China’s Outward Foreign Direct Investment and...

Chinarsquos Outward Foreign Direct Investment andInternational Investment Law

Karl P Sauvant and Michael D Nolan

A B S T R A C T

As Chinarsquos outward foreign direct investment (FDI) has grown its approach to inter-national investment agreements (IIAs) has changed China is now one of the worldrsquosmost important outward investors with Chinese FDI facing widespread criticism Thechallenge for China is to adapt to this new configuration of interests stemming fromthese developments both in terms of its national policies and the contents of its IIAsIn so doing it is likely to influence perhaps significantly the further evolution of inter-national investment law This article deals briefly with the salient features of Chinarsquosoutward FDI and the policies that support it (Section A) the perception and receptionof Chinarsquos outward FDI in key host countries (Section B) and the changing nature ofthe countryrsquos approach to international investment treaties (Section C) The articleconcludes (Section D) with a brief review and outlook

I S A L I E N T F E A T U R E S O F C H I N A rsquo S O U T W A R D F D I A N D P O L I C YI S S U E S R E L A T E D T O T H E M

A The rise of Chinarsquos outward FDIChina has become a major player in the world FDI market The countryrsquosoutward FDI flows grew from US$7 billion in 20011 to US$101 billion in

Karl P Sauvant (karlsauvantgmailcom) is Resident Senior Fellow Columbia Center on SustainableInvestment (CCSI) a joint center of Columbia Law School and The Earth Institute at ColumbiaUniversity and an Adjunct Professor at Columbia Law School he was the Founding Executive Director ofthe predecessor of CCSI the Vale Columbia Center on Sustainable International Investment and Directorof UNCTADrsquos Investment Division Michael D Nolan (mnolanmilbankcom) is a Partner in theLitigation and Arbitration Group of Milbank Tweed Hadley amp McCloy LLP and an Adjunct Professor ofLaw at Georgetown University The authors would like to thank Louis Brennan Filip De Beule ChristophDoerrenbaecher Noha Rubins Anthea Roberts Stephan Schill and Wenhua Shan for their helpful peer re-views as well as Camilla Gambarini Schahram Ghalebegi Thomas Jost Nancy Lee Andrei Panibratovand Adrian Torres who prepared the host country analyses on which section B of this chapter is based andKamel Aıt-El-Hadj Victor Z Chen Monica R DiFonzo Ksenia Gal Premila Nazareth Satyanand ZhangSheng Yina Yang and You Zhou for their very helpful assistance in the preparation of this chapter Specialthanks go to Camilla Gambarini for helping to finalize this manuscript A shortened version of this articleappears in Benjamin Liebman and Curtis J Milhaupt eds Regulating the Visible Hand The InstitutionalImplications of Chinese State Capitalism (New York Oxford University Press 2015)

1 Unless otherwise indicated all data are from UNCTAD Stat available at httpunctadstatunctadorgReportFoldersreportFoldersaspx (last visited 6 March 2015)

1

Journal of International Economic Law 2015 0 1ndash42doi 101093jieljgv045Article

by guest on Novem

ber 21 2015httpjieloxfordjournalsorg

Dow

nloaded from

20132 and US$116 billion in 20143 for an accumulated stock of US$730 billion4 Interms of outflows this made China the single most important home country amongall emerging markets5 in 2014 and the third (behind the USA and Hong Kong(China)) largest among all home countries6 complementing its role as the singlelargest host country among developing countries Indications are that Chinarsquos out-ward FDI will continue to rise with one source projecting US$1-2 trillion in globalChinese outward FDI from 2010ndash207 In fact Chinarsquos outward FDI flows have al-ready almost caught up with Chinarsquos inward FDI flows in 2001 outward FDI flowsas a percentage of inward FDI flows were 158 in 2014 they were 909 Chinamay soon be a net outward FDI flows country

Chinarsquos 16000 multinational enterprises (MNEs) had established some 22000foreign affiliates in 179 countries and territories by end-201210 Mergers and acquisi-tions (MampAs) have become an important entry mode into foreign markets It ishowever difficult to ascertain how the countryrsquos FDI is distributed across sectors andgeographic regions as more than two-thirds of Chinarsquos non-financial sector outflowsare channelled via financial centers and tax havens (Hong Kong the Cayman Islandsthe British Virgin Islands Luxembourg Panama)11 consequently it is not known inwhich countries and sectors they are ultimately invested But it seems to be likelythat services and natural resources are the most important sectors and that Chinesefirms have invested substantially in both developed and developing countries

These figures should not disguise however that globally Chinarsquos average sharein world FDI outflows averaged only 5 during 2010ndash12 while its share in theworldrsquos outward FDI stock was 3 in 201412

A mix of motives drives the growth of Chinarsquos outward FDI motives also knownfrom the growth of MNEs headquartered in other countries although their relativeimportance may vary13 A good part is resourcendashseeking explained by the fact thatChina is short of mineral and petroleum resources while its rapid economic growthneeds these in high quantities Trade-supporting FDI is important reflecting thecountryrsquos leading role in international exports Also relevant is the desire to access

2 See UNCTAD World Investment Report 2014 Investing in the SDGs An Action Plan 206 (GenevaUNCTAD 2014) available at httpunctadorgenPublicationsLibrarywir2014_en

3 See UNCTAD World Investment Report 2015 Reforming International Investment Governance (GenevaUNCTAD 2015) A4

4 See ibid at A85 See ibid Annex table 26 See UNCTAD above n 3 at 87 See Thilo Hanemann and Daniel H Rosen Chinese Invests in Europe Patterns Impacts and Policy

Implications 5 (New York Rhodium Group 2012) This compares to a global FDI outward stock of US$26 trillion in 2013 see UNCTAD n 2 at 30

8 See UNCTAD Stat available at httpunctadstatunctadorgReportFoldersreportFoldersaspx9 See UNCTAD n 3 at A4

10 Ministry of Commerce Peoplersquos Republic of China (MOFCOM) Summary 2012 Statistical Bulletin ofChinarsquos Outward Foreign Direct Investment (10 August 2013) available at httpwwwmofcomgovcnarticletongjiziliaodgzz20130920130900295526shtml

11 MOFCOM 2011 Statistical Bulletin of Chinarsquos Outward Foreign Direct Investment available at httpimagesmofcomgovcnhzs20130920130923082710756pdf

12 UNCTAD above n 313 See eg Peter J Buckley et al lsquoThe Determinants of Chinese Outward Foreign Direct Investmentrsquo 38

Journal of International Business Studies 499 (2007)

2 Chinarsquos Outward FDI and International Investment Law

by guest on Novem

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markets through direct investment (as opposed to trade) including to protect theChinarsquos exporters against possible trade barriers A number of projects are further-more characterized by the need to acquire technology and other asset-augmentingresources (such as brand names and distribution networks) Given rising costs par-ticularly in the countryrsquos coastal provinces (especially of labor) efficiency-seeking in-vestment is becoming important directed mainly to some Asian and Africancountries Finally a number of specific factors play a role including round-trippingfunds back into the country (eg to benefit from the protection of bilateral invest-ment treaties (BITs)) to benefit from lower taxes (or avoid taxes) to park fundsabroad for future uses or simply to take funds out of the country under the guise ofoutward FDI14

B Principal characteristicsApart from its rapid and speedy rise and the salient features already mentioned thereare two other features that characterize Chinarsquos outward FDI

The first one is that in distinction to virtually all other major outward investorsstate-owned enterprises (SOEs) account for a substantial share of the countryrsquos out-ward FDI flows and stock In addition many non-SOEs (especially the bigger ones)are linked to Chinarsquos government in one way or another including because top ex-ecutives and board member are members of the Chinese Communist Party some-times in high positions15 Although as of the end of 2011 some 13500 Chinesefinancial and non-financial enterprises had established about 18000 foreign affiliatesin 177 host economies16 the 113 central SOEs controlled by the State-owned AssetsSupervision and Administration Commission (SASAC)17 alone accounted for 66of Chinarsquos non-financial FDI outflows and 76 of the countryrsquos non-financial out-ward FDI stock in 2011 This raises the question of whether Chinarsquos outward FDI(or at least a good part of it) might be made for purposes other than commercialones and more specifically may be detrimental to the national security of host coun-tries18 The extent to which this might be the case in a systematic manner is difficultto ascertain as it is for the outward FDI of SOEs headquartered in other countries19

14 This can also involve individuals who may buy real estate or otherwise take their funds abroad under theguise of outward FDI

15 See Curtis J Milhaupt and Wentong Zheng lsquoBeyond Ownership State Capitalism and the Chinese FirmrsquoGeorgetown Law Journal (forthcoming 2015) It is of course difficult to determine how much influencethis has on the day-to-day operations of a firm as many of the founders and chief executives of that gener-ation were members of the Party andor government

16 MOFCOM above n 11 at 317 See State-owned Assets Supervision and Administration Commission of the State Council available at

httpwwwsasacgovcnn1180n1226n2425indexhtml (last visited 17 July 2014)18 For a discussion of these concerns Karl P Sauvant et al (eds) Sovereign Investment Concerns and Policy

Reactions (Oxford University Press New York 2012)19 In this context it should be noted that outward FDI by SOEs headquartered in developed countries is

significantly more important than that by SOEs headquartered in emerging markets More specifically in2010 of the top 100 largest non-financial MNEs worldwide and the 100 largest headquartered in emerg-ing markets (determined on the basis of the size of their foreign assets) 49 were SOEs Of these 49 20were headquartered in developed countries controlling US$14 trillion in foreign assets while 29 wereheadquartered in emerging markets controlling US$04 trillion See Karl P Sauvant and Jonathan StrausslsquoState-controlled Entities Control Nearly US$2 Trillion in Foreign Assetsrsquo 64 Column FDI

Chinalsquos Outward FDI and International Investment Law 3

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Still as will be discussed below these concerns have led to the creation orstrengthening of regulatory review processes of incoming MampAs in a number ofcountries especially for certain sensitive industries The September 2012 veto by thePresident of the USA of a Chinese windmill project near a military base inOregonmdashthe first such veto in 22 years and only the second one in the history ofthe Committee on Foreign Investment in the USAmdashis emblematic of these con-cerns20 On the other hand Chinarsquos government has encouraged private enterprisesrsquooverseas investment in the past several years For example the NationalDevelopment and Reform Commission issued lsquoThe Implementation Opinions onEncouraging and Guiding Private Enterprises to Actively Conduct OverseasInvestmentrsquo in 201221 which created preferential policies for the outward FDI of pri-vate enterprises including tax incentives financial support and custom reform

The second feature that distinguishes Chinarsquos outward FDI concerns the fact thatChina has a relatively sophisticated regulatory framework dealing with outward FDIIt is a framework that has moved within two decades from restricting to encourag-ing22 Embedded in an overall development strategy Chinarsquos lsquogoing outrsquo strategy23

has two principal purposes One the regulatory framework facilitates and supportsoutward FDI to create globally competitive Chinese firms a portfolio of locationalassets in form of an international network of foreign affiliates provides access to re-sources of all kinds (including know-how brand names) and facilitates access to mar-kets both enhance corporate competitiveness including by allowing firms toupgrade their own capabilities and thus compete more successfully in the domesticmarket (with other domestic firms and foreign affiliates in China) Two Chinarsquos out-ward FDI framework encourages the type of outward FDI that contributes directlyto Chinarsquos development especially by obtaining natural resources promoting exportsor strengthening the countryrsquos technological base24 The government has put in placean institutional structure and various instruments (lsquohome country measuresrsquo) for thispurpose

Although a number of government institutions have in one way or another a sayon outward FDI the principal ones are the National Development and ReformCommission (NDRC) and the Ministry of Commerce (MOFCOM) Together witha number of other institutions they established (in 2006) a lsquoSector direction policyrsquothat provides guidance for specific promotional measures on the basis of investmentthat is encouraged allowed and prohibited25 The specific instruments used to

Perspectives(2012) 1 lsquoSOEsrsquo are defined as enterprises in which the government has a controlling inter-est with lsquocontrolrsquo defined as a stake of 10 or more of voting power ibid at 2

20 In rare move lsquoObama Unwinds Chinese Acquisition of US Wind Farmsrsquo 12(39) Inside US Trade 1(2012) at 16ndash17

21 See National Development and Reform Commission available at httpwwwsdpcgovcnfzgggzwzlyzcfgwzzcjwtz201404t20140410_606603html (last visited 26 August 2014)

22 For a detailed discussion see Karl P Sauvant and Victor Z Chen lsquoChinarsquos Regulatory Framework forOutward Foreign Direct Investmentrsquo 7 China Economy Journal 141 (2013) at 141ndash163

23 The lsquogoing outrsquo strategy which guided the creation of the current FDI policy and regulatory frameworkwas announced by the Third Plenum of the Ninth National Peoplersquos Congress in March 2000 See XiaoYu and Lei Jiao lsquoA Brief Introduction of the ldquogo outrdquo Strategyrsquo 2 Qiaowu Gongzuo Yanjiu 1 (2011)available at httpqwgzyjgqbgovcnyjytt1591743shtml

24 See Sauvant and Chen above n 2225 See ibid

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encourage outward FDI include various subsidies (including financial and fiscal sup-port) priority access to loans expedited approval priority access to foreign ex-change tax rebates on (or waivers for) the export of goods (eg equipment)priority regarding overseas financing investment consulting risk assessment riskcontrol and investment insurance and priority treatment regarding informationquestions consular protection customs exit and the entry of personnel expatriatepersonnel approval registration and the domestic coordination of importndashexport op-eration rights and international communication26 These home country measuresseem to be equally available to both SOEs and private enterprises at least as far asthe formal regulatory framework is concerned27 At the same time China has a num-ber of regulations in place that prescribe standards of behavior for its foreigninvestors28

Finally a network of 130 bilateral investment treaties (BITs)29 as well as a num-ber of other international investment agreements provides protection to Chinarsquosoutward investors While these treaties were originally concluded with inward FDI inmind they have evolved considerably over time to reflect the rise of China as an out-ward investor an evolution discussed below in this paper

C ImplicationsAgainst this background three observations are in order

One while Chinarsquos regulatory framework for outward FDI appears to be verysophisticated the approval process is complex cumbersome and can be slow30

With the further growth of outward FDI the approval process will have to be simpli-fied considerably if not replaced by mere notifications unless it might collapse under

26 See ibid27 In practice though SOEs may benefit more from the home country measures that are available For ex-

ample the approval process may be faster for (especially large) SOEs and SOEs (especially the centralones) may have easier access to credit (typically an obstacle to SMEs everywheremdashand most of Chinarsquosoutward investors are SMEs) especially if this finance comes from state-owned banks Some of thesebenefits may simply be related to size and regardless of whether outward investors are SOEs or privatelyowned enterprises See ibid

28 See MOFCOM Outward Investment and Economic Cooperation Chinese foreign investment joint ventureconstruction compilation available at httpfecmofcomgovcnarticlezcfgzcfbdwtz2013031741680_1html (last visited 1 October 2014) MOFCOM Outward Investment and Economic CooperationChinese foreign investment joint venture construction compilationmdashPreparation instructions available athttpwwwgovcngzdt2009-0601content_1329230htm httpwwwcaeporgcnbook

pdf The ExportndashImport Bank of China Environmental ImpactAssessment Framework 2 January 2011 available at httpwwweximbankgovcntmmedialistindex_23_14365html The ExportndashImport Bank of China Resettlement Policy Framework 2 January 2011 avail-able at httpwwweximbankgovcntmmedialistindex_23_14367html China Banking RegulatoryCommission Notice on Issuing the Green Credit Guidelines 24 February 2012 available at httpwwwcbrcgovcnEngdocViewdodocIDfrac143CE646AB629B46B9B533B1D8D9FF8C4A China Chamber ofCommerce of Metals gt available at httpwwwsyntaocomUploadsfilePublic-Consultation_Draft_Guideline_Chinesepdf

29 See available at httpinvestmentpolicyhubunctadorgIIAIiasByCountryiiaInnerMenu (last visited 17December 2014) UNCTAD reported that the three countries with the most BITs were Germany Chinaand France

30 The last of these characteristics can create problems in the case of MampAs when at times speedy decisionsare required

by guest on Novem

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its own weight (given the growing number of Chinese MNEs and their foreign affili-ates) Reform may indeed be in the offing as part of XI Jinpings broader reform ef-forts indicative of this change is that beginning in May 2014 requiring only dealsvalued at more than US$ 1 billion to be approved by the National Development andReform Commission as compared to deals valued at more than US$ 100 millionpreviously31 It would also be more efficient to create a one-stop shop for the variousmeasures available to qualifying outward investors The combination of bothapproaches if pursued would imply that control measures regarding outward FDIwould increasingly be replaced by incentives in order to support the governmentrsquosbroader economic development goals making home country measures even moreimportant to encourage outward FDI that contributes as much as possible to thecountryrsquos development

Two as already noted China is in the process of becoming a net outward in-vestor One likely implication of this trend is that the governmentrsquos interest in pro-tecting its outward investments and facilitating access to markets for its firms wouldbe further enhanced perhaps eventually trumping its interest to protect its own firmsfrom inward FDI in certain sectors32 This in turn most likely would have implica-tions for the countryrsquos policy stance on international investment agreements Thewatershed accord reached in July 2013 between the governments of China and theUSA (in the context of the USAndashChina Strategic and Economic Dialogue) to con-tinue their negotiations of a BIT on the basis of pre-establishment national treatment(ie granting foreign investors market access) and the negative list approach to ex-ceptions from such treatment (ie listing sectors that are restricted to foreign in-vestors as opposed to sectors that are open to them)33 pinpoints the shift inemphasis in the countryrsquos perspective from a host country to a home country At thesame time it is of course entirely possible that this shift in approach was alsomotivatedndashand perhaps greatly sondashby the expectation that it could help in internaleconomic reform processes (including capital-market and SOE reforms) For thisreason the BIT negotiations (lsquocentury negotiationsrsquo) between China and the USA

31 See National Development and Reform Commission Peoplersquos Republic of China Order No 9 8 April2014 available at httpwwwsdpcgovcnfzgggzwzlyzcfgwzzcjwtz201404t20140410_606603html(The reference is to NDRC No 9 Order of 2014) MOFCOM still uses the same review documents asbefore but is proposing a new document in which only sensitive areasindustries will require full reviewsSee MOFCOM Department of Treaty and Law Commerce Department on lsquoOverseas InvestmentManagement (Amendment) (draft)rsquo for public comment available at httptfsmofcomgovcnarticleas20140420140400551680shtml (last visited 17 July 2014)

32 In fact it may well be that certain industries might already have reached such a degree of competitivenessthat protection is no longer needed and hence opening up might not have any discernible impact on themarket dynamics in those industries For example if one takes the Internet sector (where foreign firmshave mostly either been excluded completely or restricted in their operations) Chinarsquos firms in that in-dustry have gained such a degree of market dominance that it is difficult to see foreign firms competingsuccessfully in that industry Rather these Chinese firms are now beginning the early stages of their lsquogoingoutrsquo process potentially posing a threat to the established dominant Western firms in overseas marketsWe are grateful to Louis Brennan for this insight

33 lsquoImportant Outcomes in Economic Track in the Context of the Fifth-round of the US-China Strategicand Economic Dialoguersquo Xinhua (12 July 2013) The devil is of course in the detail much will dependon what kind of exceptions will be negotiated with future treaty partners and as far as the negative list isconcerned what industries will be placed on them

by guest on Novem

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have at times been compared to the negotiations that led to Chinarsquos entry into theWorld Trade Organization in terms of the internal reform consequences this entrybrought with them34 In any event soon after this watershed accord Chinarsquos StateCouncil approved (on 17 August 2013)mdashin a move reminiscent of the establish-ment of the first special economic zone in Shenzen in 1980mdasha pilot free trade zonein Shanghai35 that among other things will operate on the basis of a negative list ofexceptions for foreign investment36 Other experimental free trade zones of this typemay well be established in due course

Three China is not the only country that pursues its own national objectives inregard to the outward FDI of its firms and that has put home country measures intoplace to promote these objectives Virtually all developed countries (but only a fewdeveloping ones) pursuemdashto a larger or lesser extentmdashsimilar policies and supportthem through appropriate instruments37 Hence if home country measures becomean object of international negotiations a number of countries would be directlyaffected

Nevertheless in the view of a number of developed countries helping firms to in-vest abroad has become undesirable at least when it involves SOEs The principalreason38 might well be that MNEs from emerging markets and especially SOEs

34 According to a representative of the MOFCOMrsquos delegation negotiating the BIT lsquothe significance of theChina-US BIT negotiation is comparable to that of the WTO accession While the WTO access negoti-ation is related to opening up of trade the BIT negotiation is related to the reform of the administrativesystem of foreign investment and the opening up of foreign investment Hence the BIT negotiation willhave more challenges but more profound implicationsrsquo See Jiang Wei

(lsquoChina-US BIT Negotiations advance to negoti-ations on textrsquo) 21st Century Business Herald (16 January 2014) available at httpjingji21cbhcom20141-16yMMDA2NTFfMTA0NTIyMAhtml Wang Xinkui of the Shanghai WTO Center put it evenstronger lsquoThe China-US bilateral investment pact carries more significance than Chinarsquos accession intothe World Trade Organizationrsquo Li Jiabao lsquoChina US ldquopragmatic about pactrdquo rsquo China Daily Asia (16January 2014) available at httpwwwchinadailyasiacombusiness2014-0116content_15112679html (quoting Wang Xinkui)

35 See China (Shanghai) Pilot Free Trade Zone Promote reform with opening-up and promote developmentwith innovations available at httpenshftzgovcnhomepage_notehtml (last visited 2 August 2014) SeeChina (Shanghai) Pilot Free Trade Zone Regulations of China (Shanghai) Pilot Free Zone (Adopted at the14th Session of the Standing Committee of the 14th Shanghai Municipal Peoplersquos Congress of Shanghai on July25 2014) available at httpenshftzgovcnGovernment-affairsLawsGeneral319shtml (last visited25 July 2014) For a discussion see Timothy P Stratford and Scott Livingston lsquoThe Third WaversquoInsight November 2013 at 22 available at httpswwwamcham-shanghaiorgNRrdonlyres89B7633D-3682-4EBF-AC3F-F64D40151D1A203631Cover1pdf The authors suggest that theShanghai FTZ lsquocould signal the launch of a third wave of economic reformrsquo Ibid at 23

36 For an unofficial translation of the negative list see American Chamber of Commerce in ShanghaiNegative List for Shanghai Free Trade Zone available at httpamcham-shanghaiorgNRrdonlyres88D66CDB-B8C8-42C8-BBA0-69E18E02EC7220131UnofficialTranslationNegativeListOctober2013pdf (last visited 2 August 2014) The Shanghai free trade zone is a pilot project at the time of writingthis chapter not all regulations had as yet been put in place and the negative list was reportedly beingrevised See lsquoThe Compilation of the Negative List (2014 Version) Has Startedrsquo China Business News 20December 2013 available at httpwwwyicaicomnews2013123253248html

37 For an extensive analysis see Karl P Sauvant et al lsquoTrends in FDI Home Country Measures andCompetitive Neutralityrsquo in Andrea Bjorklund (ed) Yearbook on International Investment Law and Policy(Oxford University Press New York 2014) 2012ndash2013

38 In the case of Chinarsquos rapidly rising outward FDI furthermore broader geo-political considerationsrelated to strategic competition may come into play especially in the case of the USA

by guest on Novem

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from China have become significant outward investors39 Such help in the form ofhome country measures is seen as giving special advantages to SOEs40 distorting inthis manner the competitive OFDI landscape in favor of these enterprises in the mar-kets in which they invest The relevant concept is lsquocompetitive neutralityrsquo41 In theinternational context this concept means that no entity in an international marketshould have undue competitive advantages vis-a-vis its competitors Thus measuresto help firms in their outward FDI even when available equally to both public andprivate entities may in the future be evaluated in terms of their impact on competi-tive neutrality

The international discussions so far however have focused only on advantagesthat are enjoyed by SOEs This is the case in spite of the fact that in the case ofcountries that make such incentives available home country measures are availableto both public and private firms and that there is no systematic evidence that homecountry measures regularly provide SOEs with competitive advantages over their pri-vate (or mixed) counterparts when engaging in FDI and regardless of whether SOEsare based in developed economies or emerging markets42 A recent OECD studycame to the same conclusion when it noted regarding the types of advantagesgranted to SOEs by governments with respect to cross-border activities lsquo[e]xistinginformation on such advantages is often either anecdotal or limited to individualcasesrsquo43

The competitive neutrality discussions are being carried out in the OECD butthis issue has also entered the negotiations of the Trans-Pacific PartnershipAgreement44 and is expected to do so in other future negotiations45 with a view to-ward imposing disciplines on the availability of measures supporting outward FDI bySOEs Depending on the outcome of these negotiations and in particular future ne-gotiations in which China might participate the support that Chinarsquos SOEs obtainwhen investing abroad may eventually become a difficult policy issue

39 Outward FDI from all countries not classified by UNCTAD as lsquodevelopedrsquo reached US$550 billion in2013 (see UNCTAD above n 2)mdashsome eleven times of what world FDI flows were during the first halfof the 1980s

40 SOEsmdashand for that mattermdashalso other enterprises may be able to draw on other advantages eg whenthey have a monopoly position in their domestic market The discussion here focuses narrowly on specificmeasures meant to help firms invest abroad

41 The 2005 OECD lsquoGuidelines on corporate governance of state-owned enterprisesrsquo stipulate that lsquo[t]helegal and regulatory framework for state-owned enterprises should ensure a level-playing field in marketswhere state-owned enterprises and private sector companies compete in order to avoid market distor-tionsrsquo See Organisation for Economic Co-operation and Development (OECD) Guidelines on CorporateGovernance of State-Owned Enterprises at 18 (2005) available at httpwwwoecdorgcorporatecacorporategovernanceofstate-ownedenterprises34803211pdf

42 See Sauvant et al above n 3743 Przemyslaw Kowalski et al lsquoState-owned Enterprises Trade Effects and Policy Implicationsrsquo 147 OECD

Trade Policy Papers (2013) at 1044 For a discussion of the SOE issue in the Trans-Pacific Partnership negotiations see David A Glantz lsquoThe

United States and the Trans-Pacific Partnershiprsquo in Bjorklund above n 3745 For example in the context of the negotiations a Transatlantic Trade and Investment Partnership See

Office of the United States Trade Representative available at httpwwwustrgovabout-uspress-officefact-sheets2013februaryUS-EU-TTIP (last visited 2 August 2014)

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I I T H E P E R C E P T I O N A N D R E C E P T I O N O F C H I N A rsquo SO U T W A R D F D I I N H O S T C O U N T R I E S

A Rising scepticismChinarsquos outward FDI is facing rising scepticism This is partly the result of the speedwith which this investment has grown the leading role of SOEs in the countryrsquos out-ward FDI (and the associated concern that it could serve non-commercial purposes)the negative effects that can be associated with FDI (such as the transfer of research-and-development facilities from newly acquired firms to parent firms) the fear espe-cially regarding natural resource projects that host countries do not get a fair deal inthe distribution of benefits from such projects (including when these projects em-ploy primarily Chinese workers) perceived unfair competition especially in the caseof SOEs (based on eg the suspicion of subsidized financing) the negative image ofthe home country in some host countries (related also to the fact that members ofthe Chinese Communist Party are often in leading positions in Chinese MNEs) andthe fear that Chinarsquos outward FDI might compromise national security (especially re-garding such investment in critical industries and infrastructure) while supportingthe countryrsquos emergence as a global strategic competitor46 A look of the most im-portant host countries among developed countries emerging markets for Chinarsquosoutward FDI helps to throw more light on these matters47

46 See eg Hanemann above n 7 at 54ndash61 Peter Drysdale and Christopher Findlay Chinese ForeignDirect Investment in the Australian Resource Sectorrsquo in Ross Garnaut Ligang Song and Wing Thye Woo(eds) Chinarsquos New Place in a World in Crisis (Canberra ANU Press 2009) 349ndash388 available at httppressanueduauwp-contentuploads201106ch162pdf Cosima Cassel Giuseppe de Candia andAntonella Liberatore lsquoBuilding African Infrastructure with Chinese Moneyrsquo Paper (2010) available athttpwwwbarcelonagseeutmppdfITFD10Africapdf Xiaofang Shen Private Chinese Investment inAfrica Myths and Realities (Washington World Bank 2013) mimeo and Transparency matters disclos-ure of payments to governments by Chinese extractive companies Global Witness (January 2013) avail-able at httpwwwglobalwitnessorgsitesdefaultfileslibrarytransparency_matters_lrpdf Some ofthese fears accompanied also the rise of Japan as an outward investor in the 1980s For a study of the re-actions in the USA to this rise see Curtis J Milhaupt lsquoIs the US ready for FDI from China Lessons fromJapanrsquos experience in the 1980srsquo in Karl P Sauvant (ed) Investing in the United States Is the US Ready forFDI from China (Cheltenham Edward Elgar 2009) 185ndash208 And a number of these concerns (as wellas others) were traditionally also voiced by developing and other countries see UNCTAD WorldInvestment Report 1999 Foreign Direct Investment and the Challenge of Development (Geneva UNCTAD1999)

47 Extensive research was conducted between early September 2013 and the end of March 2014 on the fol-lowing countries primarily using Google to locate local newspapers institutions and government web-sites as well as the Factiva database and focusing on the years 2012 and 2013 some 700 items wereconsulted (in a number of cases the Chrome translation service was utilized) Australia Belgium BrazilCambodia Canada Chile China France India Indonesia Iran Ireland Italy Kazakhstan Laos MexicoMongolia the Netherlands Russia Saudi Arabia Singapore Spain Sudan the UK the USA and Zambiain addition research was undertaken for the European Union as a whole reflecting the fact that after theentry into force of the Lisbon Treaty on 1 December 2009 the Union has exclusive authority in the FDIarea These countries plus other members of the European Union accounted for some two-thirds ofChinarsquos outward FDI stock in 2011 and a somewhat higher share of Chinarsquos average FDI outflows during2009ndash2011 (as reported by MOFCOM) not counting Chinese FDI in the tax havens and financial cen-ters mentioned earlier in the text See MOFCOM above n 10 (Note however the observation made ear-lier that the MOFCOM data do not provide an accurate picture about the ultimate destination of Chinarsquosoutward FDI precisely because most of it is channeled via financial centers and tax havens) The researchwas done for English language publications and in each countryrsquos official language (except for Indonesia

by guest on Novem

Dow

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Overall FDI from China receives considerable attention in most of the countriesresearched even though it is relatively small in the great majority of them both inabsolute amounts and relative to the sums invested by firms from other countriesMoreover such investment is regarded with some trepidation in most (if not all)countries researched This is true especially for MampAs for which (apart from na-tional security reasons and competition issues) economic reasons can include thatMampAs may lead to lay-offs the closing down of production lines and the transfer ofresearch-and-development capacities to the parent firms (all concerns also knownfrom MampAs undertaken by MNEs headquartered in other countries) At the sametime it is recognized that MampAs can save firms that otherwise may be failingChinese greenfield investment on the other hand is generally welcome althoughthere are issues in the case of FDI in natural resources and telecommunications

Perceptions of incoming Chinese FDI are not uniform across constituencieswithin countries however nor are reactions to it across countries

B The mediaIn most of the host countries to Chinese FDI that were researched newspapers tendto represent a more critical constituencymdashbut again unevenly so Everywhere therise of incoming Chinese FDI (and especially important Chinese acquisitions) re-ceive attention far out of proportion of the relative importance of Chinese inwardFDI compared with that from other countries48 Headlines in newspapers read forexample lsquoLatin America playing a risky game by welcoming in the Chinese drag-onrsquo49 lsquoKazakh opposition calls for halt to Chinese expansionrsquo50 lsquoChinese investmentand aid in Cambodia a controversial affairrsquo51 lsquoChinese investment in Mongolia An

and Saudi Arabia) to obtain the relevant information To the extent possible official statements fromeach countryrsquos administration as well as parliamentary debates related to new legislations affectingChinese outward FDI were consulted In addition a good part of the information found was contained inboth domestic and international newspapers and in some cases research papers Research for Germanywas conducted by Schahram Ghalebegi The Perception and Reception of Chinarsquos FDI in Germany (BerlinSchool of Economics and Law Berlin April 2014) (on file with the authors) research for Kazakhstan andRussia was conducted by Andrei Panibratov Perceptions of Chinese FDI in Neighboring EmergingEconomies Different Groupsrsquo Opinions in Russia and Kazakhstan (St Petersburg State University StPetersburg May 2014) (on file with the authors) and research for all other countries was conducted byCamilla Gambarini Nancy Lee and Adrian Torres The Perception and Reception of Chinarsquos Outward FDIin Key Host Countries (New York Columbia Center on Sustainable Investment April 2014) (on file withthe authors)

48 In 2012 for example the USA received US$ 4 billion in FDI from China accounting for 5 of the totalKazakhstan received US$ 3 billion accounting for 3 of the total the UK received US$ 3 billion ac-counting for 3 of the total Australia received US$ 2 billion accounting for 3 of the total andIndonesia received US$ 1 billion accounting for 2 of the total See MOFCOM 2012 Statistical Bulletinof Chinarsquos Outward Foreign Direct Investment 36 (Beijing China Statistics Press 2012) In a few countrieshowever like Cambodia China accounts for a substantial share of inward FDI flows

49 Kevin Gallagher Latin America Playing a risky game by welcoming in the Chinese dragon The Guardian(30 May 2013 200 PM) available at httpwwwtheguardiancomglobal-developmentpoverty-matters2013may30latin-america-risky-chinese-dragon

50 Robin Paxton Kazakh opposition calls for halt to China expansion Reuters (28 May 2011 1057 AM) avail-able at httpukreuterscomarticle20110528kazakhstan-china-protest-idUKLDE74R02M20110528

51 Heng Pheakdey Chinese investment and aid in Cambodia a controversial affair East Asia Forum (16 July2013) available at httpwwweastasiaforumorg20130716chinese-investment-and-aid-in-cambodia-a-controversial-affair

by guest on Novem

Dow

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uneasy courtship between David and Goliathrsquo52 and lsquoFears over growing Chinese in-dustry in Laosrsquo53 National security concerns are particularly salient in the USAFrance54 and the UK55 Chinese FDI in natural resources sectors receives attentionin natural resource-rich countries such as Australia Canada Kazakhstan andZambia The fear is that when critical resources are controlled from abroad56 thebenefits associated with such projects may not be equitably distributed between for-eign investors and host countries including because labor is often imported fromChina and working conditions may be poor57 Media concerns in Australia also relateto the worry that strong Chinese investment in Australian real estate is leading to areal estate bubble58 Other media criticism involves broader negative effects such in-vestment can bring For example in France it was claimed (in relation to Chinese ac-quisitions of enterprises in key sectors of the European and French economies) thatlsquoChinarsquos cooperation dialogue usually hides the will of power and fast profitsrsquo59 In

52 Justin Li Chinese investment in Mongolia an uneasy courtship between David and Goliath East AsiaForum (2 February 2011) available at httpwwweastasiaforumorg20110202chinese-investment-in-mongolia-an-uneasy-courtship-between-goliath-and-david

53 Conor Woodman Fears over growing Chinese industry in Laos BBC News (28 May 2011) available athttpnewsbbccouk2hiprogrammesfrom_our_own_correspondent9498760stm

54 M Jean-Marie Bockelf Rapport drsquoInformation fait au nom de la commission des affaires etrangeres de ladefense et des forces armees sur la cyberdefense (Paris French Senate 18 July 2012) available at httpwwwsenatfrrapr11-681r11-6811pdf (noting that while the USA and Australia have banned the useof Chinese routers for reasons of national security (ie Chinese enterprises may be connected to the gov-ernment and there are suppositions of cyber espionage) such a ban does not exist in the EuropeanUnion According to the author of the report it is indispensable that the Commission introduces a banon the use of routers from China because it affects national security)

55 Brian Wheeler Is it a good idea to allow China a stake in UK nuclear BCC (Oct 17 2013) available athttpwwwbbccomnewsuk-politics-24563535 (reporting several concerns on the potential participa-tion of Chinese companies in United Kingdom nuclear power plants)

56 In Latin America and the Caribbean Chinese FDI in natural resources accounted for an average of almost90 of the countryrsquos FDI in the region during 2007ndash2011 (compared to a share of 25 for all foreign in-vestors in that region) See Taotao Chen and Miguel Perez Ludena Chinese Foreign Direct Investment inLatin America and the Caribbean (Santiago ECLAC 2014) 13 Together with the high share of natural re-sources in Chinarsquos imports from Latin America (70 see ibid) this has given rise to the fear that a newcenter-periphery relationship is in the making See also Miguel Perez Ludena lsquoIs Chinese FDI PushingLatin America into Natural Resourcesrsquo 63 Column FDI Perspective (19 March 2012)

57 In response to the low wages offered by Chinese firms the Zambian government raised the minimumwage (which came into effect on 4 July 2012) See Zambia dreaming of a minimum wage IRIN News (10July 2012) available at httpwwwirinnewsorgfrreport96073zambia-dreaming-of-a-minimum-wage

58 Vesna Nazor Chinarsquos appetite for Aussie real estate sparks boom SBS News (6 November 2013) avail-able at httpwwwsbscomaunewsarticle20131106chinas-appetite-aussie-real-estate-sparks-boom

59 Philippe Delalande Les investissements chinois en France les craindre ou les souhaiter Le Monde (15October 2012) available at httpwwwlemondefrideesarticle20121015les-investissements-chinois-en-france-les-craindre-ou-les-souhaiter_1775602_3232html (lsquoles Francais devront se departir drsquounecertaine naıvete face aux Chinois Ils se laissent seduire pas les discours chinois sur la cooperation quimasquent souvent une volonte de puissance et de profits rapides Et ils sont decontenances par la collu-sion constante en Chine des autorites politiques et des entreprises contraire a leur conception de lrsquoecono-mie de marche LrsquoEurope doit reformer son droit pour se preserver des risques que comportent lesinvestissements chinois et ne retenir que ceux qui lui seront benefiques Elle pourrait srsquoinspirer de la legis-lation chinoise dont la priorite est toujours la preservation des interets de la Chine A defaut on peutcraindre que le capital productif et patrimonial de lrsquoEurope ne passe sans profit pour elle sous la coupechinoise plus vite qursquoon le pensersquo) See also De grands patrons chinois en escale a Paris pour chercher in-spiration et investissements AFP (24 June 2013) available at httplentrepriselexpressfrde-grands-patrons-chinois-a-paris-pour-chercher-inspiration-et-investissements_1527422html (lsquoles investisseurs

by guest on Novem

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Cambodia the activities of Chinese firms have been criticized for severely damagingthe environment60 In Mongolia the influx of foreign laborers particularly Chinesehas been noted negatively especially since many Mongolians remain unemployed61

In Indonesia the lack of integration of Chinese enterprises into the countryrsquos societywhich includes a very complex traditional social system were criticized62

On the other hand other newspapersmdashoften the business press in somecountries63mdashare neutral in tone and headlines focus on eg lsquoNew study shows noevidence of German ldquoindustrial crown jewelsrdquo sell off to Chinarsquo64 lsquoChinese firms toinvest 700 m in Hollandrsquo65 lsquoChina keen on investing in Brazil infrastructure man-ufacturingrsquo66 lsquoChinese investment funds target Singapore propertiesrsquo67 and lsquoKennysells the Irish as ldquoa great bunch of ladsrdquo rsquo68

Again other media focus on positive aspects reflected in such articles as lsquoMade inItaly Investimenti cinesi Stanca spesso un bene per lrsquoItaliarsquo69 lsquoLe developpementde la Chine nrsquoest pas une menace mais une opportunitersquo70 lsquoIndia invites foreign

chinois ont mene ces dernieres annees une offensive sur les vignobles francais engrangeant une trentainede chateaux du Bordelais et GevreyChambertin en Bourgognersquo) Interestingly the author of the articleuses the word lsquoune offensiversquo

60 Heng Pheakdey Chinese investment and aid in Cambodia a controversial affair East Asia Forum (16 July2013) available at httpwwweastasiaforumorg20130716chinese-investment-and-aid-in-cambodia-a-controversial-affair (noting that while Chinese investment and aid is much needed for economic de-velopment Chinarsquos unquestioning approach to how its aid and investment money is distributed and usedhas exacerbated corruption deteriorated good governance and human rights and ruined Cambodiarsquos re-sources and natural environment Moreover human rights activists have often accused Chinese textile fac-tories of abusing workerrsquos rights while Chinarsquos hydropower investments have destroyed protected areasforest biodiversity and wildlife habitat) See also Concern over Chinese investment Radio Free Asia (7February 2013) available at httpwwwrfaorgenglishnewscambodiachina-02072013175545html

61 M Zoljarga Contractors bring illegal workers while Mongolians remain unemployed The UB Post (17December 2013) available at httpubpostmongolnewsmnpfrac147031

62 Great Han Samarinda Investment from Chinarsquos enterprises The Jakarta Post (21 September 2012) avail-able at httpwwwthejakartapostcomnews20120921your-letters-investment-china-s-enterpriseshtml

63 For example the Frankfurter Allgemeine Zeitung and the Manager Magazine in Germany and Il Sole 24 Orein Italy

64 See Press Release BGM Associates Dragons and Tigers Hunting in Germany Chinese and IndianAcquisitions of German Firms 2002-2012 available at httpwwwbgmassociatescomnewshtml Thestudy found that Chinese acquisitions were mainly motivated by the desire to acquire technologies know-ledge and brands

65 Chinese firms to invest E700m in Holland Dutch News (30 October 2009) available at httpwwwdutchnewsnlnewsarchives200910chinese_firms_to_invest_700m_iphp

66 Gerald Jeffris China Keen on Investing In Brazil Infrastructure Manufacturing The Wall Street Journal(10 May 2013 607 PM) available at httponlinewsjcomarticleBT-CO-20130510-715152html

67 Jacquelyn Cheock Chinese investment funds target Singapore properties The Business Times (3September 2013) available at httpwwwstpropertysgarticles-propertysingapore-property-newschinese-investment-funds-target-singapore-properties-cbrea135247

68 Fiach Kelly Kenny sells the Irish as lsquoa great bunch of lads Irish Independent (21 February 2012) availableat httpwwwindependentieopinionanalysisfiach-kelly-kenny-sells-the-irish-as-a-great-bunch-of-lads-26823861html

69 Sonia Montrella Made in Italy Investimenti cinesi Stanca spesso un bene per lrsquoItalia [lsquoMade in ItalyChinese Investment Stanca usually a good opportunity for Italyrsquo] AgiChina 24 (18 January 2013) avail-able at httpwwwagichina24itin-primo-pianomade-in-italynotizieinvestimenti-cinesi-stancabr-spesso-un-bene-per-lrsquoitaliabr-

70 Le developpement de la Chine nrsquoest pas une menace mais une opportunite Frenchpeoplecomcn (25September 2013) available at httpfrenchpeopledailycomcnInternational8410014html

by guest on Novem

Dow

nloaded from

direct investment from Chinarsquo71 lsquoFear of Chinese investment misses the economicpointrsquo72 lsquoChinese firms act for profit not statersquo73 and lsquoMessieurs les Chinois inves-tissez svprsquo74 In the USA eg Chinese investments in depressed areas such asDetroit were positively commented upon75 In the Netherlands and Luxembourgthere was little negative public opinion perhaps because Chinese investments theretypically require relatively higher-skilled labor

C The business communityThe business community itself does not appear to be strongly engaged in the public de-bate on this subject Big businessmdashout of self-interestmdashtypically supports an openinternational investment regime that provides strong protections for investors and in-vestments and access to markets Moreover China is an important export market andhost country for many firms making the enterprises involved reluctant to advocate re-strictive policies for fear of retaliation However it may well be that firms and busi-ness associations lobby the government to take action especially because of perceivedcompetitive threats and the arrival of new competitors is not always welcome In thecase of FDI by SOEs moreover concerns about possible competitive advantages ofthese enterprises come into play In fact the Business Coalition for TransatlanticTrade (BCTTmdashthe most important US business coalition for the TransatlanticTrade and Investment Partnership negotiations) is a driving force to impose discip-lines on SOEs in the context of outward FDI and competitive neutrality76 BCTTrsquos

71 India invites foreign direct investment from China The Economic Times (28 February 2013) available athttparticleseconomictimesindiatimescom2013-02-27news37331014_1_chinese-companies-china-s-jaishankar-mutual-investment

72 Wenran Jiang Fear of Chinese investment misses the economic point Edmonton Journal (15 February2012) available at httpwww2canadacomedmontonjournalnewsideasstoryhtmlidfrac14763d030e-f0d3-4f45-8fe9-7e64d2221a1f

73 Peter OrsquoNeil Chinese firms act for profit not state Vancouver Sun (22 February 2012) available athttpwww2canadacomvancouversunnewsarchivesstoryhtmlidfrac14ce11da98-bbf1-4040-a95b-29eafbfb887a

74 Messieurs les Chinois investissez svp La Librebe (2 June 2006) available at httpwwwlalibrebeeconomieactualitemessieurs-les-chinois-investissez-svp-51b88ec9e4b0de6db9ae0ead

75 Kathy Chen US cities seek to woo Chinese investment The Wall Street Journal (6 April 2010) availableat httponlinewsjcomnewsarticlesSB10001424052702303410404575151593460208482

76 Most major USA associations and major companies are members of BCTT Under the headinglsquoDisciplines for State Favored Commercial Actorsrsquo a short basic paper on competition policy lists the fol-lowing among BCTTrsquos objectives regarding state-ownedstate-favored commercial actors

Discipline government financial advantages provided on a preferential access and non-commercialbasis to these entities

Discipline government non-financialregulatory treatment including prohibiting selective en-forcement of laws and regulations that is often done in a manner that is partial to these entities

Ensure that a government is accountable for these entitiesrsquo decisions in the market that are pro-ven to be discriminatory or made as a result of government influence and not conducted in ac-cordance with commercial consideration

The obligations to address all of these distortions are subject to dispute settlement

Competition Policy Business Coalition for Transatlantic Trade (BCTT) available at httpwwwtransatlantictradeorgissuescompetition-policy (last visited 25 July 2014)

by guest on Novem

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position is very similar to that of the US Business Coalition for TPP (the Trans-Pacific Partnership)77

D Trade unionsTrade unions too do not seem to be that engaged This is somewhat surprising sincemany of Chinese firmsrsquo MampAs involve firms that are in difficulty or even insolvent78

and the consequences of such situations typically involve lay-offs On the other handif such firms are taken over and continue as going concerns this is a positive devel-opment In the end trade union welcome any investment whether domestic or for-eign that creates or maintains jobs as long a working conditions are fully in linewith domestic legislation or even better79 At the same time at least the AFL-CIO isconcerned about FDI by SOEs in the USA fearing that it is asset-stripping or con-sists only of toehold investment80

77 This Coalition has among its Principles the following

11 An agreement that promotes fair competition and a level playing field

A successful TPP agreement should ensure a level playing field by protecting and promoting thecompetitive process through strong rules on transparency and due process in competition-policyproceedings In addition this agreement should ensure that state- owned state-invested andstate-favored industries compete on a level playing field with private and foreign companies

See Principles US Business Coalition for TPP available at httptppcoalitionorgabout(last visited26 August 2014)

78 In Germany a leading European host country for Chinese firms a 2013 study found that of the 46 for-eign affiliates covered in the study and taken over by BRIC investors 33 were insolvent or insolvencyproceedings had been initiated Among these 46 firms 15 were Chinese affiliates the overall insolvencyrate appears to apply to them as well (there were about 615 Chinese foreign affiliates in Germany in2013) See Kai Bollhorn and Sophie Golinski BRIC-Investitionen in Deutschland Mythen amp Realitaet(MarburgLeipzig Phillips-UniversitaetLeibniz-Institut fuer Laenderkunde 2013) The study wasundertaken for the Hans Boeckler Stiftung a foundation close to Germanyrsquos trade unions

79 To quote Celeste Drake of The American Federation of Labor and Congress of Industrial Organizations(AFL-CIO) lsquoWe support increased investment of all kinds including foreign and domestic so long asthe investments help grow our economy and create good job opportunitiesrsquo See Celeste DrakelsquoTestimony for the Hearing ldquoDiscussion draft of HR___ The Global Investment in American Jobs Actof 2013rdquo before the House Subcommittee on Commerce Manufacturing and Tradersquo at 1 (WashingtonDC AFL-CIO 18 April 2013)

80 lsquoA looming threatmdashthat of increased outward investment by Chinese SOEsmdashis also on the horizon USfirms will increasingly face unfair direct competition in the US by Chinese SOEs operating here as theyscour the globe for investment opportunities resulting from the huge cache of funds they have amassedfrom their protectionist and predatory policies To date such investment has taken the form of eitherasset stripping of distressed companies or ldquotoeholdrdquo investments to ensure market access and has oper-ated to maximize employment within China at the cost of employment in the target countriesrsquo Letterfrom R Thomas Buffenbarger Chair Labor Advisory Committee for Trade Negotiations and TradePolicy (President International Association of Machinists and Aerospace Workers) to Terry McCartinDeputy Assistant US Trade Representative for China Affairs regarding the Labor Advisory CommitteeInput for the Tenth WTO Transitional Review Mechanism for China 12 August 2011 available at httpwwwafmorguploadsfileLACChinapdf (last visited 13 October 2014) Consequently lsquoWe believe thatthe USTR should ensure that SOEs and any other entities acting with state-delegated authority do notundermine the competitiveness of private enterprise or the rights pay and benefits available to theirworkers Nor should these entities be allowed to skew supply chains or engage in predatory practices inthe US or third country markets thereby destroying jobs for American workersrsquo Testimony of TheaMei Lee Deputy Chief of Staff American Federation of Labor and Congress of Industrial OrganizationsBefore the Congressional Executive Commission on China Chinarsquos Compliance with the WTO and

by guest on Novem

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E GovernmentsFinally governments ie the Executive and legislative bodies reflect the conflicted at-titude of other stakeholders On balance however the Executives of the countriesthat were researched maintain a welcoming attitude not only regarding incomingFDI in general but also regarding such investment from China For instance in May2007 the President of the USA George W Bush issued a statement on lsquoOpenEconomiesrsquo81 reaffirming the countryrsquos openness to FDI (The statement wasreleased just before the Foreign Investment and National Security Act was enactedwhich strengthened the countryrsquos MampA review process) Moreover governmentsfrom all parts of the world have supported missions to China to attract investmentand often competition for such investment takes also place at the sub-national level(eg in the USA)82 Chinese FDI was especially welcome in the European countriesmost affected by the Euro crisis at times as a means to forestall the bankruptcy ofdomestic firms and to re-launch economic growth83 Some countries even intro-duced regulations to facilitate such investment eg by simplifying the visa process84

International Trade Rules (15 January 2014) at 7 available at httpwwwceccgovsiteschinacommissionhousegovfilesCECC20Hearing20-20WTO20-20Thea20Lee20Written20Statementpdf

81 Press Release President Bushrsquos Statement on Open Economies The White House Archives (10 May2007) available at httpgeorgewbush-whitehousearchivesgovnewsreleases20070520070510-3html

82 Business ties between China and The Netherlands intensified Dutch Daily News (21 September 2012)available at httpwwwdutchdailynewscombusiness-ties-between-china-and-the-netherlands-intensified Hollande encourage les relations commerciales avec la Chine Les Echos (25 June 2013) availableat httpafaseorgfr in Latin America Chile was particularly active in seeking to attract Chinese FDI(see Acuerdo que dinamizara el comercio de servicios entre Chile y China serıa aprobado antes de la visitadel Presidente Hu Jintao Senado de la Republica 13 April 2010 available at httpwwwsenadocl (lastvisited 4 August 2014) Comision de Relaciones Exteriores apoyo el acuerdo suplementario con ChinaSenado la Republica 16 August 2013 available at httpwwwsenadocl (last visited 4 August 2014)Visan ocho acuerdos internacionales que profundizan materias de seguridad comercio cultura y reciproc-idad diplomatica 4 September 2013 available at httpwwwsenadocl (last visited 4 August 2014)Sesion 53a Ordinaria en miercoles 4 de septiembre de 2013 6 September 2013 available at httpwwwsenadocl last accessed on 4 August 2014 Kathy Chen US cities seek to woo Chinese investmentThe Wall Street Journal (6 April 2010) available at httponlinewsjcomnewsarticlesSB10001424052702303410404575151593460208482

83 See eg Montrella above n 68 See Sergey Filippov European Investment Promotion Agencies vis-a-visMultinational Companies from Emerging Economies Com-parative Analysis of BRIC Investor Targeting(Maastricht UNU-MERIT 2012) for a discussion relevant here

84 Reportedly Ireland and Spain introduced new visa regulations specifically with Chinese investors inmind Ireland introduced the Immigration Scheme for Investors and Entrepreneurs in 2012 In adoptingthis Scheme the Ministry of Justice and Equality underlined that the implementing measures are notunique internationally and Ireland should compete with other countries (eg Australia New Zealand theUK) to attract migrant investors and entrepreneurs from Hong Kong and mainland China See ImmigrantInvestor Programme and Start-up Entrepreneur Scheme Statements House of the Oireachts (9 February2012) available at httpdebatesoireachtasieseanad2012020900006asp

As to Spain the countryrsquos Parliament passed the new law for entrepreneurs in September 2013 Ley 142013 available at httpwwwboeesboedias20130928pdfsBOE-A-2013-10074pdf Its Article 63provides for a special visa for investors making considerable investments in Spain The new rules facilitatethe obtainment of visa for foreign investors from China (and Russia) See Statement by the Secretary of theMinistry of Commerce and Competition Mr Jaime-Garcia Legaz reported in Monica Cebario Belaza ElGobierno planea otorgar la residencia a quienes compren pisos de 160000 euros EL PAIS (19 November 2012)available at httppoliticaelpaiscompolitica20121119actualidad1353320638_988833html Ferran

by guest on Novem

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In Belgium85 Brazil86 Germany87 and the UK88 government officials encouragedincoming Chinese FDI In Russia the highest authorities welcome Chinese FDI (al-though there are also fears that Chinarsquos role might become too strong)89 The sameapproach appears to prevail in Kazakhstan90 (including to balance the countryrsquos rela-tionship with Russia) and Saudi Arabia (to mitigate its petrodollar dependency)91

South-East Asian countries for their part are tightly linked with China through glo-bal value chains92 and governments therefore regard Chinese FDI as a positive fac-tor for their development and have actively sought it93

But the Executives of a number of countries also have concerns and in any eventare subject to pressure from their Legislatures or individual members (or group ofmembers) of such bodies Concerns relate to the various issues mentioned at the be-ginning of this section especially in the areas of national security and the role ofSOEs in Chinarsquos outward FDI Security concerns are particularly pronounced in theUSA were the issue of cyber-security (particularly in the area of telecommunica-tions) adds an additional dimension94 In Australia and Canada governmental con-cerns focus more on the control of natural resources and the net benefits associated

Ferrer Residencia en Espana a cambio de inversion inmobiliaria El Paıs (17 September 2013) available athttpeconomiaelpaiscomeconomia20130917vivienda1379441954_406528html

85 Chen Jia Wealth fund to help Chinese companies invest China Daily (3 May 2013) available at httpeuropechinadailycomcneurope2012-0503content_15195452htm

86 A Moreira Para atrair investimentos chineses Brasil promete seguranca jurıdica Portos E Navios (6November 2013) available at httpwwwportosenavioscombrgeral21586-para-atrair-investimentos-chineses-brasil-promete-seguranca-juridica

87 See eg Bruederle lehnt Schutzwall gegen auslaendische Investitionen ab DAPD Nachrichtenagentur (27December 2010) available at httpwwwthemenportaldenachrichtenbruederle-lehnt-schutzwall-gegen-auslaendische-investitionen-ab-46024 (mentioning that Germanyrsquos Minister of EconomicsBruederle explicitly invited Chinese FDI to Europe and especially Germany)

88 Matt Warman London will offer China more than Singapore can The Telegraph (12 October 2013)available at httpwwwtelegraphcoukfinancechina-business10373854London-will-offer-China-more-than-Singapore-can-says-Boris-Johnsonhtml

89 Panibratov above n 4790 Ibid See also Daniel Orsquo Neill Chinarsquos Support for Investment in Kazakhstan Good Neighbor Good

Economics or Good Geopolitics (Saint Luis Washington University 2009) available at httpwwwirexorgresourcechinas-support-investment-kazakhstan-good-neighbor-good-economics-or-good-geopolitics-resea

91 Saudi Arabia and China team up to build a gigantic new oil refinery ndash is this the beginning of the end forthe petrodollar Alt-Market (22 March 2012) available at httpwwwalt-marketcomarticles1446-saudi-arabia-and-china-team-up-is-this-the-beginning-of-the-end-for-the-petrodollar

92 See UNCTAD World Investment Report 2013 Global Value Chains Investment and Trade for Development(Geneva UNCTAD 2013)

93 See eg Eka Utami Aprilia China asked to invest in shipping Tempo (24 November 2010) China to in-crease investment in Indonesian fisheries industry Kompas Cyber Media (22 September 2010) Indonesiainsists China to support joint ventures Indonesian Government News (28 March 2010)

94 See Chairman Mike Rogers and Ranking Member CA Dutch Ruppersberger Investigative Report on theUS National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE H R Rep(8 October 2012) available at httpintelligencehousegovsitesintelligencehousegovfilesdocumentsHuawei-ZTE20Investigative20Report2028FINAL29pdf Cyber-security is also a concernin the United Kingdom See Foreign Involvement in the Critical National Infrastructure The implications forNational Security Intelligence and Security Committee Chairman The Rt Hon Sir Malcolm RifkindMP June 2013 available at httpswwwgovukgovernmentuploadssystemuploadsattachment_datafile205680ISC-Report-Foreign-Investment-in-the-Critical-National-Infrastructurepdf last ac-cessed on 25 July 2014 (The report addresses the Huaweirsquos threat to the Telecommunication sector of

by guest on Novem

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with their exploitation (mirroring the discussions in media) although other tests(including national security) are employed as well The discussions surrounding thetake-over of Australiarsquos Lynas95 and the acquisition of Canadarsquos Nexen96 exemplifythis In the Latin American countries researched it does not appear that ChineseFDI issues have figured noticeably in parliamentary discussions But in India 19questions relating to FDI from China were asked in the Lower House of Parliamentand 19 in the Upper House during the period 7 July 2009 and 22 February 2014with 10 of these questions involving national security97 The perhaps best-knownparliamentary reaction was a 2005 resolution adopted by the US House ofRepresentatives condemning in a vote of 138 to 15 the attempted take-over of theUS firm Unocal by CNOOC of China98

These various cross-cutting pressures are reflected in the fact that a number ofcountries have strengthened or established review mechanisms for incoming FDIfocused on MampAs by SOEs (and also before the Western financial crisis by sover-eign wealth funds) This involves walking a fine line balancing the mitigation of con-cerns with maintaining an investment climate that remains attractive to (in this case)Chinese MNEs The focus of these mechanisms is on national security and net bene-fits for the host country (especially concerning technology-intensive industries andcritical infrastructure as well as natural resource industries) including concernsabout SOEs benefitting from various subsidies that put them in a competitive advan-tage vis-a-vis domestic firms

While the competitive advantage concern has been taken up (as mentioned ear-lier) in international negotiations (that are likely to be of particular interest toChina) a number of countries have strengthened their mechanisms to review incom-ing MampAs to make sure that such transactions are in their national interest The ac-tions taken by the USA Canada and Australia exemplify this approach

the United Kingdom and the potential issues of cyber attacks Most of the concerns surrounding Huaweirelate to its perceived links to the Chinese government)

95 Cole Latimer et al Chinarsquos rare earth monopoly threatens global suppliers rival producers claim TheFinancial Times (29 May 2009) available at httpwwwftcomintlcmss275fe65ce-4c4e-11de-a6c5-00144feabdc0htmlaxzz349iZ5X6C Chinarsquos CNMC to acquire Australiarsquos Lynas for A$505 millionDomainndashbcom (2 May 2009) available at httpwwwdomain-bcomindustryMining20090502_china_nonferroushtml see also Bruno A Growing bilateral ties between Australia and China may benefitLynas Investor Intel (29 May 2014) available at httpinvestorintelcomrare-earth-intelgrowing-bilateral-ties-australia-china-may-benefit-lynas-corp

96 Ian Austen Canada clears $15 billion Chinese takeover of an energy company New York Times (7December 2012) available at httpdealbooknytimescom20121207canada-clears-15-billion-chinese-takeover-of-an-energy-company_phpfrac14trueamp_typefrac14blogsamp_rfrac140 Nathan Vaderklippe Investment dealwith China coming in lsquoshort order The Globe and Mail (16 October 2013) available at httpwwwtheglobeandmailcomreport-on-businessinternational-businessasian-pacific-businessinvestment-deal-with-china-coming-in-short-order-bairdarticle14884704 (noting that although the deal was eventually approved theCNOOC takeover of Nexen was accompanied by lsquonew handcuffs on SOEs whose ability to do big dealsparticularly in the oil sands now appears to be limitedrsquo)

97 This is however a small percentage of all 1185 questions asked during this period Still they show the sa-liency of Chinese FDI in India on the other hand no other country received more questions related toFDI and national security See Premila Nazareth Satyanand Policy Brief What do Indiarsquos MPs want toknow about FDI (2 July 2009ndash21 February 2014) New Dehli National Council of Applied EconomicResearchrdquo (forthcoming)

98 HR Res 344 109th Cong (2005) available at httpswwwgovtrackuscongressbills109hres344text

by guest on Novem

Dow

nloaded from

In the USA the Foreign Investment and National Security Act99 adopted by theUS Congress in 2007 strengthens the role of the Committee on Foreign Investmentin the USA (itself established in 1988 as a reaction to the rapid growth of JapaneseFDI in the USA) to review incoming MampAs Among other things it requires that in-coming MampAs by state-controlled entities need not only to be notified but also are(in principle) subject to investigations100

The Government of Canada had issued lsquoGuidelines Investment by state-ownedenterprises Net benefit assessmentrsquo101 in December 2007 to clarify the investmentprocess as applicable to acquisitions of a certain size by SOEs The continued growthof MampAs by such firms led the Government to issue further clarifications inDecember 2012 in a lsquoStatement Regarding Investment by Foreign State-OwnedEnterprisesrsquo102 The Statement provided that lsquoFor the purposes of evaluating pro-posed investments by foreign SOEs Section 20 of the ICA [Investment Canada Act]and supporting Guidelines require that the investor satisfies the Minister of the in-vestmentrsquos commercial orientation freedom from political influence adherence toCanadian laws standards and practices that promote sound corporate governanceand transparency and positive contributions to the productivity and industrial effi-ciency of the Canadian businessrsquo It continues to say lsquoEach case will be examined onits own merits however given the inherent risks posed by foreign SOE acquisitionsin the Canadian oil sands the Minister of Industry will find the acquisition of controlof a Canadian oil sands business by a foreign SOE to be net benefit to Canada on anexceptional basis onlyrsquo103 In June 2013 then the Canadian Parliament amended theCanada Investment Act specifying the threshold for reviewable private foreign in-vestment and for reviewable foreign SOE investment and spelling out a definition ofSOEs104

The Government of Australia announced in February 2008 a new policy (consist-ing of a set of principles) that require the Treasurer to examine a number of specificissues when considering applications for investments by foreign governments andtheir agencies including whether an investorrsquos operations are independent from therelevant foreign government whether the investor observes common standards ofbusiness behavior whether the investment may have an impact on the countryrsquos

99 Foreign Investment and National Security Act Public Law 110ndash149 (2007) available at httpwwwgpogovfdsyspkgBILLS-110hr556enrpdfBILLS-110hr556enrpdf

100 For a discussion of the Act see David N Fagan The US regulatory and institutional framework for FDIin Sauvant above n 46 at 4ndash-84

101 See Government of Canada News Release Policy Statement and Revised Guidelines for Investments byState-Owned Enterprises (7 December 2012) available at httpnewsgccawebarticle-endonidfrac14711489 In releasing these guidelines the Government outlined some of its key considerationsto be taken into account when reviewing incoming FDI projects by SOEs reflecting the concern thatforeign SOEs could present certain risks lsquoFirst foreign SOEs are although to varying degrees inher-ently susceptible to foreign government influence that may be inconsistent with Canadian national in-dustrial and economic objectives Second SOE acquisitions of Canadian businesses may also haveadverse effects on the efficiency productivity and competitiveness of those companies which may havenegative effects on the Canadian economy in the longer termrsquo

102 See ibid103 See ibid104 See Investment Canada Act available at httplaws-loisjusticegccaengactsI-218page-3htmlh-9

and httplaws-loisjusticegccaPDFI-218pdf

by guest on Novem

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national security and what the contribution of an investment is to the countryrsquoseconomy and broader community105 Reportedly the influx of Chinese investmenttriggered this action106

The principal purpose of these measures taken by these three countries was tocreate the tools to block if need be undesirable MampAsmdashnot only from China butalso from firms headquartered in other countries107 However it is noteworthy thatthese actions took placemdashin fact were triggeredmdashwhen Chinarsquos outward FDI beganto rise rapidly and that the screening mechanisms are particularly strong for MampAsundertaken by SOEs

From Chinarsquos perspective government activities that impact Chinese (SOE-dominated) outward FDI through host country review mechanisms are not surpris-ingly of concern creating an interest to address this subject in international invest-ment agreements In fact all countries that have some kind of review mechanismwould want to protect it in their international investment agreements

In sum the perception and reception of Chinarsquos growing outward FDI in thecountryrsquos principal host countries has been decidedly mixed both regarding the entrystrategies of Chinese MNEs into host countries (MampAs vs greenfield investments)and the perception of and reactions to such investment by (and within) varioushost country constituencies108 This was recently recognized publicly in China Toquote the Governor of Chinarsquos Central Bank Zhou Xiaochuan lsquoDifferent entitieshave behaved differently There may have been some phenomena of Chinese

105 Australiarsquos Foreign Investment Policy available at httpwwwfirbgovaucontentpolicyasp (last vis-ited) see Australian Government Foreign Investment Review Board 20082009 Annual Report at 7available at httpwwwfirbgovaucontentPublicationsAnnualReports2008-2009_downloads2008-09_FIRB_ARpdf The Treasurer is already obliged under the lsquoForeign Acquisitions andTakeovers Act 1975rsquo to determine whether proposed foreign investments The Treasurer is alreadyobliged under the lsquoForeign Acquisitions and Takeovers Act 1975rsquo to determine whether proposed for-eign investments above a certain amount are consistent with Australiarsquos national interest (which is notdefined) See Foreign Acquisitions and Takeovers Act 1975 available at httpwwwcomlawgovauDetailsC2013C00089

106 Peter Cai Delicate balancing act for the foreign investment board The Sydney Morning Herald (26October 2013) available at httpnewsstoresmhcomauappsviewDocumentacjsessionidfrac14BD5FEACDC3FE58239A711B03BC59962Asyfrac14aframppbfrac14all_ffxampdtfrac14selectRangeampdrfrac141monthampsofrac14relevanceampsffrac14textampsffrac14headlineamprcfrac1410amprmfrac14200ampspfrac14brsampclsfrac141435ampclsPagefrac141ampdocIDfrac14SMH13102629BJ57M4T2E

107 This may well be part of a broader reassessment of the role of FDI in national economies at least as faras MampAs are concerned This is exemplified by the decree issued by the government of France in 15May 2014 at the time when both GE (USA) and Siemens (Germany) were interested in acquiring apart of the French firm Alstom See Michael Stothard France widens its powers to stop foreign acquisi-tions Financial Times (17ndash18 May 2014) at 9 This decree toughens an existing measure by giving thegovernment an effective veto over MampAs in an expanded list of industries

108 There is however one area in which the discussion has subsided at least for the time being In the wakeof the economic crisis (during which many countries were desperate for employment-creating FDI re-gardless of its origin and the form it took) the discussions about sovereign wealth funds (includingChinarsquos) entering the world FDI market (although not in a substantial manner)mdashwhich reached its cli-max just before the onset of the crisis and had led to the adoption (under the aegis of the IMF) of the2008 lsquoSantiago Principlesrsquo (International Working Group of Sovereign Wealth Funds Sovereign WealthFunds Generally Accepted Principles and Practices lsquoSantiago Principlesrsquo available at httpwwwiwg-swforgpubsengsantiagoprinciplespdf (last visited 25 July 2014))mdashhave died down It remains to beseen however whether with the economic performance of countries recovering FDI by sovereignwealth funds will receive renewed critical public attention

by guest on Novem

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investors [that were] not so good not so satisfactoryrsquo109 As Chinarsquos outward FDIgrows it may well be that scepticism toward such investment will grow as well insome circles

F Implications for Chinarsquos national outward FDI policySo the obvious question is what could be done to deal with the reaction to Chinarsquosoutward FDI to avoid a backlash and build trust (There is of course also the chal-lenge for host countries and especially developed ones to accommodate the rise ofChinarsquos outward FDI and respect that countryrsquos interests)

At the national level SOEsmdashas the main outward investorsmdashhave a special re-sponsibility to make sure that their investments abroad are well planned preparedand received This is particularly important when investments take the form ofMampAs and are in industries that are sensitive (eg for national security of culturalreasons) or involve iconic targets (Even MampAs in other areas may elicit concerns asthey are frequently associated with restructuring and the shedding of jobs) Hencegovernments at all levels need to be carefully prepared and the benefits of a particu-lar acquisition need to be spelled out Moreover once established SOEs need tomake an extra effort to become lsquoinsidersrsquo ie good corporate citizens that are recog-nized as such This can be achieved for example through sourcing from local sup-pliers by employing nationals in high corporate positions becoming members oflocal associations and engaging in various corporate social responsibility (CSR)activities In fact SOE affiliates in host countries could commit themselves to dedi-cate a small percentage of their earnings to CSR activities in their host countries110

and to support the initiative of the Group of 7111 to establish a global facility thathelps developing countries (and especially the least developed among them) negoti-ate large scale contracts with MNEs to ensure that both host countries and investorsbenefit equitably from the investments made especially in natural resources

But Chinarsquos government also has a role to play For example it could pay more at-tention to enforcing the various instruments that it has already in place to guide thebehavior of its foreign investors abroad More ambitiously China could complementits lsquogoing-outrsquo strategy with a lsquogoing-inrsquo strategy112 Such a strategy would seek tomaximize not only the benefits of the countryrsquos outward FDI for China (and its

109 Javier Blas Chinarsquos central bank chief admits difficulties with Africa Financial Times (22 May 2014 613PM) available at httpwwwftcomintlcmss05b212302-e1c9-11e3-b7c4-00144feabdc0htmlaxzz3EolVbxrE (quoting the governor)

110 A variation of what Indiarsquos Companies Act 2013 mandates for corporate responsibility spending by itsown firms in India See The Companies Act No 18 of 2013 India Code available at httpindiacodenicinacts-in-pdf182013pdf

111 The Group of 7 in its June 2014 Summit announced lsquoa new initiative on Strengthening Assistance forComplex Contract Negotiations (CONNEX) to provide developing country partners with extendedand concrete expertise for negotiating complex commercial contracts focusing initially on the extractivessector rsquo See Memorandum The Brussels G7 Summit Declaration European Commission - MEMO14402 05062014 available at httpeuropaeurapidpress-release_MEMO-14-402_enhtm Part ofthis initiative is a Knowledge Portal developed by the Columbia Center on Sustainable Investmentavailable at wwwnegotiationsupportorg last accessed on 25 July 2014 and launched 17 June 2014

112 For a brief elaboration of such a strategy see Karl P Sauvant and Victor Z Chen lsquoChina Needs toComplement its ldquogoing-outrdquo Policy with a ldquogoing-inrdquo Strategyrsquo 121 Column FDI Perspectives(12 May2014) available at httpccsicolumbiaedupublicationscolumbia-fdi-perspectives

by guest on Novem

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nloaded from

firms) but also for the economic social and environmental development of the hostcountries in which Chinese firms invest and takes place in fair governance mechan-ismsmdashin short a strategy for sustainable FDI Key elements of such a lsquogoing-inrsquo strat-egy could be to reinforce Chinarsquos current regulatory framework dealing with thebehavior of Chinese MNEs abroad to expand it (eg in line with the OECDGuidelines for Multinational Enterprises to which China could adhere) and betterto monitor and enforce the countryrsquos regulatory framework guiding the behavior ofits firms abroad (including by linking access to various home country measures re-garding outward FDI to the observance of certain requirements) Such a strategycould be underpinned by requiring by law that Chinese SOEs (and for that matterother outward investors) dedicate a small percentage of their earnings to CSR activ-ities in host countries The government itself could furthermore support the earliermentioned initiative of the Group of 7 to establish a negotiations support facility

A lsquogoing-inrsquo strategy by China along these lines could become a model for otherhome countries whether they are developed or developing Conceivably it could alsoinfluence the content of international investment agreements and give home countrygovernments a role in ensuring that the outward investment by firms headquartered intheir territories has as much as possible the characteristics of sustainable FDI

Beyond that and most importantly in the context of this article the mixed per-ception and reception of Chinarsquos OFDI in important host countries for its MNEsstrengthens Chinarsquos interest in international investment agreements that protect thecountryrsquos outward FDI (especially against discriminatory treatment of its investorsincluding SOEs) and that help to secure access to markets (Considerations of thistype may well be one of the principal driving forces behind Chinarsquos interest to con-clude BITs with the USA and the European Union the worldrsquos biggest markets aswell as other important host countries) At the same time China would want to pro-tect its lsquogoing outrsquo strategy and the various instruments it has put in place in the con-text of this strategy

Thus Chinarsquos interests have changed profoundly since it entered to world FDImarket in a substantial manner more than a decade ago Accordingly the countryrsquosapproach to international investment agreements has changed and can be expectedto evolve furthermdasha topic that is being considered next

I I I C H I N A rsquo S C H A N G I N G A P P R O A C H T O I N T E R N A T I O N A LI N V E S T M E N T A G R E E M E N T S

As mentioned earlier China has signed more BITs than any other country exceptGermany113 China also has in place other IIAs including free trade agreements(FTAs) containing investment chapters (ASEAN Chile Costa Rica Iceland NewZealand Pakistan Peru Singapore and Switzerland) and a trilateral agreement withJapan and the Republic of Korea114 Chinarsquos IIA program which was initiated in

113 As of December 2014 Germany had concluded 134 BITs and China 130 See httpinvestmentpolicyhubunctadorgIIAIiasByCountryiiaInnerMenu (last visited 17 December 2014)

114 See China FTA Network MOFCOM available as httpftamofcomgovcnenglishindexshtml (lastvisited 30 September 2014) China is also currently negotiating FTAs with the Gulf CooperationCouncil Australia Norway and JapanRepublic of Korea

by guest on Novem

Dow

nloaded from

1982 has undergone a major shift in focus during the past approximately 15 yearsThis shift corresponds to the evolution of Chinarsquos policy respecting foreign invest-ment Indeed as China has gradually become a capital-exporting nation it becamenecessary for it to ensure protection of Chinese interests abroad

A Chinarsquos evolving investment treaty program reflects anincreasing engagement in ISDS

After decades of isolation China opened up to foreign investment in around1980115 The first BIT that China entered into was with Sweden in 1982 andChinarsquos focus for the major part of the 1980s was clearly on inward investmentDuring this period most of Chinarsquos BITs were concluded with European countriesIt was only in the 1990s that Chinarsquos investment treaty endeavors gained signifi-cance116 Between 1988 and 1998 more than 60 BITs were signed the majority ofwhich were with developing countries

This first generation of Chinarsquos BITs concluded between 1982 and 1998 is markedby the restrictive approach taken with respect to both substantive protections such asnational treatment and investor-state dispute resolution Indeed arbitrability of dis-putes arising under these investment treaties is arguably limited117 China was then apredominantly capital-importing country and it had little incentive to place its trust ina dispute resolution mechanism in which its sovereignty could be impinged The dis-pute resolution clauses in these first BITs exhibited language to the effect that onlylsquodisputes concerning the amount of compensation for expropriationrsquo118 or lsquodisputesinvolving the amount of compensation for expropriationrsquo could be arbitrated119 As aresult disputes arising out of a first-generation treaty should arguably be limited to thevery narrow question of quantum where a foreign investor was dispossessed of its in-vestment120 In most BITs entered during this period Chinarsquos so-limited consent wasto arbitration by ad hoc tribunals under the UNCITRAL Rules

In keeping with the limited nature of its consent to arbitrate disputes with foreigninvestors China qualified its ratification of the ICSID Convention in 1993 by statingthat lsquothe Chinese Government would only consider submitting to the jurisdiction ofthe International Centre for Settlement of Investment Disputes for disputes overcompensation resulting from expropriation and nationalizationrsquo121

115 See Stephan W Schill lsquoTearing Down the Great Wallrsquo 15 Cardozo Journal of International andCompetitive Law 73 (2007) at 77ndash80

116 See Congyan Cai lsquoOutward Foreign Direct Investment Protection and the Effectiveness of Chinese BITPracticersquo 7 Journal of World Investment and Trade 621ff (2006)

117 See eg Peter J Turner and Mark Mangan lsquoChinarsquos Investment Treaties Substantive and ProceduralRightsrsquo 5 Asian Counsel 43(2007) (lsquoTypically the right to arbitration was restricted under these BITs tothe amount of compensation payable on expropriation (but not the initial question of whether an expro-priation had taken placersquo) see also Schill above 115 at 89ndash91

118 See eg ChinandashUK BIT119 See eg ChinandashMongolia BIT Art 8(3)120 It should be noted here that some tribunals have taken the view that a dispute over the amount of com-

pensation should be construed as encompassing the very existence of an expropriation See belowSection IIIB

121 See Chinarsquos Notification dated 7 January 1993 available at icsidworldbankorg This notification wasnever repealed despite Chinarsquos broad adherence to the concept of investment dispute settlementthrough arbitration in later iterations of IIAs This notification however does not prevent arbitrating

by guest on Novem

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nloaded from

In its second generation of BITs starting with its agreement with Barbados in1998 China considerably broadened its consent to arbitration for disputes with for-eign investors The majority of treaties concluded between 1998 and 2008 vested ar-bitral tribunalsmdasheither under the auspices of ICSID or ad hocUNCITRALmdashwiththe competence to hear lsquoany disputes concerning an investmentrsquo122 The broadeningof Chinarsquos consent to arbitration in the second generation of its BITs at the turn ofthe century coincided with an impending announcement of the countryrsquos lsquogoing outrsquostrategy in 2001 and the subsequent rise in outward investment from around US$2billion in 1999 to US$116 billion in 2014123

As Chinarsquos outbound FDI has increased over the past decade so too has its re-solve to protect Chinese interests abroad The third generation of China IIAsembodies distinctive features showing a seemingly more careful approach to treatyprotection with on the one hand a tightening of the admissibility of investorsrsquo claimsand on the other hand an increased level of substantive protections afforded to in-vestors including SOEs Chinarsquos new tailored approach seems to reflect a balancingact It ensures that its SOE-focused investment program is protected while the pro-tections afforded to foreign investors are on par with current international standardsbut nonetheless allow sufficient flexibility for China to exercise its sovereign policepowers

1 Restrictions in China IIAs to admissibility of investor claims(i) lsquoInvestorsrsquo The IIAs that China recently has entered into use language requiringnot only that the incorporation or seat of a foreign investor to be in the contractingstate as was the case in previous iterations but also that a foreign investor have lsquorealeconomic activitiesrsquo124 or be lsquoengaged in substantive business operationsrsquo125 in theterritory of the contracting state Some other treaties refer to the requirement thatthe foreign investor if a corporate entity must be controlled by nationals of the con-tracting state to be entitled to treaty protection126 These requirements are some-times coupled with an affirmative lsquodenial of benefitsrsquo clause which as the namesuggests denies to foreign investors the benefit of investment treaty protection when

disputes that would be subjected to IIAs of second or third generation Indeed lsquoa notification under Art25(4) does not stand in the way of consentrsquo See Christoph H Schreuer The ICSID Convention ACommentary (2nd ed Cambridge University Press Cambridge 2009) 930 That is because as theWorld Bankrsquos Executive Directorsrsquo Committee expressed in the ICSID Report No 29 dealing with Art25(4) of the ICSID Convention lsquoa statement by a Contracting State that it would consider submitting acertain class of dispute to the Centre would serve for purposes of information only and would not con-stitute the consent required to give the Centre jurisdiction Of course a statement excluding certainclasses of disputes from consideration ould not constitute a reservation to the Conventionrsquo ibid at 923ndash935

122 See eg 1999 ChinandashBarbados BIT This BIT however subjected arbitration of the dispute to exhaus-tion of lsquolocal administrative review procedurersquo at the statersquos election See Art 9(3) In the subsequent2003 ChinandashGermany BIT no such exhaustion of remedies provision was inserted in the arbitrationclause (Art 9) although the BITrsquos Protocol provided that an administrative review procedure must beinitiated by the investor and that lsquothe dispute still exists three months after [the investor] has broughtthe issue to the review procedurersquo

123 See above n 3124 ChinandashRomania BIT Art 2(b)125 ChinandashMexico BIT Art 1(b)126 See eg ChinandashPeru FTA Art 126

by guest on Novem

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nloaded from

certain requirements such as control by a national of the contracting state or substan-tive business activities in the contracting state are not satisfied127

Importantly Chinese SOEs are now included as falling within the ambit of bilat-eral treaty protections Indeed in recent Chinese IIAs lsquopublic institutionsrsquo128 or lsquogov-ernmentally owned or controlledrsquo129 investors are protected This languagepresumably follows the example of NAFTA or the 2004 US Model BIT130 Othercountries have expressly referred to their government in the definition of lsquoinvestorrsquoincluding Saudi Arabia131 Qatar132 and the United Arab Emirates133

As seen above SOEs are crucial to Chinarsquos outward FDI as they account for be-tween 23 and 34 of total FDI134 As is the case in the vast majority of IIAs135

China had not expressly included state entities in the scope of protected investors inprevious iterations of IIAs Although older IIAs did not expressly include SOEswithin their purview one may wonder whether investment treatyrsquos protectionsshould be extended or denied to an SOE thereunder This question is all the moreimportant as China has historically operated exceedingly heavily through SOEs136

127 ibid Art 137128 See eg ChinandashKorea BIT Art 1(2)(b)129 ChinandashNew Zealand FTA Art 11 ChinandashMexico BIT Art 1 ChinandashASEAN FTA Art 1(f) Chinandash

JapanndashRepublic of Korea TIT Art 1(4)130 The 2004 US Model BIT defines lsquoinvestor of a Partyrsquo as lsquoa Party or state enterprise thereof that at-

tempts to make is making or has made an investment in the territory of the other Partyrsquo This languageis almost identical to that of NAFTA Art 1139 (lsquoinvestor of a non-Party means an investor other thanan investor of a Party that seeks to make is making or has made an investmentrsquo) Other IIAs take a simi-lar approach namely the Canada Model BIT Art 1 USndashAustralia FTA Art 12 USndashSingapore FTAArt 12 CanadandashChile FTA Art 1(2) and JapanndashMexico FTA Art 2

131 Eg Saudi ArabiandashBelgiumndashLuxembourg BIT Art 1(3) lsquothe term ldquoinvestorrdquo means (a) in respect ofthe Kingdom of Saudi Arabia III ndash the Government of the Kingdom of Saudi Arabia and its finan-cial institutions and authorities such as the Saudi Arabian Monetary Agency public funds and other simi-lar governmental institutions existing in Saudi Arabiarsquo Saudi ArabiandashItaly BIT Art 1(3)(a)(iii) lsquoCon iltermine ldquoinvestitorerdquo si intende il governo del Regno dellrsquoArabia Saudita e le sue istituzioni ed autor-ita finanziarie quali la Saudi Arabian Monetary Agency i fondi pubblici ed altre istituzioni governativeanaloghe esistenti in Arabia Sauditardquo Saudi Arabia-France BIT Art 1(2) ldquoLe terme drsquoinvestisseur ldquodesigne lrsquoune ou lrsquoautre des Parties contractantes et ses institutions et autorites financieres fondspublics et autres institutions gouvernementales analoguesrsquo

132 QatarndashGermany BIT Art 1(3)(b)(3) lsquoThe term ldquoinvestorsrdquo means in respect of the State ofQatar (c) the Government of the State of Qatarrsquo The same language was used in other QatarBITs such as the QatarndashRepublic of Korea BIT Art 1(3)(b) QatarndashSwitzerland BIT Art 1(1)(c) andQatarndashChina BIT Art 1(2)

133 UAEndashChina BIT Art 1(2)(b) lsquoThe term ldquoinvestorrdquo shall mean for the United Arab Emirates (1) theFederal Government of the UAErsquo and Art 1(2)(b)(2) lsquothe Local Governments and their local and fi-nancial institutionsrsquo UAEndashAustria BIT Art 1(1)(c) UAEndashFinland BIT Art 1(4)(a) UAEndashFranceBIT Art 1(2) UAEndashSwitzerland BIT Art 1(1)(b)(iii) UAEndashUnited Kingdom BIT Art 1(e)

134 See above Section I135 See Jo En Low lsquoThe Status of State-Controlled Entities under International Investment Agreementsrsquo in

Andrea Bjorklund (ed) Yearbook on International Investment Law and Policy (Oxford University PressNew York 2014) 2012ndash2013 543

136 It was reported that by 2010 there were 26319 lsquocentrally controlled non-financial SOEsrsquo in China ac-counting for 10 of Chinarsquos GDP Sixty six of these SOEs made the 2012 Fortune Global 500 list SeeDuanjie Chen Chinarsquos State-owned enterprises how much do we know From CNOOC to its siblingsUniversity of Calgary SPP Research Paper No 6-19 (June 2013) available at httppapersssrncomsol3paperscfmabstract_idfrac142277938

by guest on Novem

Dow

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One author emphasized that lsquoif an [SOE] is established as required under the lawof a contracting party it [therefore] qualifies as an ldquoinvestorrdquo rsquo such that it is notexcluded from the scope of investment protections137 Another commentator sug-gested that lsquoexclusion of State entities from coverage would leave the investmenttreaty with no meaningful applicationrsquo for BITs concluded with communist states138

On the other hand SOEs as state owned presumably have greater access to statesupport when investments are distressed than lsquoprivatersquo BIT claimants may haveTherefore their access to investor-state arbitration seems less justifiable per se ab-sent express language to that effect especially if one considers the concept of com-petitive neutrality that mandates maintaining a level-playing field between SOEs andprivate businesses139

In a landmark arbitration award the arbitral tribunal took the position that pro-tections should be extended where the SOE is not lsquoperforming State functionsrsquo140

This view corresponds to the traditional dichotomy lsquoacta jure gestionisrsquomdashie wherethe country acts in a commercial capacitymdashversus lsquoacta jure imperiirsquomdashie where thestate acts as a sovereign (and is thus protected by the doctrine of sovereignimmunity)141

The drafting history of the ICSID Convention is enlightening in that respectIndeed the travaux preparatoires reflect that the drafters debated and ultimately re-jected the possibility that investor-states could appear in ICSID proceedings142 Onthe other hand they considered that an SOE lsquo ldquoshould not be disqualified as a ldquona-tional of another Contracting Staterdquo unless it is acting as an agent for the governmentor is discharging an essentially governmental functionrdquo rsquo143 Indeed the purpose ofthe ICSID Convention was to lsquostimulat[e] a larger flow of private international

137 Jo En Low above n 135 at 547138 Claudia Annacker lsquoProtection and Admission of Sovereign Investment under Investment Treatiesrsquo

10(3) Chinese Journal of International Law 531(2011) available at httpchinesejiloxfordjournalsorgcontent103531short

139 See aboveSections I and II Although investor-state arbitration is meant to establish equality of armswhere the relationship between parties is by nature imbalanced it might be argued that providing thebenefit of investor protection to an entity that already benefits from state protections would unduly tipthe balance

140 CSOB v Slovak Republic ICSID Case No ARB974 Decision on Jurisdiction 24 May 1999 paras23ndash27

141 This is also known as the lsquoBroches testrsquo a reference to ICSIDrsquos founding father Aron Broches See belown 143 An example is Rumeli v Kazakhstan in which the tribunal stated that lsquoa state-owned entity quali-fies as a national of another Contracting State unless it acts as an agent for the government or dischargesan essentially governmental functionrsquo See also Rumeli Telekom AS and Telsim Mobil TelekomikasyonHizmetleri AS v Republic of KazakhstanICSID Case No ARB0516 Award 29 July 2008 para 211 Seealso Walid Ben Hamida lsquoSovereign FDI and International Investment Agreements Questions Relatingto the Qualification of Sovereign Entities and the Admission of their Investments under InvestmentAgreementsrsquo 9 Law and Practice of International Courts and Tribunals 22 (2010) See also Annackerabove n 138

142 See History of the ICSID Convention Washington World Bank 2006 vol II-1 401 976ndash979 1018(2006)

143 Aron Broches lsquoThe Convention on the Settlement of Investment Disputes between States andNationals of Other Statesrsquo 136 RdC 331 (1972) 355

by guest on Novem

Dow

nloaded from

investmentrsquo144 which arguably bars access to arbitration to lsquonationalsrsquo whose invest-ment reflects only governmental concerns145

An UNCTAD report stated on that topic that lsquo[t]he question whether State-owned or controlled enterprises are covered by an investment agreement has to betreated differently from the question whether States parties to the agreement them-selves can act as investors Usually State enterprises are covered even if not explicitlystated while States themselves tend not to be unless this is expressly provided forrsquo146

Yet it bears noting that Chinarsquos SOEs in contrast with some other SOEs and pri-vately owned companies have been said often not to have financial performance atheartmdashas evidenced by their profitability ratios147mdashbut rather may be animated bystrategic state-related considerations Indeed to further Chinarsquos industrial policylsquoaimed at leapfrogging global economic powersrsquo China is said to be lsquogoing outrsquothrough some of its SOEs in an effort to have access to foreign resources148 In thecontext of access investor-state arbitration it is legitimate to wonder whether SOEsto the extent that their impetus is the same as that of the state should qualify underIIA regimes absent an express agreement to that effect in the applicable IIA To ad-dress this question with respect to China further clarification is required on a case-by-case basis as to whether Chinese SOEs constitute instrumentalities of the Chinesecentral government

(ii) lsquoInvestmentsrsquo For most of its BIT history China has considered that lsquoevery kindof assetrsquo qualified as investments149 It appears that in its most recent treaties Chinais departing from this approach China following the example of countries such asthe USA now specifically excludes certain business transactions from the definitionof qualified investments So far China has excluded certain types of loans anddebts150 China has also excluded claims to money arising out of commercial con-tracts for sale of goods and services or out of extensions of credit in connection withcontracts for sale of goods and services151 By so doing China effectively denies thebenefit of investor-state arbitration to these categories of investments

Furthermore to qualify as an lsquoinvestmentrsquo under Chinarsquos BITs an economic in-vestment must be made lsquoin accordance with the lawsrsquo of the host state152 Dependingupon the specific formulation used in a particular treaty failure to abide by the

144 Barton Legum and William Kirtley lsquoThe Status of the Report of the Executive Directors on the ICSIDConventionrsquo 27(1) ICSID Review (2012) paras 12ndash13

145 Caution should be exercised however as the distinction between private and public capital is often arti-ficial considering the frequently hybrid nature of the pooling of funds in a transnational investmentDetermining jurisdiction on the basis of the source of capital alone seems outmoded and impracticalSee Jo En Low above n 135 at 558ndash559

146 UNCTAD International Investment Agreements Key Issues 142 n 12 (2004) For a recent discussion seeJo En Low above n 135

147 Chen above n 136 at Table 6 The author observes that if we take account of the advantages that SOEsenjoy such as free use of land and natural resources the numbers plummet even more Ibid at 6

148 ibid at 12149 See eg 1985 ChinandashFrance BIT Art 1(1) lsquoLe terme laquo investissement raquo designe des avoirs de toute

naturersquo These clauses would generally include a non-exhaustive list of categories of such investments150 ChinandashMexico BIT Art 1(c) and (d) ChinandashNew Zealand FTA Art 135 and ChinandashPeru Art 126151 ChinandashMexico BIT Art 1(h)152 See eg 1982 ChinandashSweden BIT Art 1

by guest on Novem

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nloaded from

domestic law of the host country may be interpreted as excluding protection under atreaty153

(iii) Umbrella clause The so-called lsquoumbrella clausesrsquo also known as lsquoobservance ofundertakingsrsquo clauses may allow investors to claim that a breach of a contractualundertaking arising out of an associated contract between the foreign investor andthe state constitutes a treaty violation154 Umbrella clauses were a hallmark of the se-cond generation of Chinarsquos BITs with some of these treaties imposing on a contract-ing state the observance of lsquoany commitments it may have entered into with theinvestorsrsquo155 or lsquoany contractual obligation it may have entered into towards aninvestorrsquo156

As many a claimant has attempted to elevate contract breaches to internationaltreaty violations through lsquoumbrella clausesrsquo recent IIAs have generally abandonedthis type of provision China following the example of the USA and others hasrevised its second-generation model dispute settlement clause to narrow its consentto arbitration in the current generation of Chinese IIAs Arbitration is now restrictedto only lsquodisputes between a Contracting Party and an investor of the otherContracting Party arising from an alleged breach of [a treaty] obligationrsquo157

153 lsquoIn accordance with the lawrsquo provisions are generally contained as part of the definition of investmentsor within the provisions dedicated to admission and protection of an investment Should the investmentcontravene the domestic laws of the host state tribunals can deny jurisdiction See eg Fakes v Republicof Turkey ICSID Case No ARB0720 Award July 14 2010 para 115 Inceysa Vallisoletana v Republicof El Salvador ICSID Case No ARB0326 Award para 195 Saluka Investments BV v Czech RepublicUNCITRAL Partial Award para 204 Not all violations qualify as an exclusion however such as minorbreaches of bureaucratic formalities See Tokios Tokeles v Ukraine ICSID Case No ARB0218 Award26 July 2007 para 97 It should also be noted that even when no lsquoin accordance with the lawrsquo provisionwas included in the IIA some tribunals found that such an obligation is implicit See Plama ConsortiumLtd v Bulgaria ICSID Case No ARB0324 Award 27 August 2008 For general developments on lsquoinaccordance with the lawrsquo see Rudolph Dolzer and Christoph Schreuer Principles of InternationalInvestment Law (Oxford University Press 2012) 92 13492 134-139 139 See also Rahim Moloo andAlex Khachaturian lsquoThe Compliance with the Law Requirement in International Investment Lawrsquo34(6) Fordham International Law Journal (2011) See also Stephan W Schill Illegal investments ininternational arbitration SSRN (4 January 2012) available at httpssrncomabstractfrac141979734

154 See eg SGS Societe Generale de Surveillance SA v Republic of the Philippines ICSID Case No ARB026 Decision of the Tribunal on Objections to Jurisdiction 29 January 2004 Salini Construtorri SpA andItalstrade SpA v Morocco Jurisdiction ICSID Case No ARB004 Award 23 July 2001 See alsoGaillard Investment treaty arbitration and jurisdiction over contract claimsmdashthe SGS cases considered inInternational Investment Law and Arbitration Leading Cases from the ICSID NAFTA Bilateral Treatiesand Customary International Law 325 (Cameron amp May eds 2005) Some tribunals however deniedsuch an effect to umbrella clauses See eg SGS Societe Generale de Surveillance SA v Islamic Republic ofPakistan ICSID Case No ARB0113 Award on Jurisdiction 6 August 2003 and Joy Mining MachineryLimited v Egypt ICSID Case No ARB0311 Award on Jurisdiction dated 30 July 2004 For a compre-hensive analysis of the scope of umbrella clauses See Laura Hanonen lsquoContaining the Scope of theUmbrella Clausersquo 1 Investment Treaty Arbitration and International Law 27(TJ Grierson Weiler ed2008)

155 Eg 2001 ChinandashNetherlands BIT Art 3(4)156 Eg 2001 ChinandashJordan BIT Art 9(2)157 See eg 2008 ChinandashMexico BIT Art 11ff

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(iv) Non-precluded measures Recent IIAs concluded by China invariably contain theso-called lsquonon-precluded measuresrsquo (NPM) clauses Such clauses allow states to dero-gate from the duties they would otherwise be compelled to abide provided certaincircumstances occur The most common such derogation pertains to measures takenby the state in the interest of security under specific circumstances158 Other possibleNPMs are prudential measures lsquoto ensure the integrity and stability of the financialsystemrsquo159 or taxation measures160 Often IIAs that include a NPM clause state thatthe clause is self-judging meaning that whether the measure comports with thescope of the clause is a matter for the judgment of the state taking the measure161

The NPM mechanism calls for some observations in relation with the concept ofindirect expropriation International arbitral tribunals have uniformly recognized theprinciple that expropriation could be indirect or creeping162 through adoption bythe host state of lsquomeasures tantamount to expropriationrsquo163 such as regulatory or le-gislative orders effectively depriving the investor from the enjoyment of its invest-ment164 Through NPMsmdashthe most notable of which arguably being taxationmeasuresmdasha state can effectively carve out measures that could otherwise be deemedexpropriatory such that it be shielded from liability for the use of its regalian powersIn that respect recent treaties executed by China contain annexes making clear thatlsquodeprivation of property [through] measures taken in the exercise of a statersquos regula-tory powers as may be reasonably justified in the protection of the public wel-fare shall not constitute an indirect expropriationrsquo165 Because such measureshaving the effect of depriving an investor of its property should be lsquoreasonablyjustifiedrsquo however they are not self-judging contrary to standard non-precludedmeasures

(v) Administrative review As it moved toward its second generation of IIAs seem-ingly in anticipation of its lsquogoing outrsquo strategy China adopted the Administrative

158 Eg China NewndashZealand FTA Art 201 ChinandashPeru FTA Art 194159 Eg China NewndashZealand FTA Art 203 ChinandashPeru FTA Art 197160 Eg China NewndashZealand FTA Art 204161 Language typically used refers to measures lsquodeemed necessaryrsquo or lsquothat [the host state] considers neces-

saryrsquo A claim deemed precluded by the state should nevertheless be subject to a balancing test upon re-view by an arbitral tribunal as to its admissibility rationae materiae See Michael D Nolan and FredericG Sourgens lsquoThe Limits of Discretion Self-judging Emergency Clauses in International InvestmentAgreementsrsquo in Sauvant (ed) Yearbook on International Investment Law amp Policy (2012) 2010ndash2011362ff

162 See Companıa del Desarrollo de Santa Elena SA v Republic of Costa Rica ICSID Case No ARB961Award of the Tribunal (17 February 2000) See also Generation Ukraine Inc v Ukraine ICSID Case NoARB009 Award para 2022 (16 September 2003)

163 See eg SD Myers v Canada UNCITRALNAFTA First Partial Award (13 November 2000) para 285164 See eg Pope amp Talbot Inc v Govrsquot of Canada NAFTAUNCITRAL Interim Award (26 June 2000)

para 306 See also L Yves Fortier and Stephen L Drymer lsquoIndirect Expropriation in the Law ofInternational Investment I Know it When I See it or Caveat Investorrsquo 13 Asia Pacific Law Review 79(2005) 81

165 ChinandashNew Zealand FTA Annex 13 ChinandashPeru FTA Annex 9 See also 2006 ChinandashIndia BITProtocol III Ad Art 5(3) lsquonon-discriminatory regulatory measures adopted by a Contracting Party inpursuit of public interest including measures pursuant to awards of general application rendered by judi-cial bodies do not constitute indirect expropriation or nationalizationrsquo

by guest on Novem

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nloaded from

Reconsideration Law in 1999166 Concomitantly China inserted provisions into itsBITs establishing a two-step mechanism for investment disputes presumably be-cause second-generation IIAs provided that any such disputes could be arbitratedThese disputes ought to be submitted to administrative review under Chinese sub-stantive law within 60 days from the date the investor was notified of the aggrievingact167 The administration then disposes of the same time limit of 60 days to renderits decision It is only after expiry of these successive time limits that resorting to ar-bitration becomes permissible168 Pursuant to Article 6 of that AdministrativeReconsideration Law the Chinese administration is vested with the exclusive powersto review inter alia

administrative penalties such as confiscation of illegal gains confiscation ofunlawful property or things of value order for suspension of production or busi-ness operation temporary suspension or rescission of permit temporary suspen-sion or rescission of license freezing of property suspension or revocationof such documents as permits licenses and qualification certificates right ofownership in or the right to the use of natural resources rdquo

A commentator has observed that prior recourse to administrative reconsiderationshould not be warranted if the state act complained of is a court order or piece of le-gislation as opposed to an action of an administrative nature169

2 Enhanced substantive protections in recent Chinese BITs(i) Fair and equitable treatment The obligation that foreign investments be affordedfair and equitable treatment (FET) was accounted for as early as the 1982 ChinandashSweden BIT170 With a few exceptions171 all Chinese BITs contain a FET clause Anotable distinction exists however in that third generation of Chinese BITs subjectthe FET standard to customary international law172 Just like many BITs from othernations173 the language of Chinarsquos second-generation BITs generally referred toFET lsquoin accordance with International Lawrsquo174 or lsquoconformement aux principes duDroit internationalrsquo175 This language coupled with a broad arbitration clause (lsquoany in-vestment disputersquo) arguably exposed China to broad liability This is because the

166 Law of the Peoplersquos Republic of China on Administrative Reconsideration (29 April 1999) available athttpunpan1unorgintradocgroupspublicdocumentsapcityunpan048297pdf

167 ibid at Art 9168 See eg ChinandashGermany BIT Protocol 6 (Ad Art 9)169 See Wang Guiguo lsquoInvestor-State Dispute Settlement in Chinarsquo Transnational Dispute Management 5

(2011) at 4 available at httpwwwtransnational-dispute-managementcomarticleaspkeyfrac141764170 ChinandashSweden BIT Art 1(1)171 1988 ChinandashJapan BIT 1990 ChinandashTurkey BIT172 For an analysis of FET standard encompassing customary international law principles see Dolzer above

n 153 at 134ndash139173 Eg France IIAsrsquo FET clauses (lsquoChacune des Parties contractantes srsquoengage a assurer sur son territoire

et dans sa zone maritime un traitement juste et equitable conformement aux principes du droitinternationalrsquo)

174 2007 ChinandashCosta Rica BIT175 2005 ChinandashMadagascar BIT

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vague reference to international law presumably gives extensive latitude to an arbitraltribunal to interpret the applicable FET standard without necessarily resorting to opi-nio juris sive necessitates (general practice accepted as law)176 This among other rea-sons may have prompted change in Chinarsquos recent investment treaties in which thelanguage historically used is replaced by clauses providing for fair and equitable treat-ment lsquoin accordance with commonly accepted rules of international lawrsquo177 or lsquoin ac-cordance with customary international lawrsquo178 which presumably leaves less roomfor interpretation as the concept of lsquocustomary international lawrsquo commonly refers tolsquoestablished state practicersquo179 This change was reported as an example of NAFTArsquosinfluence on Chinarsquos drafting of its third-generation IIAs180

(ii) Most-favored-nation treatment It was the regular practice of drafters of ChinarsquosBITs even in the early days to include a most-favored-nation (MFN) clause grant-ing investments subject to a BIT containing an MFN the same prerogatives and ad-vantages (or some subset of them) offered to investors under other BITs concludedby China181 MFN clauses foster equality in the competitive environment among for-eign investors182 Although the content of the MFN clause itself has not substantiallyvaried through the BIT generations its import does it has lsquoconsiderable weight sinceher [sic]new generation investment grant broader protection to foreign investorsrsquo183

Thus an investor with an investment subject to the protections of a first-generationBIT may attempt to invoke enhanced protections of a second or third-generationBIT184

(iii) National treatment In the first generation of its BITs China refused to grantnational Treatment (NT) to foreign investors that is equal treatment to that af-forded to its own citizens or did so only on a best effort basis185 Chinarsquos originalreluctance was said to be caused by the lack of strength of its nascent economy vis-a-vis international actors186 or to uphold lsquostructures of a socialist planning

176 See generally James Crawford Browliersquos Principles of Public International Law (Oxford University Press2013) 25

177 2008 ChinandashNew Zealand FTA Art 143(1)178 2009 ChinandashPeru FTA Art 132179 See Definition of Customary International Law Legal Information Institute available at httpwww

lawcornelleduwexcustomary_international_law See also International Court of Justice Case concern-ing the Continental Shelf (Libyan Arab Jamahiriya v Malta) Judgment 3 June 1985 para 27 (lsquoIt is ofcourse axiomatic that the material of customary international law is to be looked for primarily in the ac-tual practice and opinio juris of Statesrsquo)

180 See Axel Berger lsquoInvestment Rules in Chinese PTIAs ndash Partial ldquoNAFTA-izationrdquo rsquo in R Hofmann SSchill and C Tams (eds) Preferential Trade and Investment Agreements From Recalibration toReintegration (2013)

181 See Rainer Hofmann Stephan Schill Christian J Tams eg ChinandashSweden BIT Art 2(2) (subject to con-ditions of Art 2(3) regarding customs union or FTA)

182 Schill above n 115 at 100183 ibid184 See below Section IIIB for a summary analysis of applicability of MFN treatment to IIA arbitration

clauses185 See eg ChinandashUK BIT Art 3(3) which uses the language lsquoto the extent possiblersquo186 Armand De Mestral and Celine Levesque Improving International Investment Agreements (Routledge

2013) 65

by guest on Novem

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nloaded from

economyrsquo187 Yet national treatment is a lsquocore guaranteersquo of investment treaty prac-tice for instilling a sense of fairness in competition between foreign and localactors188 China shifted gears in its recent treaties With Chinarsquos accession to marketeconomy prominence and notable accession to the WTO regime which imposesnon discrimination and national treatment as core principles189 NT clauses are nowroutinely inserted albeit with a (significant) caveat the NT clause contains eitherthe qualification lsquowithout prejudice to its laws and regulationsrsquo190 or a so-calledlsquograndfather clausersquo exempts the state from foreign investorsrsquo claims of discrimin-ation on the basis of pre-existing law191

An important development occurred during the on-going negotiations betweenChina and the USA for the conclusion of a BIT As reported above China concededin July of 2013 to granting national treatment at the pre-establishment stage of an in-vestment192 Not only that but China has also agreed to switch from a positive listsystemmdashwhere allowed investments are exhaustively enumeratedmdashto a negative listsystemmdashwhere only the sectors where foreign investment is prohibited are listedthe rest being libera terra This change may well signal Chinarsquos willingness to furtheradapt to the standards adopted by other countries and engage in a fourth generationof IIAs193

China had used a positive list for decades notably pursuant to its Catalogue ofIndustries for Guiding Foreign Investment (lsquoCataloguersquo) delineating the sectorswhere foreign investment was encouraged allowed and prohibited194 This positivelist system was coupled with a post-establishmentmdashmeaning only after approval bythe Chinese administrationmdashnational treatment protection

The major change from positive to negative list was meant to lsquohelp establish alevel playing ground for market players as two way trade and investment havecontinued to expandrsquo195 Chinarsquos remarks underline a potential greater adherence tointernational standards of protection for investors presumably prompted by a desireto safeguard its interest abroad But even if China decides to adopt pre-establishmentnational treatment in a more systematic way196 the contours of such protections areunclear and depending on the content of the negative list they could very well be

187 Wenhua Shan The Legal Framework of EU-China Investment Relations ndash A Critical Appraisal (2005)163ff

188 Schill above n 115 at 94189 ibid at 99190 See China Model BIT Art 32 This type of clause would not frustrate challenges to administrative acts191 See eg ChinandashNew Zealand FTA Art 138 lsquo[NT] does not apply to (a) any existing non-conforming

measures maintained within its territory (b) the continuation [thereof]rsquo192 See Paxton above n 49 Pheakdey above n 50193 One could envision that such a fourth generation of IIAs may well encompass environmental consider-

ations modern transparency standards and workforce protection see below Section IV194 See Nie Pingxiang Negative list in need of some positive tweaks China Daily Asia (19 May 2014) avail-

able at httpwwwchinadailyasiacombusiness2014-0519content_15135843html195 MOC China using global approach in investment talks with US Xinhua (12 July 2013) available at

httpenglishpeopledailycomcn907788323785html196 China is currently experimenting the pre-establishment negative list system in its Shanghai Free Trade

Zone since 30 September 2013 and in Pingtan Island since 3 June 2014 See Luo Liexin Chinarsquos secondnegative list a move forward China Daily (4 June 2014) available at httpwwwchinadailycomcnchina2014-0604content_17563011htm

by guest on Novem

Dow

nloaded from

hampered in practice Indeed one could imagine a list as extensive as to defeat itspurpose197 In that respect it is worth noting that the Shanghai Free Trade Zonersquospilot program which implements a negative list system reportedly has had a mere27 reduction in its foreign investment restrictions198

(iv) Full protection and security Initially Chinese BITs flatly affirmed that foreign in-vestment lsquoshall enjoy protectionrsquo199 It is unclear whether this language was intendedto cover less than the largely internationally recognized standard of full protectionand security (FPS) but China has used more expansive language in recent treatiessuch as lsquoconstant protection and securityrsquo200 lsquofull protectionrsquo201 or lsquofull protectionand securityrsquo202 The standard implies an lsquoobligation of vigilancersquo203 from the part ofthe host state with lsquothe mere lack or want of [its] diligencersquo sufficing to constitute abreach204 There is no consensus as to whether FPS clauses should be understood aslimited to physical protection of the investment by the host state205 or as also ex-tending to circumstances not involving physical violence or damage206

In an interpretive exercise the NAFTA Free Trade Commission tied FPS clauseswith protections not to exceed customary international law standards207 This ap-proach found some supporters in investment arbitration208 and seemed to have beenendorsed recently by China Indeed in its recent treaties China circumscribes theFPS clause with lsquocommonly accepted rules of international lawrsquo209 lsquointernational lawminimum standard of treatment of aliensrsquo210 or lsquocustomary international lawrsquo211

In sum it seems clear upon review of the Chinese IIAs entered into since theearly 1980s that Chinarsquos perspective on investment protection has dramaticallychanged as it has increasingly engaged into outbound investment activities mainly

197 It seems that the approach taken thus far is to make a mirror-image of the former positive lists of theCatalogue in the first iteration of its negative list See Pingxiang above n 191

198 See Matthew Zito Camille Chen and Rainy Yao Shanghai FTZ revised negative list introduces targetedFDI reforms China Briefing (3 July 2014) available at httpwwwchina-briefingcomnews20140703shanghai-ftz-revised-negative-list-introduces-targeted-fdi-reformshtml

199 See eg ChinandashCroatia BIT Art 3(1) ChinandashEthiopia BIT Art 3(1)200 See eg 2005 ChinandashBelgium Luxembourg Economic Union BIT Art 2(3)201 See eg 2006 ChinandashRussian Federation BIT Art 2(2)202 See eg 2005 ChinandashCzech Republic BIT Art 2(2)203 American Manufacturing amp Trading Inc v Zaıre ICSID Case No ARB931 Award (1997) para 605204 Asian Agricultural Products Ltd v Republic of Sri Lanka ICSID Case No ARB873 Award (1990) para

77205 See eg Rumeli v Kazhakstan above n 80 at para 668 Saluka Investments v Czech Republic above n 153

at paras 483ndash484 BG Group PLC v Republic of Argentina UNCITRAL Final Award 24 December 2007para 324 Wena Hotels v Egypt ICSID Case No ARB984 Annulment Proceeding Decision 5February 2002 para 84

206 CME v Czech Republic UNCITRAL Partial Award 13 September 2001 para 613 Azurix v ArgentinaICSID Case No ARB0112 14 July 2006parapara 406 Vivendi v Argentina ICSID Case No ARB973Award (2007) para 7412 Biwater Gauff v Tanzania ICSID Case No ARB0522 Award 24 July2008 para 729

207 See Mahnaz Malik The full protection and security standard comes of age yet another challenge forstates in investment treaty arbitration IISD Paper (November 2011) at 9

208 See eg Noble v Romania ICSID Case No ARB0111 Award (2005) para 164209 ChinandashNew Zealand FTA Art 143210 ChinandashMexico BIT Art 5211 ChinandashPeru FTA Art 132

by guest on Novem

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through its SOEs over the past 15 years or so As it has evolved toward becoming anet outward investor China has apparently understoodmdashand hence soughtmdashthebenefits of investment treaty protections in its BIT program China balanced its BITprogram however by adopting the modern cannons of investment treaty protectionsalong the way (eg reference to customary international law in its FET and FPSclauses) presumably to delimitate protection of its inbound FDI and perhaps toalign with Western nationsrsquo model BITs (which in turn should foster confidence inChinarsquos protection of inbound FDI) Yet despite the fact that protections underChina BITs have existed for more than three decades the mechanism through whichsuch protections are ensured and enforcedmdashie investor-state arbitrationmdashhas onlyrecently started being triggered in disputes commenced by Chinese investors as willbe seen below Given the number of first generation BITs which as we have seenallow for limited access to investor-state arbitration most such disputes involve ques-tions of jurisdiction that respondent-states have raised and arbitral tribunals haveexamined

B Chinarsquos consent to arbitral determination as scrutinizedby arbitral tribunals

Thus far only seven cases were reported to have been brought pursuant to aChinese BIT five by Chinese investors against foreign states212 and two by a foreigninvestor against China213 As mentioned above investment arbitration under aChinese BIT very much depends upon the generation of which the BIT is a part Forexample although second and third-generation treaties do provide for investment ar-bitration for lsquoany dispute concerning an investmentrsquo or disputes arising out of a viola-tion of the treaty respectively first-generation BITs only allow those lsquoinvolving theamount of compensation for expropriationrsquo According to the dominant view there-fore the only disputes that China agreed to arbitrate in its early BITs are solely dis-putes over quantum due for expropriation Other grounds for violation of a treatysuch as breach of FET FPS or the threshold issue of the existence of an expropri-ation would thus need to be entertained by national courts of the host countryProponents of an expansionist stance on the scope of Chinarsquos consent to arbitrationhave however gained some traction recently

One example of this trend is the Tza Yap case Mr Tza Yap filed a claim againstPeru registered by ICSID on 12 February 2007 on the basis of the ChinandashPeru BITdated 9 June 1994 This case involved an alleged expropriation by Peru of Mr TzaYaprsquos fish flour company TSG Peru SAC Mr Tza Yap claimed $25 million in

212 Senor Tza Yap Shum v Republic of Peru (ICSID Case No ARB076) Sanum Investments Limited andThe Government of the Lao Democratic Peoplersquos Republic (PCA Case No 2013-13) China HeilongjiangInternational Economic amp Technical Cooperative Corp Beijing Shougang Mining Investment Company LtdQinhuangdaoshi Qinlong International Industrial Co Ltd v Mongolia (PCA Case No 2010-20) Ping AnLife Insurance Company of China Ltd and Ping An Insurance (Group) Company of China Ltd v Kingdomof Belgium (ICSID Case No ARB1229) Beijing Urban Construction Group Co Ltd v Republic of Yemen(ICSID Case No ARB1430)

213 Ekran Berhad (Malaysia) v Peoplersquos Republic of China ICSID Case No ARB1115 (filed on 24 May2011 the case was suspended on July 22 of the same year to finally be discontinued upon joint requeston 16 May 2013) Ansung Housing Co Ltd v Peoplersquos Republic of China ICSID Case No ARB1425

by guest on Novem

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nloaded from

compensation As the then prevailing ChinandashPeru BIT was a first-generation treatyits dispute resolution clause provided for arbitration of only disputes involving theamount of compensation due for expropriation214

Mr Tza Yap argued that the language of the BIT did not limit arbitration to thequestion of the determination of the quantum for expropriation but the necessarypre-determination of the existence of an expropriation In its decision on jurisdictionthe Tribunal agreed with him

Al otro lado del espectro interpretativo la frase podrıa incluir ademas delmonto de la compensacion una determinacion de otras cuestiones impor-tantes relativas a la alegada expropiacion Esta es la interpretacion solicitadapor el Demandante Por diversas razones el Tribunal decide que la ultimainterpretacion la mas amplia resulta ser la mas apropiada215

The Tribunal based its decision on the fact that the word lsquoinvolvingrsquo is not re-strictive as would the words lsquolimited torsquo or lsquoexclusivelyrsquo216 and that the context ofArticle 8(3) supports such an interpretation217 Peru filed a request for annulment ofthe award and a hearing was held in March 2014 by an ICSID ad hoc committee thedecision of which is pending

Another example of the recent expansionist trend regarding the scope of Chinarsquosconsent to investor-state arbitration is the Sanum v Laos arbitration In this case aMacao investment firm alleged that it was expropriated from its investment in a hoteland casino project under gambling licenses in Laos requesting over US$235 millionin damages218 Just as in Tza Yap the arbitration provisions of the 1993 ChinandashLaosBIT provides that only lsquodisputes involving the amount of compensation for expropri-ationrsquo can be submitted to arbitration for resolution The case has been discontinuedfurther to a settlement agreement dated 15 June 15 2014 Before the case was dis-continued however the Sanum tribunal had an opportunity to rule on Laosrsquos juris-dictional objections based on the restrictive language of the ChinandashLaos BIT219

The tribunal adopted the Tza Yap approach and held that the language of Article8(3) does allow arbitration of disputes lsquoinvolving the amount of compensationrsquo Thetribunal based its decision on the fact that the word lsquoinvolvingrsquo is not limitative inand of itself Also importantly and in the same vein as Tza Yaprsquos reasoning the tribu-nal rejected Laosrsquos argument that Article 8(3) was intended to only submit questions

214 Turner and Mangan above n 117 at 44ndash45 lsquothe recent claim under this very BIT filed by a Chinese in-vestor [Tza Yap Shum] against Peru could on the express terms of the BIT as set out above only be inrelation to the compensation that is due as a result of an expropriation that has been determined by anational court to have taken placersquo

215 Senor Tza Yap Shum v Republic of Peru (ICSID Case No ARB076) Decision on Jurisdiction andCompetence (2009) para 150

216 ibid at para 151217 ibid at paras 152ff218 See Sanum Investments Limited and The Government of the Lao Democratic Peoplersquos Republic Notice of

Arbitration available at httprlgeorgDOCSanum20Investments20-200220-20NoApdf(last visited 11 September 2014)

219 The Award on Jurisdiction can be downloaded through Investment Arbitration Reporterrsquos website avail-able at httpwwwiareportercomdownloads20140721

by guest on Novem

Dow

nloaded from

of quantum for expropriation to arbitration the prior question of liability for expro-priation being left for the host statersquos courts to decide This is because Article 8 con-tains a so-called lsquofork-in-the-roadrsquo clause according to which arbitration is notavailable in the event the claiming party has resorted to local courts In particularthe tribunal stated that a party would be precluded from ever bringing a claim for de-termination of the amount of compensation to arbitration because such party wouldbe compelled to resort to local courts for claims over the existence of an expropri-ation which would also settle the question of the amount thereof thereby renderingthe arbitration mechanism inoperative220

Because of the possible import of the tribunalrsquos decision on jurisdiction for futuredisputes Laos has sought a set aside decision from the courts of Singapore (wherethe arbitration was held) notwithstanding the settlement agreement221 TheSingapore High Court went on to annul the Sanum award on jurisdiction by judg-ment dated 20 January 2015 and notably stated in dictum that lsquothe Tribunal did notpossess subject-matter jurisdiction over the defendantrsquos expropriation claims becauseonly disputes over the amount of compensation for expropriation can be submittedto arbitration under Art 8(3)rsquo222

The expansionist analysis of Chinarsquos consent to arbitration in its early IIAs hasbeen criticized223 and indeed certain elements seem to militate against the adequacyof the Tza Yap and Sanum tribunalsrsquo rulings

First a treaty must be interpreted lsquoin accordance with the ordinary meaning to begiven to the terms of the treaty in their context and in light of its object and pur-posersquo224 China BITs of the first generation specifically referred to lsquodisputes involvingthe amount of compensation for expropriationrsquo as the only disputes between in-vestors and states that could be arbitrated the other disputes being subject to litiga-tion before national courts Such language appears on its face to be restrictive ifChina had agreed to arbitrate all matters of expropriation it was arguably sophisti-cated enough as a sovereign to have stated so expressly

Second Chinarsquos intent not to submit to international tribunalsrsquo jurisdiction in theearly years of its BIT program was expressly recognized but disregarded by the Tza

220 It is worth noting that the rationale in the Tza Yap and Sanum cases hinges on a fork-in-the-road provi-sion In both cases the mechanism for resorting to international arbitration as provided in the relevanttreaty consists of prior negotiations in the context of a pronouncement of expropriation pursuant to theexpropriation section of the BIT It thus seems that the contemplated mechanism for international arbi-tration is distinct from the national court action that the respective tribunal envisioned When an expro-priation is proclaimed Art 8(3) allows arbitration over the amount of compensation if priornegotiations proved unfruitful as to the lsquoequivalen[ce of the compensation] to the value of the expropri-ated investmentrsquo per Art 4(2) When expropriation is not proclaimedmdashand its very existence is thus dis-putedmdashthe mechanism that China consented to is contained in Art 8(2) that is resorting to nationalcourts after failed negotiations

221 See Luke Eric Peterson China offers support to Laos in latterrsquos bid to set aside arbitratorsrsquo expansivereading of China-Laos BIT Investment Arbitration Reporter (21 July 2014)

222 Government of the Lao Peoplersquos Democratic Republic v Sanum Investments Ltd Judgment (2015) SGHC15 para 128

223 Wei Shen lsquoThe Good the Bad or the Ugly A Critique of the Decision on Jurisdiction and Competencein Tza Yap Shum v The Republic of Perursquo 10 Chinese Journal of International Law paras 31ff availableat httpchinesejiloxfordjournalsorgcontent10155short

224 Vienna Convention on the Law of Treaties (VCLT) Art 31 (1)

by guest on Novem

Dow

nloaded from

Yap and Sanum tribunals In that respect in its decision to annul the Sanum awardthe Singapore High Court noted the Tza Yap tribunalrsquos observation that lsquocommunistregimes possessed a certain degree of distrust regarding investment of private capitaland were concerned about the decisions of international tribunals on matters overwhich they have no controlrsquo225 China indeed reiterated that it did not intend to con-sent to arbitration other than to lsquodisputes over compensation resulting from expro-priationrsquo when it acceded to the ICSID system in 1993 and issued its notificationunder Article 25(4) of the Washington Convention226 As regards Tza Yap whichwas an ICSID case it should be noted that the context for the interpretation of atreaty can be extracted from lsquoany instrument which was made by one or more partiesin connection with the conclusion of the treatyrsquo227 Given that Article 8(3) of theChinandashPeru BIT submitted expropriation amount disputes to ICSID Chinarsquos abovenotification appears relevant to establish competence ratione voluntatismdashor lackthereofmdashwith respect to cases arising under first-generation BITs such as Tza YaprsquosAs of the date of this article China has not made any comment disavowing this offi-cial position

Third the argument that the fork-in-the-road provision would preclude access toinvestor-state arbitration seems erroneous Indeed the BITs under which the TzaYap and Sanum cases arose had an express provision contemplating that compensa-tion was due for lsquoproclaimedrsquo expropriations which provision is context for andshould be read in conjunction with the dispute resolution clause In the light ofChinarsquos stance on submission to the jurisdiction of international tribunals it seemsclear that the intent of China was to reserve for arbitration only the question of de-termination of quantum where the state had sovereignly declared an expropriationnationalization by way of an executive order or regulation Following that logic aparty could resort to arbitration in case of disagreement over the civilmdashas opposedto sovereignmdashquestion as to whether the lsquoamount of compensation for expropri-ationrsquo offered is adequate given that international standards may be more favorablethan those of the host state

Fourth there is a line of precedents under BITs from other countries containingsimilar language than that of Chinese BITs (albeit perhaps more explicitly restrictive)that is at odds with the tribunalrsquos ruling in Tza Yap For example the tribunal in theBerschader case held that under the BelgiumndashRussia BIT lsquothe ordinary meaning ofthe provision [which read ldquoany dispute relating to the amount or mode of com-pensationrdquo for expropriation] excludes from the scope of the arbitrationclause disputes concerning whether or not an act of expropriation actuallyoccurredrsquo228 In the RosInvest case lsquothe Tribunal [could not] see how the referencein the first jurisdictional clause expressly to the amount or payment of compensationunder Articles 4 or 5 [of the UK-Russia BIT] only can nevertheless be interpreted asa reference also to the earlier sections of Article 5 which deal with expropriation in

226 See above Section IIIA227 VCLT Art 31(2)(b)228 Vladimir Berschader and Moıse Berschader v The Russian Federation SCC Case No 0802004 Award

dated 21 April 2006 para 153

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generalrsquo229 More recently the ST-AD tribunal decided that under the GermanyndashBulgaria BIT lsquothe Tribunalrsquos jurisdiction is limited to one narrow issue only that isthe amount of compensation for an investment found to be expropriated by a findingmade by a Bulgarian courtrsquo230 We should note however that at least one other pre-cedent lends support to the findings of the Tza Yap and Sanum tribunals In theRenta4 case the tribunal indeed held that it had lsquojurisdiction to decide whether com-pensation is ldquoduerdquo to them under international law by reason of the conduct of whichthey complain (and if so in which amount)rsquo231

Another interesting and ancillary jurisdictional question raised in the Sanum caseis whether the lsquonarrow doorrsquo232 left open by first-generation China BITs could be cir-cumvented through the MFN clause that most of Chinarsquos early BITs containIndeed it is reported that Sanum had attempted to bypass the narrow arbitrationclause of the ChinandashLaos BIT through its MFN mechanism That way Sanum washoping to benefit from other Lao BITs granting access to international arbitrationfor disputes beyond issues of quantum as an alternative argument Sanumrsquos rationalewas that the lsquoactivities associated with investmentsrsquo referred to in the ChinandashLaosBITrsquos MFN clause would lsquoinclude access to arbitration over both claims of both ex-propriation and violation of fair and equitable treatmentrsquo233 Indeed some tribunalshave held that all the provisions including dispute resolution clauses were subject tothe MFN clausersquos reach234 Yet the MFN clause is almost invariably textually linkedto other provisions regarding the substantive treatment to be given to foreign invest-ment such as the FET Consequently some commentators have posited that thedrafters of the BITs intended to reserve MFN benefits to substantive protectionsonly235 This understanding was reached by some arbitral tribunals such as in the

229 RosInvestCo UK Ltd v The Russian Federation SCC Case No Arb V0792005 Award on Jurisdictiondated October 2007 paras 112ndash114

230 ST-AD GmbH (Germany) v The Republic of Bulgaria PCA Case No 2011-06 (ST-BG) Award onJurisdiction dated 18 July 2013 paras 368ndash374

231 See eg Renta 4 SVSA et al v Russian Federation SCC No 242007 Award on Preliminary Objectionsdated 20 March 2009 paras 19ff In another case the tribunal also held that it had jurisdiction to decidewhether an expropriation had actually occurred This case is however clearly distinguishable from TzaYap and Sanum in that the language of the dispute resolution clause provided that disputes lsquoconcerningcompensationrsquo were arbitrable and not disputes lsquoinvolving the amount of compensationrsquo See EuropeanMedia Ventures SA v Czech Republic High Court Queenrsquos Bench Judgment dated 5 December 20072007 EWHC 2851 (Comm)

232 ST-AD v Bulgaria above n 224 at para 372233 See Jarrod Hepburn and Luke Eric Peterson Laos has yet to pay $56 million arbitral debt but new in-

vestors line up to sue Chinese claimant says MFN clause circumvents narrow arbitration clauseInvestment Arbitration Reporter (19 August 2012) available at httpwwwiareportercomarticles20120819_2

234 See eg Emilio Augustın Maffezini v The Kingdom of Spain ICSID Case No ARB977 Decision onJurisdiction dated 25 January 2000 para 64 Austrian Airlines v Slovak Republic UNCITRAL FinalAward dated 20 October 2009 para 124

235 See Campbell McLachlan QC Laurence Shore and Matthew Weiniger International InvestmentArbitration Substantive Principles para 7168 (Oxford University Press 2007) (lsquoit is particularly import-ant to construe the ambit of the Statersquos consent strictly the balance struck in investment treaties be-tween the various dispute settlement options is often the subject of careful negotiation between theState Parties selecting from a range of different techniques It is not to be presumed that this can be dis-rupted by an investor selecting at will from an assorted menu of other options provided in other treatiesnegotiated with other State Parties and in other circumstances The result will be that the Most

by guest on Novem

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Plama v Bulgaria case where the arbitration clause at hand contained similar lan-guage to that of first-generation Chinese BITs236 Confirming the understanding ofthe Plama tribunal Chinarsquos recent treaties expressly state that the MFN clause doesnot apply to dispute resolution237 The tribunal in the Sanum case eventually deniedSanumrsquos argument because lsquoto read into [the MFN] clause a dispute settlement pro-vision to cover all protections under the Treaty when the Treaty itself provides forvery limited access to international arbitration would result in a substantial re-writeof the Treaty and an extension of the States Partiesrsquo consent to arbitration beyondwhat may be assumed to have been their intentionrsquo238

Finally with respect to arbitrations involving China IIAs it should be observedthat there are two other known cases involving a China BIT of first generation cur-rently underway In the China Heilongjiang et al v Mongolia arbitration239 ChineseSOE investors have alleged that the ad hoc tribunal was competent to decidewhether an expropriation by Mongolia occurred further to the revocation of their li-cense to exploit the Tumurtei iron ore deposit despite the narrow consent providedin Article 8(3) of the ChinandashMongolia BITIn the recently filed Beijing UrbanConstruction Group Co Ltd v Republic of Yemen ICSID case it is to be expected that

Favoured Nation clause will not apply to investment treatiesrsquo dispute settlement provisions save wherethe States expressly so providersquo) See also Zachary Douglas lsquoThe MFN Clause in InvestmentArbitration Treaty Interpretation Off the Railsrsquo 2(1) Journal of International Dispute Settlement97(2011) (arguing that MFN clauses do not apply to dispute settlement mechanism as lsquo[t]here is a fun-damental distinction in general international law between the substantive obligations in a treaty whichare addressed to the state parties and the provisions that create a jurisdictional mandate for an interna-tional tribunal which are addressed to the tribunal and to the disputing parties who enter into a rela-tionship of procedural equality once arbitration proceedings have been commenced This distinctionmust be respected by investment treaty tribunals in confronting the question of the scope of MFNclausesrsquo) But see Stephan W Schill lsquoAllocating Adjudicatory Authority Most-Favoured-Nation Clausesas a Basis of Jurisdiction-A Reply to Zachary Douglasrsquo 2(2) Journal of International Dispute Settlement353 (2011) (arguing that the application of MFN standard to dispute settlement mechanism lsquoaccordswith the structure of international law and the most fundamental duty it imposes on States namely tocomply with its international obligationsrsquo)

236 Plama Consortium Ltd v Bulgaria ICSID Case No ARB0324 Decision on Jurisdiction dated 8February 2005 para 223 lsquoan MFN provision in a basic treaty does not incorporate by reference disputesettlement provisions in whole or in part set forth in another treaty unless the MFN provision in thebasic treaty leaves no doubt that the Contracting Parties intended to incorporate themrsquo See alsoBerschader v Russia above n 222 at para 206 (lsquoThe starting point in determining whether or not anMFN clause encompasses the dispute resolution provisions of other treaties must always be an assess-ment of the intention of the contracting parties upon the conclusion of the original treaty The Tribunalhas applied the principle that an MFN provision in a BIT will only incorporate by reference an arbitra-tion clause from another BIT where the terms of the original BIT clearly and unambiguously so provideor where it can otherwise be clearly inferred that this was the intention of the Contracting Partiesrsquo)Wintershall Aktiengesellschaft v Argentine Republic ICSID Case No ARB0414 Award dated 8December 2008 paras 173ff

237 See eg ChinandashNew Zealand FTA Art 139 (2) (lsquoFor greater certainty the [MFN] obligation in thisArticle does not encompass a requirement to extend to investors of the other Party dispute resolutionprocedures other than those set out in this Chapterrsquo)

238 Sanum v Laos Jurisdictional Award above n 214 at para 358 As seen above the Sanum tribunaldecided that the dispute resolution clause itself encompassed issues of determination of expropriationmaking the question of expansion through MFN clause unnecessary

239 China Heilongjiang International Economic amp Technical Cooperative Corp Beijing Shougang MiningInvestment Company Ltd Qinhuangdaoshi Qinlong International Industrial Co Ltd v Mongolia PCA CaseNo 2010-20 Mr Nolan represents Mongolia in this arbitration

by guest on Novem

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because of the restrictive language in the ChinandashYemen BIT providing for arbitrationof only disputes over the amount of compensation for expropriation240 the Chineseinvestor also will argue that the tribunal has jurisdiction over its claims related to itsbuilding of an international airport in Sanarsquoa for an amount of US$114 million241

C The apparent reluctance to resort to investor-state arbitrationunder Chinese IIAs

Despite the gradual broadening of Chinarsquos consent to arbitration that its IIAs havereflected as China outward flow of investment has increased few disputes arisingunder Chinarsquos IIAs have been reported242 The relative scarcity of cases involvingChina BITs is somewhat surprising considering the number of treaties it concludedsince the early 1980s and its volumes of inward as well as outward investment regis-tered over the past 15 years

Some authors advance that the reasons are cultural lsquopraise of harmony usuallycomes firstrsquo which makes it preferable for Chinese people not to resort to litigiousmeans of resolution of disputes243 Another commentator put it that in a societydominated by the Confucianist ideology conflicts are frowned upon for they lsquoob-struct[] the natural order of life and other intrinsic disharmonious principlesrsquo244 As aresult mediation or other informal means of resolution of disputes (eg direct nego-tiation with government officials through Chinese partners) is said to have contrib-uted to the paucity of investment arbitration cases245

The reasons may in fact be more pragmatic With respect to inbound invest-ment foreign investors may be discouraged from risking time money and efforts ina case where they expect that irrespective of the outcome the chances of enforcingthe award in China may be slim Indeed Chinarsquos legal landscape has been said cur-rently to disallow enforcement of foreign investor-state arbitral awards First Chinahas upon acceding to the 1958 New York Convention on Recognition andEnforcement of Arbitral Awards expressly excluded enforceability of investor-stateawards246 Second the principle that ICSID awards are self-executing in a statersquos legalorder may be undermined by the requirement that execution be lsquogoverned by the

240 See Chester Brown (ed) Commentaries on Selected Model Investment Treaties (Oxford University Press2013) 173

241 See lsquoChinese investor takes on Yemen at ICSIDrsquo Global Arbitration Review 9 December 2014 availableat httpglobalarbitrationreviewcomnewsarticle33242chinese-investor-takes-yemen-icsid

242 See Wang above n 170 at 7ff We note however that six out of the seven investor-state cases reportedhave been commenced in the last 5 years which may signal a decreasing frilosity as regards investor-statearbitration under China IIAs

243 Ibid at 19244 George O White lsquoNavigating the Cultural Malaise Foreign Direct Investment Dispute Resolution in

the Peoplersquos Republic of Chinarsquo 55 Tennessee Journal of Business Law 64 (2003)245 Wang above n 170 at 20ndash21 Wang emphasizes on the importance for government officials at every

level to not deter foreign investment lsquoWhere the attraction of foreign investment is essential for bothGDP and the positive performance evaluations of local governments any dispute with foreign investorswould be seen to be counterproductive to this effort as it may be viewed as creating a poor environmentfor foreign investment Whenever a serious dispute arises which triggers withdrawal of foreign invest-ments the local government officials in charge may be held responsiblersquo

246 Notice on the Implementation of Chinarsquos Accession to the Convention on the Recognition andEnforcement of Foreign Arbitral Awards of 1987 issued under Art 5(2) of the New York Convention

by guest on Novem

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laws concerning the execution of judgments in force in the State in whose territoriessuch execution is soughtrsquo247 Importantly China does not have any law allowing en-forcement of arbitral awards against state-owned property248

What is more China adopts a rigid position on sovereignty China emphaticallystated that it strictly adheres to the principle of absolute sovereign immunity Indeedin the FG Hemisphere case249 China propounded that lsquo[t]he consistent and prin-cipled position of China is that a state and its property shall in foreign courts enjoyabsolute immunity including absolute immunity from jurisdiction and from execu-tion and has never applied the so-called principle or theory of ldquorestrictive immun-ityrdquorsquo250 This arguably contributes to investor sentiment that resorting to arbitrationagainst China would prove inefficacious due to the enforcement challenges associ-ated with arbitral award against the state

The reasons seem similarly rooted with respect to outbound investment On theone hand the influence of China in Asia where much of its outward FDI goes251

possibly contributes to prompt settlement between host countries and potentialclaimants Chinese SOEs outside of litigious avenues On the other hand the massiveunderwriting by the China Export amp Credit Insurance Corporation (lsquoSinosurersquo) ofexport credit insurance to extend credit enhancement to Chinese investors252 mostlySOEs as explained above makes resorting to legal protections little appealing It isworthy of note that Sinosure was established and became operational in 2001 that iswhen China announced its lsquogoing abroadrsquo strategy to the world and concomitant in-sertion of broad arbitration clause in its IIAs253 Coincidentally the second gener-ation of BITs started including subrogation clauses whereby if a state agencymdashsuchas Sinosuremdashmakes a payment to a Chinese investor in relation to investments in

Therefore awards rendered under the auspices of other arbitral institutions than ICSID such as ICC orSCC or by ad hoc tribunals cannot either be enforced in China

247 Washington (ICSID) Convention Art 54(3)248 Wang above n 170 at 24ndash25249 FG Hemisphere Associates LLC v Democratic Republic of the Congo and Ors Judgment [FACV Nos 5 6

amp 7 of 2010]250 Chinarsquos Letter of 25 August 2010 reproduced at para 211 of the Judgment China goes on to say

The courts in China have no jurisdiction over nor in practice have they ever entertained anycase in which a foreign state or government is sued as a defendant or any claim involving theproperty of any foreign state or government irrespective of the nature or purpose of the relevantact of the foreign state or government and also irrespective of the nature purpose or use of therelevant property of the foreign state or government At the same time China has never ac-cepted any foreign courts having jurisdiction over cases in which the State or Government ofChina is sued as a defendant or over cases involving the property of the State or Governmentof China This principled position held by the Government of China is unequivocal andconsistent

251 Sophie Song Southeast Asia receives more foreign direct investment (FDI) than China which is now theworldrsquos third-largest foreign investor International Business Times (5 March 2014) available at httpwwwibtimescomsoutheast-asia-receives-more-foreign-direct-investment-fdi-china-which-now-worlds-third-largest

252 As of late 2013 Sinosure had lsquosupported export domestic trade and investment with a total value ofUSD 148465 billionrsquo and had lsquofacilitated the lending of CNY 18 trillion by 190 banksrsquo (about USD 290billion) See Sinosurersquos Company Profile available at httpwwwsinosurecomcnsinosureenglishCompany20Profilehtml

253 See Sinosurersquos History available at httpwwwsinosurecomcnsinosureenglishhistoryhtm

by guest on Novem

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nloaded from

the territory of a contracting country such agency will be subrogated in the rights ofthe investor and will thus be in a position to trigger the protections of the treatyitself254

Consistent with Chinarsquos new status as a net outward investor255 it may fully em-brace the investor-state arbitration system moving forward It has signalled of latethat it may do so through the above-described evolution of its investment protectiontreaties

I V Q U O V A D I S As laid out above Chinarsquos transition to become a major contributor of outward FDIhas led to a profound reformation of its investment treaty regime The data amply es-tablish the extent to which China has departed from being a purely capital-importingcountry in an effort to sustain its rapid economic growth to a capital-exportingcountry catching up with Europe and the USA256 At the same time a closer analysisof the data reveals that the picture is in some respect more complicated than what iscommonly presented257 As a general comment the size of Chinarsquos outward FDIstock was merely US$ 730 billion in 2014 significantly smaller than that of the USAwith over US$ 5 trillion Also although much has been made of Chinarsquos takeover ofAfrica in that it lsquois trying to establish firm control to resources-rich countriesrsquo258

China comes in only in third place among developing country investors behindMalaysia and South Africa259 and is furthermore in the view of one commentator defacto limited to financing infrastructures in lsquoremote locations often with poorqualityrsquo260

By juxtaposing the economical raw data with the actual practice of China vis-a-visthe international legal regime respecting investment treaty one cannot help but no-tice the correlation between the language adopted in its IIAs and the clear movementfrom its positioning on the investment spectrum Although China had an active BITprogram since the early 1980s it was of an extremely limited applicability WithoutChinarsquos consent to arbitration of investor-state disputes BITs were lsquotoothlessrsquo

Under the second generation of IIAs which began in 1998 investors finally dis-posed of a dispute resolution mechanism to ensure that the promised treaty protec-tions were upheld As explained above however it remains to be seen whether suchinvestors could recoup any potential losses incurred as a result of a treaty violation as(i) no investor ventured in the uncharted territory of investment treaty arbitrationagainst China yet and (ii) even if an arbitration had been carried out under a ChinaIIA Chinarsquos position on the unenforceability of non-ICSID investor-state arbitral

254 See eg ChinandashBarbados BIT Art 7 For an example of subrogation clause in third-generation IIA seeChinandashJapanndashRepublic of Korea TIT Art 14

255 See above Section A256 ibid257 ibid258 Huiping Chen Sino-African BITs practice a new legal paradigm Paper at 3 Taipei Conference on

International and Comparative Law (forthcoming)259 See UNCTAD above n 11 at 40260 Chen above n 254 at 4

by guest on Novem

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nloaded from

awards and its lack of domestic legal mechanisms allowing enforcement of awardsagainst state assets could deflated even the boldest investor

In its third generation of IIAs China comes of age with respect to adherence tothe international legal regime for investment protection and solidifies its economicprominence in the likes of the USA and European countries China sees itself as aprovider of outbound flows of investment and as a participant in the internationallegal regime Accordingly it seems to align its view as to the fundamental tenets ofinvestor-state protection and adopts the hallmarks of European Union or USA IIAsNotably and in keeping with the USA practice observed under the 2004 US ModelBIT China has largely accepted ICSID arbitration of disputes against investors(including under ICSIDrsquos Additional Facility)261 abandoned umbrella clauses sub-jected FET and FPS protections to customary norms of international law and evenoperated a paradigm shift by agreeing to the concept of a pre-establishment NT onthe basis of a negative list262 It also ensured along the way that its SOEs throughwhich most of its foreign resources-oriented investments are channelled are ex-pressly covered by the investment protections that are owed to lsquoinvestorsrsquo as definedin these IIAs of third generation

It remains to be seen however whether the position of China in its interactionwith other mature home countries will result in a further adoption of recent invest-ment protection standards and its engaging in a fifth generation of IIAs For examplethe 2012 US Model BIT anticipates resorting to a future multilateral appellate mech-anism263 provides for transparency of arbitral proceedings264 recognizes the obliga-tions of states under domestic labor laws265 and establishes that environmentalconcerns may justify non-precluded measures266 In the light of global efforts towardencouraging lsquosustainablersquo foreign direct investment spearheaded by the OECD267

and UNCTAD268 it is possible that China will jump on the bandwagon and followalong the lead of other capital-exporting nations There is some indication thatChina may decide to do so upon review of some recent treaties in which for ex-ample environmental measures do enjoy a basic level of observance269 If this is thefuture trajectory of Chinarsquos IIAs then there is hope for a largely uniform interna-tional investment law and policy regime

261 See eg Art 15 of the ChinandashJapanndashRepublic of Korea TIT262 See above Section IIIB(2)263 Art 28264 Art 29265 Art 13266 Art 12267 See OECD OECD 2011 Guidelines for Multinational Enterprises available at httpwwwoecdorgdaf

invmne48004323pdf268 See lsquoInvestment policy framework for sustainable developmentrsquo in UNCTAD World Investment Report

2012 Towards a New Generation of Investment Policies (Geneva UNCTAD 2012)269 See eg ChinandashJapanndashRepublic of Korea Treaty Art 23 (lsquoeach Contracting Party should not waive or

otherwise derogate from such environmental measures as an encouragement for the establishment ac-quisition or expansion of investments in its territoryrsquo)

by guest on Novem

Dow

nloaded from

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Page 2: China’s Outward Foreign Direct Investment and ...ccsi.columbia.edu/files/2015/12/KPS-MDN-Chinas-OFDI-IIL-Nov.-15... · China’s Outward Foreign Direct Investment and International