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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 264 November 4, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
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On March 15, 2019, China’s new
Foreign Investment Law was passed, creating a general framework for FDI in China.[1] It marks a milestone in a 40-year
policy process, through which China has opened up to the outside world, while incrementally adopting international standards to drive domestic reform. It also signals a new stage of increasingly difficult and substantive reforms.
Notwithstanding the current criticism of globalization, the integration of global value chains has significant implications for the international economic order. China’s investment law endeavors to establish an open market to attract and promote the free flow
of resources, with Pilot Free Trade Zones serving as experimental precursors. Three features are noteworthy:
- Investment facilitation is the first step toward improving the domestic investment environment. The Law provides for a transparent law- and standard-setting process, entitling the participation of foreign investors; mandates a system enabling consultations
regarding all investment law and policy matters; simplifies administrative procedures for FDI (e.g., permissions, licensing); and provides for the establishment of bilateral or multilateral cooperative institutions to enhance the international exchange of
best practices for FDI, all of which reflect the principles of the WTO’s
Joint Ministerial Statement on Investment Facilitation for Development. This is supported by China’s general policy to streamline administrative procedures, delegate powers and improve regulations and services. As investment facilitation does not address
market access, standards of treatment and dispute settlement, it does not impinge on the country’s sovereignty and is therefore a rather low-hanging fruit for enhancing the doing-business environment.
- The Law grants foreign investors pre-establishment national treatment, with
Special Management Measures for Foreign Investment Access (negative list) as the only exception. This mechanism changes China’s FDI regulatory regime substantially. The negative list is the result of the Pilot Free Trade Zones experimentation underway since
2013 and the exercise of evaluating the potential risks of an open investment market, while responding to foreign investors’ concerns regarding particular issues such as forced local partners. In its latest version, the list (which replaces China’s long-standing
Catalogue of Industry Guidance for Foreign Investment) lays out the market-opening timelines for automobile manufacture and finance industries, and eliminates the shareholding ratio requirements for sectors such as the power grid and railway network infrastructure,
as well as aircraft design, manufacture and maintenance. Although the list will continue to become shorter (thus opening more industries), its current implementation is insufficient, as the list adopts China’s
Industrial Classification, which differs from international practices and might cause confusion for foreign investors; the listed special management measures fail clearly to refer to specific regulatory rules and thus lack transparency; and once an investment
is established, doing business in certain industries remains subject to licenses or permissions. A more transparent, precise and integrated regulatory system is needed so that foreign investors can truly enjoy national treatment.
- Regarding investment protection, however, law and policy makers are too eager to please foreign investors, partly because they stretch to address issues not properly included in an FDI law. Concerning the protection of intellectual property rights,
the Law explicitly prohibits government officials to force intellectual property transfers or to reveal foreign investors’ business secrets acquired in exercising their authority to any third party. However, this issue might be better addressed through amending
the intellectual property law and related mechanisms. The Law also provides foreign affiliates with a complaint mechanism, to facilitate communication with foreign investors in terms of policy coordination or public bodies’ tortious acts. However, enforceable
procedures are absent, as well as explanations about the relationship between the complaint mechanism and existing administrative procedures. The Law touches upon issues outside its scope and lacks enforceable mechanisms. This may arouse suspicion rather than
boost the trust of foreign investors.
The Foreign Investment Law will take effect in January 2020. Detailed regulations are currently being drafted and reviewed at the national level, led by the State Council, the Ministry of Commerce and the National Development and Reform Commission. As provided
for in the Law, comments from foreign investors submitted through the drafting process shall be taken into account. While this reform process reflects China’s long-term interests, it faces the immediate difficulty of winning the trust of international investors.
*
The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinions of CCSI or Columbia University or our partners and supporters.
Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Yun Zheng ([log in to unmask])
is Lecturer at the School of International Law, Southwest University of Political Science and Law, and Associate Researcher at the Institute of Free Trade Zones, Sun Yat-Sen University. The author wishes to thank Manjiao Chi, Tong Qi and Qinglin Zhang for
their useful insights, and is grateful to Julien Chaisse, Shaun Donnelly and Timothy Stratford for their helpful peer reviews.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Yun Zheng, ‘China’s new Foreign Investment Law: deeper reform and more trust are needed,’ Columbia FDI Perspectives, No. 264,
November 4, 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. 263, Fabio Morosini, Nicolás M. Perrone and Michelle R. Sanchez-Badin, ‘Strengthening multi-stakeholder cooperation in the international investment regime: The Brazilian model,’ October 21, 2019
- No. 262, Rishi Gulati and Nikos Lavranos, ‘Guaranteeing the independence of the judges of a Multilateral Investment Court: A must for building the Court’s credibility,’ October 7, 2019
- No. 261, Zbigniew Zimny, ‘FDI has benefitted the EU members from Central and Eastern Europe and can continue to do so,’ September 23, 2019
All previous
FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- CCSI is hiring an Economics and Policy Researcher to help develop and execute the Center’s applied research agenda on energy, extractive industries and sustainable development. Specifically, the incumbent
will lead research on the economic and policy frameworks shaping investments in oil, mining and gas globally, and their impacts on sustainable development, as well as on implications for investment of the energy transition. For more details and qualifications,
please see our
website.
- On November 7, 2019, our Fall 2019 International Investment Law and Policy Speaker Series, co-sponsored by Baker McKenzie and Arnold & Porter, continues with a talk by
Martti Koskenniemi, Professor of International Law, University of Helsinki, Director of Erik Castrén Institute of International Law and Human Rights, on “Private Rights and International Law: A History of Globalization.” Please
see our website for more information and the full
schedule.
- On November 18, 2019, CCSI, the Center for Chinese Legal Studies, and the Society for Chinese Law (SCL) will co-host a talk by Angela Zhang, Associate Professor of Law and Director
of the Centre for Chinese Law, University of Hong Kong, on “The US-China Trade Negotiation: A Contract Theory Perspective.”
Please see our
website for more information.
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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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