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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 257 July 29, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
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The EU and China have been negotiating an investment agreement since 2013.[i] The EU-China Summit Joint Statement released on April 9, 2019 set an ambitious target for the conclusion of a EU-China Comprehensive Investment Agreement in 2020. However, some critical concerns remain to be addressed.
- Market access. Although both parties have agreed on a “negative list” approach, they face difficult challenges with defining a short and narrow list of reservations. Contrary to the EU, China has never adopted negative lists in bilateral agreements (except in the 2017 supplementary agreements relating to the comprehensive economic partnership agreements with Hong Kong and Macao). China’s experiments conducted in pilot free trade zones since September 2013 have not been successful enough to warrant further experimentation. Furthermore, EU members, for their part, have reservations at the state level under the EU’s two-tier legal system, while China is a unitary state that has to adopt a single negative list. Balancing the EU and member states’ expectations for market access and China’s possible concessions is a difficult exercise. To move negotiations forward efficiently, both parties may want to take the third version for market access considered in the U.S-China bilateral investment treaty (BIT) negotiations as a basis. China may make reservations in sensitive industries (e.g., national defense, infrastructure, finance, media) and attempt to minimize EU member states’ reservations.
- National treatment (NT). Among China’s 26 BITs with EU members, only 15 provide for NT, and none of them includes pre-establishment NT. Pre-establishment NT is not just a contentious matter in the negotiations, but controversy persists about the definition of “Chinese investors”. Even though none of China’s statutes grant more advantages to Chinese state-owned enterprises (SOEs) than to private entities, SOEs enjoy more favorable preferences regarding subsidies, tax deferral and credit support. While China’s just-adopted Foreign Investment Law grants pre-establishment NT, it does not clarify the status of SOEs, which may be specified in future State Council regulations. In the EU-China BIT negotiations, China may adopt neutral competition principles in allocating subsidies, tax referral, finance, or other support, as well as providing for equal access to information and government procurement, to ensure non-discriminatory treatment of EU investors.
- Investment court system (ICS). To address the flaws of investor-state dispute settlement (ISDS), the EU advocates an ICS in negotiating investment agreements with other partners, while historically China has been skeptical about—even averse to—international dispute-settlement mechanisms. As a host and home country vis-a-vis the EU, China aims to balance benefits in both capacities. China has adopted ISDS in most of its agreements since entering into the 1998 China-Barbados BIT, and it has been involved in some ISDS cases. Due to significant differences between the ISDS and ICS approaches, China has not taken a clear stand on, nor expressly opposed, the ICS. In the above-mentioned Joint Statement, both the EU (and member states) and China envisage cooperating in support of ISDS reform. In particular, China may request further negotiations on specific issues, including the selection of third-party ICS members, the appeal tribunal authority and the enforcement of decisions (since the EU is not a signatory to the ICSID Convention and the New York Convention), as well as clarifications on some substantive matters (especially fair and equitable treatment, indirect expropriation). China may adopt the ICS if the parties agree on these pending issues.
- Other issues. Besides seeking high standards for investment protection and liberalization, the EU also seeks to include such “investment-plus” (or “investment-extra”) issues as democracy, taxation, intellectual property, labor and environmental protection, and sustainable development in the negotiations. Although China has incorporated sustainable development, public health and environmental protection in the preambles of recent agreements, it is reluctant to adopt them as binding obligations, enforced through ISDS. Instead, China prefers negotiations, mediation, conciliation, ad hoc state-to-state committees, or other approaches. The EU must know that these issues cannot be settled under an “all-or-nothing” strategy. The more pragmatic and effective way is to set these issues as non-binding obligations (e.g., stated purposes, objectives, guiding principles) or as obligations actionable through joint consultations, negotiations, mediation, or periodic policy reviews—and upgrade them step-by-step through further negotiations.
Concluding the EU-China BIT is a considerable challenge. However, as economies are becoming increasingly interconnected and interdependent, and with both parties considering cooperation as a counterpoint to the “America-First” policy, an agreement should be possible in the near future. The parties’ ambition to reach an agreement in 2020 and China’s just-adopted Foreign Investment Law (which promotes investment and provides high standards of investment protection) are strong signals to that effect.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinion of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Yong Liang ([log in to unmask]), Ph.D., is Associate Professor, Fudan University Law School Shanghai. The author is grateful to Julien Chaisse, Huiping Chen and an anonymous peer reviewer for their helpful comments.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Liang Yong, ‘Challenges for the EU-China BIT negotiations,’ Columbia FDI Perspectives, No. 257, July 29, 2019. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Alexa Busser, [log in to unmask].
Most recent Columbia FDI Perspectives
- No. 256, Evan Gabor and Karl P. Sauvant, “Incentivizing sustainable FDI: The Authorized Sustainable Investor,” July 15, 2019
- No. 255, Kinda Mohamadieh, “A legally binding instrument on business and human rights to advance accountability and access to justice,” July 1, 2019
- No. 254, Marion A. Creach, “Assessing the legality of data-localization requirements: Before the tribunals or at the negotiating table?,” June 15, 2019
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On September 25, 2019, CCSI, will host its 14th Annual Columbia International Investment Conference: “Aligning Corporations with the Sustainable Development Goals.” The conference aims to clearly define SDG-aligned corporate activity in order to bring coherence and rigor to SDG measurement, reporting, and tools, helping to avoid the divergence and incoherence that has undermined the usefulness of ESG criteria and tools to date. For more information, and to register, please see our website here.
- On September 25, 2019, CCSI, the UN Sustainable Development Solutions Network (SDSN), and Le Club des Juristes, with support from Iberdrola and under the guidance of Prof. Jeffrey Sachs, Special Advisor to the UN Secretary-General on the SDGs, and Laurent Fabius, President of the Constitutional Council of the French Republic, will host a conference to discuss the Global Pact for the Environment. For more information, and to register, please see our website here.
- On September 27, 2019, CCSI, the Sabin Center for Climate Change Law, Landesa, and Wake Forest Law School will be hosting a day-long conference on the intersection between land use, the climate crisis and clean energy transition, and human rights. For more information, and to register, please see our website here.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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