China’s Fourth Model Bilateral Investment Treaty

Updated: Jan 22

© KatrinaTuliao / CC BY 2.0 / Wikimedia Commons

In recent years, China’s interest in investor-state arbitration has grown in tandem with increases in inward and outward FDI. This growth in interest is manifest in various measures taken by the Chinese government including, notably, China’s three Model Bilateral Investment Treaties (BITs). In anticipation of a fourth Model BIT, Trakman (2015, p. 271) speculates as to whether this looming policy development will demonstrate a paradigm shift in Chinese FDI policy. It is necessary, therefore, to explore the drivers of this speculation and attempt to ascertain what might reasonably be expected of a fourth Model BIT and whether or not this would in fact represent a paradigm shift.

The Story So Far…

Following its establishment in 1949, the People’s Republic of China underwent a three decade period of “self-imposed isolation from the world market”, adopting a “hostile approach towards international investment law and the protection of FDI” in line with Marxist doctrine which rejected the notion of private property and distrust of foreign influences following a century of turmoil (Berger, 2008, p7). However, following the conclusion of the Cultural Revolution, the death of Mao Zedong, and official recognition from the United States during the late 1970s, the government embarked on attempts to build a modern legal system as a means of institutionalising economic reform (Zimmerman, 2005, p53).

The legal landscape surrounding the protection of foreign investments internationally is dominated by BITs, and thus following China’s gradual accession to the global economy beginning in 1978, meant an accession to this regime. Responding to this development, the PRC has developed successive Model BITs “on which its various regional and bilateral trade and investment agreements are significantly based” (Trakman, 2015, p268), with the first emerging in the early 1980s, the second in 1992, and the current Model being introduced in 1998. While the first of these made no provision for investor-state arbitration as this was considered at odds with the conception of sovereignty held by the Chinese government, the 1992 Model allowed for arbitration in principle, although this was incorporated into BITs selectively.

The current Model BIT was adopted in 1998 as China began to pursue a ‘Going Abroad’ strategy, with protection of outward FDI now a central consideration, in contrast with the preceding Model BIT which focused primarily on attracting inward investment (Shan, 2013). This new more liberal approach to BITs includes provisions for investor-state arbitration through the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). This pivot towards acceptance of arbitration would subsequently be included in the Trilateral Investment Treaty (TIT) with Japan and South Korea, which accepts the “generally accepted rule of international law” (Shan & Chen, 2016, p238).

While this development represents a transition from investment protection to investment liberalization, the definition of ‘investment’ in China’s current Model BIT remains lacking. Aside from broadly defining investments in terms of assets, the 1998 Model privileges domestic “laws and regulations” above a “national treatment” (Trakman, 2015, p273). With respect to such obscurities and advancements such as the “elaborate state defenses grounded in public health and environmental safety” included in the aforementioned TIT (ibid. p277), “China’s acceptance of pre-establishment national treatment and a ‘negative list’ approach in the China–United States (US) BIT negotiations” (Shan & Chen, 2016, p224), the 1998 Model is increasingly viewed as anachronistic, with observers such as Leon Trakman and Wenhua Shan anticipating a successive Model in the near future.

Chinese Model BIT 4.0.

Arising out of negotiations with the United States and the European Union, issues to be addressed in a fourth Chinese Model BIT can be grouped into four categories, namely; “investment liberalization, substantive standards, social responsibility, and dispute resolution” (ibid. p232).

In terms of investment liberalization, China has demonstrated a newfound acceptance towards pre-establishment national treatment. While this was demanded in negotiations both by the EU and US respectively, the immediacy with which China acceded to these standards suggests that this change in policy was at least in part “based on domestic needs and circumstances” (ibid. p234), a natural progression of reform and opening up. By incorporating similar provisions into a new Model BIT, China can compete more effectively for high-quality FDI at a time when relative advantages such as cheap labour and land are diminishing.

While investment protections “will inevitably reflect not only the cultural and ideological predilections” (Trakman, 2016, p292), substantive standards for investment protection should according to Shan & Chen (2016, p236) account for fair and equitable treatment, expropriation and compensation, and umbrella clauses, all of which have previously raised controversies in international investment law. Trakman (2015, p288) appears sceptical as to whether this prescription might be realistic, stating that “it would be short-sighted to expect China to adopt higher standards of investor protections and lower thresholds of state defenses in future model and negotiated BITs”.

Shan & Chen (2016) conclude by identifying three major factors determining any future Model BIT; the political system, the continued transition towards a market economy, and local priorities (recognition of the diverse stages of development and different needs of various regions and provinces).

The Chinese political system both on paper and in practice is one of ‘Socialism with Chinese Characteristics’. In this sense, rather than adopting free market-oriented policies, the PRC seeks to filter such policies through the logic unique to the regime, synthesising pragmatic policy-making and ideological assumptions. Thus, a new Model BIT should assert the necessity of mutual respect between states with diverging political systems (ibid. p248). Since the inception of the ‘Socialism with Chinese Characteristics’, China’s economy has been undergoing a period of protracted reform. A fourth Model BIT should therefore also include provisions in line with Xi's (2013) Reform 2.0, including an insistence on equal treatment for Chinese SOEs investing overseas, regardless of their ownership. Finally, a Model BIT which reflects the reality of contemporary China must account for the distinctions drawn between the various regions designated as minority autonomous regions, special administrative regions, special economic regions, and free trade zones.

Towards a Paradigm Shift?

The potential paradigm shift which Trakman (2015, p287) speculates on is one moving “from a reticence to liberalize its [China’s] international investment regime” to “a willingness to reach a unique accommodation between Western liberal values and preserving China’s distinctiveness as an advancing socialist state”. However, when this synthesis of “Western liberal values weighed against [China’s] demands to reinvent itself as a sophisticated planned economy” (ibid. p292), when viewed in terms of Shan & Chen's (2016) account of ‘Socialism with Chinese Characteristics’, represents more so the natural progression of China’s protracted economic reform process than a ‘paradigm shift’.

Considering the developments between China’s successive Model BITs thus far, which have increasingly integrated market-oriented considerations into their purview, the transition from a third to fourth Model as described by Trakman appears to represent more of a linear progression than a fundamental change in China’s approach. Indeed, the fact that a fourth Model BIT has been preceded by specific advancements on the current Model in negotiated BITs reaffirms the observation that China’s approach to BITs is one of gradual reform rather than a dramatic ideological reorientation on FDI policy.

The global landscape of international investment is contingent, no more so than in the case of the People’s Republic of China. The PRC has since the early 1980s rather rapidly produced three successive Model Bilateral Investment Treaties which accounted for the distinct ideology of the Chinese government but also responded to the reality of the global economic environment. Through these successions, the tension between competing considerations has drifted increasingly away from the fundamentalist privilege of sovereignty which made investor-state arbitration incompatible with the Chinese system.

As a fourth Chinese Model BIT is anticipated, Leon Trakman proposes that this will represent a paradigm shift on China’s behalf. However, when viewed in the context of China’s overall reform process, this is not necessarily the case. Although China is likely to adopt a fourth Model BIT which views FDI and investor-state arbitration in a manner divergent from that of the original 1982 Model, China’s incremental approach appears to represent more of a gradual evolution than a paradigm shift.

Peter Carberry is a Master's candidate in International Relations at Peking University, having previously studied at Dublin City University, Shantou University, and Soochow University. His research interests include Chinese political economy, development, and the pursuit of a 'xiaokang' society.

The opinions expressed here are those of the writer and do not represent the views of European Guanxi.

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