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EU China investment agreement: a thin deal

The EU-China Comprehensive Agreement on Investment is of limited scope compared to other recent trade and investment agreements concluded by the European Union, writes Nikos Lavranos. The deal essentially focuses on investment facilitation and transparency rather than investment protection.

Thin framework agreement

The China-EU ‘Comprehensive Agreement on Investment’, which was concluded ‘in principle’ one day before New Year’s Eve 2020, is only a few dozen pages long. It is significantly shorter than the 1000-plus pages which is normally the case for comprehensive trade and investment agreements, such as CETA or the EU-UK trade agreement.

Indeed, the text, published on Friday (22 January) without annexes, is not only thin in terms of its length but, more importantly, also regarding its contents as many elements have been left out. In fact, one can sense the pressure of concluding the agreement in order to crown the German EU Presidency irrespective of the scope and contents of it.

Investment facilitation instead of an investment protection

Unlike a proper comprehensive investment agreement, such as CETA or the EU-Singapore Agreement, this agreement does not contain any investment protection standards, such as fair and equitable treatment – FET – or monetary compensation against (in)direct expropriation obligations, nor any investor-state dispute settlement provisions.

Apparently, the parties needed more time to agree on these issues or in any event agreed to “endeavour to complete” the negotiations on these items within two years. Interestingly, explicit reference is made to the progress of the negotiations currently taking place within UNCITRAL Working Group III on ISDS reform.

UNCITRAL process for investor-state dispute settlement

As we have previously reported, the EU is pursuing within the UNCITRAL working group for the replacement of the currently existing ISDS arbitration system with a multilateral investment court or MIC. These negotiations, which will continue in the second week of February 2021, are now in their final phase. However, it still remains unclear to what extent China is supporting the creation of such a MIC.

So far, China has only submitted one short comment in 2019 to the UNCITRAL working group in which it stated that it is “open to possible proposals for improving the ISDS mechanism”. It pointed in particular to the positive experience of the WTO Appellate Body as an example for creating one universal appeal body for investment disputes, while at the same time maintaining the arbitration tribunals as a first instance. This is clearly less ambitious than the EU’s MIC proposal.

State-State WTO-style arbitration dispute settlement provisions

Similar to the EU-UK or the EU-Ukraine   trade agreements, the EU-China agreement only contains state-state dispute settlement provisions, which are to a large extent copied from the WTO.

According to the EU China text, arbitration tribunals shall resolve disputes within 180 days, inter alia by taking into account relevant WTO jurisprudence. Arbitrators are selected from lists that are composed of persons nominated by the parties and a Code of Conduct of Arbitrators is applicable. As is the case with the WTO dispute settlement system, in case of failure by one party to implement arbitral tribunal decisions, the other party can retaliate by suspending benefits of an equivalent level.

In addition, a high-level Investment Committee and Working Groups on Investment and Sustainable Development will be established. These are tasked with monitoring, managing and enforcing the agreement.

Institutional framework

A high-level Investment Committee will be co-chaired by a European Commissioner and a Chinese Vice-Premier. It will meet once a year and its main task is to ensure the proper functioning of the agreement and adopt any necessary measures, including binding interpretations of the provisions of the agreement.  All decisions shall be taken by consensus and shall be binding on the parties.

Essentially, this Committee will be the main forum for the parties to discuss any major issues and develop the agreement further.

It should also be noted that any direct effect of the China-EU agreement is explicitly excluded – i.e. dispute resolution covers only the provisions of the international agreement.

Currently existing EU member state investment treaties with China remain in place

Reflecting the lack of investment protection and ISDS provisions in the China-EU agreement, it is explicitly stated that the currently existing Member States’ bilateral investment treaties with China are not replaced and thus remain in place.

In fact, most Member States have concluded bilateral investment agreements with China, such as for example, France, Germany, The Netherlands, but also Greece, Portugal, Hungary to name but a few. Maintaining these agreements creates legal certainty for European investors who are investing in China and for Chinese investors who invest in the EU. Arguably, this may change if China and EU would indeed agree on a separate investment protection and ISDS agreement in due course.

Labour protection and sustainable development

As is standard practice in recent trade and investment agreements, the China-EU agreement also contains numerous provisions that aim to ensure that labour protection and sustainable development are integral part of it.

Accordingly, reference is made to various multilateral environmental agreements and the voluntary Corporate Social Responsibility codes of the UN and the OECD and the importance of climate change is underlined.

Regarding labour protection, it is of note that the parties, in particular China, agreed to “make continued and sustained efforts” towards ratifying fundamental ILO Conventions”. Clearly, this language is rather vague and thus leaves significant flexibility to China whether, and if so, when such ratifications would take place.

As far as these policy areas are concerned, the agreement foresees specific panels of experts as a dispute settlement forum, rather than the ordinary arbitration tribunals mentioned above. The panel of experts shall deliver their reports within 180 days and are selected from lists which have been composed by nominations of the parties.

It is noteworthy, that amicus curiae submissions, by for example NGOs, are explicitly allowed, which enables them to participate in such proceedings, thereby opening them up – albeit to a limited extent –to non-disputing third parties. At the same time, it is also mentioned that the panels of experts are not obliged to address any arguments made in such amicus curiae submissions.

In any event, it appears doubtful whether the European Parliament – which must give its assent to this agreement – will be satisfied with these rather general and weak commitments by China on such sensitive issues of labour protection and sustainable development.

Indeed, just a few days ago, the European Parliament adopted a resolution with a large majority condemning the crackdown on the democratic opposition in Hong Kong and criticizing the European Commission for nonetheless rushing into concluding this agreement with China.

Investment-enabling agreement

Essentially, the EU-China agreement merely focusses on investment market access and facilitation by targeting to remove specific existing obstacles for investments in particular in China.

Accordingly, the Chinese practice of forced transfer of technology and IP rights are effectively prohibited. Moreover, the agreement states that the transfer or licensing of technology “shall be based on market terms that are voluntary and reflect mutual agreement”.

In addition, in the sectors where market access commitments are undertaken and subject to limitations and conditions that will be specified in an as yet not publicly available annex, investors are not required any longer to enter into a joint venture when carrying out economic activities in China.

These liberalisations appear to be the most tangible results for European investors who want to invest in China and thus could significantly boost investments – if China indeed ceases to apply such practices.

Regulatory transparency and state-owned enterprises

More generally, the agreement focuses on increasing regulatory transparency and non-discriminatory treatment of foreign investors, in particular regarding subsidies.

In addition, both parties pledge to establish a contact point that would deal with enquiries by investors regarding regulatory transparency issues.

However, due to the limited scope of the China-EU agreement, the transparency and subsidies provisions are considerably less detailed than compared to the ones included in for example the EU-Vietnam FTA.

Also of note is the commitments regarding state-owned enterprises – SOEs – which play an important role in China’s economy. SOEs shall act in accordance with “commercial considerations” in their purchases or sales of goods or service and shall treat European enterprises no less favourable than domestic ones.

These provisions are to a large extent comparable to the ones included in the EU-Vietnam FTA.

Finally, specific commitments are included as far as financial services are concerned.

Clearly, it remains to be seen whether, and if so, to what extent, these commitments are actually put in practice.

 

Nikos Lavranos is Guest Professor at Free University Brussels. He regularly contributes to Borderlex.

 

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