What are the potential innovations that can be expected in the China-EU bilateral investment treaty?

After 15 rounds of negotiations over more than three years, the largest bilateral investment in the world is on the cards if China and the EU successfully conclude an investment treaty later this year.   Leaders from academia, government, business and civil society will discuss regional investment trends and the treaty’s legal and policy implications at a conference in Hong Kong next month.

The Asia FDI Forum, “China-European Union investment relationships: Towards a new leadership in global investment”, organised by The Chinese University of Hong Kong’s faculty of law, the Centre for Financial Regulation and Economic Development and Tsinghua Law School, will hear insights about the challenges in the negotiation of the treaty and potential innovations that could be used in it. Professor Julien Chaisse, creator of the forum, tells Asialaw about some of the possible features of the treaty.

Asialaw (AL): What was the inspiration for the creation of the forum?

Julien Chaisse (JC): There has been a growing importance of investment in Asia, with a sharp increase in foreign investment into Asia in the past eight to 10 years. The role of law has come in with the need for stability and in resolving disputes. I started the FDI forum because there was nothing similar that people could identify with. For the third forum, the focus is on the China-EU relationship. The China-EU relationship has been growing in importance, with China being one of the top three investors into the EU and vice versa. With 27 investment treaties between China and 27 EU member states, having to go through 27 sets of conditions for market entry, regulation is cumbersome and this affects competition and regulation. EU member states have transferred the power to make the EU-China investment treaty to the European Commission to replace the existing treaties.

AL: What are the driving factors for the treaty negotiation?

JC: Firstly, there are geopolitical challenges with the US withdrawing from Asia and the Trans-Pacific Partnership (TPP) and an inexistent trade policy, so there is a spot that could be taken by the EU. Secondly, with the growth of FDI and China’s “One-Belt-One-Road” policy, it cannot rely just on the US. Thirdly, the EU wants to liberalise foreign investment and there is a need to offer preferential access for investors in China.

AL: The EU already has investment treaties with Canada, Singapore and Vietnam. What were some of the lessons learned from the negotiation of these treaties and what kinds of innovations may be expected in the treaty?

JC: The EU’s treaties with these three countries offer an indication of what the EU will do with China as a big bloc with high bargaining power. Innovations will be needed to provide new ways to solve old problems. For example, there will likely be a chapter focusing on regulating state-owned enterprises. This has been a strong focus in the Vietnam-EU treaty. There will also be a focus on investor protection from expropriation. On the issue of taxation, China wants to exclude it from the treaty because it doesn’t want to be sued for tax reforms. When applied to investments, treaties may have the impact to freeze tax reforms.

On the issue of dispute settlement, arbitration has been used for many years and has generated more cases than the WTO on not just investment issues, but also on sovereign bonds and IP rights. But there are issues of transparency and conflicts of interest, calling for the need for a more sophisticated system. An international court system with a tribunal of first instance and an appeal tribunal with permanent judges is being discussed. This system is already in place in the Canada-EU and Vietnam-EU treaties and the EU will be re-opening the negotiation of this issue with Singapore. More than one-third of the disputes that have arisen from EU member states’ treaties with China have been with Eastern European countries. These are the countries that are most attractive to investors but also the ones that are still progressing in developing tax, competition and governance regulations and more likely to generate investor disputes.

AL: What’s the motivation behind the court system?

JC: It’s about moving from private to public justice. But with arbitration, parties can pick arbitrators who can understand the difficulties of their business and it has its flexibilities and confidentiality. The goal is to get many treaties and then consolidate the court system of different treaties into one later on.

AL: What stage are the negotiations at?

JC: The first round of negotiations started in January 2014 and since then, there have been 15 rounds of negotiations divided into the three tracks: investment liberalisation, investment protection and dispute resolution. The negotiations are close to completion and the treaty may be ready later this year.

AL: Who are some of the speakers that will be sharing their insights at the forum?

JC: There will be a number of prominent speakers, including:

  • Danielle Yeow, deputy director-general at the Attorney-General’s Chambers’ international affairs division in Singapore, who has been involved in the negotiation of the TPP and EUSFTA;
  • Huiyao Wang, president at the think tank Centre for China and Globalisation and counselor at China’s State Council;
  • Theresa Cheng, professor at Tsinghua University, formerly the Chairperson of the Hong Kong International Arbitration Centre who has been involved extensively with investment disputes as an arbitrator;
  • Pascal Kerneis, managing director of the European Services Forum, a lobby group for the European services sector based in Brussels.

Asialaw is supporting the Asia FDI Forum III “China-European Union Investment Relationship: Towards a New Leadership in Global Investment Governance” on May 11 and 12.