China-EU Bilateral Investment Treaty negotiations in a crucial time: A Chinese Perspective

In November 2013 BIT negotiations between China and the EU officially commenced. The goal was to reach a high-level agreement covering investment protection and market access. At the China-EU Summit in 2019, both parties reached consensus on achieving a high-level BIT by the end of 2020. Although the COVID-19 pandemic has caused difficulties, China and the EU have been actively pushing the negotiations forward.

In the context of COVID-19, it is important to finalize the China-EU Bilateral Investment Treaty (BIT), so that it can play a key role in restarting both parties’ economies and boosting global economic recovery. This article focuses on the BIT’s market access negotiations and dispute settlement mechanism, and identifies constructive strategies from China’s perspective.

Two core issues: pre-entry national treatment plus a negative list

The market access management system of pre-entry national treatment plus a negative list is the core of investment liberalisation, and adopting it has become a trend in global BIT negotiations. Pre-entry national treatment refers to the treatment given to foreign investors and their investments during the investment access stage, which is not lower than that given to their domestic counterparts.

With pre-entry national treatment the registration process of foreign entities will be further simplified; ‘negative list’ refers to special administrative measures for foreign investment access in sectors stipulated by the state. The state gives national treatment to foreign investment not on the negative list, which means a high degree of opening-up.

China’s Foreign Investment Law, which came into effect on 1 January 2020, adopts pre-entry national treatment plus a negative list system. Therefore, China will adopt this system in the China-EU BIT, its top priority being to advance the discussion and formulation of the negative list.

According to China’s “2020 National Negative List”, which took effect on 23 July 2020, the process of opening key areas in service industries is underway. In the financial sector, all restrictions on foreign ownership have been eliminated in accordance with the opening timetable, which makes 2020 the first year of the full opening of China’s financial sector. This is also consistent with China’s promise in the phase one deal with the US.

In the infrastructure sector, it is no longer required that the construction and operation of urban water supply and drainage pipeline networks in cities with a population of 500,000 or more must be controlled by the state. However, some areas have not yet been fully opened up (e.g. domestic water transport companies must be controlled by Chinese entities).

China is expected to formulate the negative list of the China-EU BIT in line with its “2020 National Negative List” and, on this basis, reduce it further in some fields such as the pharmaceutical and education sectors, to meet the EU’s requests.  Given the aim of achieving a high-standard agreement, China will likely need to adhere to reciprocity instead of invoking developing country status in the negotiations. The EU could point out that some eastern European states may be more economically under-developed than China.

Investor-state dispute settlement

The investment dispute settlement mechanism is a major focus of China-EU BIT negotiations. Investor-State Dispute Settlement (ISDS) is an international arbitration procedure in BITs to resolve disputes between foreign investors and host countries. This procedure grants investors the right to bring claims against a host government before an independent commercial arbitral tribunal. These investor-state tribunals have proven controversial, with critics fearing they allow foreign corporations to bypass domestic law and thereby erode state sovereignty.

Consequently, ISDS has undergone a series of reforms and adjustments, a representative example of which is in the investment section of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) signed in 2016. CETA improved ISDS in several aspects such as narrowing the jurisdiction of arbitral tribunals, raising the qualification requirements of arbitrators, improving transparency, and strengthening controls on abuse of litigation.

Investment court system innovation

CETA also established the EU-led Investment Court System (ICS), which creates a permanent court of first instance, clarifies the code of conduct of arbitrators and sets up an appellate court, recognising states’ right to regulate. The ICS is an institutionalised adjudicative body with high standards of independence, transparency and legitimacy, which replaces the old model of arbitral tribunals established ad hoc for specific disputes.

The ultimate goal is to establish a international multilateral investment court system. The ICS has had an impact on the traditional ISDS advocated by the US, and the EU continues to pursue it in ongoing bilateral negotiations with other trading partners including China.

In China-EU BIT negotiations, China could include advanced investment rules, such as narrowing and clarifying the scope of arbitration, raising the qualification requirements and standards of conduct of arbitrators, and the rules on the costs of the proceedings, to follow the trend of ISDS reform. Take the selection standards of arbitrators as an example: according to CETA, the CETA Joint Committee shall establish a list of at least 15 arbitrators chosen on the basis of objectivity, reliability, and sound judgment.

The list shall be composed of three sub-lists­: one sub-list for each party and one sub-list of individuals who are not nationals of either party to act as chairpersons. Any arbitral tribunal consists of three arbitrators randomly chosen from each of these three sub-lists. The arbitrators shall be independent, serve in their individual capacities and not take instructions from any organization or government. CETA’s rules on arbitrators can, to some extent, ensure the consistency and fairness of arbitral awards, which is a good example for the China-EU BIT.

Improving dispute settlement transparency

China should also strive to include high standards of transparency in dispute settlement. Although improving transparency in arbitral proceedings has become an inevitable trend, we should also recognise that China's current policies and regulations do not match the high standards of transparency in CETA. The BIT negotiations provide a reform opportunity for China to amend relevant laws and regulations (e.g. Law of the People’s Republic of China on Guarding State Secrets).

China could follow the EU’s pace here with respect to the disclosure scope of arbitration documents and the disclosure conditions of court trials, while seeking to ensure that an appropriate balance is struck for certain types of sensitive information to be adequately protected.

In addition, China may be interested in establishing the ICS in the China-EU BIT. Although there are still many issues concerning the ICS to be further discussed and resolved, it is a systematic innovation of a dispute settlement mechanism that holds high potential. The establishment of a permanent court contributes to solving the problem of inconsistency of arbitral awards. Taking the opportunity of China-EU BIT negotiations to participate in the rule-making of the ICS will help China enhance its voice in the international investment legal system.

By Chenye Zhang, IIT Visiting Researcher and PhD Candidate at the University for International Business and Economics.

The views expressed here are the authors, and may not necessarily represent the views of the Institute for International Trade.