatory instrument was agreed in the midst of a period of hyper-financial globalization, when multinational financial institutions stretched successfully their operations across continents, new forms of financial intermediation emerged, and capital controls were progressively abolished everywhere.2 In those 21 years, not much has changed in the substantive way international trade law regulates financial services, if not for the increased predominant role of preferential liberalization. Free Trade Agreements (FTAs) are now key components of the world trading system, as they are used by virtually all WTO Members to improve supply chain dynamics, obtain better market access conditions, and protect foreign investment. Financial services are, not surprisingly, a necessary part of most FTAs. Yet, in the period between 1997 and 2017 the global financial system underwent a revolution. In 2001 and 2010, the world experienced the two worst sovereign debt crises ever, first in Argentina and then in the Eurozone, which have forced policymakers to rethink the legal mechanisms of debt restructuring. The global financial crisis of 2008 has led to huge regulatory changes in financial services that have touched all areas *  All websites cited in this chapter were live as at 21 February 2018. 1   The agreement on the Annex on Financial Services was formally reached on 12 December 1997, while the text entered into force on 1 March 1999. 2   See, IMF, IMF Institutional View on Capital Flows (2012). 156

M4644-CHAISSE_9781788971898_t.indd 156

11/10/2018 10:22



Emerging regulatory issues for financial services 157

of finance, from capital adequacy standards to derivatives trading. The global financial architecture has been reinforced with the creation of the Financial Stability Board and a more important role for the IMF on global financial stability.3 Finally, since 2011, financial technology has been disrupting the financial industry with the emergence of new forms of financial intermediation such as peer-to-peer lending platforms, electronic payment systems, virtual currencies, and blockchain contracts. All these changes inevitably have an impact, in one way or another, on the patterns of international financial intermediation. In this chapter I will discuss two issues that have become increasingly important in the context of financial services: the restructuring of sovereign debt securities and the use of international courts to challenge a domestic supervisory decision. These are not the only financial regulatory topics that matter for modern FTAs: the regulation of new financial services and FinTech, the governance of payment systems, and special dispute settlement rules for finance are other important topics that should deserve a mention. However, I have chosen them because they have generated in the last ten years a large number of disputes and are very likely to continue doing so in the near future. To conclude, I will add a few comments on financial services in the context of the EU – China Free Trade Agreement.

II.  FINANCIAL SERVICES IN FTAS Before discussing in detail those three emerging regulatory issues, it is necessary spend a few words on the way preferential integration is disciplined in modern FTAs (and EU FTAs, in particular). At the outset, it is important to say that the new generation of FTAs negotiated by the EU, the US, Canada, and Australia combine in the same agreement the classical ‘trade’ chapters such as trade in goods, services, and IPRs, with an investment chapter, which sometimes deals also with the entire market access aspects of services and investment.4 The two areas remain quite well separated, with the trade chapters modelled on the WTO Agreements, and the investment chapter incorporating the classical standards of investment protection such as non-discrimination, fair and equitable treatment, and capital repatriation. This neat separation persists also when it comes to the

3   See Emilios Avgouleas, Governance of Global Financial Markets: The Law, The Economics, The Politics (CUP, 2012). 4   See for instance, Billy Melo-Araujo, The EU Deep Trade Agenda (OUP, 2016).

M4644-CHAISSE_9781788971898_t.indd 157

11/10/2018 10:22

158

China–European Union investment relationships

settlement of disputes, as trade measures are subject to a state-state dispute settlement system modelled on the WTO Dispute Settlement Mechanism, while investment measures are subject to investor-state arbitration. Financial measures are, in this context, subject to two different (albeit sometimes overlapping) disciplines. On the one hand, a government measure that affects the supply of a financial service is, in principle, subject to the discipline set out in the Chapter on Trade in Services and its Annex on Financial Services. These chapters are modelled on the GATS Annex on Financial Services, which they replicate with minimal changes. On the other hand, a measure that affects a financial investment – be it an FDI in the banking sector, or a portfolio investment in securities – is subject to the discipline set out in the Chapter on Investment. When it comes to financial services, investment law is undoubtedly the most critical part of an FTA. A very basic empirical investigation on the number of disputes on financial services initiated in international courts in the period 1996–2016 shows that the large majority of the litigation was done under international investment law.5 In this 20-year period there have been 61 disputes on financial services, 59 of which were arbitrated under international investment law and only two litigated at the World Trade Organization.6 Given the important of investment law in regulating bilateral financial relations in an FTA, this chapter will deal primarily with the implication of financial integration from an investment law perspective. The first step of our analysis is therefore the regulatory framework for financial services in international investment law. A.  Investment Law and Finance7 Most International Investment Agreements (IIAs) include intangible financial assets in the definition of ‘investment’.8 Those include most 5   For this investigation the WTO Dispute Settlement Gateway is used for the trade part (available at https://www.wto.org/english/tratop_e/dispu_e/dispu_e. htm), and the UNCTAD Investment Dispute Settlement Navigator is used for the investment part (available at http://investmentpolicyhub.unctad.org/ISDS). 6   See, Federico Lupo-Pasini, ‘‘Financial Disputes in International Courts’’, (2018) 21(1) Journal of International Economic Law 1. 7   On this see, Federico Lupo-Pasini, ‘Monetary Policy Measures in Investment Law: The Uneasy Relationship between Monetary Stability and Investment Protection’, in Thomas Cottier, Rosa Maria Lastra, Christian Tietje, and Lucia Satragno eds., The Rule of Law in Monetary Affairs (CUP, 2014), 570–92. 8   See, Celine Levesuqe, ‘Abaclat and Others v Argentine Republic: The Definition of Investment’ (2012) 27 ICSID Review 247.

M4644-CHAISSE_9781788971898_t.indd 158

11/10/2018 10:22



Emerging regulatory issues for financial services 159

portfolio flows such as bonds, debentures, loans, equity and other shareholder capital, and more complex financial instruments such as derivatives or structured finance. The inclusion of portfolio investment extends the jurisdiction rationae materiae of the IIA to a potentially very large part of the overall cross-border investment flows between the country parties to the Treaty, especially if we talk about FTAs between financially developed economies. Once we establish that the ownership of those assets belongs to a national of one of the parties of the IIA, then the tribunal has formal jurisdiction to hear the dispute. The jurisdiction rationae personae has proved to be the most contentious part of the two-step test as financial assets are traded across different markets and are often bought and resold in secondary markets a number of times. Thus, in most disputes concerning financial assets, the main question was whether the claimant had indeed standing to bring the case to the court based on the IIA between his country and the host.9 Data from all investment disputes on financial services prove that out of 59 financial disputes examined, nine were stopped at the jurisdiction phase because of lack of jurisdiction rationale personae.10 Once it is determined that the court has jurisdiction to hear the dispute, then the next question is whether the government’s action is justifiable under the IIA. In this regard, the international investment law principles that are reflected in the IIAs regulatory framework establish a number of guarantees to protect foreign investors against governments’ actions that are perceived to be unfair towards the investor. Standards of protection of investment law vary considerably, from the obligation of non-­discrimination, to the protection against unlawful expropriation, to the right to repatriate capital and profits.11 In the context of international financial disputes, two issues in particular have proved to be particularly challenging. The first concerns the loss of property following the host government’s decision to modify unilaterally its contractual commitments or to impose losses on the bearer of financial instruments. These situations are partially different but they all lead to the same result: a financial loss for the investor. On the one hand, we have the violation of a contractual commitment by the host government, which can entail the rescheduling of a debt through reduced interest rates or the reduction of the principal or a postponement of the maturity date of the debt. This situation is particularly problematic with regard to sovereign

 9   See, Hans van Houtte and Bridie McAsey, ‘Abaclat and Others v Argentine Republic: ICSID, the BIT, and Mass Claims’ (2012) 27 ICSID Review 231. 10   See, Lupo-Pasini, (n 6). 11   August Reinisch, Standard of Investment Protection (OUP, 2008).

M4644-CHAISSE_9781788971898_t.indd 159

11/10/2018 10:22

160

China–European Union investment relationships

debt, but it could also apply to other contractual obligations, such as the refusal to pay a derivative contract as we saw in Deutsche Bank v. Sri Lanka.12 On the other hand, losses can be imposed on investors by way of the statutory power of financial supervisory authorities in the context of a corporate insolvency. These are actually, the large majority of the financial disputes litigated in international courts. The second critical legal issue is the treatment accorded to investors in the context of an administrative procedure or a judicial action. In finance, contractual guarantees accorded to financial institutions and creditors are more limited than in other sectors. Indeed, because of the need to protect financial stability, financial regulators are subject to lighter accountability mechanisms that allow them to take decisions that affect the life of a financial institution or its creditors with much more freedom of ­manoeuvre.13 Moreover, in order to guarantee the function of the markets, those decisions are usually non-challengeable in court insofar as they are taken within the statutory power of the regulators. In practice, this means that a financial institution that has received a fine or that has been declared insolvent by the supervisor and put under official administration, has a limited scope of judicial protection. In most countries, the decisions of supervisors are excluded from judicial review except for the procedural aspects of the decision.14 Investors sometimes challenge this situation under international investment law as a violation of the principle of fair and equitable treatment or due process. B.  Investment Arbitrations and Finance As I mentioned before, in the period 1995–2016 there have been 59 disputes in financial services arbitrated in investment tribunals. The analysis of those disputes allows us to draw some conclusions.15   Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka (ICSID Case No ARB/09/02). 13   Eva Hüpkes, Marc Quintyn, and Michael W. Taylor, ‘The Accountability of Financial Sector Supervisors: Principles and Practice’, IMF Working Paper WP/05/51 (2005). 14   Robert J. Dijkstra, ‘Is limiting Financial Supervisory Liability a Way to Prevent Defensive Conduct? The Outcome of a European Survey’, (2017) 43 European Journal of Law and Economics 59; Robert J. Dijkstra, ‘Liability of financial regulators: Defensive conduct or careful supervision?’, (2009) 10 Journal of Banking Regulation 269); Donal Nolan, ‘The liability of financial supervisory authorities’, (2013) 4 Journal of European Tort Law 191; Phoebus Athanasiou, ‘Bank Supervisors’ Liability: a European Perspective’, (2011) 30 Yearbook of European Law 213. 15   See, Lupo-Pasini (n 6). 12

M4644-CHAISSE_9781788971898_t.indd 160

11/10/2018 10:22



Emerging regulatory issues for financial services 161

First, it is beyond doubt that international investment law is increasingly used by firms and individual financial investors to challenge the decision of the host government’s regulator. From 2008 until 2016, there have been 29 disputes concerning purely supervisory decisions such as the imposition of fines or the forced restructuring of the foreign invested financial institution; an almost tenfold increase compared to the period 1995–2007.16 The rise of investment arbitration for financial regulatory and supervisory disputes can be partially explained by noting the increased importance of investment arbitration to settle regulatory and contractual disputes. Indeed, over the last ten years, the number of investment disputes – especially those concerning the services sector – have risen gradually from only two in 1995 to 69 in 2016.17 Finance, being a core services sector, is certainly not immune from this trend. There are various reasons why investors would find international arbitration particularly attractive. Financial supervisory and regulatory agencies are in most countries given a special status that allow them very intrusive powers and a certain degree of independence.18 As I explained before, their special status often translates in more limited judicial guarantees for firms subject to their regulatory oversight. While in domestic law the rationale for this different level of judicial protection is very well explained by the need to guarantee market integrity and financial stability and as such, invariably enshrined in the statutes of central banks and financial authorities, in international law the same balance is not easily struck. As I will explain in the next subsection, the role of prudential carve-outs in investment law is still much more limited compared to WTO law, albeit this situation might change in the future. Second, if we look at the countries listed as respondents, we can immediately see that only in the 20 per cent of the disputes the host country belongs to the Basel Committee on Banking Supervision – the most important transnational regulatory network on banking policy of which all the major financial centres are members.19 The objective of this institution is to provide guidance to members with regard to the best standards on banking regulation and supervision. Although the regulatory outputs

 Ibid.   See, http://investmentpolicyhub.unctad.org/ISDS. 18   See Hupkes and Quintin (n 13). 19   Until 2009, the Basel Committee on Banking Supervision had nine Members (Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the UK, and the US). The current membership comprises representatives of supervisory agencies from 28 countries. The list is available here . 16 17

M4644-CHAISSE_9781788971898_t.indd 161

11/10/2018 10:22

162

China–European Union investment relationships

produced by the Basel Committee or the Financial Stability Board are in the form of soft laws – and therefore, not binding – members are nonetheless subject to very strong pressure to adopt them, albeit in modified form, in their domestic legislation. This guarantee a very high standard of supervision and regulation. In the context of the present analysis, the high percentage of respondent states not members of the Basel Committee suggest that investors use international arbitration to bypass judicial restrictions in the host country to challenge regulatory or supervisory decision that are perhaps not very transparent. C.  The Role of Prudential Carve-outs A question that begs an answer is why does investment law generate such high number of disputes compared to trade. In this regard, much has to do with the absence of prudential and monetary carve-outs in international investment agreements that, on the contrary, are always present in Chapters on Trade in Financial Services.20 Given the sensitivity of the financial sector to frauds and financial crises, regulators have always insisted on keeping the highest level of financial sovereignty. When it comes to policy, this control translates in the financial regulators’ unwillingness to be bound by international law on matters of prudential regulation, bank supervision and resolution, and consumer safety. We have already seen that all financial standards issued by the various transnational regulatory networks in finance are not binding. Yet, both international trade and investment treaties are binding on their parties and are, in principle, extremely intrusive on regulatory matters. On the one hand, the rule of the GATS would require regulators to put foreign and domestic financial institutions on the same footing irrespectively of their different financial stability risks. Similarly, domestic and foreign consumers should be protected the same way even though this would require a massive financial disbursement for the host regulator, especially during a crisis. On the other hand, also the standards of protection found in investment law in principle require regulators not to adopt measures that adversely affect the financial investment in the host country, irrespectively of the regulator’s need to implement its regulatory and supervisory mandate. For instance, a regulator could be sued for the adoption of more stringent capital adequacy or disclosure requirement when these result in

  Andrew D. Mitchell, Jennifer K. Hawkins and Neha Mishra, ‘Dear Prudence: Allowances under International Trade and Investment Law for Prudential Regulation in the Financial Services Sector’, (2016) 19 JIEL 787. 20

M4644-CHAISSE_9781788971898_t.indd 162

11/10/2018 10:22



Emerging regulatory issues for financial services 163

a financial loss for the foreign invested bank. Thus, it is clear that without striking a different balance between the goals of economic integration and those of financial sovereignty, international trade and investment law could lead to disastrous results for financial regulators. For these reasons, regulators have insisted to insert provisions in international trade and investment treaties that exclude financial policy measures from the scope of the treaty. Those norms are usually known as ‘prudential carve-outs’. Under international trade law, both under the WTO GATS and in FTA with a financial services chapter, prudential carve-outs are extremely effective in insulating financial regulators from external scrutiny. The WTO discipline on trade in financial services, for instance, contains two different provisions that exclude financial measures from the scope of the WTO Agreements.21 First, Article 2 of the Annex contains the ‘prudential carveout’, which excludes all prudential measures taken by a public authority, including measures taken ‘for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system’.22 Given the broad scope of the provision, which targets both prudential regulation as well as supervisory measures taken for consumer protection or financial stability, it is very difficult for a financial measure to fall inside the scope of WTO agreements. This is especially so for those financial measures that are more likely to distort trade in financial services, such as discriminatory regulations against foreign financial institutions, or emergency financial intervention to maintain financial stability. Second, in the GATS there also two provisions – Article 1(3)(b)–(c) and Article 1(b) of the Annex on Financial Services – that exclude monetary and other macroeconomic policies from the ambit of application of the GATS. This provision has the effect of excluding monetary operations that have an impact of financial transactions, such as a debt restructuring decision. The situation, however, is very different in international investment law. Among the 59 Bilateral Investment Treaties (BITs) that were the legal basis for the claims analysed in this study, only three BITs contained a WTO-style prudential carve-out that protected the host country’s ­regulator. 23 This meant that in all other disputes, the host regulator had   Lazaros Panourgias, Banking Regulation and World Trade Law GATS, EU and ‘Prudential’ Institution Building (Brill, 2006); Mamiko Yokoi-Arai, ‘‘‘GATS’’ Prudential Carve Out in Financial Services and Its Relation with Prudential Regulation’ (2008) 57 ICLQ 1; Bart De Meester, ‘The Global Financial Crisis and Government Support for Banks: What Role for the GATS?’ (2010) 13 JIEL 1. 22   Art 2, WTO Annex on Financial Services. 23   See, Lupo-Pasini, (n 6). 21

M4644-CHAISSE_9781788971898_t.indd 163

11/10/2018 10:22

164

China–European Union investment relationships

no legal ­protection against the intrusiveness of the BITs on its regulatory mandate. In practice, whenever the dispute reached the merit phase, the regulator had no possibility to raise the need to protect the financial system or prudential concerns as a defence against the investor. The reason why we find so few carve-outs in BITs is because most of those agreements were drafted in the 1980s and early 1990s – a period in which financial investments were not as important as FDIs and where the opportunities of investment arbitration were still much unknown to investors. Having said that, the situation is very different in more modern IIAs. Indeed, most IIAs negotiated after the global financial crises of 2008 do contain very sophisticated carve-outs. This will probably lead to less disputes on financial services in the future.

III.  SOVEREIGN DEBT RESTRUCTURING After having explained how investment law dangerously intersects with financial services policy, it is now time to turn to the analysis of three critical areas that have given rise to a number of disputes in the previous years. I will start with the complex issues surrounding sovereign debt. In this regard, sovereign debt intersects investment law in two different ways: first, a sovereign default can be interpreted as a violation of an investor’s right under a BIT; second, holdout investors can use a BIT – and the threat of investment arbitration – to block a debt restructuring. A.  Sovereign Defaults Sovereign debt is one of the oldest forms of finance. Bankers have always profited from the kings or states’ needs to finance their expenditure, be these for the purpose of waging wars or to finance their welfare programmes.24 Yet, from a financial perspective sovereign borrowing is a very risky form of business for the lenders. Indeed, in a sovereign debt transaction, the creditors and the debtor are separated by, geographical, jurisdictional and legal barriers that put the two parties on an uneven playing field. The debtor is a state with sovereign power in its territory, while the creditor is a foreign investor who has very little political and legal grip over the borrower. This asymmetry of power is at the foundations of sovereign debt and becomes critical when debt contracts are not respected.

24   Niall Ferguson, The Ascent of Money: A Financial History of the World (Penguin Books, 2009).

M4644-CHAISSE_9781788971898_t.indd 164

11/10/2018 10:22



Emerging regulatory issues for financial services 165

Until quite recently, the approach of international law to sovereign defaults was to protect the sovereign through the doctrine of sovereign immunity. According to this principle of international law, which was first enunciated by Thomas Hobbes, those who make the laws cannot be bound by them.25 In practice, this meant for a long time that sovereigns could not be sued in a foreign court, including for the violation of contracts they’ve entered into.26 This doctrine was, however, softened in the 1950s when courts in the US and the UK began to exclude states’ immunities for actae juri gestionis – i.e., for a state’s private commercial acts. Since then, the international law approach to sovereign debt is to use private international law as the main legal tool to discipline the debt contract. This entails subjecting contracts to a foreign choice of law – ­usually the law of New York or England and Wales – while the jurisdiction to hear the dispute will be given to a foreign municipal court. In the event of a contractual dispute, creditors can take the sovereign to the municipal court competent for the contract and litigate under private law. The use of private international law methods to address the contractual problems of sovereign debt contracts has proved to be quite effective. London and New York courts have developed over the years a particular expertise in adjudicating sovereign debt disputes. This approach nonetheless suffers from some limitations. In the law of sovereign debt, the real problem is to have the awards recognized and enforced. When it comes to the execution of the award, the doctrine of sovereign immunity under international law is still largely unbalanced in favour of sovereigns. Because of the enforcement problems typical of international law, even if creditors have an injunctive order in their hands ordering the payment of damages or compensation, they will have difficulties in having it enforced. Even though they will seek the execution of the award in jurisdictions that recognize it as effective, more often than not, the type and amount of assets held abroad by the sovereign will not be enough to satisfy the creditors’ demands. This means that only if the sovereign agrees to enforce the award in its jurisdiction, creditors will be able to find justice. Secondly, the few sovereign assets that are indeed held abroad, are sometimes subject to a special status that insulates them from creditors’ attacks. For instance, gold reserves deposited in the vault of the New York Federal Reserve Bank are subject to a special legal regime

  See Thomas Hobbes, Leviathan (CUP, 2002, originally published in 1651).   Lee C. Buchheit, ‘Sovereign Immunity’ (1986) 7 Business Law Review 63; Holger Schier, Towards a Reorganisation System for Sovereign Debt: An International Law Perspective (Leiden: Martinus Nijhoff, 2007). 25 26

M4644-CHAISSE_9781788971898_t.indd 165

11/10/2018 10:22

166

China–European Union investment relationships

under the US Foreign Sovereign Immunities Act. central bank assets, such as gold reserves, are subject to full protection.27 The same applied to reserves deposited at the Bank for International Settlement in Basel. Private mechanisms can address partially this problem. Since the sovereign will need at one point to refinance itself in the capital market, creditors can threaten to deny market access to the sovereigns and therefore force him to rely only on its capital base. Moreover, courts can impose on the sovereign a financial blockade and prevent financial institutions in their territory from moving capital to the borrower’s jurisdiction. Anna Gelpern reports that these market tactics actually worked very well and ‘litigation was a factor in only 29 out of 180 sovereign debt restructuring episodes involving private creditors between 1976 and 2010’.28 B.  Debt Restructuring The sovereign debt crises in Argentina in 2001 and in Greece in 2010 have shown how complicated restructuring a state’s external debt can be. Sovereign lending has always existed, and with it the possibility that a sovereign debtor might not be able to satisfy its creditors. Over the last 20 years, however, the financing of public expenditures took more complex forms. The changes started with the switch from syndicated lending to sovereign bonds after the crisis in 1985, and it continued with the progressive use of CDOs to offset counterparty risks. Those two innovations, however, made much more complex the restructuring of a sovereign debt as they increased exponentially the number of bond investors. 29 Since agreeing to a restructuring outcome is in principle voluntary, creditors’ incentives have to be harmonized. However, in various circumstances, this proves to be quite difficult. The economic literature has for a very long time identified the collective action problem arising between creditors during a bankruptcy as one of the most challenging problems in sovereign debt restructurings. Unlike domestic bankruptcies, where statutes identify the ranking between creditors, sovereign bankruptcies do not benefit from any international treaty governing the restructuring of the debt stock held by creditors. Creditors are therefore incentivized to act   Ugo Panizza and others, ‘The Economics and Law of Sovereign Debt and Default’ (2009) 47 JEL 651, 654. 28   W. Mark C. Weidemaier and Anna Gelpern, ‘Injunctions in Sovereign Debt Litigation’ (2014) 31 YLJR 189 29   Ronald J. Silverman and Mark W. Deveno, ‘Distressed Sovereign Debt: A Perspective’, (2003) 11 ABILR 179, at 185; see also Lee C. Buchheit, ‘The Capitalization of Sovereign Debt: An Introduction’, UILR (1988) 401, at 402. 27

M4644-CHAISSE_9781788971898_t.indd 166

11/10/2018 10:22



Emerging regulatory issues for financial services 167

only in their own interest, without therefore considering the impact that their action have on others. In this situation, whenever the restructuring of the debt stock requires unanimity among creditors or a very large majority, creditors have an incentive to hold out from the restructuring negotiation in order to extract a better payment at the expense of the other creditors. This will in turn lead to suboptimal restructuring or a dangerous delay of the restructuring process. Sometimes holdouts chose their position as a matter of principle – for instance, many Italian bondholders of Argentinian debt were retail investors who simply did not accept a 50 per cent haircut on their investment. Other times, however, holdouts are institutional investors with broad shoulders – usually called ‘vulture funds’ – which pursue very aggressive litigation tactics in order to take a very high profit margin on the debt transaction. The power holdout creditors enjoy does not rely on an established set of international legal entitlements, but rather on legal tactics that are based on a strategic application of domestic laws in jurisdictions that occupy a critical position in the context of the debt transaction. More specifically, holdout creditors forum-shop in jurisdictions where their legal claims against the sovereign have more chance to be won due to a more favourable legal framework and judicial attitude towards creditors. Under the right conditions, an injunctive order from a national court against the sovereign could paralyze the entire sovereign debt restructuring process and create international spillovers. This strategy was first used by Elliot Associates against the Government of Peru, when the former purchased distressed debt in the secondary market for a value of US$11 million. And them managed to be repaid US$55 million.30 Another recent case is the dispute between NML v. Argentina31 in which hedge funds bought all available Argentinian debt securities in the secondary market at extremely low prices, and then sought the full recovery of the debt for 800 per cent of their original market value. The sovereign literature is mostly uniform in condemning these tactics as they disrupt the already fragile negotiating dynamics during the restructuring discussions and reduce further the chances of a positive restructuring outcome. Moreover, as the NML v Argentina dispute showed, sometimes, blocking the restructuring procedure to protect the interests of a tiny ­minority of creditors can actually result in much bigger welfare losses. Indeed, non-holdouts located all over the world will be prevented from receiving their payments. This could in turn create disruptions in financial

  Elliott Assocs., L.P. v. Banco de la Nación, 194 F.3d 363 (2d Cir. 1999)   NML Capital, Ltd. v. Republic of Argentina, 727 F.3d 230 (2d Cir. 2013).

30 31

M4644-CHAISSE_9781788971898_t.indd 167

11/10/2018 10:22

168

China–European Union investment relationships

markets abroad. This would occur because the court can exert its jurisdictional powers over local banks or financial infrastructures such as clearing and settlement firms that occupy a pivotal role in the mechanics of the debt transaction, thereby extending its effect to all the other entities that are financially connected to them. In other terms, the application of national law to an international dispute could have extraterritorial effects in the debtor country and in third countries where the non-holdout creditors are located. C.  International Investment Law So far, all litigation was conducted under private international law. However, international investment law has become in recent years a new legal battleground for debt investors. As of 2017, there have been five investment disputes initiated by debt holders against a defaulting sovereign. The trend started in 2011 with three requests of arbitration at the ICSID court by Italian bondholders against Argentina, Abaclat,32 Ambiente Ufficio,33 and Alemanni.34 Sovereign bonds restructuring was also litigated in the context of the Greek quasi-default in Poštová banka, a.s. and Istrokapital SE v. Hellenic Republic35 and, more recently, in Gramercy v. Peru, albeit with regard to municipal bonds and without a default in the background.36 Investment law is not the only area of international law that is seeing debt disputes, as bondholders have submitted even more cases tp the European Court of Human Rights. However, international investment law is the only area of international economic law that has the potential to offer a real legal anchor to sovereign debt creditors and, thus, attract in the future new litigations. Subjecting a debt dispute to an investment court is a strategic option for bond investors. Indeed, investment law offers an additional legal battleground to investors, and does not present the limitations of private international law when it comes to contractual interpretation and recognition. Clauses like ‘fair and equitable treatment’, ‘non-discrimination’,   Abaclat and others v. Argentine Republic (ICSID Case No ARB/07/5), Decision on Jurisdiction and Admissibility (4 August 2011); 33   Ambiente Ufficio S.p.A. and others v. Argentine Republic (ICSID Case No. ARB/08/9); 34   Giovanni Alemanni and others v. Argentine Republic (ICSID Case No ARB/07/8) 35   Poštová Banka, a.s. and Istrokapital SE v The Hellenic Republic (ICSID Case No. ARB/13/8), Award, 9 April 2015 (dismissed on jurisdictional grounds). 36   Gramercy Funds Management LLC, Gramercy Peru Holdings LLC, Gramercy Investment Advisors LLC and Gramercy Advisors LLC v. the Republic of Peru (claimant notice to commence arbitration, 1 February 2016). 32

M4644-CHAISSE_9781788971898_t.indd 168

11/10/2018 10:22



Emerging regulatory issues for financial services 169

and ‘expropriation’ can be interpreted broadly enough to offer new legal anchors to the creditors’ claims. Moreover, litigating in an international court undoubtedly increases the political profile of the dispute. However, what makes investment arbitration a strategic tool in the hands of creditors is the negotiating power it offers them in the context of a restructuring. At present, holdouts can use a wide range of legal tactics to incentivize sovereigns to agree to a better restructuring deal, but they all rely on contractual mechanisms. Investment arbitration offers a much broader level of protection to investors compared to domestic law. Proof is that all three sovereign debt disputes litigated in international investment courts against Argentina – Alemanni, Abaclat, and Ambiente-Ufficio – have been settled when Argentina finally gave in to holdouts’ extortionate demands to receive full compensations, thus ending a ten-year long battle between the Latin American country and a group of hedge funds.37 If well drafted, necessity clauses can reduce the impact of investors’ claims, as they protect those sovereigns that were forced to default because a true macroeconomic problem against claims by investors. Unfortunately, this is not always the case as the jurisprudence on necessity is sometimes ambivalent on the interpretation of those clauses.38 In the recent European Union–Vietnam FTA, the chapter on international investment contains an Annex on Public Debt that specifically protects against the risk of investment arbitration being used to block a debt restructuring. More specifically, the Annex contains a number of provisions that prevents a debt holder from one of the parties from launching an investment claim during a restructuring procedure or within 270 days after such procedure has been completed. Moreover, according to the Annex, the restructuring of a debt stock automatically forces all investment claims already submitted to be discontinued. The objective of this Annex is not to block investment claims on debt securities, which are indeed covered by the Chapter, but rather to prevent parties to use arbitration as a negotiating weapon against a sovereign in the context of a restructuring negotiation. ‘Negotiated restructuring’ means the restructuring or rescheduling of debt of a Party that has been effected through (i) a modification or amendment of debt instruments, as provided for under their terms, including their governing law, or (ii) a debt exchange or other similar process in which the holders of no less than 66 per cent of the aggregate principal amount of the outstanding debt

  Lupo-Pasini (n 7).   Michael Waibel, ‘Two Worlds of Necessity in ICSID Arbitration: CMS and LG&E’ (2007) 20 LJIL 637. 37 38

M4644-CHAISSE_9781788971898_t.indd 169

11/10/2018 10:22

170

China–European Union investment relationships

subject to restructuring, excluding debt held by that Party or by entities owned or controlled by it, have consented to such debt exchange or other process.39

The Transpacific Partnership Agreement’ Chapter on Investment contains a very similar clause, which similarly protects against strategic litigation by holdouts. However, the TPP goes a step further by excluding all claims in respect to default or non-payment of debt issued by one of the parties unless the investor demonstrates that this constitutes a breach of relevant investment standards – including an uncompensated expropriation.40

IV.  INTERNATIONAL BANKING The period between the late 1980s and the 2010 represented the height of financial globalization. One its core features was the rise of multinational banks – the so-called Global Systemically Important Banks (G-SIBs) or regional systemically important: financial institutions with substantial operations outside their home country and billions of dollars in assets. For what concerns the present study, the increase in global banking has increased manifold the risks of disputes between the bank and its host supervisory authorities. Financial services are among the most regulated industries. Given the very high financial risks inherent to financial contracts, the potential for frauds, and the peculiar dangers posed by ailing financial firms on financial and economic stability, financial institutions and markets are subject to very strict regulatory requirement and close oversight by supervisory agencies.41 Given their unique role as guardian of the financial system, supervisory authorities have unique statutory powers. These are a result of their need to address promptly a situation that might spiral out of ­control.42 Example of their powers are the right to conduct inspection in the firm and receive data, or the right to suspend or remove managers. When the firms are found in breach of regulation, supervisors can impose

  EU-Vietnam Free Trade Agreement, Services and Investment Chapter, Annex on Public Debt, para 3. 40   Transpacific Partnership Agreement, Investment Chapter, Annex 9-G ‘Public Debt’, para 1. 41   John Armour et al., Principles of Financial Regulation (Oxford: Oxford University Press, 2016).; Matthias Haentjens and Pierre De Gioia-Carabellese, European Banking and Financial Law (London: Routledge, 2016). 42   Frederick Mishkin, ‘Prudential Supervision: What is it and Why is it Important?’, NBER Working Paper 7926 (2001). 39

M4644-CHAISSE_9781788971898_t.indd 170

11/10/2018 10:22



Emerging regulatory issues for financial services 171

very huge fines. When the financial condition of the firm is perilous, supervisors have tremendous powers, which include the right to bailout the bank, declare it insolvent, or bail-in some of the creditors.43 Crucially, given their critical role, supervisory agencies are subject to a different level of accountability compared to other agencies of the state.44 For instance, their determinations are not easily challenged and, in certain countries, can be appealed only through internal review mechanisms. Moreover, in order to guarantee them freedom of manoeuvre during a crisis,45 supervisors cannot be liable for the actions taken in the course of their mandate and must be able to perform their duties with the guarantee that they will not be sued.46 Yet, supervisory measures do affect the life of foreign financial institutions and their creditors. It is not surprising, then, that investors have resorted to international economic law arbitration to bypass the limits of domestic judicial review mechanisms to challenge supervisory measures, especially when the decision is allegedly motivated by political rather than economic or regulatory reasons. Given the ‘prudential carve-out’, supervisory measures that affect the supply of a financial service by a member into the territory of another member are excluded from the scope of international trade law. However, given the absence of prudential carve outs in most IIAs, a supervisory measure that affects negatively the life of portfolio or FDI in banking can, in principle, be challenged for the violation of investment law. Over the last 15 years, there have been 13 investment arbitrations concerning supervisory measures. This area of litigation concerns measures taken by supervisory agencies in the context of their market oversight and enforcement mandate (as opposed to measures taken in the context of a financial stability mandate). Measures include, the revocation of banking licenses, the closure of bank accounts for anti-moneylaundering reasons, the removal of managers, or alleged negligence by the supervisory authorities in carrying out their supervisory mandate.

43   See, Taya Brook-Knight and Ylia Shapiro, ‘Metlife v Financial Stability Oversight Council’, published in Cato at Liberty blog (25 August 2016), . 44   Rosa M. Lastra and Heba Shams, ‘Public Accountability in the Financial Sector’, in Eilis Ferran and Charles A.E. Goodhart (eds), Regulating Financial Services and Markets in the 21st Century (Hart Publishing, 2001) 165–88; Christine Kaufmann and Rolf H. Weber, ‘The Role of Transparency in Financial Regulation’, (2010) 13 Journal of International Economic Law 779 45   Basel Core Principles, Principle 2. 46   Dijkstra (n 14); Nolan (14); Athanasiou (n 14).

M4644-CHAISSE_9781788971898_t.indd 171

11/10/2018 10:22

172

China–European Union investment relationships

The most notable case in this regard is Anderson v. Costa Rica, a 2007 dispute concerning the alleged failure of the government to provide proper vigilance and governmental regulatory supervision over the national financial system.47 In other cases, the dispute arises because of the allegedly discriminatory behaviour of the supervisory authorities or fundamental denial of justice. Exemplary in this regard is the 2015 case Dawood Rawat v Mauritius.48 The biggest source of contention, however, are the supervisory decisions taken in the context of a banking crisis. Cross-border bankruptcies have always given rise to coordination problems.49 However, the insolvency of a bank confronts bank supervisors with complications that are not found in any other commercial enterprise.50 First, in bank insolvencies, supervisors must balance the need to maintain financial stability with the need to ensure fair competition. In order to do so, bank supervisors – sometimes in cooperation with the Treasury and the Central Bank – utilize a wide range of tools, ranging from emergence liquidity operations, bridge banks, bailouts, or bankruptcies. Second, losses can be huge and require very painful haircuts to bank creditors, including weak parties like depositors and retail bondholders. In the context of an FTA, the issues surrounding international bankruptcies essentially concern the treatment accorded by the implementing supervisor to the foreign operations of the host bank or its creditors. Possible examples include the refusal of the bank supervisor to offer LOLR facilities to foreign banks, discriminatory bailouts only to local banks, different treatment accorded to local vs foreign creditors of an insolvent financial institution, or lack of due process in the context of a resolution action whereby bank supervisors’ decision cannot be appealed.51 As stated before, the protection given by the ‘prudential carve-out’ of Article 2 Annex on Financial Services has kept cross-border bankruptcies outside of the scope of WTO law. On the contrary, international investment law 47   Alasdair Ross Anderson et al v. Republic of Costa Rica (ICSID Case No. ARB(AF)/07/3), Award on 19 May 2010. 48   Dawood Rawat v. The Republic of Mauritius (PCA Case 2016-20), Notice of Arbitration and Statement of Claim on 9 November 2015. 49   Frederick Tung, ‘Is International Bankruptcy Possible?’, (2001) 23 MJIL 31. 50   See, Federico Lupo-Pasini, The Logic of Financial Nationalism: The Challenges of Cooperation and the Role of International Law (CUP, 2017). 51   Anne van Aaken and Jurgen Kurtz, ‘‘Prudence or Discrimination? Emergency Measures, The Global Financial Crisis and International Economic Law’’ (2009) 12 Journal of International Economic Law 859; Bart De Meester, ‘‘The Global Financial Crisis and Government Support for Banks: What Role for the GATS?’’ (2010) 13 Journal of International Economic Law 27.

M4644-CHAISSE_9781788971898_t.indd 172

11/10/2018 10:22



Emerging regulatory issues for financial services 173

has, over the last 15 years witnessed a number of arbitrations concerning a bank resolution and insolvency measure. In the period between 1995 and 2016, there have been 22 disputes involving a bank restructuring measure litigated under international ­ investment law.52 The very first was Saluka v. Czech Republic, which for the first time dealt with the thorny issue of bailouts. In that case the issue was the discriminatory treatment reserved to the foreign banks left without financial support by the Czech regulator that eventually resulted in the bankruptcy of the foreign lender.53 More recently, discriminatory treatments were challenged by foreign investors in the context of the European sovereign debt crisis. In a case still pending, Cyprus Popular Bank Public v. Greece, the foreign investor challenged the denial of emergency liquidity assistance by the host supervisor – the Greek Central Bank – that led to the wind down of the bank’s foreign branches.54 In Saab v Cyprus, another pending case involving the denial of a bailout by the host supervisor, the foreign investor was forced to declare bankruptcy. 55 Similar cases occurred also in Al Warraq v. Indonesia56 and in De Levi v. Peru.57 The recent regulatory reforms on bank resolution in the US and Europe could potentially give rise to legal challenges under international investment law. Bail-in is a new statutory power in the hands of supervisory authorities that enables them to convert bank debt into equity when a financial institution is experiencing financial turmoil. By converting debt into capital, the bank will be able to maintain an adequate level of equity over total assets and, thus, continue to operate while recovering from its losses. This operation, from a legal viewpoint, essentially entails a forced change of the private contractual obligations between the debt-holders – which could be retail depositors, institutional investors in senior debt or junior bondholders – and the financial institution under resolution. Because of its intrusiveness in the private contractual sphere of parties, in order for a bail-in to be implemented it is necessary that supervisory 52   In the same period there were at least 12 recorded disputes on bank resolution litigated at the European Court of Human Right. See, Lupo-Pasini (n 6). 53   Saluka Investments BV v. Czech Republic (Saluka Investments BV v Czech Republic), UNCITRAL, Partial Award (17 March 2006). 54   Cyprus Popular Bank Public Co. Ltd. v. Hellenic Republic (ICSID Case No. ARB/14/16). 55   Ayoub-Farid Saab and Fadi Saab v. Cyprus, Decision on Jurisdiction on 10 September 2015. 56   Hesham T. M. Al Warraq v. Republic of Indonesia, UNCITRAL, Award on 15 December 2014. 57   Renee Rose Levy de Levi v. Peru (Levi v Peru) (ICSID Case No. ARB/10/17), Award, 26 February 2014.

M4644-CHAISSE_9781788971898_t.indd 173

11/10/2018 10:22

174

China–European Union investment relationships

authorities competent for the bail-in be equipped with specific statutory powers. This is the reason why after 2012, in most jurisdictions, new statutes have been promulgated to grant specific resolution powers to bank supervisors. In the EU, this was achieved through the Bank Recovery and Resolution Directive 2014. In a domestic scenario in which the bank and its debt obligations are all subject to national law, a bail-in does not create particular problems as long as the bank supervisor has bail-in powers. However, if a bank operates internationally, a cross-border bank bail-in could generate a good deal of legal headaches. Indeed, multinational banks are much more prone to issue debt obligations in international financial centres such as London, Tokyo, or London, and subject the contract under foreign law. This means that the applicable law of the debt contracts will be different from the actual location of the debt, which can be used to finance the operations of the controlling entity back home or one of the various subsidiaries. In the context of a bail-in, this actually implies that the resolution authority in charge of the bail-in will be changing the terms of a contract under foreign law. The legal issue arises because under private international law very few common law courts will accept that a contract subject to local law will be overridden by the statutory powers of a foreign entity.

V.  A FEW NOTES ON THE EU-CHINA FTA Before concluding, it is worth discussing which financial services issues will be relevant for the EU-China FTA. Following the EU-China Summit in September 2015, the EU and China have expressed their willingness to start the negotiations for a comprehensive investment and trade agreement. Both the EU and China are major financial centres and home to various G-SIBs. Over the years the Chinese Government has relaxed its control on capital outflows and has increasingly worked towards positioning the RMB as one of the core reserve currencies, even though it still far from pursuing full capital account liberalization. Over the last ten years, there have been a number of bilateral financial deals, mainly in the form of minority shareholder acquisition of EU banking conglomerates by Chinese firms.58 At present, the Chinese financial sector is predominantly state-controlled with a number of top financial institutions directly or indirectly in the hands of the government. From a regulatory perspective,

58   Deutsche Bank, ‘China-EU Relations: Gearing Up for Growth?’, (2014) Current Issues: Emerging Markets 30.

M4644-CHAISSE_9781788971898_t.indd 174

11/10/2018 10:22



Emerging regulatory issues for financial services 175

the Chinese securities and banking regulators are increasingly engaging in international regulatory cooperation in various fora such as the Financial Stability Board and the IOSCO, even though China has not implemented all international financial standards. In 2013, the EU financial services sector employed 6.4 million people and contribute to EUR59 billion of exports and EUR23 billion of imports.59 Given the pivotal role played by London in the EU internal and external financial relations, it is now more difficult to gauge how the bilateral financial flows between the two partners will evolve. However, it is safe to say that Eurozone banks and the EU financial regulators will remain a core player in the global financial architecture. From a regulatory perspective, I would like to highlight four issues that EU and Chinese negotiators should focus on: (1)  It is imperative to insert both in the Services and Investment Chapters ‘prudential carve-outs’ that specifically target (A) standard supervisory measures, such as the imposition of fines or inspections; (B) emergency supervisory interventions such as LOLR operations, bailouts, and recovery and resolution measures; (C) as well as regulatory interventions in the financial sector. The issue is particularly relevant for the Investment Chapter, as there seems to be a trend in investment arbitration to use IIAs to challenge financial supervisors. (2) The Investment Chapter should feature a debt-restructuring clause similar to that used in the EU-Vietnam FTA to prevent portfolio investors in debt securities using international investment arbitration to block a debt restructuring or otherwise ‘corner’ the sovereign borrower to extract a better deal. (3) The EU should encourage China to level up its regulatory playing field to international standards. At present, China is lagging partially behind other major financial centres in the adoption of core financial standards. To this extent, the Annex on Financial Services should provide for the establishment of a Regulatory Cooperation Council (RCC) on Financial Services in which EU and Chinese regulators meet annually to discuss regulatory developments and streamline supervisory cooperation. The RCC should work in tandem with other initiatives such as Supervisory and Resolution Colleges. (4) Finally, it is important to increase cooperation on ‘new financial services’ and FinTech, in particular. Chinese has become over the

59   European Commission, ‘Financial Services Liberalization and Implications for TiSA: Implications for EU Free Trade Agreements’ (2016).

M4644-CHAISSE_9781788971898_t.indd 175

11/10/2018 10:22

176

China–European Union investment relationships

years a hotbed for FinTech, with a multitude of companies providing payment services, peer-to-peer lending, and other forms of financial intermediation. The regulation of FinTech is still in its nascent stage and it is imperative to ensure the highest level of regulatory and supervisory cooperation to prevent races to the bottom and increase innovation.

M4644-CHAISSE_9781788971898_t.indd 176

11/10/2018 10:22

10. OBOR in the context of China-EU FDI and China’s evolving economic diplomacy Donald J. Lewis* China’s Belt and Road (OBOR) Initiative is a remarkable, multi-dimensional, fluid creation that is rapidly evolving. It presents a fresh new take on trade and investment, not to mention geopolitics, and conjures up novel, unexpected paradigm shifts.1 OBOR 21st century paradigm shifts extend to concepts, their effects, and the principal modality for their implementation. First, the concept of Corridors – as a means to facilitate trade and investment – is refreshingly novel and different. OBOR is a series of interconnected Corridors.2 We may ask: how do transit corridors accrete FDI and foster economic development? Importantly, what is, or will be, their status under public international law? These are areas of inquiry and exploration that have been largely overlooked to date. Then there is the central OBOR concept of Connectivity. Connectivity is achieved by both physical and digital means. It is the purpose of the transit corridors and their underlying physical and cyber infrastructure. Trade facilitation, which in turn yields its own positive spin-offs, is the core *  All websites cited in the chapter were live as at 8 May 2018. 1   See Julien Chaisse and Mitsuo Matsushita, ‘China’s ‘Belt and Road’ Initiative: Mapping the World Trade Normative and Strategic Implications’ (2018) 52(1) Journal of World Trade 163–86. 2  The Silk Road Economic Belt operates along six economic Corridors: the New Eurasian Land Bridge, China-Mongolia-Russia Corridor, China-CentralAsia-West Asia Corridor, China-Indochina Peninsula Corridor, China-Pakistan Corridor, and Bangladesh-China-India-Myanmar Corridor. The Maritime Silk Road operates along two principal sea routes (and several spurs). The primary route is from South China through the South China Sea to Europe and Africa via the Malacca Straits, the Indian Ocean, and Suez Canal(s) to Europe (specifically Athens and Venice) and includes the so-called ‘String of Pearls’ Route. The secondary route is from South China to Indonesia and the countries of Oceania and the South Pacific. 177

M4644-CHAISSE_9781788971898_t.indd 177

11/10/2018 10:22

178

China–European Union investment relationships

feature, the sine qua non, of OBOR Connectivity. As a corollary, without the WTO Trade Facilitation Agreement (TFA),3 the only meaningful new WTO undertaking to emerge from the ill-fated Doha Round, OBOR would hardly have been possible. Unlike Western-driven trade exclusivity, as epitomized by CPTPP, OBOR embraces the concept of Open Inclusiveness.4 Anyone is free to participate in OBOR – even extra-regional powers, such as the United States. There are no prerequisites. This is the true meaning of Globalization, Chinese style. Then there are the effects. Via OBOR, China is building a network with States along the New Silk Roads through bilateral and multilateral negotiations. Together with the corridors, and China’s imaginative use of multifarious zones,5 these create new, intensified trade, transport, and communications nodes and matrices. In other words, they produce Network Effects. According to theory, such effects should give rise to more complex, wealth-generating inter-connected economies of scale, supply chains, and regional agglomerations, including, ultimately, free trade areas. Finally, the principal modality: Infrastructure Diplomacy. Corridors and Connectivity mean nothing without investment in physical assets, or in a word, infrastructure. China is fortunate, or extraordinarily prescient, to have acquired impressive, world-class technical capabilities over the last three decades with respect to various forms of capital construction. However, there is a twist, infrastructure is also diplomacy! Not only are physical assets being deployed, but through bilateral and multilateral negotiations (often related to infrastructure) China is expanding its

3   WT/L/940 (28 November 2014); for the text of the WTO Trade Facilitation Agreement (TFA), see . 4   See Julien Chaisse and Christian Bellak, ‘Navigating the Expanding Universe of Investment Treaties – Creation and Use of Critical Index’ (2015) 18(1) Journal of International Economic Law 79–115; Julien Chaisse, ‘The Shifting Tectonics of International Investment Law-- Structure and Dynamics of Rules and Arbitration on Foreign Investment in the Asia-Pacific Region’ (2015) 47(3) George Washington International Law Review 563–638. 5   China has deep practical experience with zones and economic development dating back to the initial Special Economic Zones (SEZs) of Guangdong and Fujian provinces in the 1980s. More recently, and of relevance to OBOR, are China’s Free Trade Zones (FTZs) – the most well-known being the Shanghai FTZ, established in 2013. There has been a recent proliferation of FTZs in China – each with its own specialized mandate. See OBOReurope, ‘A new free trade zone for the OBOR in Chongqing’ http://www.oboreurope.com/en/ftz-chongqing/.

M4644-CHAISSE_9781788971898_t.indd 178

11/10/2018 10:22



OBOR in the context of China-EU FDI 179

i­nfluence, its soft power, to create a new, unimagined universe of interdependent relationships – which nonetheless has powerful resonances with our shared heritage: a renaissance of the classical and pre-classical ancient world. This is part of what President Xi Jinping means when he speaks of OBOR as embracing ‘a community of common destin’.6

I.  THE OBOR ARCHITECTURE China’s infrastructure – or more broadly speaking – economic diplomacy, has several components – all of which serve to advance the OBOR Initiative. This is illustrated in Figure 10.1 below by what I call: The OBOR Architecture.

II.  STRATEGIC PARTNERSHIPS The first of these components is the Strategic Partnership. China does not have security alliances, but in lieu thereof, it does have close diplomatic relations – partnerships – with countries it considers important.7 Such partnerships are predicated primarily on trade and economic relations.8 Key OBOR countries typically have strategic partnership agreements with China. Moreover, there exists a hierarchy in China’s strategic partnerships with the ‘comprehensive strategic partnership’ being the most highly developed.9 Strategic partnerships are often coupled with a related OBOR implementation MoU.

6   Xinhua, ‘Xi’s world vision: a community of common destiny, a shared home for humanity’ See also Zeng Lingliang, ‘Conceptual Analysis of China’s Belt and Road Initiative: A Road towards a Regional Community of Common Destiny’ (2016) 15 Chinese Journal of International Law 517–41. 7   Feng Zhongping and Huang Jin, ‘China’s Strategic Partnership Diplomacy: Engaging with a Changing World’ European Strategic Partnership Observatory (ESPO), Working Paper, No. 8 (June 2014); M. S. Siddiqui, ‘BCIM for Security, Connectivity and Cooperation’ Daily Asian Age (22 June 2016) . 8   See Chaisse and Matsushita, supra note 1. 9   At the last count, China had concluded 47 Strategic Partnership (SP) ­agreements – many of which are with OBOR countries. China’s strategic partnerships stretch from strategic partnerships simpliciter to ‘cooperative strategic partnerships’ to ‘comprehensive strategic partnerships’ – each successively indicating a deeper degree of intimacy and collaboration. A special form of SP which may

M4644-CHAISSE_9781788971898_t.indd 179

11/10/2018 10:22

180

China–European Union investment relationships

The OBOR Architecture

Strategic Partnership

Free Trade Agreement

OBOR MoU

Mega Regional Trade Agreement

BIT

Figure 10.1  The OBOR Architecture

III.  EUROPEAN STRATEGIC PARTNERSHIPS In Europe, China has multiple high-level comprehensive strategic partnerships, see Figure 10.2. The EU itself has a Comprehensive Strategic Partnership (CSP) with China. Leading EU States, such as France and Germany, also have such partnerships. OBOR-motivated CSPs are most clearly evident in the case of the Central Eastern European or CEE Countries: Poland, the Czech Republic, and Serbia.

IV.  FREE TRADE AGREEMENTS In the OBOR context, many such strategic partnerships are intended to morph into or to produce free trade agreements (FTAs) with either the OBOR host country or a regional economic organization of which it is a

have alliance implications is the ‘all-weather strategic cooperative partnership’. Currently, China only has one such SP – with Pakistan.

M4644-CHAISSE_9781788971898_t.indd 180

11/10/2018 10:22



OBOR in the context of China-EU FDI 181

China’s European Strategic Partnerships China-EU Comprehensive Strategic Partnership CEE Countries: • China-Poland Comprehensive Strategic Partnership • China-Czech Republic Comprehensive Strategic Partnership • China-Serbia Comprehensive Strategic Partnership Principal EU Members with Comprehensive Strategic Partnerships: • • • • • • •

China-France China-Germany China-Italy China-Greece China-Spain China-Portugal China-Denmark

Figure 10.2  China’s European strategic partnerships member. It is estimated that some 56 bilateral FTAs will be negotiated by China with countries along OBOR routes. China has a burgeoning number of FTAs – both those in force and under negotiation, see Figure 10.3. China has entered into FTAs with certain European countries, most recently Switzerland and Iceland. However, these are notably not EU countries.

V.  BILATERAL INVESTMENT TREATIES In addition to FTAs, China also concludes bilateral investment treaties (BITs) with OBOR and other economically significant countries.10 Such BITs ideally should co-exist with an FTA, particularly with regard to countries where there is high-volume, two-way FDI or, as is true for many   According to the UNCTAD Investment Policy Hub, China has concluded 145 BITs to date; . 10

M4644-CHAISSE_9781788971898_t.indd 181

11/10/2018 10:22

182

China–European Union investment relationships

China’s Free Trade Agreements

• • • • • • • • • • • • •

FTAs in Force

FTAs under Negotiation

ASEAN (ACFTA) Pakistan Chile New Zealand Singapore Peru Hong Kong (CEPA) Macau (CEPA) Costa Rica Iceland Switzerland Korea Australia

• Gulf Cooperative Council (GCC) • Sri Lanka • Maldives • Georgia • Norway • Japan-Korea (trilateral)

Note: * European countries in bold have or are negotiating FTAs with China.

Figure 10.3  China’s Free Trade Agreements OBOR States, there are significant investment risks.11 However, given the growing sophistication of FTAs (which include elaborated investment chapters), as well as current Chinese trends, FTAs may, over time, replace many of China’s BITs along the Silk Roads. By contrast with its FTA practice, China has entered into many BITs with EU States, see Figure 10.4. However, there has been no re-negotiation of any EU member BIT since 2009 – owing to the Treaty of Lisbon or TFEU.12 Consequently, such EU BITs do not reflect OBOR and broader   See Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime’ (2012) 15(1) Journal of International Economic Law 51–84. 12   Since the entry into force of the EU Treaty of Lisbon on 1 December 2009, the EU has exclusive competence over FDI and agreements relating to trade in goods and services, as part of the Common Commercial Policy. See Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, 13 December 2007, 2007/C 306/01, Art. 188. 11

M4644-CHAISSE_9781788971898_t.indd 182

11/10/2018 10:22



OBOR in the context of China-EU FDI 183

China’s EU BITs • France • Germany • Italy

• Finland • Poland • Czech Republic

• Netherlands

• Slovakia

• Spain • Portugal • Austria

• Hungary • Romania • Bulgaria

• Sweden • Denmark

• Croatia • Slovenia

• BLEU • Greece

• Lithuania • Malta

Note:  *European countries in bold also have Strategic Partnerships with China.

Figure 10.4  China’s EU BITs ODI-generated reforms to China’s investment treaty-making practices, dating from at least 2012 as evidenced by the China-Tanzania BIT and China-Korea-Japan BIT. This is a serious disadvantage to European companies dealing with China – and also makes the successful completion of EU-China BIT negotiations all the more imperative.

VI.  CHINA’S RECENT FTA AND BIT PRACTICE China’s recent FTAs and BITs adopt generally progressive positions consonant with those found in NAFTA as well as EU and US BIT templates13, such as: 13   Axel Berger, ‘Hesitant Embrace: China’s Recent Approach to International Investment Rule-Making’ (2015) 16 Journal of World Investment and Trade 843; Karl P. Sauvant and Michael D. Nolan, ‘China’s Outward Foreign Direct Investment and International Investment Law’ (2015) 4 Journal of International Economic Law 893.

M4644-CHAISSE_9781788971898_t.indd 183

11/10/2018 10:22

184 ●● ●● ●● ●● ●● ●●

China–European Union investment relationships

comprehensive definition of ‘investments’14 Fair and equitable treatment (FET) Full protection and security (FPS) environmental and labour, health and safety standards broad investor-state dispute settlement (ISDS) procedures sustainable development goals and public policy considerations.15

However, these agreements do not, as yet, include State-owned enterprise (SOE) disciplines, although the EU is propagating definitive SOE formulae in other contexts, including its recent FTAs.16 The EU-China BIT negotiations are a breakthrough as China has agreed to negotiate on the basis of pre-establishment National Treatment with a negative list, in stark contrast to its past practices. All of this is a good harbinger for an early successful completion of the EU-China BIT negotiations, and, in turn, this should pave the way for an eventual EU-China FTA – something China has sought for some time.17 On the European side, FTA negotiations appear contingent on certain Chinese economic reforms, while for the Chinese, the recognition of China’s Market Economy Status (MES) is absolutely essential.18

VII.  MEGA-REGIONAL TRADE AGREEMENTS The last major piece of the OBOR Architecture is mega-regional trade agreements or RTAs. Mega-regional trade agreements are the OBOR ‘building blocs’. In this regard, China’s bilateral FTAs and BITs should support and contribute to China’s inter-connection with major Eurasian and African mega-RTAs along OBOR routes. This may sound odd to Europeans in light of Brexit and the p ­ ossible   Norah Gallagher, ‘Role of China in Investment: BITs, SOEs, Private Enterprises, and Evolution of Policy’ (2016) 31(1) ICSID Review 88. As Gallagher points out, this has included adoption of certain aspects of the Salini criteria. 15   See Preamble and Art. 10, China-Tanzania BIT (2013); UNCTAD Investment Policy Hub: http://investmentpolicyhub.unctad.org/IIA/country/42/ treaty/990. 16  Gallagher, supra note 14; Dini Sejko, ‘China-European Union Investment: Towards a New Leadership in Global Investment Governance’ paper presented at Asia FDI Forum III, Hong Kong, (2017); such FTAs include the EU-Singapore FTA, EU-Canada CETA, and EU-Vietnam FTA. 17   Gisela Grieger, ‘European Parliament Briefing, One Belt, One Road (OBOR): China’s regional integration initiative’ (2016). 18  Ibid. 14

M4644-CHAISSE_9781788971898_t.indd 184

11/10/2018 10:22



OBOR in the context of China-EU FDI 185

Non-Western Regional Economic Integration

Figure 10.5 Emblems of the Four Non-Western Mega-Regional Trade Organizations. future fragmentation of the EU – which now seems to have been forestalled by French President Emmanuel Macron’s electoral victory. However, deepening regionalism is a dynamic force in the developing world – what may be called: Non-Western Regional Economic Integration. The four main Mega-Regionals, see Figure 10.5 (other than the EU) with which OBOR inter-connects via specific corridors are: ●● ●● ●● ●●

Regional Comprehensive Economic Partnership (RCEP) Shanghai Cooperation Organization (SCO) Eurasian Economic Union (EAEU) Africa’s Tripartite/Continental Free Trade Areas (TFTA/CFTA)

RCEP is the apparent rival, or at least counterpart, of CPTPP. China and the ASEAN countries are RCEP parties and constitute the twin drivers behind the current negotiations. In particular, RCEP includes draft investment and services chapters. RCEP and ASEAN provide perhaps the best templates for the other newer, evolving OBOR mega-RTAs.

M4644-CHAISSE_9781788971898_t.indd 185

11/10/2018 10:22

186

China–European Union investment relationships

China is the SCO founder and its principal proponent. Russia is also an important member of the organization. The SCO’s geographical focus is Central Asia, but with the recent inclusion of Pakistan and India,19 there will now be a South Asian dimension, with implications not only for the Silk Road Economic Belt, but also the Maritime Silk Road and Indian Ocean geopolitics. Investment liberalization has been added to the current agenda as part of a proposed SCO Free Trade Area, announced at Bishkek in November 2016.20 The SCO has overlapping membership with the EAEU, providing large opportunities for mutually beneficial cooperation. China is not an EAEU party, but has comprehensive strategic partnerships with its leading Members, including Russia and Kazakhstan.21 As with RCEP, the EAEU Treaty has investment and services chapters. In terms of synergies, it should be noted that the SCO and EAEU announced an Economic Partnership in 2016. CFTA, which is currently being negotiated, will create a continent-wide FTA for the whole of Africa. Both TFTA/CFTA include investment and services chapters. Moreover, China has entered into a Comprehensive Strategic Partnership (CSP) with all of Africa.22 The primary vehicle for China’s trade and investment relations with African countries is FOCAC – the Forum on China-Africa Cooperation. The current FOCAC round is being implemented via the Johannesburg Action Plans and is supported by China’s Second Africa Policy Paper.23

19   Casey Michel, ‘It’s Official: India and Pakistan Join Shanghai Cooperation Organization’ The Diplomat (12 June 2017) 20   ‘Li makes six-pronged proposal, charting course for SCO’s future development’ (4 November 2016) http://en.people.cn/n3/2016/1104/c90000-9136953.html. 21   China and Russia concluded a ten-year Comprehensive Strategic Partnership (CSP) in 2012, which was updated in 2014. China and Kazakhstan entered into a CSP in 2011, which was further intensified by a Joint Declaration in 2015. See China-Kazakhstan Joint Declaration on a New Stage of Comprehensive Strategic Partnership. 22   ‘China-Africa Cooperation Embarks on a New Journey,’ Forum on China-Africa Cooperation (23 December 2015) . 23   Faizel Ismail, ‘The Changing Global Trade Architecture: Implications for Africa’s Regional Integration and Development’ (2017) 1 Journal of World Trade 1; The FOCAC Johannesburg Action Plans (2016–2018) may be accessed at http:// www.fmprc.gov.cn/mfa_eng/wjdt_665385/2649_665393/t1323159.shtml.

M4644-CHAISSE_9781788971898_t.indd 186

11/10/2018 10:22



OBOR in the context of China-EU FDI 187

VII.  EU-CHINA OBOR FDI RELATIONS The framework for EU-China OBOR FDI relations, see Figure 10.6, is based upon the larger EU-China relationship which is understandably detailed and complex. It consists of several inter-related structures, policy documents, plans, and ongoing negotiations. From a Chinese perspective, the core structure stems from the EU-China Comprehensive Strategic Partnership (CSP), established in 2003.24 Its 2014 reaffirmation specifically references OBOR.25 There are two major recent EU-China developments which merit special attention: the 2016 EU-China Elements Strategy Document and the EU-China Connectivity Platform.

Framework for EU-China OBOR FDI Relations • EU-China Comprehensive Strategic Partnership • China-EU 2020 Strategic Agenda for Cooperation • EU-China Elements Strategy Document • EU Investment Plan for Europe • EU-China Investment Agreement Negotiations • EU-China Connectivity Platform • China-CEE Countries (16+1)

Figure 10.6  Framework for EU-China OBOR FDI relations

24   Feng Zhongping and Huang Jin, supra note 7; Lisa Schäfer, ‘Pragmatic Solutions for the EU-China Strategic Partnership’ (Master Thesis, University of Leiden), 2014–15. 25   President, European Council, Joint Statement – Deepening the EU-China Comprehensive Strategic Partnership for mutual benefit (EUCO 84/14), 31 March 2014.

M4644-CHAISSE_9781788971898_t.indd 187

11/10/2018 10:22

188

China–European Union investment relationships

IX. EU-CHINA ELEMENTS STRATEGY DOCUMENT The Elements Strategy Document sets forth a new and upbeat roadmap for advancing EU-China trade and investment relations over the next few years.26 It emphasizes the need for EU-China reciprocity, a mutually level playing field and fair competition across all areas of cooperation, especially two-way FDI. The Elements Document also underlines the timely completion of the current EU-China BIT negotiations, stressing meaningful market access, particularly for services. There are also plans for a high-standard EU-China FTA, contingent on further economic reforms in China, and for WTO TFA Plus commitments on trade facilitation. China and EU are also undertaking deepening dialogues on the harmonization of standards, technical regulations, and conformity assessment – with an apparent eye on OBOR. Importantly, regular bilateral dialogues between the two sides on the implementation of the 2030 Agenda and Sustainable Development Goals (SDGs) are being conducted. Of particular significance to the OBOR Initiative, the Elements Strategy Document emphasizes the EU-China Connectivity Platform as the EU’s main vehicle ‘for working with China to connect the Eurasian continent via a physical and digital network for trade, investment and people-to-people contacts’.27

X.  EU-CHINA CONNECTIVITY PLATFORM The EU-China Connectivity Platform (CP) was established in 2015.28 Its mandate is to develop a common framework for EU-China OBOR relations as regards cooperation strategies, plans and policies along with clarifying rules and principles governing joint projects, including governance and rule of law issues. Such cooperation is intended to enhance synergies between China’s OBOR and the EU’s Connectivity initiatives, such as the Trans-European Transport Network (TEN-T) policy. It is noteworthy that Connectivity explicitly includes the development of cyber/   European Commission, Elements for a new EU strategy on China, 22 June 2016. 27  Ibid. 28   Memorandum of Understanding on the EU-China Connectivity Platform (2015); see European Commission, ‘Investment Plan for Europe goes global: China announces its contribution to #investEU’ . 26

M4644-CHAISSE_9781788971898_t.indd 188

11/10/2018 10:22



OBOR in the context of China-EU FDI 189

digital networks between China and the EU, related to trade facilitation and e-commerce – in other words, the construction of a Eurasian Cyber/ Digital Silk Road.29 CP’s primary focus is currently on coordinated infrastructure project planning, including joint opportunities in OBOR third countries.30 Trade and transport facilitation in the areas of standards, customs, interoperability, logistics, and border crossing rules for transport corridors are also under discussion. The EU Directorate-General for Mobility and Transport (DG MOVE) and European External Action Service (EEAS) are the CP Coordinators/Chairs. An initial list of projects has been identified and an Expert Group on joint financing and investment established which is tasked with overseeing practical implementation.31 The CP Expert Group at present is addressing, among others, public procurement and export credit issues.32

XI. CENTRAL AND EASTERN EUROPEAN COUNTRIES (CEE) Perhaps the most important sub-set of EU-China relationships involves the so-called CEE Countries or 16+1. The CEE countries, see Figure 10.7, include both EU States and several non-EU Balkan countries. China and the CEE countries – which are EU Members – have repeatedly stressed that their cooperation is situated within the larger EU-China Comprehensive Strategic Partnership. Treaty of Lisbon (TFEU) considerations restrict the ability of the CEE countries to negotiate separately on commercial matters with China at the inter-state level.33 However, this constraint has a silver lining – giving a greater role to private business in the development of OBOR projects. The most important policy documents are the Medium-Term Agenda for Cooperation between China and Central and Eastern European Countries (for the period 2015-2020), the 29   On contours of the Cyber/Digital Silk Road, see Donald J. Lewis and Robert Rogowsky, ‘Bridging the Sino-U.S. Digital Divide’ Caixin Online (September 22, 2015); Luigi Gambardella, ‘Synchronized rules can forge a digital Silk Road’ China Daily Europe (October 14, 2016) http://europe.chinadaily.com.cn/ epaper/2016-10/14/content_27057591.htm. 30  Grieger, supra note 17; Clingendael, ‘Economic Diplomacy in EU-China Relations: Why Europe Needs its Own “OBOR”’(Policy Brief), June 2016. 31  Ibid. 32   Clingendael (n 31); Alain Baron, ‘1st Working Group Meeting of the EU-China Connectivity Platform: Results and prospects’, European Commission, 5 February 2016. 33   See supra note 12.

M4644-CHAISSE_9781788971898_t.indd 189

11/10/2018 10:22

190

China–European Union investment relationships

CEE Countries EU Member States

Balkan Countries

• Bulgaria

• Serbia

• Croatia

• Albania

• Czech Republic

• Bosnia and Herzegovina

• Estonia

• Macedonia

• Hungary • Latvia

• Montenegro

• Lithuania • Poland • Romania • Slovakia • Slovenia

Note:  Countries in bold have Strategic Partnerships with China. Those countries in italic are at present important State actors in terms of CEE regional activities with China.

Figure 10.7  CEE countries attendant Suzhou Guidelines and the recent Riga Guidelines announced at the 16+1 Summit in November 2016.34

XII.  EU PRIVATE FDI PARTICIPATION IN OBOR There are numerous avenues for EU private companies and other investors to participate in OBOR. These include: 34   Donald J. Lewis ‘China-CEE ties on new economic path’, China Daily Online (November 7, 2016) ; PRC Ministry of Commerce, The Riga Guidelines for Cooperation between China and Central and Eastern European Countries, . An entire section of the Riga Guidelines concerns ‘Connectivity’ and, while affirming the importance of EU-China Connectivity Platform, also sets forth a separate agenda for China-CEE cooperation.

M4644-CHAISSE_9781788971898_t.indd 190

11/10/2018 10:22



OBOR in the context of China-EU FDI 191 ●● ●● ●● ●● ●● ●●

via foreign investment enterprises (‘FIEs’) established in China via companies established in Hong Kong and Macau under Closer Economic Partnership Arrangements (CEPA) via participation in China-funded OBOR projects via participation in AIIB-funded projects via participation in specific projects arising from EU-China cooperation, including the EU-China Connectivity Platform via participation in the creation and operation of the OBOR Cyber/ Digital Silk Road.

The Chinese government is stressing the use of Sino-foreign joint ventures in connection with private investment in OBOR projects. Such joint ventures may entail FDI directly from an EU country paired with Chinese investment in an OBOR third country project. However, the Chinese preference at present appears to be for European companies to invest first in China by way of a Sino-foreign joint venture which will, in turn, act as the investing entity in the OBOR country – often with one or more local OBOR partners – in what is in effect a ‘double joint venture’. Under this scenario, China becomes the primary launch pad or springboard for private FDI participation in OBOR projects. This also helps to explain the current domestic investment liberalization occurring in China through the recent adoption of the ‘negative list’ approach for market access purposes, the major overhaul of Chinese FDI legislation, the extensive use of Free Trade Zones (FTZs), and the convergence between Chinese domestic FDI legislation and China’s FTAs and BITs. China FDI is increasingly becoming a revolving, two-way open door. The other major Chinese vehicle being developed for OBOR projects is the Public-Private Partnership (PPP). PPPs are ideal for infrastructure projects and are frequently used in projects involving rail transportation, municipal facilities, environment protection, and clean energy.35 Accordingly, PPPs fit perfectly within the OBOR framework, while at the same time helping to mitigate a range of OBOR investment risks, not the least being political and social risks. Hence there is a very large, currently untapped role for both European companies and financial institutions to participate in OBOR PPPs. China has already taken major steps towards creating an internationally-friendly framework for PPPs which can be readily applied to OBOR

  See Julien Chaisse and Mitsuo Matsushita, ‘China’s “Belt and Road” Initiative: Mapping the World Trade Normative and Strategic Implications’ (2018) 52(1) Journal of World Trade 163–86. 35

M4644-CHAISSE_9781788971898_t.indd 191

11/10/2018 10:22

192

China–European Union investment relationships

projects. The Chinese lead agencies spearheading such PPP initiatives are the National Development and Reform Commission (NDRC) and Ministry of Finance (MOF). The NDRC has signed a MoU with United Nations Economic Commission for Europe (UNECE) to encourage PPP cooperation, the first China-UN MoU.36 Both the NDRC and MOF have issued detailed regulations concerning PPPs in infrastructure projects and have launched big-ticket PPP projects around the country.37 The MOF has also established a PPP Center to support the implementation of PPP models on a nation-wide basis.

XII. CONCLUSION China’s OBOR Initiative is a bold, visionary, highly elaborated blueprint, with many inter-connected moving parts, that, on both theoretical policy and practical business levels, offers perhaps humankind’s main chance for 21st century prosperity on a global scale – and the achievement of the heretofore unattainable prospect of peaceful Eurasian and African economic integration. To accomplish such monumental geopolitical transformations will require not only China’s own gargantuan efforts, but also those of the other great powers, including Russia, the EU and the US.38 Wisely, China has generously formulated OBOR in such a way that it embraces inclusiveness. If cooperation can replace selfish rivalry, we may perhaps be on the cusp of a new, promising and affirming human epoch – what the Chinese are calling a ‘community of common destiny’.

  ‘China, UNECE to boost PPP cooperation’ (21 January 2016) . 37   In December 2014, NDRC issued the Guiding Opinions on Carrying Out Public-Private Partnerships; in 2015, the NDRC and MOF, among others, promulgated the Measures for the Administration of Concessions for Infrastructure and Public Utilities; See Lan Lan, ‘PPP list open to foreign bidders with more than 1,000 projects on offer’ (China Daily Europe, 26 May 2015) . 38   It is encouraging and noteworthy that, on 22 June 2017, President Donald Trump communicated to China’s State Councillor Yang Jiechi U.S. willingness to participate in OBOR. ‘China Says Trump Open to Cooperating on Silk Road Projects’ (Bloomberg News, 22 June 2017) https://www.bloomberg.com/news/ articles/2017-06-23/china-says-u-s-is-willing-to-work-on-belt-and-road-initiative. 36

M4644-CHAISSE_9781788971898_t.indd 192

11/10/2018 10:22

11. Investment related provisions of EVFTA: implications for Vietnam’s policy reforms Nguyen Binh Duong INTRODUCTION In recent years, Vietnam has negotiated several bilateral and multilateral Free Trade Agreements (FTAs) such as the Trans-Pacific Partnership (TPP), RCEP, FTA with the European Union (EVFTA), Customs Union with Russia, Belarus and Kazakhstan (VCUFTA). Under the EVFTA, beside commitments related to trade in goods and services, this agreement also mentions new issues such as investment, intellectual property rights, government procurement, and sustainable development (labour and environment, competition). In the context that each member country of ASEAN has not signed an FTA with the EU, EVFTA is an important step for Vietnam to integrate deeply into the world economy.1 The full text of EVFTA with 24 chapters, published on February 1, 2016, has presented the content of a new generation FTA. The level of commitment and liberalization under EVFTA is also much higher than free trade agreements signed by Vietnam before: from commitments in traditional trade field to the sectors that Vietnam committed for the first time (such as SOEs, government procurement, etc.). With such wide scope, EVFTA is expected to have major impacts on Vietnam’s legal framework. The commitments in EVFTA led to requirements for Vietnam’s legislation adjustments to ensure the implementation of specific obligations in many

1   See Julien Chaisse and Christian Bellak, ‘Navigating the Expanding Universe of Investment Treaties – Creation and Use of Critical Index’ (2015) 18(1) Journal of International Economic Law 79–115; Julien Chaisse, ‘The Shifting Tectonics of International Investment Law – Structure and Dynamics of Rules and Arbitration on Foreign Investment in the Asia-Pacific Region’ (2015) 47(3) George Washington International Law Review 563–638.

193

M4644-CHAISSE_9781788971898_t.indd 193

11/10/2018 10:22

194

China–European Union investment relationships

4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0

ASEAN Korea

EU

Samoa

Japan

Taiwan

Virgin Islands

China

Turkey

Hong Kong

Source:  GSO, 2017.

Figure 11.1  EU’s accumulative FDI in Vietnam, 2015 (million USD) areas, improving the quality of the legal system and improving the investment environment, facilitating sustainable development and benefiting both domestic country and EU. As an important foreign investor in the world and in Vietnam, the EU has established requirements for market access and investment protection in Vietnam. In addition, as a developed partner, the EU itself has a system of standards for market access and investment protection which is considered to be higher than the WTO standards currently being applied by Vietnam. For Vietnam, on the one hand, it would like to improve the business environment to attract more foreign investors; on the other hand, Vietnam also would like to create favourable policy space for investors. In this context, this chapter aims to analyse the EVFTA investment provisions. After comparing these provisions with the current Vietnam’s investment law, this paper will point out some incompatibilities, and basing on these analyses, this chapter proposes some recommendations for Vietnam’s policy reform.

I.  VIETNAM- EU INVESTMENT RELATIONS Since the implementation of ‘Doi Moi’ (Renovation policy), the EU has become one of the most important investment partners for Vietnam. At the end of December 2015, the EU had invested more than $ 25 billion in Vietnam, bringing the EU to the third place in the top biggest investors in Vietnam (Figure 11.1). European investors are present in almost all provinces and cities of the country. The three most important sectors for

M4644-CHAISSE_9781788971898_t.indd 194

11/10/2018 10:22



Investment related provisions of EVFTA 195

Table 11.1 EU’s FDI in Vietnam by main counterparts, 2015 (million USD) Countries Netherlands United Kingdom France Switzerland Luxembourg F.R Germany Denmark Belgium Italy Finland

Number of projects

Total registered capital (Mill.   USD) (*)

255 241 448 111  40 260 118  63  69  14

8264.5 4739.3 3423 2045.1 1857.4 1393.7 681.9 551.7 357.3 321

Note:  *  Including supplementary capital to licensed projects in previous years. Source:  GSO, 2017.

EU’s investments are: production; power generation and transmission; and real estate.2 Among the largest EU investors in Vietnam, the Netherlands ranks first with nearly $ 8.26 billion and 255 investment projects. Second place is the UK with $ 4.7 billion and 241 projects, France is ranked the third with nearly $ 3.4 billion and 448 investment projects (Table 11.1). Most of EU projects are located in big cities with favourable infrastructure such as Hanoi, Quang Ninh, Ho Chi Minh City, Ba Ria, Vung Tau, Dong Nai. Ho Chi Minh City is the largest destination for EU’s FDI with 638 projects, worth $ 5.22 billion, the next is Hanoi ($ 3.79 billion, 389 projects); Ba Ria Vung Tau ($ 2.45 billion, 35 projects). Most of the EU’s investment projects in Vietnam are in the form of joint ventures with 100 per cent foreign capital, among which are 115 projects in the form of joint ventures (worth $ 1.6 billion); 171 projects in the form of 100 per cent foreign capital (worth $ 818.7 million). Other investment forms such as BAT, BT, and BTA are negligible.3

2   Delegation of the EU to Vietnam, ‘Guide to the EU-Vietnam free trade agreement’, last accessed 15 May 2017. 3  Ibid.

M4644-CHAISSE_9781788971898_t.indd 195

11/10/2018 10:22

196

China–European Union investment relationships

II. LITERATURE REVIEW OF INVESTMENT PROVISIONS IN FTA Among studies on free trade agreements in the world, besides trade-related aspects, investments also attract attention of many authors. David A. Gantz has analysed the changes in US investment provisions from the signing of NAFTA until the signing of US-Chile FTA.4 Gilbert Gagné and Jean-Frédéric Morin have analysed the evolution of investment provisions in general FTAs and drawn lessons for the US from the case of NAFTA.5 They have argued that the new features of investment commitments in current FTA were the result of a balance between investment protection and the state sovereignty protection. Martin Khor has presented the main contents and features of the ­investment chapter in bilateral and regional free trade agreements. The author has also outlined policy implications for developing countries.6 Amokura Kawharu has argued that current bilateral investment treaties have lacked provisions for state decision-making.7 Rather, most decisions were made through state-investors disputes. The lack of national participation after signing agreements has undermined the ability of the parties to overcome unforeseen challenges. In Vietnam, since the signing of EVFTA, several studies have mentioned this issue. Nguyen Binh Duong has analysed the impacts of the Vietnam-EU Free Trade Agreement on Vietnam’s economy and suggested policy implications for Vietnam. However, this study has focused mainly on the commercial aspects.8 VCCI 20169 has analysed Vietnamese law and compared it with

  David A. Gantz, ‘The Evolution of FTA Investment Provisions: From NAFTA to the United States – Chile Free Trade Agreement’, (2003) 19(4) American University International Law Review 1. 5   Gilbert Gagné and Jean-Frédéric Morin, ‘The Evolving American Policy on Investment Protection: Evidence from Recent FTAs and the 2004 Model BIT’, (2006) 9(2) Journal of International Economic Law 357–82. 6   Martin Khor, ‘Bilateral and Regional Free Trade Agreement: Some Critical Elements and Development Implications’, (2008) Third World Network 1. 7   Amokura Kawharu, ‘The Potential Role of FTA Trade Commissions in the Evolution of International Investment Law’, 2017 20 Journal of International Economic Law 87–113. 8   Nguyen Binh Duong, ‘Vietnam-EU Free Trade Agreement: Impact and Policy Implications for Vietnam’, (2016) SECO / WTI Academic Cooperation Project, World Trade Institute 1. 9   VCCI, ‘Review Vietnam’s legal framework against commitments under 4

M4644-CHAISSE_9781788971898_t.indd 196

11/10/2018 10:22



Investment related provisions of EVFTA 197

EVFTA. However, this report has focused mainly on technical aspects of the legal framework. In this chapter, the author will present main contents of EVFTA investment chapter and compare them with the current Vietnam’s legal framework. The objective is to find differences between investment related provisions in EVFTA and the legal framework of Vietnam. Based on these analyses, the chapter proposes some recommendations for Vietnam to improve the legal framework and to create a favourable environment for domestic and foreign investors.

III.  OVERVIEW OF EVFTA INVESTMENT CHAPTER After the entry into force of Lisbon Treaty on 1 December 2009, foreign direct investment issues have become incorporated into the EU’s common trade policy. Since then, investment has become an integral part of FTAs negotiated by the EU. Up to now, EU has signed 21 Bilateral Investment Agreements with Vietnam and they will be replaced by EVFTA after the entry into force of this agreement. The EVFTA investment chapter includes following sections: scope and definition, investment liberalization, investment protection, investment dispute resolution A.  Scope and Definition In the EVFTA investment chapter, there is a separate article titled ‘scope and definition’, but some other definitions are also included in the general provisions section such as the concepts of ‘investment’, ‘forms of investment’, ‘investors’.10 These definitions shall be subject to market access rule and national treatment, as well as to transfer or expropriation of property and disputes between investors. The ‘scope and definition’ article also lists industries, services which are out of investment liberalization commitments such as ‘national maritime’, ‘production of or trade in arms’.11 European Union-Vietnam Free Trade Agreement EVFTA) on investment’ (2016) last accessed 15 May 2017. 10   General provision and article title ‘objectives, coverage and definitions’ of EVFTA last accessed 18 May 2017. 11   General provision and EVFTA, art. 1

M4644-CHAISSE_9781788971898_t.indd 197

11/10/2018 10:22

198

China–European Union investment relationships

B.  Investment Liberalization Investment sector liberalization includes articles on market access, national treatment, most favored nation treatment, performance requirements. Main contents of this part are as follows: ●●

●●

●●

●●

●●

Market Access: In accordance with this principle, ‘Each Party shall accord treatment no less favorable than that provided for under terms, limitations and conditions agreed and specified in the schedule of specific commitments’12 in the list of commitments on liberalization of investments. This article also lists exceptions out of which all other sectors are free to invest except some special circumstances. Most favoured nation (MFN) and National treatment (NT): Under the national treatment article, ‘Each Party shall accord to the investors of the other Party and to their investments (. . .) treatment no less favourable than that accorded, in like situations, to its own investors and to their investments’.13 According to the MFN principle, ‘each party shall accord to the other Party and to their investments (. . .) treatment no less favourable than the treatment it accords, in like situations, to investors and to invest under the free trade agreement of the former Party Is negotiating on 17 July 2015 ‘or’ of any non-Party’.14 Under these principles, foreign investors and their investments may be treated better or equally, but no less than the treatment for domestic investors or any third country. Any incentive for domestic investors or any third country may be considered as a discrimination against foreign investors. Performance Requirements: Under this article, Vietnam will not be allowed to require EU investors to transfer technology, use domestic materials, increase exports, etc. In other words, investment or investment – efficiency requirement will not be allowed.

C.  Investment Protection The investment protection section in EVFTA includes nine articles: scope; investment and regulatory measures / objectives; treatment of investment;

  Ibid., art. 2.   Ibid., art. 3 14   Ibid., art. 4, para.s 1 and 2. 12 13

M4644-CHAISSE_9781788971898_t.indd 198

11/10/2018 10:22



Investment related provisions of EVFTA 199

compensation for losses; expropriation; transfer; subrogation; termination; and relationship with other agreements. The main contents of this part are as follows: ●●

●●

●●

●●

Treatment of investment: The most basic content of this clause is Vietnam, or EU, must ensure a fair and equitable treatment to investments and investors in its territory.15 Compensation for losses: In EVFTA, involving losses of investors due to war or armed conflict, national emergency, each party pledges to the other party ‘treatment no less favourable than that to its own investors or to the investors of any third country’.16 Expropriation: Besides the national treatment and equitable treatment presented above, article 16 focuses on protection against expropriation. The expropriation in the EVFTA includes ‘direct’ and ‘indirect expropriation’. If there is such a deprivation, the host country is liable to pay damages to the investor, except in the following cases: (i) for a public purpose; (ii) under due process of law; (iii) on a non-discriminatory basis; and (iv) against payment of prompt, adequate and effective compensation’.17 Transfer: Under this clause, Vietnam commits that funds will freely move in or out the country. In other words, the rules and procedures governing remittance will be prohibited or restricted.

D.  Resolution of Investment Disputes Vietnam and the EU have agreed on an investment dispute settlement mechanism that will ensure respect for fundamental investment protection rules for investors on both sides. According to this mechanism, investors are allowed to bring lawsuits against the host country at the designated international courts.18 Investment tribunal system EVFTA builds a dispute settlement mechanism in which disputes involving violation of commitments will be submitted to an independent international investment tribunal. The EU and Vietnam will appoint members   Ibid., art. 14, para. 1.   Ibid., art. 15, para. 1. 17   Ibid., art. 16, para. 1. 18   See Julien Chaisse and Rahul Donde, ‘The State of Investor-State Arbitration – A Reality Check of the Issues, Trends, and Directions in Asia-Pacific’ (2018) 51(1) The International Lawyer 47–67. 15 16

M4644-CHAISSE_9781788971898_t.indd 199

11/10/2018 10:22

200

China–European Union investment relationships

of the court system that is composed of three members: one from the EU, one from Vietnam, and one from a third country. The court must ensure independence and integrity. The dispute settlement mechanism also allows parties to file their claims before the appeal tribunal. Members of the tribunal Members of the court are experts in international investment law, international trade and dispute resolution. The tribunal composes of three members, and the president of the arbitral tribunal is a citizen of a third country. Court members must be independent, impartial, and highly qualified experts appointed by the EU and Vietnam. In cases where Vietnam is unable to nominate its candidates, Vietnam may propose candidates who are citizens of a third country. All of these procedures are intended to ensure that court decisions are correct and lawful. Enforcement of awards The final awards must be enforced. If the parties disagree with the decision of the court, they must follow the appeal procedures. The domestic courts have no right to reconsider the validity of decisions issued by international courts. Vietnam is currently reforming its domestic legislation and has a transition period of five years before the enforcement of awards come into effect. Transparency of the proceedings ‘UNCITRAL Transparency Rules’ will be applied to all EVFTA proceedings. The UNCITRAL Code allows interested third parties to file their claims before the tribunal, even if they are not a party to the dispute. UNCITRAL regulations will apply to all proceedings before the Court of First Instance and before the Court of Appeal for disputes between the EU and Vietnam.

IV. INVESTMENT CHAPTER OF EVFTA AND VIETAMESE LEGAL FRAMEWORK: A COMPARATIVE ANALYSIS AND IMPLICATIONS FOR VIETNAM A. Comparative Analysis: Vietnam’s Investment Legislation and EVFTA Commitments Vietnam’s current legal system on investments includes the laws on investments, investment related regulations and legal documents. Over the past few years, Vietnam has signed many investment agreements, the

M4644-CHAISSE_9781788971898_t.indd 200

11/10/2018 10:22



Investment related provisions of EVFTA 201

most important among them being Trade-Related Investment Measures (TRIMS) and General Agreement on Trade in Services (GATS-WTO). In addition, Vietnam has signed several bilateral and multilateral agreements, such as the Vietnam-US Bilateral Trade Agreement (BTA), FTA VietnamJapan. So far, with European partners, Vietnam has signed bilateral investment protection treaties with 21 member countries of the EU. In general, the investment law of Vietnam is built on the basis of WTO commitments. Regarding market access issues, Vietnam’s commitments with other countries are mostly lower or equal to the WTO. In addition, some issues are not internalized into Vietnam’s law, such as the foreign dispute resolution mechanism, which can be applied directly from the WTO provisions. Currently, the legal framework on investment in Vietnam is mainly based on the Law of Investment and the Law of Enterprise promulgated in 2014 and documents guiding the implementation of these two laws. In addition, in Vietnam, there are many other documents such as Decree and Circular also mentioning investment issues. However, the comparison between Vietnamese law and EVFTA commitments mainly relies on the Law of Investment and the Law of Enterprise, because these two laws have the broadest-coverage and relate directly to the research problem. In Vietnam, WTO Centre implemented a report on the review of Vietnam’s legal framework against commitments under EVFTA on investment.19 Based on this report, the author summarizes some differences between the legal framework on investment in Vietnam and the commitments in EVFTA in Table 11.2. Chapter I (general provisions) Vietnamese law is not compatible with EVFTA on the definition of ‘shipping companies’ and the definition of ‘investment’. Vietnamese law does not contain definitions of the ‘shipping companies’. Regarding the definition of ‘investments’, Vietnamese law only defines property, capital and investment, instead of the definition of ‘investments’. Chapter II (investment) – article 2 (market access) In EVFTA, the market access rules for EU investors are larger than the current liberalization level in Vietnamese law. Actually, Vietnamese law is now compatible with WTO commitments. However, in EVFTA, the

  WTO Centre, ‘Full text Vietnam-EU free trade agreement EVFTA’ (2016) http://wtocenter.vn/content/full-text-vietnam-eu-free-trade-agreement-evfta last accessed 18 May 2017. 19

M4644-CHAISSE_9781788971898_t.indd 201

11/10/2018 10:22

202

China–European Union investment relationships

Table 11.2 Comparison between EU-Vietnam Free Trade Agreement and Vietnam’s legislation on investment In EU-Vietnam Free Trade Agreement

Related contents

Vietnam’s law

Chapter 1: General  provisions

Shipping companies Investments

Chapter II  (Investment) – Article 2 (Market access)

Include some new services, sectors that are not committed in WTO (services provided by nurses, interdisciplinary R&D services, and services relating to ships, building and cleaning services, packaging services. . .) The obligation of not requiring investors to resell or dispose their investment in the sectors listed in NT Annex of Chapter 8 In Article 4 of EVFTA

No regulations There are just separate definitions about assets, investment capital, and investment project Compatible with commitments in WTO (lower than EVFTA)

No equivalent provisions

In Section 3 of EVFTA

No equivalent provisions

Chapter II  (Investment) -Article 3 (National Treatment): Chapter II  (Investment) – Article 4 (Most Favoured Nation Treatment), Chapter II  (Investment)Section 3 (Resolution of Investment Disputes):

No equivalent provisions

Source:  Author’s synthesis based on VCCI’s report (2016).

liberalization level for EU investors is deeper than WTO commitments, particularly in services sector such as services provided by nurses, interdisciplinary R&D services, and services relating to ships, building and cleaning services, packaging services.

M4644-CHAISSE_9781788971898_t.indd 202

11/10/2018 10:22



Investment related provisions of EVFTA 203

Chapter II (investment) – article 3 (national treatment) Under this clause, Vietnam will not be allowed to require EU investors to resell or dispose of their investments in the sectors listed in Annex NT of Chapter 8 (newspapers, printing, cultural products, forestry, hunting, etc.). Because there is no provision for this in Vietnamese law, therefore, the Vietnamese law at this point is considered as incompatible with EVFTA. Chapter II (investment) – article 4 (most-favoured-nation treatment) Most FTAs in Vietnam such as TPP, VN-EFTA and RCEP have a MFN clause. However, this clause is not present in current Vietnamese law. Therefore, at this point, Vietnamese law is considered as incompatible with EVFTA. Chapter II (investment) – section 3 (settlement of investment disputes) There are no provisions on the settlement of investment disputes in Vietnamese law. However, in EVFTA, this is an important content. Therefore, at this point, Vietnamese law is not compatible with EVFTA. B.  Recommended for Vietnam Basing on comparative analysis between Vietnamese law and EVFTA, this chapter proposes some recommendations for Vietnam to reform the legal system to improve the investment environment, to facilitate sustainable development and to benefit both domestic and foreign investors. First of all, Vietnamese law should have a ‘Suggested Law Implementing EVFTA Commitments on Investment’. In the scope and definition of this law, there should be definitions for ‘EU’s shipping companies’ as well as the definition of ‘investment’. For market access principle, new services (that included in the list of commitments on investment libralization in EVFTA, but not included in WTO market access commitments) should be added to this suggested Law. All annexes about market access for investment services under EVFTA should be added to the Annexes of this suggested law. Another point to emphasize is that this law should be reserved specifically for EU investors, not for all partners, to ensure the benefits of a bilateral FTA for EU investors. In addition, the article should be included in this suggested Law. In this proposed Law, MFN clause and exceptions as well as three related Agreements (such as TPP, RCEP, and the VN-EFTA) should be included. In fact, the MFN article mentions the relationship between  agreements of host country, and this case is between EVFTA and other agreements

M4644-CHAISSE_9781788971898_t.indd 203

11/10/2018 10:22

204

China–European Union investment relationships

of Vietnam. On 17 July 2015, the three FTAs mentioned above were in the negotiation process and according to the MFN article, Vietnam will ensure similar treatment to EU investors as in these three agreements, in terms of establishment of enterprises or branches (except for commitments related to the settlement of disputes between investors and the State). In addition, Vietnam also ensure to EU investors, in terms of their operations, no less favourable treatment than any other party, except for international agreements in force before the entry in force of EVFTA. EVFTA also lists exceptions that will not apply MFN: ‘communication, cultural services, fishery, forestry, hunting; mining ‘.20 MFN is also not applied in double taxation commitments or agreements relating to the recognition of certificates and licenses21 in the service sector. Finally, in Vietnamese law there is not dispute resolution mechanism between the State and Foreign Investors (ISDS), so it is necessary to internalize these commitments in the suggested law. As for the legal effect, this suggested Law will replace legal normative documents for EU’s investments. This suggested Law is a faster way to review and to amend many laws and regulations at the same time. This is also a more effective and feasible way than reviewing and amending each law. In fact, Vietnam cannot edit each law (such as ordinances, decrees and legal documents) in accordance with EVFTA commitments. Because for some services mentioned in the list of investment liberalization under EVFTA, but not included in the WTO, if Vietnam amends each law, Vietnam must unilaterally apply to all WTO partners the same level of liberalization as EU’s investors. It will make EU market access negotiations meaningless. Therefore, this proposed Law should be used to replace legal normative documents and reserved only for EU investors.

V. CONCLUSION Investment related provisions are an important part of new generation FTAs. EVFTA’s investment chapter composes four parts: scope and definition, investment liberalization, investment protection and invest­ ment dispute resolution. These provisions contain basic principles of investment management such as: protection against expropriation without compensation to investors; ability to transfer and repatriate money related

  EVFTA, art. 4, para. 3.   Ibid., art. 4, para. 5.

20 21

M4644-CHAISSE_9781788971898_t.indd 204

11/10/2018 10:22



Investment related provisions of EVFTA 205

to investment; fair and equitable treatment and security to investments; compensation for damage in certain circumstances involving war or armed conflict; ISDS. These provisions create favourable conditions for EU’s investors in Vietnam. The review of Vietnam’s legal framework and EVFTA commitments shows that most of Vietnam’s legal framework is compatible to EVFTA standards on investment liberalization and investment protection. The main differences are in detailed commitments or specific issues under EVFTA. The proposed solution is to establish and promulgate a Suggested Law implementing EVFTA on investment which contains commitments about investment liberalization, investment protection and the mechanism for settlement of investment disputes between the state and foreign investors.

M4644-CHAISSE_9781788971898_t.indd 205

11/10/2018 10:22

Toward an EU-Taiwan Bilateral Investment Treaty

12. Toward an EU-Taiwan bilateral investment treaty: a roadmap Chien-Huei Wu I. INTRODUCTION In its latest trade strategy document, released in 2015, Trade for All, the EU declared that ‘[B]uilding on the investment provisions under negotiation with China, the EU will explore launching negotiations on investment with Hong Kong and Taiwan.’1 Such proposal has been welcomed by Taiwan, but the road toward an EU-Taiwan bilateral investment treatment (BIT) is destined to be long and tortuous. Politically, the EU has, since the establishment of official diplomatic relations with China in 1975, adhered to a ‘One China policy’.2 Whether and how this ‘One China policy’ might impact the shape and substance of a EU-Taiwan BIT is a subject to be explored. This political issue can be expressed in two specific questions. On the EU side, it is doubtful whether the EU would be willing to conclude a BIT with Taiwan before inking an EU-China BIT. On the Taiwan side, the juxtaposition of Taiwan and Hong Kong seems to imply that the EU treats Taiwan and Hong Kong equally, at least from an economic perspective. Whether such a juxtaposition undermines Taiwan’s sovereignty should be carefully examined. Legally, while the EU and Taiwan are both Members of the World Trade Organization (the WTO), they are not active actors in international investment law. Moreover, given that the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) is open for signature only to sovereign states, neither 1   Commission, ‘Trade for All – Towards a More Responsible Trade and Investment Policy’, accessed 04/02/2017, p. 31. 2   For the benefit of clarity, in this chapter, China is referring to the People’s Republic of China (the PRC) and Taiwan is the term used to refer the Republic of China (ROC), which will only used in exceptional cases.

206

M4644-CHAISSE_9781788971898_t.indd 206

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 207

the EU nor Taiwan are contracting parties to this Convention; similarly, the institutional design of the International Centre for the Settlement of Investment Disputes (ICSID) limits its activities to sovereign states, the dispute settlement mechanism of an EU-Taiwan BIT should be thus located in some other forum.3 Would such a design affect the effectiveness of an investment dispute resolution? Additionally, as there are no official diplomatic relations between the EU and Taiwan, how should this EU-Taiwan BIT be signed is also an intriguing question. Would it be done through their respective missions, or are their missions to the WTO an option? In view of these uncertainties, this chapter aims to probe the possible course of the EU-Taiwan BIT negotiations and outline a roadmap. This chapter first portrays current political and economic relations between the EU and Taiwan and then explores the possible form of the envisaged EU-Taiwan BIT by examining such critical issues as the contracting parties, the design of investor-State dispute settlement, the investment court proposal by the EU and the sequence in which the EU might conclude BITs with China and Taiwan.

II. POLITICAL RELATIONS BETWEEN THE EU AND TAIWAN THE POLITICS OF RECOGNITION The relationship between the European Union (and its predecessor, the European Economic Community, the EEC) and Taiwan, or the Republic of China (ROC) has long been troubled, reflecting changes in international relations and dominated by the politics of recognition. Since the defeat of the Nationalist Party (Kuomintang) in the Chinese civil war, followed by its retreat to Taiwan, and the establishment of the PRC in 1949, the two Chinas have been competing for diplomatic recognition, political alliances and membership in the United Nations, in which the PRC displaced the ROC in 1971. This competition is also situated in the broader context of international relations and affected by such events as the Korea War and the Cold War. The UK was one of the first European countries to grant recognition to the PRC, mainly due to its interests in Hong Kong, then still a colony of the UK. The UK recognised the PRC in 1950 and posted a chargé

  See Julien Chaisse and Rahul Donde, ‘The State of Investor-State Arbitration – A Reality Check of the Issues, Trends, and Directions in Asia-Pacific’ (2018) 51(1) The International Lawyer 47–67. 3

M4644-CHAISSE_9781788971898_t.indd 207

11/10/2018 10:22

208

China–European Union investment relationships

d’affaires ad interim in Beijing.4 In contrast, the founding members of the EEC remained cautious for some time. Among the six founding members of the EEC, the Netherlands established diplomatic relations in 1954, followed by France, which under Charles de Gaulle, established diplomatic relations with China in 1964,5 and thus blocked the possibility for establishment of official EU-Taiwan relations in earlier 1960s. In a letter dated 23 July 1963, the Embassy of the ROC in Brussels expressed its desire to establish official relations with the EEC. On 23 October 1963, an agreement was reached between the Council and the Commission of the EEC for the establishment of a mission in Brussels.6 Nonetheless, Taiwan’s early efforts in pursuit of official relations with the EEC turned out to be fruitless. While Taiwan, in accordance with the decision of the Council and Commission to establish an ROC mission in Brussels, sent a diplomat to the EEC, his accreditation was blocked by France, which established diplomatic relationship with the PRC in 1964 and asserted that the EEC could not establish formal diplomatic relations with a country (ROC) which it did not recognise. Whereas delegates of other Member States protested in the Committee of Permanent Representative (COREPER), claiming that France unilaterally required the EEC to align with the French position, the COREPER was not able to iron out the differences among Member States. The outstanding question of accreditation remained unresolved until the EEC decided to establish formal relations with the PRC in 1975.7 The EEC decision came when eight of the nine Member States (Ireland being the exception) had switched recognition to the PRC. The PRC has consistently opposed the concept of ‘two-Chinas’ (in fact, the ROC under the Nationalist Party was also opposed to this idea) and tends to demand that other countries formally state that Taiwan is part of China. However, this stance has achieved only limited success when it comes in dealing with to European countries, which prefer to ‘acknowledge’ or ‘take note’ of China’s position and thus leave it an open question whether or not they endorse China’s claim.8 A similar demand was advanced by the PRC when establish-

  Francoise Mengin, ‘A Functional Relationship: Political Extensions to Europe–Taiwan Economic Ties’ 169 The China Quarterly 136, 137. 5   The Netherlands and China established formal diplomatic relationship at chargé d’affaires level and upgraded to Ambassador level in 1972. 6   Mangin (n4), p. 139; Paul Lim and Sigrid Winkler, ‘The European Union’s relations with the Republic of China (Taiwan)’ in Jens Damm and Paul Lim (eds), European Perspectives on Taiwan (Springer 2012) 173. 7  .1734. 8   Jean Pierre Cabestan, ‘The Taiwan Issue in Europe-China relations’ in David 4

M4644-CHAISSE_9781788971898_t.indd 208

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 209

ing official relations with the EEC in 1975. According to the research of Paul Lim and Sigrid Winkler, the Chinese Foreign Minister at that time, Chiao Kuan-Hua stated to the Vice-President of the European Commission responsible for external relations and chief of the European negotiating team, Sir Christopher Soames, that ‘each country had recognised that the People’s Republic of China was the sole legal government of China; that Taiwan was part of China; and that they would have no official relations with Taiwan’.9 In response, Sir Christopher Soames replied that the ‘Community as such was not a sovereign state and did not recognise or seek to define frontiers.’10 Lim and Winkler thus concluded that he was simply side-stepping the Taiwan issue. However, it appears that they might have been too optimistic. As will be shown below, in the decades since, EU-Taiwan relations have continued to be haunted by the ‘One China policy’.

III. COTTON TEXTILE AGREEMENT AND GENERALISED SYSTEM OF PREFERENCES During this period, there are two issues worth noting. The first relates to an agreement signed by the EEC and ROC in 1970.11 Signing this agreement, Taiwan managed to retain use its official name (la République de Chine) as a contracting party. The agreement is mainly concerned with Taiwan’s commitment to imposing self-restraint over cotton textile exports. Under Article 9, the agreement was to last three years and to begin on 1 October 1970. Three years later, the agreement was not renewed as the relationship between Taiwan and the EEC had come under threat from PRC’s attempts to normalise relations with the EEC. The second issue relates to Taiwan’s potential status of beneficiary country under the EEC’s Generalised System of Preferences (GSP). The GSP finds its legal basis for a waiver decision in the GATT (General Agreement on Tariffs and Trade) upon the recommendation of the United Nations Conference on Trade and Development (UNCTAD) in 1971,12 which was finalised as the

Shambaugh and others (eds), China–Europe Relations: Perception, Policies and Perspectives (Routledge 2008) 85–6.  9   Lim and Winkler (n6) p 175. On the detail of Sir Christopher Soames’ visit to the PRC, see, China and the Community, EC Bulletin 5-1975, 18–19. 10   Lim and Winkler (n6) p. 175. 11   Accord entre la Communauté économique européenne et la république de Chine sur le commerce des textiles de coton, Journal officiel des Communautés européennes, N° L 43 /22, 2. 22. 71. 12   Decision on Generalized System of Preferences (1971 Waiver Decision).

M4644-CHAISSE_9781788971898_t.indd 209

11/10/2018 10:22

210

China–European Union investment relationships

Enabling Clause in 1979.13 In accordance with the 1971 waiver decision, the EEC, at the recommendation of the UNCTAD, adopted its first GSP in 1971. However, Taiwan was unable to benefit from the EEC’s GSP, obviously due to political concerns.14 According to Lim, in 1971, Taiwan expressed its intent to be included in the EEC’s GSP scheme and illustrated the reasons for need. This request was subsequently circulated to all Commissioners. Given the reservations expressed by Member States, the EEC chose to take a pragmatic approach to trade relations with Taiwan. Striking a cynical note, Lim maintains that the EEC did not grant GSP to Taiwan simply because, for the Community, Taiwan did not exist.15

IV. CLOSER ECONOMIC TIES IN THE SHADOW OF ONE CHINA POLICY After severing diplomatic relations, exchanges between Taiwan and European countries were reduced to economic, trade and cultural activities; even in the context of economic, trade and cultural activities, these had only been intensified until 1980s.16 The restoration of contacts between Taiwan and European countries took place through unofficial trade and economic offices, and representative offices with some official functions, such as visa offices and consulates. At the beginning, these offices bore such names as ‘Trade and Investment Office’ or ‘Trade Promotion Office’. With the growth of EU-Taiwan trade and stronger semi-official links, some Member States decided to follow the practice of the US by renaming their delegations as ‘(European) Institutes/Offices in Taipei’. Such examples can be found in British Office Taipei, Bureau Français de Taipei, Das Deutsche Institut Taipei, Austrian Office Taipei, and Belgian Office Taipei. It can be observed that the term Taipei, instead of Taiwan is deliberately chosen for the sake of political sensitivity. There thus still exists slight difference between the European countries’ approaches and the American approach.

  Decision of 28 November 1979 (L/4903).   Christopher M Dent and Debra Johnson, ‘Taiwan-EU Economic Relations: a European Perspective’ 30 EurAmerica 109, 118; Mengin (n4); Lim and Winkler (n6) p. 177. It should also be noted that Taiwan, by contrast, was a beneficiary of the GSP of the US. 15   Paul Joseph Lim, ‘The European Union’s Economic Ties With the Republic of China (Taiwan)’ 27 European Studies 187, 190. 16   See generally, Robert Ash, ‘Economic Relations between Taiwan and Europe’ 169 The China Quarterly 154. 13 14

M4644-CHAISSE_9781788971898_t.indd 210

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 211

Trade Relations between the EU and Taiwan From Far Eastern Trade Service Inc to WTO framework The most significant issue and milestone relating to EU-Taiwan trade relations is Taiwan’s application to the GATT and subsequent WTO membership.17 Acting out of its economic and trade interests, the EU was one of the firmest supporters of Taiwan’s application to the international trade body, while at the same time, it encouraged and welcomed China’s GATT and WTO membership. With both Taiwan and China in the WTO, the EU is untroubled by the ‘one-China policy’ as Taiwan was admitted to the WTO as a separate customs territory. The WTO constitutional feature, which allows separate customs territories to join, conveniently prevents the EU from being trapped in the dilemma between pursuing its economic interests in bringing Taiwan into international trading system and offending China by violating the ‘one-China policy’. However, it should be remembered that a long journey lay before Taiwan en route to joining the WTO. Before that could happen, trade relations between the EEC and Taiwan had to be arranged in one way or another. On 15 October 1971, after Belgium switched its recognition from the ROC to the PRC, Taiwan’s embassy in Belgium was closed. However, some manner of quasi-official contact to deal with economic issues, in particular in the context of trade remedy measures, such as anti-dumping measures, was still needed. For this purpose, the Chinese Cultural Centre (Centre Culturel Chinois) was established on 15 October 1971, and was replaced by the Centre Culturel Sun Yat-sen on 24 February 1972. With the closure of Taiwan’s Embassy to Belgium, the company, Far East Trade Service Inc., was established to take the place of the Economic Division of the Embassy.18 Therefore, for a long time, the Community dealt with Taiwan in the context of trade and economic relations through a private corporation. With the growth of trade and economic relations between Taiwan and European countries, political relations between Taiwan and the Community ameliorated in the 1980s and 1990s. On 23 January 1990, the Economic and Cultural Office of Taipei (Office Economique et Culturel de Taïpei) was established in Brussels, and gradually came to   Sigrid Winkler, ‘A Qestion of Svereignty? The EU’s Policy on Taiwan’s Participation in International Organisations’ 11 Asia Europe Journal 1, 4–6; Sigrid Winkler, ‘Can Trade make a Sovereign? Taiwan–China–EU Relations in the WTO’ 6 Asia Europe Journal 467, 477–83. See also Chien-Huei Wu, WTO and the Greater China: Economic Integration and Dispute Resolution (Martinus Nijhoff Publisher 2012) Ch 1. 18   Lim and Winkler (n6) p. 190. 17

M4644-CHAISSE_9781788971898_t.indd 211

11/10/2018 10:22

212

China–European Union investment relationships

play the role of contact point and to take responsibility for receiving legal notifications from the Community. Far East Trade Service Inc thus ceased to act as the contact point between Taiwan and the Community.19 After Taiwan’s application for WTO membership was finalised at the Doha Ministerial Conference in 2001, trade relations between the EU and Taiwan came to be formally governed under the multilateral framework of the WTO.20 Bilaterally, they can communicate and exchange through the delegations channel of the WTO, so long as the subject matter falls within the scope of trade and economic affairs. For example, following the EU’s enlargement in 2004, the service schedules of central and eastern European countries had to be merged with that of the EU. With this in view, the EU had to negotiate with other WTO members in accordance with Article XXIV:6 and Article XXVIII of the GATT 1994. Such an agreement was reached and concluded through an exchange of letters by the delegations of the European Community and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu.21 In addition, this multilateral setting also contributes to the bilateral relations between the EU and Taiwan, which finally prompted the Council and Commission to decide to establish an Economic and Trade Office in Taiwan in 2003. European Economic and Trade Office in Taiwan When Taiwan joined the WTO in 2002, the time for the EU to establish a delegation in Taiwan had finally arrived.22 Indeed, since the 1990s, the European Parliament (EP) had repeatedly urged the EU to set up a representative office in Taiwan. The Commission declined the EP’s resolution citing the need to wait for Taiwan’s WTO membership and a lack of

  Ibid., p. 194.   Julien Chaisse and Mitsuo Matsushita, ‘Maintaining the WTO’ Supremacy in the International Trade Order – A Proposal to Refine and Revise the Role of the Trade Policy Review Mechanism’ (2013) 16(1) Journal of International Economic Law 9–36. 21   Agreement in the Form of an Exchange of Letters between the European Community and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu pursuant to Article XXIV:6 and Article XXVIII of the General Agreement on Tariffs and Trade (GATT) 1994 relating to the modification of concessions in the schedules of the Czech Republic, the Republic of Estonia, the Republic of Cyprus, the Republic of Latvia, the Republic of Lithuania, the Republic of Hungary, the Republic of Malta, the Republic of Poland, the Republic of Slovenia and the Slovak Republic in the course of their accession to the European Union, OJ L 176/102, 30. 6. 2006. 22   Hungdah Su, ‘The EU’s Taiwan Policy in a New Context’ (2010) 46 Issues & Studies 1, 13. 19 20

M4644-CHAISSE_9781788971898_t.indd 212

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 213

financial and human resources. In 2003, one year after Taiwan’s WTO accession, the EU finally opened its Economic and Trade Office in Taipei. As the name suggests, the delegation is meant only for trade and economic purposes, and does not carry any political and diplomatic implication. Nonetheless, it is not always that easy to separate economic and trade affairs from political and diplomatic issues.23 Trade disputes between the EU and Taiwan With Taiwan’s accession to the WTO and the establishment of the European Economic and Trade Office in Taipei, the management of EU-Taiwan trade relations and trade disputes were channelled through both a multilateral WTO forum and bilateral processes. Two cases are worth noting here illustrating how bilateral channel and multilateral forum work: Phillips Compulsory Licensing and EC–IT products. As will be shown below, the WTO forum serves as a medium for the EU to exercise its threat for Taiwan to change its compulsory licensing decision. If Taiwan chose to not alter its position, a legal complaint would have been sought in the WTO forum.24 On the other hand, the EC–IT Products case illustrates how the equal footing of the EU and Taiwan in the WTO forum contributes to levelling the asymmetry of trade relations between the EU and Taiwan. Before Taiwan joined the WTO, trade defence measures or tariff levies were conducted in a one-sided manner by the EU, and before the establishment of the Economic and Cultural Office of Taipei in Brussels, the legal notifications were received through a private corporation, Far Trade Service Inc. Throug the WTO forum, Taiwan has the ability to counteract EU measures. Phillips Compulsory Licensing  This case relates to the procedures initiated under the Trade Barrier Regulation, following the petition of the Dutch Company, Phillips, on 15 July 2007. This investigative procedure resulted from a decision of Taiwan Intellectual Property Office (TIPO) to grant compulsory licensing on domestic producers in recordable compact disks and rewritable compact disks (CD-RW). According to the report under the Trade Barrier Regulation on this case, it was alleged that Taiwan,25 with its incorrect interpretation of the provisions of the   Lim and Winkler (n6) p. 179.   Han-Wei Liu and Shin-Yi Peng, ‘Managing Trade Conflicts in the ICT Industry: A Case Study of EU–Greater China Area’ 19 Journal of International Economic Law 629, 647–8. 25   Report to the Trade Barriers Regulation Committee (TBR Report), Examination Procedure concerning an obstacle to trade within the meaning of 23 24

M4644-CHAISSE_9781788971898_t.indd 213

11/10/2018 10:22

214

China–European Union investment relationships

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) in combination with its licensing practices, had been using ‘compulsory licensing as an industrial policy instrument, and not as a limited exception to the use of patent rights’.26 This resulted in a grave interference of the free operation of the market. Specifically, the Trade Barrier Regulation report alleged that Article 76 of Patent Act of Taiwan27 was inconsistent with the TRIPS by permitting a compulsory license where a patent owner refused to offer a voluntary licensing to a Taiwanese operator, when the latter had offered to obtain authorisation on ‘reasonable commercial terms and conditions’. According to the Trade Barrier Regulation Report, ‘providing compulsory licences where there is no more than a refusal to licence on reasonable commercial terms and conditions empties the substance out of the exclusive rights granted by a patent and protected by the TRIPs Agreement’.28 The Trade Barrier Regulation further alleges that, even if the TRIPS Agreement permitted compulsory licensing on such ground, the Taiwanese authority, in its examination processes of this case, misinterpreted the notion of ‘reasonable commercial terms and conditions’ as its analysis was based on the situations of individual operators instead of the market.29 In accordance with this TBR Report, the European Commission threatened to file a complaint in the WTO forum. The case was finally settled amicably with Taipei High Administrative Court’s decision to repeal the compulsory licensing of TIPO and with TIPO’s commitment not to appeal.30 EC–IT Products  The above positions were reversed in the EC–IT products case, with Taiwan being the complainant and the EU being the respondent. The scenario shifted from a bilateral relationship to a multilateral setting.

Council Regulation (EC) No 3284/96, consisting of measures adopted by the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu affecting patent protection in respect of recordable compact discs, 30 January 2008 (TBR Report). 26   TBR Report, para. 9 27   The relevant paragraph of the article (renumbered Art. 87) reads as follows: request for compulsory licensing of a patent made pursuant to Subparagraph 1 or 2 of Paragraph 2 may only be approved if the requestor has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions, and that such efforts have not been successful within a reasonable time period.   TBR Report, para. 10.   Ibid., para. 11. 30   Liu and Peng (n24), pp. 646–51. 28 29

M4644-CHAISSE_9781788971898_t.indd 214

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 215

In 2008, Taiwan, in conjunction with the US and Japan, filed a complaint against the EU, alleging that the EU failed to honour its commitments under Ministerial Declaration on Trade in Information Technology Products (ITA) and thus infringed its WTO obligations by failing to grant duty-free treatment to certain information technology products. These products included flat panel display devices (FPDs), set-top boxes which have a communication function (STBCs) and multifunctional digital machines (MFMs).31 The critical issue here was that the products in question constituted IT products and thus fell within the scope of the EU’s commitments under the ITA. The core of this issue related to whether an IT product, with its added function by virtue of technological change, was transformed into a new product and was thus no longer subject to the regulation of the ITA. Or alternatively, did it remain the same IT product and thus was subject to the same tariff classification and therefore enjoyed duty-free treatment arising from the ITA?32 The Panel eventually found in favour of Taiwan and the EU chose not to appeal the case.

V.  THE ROAD TOWARD AN EU-TAIWAN BIT Current Practice of Taiwan’s Investment Promotion and Guarantee Agreements Currently, Taiwan maintains several loosely-defined investment promotion agreements with EU Member States, with limited, if any, legal ­obligations.33 In some cases, Taiwan concluded these investment promotion agreements with State-level governments, such as German Länder and Belgian Region. Given the lack of diplomatic relations between Taiwan and these countries, they were concluded via special designations. There are two approaches with regard to the contracting parties.   Panel Report, EC – IT Products, para. 2.1.   Tsai-Yu Lin, ‘Systemic Reflection on the EC-IT Product Case: Establishing an “Understanding” on Maintaining the Product Coverage of the Current Information Technology Agreement in the Face of Technological Change’ 45 Journal of World Trade 401, 404; Liu and Peng (n24), p. 652. 33   These Member States include Germany, Belgium, Ireland, Czech Republic, Lithuania, Spain; the memorandum between Taiwan and Hungary on investment promotion was terminated in 2011. On Taiwan practices in investment relations, see Chien-Huei Wu, ‘The Many Faces of States in International Investment Law: Supranational Organization, Unrecognized States and Sub-State Entities’ in Shaheeza Lalani and Rodrigo Polanco (eds), The Role of the State in Investor-State Arbitration (Martinus Nijhoff Publishers 2014) 405–29. 31 32

M4644-CHAISSE_9781788971898_t.indd 215

11/10/2018 10:22

216

China–European Union investment relationships

The first approach is agency-to-agency, namely, the investment promotion and protection agency in Taiwan vis-à-vis its European counterparts. An example can be seen in the Agreement of Cooperation between the Industrial Development and Investment Centre in Taipei and the Industrial Development Authority of Ireland on the Promotion of Investments. It is the authority responsible for investment protection and promotion in each country that signs the agreement. Here, it should also be noted that while Ireland uses it official title, Taiwan uses neither its official title, ROC, nor Taiwan, but merely Taipei. This is obviously due to political concerns. The second approach makes use of paired representative offices. An example of the approach can be seen in the Memorandum of Understanding (MoU) on the Promotion of Bilateral Investment and Cooperation in Training Programmes between the Taipei Economic and Cultural Office in Spain and the Spanish Chamber of Commerce in Taipei. As can be seen from the title, the MoU was concluded by Taiwan’s representative office to Spain, and Spain’s representative office to Taiwan. However, it should be noted that at the very beginning of the MoU, Taiwan states that the Taipei Economic and Cultural Office is an official organisation of Taiwan, whereas Spain makes it clear that Spanish Chamber of Commerce in Taipei is ‘a non-profit organization established in Taipei and approved by the Spanish Authorities in accordance with the regulations governing the Spanish Chambers of Commerce abroad’.34 There is a particular case worth noting. The agreement between Taiwan and the Czech Republic refers to Taiwan as Republic of China on Taiwan. Given that the Czech Republic did not maintain diplomatic relations with Taiwan, it is of great symbolic meaning that the agreement refers to Taiwan as the ROC on Taiwan. However, the full title of the agreement retains some features of contradiction in that it refers to Taiwan investment agency as the Industrial Development and Investment Centre Taipei, instead of using the parallel Taiwanese Industrial Development and Investment Centre to Czech Invest (the Czech Agency for Foreign Investment). The Taiwan-Czech investment promotion agreement again points to the inconsistency and ambiguities of Taiwan’s practices in signing investment promotion agreements with European countries, which were largely concluded with flexible and practical means and minimal political implications.

34   Taiwan-Spain MoU, preamble. Whereas some European countries upgraded their delegation to Taiwan and use the names of (European) Institutes/ Offices in Taipei, Spain still retains its delegation as non-official organisation, Spanish Chamber of Commerce in Taipei.

M4644-CHAISSE_9781788971898_t.indd 216

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 217

Regarding the substantive element of the rights and obligations contained in the investment promotion agreements between Taiwan and European countries, it can be said that the agreements set out minimal, if any, legal obligations. For example, the main obligations set out in the Taiwan-Ireland investment promotion agreement are to ‘to exchange information on the investment environment and incentives for the potential investors’;35 ‘to improve business conditions and to offer facilities of favourable conditions themselves’; 36 to ‘encourage and assist its firms to set up production facilities and associated trade’;37 to ‘promote the visits of investment missions between the two parties and take notice to extend cooperation and assistance to visitors’. 38 The obligations are broad and general and do not contain any real hard obligations. In most cases, a cooperating committee or contact point will be established with a view to facilitating exchanges of information. Key Issues in EU-Taiwan Bilateral Investment Agreement How to conclude a BIT with a counterpart you do not recognise As was made clear by the European Commission, the EU maintains a ‘one China policy’ and does not recognise Taiwan.39 Nonetheless, the EU retains trade and economic relations with Taiwan, in particular under the WTO framework which Taiwan joined as a separate customs territory. Therefore, the first question to ask is how to conclude a BIT with a counterpart that one does not recognise politically. As seen from Taiwan’s past practices, there are generally two approaches to the signing of a BIT: agency-to-agency, and representative office-to-representative office. These two models can, of course, shed some light on an EU-Taiwan BIT. Seen in this light, an EU-Taiwan BIT could be concluded agencyto-agency by the Directorate-General Trade in the EU and Ministry of Economic Affairs in Taiwan. This approach may be politically sensitive

  Taiwan-Ireland Investment Promotion Agreement, Art. 1.   Ibid., Art. 2. 37   Ibid., Art. 3. 38   Ibid., Art. 4. 39   According to the official website of the EU: accessed 02/03/2017, it is provided that: 35 36

[f]ollowing the ‘one-China’ policy, the EU does not have diplomatic or formal political relations with Taiwan. However, the EU supports Taiwan’s meaningful participation in multilateral fora, especially where Taiwan’s participation is important to the EU and global interests.

M4644-CHAISSE_9781788971898_t.indd 217

11/10/2018 10:22

218

China–European Union investment relationships

as the official ministries are involved. This approach also differs from the EU’s longstanding practice. Alternatively, the EU-Taiwan BIT might be concluded representative office-to-representative office through the European Economic and Trade Office and the Taipei Representative Office to the EU (and Belgium). This approach would arouse less political controversy and, as both representative offices are official delegations of their capital to foreign countries, there would no difficulties in attributing the legal acts of signing a BIT to the legal subjects.40 A third approach exists which is, in my view, more feasible: the WTO model. A BIT could be concluded by the EU and Taiwan (known as Chinese Taipei in the WTO context) by virtue of their status as members of the WTO. The approach has its virtues, though it is not free from questions. The first virtue of this approach is that it would be free of political controversy as both the EU and Taiwan are WTO members. The EU and Taiwan abide by WTO rules in dealing with trade and economic issues. In fact, the EU, during its enlargement process in 2004, amended its schedules and reached the agreement, in the form of exchange of letters, with Taiwan through their WTO missions.41 Second, the attribution of legal effects is clear and thus contributes to the legal certainty of the EU-Taiwan BIT. However, it may be questioned whether the EU-Taiwan BIT regulates investments and so does not fall under the ambit of the WTO. This argument has a limited degree of force. True, BITs are a distinct form of international agreement and differ from FTAs. However, this does not necessarily lead to the conclusion that investment issues are always distant and separate from trade issues. The most illustrative examples are current trends of FTAs that cover investment chapters. Even under the auspices of the WTO, investments were presented as an agenda to be negotiated during the Singapore Ministerial Conference, subsequently known as Singapore issues. There is thus no compelling reason to argue that investments fall outside the scope of the WTO and the EU-Taiwan BIT cannot be concluded under the WTO framework. Finally, there remains a legal issue to be sorted out: the compatibility of EU-Taiwan BIT with the rule of FTAs as set out for in Article XXVI of the GATT 1994 and Article V of the GATS. Does a BIT concluded by WTO members have to be scrutinised by the WTO law of FTAs? The answer is no. As I argued above, WTO members are not prevented from

  On the difficulties of attribution arising from Taiwan’s particular political status, see, Wu (n33); Liu and Peng (n24), pp. 415–22. 41   See, Agreement in the Form of an Exchange of Letters (n21). 40

M4644-CHAISSE_9781788971898_t.indd 218

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 219

concluding a BIT regulating investment issues as investments can be subject to the purview of the WTO in view of the current WTO negotiations, in particular the Singapore issues, and FTA practices. However, this does not turn a BIT into an FTA. An EU-Taiwan BIT would still be a BIT in nature and the WTO law on FTAs would not apply. Investor-State dispute settlement Investor-State dispute settlement (ISDS) is a controversial issue that attracts tremendous academic and public debates.42 The peculiarities of the EU and Taiwan as a supranational organisation and non-recognised State add additional complications to this issue. It is thus challenging to probe the form and shape of an ISDS designed for an EU-Taiwan BIT. A good starting point are the investment chapters of the EU-Singapore FTA and Taiwan-Singapore FTA given that both Taiwan and the EU have concluded FTAs with an investment chapter with Singapore. In addition, it is worth exploration whether the EU’s proposal of an investment court, as contained in the Canada-EU FTA (CETA) could be translated to the EU-Taiwan BIT. Singapore FTAs as a proxy  To begin with, it should be made clear that both the EU and Taiwan are not contracting parties to the ICSID Convention whereas Member States of the EU are. Therefore, when a dispute is brought against a Member State of the EU, instead of the EU, the ICSID may be the appropriate forum; by contrast, where a dispute is brought against either the EU or Taiwan, the ICSID has no jurisdiction over it.43 With this being taken into account, the ICSID and Additional   See Julien Chaisse and Christian Bellak, ‘Navigating the Expanding Universe of Investment Treaties – Creation and Use of Critical Index’ (2015) 18(1) Journal of International Economic Law 79–115; Julien Chaisse, ‘The Shifting Tectonics of International Investment Law-- Structure and Dynamics of Rules and Arbitration on Foreign Investment in the Asia-Pacific Region’ (2015) 47(3) George Washington International Law Review 563–638. 43   Here, there exists a delicate internal division of competence between the EU and its Member States. The EU-Singapore FTA regulates this issue in Art. 9.15. The guiding principle of the determination of the respondent is that the notice of intent to arbitrate is to be sent to the Union or to Singapore. When the notice of intent to arbitrate is sent to the Union, the Union shall ‘make a determination of the respondent within two months from the date of receipt of the notice’ and inform the claimant (Art. 9.15.2). If no determination is made, the determination of respondents would be conditional upon the treatment identified by the claimant in the notice of intent to arbitrate: being its Member States or the Union. The legal effects of such determination or in case of no determination, the identified treatment leading to either the Union or a Member State act as respondent is that: 42

M4644-CHAISSE_9781788971898_t.indd 219

11/10/2018 10:22

220

China–European Union investment relationships

Facilities listed in the investment chapter of the EU-Singapore FTA may not be of any avail in designing the ISDS of an EU-Taiwan BIT. In the context of EU-Singapore FTA, the ICSID and Additional Facilities are relevant as Singapore and the Member States of the EU are sovereign states and investors of the other party (Singapore or Member States of the EU) may refer to the ICSID or Additional Facilities for arbitration. In the context of the EU-Taiwan BIT, even though Member States of the EU remain sovereign states, the investors of Taiwan or Member States of the EU cannot refer to the ICSID for arbitration since Taiwan is not recognised as a sovereign state under the ICSID Convention. Therefore, the ICSID and Additional Facilities are not an option. Putting aside the ICSID, the EU-Singapore FTA and Taiwan-Singapore FTA explicitly provide two more options: UNCITRAL Arbitration Rules and International Chamber of Commerce (ICC) Arbitration Rules. Both the EU-Singapore FTA and Taiwan-Singapore identify UNCITRAL Arbitration Rules while only the Taiwan-Singapore FTA identifies ICC Arbitration Rules. As regards the enforcement of arbitral awards, both the EU-Singapore FTA and Taiwan-Singapore FTA rely upon the assistance of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention). With a view to ensuring the arbitral awards made under the UNCITRAL Arbitration Rules and ICC Arbitration Rules will be effectively enforced in the territories of the contracting parties to the EU-Singapore FTA and Taiwan-Singapore FTA, both FTAs designated the place for arbitration to be the territory of a State that is contracting party to New York Convention, which in Article 5 obliges contracting parties to recognise and enforce the arbitral award in question unless one or more than one of the specific conditions set out for in this article are satisfied.44 The designation for the arbitration to be seated in the territory of a State that is contracting party to New York Convention thus enhances the perspective recognition and enforcement procedures when the respondent State declines to pay the compensation voluntarily. Investment court  According to the European Commission, the EU is ‘best placed – and has a special responsibility – to lead the reform of the neither the Union nor the Member State concerned shall assert the inadmissibility of a claim, or otherwise assert that a claim or award is unfounded or invalid, on the ground that the proper respondent should be or should have been the Union rather than the Member State or vice versa. (Art. 9.15.4) 44   EU-Singapore FTA, Art. 9.18.11; Taiwan-Singapore FTA, Art. 9.16.7.

M4644-CHAISSE_9781788971898_t.indd 220

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 221

global investment regime, as its founder and main actor’.45 According to the Communication, the first step is to transform ‘the old investor-state dispute settlement into a public Investment Court System composed of a Tribunal of first instance and an Appeal Tribunal operating like traditional courts’46 in EU bilateral agreements. At the same time, the EU will engage with its trading partners with a view to building consensus for a fully-fledged, permanent International Investment Court. In the long run, the EU will encourage and support the incorporation of investment rules into the WTO, which would ‘simplify and update the current web of bilateral agreements to set up a clearer, more legitimate and more inclusive system’.47 This international investment court proposal, a tribunal of first instance and an appeal tribunal, with a view to reaching consistence and coherence and ensuring accountability, is an innovative initiative advanced by the EU and has been put into practice in the CETA insofar as the appellate tribunal is concerned. According to current design of the appellate tribunal as set out in the CETA, it is to review arbitral awards rendered in accordance with the investment section of the CETA. The responsibilities of such an appellate tribunal is provided as follows: The Appellate Tribunal may uphold, modify or reverse a Tribunal’s award based on: (a) errors in the application or interpretation of applicable law; (b) manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law; (c) the grounds set out in Article 52(1) (a) through (e) of the ICSID Convention, in so far as they are not covered by paragraphs (a) and (b). In accordance with this provision, the appellate tribunal has three main responsibilities: to uphold, modify or revise legal errors; manifest factual errors; and the grounds for annulment of arbitral awards as listed in Article 52(1) of the ICSID Convention.48 The designation of appellate   Trade for All, para. 4.12. See also Chaisse and Donde (n3).   Trade for All, para. 4.12. 47  Ibid. 48   Art. 52(1) of the ICSID reads as follows: 45 46

[e]ither party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member

M4644-CHAISSE_9781788971898_t.indd 221

11/10/2018 10:22

222

China–European Union investment relationships

tribunal in the CETA partially reflects the direction put forward in the Trade for All communication in establishing a permanent international investment court. Moreover, the practice between the EU and Canada, according to Article 8.29 of the CETA is to be translated into wider acceptance with the efforts to establish a multilateral investment tribunal and appellate mechanism. Upon the establishment of such a multilateral mechanism, the investment disputes arising from CETA should be referred to this forum with a decision adopted by the CETA Joint Committee providing appropriate arrangements. As instructed by this provision, the EU and Canada agree to ‘pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes’.49 Therefore, it is feasible to explore whether such practices with respect to an appellate investment court could be transplanted to the EU-Taiwan BIT. Such a question is not unfounded as Taiwan has limited BIT experience and no model BIT template, so the EU may have the upper hand in shaping the substance of the EU-Taiwan BIT. From Taiwan’s perspective, it is also feasible to support the permanent international investment court proposal as long as this new institution includes such non-conventional investment actors as the EU and Taiwan. Taiwan would able to overcome its institutional disadvantage arising from the prejudice embedded in the ISCID system. Moreover, a long-term plan to incorporate investment issues into the WTO should also be welcome by Taiwan since the WTO is, to date, one of the few international organisations in which Taiwan enjoys full membership; that potential should be fully exploited. China first, Taiwan second?  Finally, one may have to reflect whether ‘One-China Policy’ will impact the course or timeline of EU-Taiwan BIT in ways. As argued above, the EU and Taiwan can conclude their BIT using one of three different approaches, regardless of the lack of an official relationship. However, it is not entirely clear whether, from a policy perspective, the EU is willing to conclude a BIT with Taiwan before it concludes one with China. Such doubt finds some support in the passage cited above in Trade for All communication. As the passage suggests, the launch of investment negotiations between the EU and Hong Kong and

of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based. 49   CETA, Art. 8.29.

M4644-CHAISSE_9781788971898_t.indd 222

11/10/2018 10:22



Toward an EU-Taiwan Bilateral Investment Treaty 223

Taiwan are to be built on the investment provisions under negotiation with China. This reminds again us the legacy of the WTO model. According to 1992 GATT Chairman statement: [T]he Council should give full consideration to all views expressed, in particular that the Council should examine the report of the Working Party on China and adopt the Protocol for the PRC’s accession before examining the report and adopting the Protocol for Chinese Taipei, while noting that the working party reports should be examined independently.50

In the end, Taiwan joined the WTO one day after China. It is thus interesting to approach WTO sequencing in the context of the EU’s BIT negotiations with Taiwan. Is it feasible or possible for the EU to conclude a BIT with Taiwan before it does so with China? Simply put, it is a matter of politics and depends entirely on political will. However, we should be mindful of the limits of WTO sequencing, and in particular take account of the 1992 General Council meeting, in which some Contracting Parties did not necessarily agree to the ‘China first, Taiwan second’ sequence. In practical terms, Taiwan would not be happy to see its BIT negotiations with the EU delayed by the rate of progress of the EU-China BIT. From the EU’s perspective, parallel EU-Taiwan BIT negotiations and their potential early conclusion might provide some impetus to move the EU-China BIT forward.

VI. CONCLUSION This chapter reviewed the political and economic relations between the EU and Taiwan and probed the possible shape of the envisaged EU-Taiwan BIT. This chapter found that whereas the EU, in the context of high politics of recognition, opts for ‘one China policy’ and does not maintain diplomatic relations with Taiwan, practical needs arising from trade and economic exchanges were be satisfied in various ways. For some time, it was channelled through private corporations and subsequently with the intensification of economic ties between the EU and Taiwan, it was

50   GATT, Minutes of Meeting – Held in the Centre William Rappard on 4–5 November 1992 (27 October 1992) C/M/259 4. It should be noted that in the 1992 Chairman statement, some Contracting Parties to the GATT voiced their reservation on the sequence of accession. See further, Chien-Huei Wu, WTO and the Greater China: Economic Integration and Dispute Resolution (Martinus Nijhoff Publisher 2012) Ch 1, pp. 13–14.

M4644-CHAISSE_9781788971898_t.indd 223

11/10/2018 10:22

224

China–European Union investment relationships

carried out by semi-official delegations of Taiwan and European countries to their counterparts. Taiwan’s accession to the WTO in this context marks a milestone in that the WTO provides a forum for Taiwan to join as separate customs territory. The EU in this way can pursue its economic interests in supporting Taiwan’s accession without sidestepping the ‘one China policy’. With Taiwan’s accession to the WTO finalised, it provides another impetus for the EU to establish a trade and economic office in Taiwan. These multilateral WTO forum and bilateral exchange provide a good channel for the EU and Taiwan to mange their trade relations and resolved trade disputes. Regarding the envisaged EU-Taiwan BIT, this chapter examined three possible approaches for the EU and Taiwan to conclude it: agency-toagency; delegation-to-delegation and WTO model. This chapter argues that the EU and Taiwan can take advantage of their WTO memberships in pursuing this BIT and that a BIT can be concluded under the WTO framework in view of the recent FTAs containing investment chapters and the WTO’s attempt to address investments in Singapore issues. At the same time, the chapter argues that the conclusion of the EU-Taiwan BIT through the WTO missions does not change its nature of being an investment treaty and is not subject to the challenge or scrutiny of Article XXIV of the GATT 1994. This chapter argues that Taiwan should welcome the EU’s proposal for investment court and should support the EU’s long-term aim to bring investments into the ambit of the WTO. For the time being, investor-State arbitration may be conducted under the UNCITRAL or ICC auspices. Finally, this chapter agues that the sequence of China’s and Taiwan’s accessions to the WTO should not set the precedence for the EU to sign a BIT with these two countries. The earlier conclusion of the EU-Taiwan BIT can present additional impetus for the EU-China BIT.

M4644-CHAISSE_9781788971898_t.indd 224

11/10/2018 10:22

PART III

From investor-state arbitration to a permanent investment court?

M4644-CHAISSE_9781788971898_t.indd 225

11/10/2018 10:22

13. How much of a court? The EU investment court system as a hybrid mechanism Joanna Jemielniak*

1

I. INTRODUCTION Arbitration, the most widespread mechanism of resolving investor-state disputes, has enjoyed remarkable success worldwide, but has also in recent years met with critical opinions. The non-transparent character of arbitration (considered detrimental to public interest), suggested pro-investor bias, fragmented character of case law, as well as such phenomena as forum shopping and parallel proceedings have been pointed to as disadvantages of the existing investor-state dispute settlement (ISDS) regime. They have also been debated as arguments in favour of introducing consolidated court-like mechanisms for resolution of investment disputes. Recently, the concept of establishing a permanent adjudicatory body for investor-state disputes has become very close to political fulfilment. The European Commission has endorsed the introduction of a permanent, court-like mechanism for investment disputes in several Free Trade Agreements (FTAs). A two-tier Investment Court System (ICS) has been accepted in the European Union’s (EU) FTA with Vietnam (EVFTA) and in the  Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. In 2015, the European Commission also officially announced and widely publicized an analogical proposal for the – ­currently stalled – negotiations of the mega-regional Transatlantic Trade and Investment Partnership (TTIP) agreement with the US. Reopening of the – already closed – negotiations of the EU-Singapore FTA in order to include the ICS, has also been indicated. This widely publicized EU ICS project has been presented as a court, to be further promoted in forthcoming EU FTA negotiations, and

*  all websites cited in the chapter were live as at 1 August 2018. 226

M4644-CHAISSE_9781788971898_t.indd 226

11/10/2018 10:22



How much of a court? 227

­ ulti-lateralized in the future. It has also been introduced to the general m public in opposition to the existing ISDS regime and as an original response to its shortcomings.1 This chapter examines, to what extent such a characterization of the ICS is justified. For this purpose, the historical context of investor-state dispute resolution is explored. In particular, former proposals of establishment of a permanent adjudicatory body in this area are examined. Against this background, public discourse on ICS is analysed in order to present the goals of the project and its aimed direction of development. The chapter then turns to specific procedural and institutional features of the ICS, which are decisive for its characterization as a court. This part of the analysis includes comments on transparency standards and third-party participation (highlighted by the European Commission communications as crucial in the ICS design). Composition of adjudicatory bodies and the status of adjudicators are then considered as an area of judicialization. This part of the chapter is followed by a discussion of procedural framework of the ICS and of the status of rulings, with particular focus on their enforceability. Finally, concluding remarks are offered.

II. HISTORICAL PROPOSALS OF COURT-LIKE MECHANISMS The first projects of creating a judicial body to resolve investment disputes were raised in the 1940s and 1950s.2 While some of these efforts can be characterized as advanced (such as the 1948 proposal of Arbitral Tribunal for Foreign Investment and of the Foreign Investment Court, with the statute prepared under the auspices of the International Law Association3), they were not successful, mostly because of the averse stance of the host states, affected by ongoing decolonization processes.4 The failure to create a multilateral forum for resolution of investment

1   See Julien Chaisse and Rahul Donde, ‘The State of Investor-State Arbitration – A Reality Check of the Issues, Trends, and Directions in Asia-Pacific’ (2018) 51(1) The International Lawyer 47–67. 2   Kate Miles, The Origins of International Investment Law: Empire, Environment and the Safeguarding of Capital (Cambridge University Press 2013) 85. 3   International Law Association, Draft Statute of the Arbitral Tribunal for Foreign Investment and the Foreign Investment Court (reprinted in UNCTAD, International Code 1948). 4   See Miles supra note 2 at 85.

M4644-CHAISSE_9781788971898_t.indd 227

11/10/2018 10:22

228

China–European Union investment relationships

disputes had induced capital-exporting states to seek relevant means of legal protection through bilateral negotiations and treaties, with arbitration adopted as a default mechanism. As a result, the field of investor-state disputes has been for decades dominated by arbitration, leading to mixed reactions by the commentators. The transparency deficits of this system, and the ensuing insufficient social legitimacy have been among the most commonly invoked points of criticism,5 along with the issues of forum shopping and parallel proceedings,6 as well as the incoherence of case law7 and suggested pro-investor bias.8 Many of these concerns have been addressed already to a different degree within the field of investor-state arbitration.9 They have also been, however, postulated to be resolved through a more substantial change of the system, through an introduction of a permanent, court-like mechanism. A revival of the early idea of an international investment court has led to a formation of two streams in legal doctrine. One of them, adopting a reformatory stance, seeks to retain the existing investment arbitration regime, to be further supplemented with a permanent appellate body. Another one aims at replacing investor-state arbitration with a court-like system, enshrined either in a one-tier judicial mechanism, or in a two-tier one (consisting of a first instance tribunal and an appellate body). The advocates of the reformist approach have pointed to the lack of significant, political will among the main stakeholders to resign from investment arbitration. Its continuous appearance in investment treaties serves as an evidence that ‘at least in the eyes of the users of the system, arbitration is not a fundamentally flawed model’.10 Supplementation of   See the discussion on Part VI infra.   See Greg Tereposky and Laura Nielsen, ‘Coordinated Actions in International Economic Law as Illustrated by Investment Treaty Arbitration and World Trade Organization (WTO) Disputes’, in Joanna Jemielniak and others (eds) Establishing Judicial Authority in International Economic Law (2016).  7   See G. Harten, Investment Treaty Arbitration and Public Law (2007) 164–5. Evidence to the contrary has been presented by Günes Ünüvar, Transformation of International Investment Law and Politics – Interplay between Interpretation, Application, and Policy-Making (2016) University of Copenhagen.  8   See Harten, ibid. at 172–3. Cf. William W. Park, ‘Arbitrator Integrity: The Transient and the Permanent’, (2009) 46 San Diego L. Rev. 629, 658–61; Schreuer, ‘Investment Arbitration’, in Romano, Alter and Shany (eds) The Oxford Handbook of International Adjudication (2013) 314.  9   Shai Dothan and Joanna Jemielniak, A Paradigm Shift? Arbitration and Court-Like Mechanisms in Investors’ Disputes (2017). forthcoming 10   Jonathan Ketcheson, ‘Investment Arbitration: Learning from Experience’, in Steffen Hindelang and Markus Krajewski (eds), Shifting Paradigms in International Investment Law: More Balanced, Less Isolated, Increasingly Diversified (2016) 110.  5  6

M4644-CHAISSE_9781788971898_t.indd 228

11/10/2018 10:22



How much of a court? 229

this model with an appellate body is thus an option much more feasible than its full replacement with a court-like system, which would still secure proper representation of public interest and safeguard consistency of jurisprudence.11 It could also aim at including the UNCITRAL Rules on Transparency into investment agreements already in force,12 as well as implement relevant ethical rules of conduct. Whereas most commentators would see the appellate body authorized to review awards issued by investment tribunals, there have also been proposals of expansive delineation of its jurisdiction, so as to encompass both: investment and commercial arbitral awards issued in those cases in which the issues of public interest were decided.13 Many commentators have been, however, doubtful about the prospects of a successful reform of the existing ISDS system and criticized the arbitration-based regime as intrinsically inadequate to the demands of public law adjudication. As a consequence, they have postulated its replacement with a permanent investment court, equipped with a number of independence safeguards (including the adjudicators’ tenure).14 Many  of such proposals have been directly inspired by the World Trade Organization (WTO) Dispute Settlement Mechanism (DSM), in particular the WTO Appellate Body (AB). In the opinion of its proponents the, so created institution could function either as a chamber of the International Court of Justice (as in Asif Qureshi’s project of the Supreme Investment Court)15 or as a separate institution.16 As Mark Wu notes, the popularity of the proposals for a permanent multilateral investment tribunal patterned after the WTO AB was particularly high in early 2000s, and then declined due to lack of political

11   See Susan D. Franck, ‘The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law Through Inconsistent Decisions’, (2005) 73 Fordham Law Review 1; Cf. Andreas Bucher, ‘Is There a Need to Establish a Permanent Reviewing Body?’, in Emmanuel Gaillard (ed.), The Review of International Arbitral Awards (2008) 285. 12  Ketcheson supra note 10 at 112 and ff. 13   See Kun Fan, ‘Expansion of Arbitral Subject Matter: New Topics and New Areas of Law’, in Stavros Brekoulakis and others (eds), The Evolution and Future of International Arbitration (2016) 318. 14   Gus Van Harten, Investment Treaty Arbitration and Public Law (2008) 180–81; Gus Van Harten, A Case for an International Investment Court (2008). 15   See Asif H Qureshi, ‘An Appellate System in International Investment Arbitration?’, in Peter Muchlinski and others (eds), The Oxford Handbook of International Investment Law (2008) 1165 and ff. 16   See Barton Legum, ‘Visualizing an Appellate System’, in Federico Ortino and others (eds), Investment Treaty Law: Current Issues (2006).

M4644-CHAISSE_9781788971898_t.indd 229

11/10/2018 10:22

230

China–European Union investment relationships

support, but also because of deep structural differences between the trade and investment regimes.17 The current, scattered character of ISDS is directly connected to the fragmented character of substantive investment law, which consists of hundreds of treaties. Even if a single, permanent adjudicatory body for investment cases was created, the task of establishing a coherent body of jurisprudence by applying so deeply diversified substantive rules would be highly demanding in comparison with the analogical role of the WTO AB (which applies an aggregate set of the WTO agreements).18 These reservations can be revisited in the context of the ICS project, currently promoted by the EU. Among numerous doctrinal proposals raised since the 1940s and mentioned above, it is a unique one in a sense of actual political backing: it may be the first such project which will find an institutional form. It is also worth noticing that this proposal has not been presented as a ‘grand universal project’,19 but as an attempt to introduce a consolidated dispute resolution system through creeping multi-lateralization. The ICS is thus introduced in negotiations of separate agreements with different EU partners, with an option of having the – so established – institutions merged in the future. Such an approach, if successful, can thus perhaps lead to a creation of a regional adjudicatory mechanism. Its truly multilateral outreach as a globally shared standard remains, however, at present highly speculative.

III. ICS AS THE EUROPEAN MODEL OF MULTI-LATERALIZATION Up to the present, the ICS provisions have been successfully introduced into already concluded negotiations of two agreements. First of them is the EVFTA, with the text published on February 2016 and the instrument being directed to legal review, translations and formal presentation to the

17   See Mark Wu, ‘The Scope and Limits of Trade’s Influence in Shaping the Evolving International Investment Regime’, in Zachary Douglas and others (eds), The Foundations of International Investment Law: Bringing Theory into Practice (2014) 184–5. 18   Michael Schneider, ‘Does the WTO Confirm the Need for a More General Appellate System in Investment Disputes?’, in Federico Ortino and others (eds) Investment Treaty Law: Current Issues (2006) 103 and ff. Donald McRae, ‘The WTO Appellate Body: A Model for an ICSID Appeals Facility?’, (2010) 1 Journal of International Dispute Settlement. 19   Dothan and Jemielniak supra note 9.

M4644-CHAISSE_9781788971898_t.indd 230

11/10/2018 10:22



How much of a court? 231

Council of Ministers for approval and for ratification by the European Parliament.20 The second is CETA, which was approved by the European Parliament on February 15, 2017 and in a large part provisionally entered into force in April 2017 (until ratification processes in Canada and the EU Member States will be completed).21 Notably, the rules on ICS have been excluded from the provisional entry into force. This decision was officially justified by the need to properly acquaint the general public with this novel mechanism: [s]ince the Investment Court System (ICS) is a new issue in trade agreements and the public debate on it is not finished in many countries, the choice of EU Member States – supported by the Commission – is that ICS will be out of the scope of the provisional application of CETA. This means that it will only be implemented once all Member States conclude their national ratification procedures.22

If it successfully entered into force, CETA would indeed form a threshold point for establishing a new standard for investor-state dispute resolution for several reasons. While its status as a mega-regional agreement is somewhat debatable, the joint size and trading capacity of the partners’ economies is remarkable; once implemented, the impact of the CETA ICS would be thus unprecedented. CETA partners are developed states, which also may facilitate acceptance of the dispute resolution system diverging from the standard, arbitration-based solutions. Furthermore, ICS was also formally proposed in 2015 by the European Commission for inclusion into the Transatlantic Trade and Investment Partnership  (TTIP) with the US.23 Negotiations of this agreement have been stalled after the assumption of the office by the US president Donald Trump in January 2017. Another 2017 development, pointing to the EU’s interest in promoting the ICS, is the announcement of a possible reopening of the – already successfully closed – negotiations of the EU-Singapore FTA in order to change the mechanism for investor-state dispute resolution from arbitration to the court-like system.24 This decision has opened the floor for discussion whether the EU indeed intends to create separately  http://ec.europa.eu/trade/policy/countries-and-regions/countries/vietnam/.  http://ec.europa.eu/trade/policy/in-focus/ceta/. 22  Ibid. 23   Commission draft text: Transatlantic Trade and Investment Partnership. Trade in Services, Investment and E-Commerce. Chapter II—Investment. http:// trade.ec.europa.eu/doclib/docs/2015/september/tradoc_153807.pdf. 24  Bilaterals.org, EU makes big step toward setting investor court as global norm., http://bilaterals.org/?eu-makes-big-step-toward-setting&lang=en. 20 21

M4644-CHAISSE_9781788971898_t.indd 231

11/10/2018 10:22

232

China–European Union investment relationships

operating court-like mechanisms under different agreements, and only later to attempt to merge them into a multilateral institution (which the formulation of the CETA and EVFTA provisions suggests) – or whether it would rather seek to reach a critical mass of several successfully concluded FTAs and establish a consolidated ICS ab initio. The second scenario would require serious readjustments and harmonization of the appointment and tenure terms of the members of tribunals (which already differ under the CETA and the EVFTA). It is, however, possible to see mechanisms introduced under specific treaties further merged as chambers of the future, single institution. The communication ‘Trade for All: Towards a More Responsible Trade and Investment Policy’25 from October 2015 sheds some light on the intentions the European Commission in regard to the creation of a permanent, multilateral investment dispute resolution system. This document declares that the Commission shall work towards including the ICS provisions in bilateral agreements, but also: ‘in parallel, engage with partners to build consensus for a fully-fledged, permanent International Investment Court’.26 A similar stance has been presented by the Commission during the public consultation on investor-state dispute resolution in TTIP, which was organized in 2014.27 The Commission, in a press release of November 12, 2015, regarding the TTIP negotiations, further clarified that: [t]he objective is to, over time, replace all investment dispute resolution mechanisms in EU agreements, in EU Member States’ agreements with third countries, and trade and investment treaties concluded between non-EU countries, with the International Investment Court. This would lead to the full replacement of the ‘old ISDS’ mechanism (. . .).28

The European Commission has also officially, firmly declared its intention to proliferate the ICS in its upcoming, as well as already pending negotiations. As the European Commission’s Inception Impact Assessment paper of August 1, 201629 informs, provisions introducing the discussed

  .   Ibid., at 21–2. 27   Online public consultation on investment protection and investor-to-state dispute settlement (ISDS) in the Transatlantic Trade and Investment Partnership Agreement (TTIP), . 28   . 29   ‘Establishment of a Multilateral Investment Court for investment dispute resolution’, . 25 26

M4644-CHAISSE_9781788971898_t.indd 232

11/10/2018 10:22



How much of a court? 233

dispute resolution mechanism will be proposed in trade and investment negotiations, as well as in the new investment agreements between the EU Member States with third countries, entered into upon the authorization of Regulation No EU 1219/2012 of 20 December 2012. As the cited instrument discloses, court-like systems, analogical to the tribunals embedded in CETA and EVFTA, shall be promoted in negotiations conducted, among others, with China, Myanmar, Tunisia, Morocco, Japan, Philippines, and Mexico. They should also be proposed in the intended negotiations with Indonesia, Australia, New Zealand, and Chile.30

IV. PRESENTATION OF THE ICS PROJECT AS FULFILLMENT OF THE EU POLICY OF TRANSPARENCY The ICS has been consistently characterized in various European Commission communications and press releases as a remedy to the transparency deficits of the existing ISDS regime. This is a direct consequence of the formulation of the main objectives of the EU’s investment policy, following the entry into force of the Treaty of Lisbon in December 2009. The Treaty endowed the EU with exclusive competence in common commercial policy, including the negotiation of investment and trade agreements (transferred from the EU Member States). In July 2010 the European Commission published a communication ‘Towards a comprehensive European international investment policy’, which set the main goals of the EU in the discussed area in accordance with the Treaty.31 Pertaining problems with transparency in investment dispute resolution were identified by the Commission in the communication as ‘main challenges’ to be addressed. As a result, the Commission declared that: In line with the EU’s approach in the WTO, the EU should ensure that investor-state dispute settlement is conducted in a transparent manner (including requests for arbitration, submissions, open hearings, amicus curiae briefs and publication of awards).32

This line of reasoning has been presented and further developed in the following negotiations and public discussion of the EU FTAs as one   Ibid. at 3.   European Commission, ‘Towards a comprehensive European international investment policy’, . 32   Ibid. at 10. 30 31

M4644-CHAISSE_9781788971898_t.indd 233

11/10/2018 10:22

234

China–European Union investment relationships

of the key advantages of the new European approach to investor-state dispute resolution, expressed in the ICS model. ‘Full transparency in investment dispute settlement proceedings’ has been emphasized as one of the key points in the public factsheet regarding investment protection provisions in CETA.33 In all negotiations in which the ICS project has been officially forwarded so far, provisions on transparency have been included. Whereas such explicit addressing of transparency concerns deserves to be appreciated, it also raises a question to what extent the solutions promoted in the ‘new wave’ EU FTAs indeed differ from the status quo of the existing ISDS regime (which, as indicated above, has undergone quite a notable evolution in this regard). This issue is discussed in the following part of the article.

V. TRANSPARENCY AND NON-PARTY PARTICIPATION IN ICS Transparency standards adopted in CETA are directly based on the UNCITRAL model. The key provision of CETA, Article 8.36 (‘Transparency of Proceedings’), declares explicitly that ‘[t]he UNCITRAL Rules on Transparency, as modified by this Chapter, shall apply in connection with proceedings under this Section’.34 This reliance on an external instrument, drafted for arbitral proceedings (from which the European Commission distances itself so clearly in the context of the ICS project) is notable. It is further reinforced and expanded in the following provisions. In particular, the list of documents which are by default available to the public under Article 3(1) of the UNCITRAL Rules on Transparency Article 3(1), is extended by virtue of Article 8.36(2) of CETA. The UNCITRAL standard derestricts: the notice of arbitration, the response to the notice of arbitration, the statement of claim, the statement of defence and any further written statements or written submissions by any disputing party; a table listing all exhibits to the aforesaid documents and to expert reports and witness statements, if such table has been prepared for the proceedings, but not the exhibits themselves; any written submissions by the non-disputing Party (or Parties) to the treaty and by third persons, transcripts of hearings, where available; and orders, decisions and awards of the arbitral tribunal.   , p. 5. 34   CETA, Art. 8.36(1). 33

M4644-CHAISSE_9781788971898_t.indd 234

11/10/2018 10:22



How much of a court? 235

Article 8.36(2) of CETA adds to this list: [t]he request for consultations, the notice requesting a determination of the respondent, the notice of determination of the respondent, the agreement to mediate, the notice of intent to challenge a Member of the Tribunal, the decision on challenge to a Member of the Tribunal and the request for consolidation.35

This extension acknowledges the specific character of the identity of the respondent (on the European side) under CETA, as it may be either a Member State or the entire European Union.36 The enlisted documents must be, pursuant to CETA Article 8.36(4), made public ‘in a timely manner’, before the constitution of the tribunal addressing the dispute. It is worth noticing that data related to identification of the parties, such as their names, economic sector involved, and the treaty under which the claim is posed, are public under Article 2 of the UNCITRAL Rules on Transparency. CETA Article 8.36(4) provides that, notwithstanding Article 2 of the UNCITRAL Rules on Transparency, documents derestricted under CETA Article 8.36(2) are ‘subject to the redaction of confidential or protected information’.37 Performance of derestriction of expert reports and witness statements under the UNCITRAL Rules on Transparency is broadened by CETA Article 8.36(3) so as to be exercised upon request by any person to the arbitral tribunal.38 Under CETA Article 8.36(5) the hearings ‘shall be open to the public’,39 which resembles the wording of Article 6(1) of the UNCITRAL Rules on Transparency. The cited CETA provision further establishes the duty of the tribunal to arrange ‘in consultation with the disputing parties, the appropriate logistical arrangements to facilitate public access to such hearings’. The exception, related to protection of confidential or protected information, is confirmed, and the tribunal is authorized to keep private parts of the hearing where such information is disclosed.40 In regard to confidential and protected information, the key provisions  Ibid.   Joanna Jemielniak and Günes Ünüvar, ‘Participatory Aspects of InvestorState Dispute Settlement in the EU ‘New Wave’Trade Agreements’, iCourts Working Paper Series (2016) 13. In the context of CETA Art. 8.21 on the Determination of the respondent for disputes with the European Union or its Member States. 37   Ibid., Art. 2. 38   UNCITRAL Transparency Rules, Art. 3(2). 39   CETA, Art. 8.36(5). 40  Ibid. 35 36

M4644-CHAISSE_9781788971898_t.indd 235

11/10/2018 10:22

236

China–European Union investment relationships

are included in Article 7 of the UNCITRAL Rules on Transparency (Exceptions to Transparency). Article 7(2) defines confidential or protected information as confidential business information; informa­ tion that is protected under the treaty; information protected under the domestic law; and information the disclosure of which would impede law enforcement.41 It should be noted that the tribunal has been vested with the powers of determination whether information is confidential or protected after consultation with the parties (Art. 7(3)). However, under Article 7(5), the states are entitled to not allowing for disclosure of any information which they would deem contrary to their essential security interests. This competence has been interpreted as remarkably limiting discretionary powers of the tribunal regarding the determination of the status of information in question. Pursuant to Article 7(7) of the UNCITRAL Rules on Transparency, the tribunal also may – either sua sponte or upon the application by a party – restrain publication of information which: would jeopardize the integrity of the arbitral process because it could hamper the collection or production of evidence, lead to the intimidation of witnesses, lawyers acting for disputing parties or members of the arbitral tribunal, or in comparably exceptional circumstances.42

Finally, CETA Article 8.36(6) establishes the respondent’s obligation to follow relevant domestic laws on disclosure of information to the public, CETA provisions notwithstanding. It also expresses a duty of the respondent to apply these laws ‘in a manner sensitive to protecting from disclosure information that has been designated as confidential or protected’.43 Another key issue in the sphere of procedural transparency, which CETA addresses, is the status of third persons and non-disputing parties. CETA Article 8.3844 establishes relevant rights of the actors in in connection with Article 4 and Article 5 of the UNCITRAL Rules on Transparency, which regulate submissions by third persons and submissions by non-disputing parties to the treaty respectively. In particular, the tribunal shall ascertain whether the non-disputant has demonstrated significant interest in the proceedings and to what extent the submission would be helpful in determination of a factual or legal issue by reaching beyond the material already being offered by the parties. CETA Article 8.38 further elaborates on documents which shall be  Ibid.   Ibid., Art. 7(7). 43   Ibid., Art 8.36(6). 44   Ibid., Art. 8.38. 41 42

M4644-CHAISSE_9781788971898_t.indd 236

11/10/2018 10:22



How much of a court? 237

delivered to non-disputing parties without their request (a request for consultations, a notice requesting a determination of the respondent, a notice of determination of the respondent, a claim submitted pursuant to Article 8.23, a request for consolidation, and any other documents that are appended to such documents) and upon their request (pleadings, memorials, briefs, requests and other submissions by a disputing party; written submissions made pursuant to Article 4 of the UNCITRAL Rules on Transparency; minutes or transcripts of hearings; and orders, awards and decisions of the tribunal). Moreover, upon request and at the cost of the non-disputing party, all or part of the evidence that has been tendered to the tribunal shall be presented to the non-disputant unless the requested evidence is publicly available (Art. 8.38(1)(c)). Similar solutions in regard to transparency have been adopted in the EVFTA. Analogically to CETA Article 8.36, EVFTA Article 20 stipulates that the UNCITRAL Rules on Transparency shall be applied to disputes brought under the treaty.45 The effect of EVFTA transparency provisions is thus similar to those in CETA, as their interpretation shall take place along with the UNCITRAL Rules on Transparency. As in CETA Article 8.36(2), also EVFTA Article 20(2) expands the list of documents, which shall be made available to the public, provided in Article 3(1) of the UNCITRAL Rules on Transparency. The added types of documents in both treaties include the request for consultations, the notice of challenge against an arbitrator, and the decision on such challenge. Article 3(3) of the UNCITRAL Rules on Transparency and EVFTA Article 20(3) address the issue of further extension of the list derestricted documents and endow the tribunal with relevant powers. The wording of both provisions is almost identical. UNCITRAL Rules on Transparency Article 3(3) in fine provides, however, for the possibility of making documents publicized by the decision of the tribunal available, for example, at a specified site; whereas EVFTA Article 20(3) notices in the final sentence the possibility of inclusion of exhibits into such category. Furthermore, EVFTA Article 20(6) introduces a review procedure in regard to decisions made under paragraph 3. It also provides for the possibility of replacement of EVFTA Article 20(3) by Article 3(3) of the UNCITRAL Rules on Transparency upon a request by a party and following the review under EVFTA.46 The exception from the obligation of the parties to promptly transmit the documents to the non-disputing party and to make them publicly available, regarding confidential or protected information, is reinstated

  EVFTA, Art. 20.   UNCITRAL Transparency Rules, Art. 3(3).

45 46

M4644-CHAISSE_9781788971898_t.indd 237

11/10/2018 10:22

238

China–European Union investment relationships

in EVFTA Article 20(4). In the explanatory footnote to this provision the list of documents, categorized as containing such information, offered by the UNCITRAL Rules on Transparency, is notably expanded to include ‘classified government information’.47 Furthermore, the disclosure of ‘any protected information where the disputing party that provided the information clearly designates it as such’ is explicitly prohibited by EVFTA Article 20(7).48 In regard to rights of non-disputing parties, the solutions adopted in EVFTA also strongly resemble those provided by CETA. Under EVFTA Article 25, analogically to CETA, documents available to non-disputants are categorized as those accessible by default, and those available upon request. In the first category requests for consultations, determination of the respondent party (either the EU and an EU Member State), and submissions of claims are enlisted. Documents disclosed upon request include ‘any documents that are made available to the public in accordance with Article 20 (Transparency of Proceedings)’.49 Finally, even though the TTIP negotiations are currently in hiatus and their future seems highly uncertain, it is also worth to review provisions of the draft Chapter II (‘Investment’), proposed for this agreement by the European Commission in 2015. This document, while not officially negotiated, is interesting as a presentation of a purely European approach, not affected by the stance of its partner. Transparency issues are addressed in the proposal in Section 3, Article 18 in a manner which highly resembles CETA and EVFTA. UNCITRAL Rules on Transparency are incorporated into dispute resolution procedures to be conducted under TTIP (with modifications offered by the Proposal).50 The list of documents provided for by CETA Article 8.36(2) is largely repeated by TTIP Proposal Article 18(2), with the addition of ‘all documents submitted to and issued by the Appeal Tribunal’ to the list.51 Similarly, the wording of Article 18(3) of the proposal is analogical to CETA Article 36(3) (the main difference is an explicit inclusion of exhibits). TTIP Proposal, Article 18(4), like CETA Article 8.36(4), provides that derestricted documents shall be made available in a timely manner, but it does not establish that this obligation shall be fulfilled prior to the constitution of the tribunal. Finally, in regard to the status of non-disputing parties, the standards offered by Article 22

    49   50   51   47 48

EVFTA, Art. 20(4). Ibid., Art. 20(7). Ibid., Art. 25. TTIP Proposal, Art. 18. Ibid., Art. 18(2).

M4644-CHAISSE_9781788971898_t.indd 238

11/10/2018 10:22



How much of a court? 239

of the TTIP Proposal virtually do not diverge from relevant provisions of CETA.52

VI.  COMPOSITION OF ADJUDICATORY BODIES In terms of institutional design, the solutions adopted in CETA and in the EVFTA (as well as in the TTIP proposal) are ‘broadly similar’, as they are ‘centered on the establishment of a tribunal of first instance and a built-in appellate tribunal’.53 The first instance tribunal under the discussed instruments shall consist in equal parts of nationals of the EU Member States, of nationals of Canada, Vietnam or the US, and of nationals of third countries. The members of the tribunal will be elected by a joint committee and appointed for a fixed term, the length of which, as discussed below, varies in the analysed agreements. They can also be re-elected once.54 The tribunal will hear the cases in divisions of three members, with a national of a third country always chairing the division.55 Upon a consent by the disputants, a case can also be decided by a sole member of the tribunal, appointed from among the third-country nationals.56 The impartiality and independence of the adjudicators shall be enhanced by a ‘random and unpredictable’ allocation of the cases among divisions composed on a rotational basis by the decision of the president of the ­tribunal.57 Despite these signals of judicialization, some features of the new mechanisms indicate their limited institutional autonomy. In particular, they have not been equipped with their own secretariats. As discussed in detail below, for CETA tribunals relevant functions will be fulfilled by the ICSID Secretariat,58 whereas analogical decisions have not been made in EVFTA and in the TTIP Proposal.59 Rulings rendered by the first instance tribunal can be reviewed by the appeal tribunal (AT), in divisions of three members. The AT can uphold,   Ibid., Art. 22.   Gabrielle Kaufmann-Kohler and Michele Potestà, ‘Can the Mauritius Convention serve as a model for the reform of investor-State arbitration in connection with the introduction of a permanent investment tribunal or an appeal mechanism?’, CIDS Research Paper (2016) 24. 54   CETA, Art. 8.27; EU-Vietnam FTA, Art. 12, TTIP Proposal, Art. 9. 55   CETA, Art. 8.27.6; EU-Vietnam FTA, Art. 12(6), TTIP Proposal, Art. 9.6. 56   CETA Art. 8.27(9); EU-Vietnam FTA, Art. 12(9), TTIP Proposal, Art. 9.9. 57   CETA, Art. 8.27.7; EVFTA, Art. 12(7), TTIP Proposal, Art. 9.7. 58   CETA, Art. 8.27.16. 59   EVFTA Art. 12(18), TTIP Proposal, Art. 9.16. 52 53

M4644-CHAISSE_9781788971898_t.indd 239

11/10/2018 10:22

240

China–European Union investment relationships

modify or remand an award. Under the EVFTA,60 the tribunal shall consist of six members, whereas the number of the CETA AT members will be decided by the joint committee of the parties.61 The joint committees under both agreements will also appoint the members of the AT.62 Analogical solution has also been adopted in the TTIP Proposal.63 The quasi-judicial character of the examined solutions can also be seen in the status of adjudicators. In particular, their appointment is permanent, and their tenure has been determined as four years (in EVFTA), five years (in CETA), and as six years (in the TTIP proposal). These differences can thus pose a potential problem for the plans of consolidation of the discussed adjudicatory systems into a uniform, multilateral mechanism. Furthermore, the members of the tribunals are subject to a number of ethical rules, and their independence shall be guarded by a formal code of conduct.64 They are prevented from combining the roles of a member of the tribunal and a counsel.65 Appearance of conflict of interest may lead to their challenge.66 Failure to comply with their duties may also result in removal of an adjudicator from his or her office.67 The discussed ICS instruments also introduce a number of formal requirements, to be fulfilled by the candidates for members of the tribunals, analogically to the existing international courts.68 Judicialization of the role of adjudicators in ICS, as an important goal of the agreement, can also be seen in official statements and documents accompanying CETA. In particular, expeditious development of the standards for adjudicators have been announced in the Joint Interpretative Instrument to CETA of October 27, 2016,69 where the parties have   EVFTA Art. 13(2).   CETA, Arts 8.28.3 and 8.23(7)(f). 62   CETA, Art. 8.28.3; EVFTA, Art. 13(3). 63   TTIP Proposal, Art. 10.3. 64   CETA, Arts 8.30.1 and 8.44.2; EU-Vietnam FTA, Art. 14(1) and Annex II; TTIP Proposal, Art. 11.1 and Annex II. 65   CETA, Art. 8.30.1; EU-Vietnam FTA, Art. 14(1); TTIP Proposal, Ch 2, Art. 11.1. 66   CETA, Art. 8.30.2-3; EU-Vietnam FTA, Art. 14(2)–(4); TTIP Proposal, Ch 2, Art. 11.2-4. 67   3 CETA, Ar. 8.30.4; EU-Vietnam FTA, Art. 14(5). 68   CETA, Arts 8.27.4 and 8.28.4; EU-Vietnam FTA, Arts 14(1) and 13(7); TTIP Proposal, Ch 2, Arts 9.4 and 10.7. 69   Joint Interpretative Instrument on the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union and its Member States, . 60 61

M4644-CHAISSE_9781788971898_t.indd 240

11/10/2018 10:22



How much of a court? 241

announced that they will ‘begin immediately further work on a code of conduct to further ensure the impartiality of the members of the Tribunals’.70 As noted by Guillaume Van der Loo in the commentary to the Joint Interpretative Instrument,71 the explicit intention to develop the rules regarding ICS adjudicators before entry into force of the agreement is in fact the only truly innovative element added to CETA and included in the instrument. Besides guidelines of conduct aimed at the members of the tribunals, the parties shall also specify the method and level of their remuneration, and the process for their selection.72 The decisive joint declaration in this regard, expressed in the instrument, can be thus seen as a point of special focus of the CETA parties. It has also been further elaborated in the statement by the European Council and the European Commission, characterized by Van der Loo (along with the intra-Belgian declaration addressing the Walloon controversy) as one of the two most important among the 38 statements and declarations of the EU Member States and institutions, which accompanied the issuance of the Joint Interpretative Document. The discussed statement by the Council and the Commission: repeats the wording on the ICS in the Joint Interpretative Instrument, but adds several elements. It states that the Commission will further review the ICS in order to improve the selection criteria and ethical codes of the ICS judges. For example, there will be a rigorous process for selecting all judges with the aim of guaranteeing the judges’ independence and impartiality, as well as the highest degree of competence. Candidates to become European judges must be nominated by the member states, which will also participate in the assessment of candidates.73

As demonstrated by the CETA example, the emphasis on safeguarding impartiality and establishment of fixed, uniform criteria of selection of the members of the tribunals is thus strongly present in the official discourse on ICS. The announced introduction of a ‘hard’ code of conduct and prevention of double-hatting by adjudicators can also be interpreted as a move away from the ‘soft’ code of conduct for ISDS arbitrators, stipulated for in the EU-Singapore FTA74. It is however worth noticing

  Ibid., p. 6.   Guillaume Van der Loo, CETA’s signature: 38 statements, a joint interpretative instrument and an uncertain future. CEPS Commentary, 31 October 2016 (2016) 2. 72  Ibid. 73   Ibid., p. 3. 74   cf. Gus Van Harten, ‘The European Union’s Emerging Approach to ISDS: 70 71

M4644-CHAISSE_9781788971898_t.indd 241

11/10/2018 10:22

242

China–European Union investment relationships

that the latter provisions can be subject to further change if the negotiations of the agreement were reopened in order to include ICS, as indicated supra.

VII. PROCEDURAL FRAMEWORK AND STATUS OF RULINGS The status and enforceability of rulings issued by the discussed tribunals remains one of the most debated issues of the ICS. As indicated supra, functioning of the system shall be based on a non-uniform body of procedural rules. Pursuant to CETA, Article 8.23.2; and EVFTA, Article 7(2), claims can be submitted under the ICSID Convention and Arbitration Rules, the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules or any other rules agreed by the parties. In case of lack of such agreement within 30 days from receipt of relevant proposal as to the set of rules, presented by the claimant, the claimant is entitled to file a claim under any of the rules listed above.75 The issue of administration of the proceedings has not been regulated by EVFTA, and according to the negotiators’ note to Article 12(18) shall be further decided in the process of legal scrubbing as provided either by the ICSID Secretariat or by the secretariat of the Permanent Court of Arbitration. Similar wording has been adopted in the TTIP Proposal, Article 9(16). Under CETA, The ICSID Secretariat shall act as secretariat for the tribunal. Adoption of such a solution can be seen as indicative of lack of fully independent institutional standing of the discussed mechanisms, as opposed to fully fledged international courts and tribunals. The analysed instruments label rulings of the tribunals as awards, and their enforceability between the contracting parties has been carefully, albeit not completely non-controversially regulated.76 In particular, the effects of rulings on third parties have been subject of a debate. Article 8.41(6) of CETA stipulates that an award issued by a tribunal established pursuant to the ICSID Convention ‘shall qualify as an award under section 6 of the ICSID Convention’. A ruling rendered under other sets of a Review of the Canada-Europe CETA, Europe-Singapore FTA, and EuropeVietnam FTA’, (2016) 1 University of Bologna Law Review (2016) 145. 75   CETA, Art. 8.23.3; EVFTA, Art. 7(2)(d). 76   cf. August Reinisch, ‘Will the EU’s Proposal Concerning an Investment Court System for CETA and TTIP Lead to Enforceable Awards?—the limits of modifying the ICSID Convention and the nature of investment arbitration’, (2016) 19(4) Journal of International Economic Law 761–86.

M4644-CHAISSE_9781788971898_t.indd 242

11/10/2018 10:22



How much of a court? 243

procedural rules is, according to Article 8.41.5 treated as arbitral award, that is deemed to ‘relate to claims arising out of a commercial relationship or transaction for the purposes of Article I of the New York Convention’. Analogical enforcement regime has been adopted in EVFTA (Art. 31), with a reservation of a transitional period of five years. During this period recognition and enforcement of all awards resulting from a dispute where Vietnam is the respondent shall take place on the basis of the New York Convention.77 The rulings of CETA and EVFTA Tribunals are subject to appeal on the grounds stipulated in Article 52 of the ICSID Convention, and for errors in the application or interpretation of applicable law and for manifest errors in the establishment of the facts, including the establishment of relevant domestic law. The appeal tribunal may decide to uphold, modify or reverse, as well as remand an award. According to Article 54 of the ICSID Convention, all the contracting parties of the Convention (and not just the parties to the ICSID ­arbitration) are obligated to: ‘recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State’. Such a selection of the legal ground under the CETA suggests that drafters of the agreement aimed at securing high enforceability for the awards. However, as argued by August Reinisch, the attempted qualification of CETA rulings as ICSID awards does not necessarily have to be shared by other contracting parties of the Convention. The ICS provisions, enshrined in CETA, may be interpreted as a ‘permissible inter se modification of the ICSID Convention pursuant to Article 41 VCLT’.78 However, as Reinisch demonstrates, ‘[p]ermissible inter se agreements under general treaty law remain inter se agreements, i.e. agreements modifications binding the modifying partners only’.79 The hybrid character of the ICS, combining elements of a permanent court and arbitration, raises doubts as to the qualification of rulings as awards, and, as a consequence, as to their enforceability either pursuant the ICSID Convention, or the New York Convention. The existing case law regarding other hybrid bodies seems to confirm that such acknowledgement is highly probable; it is however not certain. In particular, the experience of the Iran-US Claims Tribunal shall be considered. The rulings of the tribunal were recognized and enforced in

  EVFTA, Art. 31(3).  Reinisch supra note 76, 785. 79  Ibid. 77 78

M4644-CHAISSE_9781788971898_t.indd 243

11/10/2018 10:22

244

China–European Union investment relationships

third countries, albeit not without controversies. The English High Court in Dallal v Bank Mellat did not acknowledge existence of a valid arbitration agreement under the law of the Netherlands (the seat of the tribunal). As a consequence, the court did not find grounds for application of the New York Convention as a basis for enforcement of the decision. It was, however, enforced by the court on the grounds of international comity.80 Another disputable issue raised in the context of hybrid bodies is that of their independence. This might seem somewhat paradoxical, as in the public debate on the ICS regime, increase of independence (in comparison with investor-state arbitration) has been a commonly raised argument, following a well-established line of doctrinal criticism, directed towards ISDS.81 However, there have also been voices pointing to the new system as diminishing influence of investors as parties to the proceedings.82 Unlike in arbitration, in case of the ICS mechanisms, the members of the tribunals are solely appointed and reimbursed by the states; it is also the states that retain decisive influence over the rules of procedure applied in dispute resolution. Arguments to this effect, putting in question impartiality and procedural fairness of proceedings have been raised in regard to the Court of Arbitration for Sports (CAS) in Elmar Gundel v Fédération Equestrian International.83 In this case the Swiss Federal Court stated that CAS at that time did not fulfil all conditions for adjudicatory independence. The court considered such elements as the fact that the International Olympic Committee (which can also be a party before CAS) could amend the Statute of CAS, and that it was bearing its operating costs and playing a considerable role in the appointment of the members of CAS.84 Despite these reservations, the court acknowledged CAS as sufficiently autonomous and its awards have been found enforceable, but the discussed case law has led to a major reorganization of this institution.85 As the discussed case law demonstrates, enforceability of the ICS rulings in third countries, and their status as arbitral awards may be potentially put into question.

80   England and Wales, Court of Appeal, 26 July 1985 Dallal v Bank Mellat, in [1986] 1 QB 441. 81   cf. Charles N Brower and Stephen W Schill, ‘Is Arbitration a Threat or a Boom to the Legitimacy of International Investment Law’, (2008) 9 Chi. J. Int’l L. 1. 82  Ibid. 83   Swiss Federal Court, 15 March 1993, Gundel v Fédération Equestre Internationale, in BGE 119 II S. 271. 84  Ibid., p. 280. 85   Cf. Lorenzo Casini, ‘The Making of a Lex Sportiva by the Court of Arbitration for Sport’, in Lex Sportiva: What is Sports Law? (2012).

M4644-CHAISSE_9781788971898_t.indd 244

11/10/2018 10:22



How much of a court? 245

VIII. CONCLUSION Examination of the historical context, as well as analysis of the provisions of CETA, EVFTA and of the TTIP Proposal does not allow for ­qualification of the ICS as a fully developed international court. From the doctrinal point of view, the EU project belongs to a long line of proposals of establishment of a permanent adjudicatory body for investment disputes, aimed at replacing the ISDS regime. Its novelty thus lies not in the conceptual originality, but in the feasibility of this initiative: for the first time in decades a plan to create a permanent adjudicatory body for investor-state disputes may become reality. A scale of success of this initiative remains uncertain and will largely depend upon securing ­sufficient support from EU partners in further (or – as in case of Singapore – reopened) FTA negotiations. In terms of institutional and procedural design, the key characteristics of the ICS do not offer sufficient grounds for classifying the system as a court-type one. Whereas transparency and publicity of proceedings before the ICS tribunals have been widely publicized as differentiating them from investor-state arbitration, standards adopted in the discussed instruments in these two areas are largely based on the UNCITRAL Rules on Transparency. CETA, EVFTA and the TTIP Proposal thus incorporate the existing ISDS standards with a few modifications. As a consequence, the change in this regard in comparison with arbitration cannot be seen as substantial. In the sphere of composition of adjudicatory bodies and their ­institutional design, ICS introduces the – long postulated in legal doctrine – tenure of adjudicators, personal and professional qualifications to be fulfilled by them (similar to those demanded in existing international courts), and ethical requirements related to exercising the function of a member of a tribunal (to be expanded in the future code of conduct). All these components can be classified as court-like, and indicative of judicialization of dispute resolution in the ICS. It is however worth noticing that the character of appointments, which in the context of tenure has been indicated as safeguarding adjudicatory independence and neutrality, in opinion of some commentators may diminish the ability of the tribunal to preserve equal footing towards the disputants (as, unlike in arbitration, it is only the states, and not also investors, who shall have influence on the composition of the body deciding their cases). 86

86   Dispute Resolution in M&A/JV Transactions (Roundtable: Challenges and Future of Investment Arbitration). Warsaw, 28–29 May 2015.

M4644-CHAISSE_9781788971898_t.indd 245

11/10/2018 10:22

246

China–European Union investment relationships

These reservations are also noteworthy in the context of the status and, in particular, enforceability of rulings. The drafters of CETA and EVFTA clearly aimed at qualification of the ICS rulings as arbitral awards in order to secure their enforceability either under the ICSID Convention or under the New York Convention. While decidedly practical, such a solution offers yet another argument against the judicial character of the ICS. Its effectiveness may also prove to be limited in regard to enforcement of rulings in third countries, as jurisprudence related to case law of other, not purely arbitral institutions (Iran-US Claims Tribunal and CAS) demonstrates. While announced as a response to criticism surrounding investor-state arbitration, and as a mechanism diametrically different from ISDS, ICS in fact shares a number of key features with ISDS. It has adopted its regulatory framework of arbitration, as well as seeks to utilize its institutional design (as can be seen in the lack of own secretariat and reliance on ICSID in this regard). All these elements suggest that ICS is indeed a hybrid regime, retaining many of significant characteristics of arbitration.

M4644-CHAISSE_9781788971898_t.indd 246

11/10/2018 10:22

14. The inclusion of investment court system into the EU-China CAI: innovations, prospects and problems Chi-Chung Kao I. INTRODUCTION In November 2013 the launch of negotiations for an EU-China bilateral investment agreement (EU-China BIA) was announced at the 16th EU-China Summit and the first round of talks began in January 2014.1 The EU and China are two of the biggest economies in the world; in terms of trade in goods and services, EU and China are among top trading partners with each other, trading more than 1 billion euro per day.2 However, with respect to foreign direct investment (FDI), merely 2 to 3 per cent of European FDI flows into China, whilst Chinese investments in the EU accounts for an even lower percentage of its overall investments abroad.3 Once the EU-China BIA is concluded, one can expect restrictions regarding investments to be lifted and access to market further widened in both directions. As agreed by the G20 countries, access to effective mechanisms for the settlement of disputes between investors and host states is one of the key issues concerning investment protection.4 Therefore investor-state dispute 1   European Commission, ‘Press release: EU and China begin investment talks’ (2014) 1, available at accessed on May 7, 2018. 2  Ibid. 3   Ibid. See also Julien Chaisse, ‘Promises and Pitfalls of the European Union Policy on Foreign Investment – How Will the New EU Competence on FDI Affect the Emerging Global Regime’ (2012) 15(1) Journal of International Economic Law 51–84. 4   James Zhan, ‘G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective’ The E15 Initiative (2016) 4-5, available at accessed on May 7, 2018.

247

M4644-CHAISSE_9781788971898_t.indd 247

11/10/2018 10:22

248

China–European Union investment relationships

s­ ettlement (ISDS) is a crucial element in the EU-China BIA. Past treaty practice suggests that ISDS procedures usually contain investor-state arbitration as a last resort; disputes not settled amicably might be submitted to arbitration administered by the International Center for Settlement of Investment Disputes (ICSID) established by the Convention on Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), or other arbitration institutions; arbitration may also be conducted ad hoc in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL Arbitration Rules). Despite its prevalence, investor-state arbitration has faced severe criticisms, such as arbitrators being biased in favour of investors, arbitral proceedings lacking transparency, and arbitral awards imposing a chilling effect on state regulatory power over public interests. Responding to such criticisms, EU in late 2015 proposed an Investment Court System (ICS) to improve investorstate arbitration; the ICS is intended to be incorporated in all ongoing and future investment treaty negotiations, including the Transatlantic Trade and Investment Partnership (TTIP) between the EU and the US.5 In other two recently negotiated agreements, namely, the Comprehensive Economic and Trade Agreement between Canada and the EU (CETA),6 and the Free Trade Agreement between the EU and Vietnam (EU-Vietnam FTA),7 mechanisms similar to the ICS have also been ­included.8 For the convenience

  European Commission, ‘Press release: Commission proposes new Investment Court System for TTIP and other EU trade and investment negotiations’ (2015) 1, available at accessed on May 7, 2018. The EU’s negotiating text of the TTIP, referred hereinafter, is as of November 2015 < http://trade.ec.europa.eu/doclib/docs/2015/november/ tradoc_153955.pdf> accessed on May 7, 2018. See also Julien Chaisse and Rahul Donde, ‘The State of Investor-State Arbitration – A Reality Check of the Issues, Trends, and Directions in Asia-Pacific’ (2018) 51(1) The International Lawyer 47–67. 6   CETA has been concluded by the EU and Canada on 30 October 2016 and is pending approvals of the European Parliament and Parliaments of EU Member States as of January 2017. See European Commission, ‘In Focus: CETA’ available at accessed on May 7, 2018. The text of the CETA referred hereinafter is the concluded version available at accessed on May 7, 2018. 7   The EU-Vietnam FTA is pending legal revision and ratification as of January 2017. See European Commission, ‘News Archive: EU-Vietnam FTA: Agreed Text as of January 2016’ (2016) 1, available at accessed on May 7, 2018.  8   In the EU-Vietnam FTA, it is called the ‘Investment Tribunal System.’ See EU-Vietnam FTA, Chapter 8: Trade in Services, Investment and E-Commerce, 5

M4644-CHAISSE_9781788971898_t.indd 248

11/10/2018 10:22



The inclusion of investment court system 249

of discussion, this chapter uses the term ‘ICS’ collectively to encompass the relevant provisions of the EU’s proposed text of TTIP, the CETA, and the EU-Vietnam FTA, unless mentioned specifically.9 The ICS contains certain procedural innovations as compared to past treaty practice. First of all, the ICS is designed as a two-tier system, consisting of a tribunal of first instance (TFI) and an appellate tribunal (AT).10 Secondly, the TFI and AT are comprised of arbitrators appointed  by special committee with fixed terms of office,11 whilst individual cases are to be heard by divisions consisting of arbitrators appointed by the head of the tribunals.12 Thirdly, transparency is enhanced in the ICS proceedings with the mandatory application (with modification) of the UNCITRAL Transparency Rules.13 Finally, the adoption of ‘loser pays all costs’ principle serves to deter unfounded or frivolous claims.14 Chapter II: Investment (Investment Chapter of EU-Vietnam FTA), Section 3, sub-section 4.  9   As of late 2016, TTIP negotiations seemed to come to a halt. Aleksandra Eriksson, ‘EU admits “unrealistic” to close TTIP deal this year’ EU Observer (Brussels, 2016) 1, available at accessed on May 7, 2018. 10   CETA, art 8.28.1; Investment Chapter of EU-Vietnam FTA, Section 3, art 13.1; the EU’s TTIP proposal, Trade in Services, Investment and E-Commerce, Chapter II – Investment (Investment Chapter of TTIP), Section 3, art 10.1. 11   CETA, art 8.27.2-5; Investment Chapter of EU-Vietnam FTA, Section 3, arts 12.2-5, 13.2-5; Investment Chapter of TTIP, Section 3, arts 9.3-5, 10.2-5. Although the text of the Agreements does not use the term ‘arbitrator’ (under the ECTA and the EU-Vietnam FTA the term ‘Members of the Tribunal’ is used, whilst the term ‘Judges’ is used in the TTIP), the wording of certain provisions indicates the resemblance of the ICS proceedings to arbitration. For example, under the CETA, dispute may be submitted under specific arbitration rules (CETA, art 8.23.2); the respondent consents in writing to the settlement of dispute by the ICS, as required by Article 25 of the ICSID Convention and art II of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) (CETA, art 8.25); the UNCITRAL Rules on Transparency in Treatybased Investor-State Arbitration (UNCITRAL Transparency Rules) is applicable to the ICS proceedings (CETA, art 8.36.1); final award issued by the tribunals of the ICS is deemed to fall with the scope of the New York Convention (CETA, art 8.41.5). Accordingly, this paper considers the ICS proceedings as arbitral proceedings in essence, and uses the term ‘arbitrator’ when referring to the adjudicators under the ICS. 12   CETA, art.8.27.6-7; Investment Chapter of EU-Vietnam FTA, Section 3, arts 12.6-7, 13.8-9; Investment Chapter of TTIP, Section 3, arts 9.6-7, 10.8-9. 13   CETA, art 8.36.1; Investment Chapter of EU-Vietnam FTA, Section 3, art 20.1; Investment Chapter of TTIP, Section 3, art 18.1. 14   CETA, arts 8.32, 8.33, 8.39.5.

M4644-CHAISSE_9781788971898_t.indd 249

11/10/2018 10:22

250

China–European Union investment relationships

By mid-January 2016, the development of the EU-China BIA has entered into the phase of specific text-based negotiations.15 Considering the proximity in time between the introduction of the ICS and the negotiations of the EU-China BIA, as well as the EU’s commitment to implement ICS in all ongoing treaty negotiations, it is highly likely that EU will bring out the ICS at the negotiating table. If the ICS is included in the EU-China BIA, it would signalize a new direction for future practice of ISDS. It is therefore necessary for the second part of this chapter to discuss the procedural innovations of the ICS. Based on the findings of the second part, the third part will analyse the prospects of China’s acceptance of the ICS. The fourth part will deal with the rules concerning the pre-selection of arbitrators that this chapter considered as problematic.

II. THE MAIN PROCEDURAL FEATURES OF THE ICS Under most circumstances, investment-state arbitration proceeds for one instance only. An award made by the tribunal on the merits of the dispute is final and binding on the parties and not subject to appeal. Generally speaking, the finality of the awards has predominance over the correctness of the awards.16 Review of the awards is not completely barred, but only allowed under exceptional and limited grounds. For ICSID arbitration, an award may only be challenged in accordance with the ICSID’s internal annulment procedure,17 which merely deals with serious procedural irregularity of the award.18 For non-ICSID proceedings, the common practice to challenge an award and to resist its enforcement is to initiate proceedings in domestic courts to set aside the award.19 In this regard, the UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law), on which many jurisdictions have

15   European Commission, ‘News Archive: EU and China agree on scope of the future investment deal’ (2016) 1, available at accessed on May 7, 2018. 16   Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 300. 17   ICSID Convention, art 53(1). 18   Ibid., art 52(1). See also Dolzer and Schreuer (n 16) p. 302. 19   Dolzer and Schreuer, ibid., p. 300. See also Nigel Blackaby and others, Redfern and Hunter on International Arbitration (5th edn, OUP 2009) 591; Gary B Born, International Arbitration: Law and Practice (Wolters Kluwer 2012) 438.

M4644-CHAISSE_9781788971898_t.indd 250

11/10/2018 10:22



The inclusion of investment court system 251

their ­arbitration legislation modelled,20 provides limited instances for setting aside an award; the grounds include the invalidity of the arbitration agreement, lack of proper notice of the arbitral proceedings, a decision in the award beyond the scope of submission to arbitration, improper composition of the arbitral tribunal, the subject matter not capable of settlement by arbitration under the law of the seat, as well as the award in conflict with the public policy of the seat.21 Substantive issues such as wrongful application of law or mistake of facts do not fall within the scope of review for both ICSID and non-ICSID awards. Contrarily, the ICS provides for a full-scale appellate procedure. For example, under the CETA, a disputing party is allowed to appeal an award of the TFI to the AT on the ground that the TFI has erred in the interpretation or application of the applicable law; that the TFI has manifestly erred in the finding of facts (including the appreciation of relevant domestic law);22 grounds for annulment under Article 52 of the ICSID Convention are also incorporated by reference.23 This appellate procedure aims at not only curing an award’s procedural irregularity, but also correcting its substantive errors. An advantage of the appellate mechanism is that, by allowing the decision of the TFI to be challenged on the substantive grounds, judicial control over legal correctness of the award could be improved; in particular, because of the AT’s competency to rectify erroneous interpretation or application of law or facts made by the lower tribunal, consistency of the interpretation of treaty provisions (at least under the same BIA) could be significantly enhanced, which in turn increases the overall predictability of the results of investor-state arbitration. such changes might gradually reduce the general public’s distrust, and ultimately rebuild their confidence in and acceptability towards ISDS. With regard to the appointment of arbitrators and composition of tribunals, the general principle is to have arbitrators appointed by the disputing parties, unless the parties agreed otherwise. Under the ICS the   As of January 2018, legislation based on the UNCITRAL Model Law has been adopted in 78 states in a total of 109 jurisdictions. See UNCITRAL, ‘Status: UNCITRAL Model Law on International Commercial Arbitration (1985), with amendments as adopted in 2006’, available at accessed 19 January 2018. 21   UNCITRAL Model Law, art 34(2). Note that under the UNCITRAL Model Law setting aside is the only remedy available against an arbitral award. UNCITRAL Model Law, art 34(1). 22   CETA, art 8.28.2.(a), (b) 23   Ibid., art 8.28.2.(c). 20

M4644-CHAISSE_9781788971898_t.indd 251

11/10/2018 10:22

252

China–European Union investment relationships

rules are different. Take CETA for example, the TFI is comprised of 15 arbitrators, including five nationals of the Member States of the EU, five nationals of Canada, and five nationals of third countries. These arbitrators are installed by the CETA Joint Committee upon the entry into force of the CETA.24 The pre-installed arbitrators will hold their office for a fixed term, renewable once.25 The TFI will have a President, appointed by the same Committee from among the five arbitrators of third-country nationality.26 The TFI will hear individual cases in divisions consisting of three arbitrators, of whom one shall be a national of an EU Member State, one national of Canada, and one from a third country; the arbitrators serving in the divisions will be appointed by the President of the TFI on a rotation basis; only the arbitrator from the third country can chair the division.27 The disputing parties may also agree to have their case heard by a sole arbitrator of third-country nationality; the sole arbitrator shall also be appointed by the President.28 For the AT, the methods concerning composition and appointment of the arbitrators are similar.29 Under the ICS it is for a special Committee to preselect the arbitrators and appoint the President of the TFI/AT, and for the President to appoint arbitrators sitting in individual divisions. Given the fact that such a Committee is to consist of government officials representing the Contracting States to the treaty,30 the arbitrators hearing individual cases are essentially appointed by the Contracting States indirectly via the President of the TFI/ AT. This new approach deprives the investors of their right to appoint

  Ibid., art 8.27.2.   Ibid., art 8.27.5. 26   Ibid., art 8.27.8. 27   Ibid., art 8.27.6. 28   Ibid., art 8.27.9. It is emphasized that, ‘the respondent shall give sympathetic consideration to such a request from the claimant, in particular where the claimant is a small or medium-sized enterprise or the compensation or damages claimed are relatively low.’ CETA, art 8.27.9. Clearly this is out of the considerations to lessen a small- or medium-sized enterprise (SME) claimant’s financial burden, and to draw a balance between the cost of arbitral proceedings and the awarded compensation or damages. 29   Ibid., arts 8.28.3-5, 8.28.7.(f). 30   For example, under the EU-Vietnam FTA, it is the trade committee that is in charge of appointing the arbitrators. See Investment Chapter of EU-Vietnam FTA, Section 3, arts 12(2), 34(2)(a). The Trade Committee under the EU-Vietnam FTA comprises government officials representing EU and Vietnam respectively. See Chapter 17 of the EU-Vietnam FTA, art 17.1. Similarly, the CETA Joint Committee is empowered to appoint the arbitrators. See CETA, art 8.27.2. The CETA Joint Committee also consists of government representatives of the EU and Canada respectively. See CETA, art 26.1.1. 24 25

M4644-CHAISSE_9781788971898_t.indd 252

11/10/2018 10:22



The inclusion of investment court system 253

arbitrator. One possible advantage is that, the composition process under the ICS is more simplified and streamlined, thus more efficient than the constitution of arbitral tribunal in conventional investor-state arbitration. Procedural transparency has been one of the focuses regarding how investor-state arbitration should be reformed. The UNCITRAL Transparency Rules is an example of the international endeavours to address the transparency issues. However, the applicability of the UNCITRAL Transparency Rules is conditional, depending on factors such as the date of conclusion of a specific treaty, the application of the UNCITRA Arbitration Rules, or the agreement by the disputing parties.31 The ICS, however, provides for mandatory and unconditional application of UNCITRAL Transparency Rules.32 Pursuant to the UNCITRAL Transparency Rules, transparency issues in ISDS is addressed in the following aspects: first, the public is granted access to arbitration-related information, including documents prepared by and exchanged between the disputing parties, and document made by the tribunal.33 Expert reports and witness statements are also available to the public.34 Furthermore, the arbitral tribunal may decide whether and how to make available exhibits and any other documents.35 The disclosure of the above information is with exceptions to protect confidential or sensitive information, as well as the integrity of the proceedings; accordingly, the tribunal has the power to make necessary arrangements to prevent, restrict, or delay the disclosure of such information.36 Secondly, under the requirement that the arbitral proceedings not being disrupted or unduly burdened, or that the disputing parties not being unfairly prejudiced,37 third parties may be allowed to submit written statements relating to matters in the dispute,38 whilst non-disputing parties to the treaty may be permitted to submit statements on issue of treaty interpretations.39 The written submissions must comply with certain formality requirements, such as the third person’s self-description, disclosure of connection with any disputing party, the third person’s interest in the

  UNCITRAL Transparency Rules, arts 1.1, 1.2.   CETA, art 8.36.1; Investment Chapter of EU-Vietnam FTA, Section 3, art 20.1; Investment Chapter of TTIP, Section 3, art 18.1. 33   UNCITRAL Transparency Rules, arts 2, 3.1. 34   Ibid., art 3.2. 35   Ibid., art 3.3. 36   Ibid., art 7. 37   Ibid., arts 4.5, 5.4. 38   Ibid., art 4.1. 39   Ibid., art 5.1. 31 32

M4644-CHAISSE_9781788971898_t.indd 253

11/10/2018 10:22

254

China–European Union investment relationships

dispute, issues to be addressed, and the submission being concise.40 In order to safeguard their interest, the disputing parties are given reasonable opportunity to present their observations on any submission made by a third person or a non-disputing party.41 Thirdly, hearings for the presentation of evidence or for oral argument are open to the public in principle; hearings may be held partially in private where protected information or the integrity of the proceedings is concerned.42 The tribunal is responsible for logistical arrangements to facilitate the public access to open hearings; private hearing might also be allowed if public access to an open hearing is infeasible due to logistical reasons.43 The ICS has not been put into practice yet, but example of the application of the UNCITRAL Transparency Rules can be observed in other cases. In BSG Resources v Guinea, for example, the tribunal ruled that the UNCITRAL Transparency Rules were applicable as agreed by the disputing parties, with amendments made by the tribunal.44 The tribunal also ruled that hearings were in principle to be held in public, regardless of the parties’ objection.45 To satisfy the required ‘logistical arrangements to facilitate the public access to hearings’ under Article 6.3 of the UNCITRAL Transparency Rules, the tribunal made specific and detailed instruction, including that the hearing is be broadcasted with video link on the ICSID website, the broadcasting is to be 30 minutes later than the live proceedings, and that the broadcasting can be temporarily suspended for the protection of confidential information.46 The above case demonstrates that, with technological support, transparency can be pursued without infringing confidential information. Through appropriate logistic arrangements, arbitral proceedings can be as transparent insofar as the need to protect confidential information is also being taken care of. In addition to the UNCITRAL Transparency Rules, the ICS takes a step further by stipulating its own extra obligations of transparency. For example, under the UNCITRAL Transparency Rules, publication of exhibits is at the discretion of the tribunal, but under the ICS exhibits

  Ibid., art 4.2.   Ibid., arts 4.6, 5.5. 42   Ibid., arts 6.1, 6.2. 43   Ibid., art 6.3. 44   BSG Resources v Guinea, ICSID Case No ARB/14/22, Procedural Order No 2, 17 September 2015, paras 9–10, 12. 45   Ibid., para 13. 46   Ibid., para 14. 40 41

M4644-CHAISSE_9781788971898_t.indd 254

11/10/2018 10:22



The inclusion of investment court system 255

are included as documents that must be made public;47 a disputing party’s notice to challenge an arbitrator and the decision on such challenge are also expressly included as documents available to the public;48 the right of submission by a third party is granted to natural persons who can establish a direct and present interest in the result of the dispute.49 With the compulsory application of the UNCITRAL Transparency Rules, and the ICS’s additional requirements, the level of transparency in ICS proceedings can be expected to be raised substantially. The high costs generated in arbitral proceedings is a major problem of investor-state arbitration. The average cost is about 8 million US dollars for each side of the disputing parties; in some extreme cases, the total amount of costs spent by the parties reached more than 30 million US dollars.50 For example, in Abaclat, the jurisdictional phase alone has caused the claimants and the respondent 28 and 12 million US dollars respectively;51 and the case is still ongoing as of November 2016. For a concluded case, the award in Libananco v Turkey might have set a record with combined costs for both parties at 60 million US dollars.52 The predominant portion of the costs involves the fees and expenses for legal counsel and experts, which could correspond to approximately 82 per cent of the total cost; the average remunerations for arbitrators amount to 16 per cent, while the institutional costs, such as the fees of registration and administration of the dispute, and charges for secretarial services, make up the remaining 2 per cent.53 Such high costs, especially the fees and expenses for legal representation and assistance in millions of US dollars, might be a financial barrier a claimant must overcome before it can have recourse to arbitration. For investors that are SMEs, such cost might simply be unaffordable, thus constituting a denial of access to arbitration.54

  CETA, art 8.36.3; Investment Chapter of TTIP, Section 3, art 18.3.   CETA, art 8.36.2; Investment Chapter of TTIP, Section 3, art 18.2; Investment Chapter of EU-Vietnam FTA, Section 3, art 20.2. 49   Investment Chapter of TTIP, Section 3, art 23.1. 50   David Gaukrodger and Kathryn Gordon, ‘Investor-State Dispute Settlement: A Scoping Paper for the Investment Policy Community’ OECD Publishing (2012) 19, available at accessed on May 7, 2018. 51   Abaclat v Republic of Argentina, ICSID Case No ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, paras 683, 685. 52   Libananco v Turkey, ICSID Case No ARB/06/8, Award, 2 September 2011, paras 558–559. 53   Gaukrodger and Gordon (n 50); See also Dolzer and Schreuer (n 16), pp. 298–9. 54   For further discussion on how the high cost might affect SMEs’ access to 47 48

M4644-CHAISSE_9781788971898_t.indd 255

11/10/2018 10:22

256

China–European Union investment relationships

Even if the disputing parties could afford the high costs, a question subsequently emerged as to how the costs are to be allocated. For ICSID arbitration, this issue is to be dealt with by the tribunal’s discretion, unless the parties agree otherwise.55 For arbitration conducted in accordance with the UNCITRAL Arbitration Rules, the costs shall in principle be borne by the unsuccessful party; however, splitting the costs proportionately between the parties is allowed if the tribunal finds apportionment reasonable.56 In practice, tribunals’ decision on the attribution of costs is far from uniform. One approach is for administrative fees and arbitrator’s remuneration to be divided equally between the parties, with each party paying its own legal fees and expenses.57 Such approach could be problematic in a situation where the claimant prevails and receives compensation or damages in the final award, but the prevailing claimant is nevertheless ordered to bear its own legal fees and expenses and to share equally the procedural costs, which total substantially close to the amount of compensation or damages awarded. This is what actually happened in the case of Tza Yap Shum, in which the claimant was awarded just over 1million US dollars for compensation with interest but was ordered to bear its own costs for around 930,000 US dollars.58 This kind of result renders the arbitral proceedings fruitless. Each party bearing its own legal costs is also unfair for the responding host states, as the investors generally decide whether to submit the dispute to arbitration, with the host states constantly cast as the defending respondent. If, irrespective of winning or losing the case, each party is bound to pay its own legal fees and expenses, a reckless investor might incline to try its luck by filing unmeritorious even frivolous claims, ­causing investor-state arbitration, see Lee M Caplan, ‘Making Investor-State Arbitration More Accessible to Small and Medium-Sized Enterprises’ in Catherine A Rogers and Roger P Alford (eds), The Future of Investment Arbitration (OUP 2009) 297. See also Stephan Wilske, ‘Collective Action in Investment Arbitration to Enforce Small Claims – Justice to the Deprived or Death Knell for the System of InvestorState Arbitration’ (2012) 5 Contemporary Asia Arbitration Journal 165. 55   ICSID, art 61(2): In the case of arbitration proceedings the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and the charges for the use of the facilities of the Centre shall be paid. Such decision shall form part of the award.   UNCITRAL Arbitration Rules (2013), art 42(1).   Dolzer and Schreuer, (n 16), p. 370. 58   Tza Yap Shum v Peru, ICSID Case No ARB/07/6, Award, 7 July 2011, paras 293, 302, p 120 (section VIII: Decision). 56 57

M4644-CHAISSE_9781788971898_t.indd 256

11/10/2018 10:22



The inclusion of investment court system 257

the host state to spend millions of US dollars in defending itself. For respondents that are developing countries, such government funds could have been spent elsewhere to promotes public welfares.59 Another approach is the ‘loser pays’ principle, under which the tribunals order costs to be borne by the unsuccessful party.60 For example, in ADC v Hungary, the prevailing party could have its costs, including legal fees and expenses, reimbursed by the losing party.61 This approach is endorsed by international community. The United Nations Conference on Trade and Development (UNCTAD), for example, considered the ‘loser pays’ method as an option to reform investor-state arbitration.62 Indeed, if the parties are faced with the consequence of having to bear not only their own costs, but also those of their opponent, they might probably think twice and re-evaluate their relative strength and weakness of standpoints, and have the dispute settled. Accordingly, the ‘loser pay’ principle could serve to deter an investor from filing claims that are unmeritorious, unfounded, or frivolous. The ICS adopts the ‘loser pays’ rule with regard to the allocation of costs. For example, Article 8.39.5 of the CETA provides that, costs of the proceedings, as well as costs of legal representation and assistance, shall be borne by the unsuccessful disputing party; only under exceptional circumstances can the allocation of such costs be adjusted and apportioned between the parties; in a situation where the claims are partially successful, the costs shall be allocated proportionately according to the number or extent of the successful part of the claims.63

III.  CHINA`S WILLINGNESS TO APPROVE THE ICS Would China agree to include the ICS, with the aforementioned mechanisms, into the EU-China BIA? Due to the following considerations, the 59   Pia Eberhardt and Cecilia Olivet, ‘Profiting from Injustice: How Law Firms, Arbitrators and Financiers Are Fuelling an Investment Arbitration Boom’, Corporate Europe Observatory (CEO) and Transnational Institute (TNI) (2012) 15, available at accessed on May 7, 2018. 60   Dolzer and Schreuer (n 16), p. 373. 61   ADC v Hungary, ICSID Case No ARB/03/16, Award, 2 October 2006, paras 531. 533. 62   UNCTAD, ‘World Investment Report 2015’ (2015) 148, available at accessed on May 7, 2018. 63   Similar provisions can be seen in Investment Chapter of TTIP, Section 3, art 28.4, Investment Chapter of EU-Vietnam FTA, Section 3, art 27.4.

M4644-CHAISSE_9781788971898_t.indd 257

11/10/2018 10:22

258

China–European Union investment relationships

answer might be affirmative. First, regarding the appellate mechanism, if it is included into the EU-China BIA, the disputing parties will be allowed appeal the provisional award of the TFI before the AT, on the grounds of mistakes of law or facts, in addition to serious irregularity. As a result, not only the integrity of the arbitral proceedings, but also the legal correctness of the award can be enhanced. In other words, the appellate mechanism is likely to produce awards with more consistency, in terms of treaty interpretation and application. Such consistency in turn improves the predictability of the result of arbitration. This predictability can make the disputing parties consider thoroughly their respective strength and weakness in legal standings. The predictability of the arbitration, combined with the ‘loser pays’ rule, could persuade an investor with a weak case to reconsider its chance of success before filing its claim or appeal. Likewise, a responding host state could also be encouraged to settle a case which it might not be able to defend successfully. In the end, abuse of the arbitral proceedings could be reduced, and significant amount of costs could be saved. Secondly, in respect of the appointment of arbitrators, the ICS’s rules depart from the conventional approach of party appointment. If such rules are incorporated into the EU-China BIA, and supposing the special Committee is composed of government representatives from EU and China, then the pre-selection and appointment of arbitrators is effectively made by the Contracting States in an indirect way. Under these rules, China, as a Contracting State to the EU-China BIA, would have more control (jointly with the EU) over the selection of arbitrators in the capacity of the responding host state, while the investor-claimant has none. Thirdly, with regard to procedural transparency, suppose the UNCITRAL Transparency Rules are to be expressly incorporated into the EU-China BIA, it would result in disclosure of and public access to documents and information relating to arbitral proceedings, open hearings, and third-party participation by written submissions. However, such transparency should not constitute a serious threat to China, as Article 7 of the UNCITRAL Transparency Rules provides exceptions, under which protected or confidential information is exempt from disclosure.64 Furthermore, the UNCITRAL Transparency Rules allow the Contracting States to agree on what information not to be disclosed to the public under the treaty,65 so under the EU-China BIA China can negotiate with EU regarding the information it considers inappropriate to be made publicly available.

  UNCITRAL Arbitration Rules, art 7.2(c), (d).   Ibid., art 7.2(b).

64 65

M4644-CHAISSE_9781788971898_t.indd 258

11/10/2018 10:22



The inclusion of investment court system 259

Finally, as far as allocation of costs is concerned, the ICS expressly adopts the ‘loser pays’ principle. Given that arbitral proceedings are in general initiated by the investor against the host state, an investor requesting for arbitration with a relatively weak case would risk being ordered to pay huge amount of legal fees for both itself and the responding host state, if the investor loses its case. Under such a rule an investor would probably think more carefully before resorting to arbitration. Accordingly, if the ‘loser pays’ rule is stipulated in the EU-China BIA, it could be expected that certain investors would be deterred from filing unfounded, unmeritorious, or frivolous claims against the host state. On the other hand, for a host state facing an investor’s claim that stands a fair chance to prevail in arbitration, the same rule could also encourage the host state to settle the case before it is submitted to arbitration, saving the host state from being ordered to pay all the costs, including costs spent by the claimant.

IV. THE PROBLEMATIC RULES REGARDING THE PRE-INSTALLATION OF ARBITRATORS BY THE CONTRACTING STATES The aforementioned procedural characteristics of the ICS each has its own underlying policy considerations. The appellate mechanism aims at strengthening legal correctness and consistency of the arbitral awards; the incorporation of the UNCITRAL Transparency Rules is to increase the public’s trust in arbitral proceedings; the allocation of costs by the ‘loser pays’ principle is meant to deter abuse of arbitral proceedings. This chapter concurs with these considerations and agrees that the inclusion of the above features into the EU-China BIA would bring improvements to the ISDS. However, with regard to the appointment of arbitrators, it is alleged that the conventional practice of arbitrators being appointed by the disputing parties would create a financial incentive for the appointees to act in favour of the parties, in particular, the investor-claimant; such arbitrators are unable to perform their duty impartially and ­independently.66 As a result, depriving an investor of its right to appoint an arbitrator and transferring such a right to the Contracting States can uphold the impartiality and independence of the arbitrators. This is the implied

66   Kyla Tienhaara, ‘Investor-State Dispute Settlement in the Trans-Pacific Partnership Agreement’ (2010) 5, available at accessed on May 7, 2018; See also Eberhardt and Olivet (n 59), pp. 35–6.

M4644-CHAISSE_9781788971898_t.indd 259

11/10/2018 10:22

260

China–European Union investment relationships

consideration under the ICS to have arbitrators indirectly appointed by the Contracting States.67 From the author’s viewpoint, such consideration is unfounded. It could cause problems to the future development of ISDS, rather than bringing improvements to it. The ICS’s rules concerning appointment of arbitrators are based on the presumption that appointment leads to bias. This ‘pro-investor’ allegation is, nevertheless, unsound from a logical point of view. In the case of a tribunal consisting of three arbitrators, if the appointment of an arbitrator by the investor could result in that arbitrator’s bias in favour of the investor for future financial gains (such as re-appointment in future disputes), the very same incentive would apply equally to the arbitrator appointed by the host-state to appease the latter. Such biases might just offset each other. As for the chair, the third arbitrator, who is either jointly appointed by mutual consent of the disputing parties or the two appointed arbitrators, or selected independently by an appointing authority, there would be no motive for the third arbitrator to favour either party. As for arbitral proceedings conducted by a sole arbitrator, the appointment is similar to that of the chair, therefore creating no incentive to favour either party either. Accordingly, from a logical perspective, the conventional approach concerning the composition of an arbitral tribunal does not affect the integrity of the tribunal. Additionally, if the pro-investor argument stands as true, there should have been the results that investor-claimants won more cases than responding host states did. In fact, statistics suggest the very opposite. According to an UNCTAD research, by 2013, among 274 concluded cases, approximately 43 per cent of the cases were decided in favour of the host-state, while 31 per cent were in favour of the investor, and the remaining 26 per cent were settled.68 By the end of 2014, out of 405 concluded cases, around 36 per cent were ruled in favour of the host-state, while 27 per cent ended in favour of the investor, with an additional 2 per cent of the cases where the host state was found in breach of treaty obligation but 67   European Commission, ‘Concept Paper: Investment in TTIP and Beyond – The Path to Reform: Enhancing the Right to Regulate and Moving from Current Ad Hoc Arbitration towards An Investment Court’ (2015) 6–7, available at accessed on May 7, 2018. See also European Commission, ‘Reading Guide: Draft Text on Investment Protection and Investment Court System in the Transatlantic Trade and Investment Partnership (TTIP)’ (2015) 1, (stating that the new rules proposed for the ICS are an effective way to insulate judges from any real or perceived risk of bias), available at accessed on May 7, 2018. 68   UNCTAD, ‘World Investment Report 2014’ (2014) 126, available at accessed on May 7, 2018.

M4644-CHAISSE_9781788971898_t.indd 260

11/10/2018 10:22



The inclusion of investment court system 261

no compensation was awarded to the investor; about 26 per cent of the cases were settled.69 ICSID statistics demonstrate that, by 30 June 2016, the overall outcomes show a 36 per cent of the submitted cases being settled or otherwise discontinued;70 for the 64 per cent decided cases, only 46 per cent were upholding claims in part or in full, whilst 54 per cent were ruled in favour of the responding host states.71 The UNCTAD and ICSID statistics reveal a steady trend of host states winning more cases than investors, a fact rebutting the allegation that arbitrators are biased in favour of the investor-claimants. Another criticism accompanying the appointment of arbitrators by the disputing parties is that, the appointees are usually of commercial background, lacking expertise in international law; such commercial arbitrators are not suitable for investment treaty disputes as they would look after corporate interests of the investor-claimant, rather than public interests asserted by the responding host state.72 It is presumably the reason under the ICS to require arbitrators to be selected from candidates qualified to hold judicial office in their respective countries.73 Under such a hypothesis, an arbitrator who formerly served as a state judge is more capable than one that is a commercial lawyer to hear an investment treaty dispute. 69   UNCTAD, ‘World Investment Report 2015’ (2015) 116 (the remaining 9 per cent of the cases were discontinued for reasons other than settlement or unknown reasons). 70   ICSID, ‘The ICSID Caseload – Statistics (Issue 2016-2)’ (2016) 13, available at accessed on May 7, 2018. 71   Ibid., 14. 72   See, e.g., US Senator Elizabeth Warren, ‘Opinion: The Trans-Pacific Partnership Clause Everyone Should Oppose’ Washington Post (2015) 1, available at accessed on May 7, 2018. Senator Warren contended that:

highly paid corporate lawyers would go back and forth between representing corporations one day and sitting in judgment the next. Maybe that makes sense in an arbitration between two corporations, but not in cases between corporations and governments. If you’re a lawyer looking to maintain or attract highpaying corporate clients, how likely are you to rule against those corporations when it’s your turn in the judge’s seat? 73   Stephen M Schwebel, ‘The Outlook for the Continued Vitality, or Lack Thereof, of Investor-State Arbitration’ (2016) 32 Arbitration International 1, 12. See also Investment Chapter of TTIP, Section 3, art 9.4; CETA, art 8.27.4; Investment Chapter of EU-Vietnam FTA, Section 3, art 12.4.

M4644-CHAISSE_9781788971898_t.indd 261

11/10/2018 10:22

262

China–European Union investment relationships

In fact, arbitrators with commercial backgrounds have dismissed claims made by investors. In Methanex, for example, the investor asserted that the environmental regulation of the host state infringed its investment interests; the claim was nevertheless dismissed by the tribunal chaired by V.V. Veeder, an arbitrator well-known for his commercial expertise.74 On the contrary, there are instances where arbitrators previously holding judicial office with expertise in international law have approved the investor’s claims against the host state, even in controversial cases involving environmental issues. For example, in Clayton/Bilcon v Canada, the claimants asserted that the host state arbitrarily denied them a permit to construct a quarry in a sensitive maritime environment; the claim was approved by the tribunal chaired by Bruno Simma, former judge of the International Court of Justice (ICJ).75 Furthermore, the distinction between commercial arbitrators and arbitrators from other backgrounds is absurd, as many experienced arbitrators are in multiple capacities, such as being practitioners and academics at the same time. In the recently decided two Philip Morris tobacco cases, namely, Philip Morris v Australia and Philip Morris v Uruguay, the arbitrators sitting in the tribunals included Karl-Heinz Böckstiegel, Gabrielle KaufmannKohler, Donald M. McRae, for the Australian case, and Piero Bernardini, Gary Born, James Crawford, for the Uruguayan case. Among them, only James Crawford holds judicial office as a judge of the ICJ, the others are all practitioners, who also engage actively in academic activities. All of them are recognized by their achievements in various areas of law, such as international investment, international business transaction, and international arbitration. Such mixed backgrounds did not hinder these arbitrators from performing their duty independently and impartially to determine issues relating to public interests, such as tobacco control and public health, as the investor’s claims were either rejected on jurisdictional grounds,76 or dismissed on merits.77 These cases demonstrate that the result of arbitration has nothing to do with the arbitrators’ background, and that arbitrators appointed by the parties (including the investor-claimant) can be competent   Methanex v United States, Arbitration under NAFTA and UNCITRAL Arbitration Rules, Final Award of the Tribunal on Jurisdiction and Merits, 3 August 2005, part VI, p 1. 75   Clayton/Bilcon v Canada, Arbitration under NAFTA and UNCITRAL Arbitration Rules, PCA Case No 2009-04, Award on Jurisdiction and Liability, 17 March 2015, para 742. 76   Philip Morris v Australia, UNCITRAL Arbitration Rules (2010), PCA Case No 2012-12, Award on Jurisdiction and Admissibility, 17 December 2015, paras 585-88, p. 186. 77   Philip Morris v Uruguay, ICSID Case No ARB/10/7, Award, 8 July 2016, paras 552–81, 590. 74

M4644-CHAISSE_9781788971898_t.indd 262

11/10/2018 10:22



The inclusion of investment court system 263

to decide cases involving important public interests. Accordingly, the allegation concerning a commercial arbitrator’s inappropriateness to handle investment disputes is, as proven, an invalid assertion. Therefore, the shifting of power of appointing arbitrators from disputing parties to the Contracting States based on such allegation is unpersuasive and unjustifiable. The deprivation of the disputing parties’ right under the consideration of preventing arbitrators from being biased poses another problem. In criminal proceedings there is the ‘presumption of innocence’ doctrine, under which a defendant who enters trial is presumed to be innocent of the accused crime; this presumption holds until the defendant is proven to be guilty of the crime during investigation; the prosecutor bears the burden of proving the defendant guilty in court.78 This doctrine is universally accepted and followed, as it is regard, not just a legal right, but also an international human right under Article 11 of the UN’s Universal Declaration of Human Rights.79 Applying such doctrine by analogy to arbitral proceedings, it could be said that arbitrators should be presumed impartial and independent unless their bias is proven. However, the ICS seems to presume that arbitrators appointed by the investors are inherently biased, so the linkage between the investor-claimant and the arbitrator via appointment has to be severed. The ICS’s approach is contradictory to the presumed impartial and independent principle. An arbitrator should not be considered biased simply because he or she is appointed by the investor-claimant. Instead, an arbitrator should be seen as impartial and independent unless challenged and proven not so. Under the ICSID Convention, for example, high moral character and the ability to exercise independent judgment are required qualifications of arbitrators.80 If an appointed arbitrator seems to fail to meet such requirements, a party is given the right to challenge by proposing to the tribunal the disqualification of such arbitrator, on account of any fact indicating a manifest lack of the required qualifications.81 Similar ­provision can be seen from the United Nations

78   The Law Dictionary (featuring Black’s Law Dictionary Free Online Legal Dictionary 2nd Edn), available at accessed on May 7, 2018. 79   ‘Everyone charged with a penal offence has the right to be presumed innocent until proved guilty according to law in a public trial at which he has had all the guarantees necessary for his defence.’ UN, The Universal Declaration of Human Rights, art 11(1). 80   ICSID Convention, art 14.(1). 81   Ibid., art 57. The procedure of the disqualification has been further explained in Rule 9 of the ICSID Rules of Procedure for Arbitration Proceedings.

M4644-CHAISSE_9781788971898_t.indd 263

11/10/2018 10:22

264

China–European Union investment relationships

Commission on International Trade Law Arbitration Rules (UNCITRAL Arbitration Rules), which states that ‘[a]ny arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence’.82 The effectiveness of the challenge mechanism in previous arbitral proceedings can be observed. For instance, in recent ICSID cases, such as Caratube v Kazakhstan;83 Blue Bank v Venezuela;84 and Burlington Resources, Inc v Ecuador,85 the challenged arbitrators either resigned or were disqualified. The inclusion of the challenge mechanism in the ICS evidences that, irrespective of how the arbitrators are appointed, the risk of bias still exists; the deprivation of parties’ right to appoint arbitrators in the name of integrity of arbitrators is not justified. It is the challenge procedure that serves to effectively safeguard the ICS proceedings from corrupt arbitrators. Investor-state arbitration not only provides a neutral forum of adjudication, it also allows the disputing parties, particularly the investorclaimant, to select and agree on the arbitrators. The appointment gives the investor-claimants the right to choose or consent to arbitrators with considerations based on legal expertise, professional experience and knowledge in accordance with the circumstances of a specific dispute, and it builds up the claimants’ confidence in the tribunal. Under the ICS, a claimant is deprived of the right to appoint an arbitrator. Divisions hearing individual cases are constituted by arbitrators who are indirectly appointed by the responding states. Ethical standards may be stipulated, requiring such arbitrators to be insulated from any political influence or interference from the states, and to act impartially and independently,86 a claimant’s confidence in the tribunal could be weakened, as the linked trust via appointment no longer exists. Consequently, the investor might be less willing to resort to arbitration under the ICS. Such development could be detrimental to the endeavours to depoliticize treaty disputes between foreign investors and host states; if the disputing

  UNCITRAL Arbitration Rules (2013), art 12.1.   Caratube v Kazakhstan, ICSID Case No ARB/13/13, Decision on the Proposal for Disqualification of Mr. Bruno Boesch, 20 March 2014. 84   Blue Bank v Venezuela, ICSID Case No ARB/12/20, Decision on the Parties’ Proposal to Disqualify a Majority of the Tribunal, 12 November 2013. 85   Burlington Resources, Inc v Ecuador, ICSID Case No ARB/08/5, Decision on the Proposal for Disqualification of Professor Francisco Orrego Vicuńa, 13 December 2013. 86   CETA, art 8.30.1; Investment Chapter of TTIP, Section 3, art 11.1; Investment Chapter of EU-Vietnam FTA, Section 3, art 14.1. 82 83

M4644-CHAISSE_9781788971898_t.indd 264

11/10/2018 10:22



The inclusion of investment court system 265

parties cannot reach settlement by direct negotiations, consultations, or mediation, and the investor is unwilling to submit the dispute to arbitration, the investor might have no choice but turn to its home state, demanding the latter to intervene. This would not necessarily constitute a resurrection of diplomatic protection, but it could pose as a potential threat to the depoliticization of ISDS.87 The above findings suggest that the ICS’s rules concerning the unilateral pre-selection and appointment of the arbitrators by the Contracting States are problematic. The presumption that an investor-appointed arbitrator is biased in favour of the appointing investor is proven by empirical statistics as untrue; the allegation that party-appointed commercial arbitrators are not capable of handling claims involving public interest is equally unfound. In addition, actual cases have demonstrated that the integrity of the arbitral proceedings can be upheld by the challenge mechanism, under which a potentially partial or biased arbitrator can be removed. The deprivation of the investor’s right to appoint arbitrator is a disproportionate measure in this regard. Finally, investors might lose their confidence in arbitration if arbitrators under the ICS are pre-installed by the Contracting States. Investors might feel unwilling to have recourse to arbitration, and turn to their home state for intervention instead. This could cause a setback in the depoliticization of ISDS. Due to the above reasons, there is nothing fundamentally wrong with the conventional approach of parties appointing arbitrators. The ICS’s rules in this regard bring only harms, rather than reforms, to ISDS. If the EU-China BIA does incorporate the ICS, it should do so by retaining the parties’ right of appointment.

IV. CONCLUSION The ICS is intended to improve ISDS with its procedural innovations. But the rules concerning the unilateral appointment of arbitrators by the states are problematic. The presumption that an investor-appointed arbitrator is biased in favour of the appointing investor is proven by empirical statistics to be untrue; the allegation that party-appointed commercial arbitrators   Note that, take the EU’s proposed TTIP for example, the Contracting States are prohibited to bring international claims against each other if the dispute between an investor and the host state has been proceeded in accordance with the ISDS mechanisms, but a Contracting State is not precluded from intervening if the dispute is not submitted to arbitration; moreover, the Contracting States are allowed to ‘exchange information’ with each other in order to facilitate a settlement of the dispute. Investment Chapter of TTIP, Section 3, art 26. 87

M4644-CHAISSE_9781788971898_t.indd 265

11/10/2018 10:22

266

China–European Union investment relationships

are not capable of handling claims involving public interest is equally unfounded. In addition, actual cases have demonstrated that the integrity of the arbitral proceedings can be effectively upheld by the challenge mechanism, under which a potentially partial or biased arbitrator can be removed. The deprivation of the investor’s right to appoint arbitrator is a disproportionate measure in this regard. Finally, investors might lose their confidence in arbitration if arbitrators are pre-installed by the states. Investors might be unwilling to have recourse to arbitration, and turn to their home state for intervention instead. This could cause a setback in the depoliticization of ISDS. There is nothing fundamentally wrong with the conventional approach of parties appointing arbitrators. The ICS’s rules in this regard jeopardize, rather than improve ISDS. If the EU-China BIA does incorporate the ICS, it would be better if the ICS is modified so the disputing parties retain their right to appoint arbitrators.

M4644-CHAISSE_9781788971898_t.indd 266

11/10/2018 10:22

15. The appellate option: promises and pitfalls Matthew Hodgson and Vee Vian Thien1 I. NEED FOR REFORM: PERCEIVED SHORTCOMINGS OF THE PRESENT ISDS SYSTEM In recent years, the existing system for resolution of investor-state disputes has been subject to increasing criticism. Amongst the various perceived shortcomings of ISDS is the lack of an appellate procedure which could act as a control on decisions made by arbitral tribunals. In its argument against the inclusion of ISDS provisions in forthcoming EU investment treaties, the European Economic and Social Committee noted the following: The systematic shortcomings arising from the working of ISDS include opacity, lack of clear rules of arbitration, the lack of right of appeal, discrimination against domestic investors who cannot use the system, the fear that purely speculative investments are protected, which, inter alia, do not have the effect of creating jobs, and the fear of exploitation by specialist legal firms.2 (emphasis added)

The European Parliament has similarly advocated ‘the opportunity for parties to appeal’ amongst other proposed changes to the EU’s present dispute settlement regime.3

  Views expressed herein are those of the authors, not of Allen & Overy. The authors wish to thank Clara Chang and Benjamin Wan for their assistance in the preparation of this Chapter. 2   Opinion of the European Economic and Social Committee on investor protection and investor to state dispute settlement in EU trade and investment agreements with third countries (27 May 2015) OJ C332/45 accessed 4 February 2018. 3   European Parliament Resolution of 6 April 2011 on the future European international investment policy (2010/2203(INI)). 1

267

M4644-CHAISSE_9781788971898_t.indd 267

11/10/2018 10:22

268

China–European Union investment relationships

The need for a review procedure is particularly pronounced in light of the fact that tribunals in a number of investment treaty cases have reached contradictory outcomes, even though there were no substantial factual or legal differences in the underlying claims (see e.g., the Lauder arbitrations).4 Currently, the ICSID Convention provides for a limited annulment procedure which if successful, results in the invalidation of the award (or parts of the award) but does not permit revision or amendment of the award.5 The negotiators of the ICSID Convention perceived finality as an important aspect of arbitration; as the ICSID Convention was originally designed primarily with contract-based claims between investors and states in mind, it is therefore natural that the Convention was strongly influenced by commercial arbitration that prioritises finality and efficiency.6 Accordingly, it is unsurprising that the provision of annulment in the ICSID Convention was intended to perform the limited function of preventing ‘flagrant cases of excess of jurisdiction and injustice’,7 rather than act as a channel to appeal the merits of a case. The grounds for annulment are set out in Article 52 of the ICSID Convention: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; (d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based.

4   Referring to CME Czech Republic B.V. v The Czech Republic, UNCITRAL, Partial Award, 13 September 2001 and Ronald S. Lauder v The Czech Republic, UNCITRAL, Final Award, 3 September 2001, it has been observed that the two tribunals came to different conclusions in essentially the same dispute which arose from licensing in the Czech Republic of television broadcasting. See Susan D. Franck, ‘The Nature and Enforcement of Investor Rights under Investment Treaties: Do Investment Treaties have a Bright Future?’ (2005) 12 U.C. Davis Journal of International Law and Polic, 47. 5   By contrast, the UNCITRAL Arbitration Rules have no provisions for either annulment or appeal. 6   P. Hainbach, ‘The EU’s Approach to Investor-State Arbitration in the Comprehensive Economic and Trade Agreement (CETA)’ (2016) 13(1) TDM 1 accessed 4 February 2018. 7  ICSID, Updated Background Paper on Annulment for the Administrative Council of ICSID (2016), para. 7.

M4644-CHAISSE_9781788971898_t.indd 268

11/10/2018 10:22



The appellate option 269

As a side note, Article 52 of the ICSID Convention offers a higher standard for annulment (and therefore a greater chance of finality) than the New York Convention, which provides broader grounds for a national court to refuse enforcement of a New York Convention award. In summary, these grounds are: (a) the arbitration agreement was not valid; (b) the party against whom the award is involved was unable to present its case; (c) the award contains decisions on matters beyond the scope of the submission to arbitration; (d) the composition of the arbitral authority or the arbitral procedure was not in accordance with parties’ agreement or the law of the country where the arbitration took place; or (e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority. In addition, recognition and enforcement may also be refused if the competent authority in the country where recognition and enforcement is sought finds that the subject matter of the difference is not capable of settlement by arbitration under the law of that country, or the recognition or enforcement of the award would be contrary to public policy.8 A.  Application of the ICSID Annulment Procedure One of the grounds for annulment in Article 52 of the ICSID Convention, namely that of the tribunal having manifestly exceeded its powers, has in recent times proven to be a potential (but inadequate, as we shall see) route for assessing the merits of a tribunal’s decision. The scope of this ground has been interpreted differently by annulment committees in the past, thereby leading to inconsistent outcomes. This is illustrated by two cases, both involving Argentina as the respondent State, CMS v Argentina and Sempra v Argentina.9 The same question was placed before the two annulment committees, i.e., whether the respective tribunals had made an error in their approach towards the defence of necessity based on treaty law   United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), art V. 9   CMS Gas Transmission Company v Argentine Republic, Decision of the Ad Hoc Committee on the Application for Annulment of the Argentine Republic (ICSID Case No. ARB/01/8) and Sempra Energy International v Argentine Republic, Decision on the Argentine Republic’s Application for Annulment of the Award (ICSID Case No. ARB/02/16). 8

M4644-CHAISSE_9781788971898_t.indd 269

11/10/2018 10:22

270

China–European Union investment relationships

(Art. XI of the BIT) and customary law (Art. 25 of the ILC’s Articles on State Responsibility). By way of background, in both cases, the requirements of Article XI of the BIT were more readily satisfied than Article 25 of the ILC’s Articles on State Responsibility. However, the tribunals in both cases acknowledged but did not apply Article XI on the basis that Article 25 was not satisfied. In both annulment proceedings, the approach taken by the tribunals was thought to be incorrect as the application of Article XI ought to be a separate question from the application of Article 25. The committees in both cases agreed that failure to apply the applicable law may amount to an excess of powers, whereas erroneous application of the law would not constitute a basis for annulment. However, while the Committee in CMS recognised that although there were manifest errors of law in the award, it could not annul the award because the tribunal had ultimately applied the law (i.e., Art. XI), albeit cryptically and defectively.10 On the other hand, the Committee in Sempra was more interventionist and annulled the award on the basis that the tribunal had failed to apply the applicable law (i.e., failed to apply Art. XI on the erroneous basis that the respondent had failed to satisfy Art. 25). The Sempra decision sparked controversy and criticism as the tribunal’s application of the law arguably did not justify annulment, and the Committee may have overstepped the extent of review which could be undertaken by an annulment committee. However, given the extent to which the tribunal’s decision was criticised in CMS, the annulment committee in that case left no doubt that it would have overturned the decision if it had the power of review granted to an appellate body. The purported importance of finality of the award is also questionable in light of recent statistics published by ICSID, showing that out of the 228 awards which were granted in ICSID’s 50-year history, 90 annulment proceedings were instituted, meaning that parties sought to challenge the outcome roughly 40 per cent of the time.11 However, out of these annulment proceedings, only five awards have been annulled in full and another ten awards have been partially annulled. As it is clear from the foregoing that the existing annulment procedure is inadequate to provide redress for awards which are simply incorrect, a case can be made that the time is ripe for the introduction of a new appellate court mechanism.

  CMS Gas Transmission Company v Argentine Republic, ibid., para. 136.   ICSID (n. 7), para. 31.

10 11

M4644-CHAISSE_9781788971898_t.indd 270

11/10/2018 10:22



The appellate option 271

II. PROPOSALS FOR AN APPELLATE COURT MECHANISM: THE EU APPROACH There have been various attempts over the years to propose a mechanism for an appellate court which would effectively review decisions made by first instance tribunals in ISDS disputes, with varying degrees of success. In 2004, the ICSID Secretariat published a paper12 to address public concerns about ISDS and to examine various proposals for reform. It set out a proposal for an appellate tribunal which parties could consent to in their treaties, which would be intended to ‘foster coherence and consistency in the case law’. Such an appellate tribunal would be able to review an award based on clear error of law or any of the five grounds for annulment of an award in Article 52 of the ICSID Convention. However, there was insufficient support for the initiative and the proposal was stayed. Recent bilateral and multilateral international investment agreements (IIAs) have referred to the possibility of an appellate mechanism being set up in future and obligating the parties to consider whether awards should be subject to that appellate mechanism, e.g., 2012 U.S. Model BIT, recent treaties concluded by Canada, Australia and China. However, no action appears to have been taken towards the establishment of such bodies under any of those agreements.13 The strongest impetus for reform has recently come from the EU. As Member States of the EU account for just under half of all existing IIAs, this is a significant development.14 The European Commission intends to replace the current ISDS with a dispute settlement mechanism centred around a permanent investment court within the context of the negotiations of the Transatlantic Trade and Investment Partnership (TTIP) with the US, which is still being negotiated.15 Furthermore, both

12  ICSID, Possible Improvements of the Framework for ICSID Arbitration (2004). 13   Gabrielle Kaufmann-Kohler and Michele Potestà, ‘Can the Mauritius Convention serve as a model for the reform of Investor-State arbitration in connection with the introduction of a permanent investment tribunal or an appeal mechanism?’ CIDS-Geneva Center for International Dispute Settlement (2016) 22 < http://www.uncitral.org/pdf/english/commissionsessions/unc/unc-49/ CIDS_Research_Paper_-_Can_the_Mauritius_Convention_serve_as_a_model. pdf> accessed 4 February 2018. 14   European Commission, ‘Establishment of a Multilateral Investment Court for Investment Dispute Resolution’ (2016) accessed 4 February 2018. 15   There is some uncertainty as to the future direction of TTIP following

M4644-CHAISSE_9781788971898_t.indd 271

11/10/2018 10:22

272

China–European Union investment relationships

the Comprehensive Economic and Trade Agreement (CETA between EU and Canada) and EU-Vietnam FTA, which were finalised in early 2016, included a permanent investment court system in lieu of the traditional investor-state arbitration system and envisage the possibility that a future multilateral investment court and appeal tribunal will be established (this will be discussed in further detail below). The proposals included in the TTIP, CETA and EU-Vietnam FTA (collectively referred to below as the EU proposal), which are broadly similar, contemplate an appellate system composed of two instances (a first instance tribunal and an appellate tribunal) with permanent judges appointed by the EU and its trade and/or investment agreement partners. In the EU proposal, the appellate tribunal would be composed of members appointed jointly by the EU and the other Contracting Party, with one-third of the number of members being nationals of EU Member States, one-third being nationals of the other Contracting Party, and the remaining one-third being nationals of a third country.16 These members of the Appellate Tribunal would be subject to strict qualifications and ethical requirements. As with the judges of the first instance tribunal, the members of the Appellate Tribunal are prohibited from taking on work as legal counsel or as party-appointed expert or witness in any investment disputes,17 so as to avoid the perception of ‘double-hatting’, a frequent criticism of arbitrators in ISDS. If a disputing party considers that a member has a conflict of interest, it may challenge the appointment of that member.18 The appellate tribunal would hear appeals in divisions consisting of three members, of whom one would be a national of an EU Member State, one a national of the other Contracting Party and the remaining one a national of a third country, who would be the chairman. The composition of each division would be selected on a random basis. The grounds of appeal contemplated by the EU proposal include: (a) error in the interpretation or application of the applicable law; (b) the 2016 US presidential election. However, by contrast to the Trans-Pacific Partnership, the present administration of the US has not expressly withdrawn from negotiations of TTIP. 16   See Appendix for more details. 17   Art. 11(1) of Section 3, Chapter II of the TTIP (version of 12 November 2015) (references hereinafter to articles in the TTIP are to this section and version); Art. 8.30(1) of the CETA; Article 14(1) of Section 3, Chapter II of Chapter 8 (Trade in Services, Investment and E-Commerce) of the EU-Vietnam FTA (version of January 2016) (references hereinafter to articles in the EU-Vietnam FTA are to this section and version). 18   Arti. 11(2) of the TTIP; Art. 8.30(2) of the CETA; Art. 14(2) of the EU-Vietnam FTA.

M4644-CHAISSE_9781788971898_t.indd 272

11/10/2018 10:22



The appellate option 273

manifest error in appreciation of the facts (including appreciation of domestic law); and (c) the grounds provided for in Article 52 of the ICSID Convention, insofar as these are not already covered by the grounds in (a) and (b). It is apparent that the appellate procedure aims to not only rectify any serious procedural irregularity, but also to correct any substantive errors of applicable law or, significantly, appreciation of the facts. The Appellate Tribunal is empowered to uphold, modify or reverse the award. To avoid frivolous and unfounded claims, costs of the proceedings would be borne by the unsuccessful disputing party (the ‘loser pays’ principle).19 Where serious concerns arise regarding matters of treaty interpretation relating to certain provisions, the joint committee of the Contracting Parties may adopt decisions interpreting those provisions, which shall be binding.20 A.  Possible Establishment of a Multilateral Investment Court (MIC) The ad hoc system of ISDS is currently included in a majority of the approximately 3,300 investment treaties in existence today,21 of which EU Member States are party to 1,384.22 As such, a multilateral system for the resolution of international investment disputes is thought to be a more effective way to reform the ISDS system than bilateral reforms and any proposal from the EU is likely to have a substantial impact on the current ISDS system. Furthermore, multiple bilateral courts, functioning on the basis of different procedural rules based on the outcome of each negotiation, may lead to increased fragmentation (another criticism of the existing ISDS system) through a multiplicity of dispute settlement procedures. Accordingly, many scholars have urged that a MIC to be established as quickly as possible, before the practices and jurisprudence of each bilateral investment court becomes entrenched. The envisaged MIC would be a permanent body to adjudicate disputes under future and existing investment treaties.23 It would be open to all   See Appendix for more details.   Art. 13(5) of the TTIP; Art. 8.31(3) of the CETA; Art. 16(4) EU-Vietnam FTA. 21   UNCTAD International Investment Navigator. Data accurate on 6 February 2018. 22   European Commission, ‘Commission Staff Working Document Impact Assessment: Multilateral reform of investment dispute resolution Accompanying the document Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes’, SWD/2017/0302 final. 23   European Commission fact sheet, ‘A future multilateral investment court’ 19 20

M4644-CHAISSE_9781788971898_t.indd 273

11/10/2018 10:22

274

China–European Union investment relationships

interested countries and rule on disputes arising under future and existing investment treaties. Over time, the investment court would replace all investment dispute resolution mechanisms provided in EU agreements, EU member states’ agreements with third countries and in trade and investment treaties concluded between non-EU countries. An obligation to start work on the establishment of an MIC is expressly included in the most recent EU investment treaties, albeit in varying forms. The CETA provides that ‘the Parties shall pursue with other trading partners the establishment of a multilateral investment tribunal and appellate mechanism for the resolution of investment disputes’.24 Similarly, the EU-Vietnam FTA provides that ‘the Parties shall enter into negotiations for an international agreement providing for a multilateral investment tribunal in combination with, or separate from, a multilateral appellate mechanism applicable to disputes under this Agreement’.25 By contrast, the TTIP contemplates replacement of its dispute resolution provisions with the MIC once such agreement for the establishment of the MIC enters into force, but does not include wording which obliges the parties to commence negotiations to establish such MIC.26 At present, the European Commission has recommended that the European Council issue a decision to authorise commencement of negotiations for a new convention to establish a permanent MIC comprised of full time judges / members with the following features: The multilateral court should be composed of a tribunal of first instance and an appeal tribunal. The appeal tribunal should have the competence to review decisions issued by the tribunal of first instance on the grounds of errors of law or manifest errors in the appreciation of facts. The appeal tribunal should have the power to send back cases to the tribunal of first instance for the completion of the proceedings in light of the findings of the appeal tribunal.27

(2016) accessed 4 February 2018. 24   Art. 8.29 of the CETA. 25   Art. 15 of the EU-Vietnam FTA. 26   Art. 12 of Section 3 of the TTIP states that: Upon the entry into force between the Parties of an international agreement providing for a multilateral investment tribunal and/or a multilateral appellate mechanism applicable to disputes under this Agreement, the relevant parts of this section shall cease to apply. The [] Committee may adopt a decision specifying any necessary transitional arrangements.   See European Commission, ‘Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes’, COM (2017) 493 final. 27

M4644-CHAISSE_9781788971898_t.indd 274

11/10/2018 10:22



The appellate option 275

The MIC could be a standalone entity or be incorporated into an existing international organisation.28 With regards to costs, the European Commission has suggested that the MIC be financed in principle by contracting parties to the new convention but the distribution of such costs be decided on an equitable basis which may take into consideration factors such as a contracting state’s level of development, number of agreements covered per state and the contracting states’ respective volume of international investment flows or stocks.29 This is not dissimilar to how a number of other international organisations (e.g., IMF, WHO and WTO) are financed. Much discussion has revolved around how an appellate body should be implemented within the framework of the ICSID Convention. The most straightforward method would be to amend the ICSID Convention; however, it may not be feasible to obtain the consent of all ICSID members. In principle, an inter se modification of the Convention is possible. However, such modification would need to be in line with the Vienna Convention on the Law of Treaties, which requires that the modification ‘does not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole’ (Art. 41). Whether such an amendment would be incompatible with the ICSID Convention is debatable. Schreuer argues that it would be incompatible, as the explicit exclusion of any appeal or additional remedy in Article 53 of the ICSID Convention is closely related to the ‘effective execution’ of the Convention’s object and purpose.30 On the other hand, Kaufmann-Kohler and Potestà are of the view that the Convention’s purpose is to provide facilities for conciliation and arbitration of investment disputes, and ‘the creation of an appeal in lieu of annulment in derogation to Article 53 does not appear incompatible with any such objectives’.31 Finally, it has been suggested that the appeals facility can take the form of a resolution of the Administrative Council of the ICSID, adopting appeals facility rules and authorising the Secretariat of ICSID to

28   European Commission fact sheet, ‘A future multilateral investment court’ (2016) accessed 4 February 2018. 29   See European Commission, ‘Recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes’, COM (2017) 493 final. 30   Christoph Schreuer, ‘Revising the System of Review for Investment Awards’ (2009) accessed 4 February 2018. 31   Kaufmann-Kohler and Potestà (n. 13), pp. 84–5.

M4644-CHAISSE_9781788971898_t.indd 275

11/10/2018 10:22

276

China–European Union investment relationships

a­ dministrate appellate proceedings in treaty-based cases, without having to amend the ICSID Convention.32

III.  EVALUATION OF THE EU PROPOSAL This section discusses the extent to which the EU proposal for a new appellate procedure is able to address the shortcomings of the current system and whether this proposal adequately pre-empts the issues which are expected to arise by adopting appropriate safeguards. A.  Correctness and Consistency of Awards The primary rationale for introducing an appellate mechanism is that it would ensure correctness and consistency of awards, improve predictability of treaty interpretation and, ultimately, contribute to increased acceptance of arbitration as a method of ISDS. Even in the absence of a formal rule of precedent, it is believed that having a permanent court in place with appointed members would encourage a consistent jurisprudence. However, it is arguable that only by establishing a MIC could real consistency be achieved. As commentators have pointed out, the creation of numerous permanent investment tribunals might lead to the application of multiple inconsistent approaches, which would further complicate the present problem of fragmentation. Furthermore, even with an MIC in place, the court would only achieve consistency in respect of the particular IIA which it is being asked to interpret. However, there would still be consistency in respect of certain general issues (e.g., whether MFN treatment applies to dispute settlement, the limits of fair and equitable treatment clauses etc.)33, and also consistency across IIAs with identical or similar language. As substantive treaty standards have been criticised for being formulated in vague terms and interpreted differently by tribunals (see e.g., conflicting decisions by the tribunals in Siemens v Argentina, Wintershall v Argentina and Hochtief v Argentina over the scope of the same MFN clause),34 improved predictability and a consistent approach would be welcomed.   Margie-Lys Jaime, ‘An Appellate Body in Treaty-Based Investment Arbitration: Redefining the Investor-State Dispute Settlement Mechanism’ (2014) Spain Arbitration Review 93–102. 33   Kaufmann-Kohler and Potestà (n. 13), p. 69. 34   All three tribunals in Wintershall Aktiengesellschaft v. Argentine Republic (ICSID Case No. ARB/04/14), Siemens A.G. v. Argentine Republic (ICSID Case No. ARB/02/8) and Hochtief Aktiengesellschaft v. Argentine Republic (ICSID Case 32

M4644-CHAISSE_9781788971898_t.indd 276

11/10/2018 10:22



The appellate option 277

On the other hand, it should be questioned whether inconsistency is really the fault of the system, or whether it is a natural occurrence in any relatively young system of jurisprudence. As Kalicki notes, the whole body of ICSID case law, and particularly of treaty-based interpretation, has only really developed over the last 20 years.35 B.  Appointment of Tribunal by States – Perception of Bias Under the proposed investment court regime, the adjudicators (termed ‘judges’ or ‘members of the tribunal’ rather than ‘arbitrators’ in the EU proposal) will be appointed by each contracting state, rather than by the parties to the arbitration agreement as is the usual case in ISDS. As such, parties will lose the possibility of appointing their own arbitrators and consequently, there may be a perception that States have an advantage in being able to appoint individuals who might have a bias towards the state. The EU proposal attempts to minimise any perception of bias by providing that members of both the first instance and appeal tribunal shall hear cases or appeals in divisions, which composition is random and unpredictable, while giving equal opportunity to all members to serve.36 In any event, such assumptions or perceptions of bias may be overstated. It is important for contracting states (particularly capital-exporting states) to consider the interests of its investors when selecting appropriate judges, so it would not necessarily be logical to assume that every State-appointed judge would be heavily pro-State. It has also been argued that there is no need in the first place to import this level of party autonomy to investment disputes where decisions are rendered on sensitive public policy matters and governmental acts.37

No. ARB/07/31) considered the same MFN clause in the Argentina-Germany BIT, in particular whether such clause extended to dispute resolution provisions in other treaties. This would dispense with the requirement under the Argentina-Germany BIT that the investor should first exhaust local remedies for an 18-month period by submitting the dispute to the Argentinian courts. The three tribunals arrived at conflicting conclusions. In Wintershall, the tribunal held that the MFN clause in the BIT did not extend to dispute resolution. However, the tribunals in Siemens and Hochtief decided that the same MFN clause did extend to dispute resolution provisions in other IIAs. 35   J.E. Kalicki, ‘ICSID Annulment Procedure – Review of Practice and Experience’ (2017) 14(1) TDM 5 < www.transnational-dispute-management.com/ article.asp?key=2436> accessed 4 February 2018. 36   See TTIP Art 9(7) and 10(9); CETA Arts 8.27(7) and 8.28(5); EU-Vietnam FTA Arts 12(7) and 13(9). 37   P. Hainbach, ‘The EU’s Approach to Investor-State Arbitration in the

M4644-CHAISSE_9781788971898_t.indd 277

11/10/2018 10:22

278

China–European Union investment relationships

C.  Increased Time and Cost An inevitable side effect of improved correctness and consistency is the increased time and costs associated with the appeal proceedings. This is arguably the most unattractive feature of the proposal given the substantial time and costs involved in the present ISDS system.38 There would be a risk of appeals becoming the rule, as the unsuccessful party could be pressurised by those who hold it accountable to file an appeal regardless of the merits of its case. Furthermore, in a meeting hosted by the European Commission on 27 February 2017, some stakeholders indicated their concern that an appeal instance may result in unnecessarily long proceedings and that this would be particularly problematic for SMEs.39 It is also arguable that the delay problem already exists to a certain extent with regard to the ICSID annulment procedure, as the manner in which the annulment grounds have been applied could encourage parties to bring unmeritorious claims anyway, in the hope that the grounds are applied in their favour. The EU proposal has also put the following measures in place to deal with the issue of time and costs: (i) ‘loser pays’ principle to discourage unmeritorious claims; (ii) a fast-track system for rejecting unfounded claims;40 and (iii) strict time limits to ensure a swift final ruling. Subject to certain exceptions, the first instance decision must be issued within 18 months from submission of a claim and the appellate process must not take longer than 180 days.41

Comprehensive Economic and Trade Agreement (CETA)’ (2016) 13(1) TDM 23 accessed 4 February 2018. 38   For further reading, see Matthew Hodgson and Alastair Campbell, ‘Damages and Costs in Investment Treaty Arbitration Revisited (2017) accessed 4 February 2018. 39   European Commission, ‘Stakeholder meeting on a multilateral reform of investment dispute resolution including the possible establishment of a multilateral investment court’ (2017) accessed 4 February 2018. 40   Art. 8.3-233 of the CETA; Arts 16–17 of the TTIP. Under the TTIP, the appeal tribunal may also dismiss the appeal on an expedited basis where it is clear that the appeal is manifestly unfounded (Art. 29(2)). 41   See Appendix for further details.

M4644-CHAISSE_9781788971898_t.indd 278

11/10/2018 10:22



The appellate option 279

By comparison, under the current ICSID system, the average duration of first instance proceedings alone exceeds three years.42 The current annulment mechanism can also lead to long delays, particularly when a dispute is submitted to a second tribunal following annulment (and in a small number of cases, to a second annulment panel). The average time for an annulment proceeding from 2011 to 2016 was 22 months from the date of registration (20 months from the date of constitution of the ad hoc Committee).43 It is unclear how the current fees for arbitrators would compare with the combined amount of the fees and retainer fee for the first instance and appellate tribunal under the EU proposal.44 It appears that the contracting parties would bear most of the costs, which might have a significant impact on developing states. Again, this could be ameliorated by establishing a MIC, which may enable the fees paid by each state to be reduced considerably. The EU’s currently finalised agreements also contemplate further rules being discussed between the contracting parties to assist claimants which are natural persons or SMEs. The CETA imposes an obligation on the Joint Committee to ‘consider supplemental rules aimed at reducing the financial burden on claimants who are natural persons or SMEs’.45 The EU-Vietnam FTA provides that: the Trade Committee may adopt supplemental rules on fees for the purpose of determining maximum costs of legal representation that may be borne by specific categories of unsuccessful disputing parties, taking into account the financial resources of a claimant. Such rules shall be adopted no later than one year after the FTA enters into force.46

In the Impact Assessment released on 13 September 2017, the European Commission took the view that its recommended MIC would ensure a better ISDS system for SMEs given the anticipated shorter timelines for proceedings (as the proposed MIC will eliminate the need to appoint

42   C. Titi, ‘The European Union’s Proposal for an International Investment Court: Significance, Innovations and Challenges Ahead’ (2017) 14(1) TDM 12 accessed 4 February 2018. 43   ICSID (n. 7). 44   The TTIP includes a note which says that the retainer and daily fee suggested by the EU would be around the same as for the WTO Appeal Tribunal members, i.e., around €7,000 per month. 45   Art. 8.39(6) of the CETA. 46   Art. 27(5) of the EU-Vietnam FTA.

M4644-CHAISSE_9781788971898_t.indd 279

11/10/2018 10:22

280

China–European Union investment relationships

adjudicators) and the Commission also envisaged potential additional costs assistance to SMEs in view of their lower turnover.47 D.  The EU-China Investment Agreement The EU and China account for a considerable portion of global trade. China is now the EU’s second trading partner behind the US and the EU is China’s biggest trading partner.48 At the end of 2013, discussions began between EU and China regarding a comprehensive EU-China investment agreement and a political commitment was made by European and Chinese leaders at the June 2015 EU-China summit. The IIA will replace the existing BITs between individual EU Member States and China with one single comprehensive agreement. The negotiations were initiated due to recognition of the fact that the current level of bilateral investment between the EU and China was below what would be expected from two of the most important economic blocks in the world. For example, whereas goods and services traded between the EU and China are worth well over €1 billion every day, just 2.1 per cent of overall EU foreign direct investment is in China.49 Furthermore, bilateral trade in services was about ten times lower than trade in goods in 2012 and was seen as an area full of potential if China removed the barriers to entry.50 In January 2016, the EU and China agreed that the future deal should improve market access opportunities for their investors by establishing a genuine right to invest and by guaranteeing not to discriminate against their respective companies. Other areas to be covered include: transparency, licensing and authorisation procedures; rules on environmental and labour-related dimensions of foreign investment.51 Given that the investment court system is intended to be incorporated   European Commission (n 22).   European Commission, Trade – Policies, information and services, ‘Countries and regions – China’ (2017) http://ec.europa.eu/trade/policy/countries-and-regions/ countries/china/ accessed 4 February 2018. 49   European Commission press release, ‘EU and China begin investment talks’ (2014) accessed 4 February 2018. 50   European Commission fact sheet, ‘Facts and figures on EU-China trade’ (2014) accessed 4 February 2018. 51   European Commission, ‘EU and China agree on scope of the future investment deal’ (2016) accessed 4 February 2018. 47 48

M4644-CHAISSE_9781788971898_t.indd 280

11/10/2018 10:22



The appellate option 281

in all of the EU’s on-going and future investment treaty negotiations,52 the EU-China BIT will likely include provisions on ISDS that refer to the EU’s proposed new court for ISDS. In October 2016, during the 12th round of negotiations, the negotiating teams discussed the possibility to reform the old-style system through means such as establishment of binding interpretations, an appeal mechanism or the selection procedures for the composition of panels.53 The 16th round of the EU-China BIT negotiations took place in Brussels from 12–15 December 2017 which concluded with the parties agreeing to establish a negotiation agenda for this agreement in January 2018.54 It has been observed that China is taking an increasingly positive attitude towards ISDS.55 The negotiation of improved dispute settlement provisions may be in China’s interests as it continues to shift towards becoming a capital exporting economy.

52   European Commission, ‘A future multilateral investment court’ (2016) accessed 4 February 2018. 53   European Commission Directorate-General for Trade, ‘EU-China Investment Agreement: Report of the 12th round of negotiations, Brussels 26–30 September 2016’ accessed 4 February 2018. 54   See European Commission, ‘EU-China Investment Agreement: Report of the 16th Round of negotiations’ , accessed 4 February 2018. 55   Qianwen Zhang, ‘China’s ‘new normal’ in international investment agreements’ Columbia Center on Sustainable Investment (2016) accessed 4 February 2018.

M4644-CHAISSE_9781788971898_t.indd 281

11/10/2018 10:22

282

M4644-CHAISSE_9781788971898_t.indd 282

11/10/2018 10:22

56

Appeal panel composed of 15 persons elected by the Administrative Council of ICSID on the nomination of the Secretary-General of the Centre. The terms of the panel members would be staggered. Each appeal tribunal would have three members.

Composition of appellate tribunal The fees and expenses of the appeal tribunal members would be the same as those to which ICSID arbitrators are entitled (para. 10).

Remuneration

Any of the five grounds for annulment of an award set out in Art. 52 of the ICSID Convention, but also for a ‘clear error of law’ or for ‘serious errors of fact’ (which would be narrowly defined to preserve appropriate deference to the findings of fact of the arbitral tribunal) (para. 7).

Grounds of appeal Could consider merits of disputes, empowered to uphold, modify, reverse or annul (in whole or in part) awards. It could have remanded disputes to original arbitral tribunals or submitted them to new ones (para. 9).

Power of appellate tribunal The party requesting review of the award would be solely responsible for advances to meet the fees and expenses of the appeal tribunal members and other direct costs of the review proceeding (para. 10).

Costs

The time limit for the appeal tribunal to render its decision might be 120 days from the closure of the proceeding (para. 12).

Timing requirements

  ICSID Secretariat Discussion Paper, ‘Possible Improvements of the Framework for ICSID Arbitration’ (October 22, 2004).

None specified – the appeal facility could be used in conjunction with both forms of ICSID arbitration, UNCITRAL Rules arbitration and any other form of arbitration provided for in the ISDS provisions of investment treaties.

ICSID (2004)56

56

Composition of first instance tribunal

IIA

Table 15A.1 A comparison of the main provisions of the annulment procedure under the ICSID Convention and the appellate procedure in the EU proposal

APPENDIX

283

M4644-CHAISSE_9781788971898_t.indd 283

11/10/2018 10:22

TTIP

Appointments of appeal tribunal members would be made from the panel after consultation with the parties as far as possible (para. 5). 15 Judges, Six appointed composed of five members, nationals of an EU composed of two Member State, five nationals of an US nationals and EU Member State, five nationals of two US nationals third countries, to and two nationals be appointed by of third countries, a joint committee appointed by the of the contracting committee (Art. parties (Ar. 9(2)). 10(2) and (3)). Cases to be heard The appeal tribunal in divisions shall hear appeals consisting of three in divisions judges (Art. 9(6)). consisting of three Members (Art. 10(8)). Monthly retainer fee and a fee for each day worked, paid equally by the contracting parties (Arts 10(12) and (13)).

Error in interpretation or application of the applicable law; manifest error in the appreciation of the facts (including the appreciation of relevant domestic law); and the grounds provided for in Art. 52 of the ICSID Convention (Art. 29(1)) (Art. 19(1)).

The appeal tribunal may dismiss the appeal on an expedited basis where it is clear that the appeal is manifestly unfounded (Art. 29(2)). If well founded, appeal tribunal may modify or reverse the legal findings and conclusions in the provisional award in whole or in part (Art. 29(2)).

‘Loser pays’ principle for both first instance and appeal proceedings (Art. 28(4)).

Subject to some exceptions, the first instance decision must be issued within 18 months from submission of a claim and the appeal proceedings must not take longer than 180 days (Arts 28(6) and 29(3)).

284

M4644-CHAISSE_9781788971898_t.indd 284

11/10/2018 10:22

Composition of first instance tribunal

15 Members, composed of five nationals of an EU Member State, five Canadian nationals and five nationals of third countries, to be appointed by the CETA Joint Committee (Art. 8.27(2)). Cases to be heard in divisions consisting of three members of the tribunal (Art. 8.27(6))

IIA

CETA

To be determined by CETA Joint Committee (Art. 8.28(7)(f)).

Composition of appellate tribunal

Table 15A.1 (continued)

To be determined by CETA Joint Committee (Art. 8.28(7)(d)).

Remuneration

Error in interpretation or application of the applicable law; manifest error in the appreciation of the facts (including appreciation of relevant domestic law); and the grounds provided for in Art. 52 of the ICSID Convention (Art. 8.28(2)).

Grounds of appeal The appellate tribunal may uphold, modify or reverse a tribunal’s award (Art. 8.28(2)).

Power of appellate tribunal ‘Loser pays’ principle for first instance proceedings (Art. 8.39(5)). Provisions related to costs for appeals to be determined by the CETA Joint Committee (Art. 8.28(7) (e)).

Costs

Subject to some exceptions, the first instance decision must be issued within 24 months from submission of a claim. (Article 8.39(7))

Timing requirements

285

M4644-CHAISSE_9781788971898_t.indd 285

11/10/2018 10:22

EUVietnam FTA

Nine members, composed of three nationals of an EU Member State, three nationals of Vietnam and three nationals of third countries, to be appointed by the Trade Committee (Art. 12(2)). Cases to be heard in divisions consisting of three members of the tribunal (Art. 12(6)).

Six appointed members, composed of two nationals of an EU Member State, two nationals of Vietnam, and two nationals of third countries (Art. 13(2)).

Monthly retainer fee and a daily fee to the President and Vice-President of the appeal tribunal for each day worked, paid by both parties taking into account their respective levels of development (Art. 13(15)).

Errors in the application or interpretation of applicable law; manifest errors in the appreciation of the facts, including the appreciation of relevant domestic law; and the grounds provided for in Art.52 of the ICSID Convention (Art. 28(1)).

The appeal tribunal can uphold, modify or reverse an award, and it can also refer back issues to the tribunal for adjustment of the award or where it is not possible for it to apply its own legal findings and conclusions and render a final decision on the matter (Art. 28).

‘Loser pays’ principle for both first instance and appeal proceedings (Art. 27(4)).

Subject to some exceptions, the first instance decision must be issued within 18 months from submission of a claim and the appeal proceedings must not take longer than 180 days (Arts 27(6), 28(5)).

M4644-CHAISSE_9781788971898_t.indd 286

11/10/2018 10:22