Investment Treaties and the Search for Market Access in China

It is a commonplace by now to say that the global investment treaty system is at a crossroads. On the one hand, a number of countries are opting out by terminating bilateral investment treaties (BITs), withdrawing from the International Centre for Settlement of Investment Disputes or by negotiating investment treaties without controversial investor-state dispute settlement (ISDS) clauses. On the other hand, treaty-making is also changing. The days of the simple, one-purpose BITs seem to be counted. As the number of newly negotiated BITs has declined in recent years, more complex investment rules are increasingly integrated in preferential trade and investment agreements (PTIAs) among larger groups of countries. These treaties typically combine more balanced rules in the post-establishment phase with market access rules for investment. The Mega regionals currently under negotiation, such as the Transpacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP), or the Transatlantic Trade and Investment Partnership (TPIP), may prove to be the outstanding examples of this trend. However, the inclusion of market access commitments in investment agreements has proven divisive: capital-exporting countries and regions like the United States, Canada, the European Union and Japan are leading proponents, while capital-importing countries often remain resistant.

Where does China stand in this increasingly complex investment treaty system? Rapidly increasing outward foreign direct investment flows by Chinese companies have put China in the spotlight of international attention. At the same time, China has built up a dense network of now more than 130 BITs. If China continues negotiating new treaties at the same pace it will overtake Germany as the country with the largest number of BITs in the near future.[1] Of course, assessing China’s international investment policy on the basis of the sheer quantity of treaties only takes us so far. More important is the question whether China is joining the trend towards comprehensive treaties that go beyond the investment protection rules found in mainstream BITs. In particular, what is China’s position on extending the scope of investment treaties by including controversial market access rules?[2]

Three generations of Chinese investment treaties

Chinese investment treaties can be categorized into three generations. The first generation of BITs, negotiated throughout the 1980s and 1990s, included various safeguards for the host country, most importantly ISDS clauses that were limited to disputes concerning the amount of compensation due in case of expropriation. China negotiated more than 70 of such first generation BITs.

The China-Barbados BIT in 1998 was the first of approximately 50 second generation treaties. This treaty can be considered a watershed of China’s investment treaty making; for the first time, China consented to allow foreign investors to bring “any dispute concerning an investment” to international arbitration.[3]  China also gradually introduced a number of other treaty innovations such as less restrictive national treatment clauses.

In recent years the Chinese approach towards international investment-treaty-making has progressed and a third generation of Chinese BITs have come to the fore. These treaties aim to strike a better balance between the rights of the investor and the host state,[4] drawing inspiration from the innovations introduced by the members of the North American Free Trade Agreement (NAFTA) in response to numerous ISDS claims. Against this background, Chinese experts speak of an “Americanization” of Chinese investment treaties.[5] A number of concepts developed by NAFTA countries, such as references to the concept of the minimum standard of treatment, adoption of the term “in like circumstances” to specify the meaning of the national treatment clause and exceptions to the transfer clause, have been adopted by China in recent years.

A noteworthy aspect of China’s investment treaty practice is that second and third generation treaties are negotiated in parallel. The reason behind this seemingly puzzling pattern is that China, unlike traditional capital exporting countries, is not insisting on its own model text as a basis of negotiations. Interviews by the author with investment treaty negotiators reveal that China is comfortable to negotiate on the basis of the partner countries model texts.

China and market access rules

In addition to its dense network of BITs, China has so far concluded 12 preferential trade agreements of which four include comprehensive rules on investment.[6] In its PTIAs China follows a largely conservative approach that focuses on trade in goods, although investment rules have been included at the request of the partner country. With the exception of the Pakistan PTIA, which merely copies China’s second generation BIT approach, the PTIAs signed with New Zealand, Peru and the ASEAN countries come under the third generation of China’s investment treaties. China, however, remains opposed to extending the coverage of the national treatment obligations to the establishment of investments, thus preserving its right to regulate the entry of foreign investments. At the most, China is willing to grant most-favoured nation treatment with the regard to market access, ensuring that its partner countries’ investors benefit from more preferable treatment that China might grant third countries in the future. In addition to PTIAs, China has also resisted including market access rules in a recent BIT signed with Canada and the trilateral investment agreement signed with Japan and South Korea, thus departing from the usual approach adopted by these partner countries.

Upcoming negotiations

In light of the global trend towards more comprehensive investment agreements, China will most likely face more demands to include market access provisions in its BITs and PTIAs. That pressure originates from three areas:

1)      The negotiation channel: China is currently negotiating a BIT with the US and is about to officially launch negotiations with the EU in autumn 2013. Both the US and the EU have stated that market access provisions would be an integral part of any future investment agreement they are willing to sign with China. Market access provisions will most likely also be tabled in the negotiations of a RCEP among ASEAN+6 nations. Given the economic importance of these countries, China will face strong pressure to include market access provisions.

2)      A changing international environment: Important capital exporting countries are pushing for a combination of post-establishment investment protection and market access provisions. This becomes apparent by the stated aim of the US and the EU to draft the trade and investment rules of the 21^st century in the context of the TTIP. The same can be said about the TPP. The noteworthy aspect about both negotiation processes is that China is excluded. Regardless of the question whether these negotiations are intentionally directed against China, these Mega Regionals will likely include investment rules that go beyond the level of investment protection included in Chinese agreements, thus exerting competitive pressure on China to provide foreign investors in China and Chinese investors abroad similar levels of protection.

3)      A changing domestic political economy: The above described pressures on the international level have to be assessed against the background of the debate within China on a recalibration of the Chinese growth model towards higher levels of domestic consumption and innovation-driven economic development. Especially controversial is the discussion to what extent China needs more market-oriented structural reforms. The report “China 2030” published by the Development Research Center of the State Council, one of the most influential Chinese think tanks on economic policy issues, together with the World Bank, for instance, called for a further liberalisation of investment restriction and especially highlighted the importance of market access provisions to be included in future Chinese investment treaties.[7] Recent policy initiatives to streamline foreign exchange rules also point to the direction of further liberalisation of China’s FDI regime.[8]

Given China’s treaty-making history as well as the importance of the state in the Chinese economy, it seems unlikely that China will give up its opposition to market access rules in its BITs and PTIAs in the near future. Nonetheless, the external and internal pressures described above are immense and make it possible that the Chinese government will move further in the direction of liberalising the admission and approval process for FDI. However, even if China decides to unilaterally liberalise its investment regime, it is an open question whether the US and the EU, in particular, can use the momentum to successfully press for the inclusion market access provisions in a stand-alone investment agreement signed with China. Chinese investors already enjoy a relatively open and stable investment framework in the EU and the US. It seems questionable, therefore, whether the EU and the US are able to offer China anything meaningful in the context of a BIT. While the US and the EU are at the moment cautious about entering into negotiations for a comprehensive trade and investment agreements with China, such an agreement could provide the possibility to trade concessions across disciplines, thus providing for more leverage to push China into the direction of more market access.

Author: Axel Berger is researcher at the German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE), Department for World Economy and Development Finance, Bonn. He works on global investment policy issues, with a focus on emerging and developing countries. His current major areas of research are the diffusion patterns and development impacts of international investment agreements.