Could a European Investment Court be a Decisive Argument for Conclusion of an EU-China Bit

Keywords – investment arbitration, European Union, ICS, regulatory power

In 2003, the European Union launched a ‘comprehensive strategic partnership’ with the People’s Republic of China.[1] This partnership was meant to address strategic, economic and security challenges and to establish a relationship based upon trust. Nevertheless, it has largely not been considered a success.[2] 

Could the Investment Court System (“ICS”), which would carry legal security and reinforce the States’ power to regulate, be a crossroad project for both the Parties? 

To explore this issue, we will first consider the strategic partnership between EU and China and the importance of a bilateral investment agreement, before scrutinizing the reform plan and the impact of an Investment Court System on the negotiations.

A strategic partnership in need of legal security

The European Union and China developed a particular relationship, characterised by economic interdependence, sometimes converging political views on global governance, and dissenting core values of social order.

Do Chinese investments constitute a threat to the European Union? The picture of a powerful and united China playing a disassembled European Union, leaving it without bargaining power, should probably be nuanced by the economic relation of the two partners. Even if Xi Jinping clearly breached the international restraint doctrine developed by Deng Xiaoping by taking the initiative in global governance,[3] China is still heavily dependent, despite its discourse, [4] on the European market for trade exportations, transfers of technology and international reputation. Since the 2019 US-China trade dispute, the EU has become the first destination for Chinese exports, illustrating its dependence on the EU’s market.[5] 

Likewise, China built its economic strength by attracting FDI notably from Europe, but is still not ranked among the top ten of investors in the EU-27.[6] The EU invests 116.4B€ more FDI to China than China invests in Europe.[7]  In this context, the negotiations launched in 2013 by the EU, which finds its trade competence in Art. 3 and 207 TFEU, for an investment agreement aims to secure this growing interdependence, providing investors on both sides with predictable, long-term access to both markets, especially the Chinese one.[8] 

While China is the second largest economy, thanks in part to the global trade and financial system,[9] the country maintains high burdens to foreign investments.[10] With regards to European countries, they are quite loose in the obligations imposed upon foreign investors in general.[11] 

An EU-China BIT would, therefore, allow Chinese restrictions to be lifted and access to market to be broadened,[12] providing China with a wide access to the EU market, that is presently segmented by the 26 individual BITs between the Member States of the EU with China (except for Ireland). The promise of an investment agreement is the commitment to a deeper strategic partnership, which reshapes an elusive vacuum vulnerable to impediments and that favours the dismantling of the EU by tempting China to play the internal dissensions.[13] 

A bilateral investment agreement would provide greater security in the opening of the Chinese market to European FDI and foster predictability and security to investors on both sides. In this context, the reform of the Investor-State dispute settlement mechanism is a crucial factor to ensure legal security and deepen the relationship between the two partners as both Parties are highly concerned about their right to regulate.[14] 

The ICS as a crossroad project

With the project of an ICS, the EU aims at recalibrating economic relations and providing a procedural reform that could seduce the European and Chinese interests.[15]

For the past decades, the ICSID Convention has been the standard mode of arbitration in Investor-State disputes. Today, this mechanism is criticised for its lack of legitimacy. The absence of an appeal system, the appointment of private arbitrators, the absence of control of awards, for instance by the Court or the European Court of Justice, the lack of coherent jurisprudence or rule of precedence, and the lack of accountability, form the main points of critique. [16] The ICSID procedure is believed to favour investors at the expense of the State’s right to regulate, notably for bona fide purposes such as the protection of the environment or public health.[17] 

The proposed ICS designed in the Investment Chapter of the CETA (Art. 8) and in the EU-Vietnam FTA (Section 3, Art. 3) is characterised by its transparency, appellate mechanism, power of States in the designation of the arbitrators and its ‘loser pays it all’ principle.[18] The appellate mechanism’s alleged goal is to reinforce the legal consistency and coherence of awards, public trust, and to deter abuse of arbitral proceedings by investors through the allocation of costs to the losing party. The appointment of arbitrators by a selection committee is nevertheless problematic, as it goes far in the direction of recalibration in favour of the States. Appointing impartial arbitrators is largely considered as one of the key components for the trust of investors. 

With the ICS, the risk is of gaining the public’s trust at the expense of the investor’s willingness to invest. It may constitute an important incentive for the Parties but a foil for investors.[19] By securing the right of State’s right to regulate over the rights of Investors, the system could become a decisive argument for Parties concerned with their discretion over international investment policies. 

While it is not considered to be a Court,[20] the ICS aims to convey procedural innovations that aim for the recalibration of International Investment Law in favour of States. This recalibration might please both Parties’ interests and open the road to the conclusion of a BIT.

Conclusion 

An EU-China Investment Court System and its recalibration goal might become a decisive argument for the conclusion of an EU-China BIT. Overall, the conclusion of a treaty could deepen the strategic partnership and provide for the regulation of Chinese overflowing investments,[21] open market opportunities,[22] improve competitiveness and provide a “realist” level playing field for investors.[23] Nonetheless, pitfalls could disrupt the negotiations. Among them, is the requirement of the European Union to address conditionality and human rights during trade negotiations (Art. 21.1 TFEU). Another is that China is likely to continue to “adopt a multiplicity of strategies when the reform of the global governance system is concerned”[24] and therefore, to play EU’s internal dissensions in its own interests.

ENDNOTES 

[1] Chaisse, J. (Ed.). (2018). China-European Union Investment Relationships: Towards a New Leadership in Global Investment Governance?. Edward Elgar Publishing.

[2] Maher, R. (2016). The elusive EU-China strategic partnership. International Affairs, 92(4), 974-76. 

[3] Burnay, M. (2020, forthcoming). China and Global Governance: Towards a Low-Cost Global Legal Order? The Hague Yearbook of International Law, Vol. 31, 8. Xi Jinping, “Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era”, Opening address to the 19th National Congress of the Communist Party of China, Xinhua (translation), 18 October 2017, available at:http://www.xinhuanet.com/english/download/Xi_Jinping’s_report_at_19th_CPC_National_Congress.pdf (accessed on the 21st of March 2020).

[4] Zeng, J. (2017). Does Europe matter? The role of Europe in Chinese narratives of ‘One belt one road’and ‘New type of great power relations.’ JCMS: Journal of Common Market Studies, 55(5), 1175-1176.

[5] Liu, M. H., Margaritis, D., & Zhang, Y. (2019). The Global Financial Crisis and the Export-Led Economic Growth in China. The Chinese Economy, 52(3), 232-248. European Commission Directorate General for Trade (2019). European Union, Trade in Goods with China in 2019. Available at: https://webgate.ec.europa.eu/isdb_results/factsheets/country/details_china_en.pdf?fbclid=IwAR3-kgRQujB-qUKx-oeFOfNBK81N5sjzYAKt9b6tsZMzYoxRLlDBEFqjcaI (accessed on the 21st of March 2020).

[6] PRC Ministry of Commerce, Bloomberg State of Administration of Foreign Exchange (SAFE), 2019. Statista (2019). Distribution of Chinese exports in 2019, by trade partner. Available at: https://www.statista.com/statistics/270326/main-export-partners-for- china/?fbclid=IwAR217HfPphpyHcEd-2L5fULssJMNal4W-iIr5MqgoditjXx71VbAmQuqJVI (accessed on the 21st of March 2020).

[7] European Commission, Trade Policy Brief with China, 2019. Available at: https://ec.europa.eu/trade/policy/countries-and-regions/countries/china/?fbclid=IwAR1iKEgqREkCSyJCRwz0brZUQ1YTi1GBFw3hXoxh5aFUCBmFjTCr9rQcmAY (accessed on the 21st of March 2020).

[8] Dimopoulos, A. (2011). EU foreign investment law. Oxford University Press, 6-8.

[9] Xi Jinping (2017). “Secure a Decisive Victory in Building a Moderately Prosperous Society (…)”.

[10] François Godement and Abigaël Vasselier, ‘China at the Gates’, 12.

[11] OECD, FID regulatory Restrictivness Index Database. OECD (2020). FDI Regulatory Restrictiveness Index. Available at: https://www.oecd.org/investment/fdiindex.htm (accessed on the 21st of March 2020).

[12] Kao, C. C. (2018). The inclusion of investment court system into the EU-China BIT: innovations, prospects and problems. In China-European Union Investment Relationships. Edward Elgar Publishing, 247.

[13] Holslag, J. (2011). the elusive axis: assessing the EU–china strategic partnership. JCMS: Journal of Common Market Studies, 49(2), 312-313.

[14] Hallinan, D. (2016). The EU–China Bilateral Investment Treaty: a challenging first test of the EU’s evolving BIT model. China-EU Law Journal, 5(1-2), 34.

[15] Chi-Chung Kao, The inclusion of investment court system’, “China’s willingness to approve the ICS”, 257-58.

[16] Adriaensen, J. (2017). The future of EU trade negotiations: what has been learned from CETA and TTIP?

[17] Henckels, C. (2015). Proportionality and Deference in Investor-State Arbitration (No. 122). Cambridge University Press, 1-2.

[18] Kao C., 250-257.

[19] Ibid, 257. 

[20] Joanna Jemialniak, ‘How much of a court? The EU Investment Court System as a hybrid mechanism’, 246.

[21] Meunier, S., Burgoon, B., & Jacoby, W. (2014). The politics of hosting Chinese investment in Europe—an introduction, 125-26.

[22] Li, Y., Qi, T., & Bian, C. (Eds.). (2019). China, the EU and International Investment Law: Reforming Investor-State Dispute Settlement. Routledge, 18-20.

[23] François Godement and Abigaël Vasselier, ‘China at the Gates: A New Power Audit of EU-China Relations’,12.

[24] Burnay, M. (2020, forthcoming). China and Global Governance: Towards a Low-Cost Global Legal Order? The Hague Yearbook of International Law, Vol. 31, 8.

Thomas Lehmann holds a dual LLM, from Universite Paris 1 Pantheon – Sorbonne, as well as City University of Hong Kong. He delves extensively into international investment arbitration, with focus on regulatory powers and varied commercial aspects. 

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.