How to Understand the China-EU Bilateral Investment Treaty Negotiation

(On July 8, an informal roundtable was held to discuss the possibility of initiating the China-EU Bilateral Investment Treaty (BIT) negotiation and its impact. The views expressed here are solely those of the discussants, and do not necessarily reflect the views of the IES, CASS.)

JIANG SHIXUE: We are very pleased to have several experts from The Institute of World Economics and Politics of CASS with us: Zhang Ming ( Associate Researcher, Head of the Office of international investment research); Tian Feng (Researcher, Deputy director of the Office of Economic Development Research); Dong Yan, (Associate Researcher, Director of the Office of International Trade research); Han Bing (Associate Researcher with the Office of International investment Research);Yan Panpan, (assistant researcher from the Office of Macroeconomic Research); and Wang Bijun, (assistant researcher from the Office of International Investment Research). 

Thank you for taking time to join us in the discussion about the China-EU investment agreement. According to the joint press communiqué released in February 2012 at the fourteenth China-EU summit meeting, "the leaders from both sides agreed that an investment treaty between China and EU will definitely promote and facilitate bilateral investment. The negotiation on the agreement will encompass all the matters of mutual concern, without prejudice to the final outcome. Both sides agreed to launch the negotiations as soon as possible." China has now already signed investment treaties with nearly all the EU member states. But why is it necessary to conclude such a new, content-rich investment agreement? In other words, what substantial benefits does such a new agreement bring to the EU and China?

ZHANG MING: At present, the development of interlocking bilateral investment treaties (BITs) and regional investment agreements in the international arena is gaining momentum at an unprecedented level with various kinds of investment agreements overlapping each other in many places. The United States is now actively pushing ahead with the TPP and TTIP negotiations, which have exerted a great deal of pressure on China. Therefore it is necessary for china to actively participate in and may even launch a new round of negotiations on bilateral and regional investment agreements so as to be better prepared to respond to external pressure.

On the one hand, China should actively participate in the TPP negotiation, on the other hand, we should start the BIT negotiations between China and the EU as soon as possible. The investment agreements signed between China and the EU members in the past are either too outdated, lagging behind with the development of international investment regulations, or too focused on the protection of the investment interests of the countries of origin for investment without taking proper measure to protect China’s own investment interests as the country of making outward investment. As the world's most important trade and investment partner, the signing of a new agreement on investment between China and the EU should be a win-win situation for both sides.

TIAN FENG: In the period of reconstruction of international rules, both China and the EU hope to expand their influence. At the same time, both sides also view the BIT  negotiations as the breakthrough point, which can hopefully promote the development of bilateral economic and trade cooperation to a new stage.

HAN BING: At present, the international law protection system for international investment in China and the EU are still imperfect and show a lack of coordination. The international rules and laws applicable to international investment between China and the EU mainly involve two dimensions: the multilateral and bilateral investment agreements.

The multilateral investment agreement mainly covers "International Convention for Settlement of Investment Disputes (ICSID Convention) ", "Multilateral Investment Guarantee Agency" (MIGA Convention) and "WTO Agreement".  The ICSID Convention mainly settles disputes between foreign investors and the recipient country of investment, while the provisions of the MIGA Convention are supposed to provide security against the political risks in international investment, so the two conventions as a whole are international treaties aiming at solving problems relating to international investment.  There are several WTO agreements directly related to international investment, such as Agreement on Trade-Related Investment Measures, General Agreement on Trade in Services, Agreement on Trade-Related Aspects of Intellectual Property Rights, Agreement on Subsidies and Countervailing Measures, SCM Agreement, but the WTO Agreement do not specifically deal with the investment problems, and it only handles some related aspects involving investment measures about trade in goods and service trade. 

So taken as a whole, the three international investment agreements are not general, omnipotent measures tackling investment problems of multilateral investment agreement, and therefore can not effectively protect and promote the international direct investment between China and the EU.

As for bilateral agreements, they include the 1985 "China-EU Trade and Economic Cooperation Agreement" and 26 bilateral investment agreements signed between China and the EU Member States. The former is insofar the most important bilateral agreement between China and the EU. According to the twelfth article of the provisions of the signed agreement, China and the EU should increase and facilitate the promotion and protection of investment arrangements on fair and equal basis. But a look at the concrete contents of the agreement shows that it is only a framework agreement, which fails to make any specific design toward the protection and promotion of investment flows.  

Up till now China has concluded BITs with 26 of the 27 members of the EU, which have provided a relatively comprehensive and substantive protection for international investment between China and the EU Member States, but they are still incomplete as there is a lack of completeness and coordination from the overall perspective of the EU. For example, between China and Ireland there is no BIT . Moreover, the BITs concluded by China with different EU Member States, although quite similar, may result in large differences in specific content such as standards of treatment, currency exchange and different provisions with regard to dispute settlement.  After all, these differences in practice will inevitably bring great distress and headachs to the investors.

In addition, according to the "Lisbon treaty" which came into force on the December 1, 2009, the EU has been bestowed the exclusive competence in "foreign direct investment (FDI)", which means that only the EU can legislate and enact a legally binding act in this area. Besides, according to the provisions as enshrined in “The Transitional Arrangements for Bilateral Investment Agreements between Member States and Third Countries” passed on December 12, 2012 by the European Parliament and the European Council, “ Without prejudice to other obligations of the Member States under Union law, bilateral investment agreements notified pursuant to this Regulation may be maintained in force, or enter into force, in accordance with the TFEU and this Regulation, until a bilateral investment agreement between the Union and the same third country enters into force.”  The regulation also points out that these BITs will be gradually replaced by the investment agreements concluded between the EU and the third country that can provide a higher level of investment protection. Therefore, we can predict that with the gradual implementation of the "foreign direct investment" exclusive competence in the EU, there should be more BITs between the EU members and other nations in the future.

So in this sense it is high time for China and the EU to launch a new and comprehensive investment protection agreement negotiation.

WANG BIJUN: The existing BITs between China and the EU member states are not sufficient to provide the convenience and protection of investment. In fact, China has signed BITs with almost all the EU member states, so it seems that there is no need to conclude a separate agreement with the EU as an entity. But the two types of BITs are not identical.  First of all, the BITs between China and the EU members can demonstrate the growing important status of China both as the recipient and export country of direct investment. Most of the previous BITs with the European member states were concluded in the 1980s and 1990s, which mainly reflect the interests of the EU for their investment in China.

Secondly, the BIT between China and the EU is expected to enjoy a higher standard of liberalization compared with the BITs signed by China and the EU members separately, and this will inevitably involve market access, transparency, labor treatment, environment, investment arbitration and many other problems. Indeed, the BIT between China and the EU will be of far-reaching strategic significance, which befits China that is now undergoing deep-going economic transformation and upgrading and is in accordance with the existing global investment regulation system. Compared with America, the obstacles and resistance Chinese enterprises met in its investment in Europe is not so huge. In 2012 China's direct investment in the EU accounted for 1/3 of its global M&A. This is in part due to the European debt crisis, which has provided the Chinese enterprises great investment opportunities, but it also reflected the compatibility of European advantage in brand and industrial technical know-how with the Chinese growing needs and demand for industrial upgrading.

Hopefully, the BIT to be reached between the EU and China will further accelerate this process. In addition, there is no such framework of global governance in the world for foreign investment as the trade organization of WTO, the financial institution of IMF. In April 2012, the United States and the European Union jointly announced seven principles for global investment, reflecting their strategic attempts to dominate the global investment system.

But in the face of the construction of global investment system, China has not only remained passive, but also failed to respond and put forward its own ideas. However, it should be borne in mind that the China-EU BIT and the Sino-US BIT will become China's two main pillars to participate in the global investment management system and it is also the best opportunity for China to engage in the reconstruction of new power relations, and the best way to participate in the construction of the global investment management system in the future.

JIANG SHIXUE: There is a lot to be done before the negotiation starts. At what stage has been the preparatory work?

ZHANG MING: The key question is what model should a new round of talks go by. Is it feasible for both sides to form a new model, or just make full use of the latest model of the United States? I think the former should be more appropriate.

TIAN FENG: China and the EU have reached a consensus on negotiations for bilateral investment agreements, but the talks are still under preparation and has not been started yet.

HAN BING: From the recent media reports, the EU formally recommended on May 23, 2013 that the Member States and China can launch BIT negotiations. But before China and the EU can launch the negotiation, the two sides should undertake a comprehensive evaluation of the possible political, economic and legal impact and sum up the advantages and disadvantages of the BIT between the two sides.

WANG BIJUN: Actually, the BIT negotiation has not started yet. I think the most difficult point for the negotiation will be market access. From September 2008 to June 2013, China and the US has held nine rounds of BIT talks, spanning a total of 8 years including two years’ preparatory work before the formal negotiations. As for the China-EU BIT negotiation, it lags far behind as both sides are still discussing the possibility and necessity of negotiations.

The EU is now trying to obtain mandate of negotiation from its member states. If it is granted in the autumn of this year (plus a year of preparatory work), the negotiation will kick off as early as by the end of 2014. but this process will be either delayed or advanced depending on the development of the bilateral political, economic and trade relations.

It is foreseeable that the biggest challenge for the talks between the two sides will be market access. That is, the EU hopes to further pry open the Chinese market, especially the service and the financial sector so as to obtain national treatment in China. In addition, the EU has traditionally high standards of human rights, the environment and labor code, which may also pose challenges to the negotiation.

JIANG SHIXUE: So based on your analysis, what is the difficulty of the negotiations? What are the respective expectations of the EU and China?

ZHANG MING: The difficulty lies in the fact that the EU will exert tremendous pressure on China about such issues as environment, labour standards, human rights, state-owned enterprises etc. The two sides will also have serious arguments on national treatment and the negative list of questions prior to the accession. Expectations on both sides would center on not only protecting their own overseas investment interests, but also the interests as the recipient country for the investment, and either side also hopes to improve the investment environment of the other through the signing of the investment agreement so as to prod the other side to make more adjustment than expected.

TIAN FENG: The greatest expectation of the EU is greater market access in China; while China’s is to protect and promote investment in the EU.

HAN BING: Compared with individual EU member, the EU as a single entity would have more bargaining chips.  Especially in terms of market access, standards of treatment, dispute settlement in the investor-recipient relationship, the EU is expected to raise higher demands for China.

In addition, the EU will also make other stringent requirements, including human rights, environmental protection and sustainable development, etc. According to its Common Commercial Policy under the guidance of the Article 205 under the Treaty on the Functioning of European Union (TFEU), the relevant action taken by the EU should be compatible with the principles, objectives and relevant policies laid down by Article 21 in the "Treaty of European Union". This means that actions taken by the European Union should be consistent with the principles of democracy, law, the universality and inviolability of human rights, equality and unity, and respect for the Charter of the United Nations and international laws. Moreover, the "Lisbon treaty" has enhanced the power of the European Parliament, thus increasing the possibility of such a situation. It will definitely pose a challenge for China given its current economic, political development, which may find the standards too high to be endured.

The EU would certainly ask China to provide better protection for its investment, create higher transparency in legal system, address the issues of market access, and strengthen intellectual property protection and other law enforcement, etc. In other words, the EU hopes not only to better protect its existing investment in China but also secure further promotion of the liberalization of investment in China in the coming years.

As more and more Chinese enterprises are "going out" to make investments in the EU, they have also encountered many regulatory problems in the EU. According to a survey conducted by the European Union Chamber of Commerce in China (EUCCC), 78% of the Chinese firms said they have encountered difficulties in their business operations in the EU, such as the problems of obtaining visa and work permit for Chinese employees. In addition, the problems of “security review” on Chinese investment by some members of the European Union and indirect tax levying on some Chinese enterprises need to be resolved through the signing of a comprehensive BIT between China and the EU.

JIANG SHIXUE: As we all know, the Trans Pacific Partnership Agreement (TPP) and the Transatlantic Trade and Investment Partnership, (TTIP) have aroused great concern and interest of the international community. The effects of TPP and TTIP on the US and Europe are tremendous. Is there any impact of the two arrangements on the China-EU BIT negotiation? What is it?

ZHANG MING: Definitely, the European Union will therefore hold the view that since China is in a weak and passive position and is under pressure from both sides, this would land China in a relatively weak position in the negotiations. The EU may also refer to the terms of relevant protocols of TPP and TTIP to put pressure on China so as to compel China to agree to these terms. I think, China is indeed in a relatively weak position if the negotiation on China-EU investment agreement is undertaken under the TPP and TTIP environment,

TIAN FENG: Yes, I do agree. First of all it would have a negative impact on the level of China-EU cooperation; secondly, it will obstruct the speed and efficiency of this cooperation.

DONF YAN: In February 2013, the United States and the European Union announced that the two sides will launch the TTIP negotiation. This has constituted a new daunting challenge for the global trade and investment system since 2008 when the US declared it would participate in the TPP negotiations. The TPP negotiation has highlighted the US economic and policy interests in the rapid development of the Asia Pacific region, whereas the TTIP is a reflection of the fact that the developed nations that have traditionally dominated the international trade are now striving to cooperate and maintain their leadership role in the world economy, international trade and global governance in response to the new economic challenges.

Therefore, at present, it seems that, by initiating the TPP and TTIP, the developed countries are trying to dominate regional trade and investment agreement negotiations so as to sway and reshape the international economic and trade relations and international trade rules for their own interest. That is to say, they want to make the international rules more favorable to them. Obama's successful re-election has further facilitated its ambitious global FTA layout and motivated its drive to launch two major regional negotiations.

Deepening integration is an important trend in the global regional integration. It calls for expanding cooperation among the member states from the low-level trade liberalization to further integration that covers such areas as investment, services, competition, labor, environment, etc. The goal of the TPP is to make high-level free trade arrangements with more openness, which requires not only the realization of zero tariff within the region but also a unified bigger market among the members in the region.

TTIP is also set to become an agreement for deepening integration with a high standard and a high degree of cooperation across the Atlantic. As neither the EU nor the United States can hardly expect to make more gains from traditional liberalization of merchandise trade, the key points of the TTIP negotiation will be geared to the elimination of non trade barriers, the liberalization of trade in services, and investment liberalization. By means of TPP and TTIP, the United States and the European Union are trying to implement more stringent standards of trade and investment rules relating to investment, government procurement, non-tariff barriers to trade, intellectual property, environment and employment, competition policy, development of state-owned enterprises, etc., so as to achieve what is not easily realized under the WTO framework.

The new round of regional trade and investment agreement negotiations initiated by The United States, the European Union have championed the high standard rules. The TPP and TTIP would certainly affect the international trade and investment rules, and is bound to have an impact on China's participation in international economic activities. As for its attitude toward TPP, China has proposed to strengthen the interaction and exchange of information with those involved with TPP negotiation. It seems that China has to put forward a suggestion to reach a China-EU Free Trade Agreement while working towards a China-EU Investment Agreement.

HAN BING:  As the negotiations on investment of TPP and TTIP have set relatively "high" goals, including the requirements for market access, intellectual property rights, market standards of state-owned enterprise, the BIT negotiation between China and the EU will be invariably influenced by such characteristics as high standards of investment protection and high level investment liberalization, thus increasing the difficulty of negotiations on the investment agreement.

For example, on April 10, 2012, the United States and the European Union jointly announced the “Shared Principles for International Investment”. The statement includes seven principles, the second of which about fair competition points out that the European Union and the United States will sanction its support for OECD’s efforts in the competitive neutral areas. According to the OECD, fair competition in a given market must be maintained for state-owned enterprises and private enterprises under the same external environment. In the TPP negotiation the United States also requires all parties to make a commitment to the issues of fair competition. Therefore, it is likely that the EU will also propose the so-called competitive neutrality in the BIT negotiation with China.

YANG PANPAN: First of all, TPP and TTIP negotiations reflect the dynamic trend of international practices and the making of international rules, which points to the fact that the United States is fully committed to reshaping the rules of international trade and international investment of the twenty-first Century. Therefore, despite the differences in the field of international rules, which include the British and American rules, we can still have reason to believe that the final model of our investment agreement with the EU will be inevitably influenced by American-style agreement. So it is necessary for China to continue to follow the development of TPP and TTIP and to become observers if the conditions are favorable. 

Secondly, TPP and TTIP have directly or indirectly changed the Chinese perception and understanding of international trade and investment rules. China’s acceptance of these rules are steadily rising, whose active promotion of the Sino-US BIT is a case in point. Besides, the official change of attitude for TPP is another significant signal in this regard. The extensive expansion of new rules will surely bring about the "Domino effect", in which if China does not take positive action and fight for their rights and secure the power of discourse for rules, it is bound to suffer in the game. Therefore, TPP and TTIP would eventually help form and promote the conclusion of a higher level investment agreement between China and the EU.

Thirdly, from a long-term perspective, TPP, the Sino-US bilateral investment agreement, and the China-EU agreement on investment are all supposed to further promote the upgrading of China's reform and opening up. Viewed in their entirety, the fact that these arrangements attach importance to the development of service industry, fair competition and protection of intellectual property rights, emphasis on environmental protection, etc., are completely consistent with China’s efforts to deepen structural reforms and sustainable development. Therefore, China can seek international cooperation in multiple fields and try to achieve favorable results in the economies of scale through negotiations.

JIANG SHIXUE: According to your predictions, will the China-EU investment agreement negotiations be very difficult or easy?

Zhang Ming: Surely, the process of negotiation will be very arduous, but it should be much easier than the Sino-US BIT negotiation. The key difference lies in the fact that the EU is not a monolithic bloc and has exhibited different development levels among its member states. China's national conditions are quite similar to that of the Central and Eastern Europe countries. Therefore, the BIT between China and the EU will be more diversified and flexible than the Sino-US agreement. Finally, in order to gain an upper hand in the negotiation about China-EU BIT, the China should strengthen its communication with the countries of Central and East Europe.

TIAN FENG:  It is extremely hard, given the vast differences in their respective national conditions and expectations.

HANG BING: Indeed, the difficulty of the negotiations is self-evident.  Although the EU has not made known its “model” for the concrete negotiation, a look at the concerns of the EU over the Chinese market access shows that it will not be accomplished easily.

YANG PANPAN: Speaking of the difficulty of negotiations, some say that trade or investment negotiations are like “darkness before the dawn”. The darkness of despair seems to bring no end in sight. However, when the moment of darkness has passed, the light will come foward very soon.  I think that metaphor applies to our investment agreement negotiation between China and the EU.

WANG BIJUN: The BIT negotiation between China and the EU may be much easier than the Sino-US negotiation on BIT, but it is still a long-term process. Although China and the US have conducted nine rounds of BIT negotiations and both sides have expressed their willingness to push ahead with the negotiations, the talks have not entered the "substantive stage" yet, with both sides still engrossed in “checking the text”. 

But in my opinion, the BIT negotiation between China and the EU may not be as difficult as the Sino-US BIT negotiations because first of all, the usual practice of the United States is to use BIT model as their negotiation blueprint, and the US began to make amendments to the 2004 version of the BIT at the end of 2009, which means that the US is reluctant to carry out substantive negotiations with China before finalizing the BIT model.

Secondly, the US model for investment has established the highest level of investment liberalization rules for the world whereas in contrast the EU has adopted a much simpler version and less harsh requirement in terms of performance and the national treatment, thus giving the investors more discretion power.

At the same time, there are also vast differences among the EU member states, which compels the EU to take into consideration the different needs and interests of the member states. These differences would give China more leverage in the negotiation.

Finally, China will not ask for more from the EU than from the United States. So, after all, China is likely to encounter less resistance in its investment in Europe than in the United States, and will be subject to less political influence and pressure from the interest groups in the process of negotiation.

In spite of this, we can not afford to overlook the protracted nature of the China-EU negotiations. On the one hand, it is very difficult to conclude an investment agreement in the short term. Take the China-Canada BIT for example. It took 18 years to complete the whole process. On the other, the Sino-EU BIT negotiation might interact with the Sino-US negotiation as well as with others such as TPP, thus adding more complexity and uncertainty.

JIANG SHIXUE: According to your judgment, what are the most important problems in the negotiation?

ZHANG MING: As for the possible demands the EU might make on China in the negotiation process, we may as well divide them into two categories. On the one hand, what is required by the EU is not consistent with China's long-term interests or vice versa; on the other, what the EU demands, such as improving labor codes and strengthening environmental protection, might be on the agenda of China’s future reforms. Therefore, we can make full use of these terms in the China-EU investment agreement to exert pressure on implementing domestic structural reforms. There is much related experience to draw upon from China's accession to the WTO.

TIAN FENG: China should also learn how to coordinate and make full use of the investment rules at the operational level.

JIANG SHIXUE: Thank you again for your participation. We’ll continue to pay attention to this issue. Hopefully, a win-win BIT will come into being soon.