An EU-China Investment Agreement?

Notes from Glasgow #1

Many thanks to Dapo, Marko and Iain for inviting me to contribute to EJIL: Talk! on a regular basis. It’s a great blog, and it complements my favourite international law journal, so I accept with pleasure. The first of my ‘Notes from Glasgow’ focuses on international investment law – an area of law that EJIL: Talk! has, I think it is fair to say, so far approached with a measure of caution. Investment law is exciting, though: not so much because of the number of awards produced, week by week, by arbitral tribunals. (In fact, just tracing awards quickly becomes boring.) But rather because it is such an interesting field-study in how international law evolves, how ‘exotic’ branches are rapidly mainstreamed, and how they change in the process.

The latter aspect – change in international investment law – is the theme of the following thoughts. I take my cue from a resolution passed in the European Parliament (EP) on 8 Oct 2013. (See here for the BBC’s coverage of the debate.) As was reported in the media, the EP in principle approved the start of negotiations towards a China-EU Investment Agreement, but added a number of caveats: notably, according to a useful summary by the EP Library (which condenses the resolution’s 49 recitals and thus can be quoted meaningfully), the EP wants the future agreement to “ensur[e] equality of investment environments” in China and the EU, to include binding provisions on “social responsibility, social and environmental standards”, to protect European public services, and to be negotiated with maximum transparency. All this is interesting for a number of reasons. I’ll flag four of them, hoping to return to some of them in subsequent posts. (photo above left, accompanying China’s announcement that it will seek an investment treaty with the EU)

(i) Start of negotiations imminent

The first is obvious, and really more for noting. It is now quite likely that China and the EU will begin formal negotiations towards an investment agreement before the end of the year. Both sides had decided to move forward at the 14th EU-China summit in early 2012; in May 2013, the Commission requested a mandate to open negotiations, which following the EP resolution, the European Council is now expected to give relatively soon. Implicit in all this is a mass (and a bit of a mess, too) of EU Law – notably the Lisbon Treaty’s recognition of an EU competence for foreign direct investment (Art 207 TFEU), and complex treaty provisions governing the respective roles of Commission, Council and Parliament in the EU’s external relations  – but this need not concern us: it’s EJIL: Talk!, after all, as in international law, not EJEL: Talk! What matters are the dimensions of the projected treaty:  Once in force, EP and Commission are agreed, an EU-China Investment Agreement would ‘replace 26 bilateral investment agreements that EU member states have with China today’ and thus re-define investment conditions for Chinese investors in the whole of the EU, and for EU investors in China. And while EU-China trade has grown considerably, to €433.8 billion in 2012, experts see potential for much more cross-border investment. In the words of the EP Library paper (with which Commissioner De Gucht agreed in his intervention in the EP): ‘Despite the magnitude of the EU-China trade relationship, investment on both sides is low. In 2011, EU investment stocks in China accounted for 2% of total EU FDI abroad, while Chinese investment in the EU was 0.4% of total FDI in the EU (Eurostat).’ In other words, while even after the end of ‘BIT-hype’, every year around 50-100 investment agreements are being concluded, this one will stand out – and the negotiation process is worth following. From an EU perspective, it is not the first attempt to apply the new competence for investment (negotiations are eg under way with Singapore, India, and Canada), but the most exciting one so far.

(ii) Demands for Recalibration

Second, it is clear from the statement that the EP wants the new agreement to be rather different from many of the 26 BITs that already exist between China and EU member States – and not only because the EU would become a treaty party. According to the resolution, the EP is keen on a number of substantive changes to the traditional pattern of investment protection that dominates the 26 existing agreements. As summarised above, while giving its green light in principle, the EP insists on important restrictions on investment protection. The new deal, states the resolution, is to include social and environmental clauses; it must not undermine public services and data protection, and it is to make provision for binding corporate social responsibility. These are just demands at present, made by one of various players on the EU side of the process. And yet they are clearly articulated and reflect a general trend: for around a decade, investment protection treaties have become more complicated, but now they are being (in José Alvarez’s term) ‘recalibrated’. While traditional BITs (say, of France, the UK, Germany) typically contained succinctly formulated obligations of States, new treaties have become more complex, and more detailed. Many States and other treaty drafters take considerable care to formulate standards: to give just a couple of examples, many investment agreements today specify instances of environmental regulation that do not amount to indirect expropriation; many contain more nuanced approaches to what qualifies as a protected investment (e.g. excluding illegal investment from the scope of protection); some of them limit access to investor-State arbitration; and there is some movement to complement investor rights by investor duties. All this is much discussed, and while details remain controversial, it seems difficult to deny that some form of ‘recalibration’ (and perhaps even a backlash) is under way. This trend reflects concerns about the (real or perceived) pro-investor bias of the traditional regime, and it is advocated today not by the capital-importing States of old (such as African, Latin-American or Asian States wary of ‘Western’ transnationals), but by traditional capital-exporting States (such as the United States, Canada, Australia, etc.).

The EP’s resolution is fully in line with the trend towards recalibration. With the exception of dispute settlement, whose importance it emphasises, the EP resolution offers almost the entire ‘recalibration menu’, including a call for CSR provisions (which few existing treaties so far incorporate). How much of the EP’s agenda will survive the internal European debates, not to speak of the negotiations with China, is by no means certain. But it is clear that the future EU-China agreement will, in one way or the other, be of the recalibrated kind. If no-one else, the EP will see to it: in the few years of EU investment policy, the EP has taken a much more pro-active role than many national parliaments who for decades were content to wave through BITs. The Europeanisation of investment protection has clearly been a catalyst for a more open debate about investment protection and its limits.

(iii) Towards Market Access

Third, while investment protection is being recalibrated, it is also extended in time. The EP is adamant that negotiations should only begin once ‘China has formally agreed to put its market access rules on the negotiating table’ (and presumably many stakeholders on the EU side of the table would agree). In other words, the future treaty should not only regulate the treatment of investments that have entered the market, but also contain rules on when the market can be entered into. Treaty rules on market access and admission of investment are not a novel aspect of investment law – not at all: treaties concluded, eg, by the United States, Canada, and Japan, have long contained ‘admissions clauses’ of varying reach. However, traditionally, the admission of investments has not been the focus of BITs concluded by European States whose BITs tended to require high levels of investment protection post-admission, but were cautious on admission itself. This cautious approach now comes under strain, as European actors are keen to establish a ‘level playing field’ allowing them access to the Chinese market.

Again, it remains to be seen how much of the strong language will survive once negotiations start in earnest. But against the background of traditional European scepticism on market access, it is interesting to see the EP (and Commission) push for it; this marks a departure from traditional approaches pursued in many European States.

(iv) Stand-alone investment treaties and ‘other IIAs’

Finally, the EP resolution at least hints at a third development in investment treaty law-making: while the substance of treaties is re-negotiated, the format of investment protection undergoes changes, too. Notably, traditional, stand-alone, instruments exclusively dealing with investment protection are being complemented by more broadly-focused agreements that address investment as part of a broader agenda.  To be sure, what China and the EU seem to have in mind is an investment agreement. But unlike a decade ago, when this would have seemed obvious, the decision to go for a ‘stand-alone investment treaty’ now needs to be emphasised. When requesting a mandate, the European Commission had observed that this was “the first ever proposal for a stand-alone investment agreement since foreign direct investment became the exclusive competence of the EU under the Lisbon Treaty”. As noted above, other treaties are being negotiated already, but they propose to address trade and investment together, under the umbrella of one so-called Preferential Trade and Investment Agreements (PTIA). PTIAs are interesting because ‘magic[ally], they bind again what [20th century] custom had strictly parted’, viz international trade and investment. The implications of this re-integration are as yet unknown: Should rules and principles that feature in both investment and trade law – MFN, national treatment, non-discrimination, etc – be construed in the same way if they form part of separate chapters of one treaty? Will the re-integration of two disciplines in one agreement affect the different enforcement strategies – private law enforcement in investment law versus inter-State enforcement of trade rules? And how will the meeting of investment specialists and trade experts affect their respective approaches? All this is open and merits analysis – which contributions to a recent book edited by Rainer Hofmann, Stephan Schill and myself provide. But none of this matters here. Notwithstanding the trend towards PTIAs, what China and the EU have in mind is a traditional, self-standing agreement addressing investment only, but not trade. It is telling, though, that in the new world of EU investment treaty practice, this has become exceptional.

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The EP’s resolution provides a snapshot of an exciting treaty-making process, but more importantly, reflects current debates about the future shape of international investment law. Recalibrated investment treaties strike a careful balance between investment protection and competing concerns. The emphasis on market access suggests that investment law’s narrow focus on post establishment may be overcome. And while the EU and China seems to aim for a stand-alone agreement, BITs are no longer the only available format for investment protection; treaty makers can choose between traditional BITs and PTIAs. All three trends result in greater diversity: the general picture emerging is one of ‘increasing complexity in international investment law’ (as Stephan Schill and Marc Jacob have rightly called it). Put differently, the new regime of investment protection of which the eventual China-EU deal will form a part, is ‘messier’ than the traditional world of BITs, and it will become more difficult to navigate. But the new complexity reflects the coming of age of a dynamic body of international law that has perhaps rather too quickly risen to prominence.