Analyses

Why is stronger foreign investment protection needed in relations with China?

One of the key elements of the protection of foreign investment (and thus the foreign investor) is the mechanism for resolving disputes between the state and the foreign investor. The mechanism itself may take different forms...

Instytut Boyma 06.07.2021

One of the key elements of the protection of foreign investment (and thus the foreign investor) is the mechanism for resolving disputes between the state and the foreign investor. The mechanism itself may take different forms – the most common is ISDS (investor-state dispute settlement), which is an arbitration, but there is also a modified version, ICS (investment court system), used by the EU within the framework of e.g. CETA (Comprehensive Economic and Trade Agreement) between the EU and Canada, which is similar in shape to an international court. In the case of China, we should speak of ISDS. 

The idea of a dispute settlement mechanism between a state and a foreign investor is, on the one hand, not to involve states in the protection of their investor who has entered into a dispute with another state (such intervention creates the risk of a deterioration in international relations), and on the other hand, to provide the foreign investor with protection independent of the judicial system of the state in which he invests (i.e. transferring it from the national to the international level) and legal standards that he might not have in a given domestic law.

ISDS is included in international agreements that define the elements of foreign investor protection. These may be BITs (bilateral investment treaties), bilateral agreements on the promotion and mutual protection of investments, as well as other agreements, including multilateral, to some extent having as their object foreign investments. The standards of investor protection, which are relevant in the process, are in turn determined by a number of different sources of international investment law, including not only treaties, but also international custom or general principles of law (Jeżewski, 2011: 96-107). 

The People’s Republic of China, like most other countries, is present in a complex structure of foreign investor protection. In the case of China, according to UNCTAD, there are 145 signed BITs and 24 agreements with investment provisions (not all of which have entered into force). In addition, China is a member of international organisations that influence investor protection standards (e.g. WTO), or its legal system addresses the position of a foreign investor, e.g. the Law on Foreign Investment of the People’s Republic of China. Why, then, should we speak of the need for stronger protection of foreign investors in the case of the Middle Kingdom?

Firstly, the influence of politics on the judicial system in China can be described as both indirect and direct. The indirect one manifests itself, for example, in statements by representatives of the administration, such as that of the President of the Supreme People’s Court of China, Zhou Qiang, in which he criticised the independence of the courts (Hornby, 2017). The direct stems from the dominant role of the Chinese Communist Party in the lives of citizens and its intertwining with the judicial system. This is succinctly captured in , The Constitutional System of the People’s Republic of China:

“The Constitution includes the principle of independent adjudication by the courts, but at the same time introduces supervision of the jurisprudence of all courts by the Supreme People’s Court and by higher courts in relation to lower courts (Articles 123-127 of the Constitution). The Supreme People’s Court is accountable to the Supreme People’s Court and its Standing Committee, and the other courts are accountable to the bodies that appoint their judges (Article 128), i.e. to the assemblies of people’s representatives of the respective court level. It is therefore impossible to speak of the independence of the Chinese judiciary”(Rowiński and Jakóbiec, 2006: 68). 

Impact of politics on the judicial system and the lack of independence of the judiciary is a manifestation of the institutional weakness of the state, characteristic of some developing countries. BITs and ISDS mostly occur in relations between developing and developed states (Jeżewski, 2011: 98). China escapes a simple division into developed and developing states, however, its judicial system is characterised by the strong influence of the ruling party. The inverse relationship, captured by the 2020 “World Justice Project Rule of Law Index®” and defined by “Government powers are effectively limited by the judiciary” was only 0.30, giving China a position of 122 out of 128 globally and 14 out of 15 regionally.

Given that a potential dispute may arise between an element external to China, i.e. the foreign investor, and the State, i.e. an internal element influencing the judicial system in the State, elevating the protection of the foreign investor to an international level plays an important role in protecting its rights.

Secondly, the level of ISDS protection between China and individual countries varies greatly. For example, BITs between China and EU members can be divided into two generations – the first, older, granting a lower level of protection to the foreign investor and the second, newer, granting a higher level of protection (Grieger, 2020: 3-4). For example, the BIT between Poland and China should be classified as first generation. The Agreement between the Government of the People’s Republic of Poland and the Government of the People’s Republic of China on Mutual Promotion and Protection of Investments, done in Beijing on 7 June 1988, is a BIT of the older category, containing a low level of protection.

Article 10(1) of the Poland-China BIT not only narrows the dispute between the foreign investor and the state to the mere amount of compensation, but also introduces an onerous procedure – the investor files a complaint with the competent authority of the host state, and the latter has one year to consider the case and only after this period can the investor turn to the national court of the host state or an international arbitration tribunal to review the compensation. In an EU context, it is therefore important to harmonise the protection of the European foreign investor in China. The absence of such harmonisation directly in the pending EU-China Comprehensive Agreement on Investment (CAI for short) is a mistake. Moreover, it may be pointed out on the example of the Poland-China BIT that it contains in Article 3(2) in connection with Article 3(1) the most-favoured-nation clause – the solution that a party to the agreement grants to the other party to the agreement treatment no less favourable than that granted in a given area to other parties. Despite the existence of this clause, there are, in my opinion, serious doubts that, on its basis, it is possible to grant a Polish investor the right to assert his rights in arbitration more broadly than just with regard to a review of compensation. Hence, in my opinion, it is necessary to modernise the protection of a European investor, especially one who finds himself in a similar situation to that of a Polish investor. 

There are at least two reasons for stronger (i.e. precise, swift, real and “internationalised”) foreign investor protection in relations with China – the lack of independence of the Chinese judiciary and, for EU members, the need to modernise and standardise protection.

Przypisy:

Bibliografia

Publications

Jeżewski, M (2011). Międzynarodowe Prawo Inwestycyjne, Warszawa, Wydawnictwo C.H.Beck. s. 96-107, s. 98

Rowiński, J; Jakóbiec, W (2006). System Konstytucyjny Chińskiej Republiki Ludowej, Warszawa, Wydawnictwo Sejmowe, s. 68

Publications and websites of the institutions on the Internet

Hornby, L. China’s top judge denounces judicial independence, Financial Times, 17 stycznia 2017, dostęp 22.02.2021: https://www.ft.com/content/60dddd46-dc74-11e6-9d7c-be108f1c1dce

Grieger, G. EU–China Comprehensive Agreement on Investment. Levelling the playing field with China, European Parliamentary Research Service, wrzesień 2020, dostęp 22.02.2021: https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/652066/EPRS_BRI(2020)652066_EN.pdf

World Justice Project Rule of Law Index® 2020, dostęp 22.02.2021: https://worldjusticeproject.org/sites/default/files/documents/WJP-ROLI-2020-Online_0.pdf oraz https://worldjusticeproject.org/rule-of-law-index/country/2020/China/Constraints%20on%20Government%20Powers/

Investment Policy Hub, UNCTAD, dostęp 22.02.2021: https://investmentpolicy.unctad.org/country-navigator/45/china

czytaj więcej

Meeting with Dr. Uki Maroshek-Klarman

It’s a great pleasure for the Boym Institute to organize an open meeting with dr Uki Maroshek who founded the betzavta method. Betzavta is taught across the globe at the Adam Institute for Democracy and Peace in Jerusalem as well as in other institutions in Europe and the Middle East.

Opportunities and challenges of India’s G20 Presidency

Ada Dyndo conducts an interview with Shairee Malhotra on India’s role in G20. Shairee Malhotra serves as a Coordinator of the T20 India Taskforce on Reformed Multilateralism for India’s G20 presidency.

Paweł Behrendt for 9DASHLINE: The South China Sea – from colonialism to the Cold War

We would like to inform, that 9DASHLINE has published article of Paweł Behrendt - the Boym Institute Analyst, in which he wrote about history of the South China Sea dispute over the 20th century.

What connects shamans and generals? On the problem of verification of internal conflicts of North Korea

The number of confirmed executions and frequent disappearances of politicians remind us that in North Korea the rules of social Darwinism apply. Any attempt to limit Kim Jong-un's power may be considered hostile and ruthless.

Are “Climate Refugees” (Just) About Climate?

As the awareness of the scale and pervasiveness of climate impacts on human societies keeps rising, so does the frequency with which the terms “climate refugees” and “climate migrants” are being used in the public discourse “to describe those who are being displaced due to adverse consequences related to climate change” (Atapattu, 2020).

Taiwanese Perceptions of Russia’s Ukraine war

Since the invasion of Ukraine, the Taiwanese government remained committed to its position of condemnation for Russia, humanitarian support for Ukraine, and deep appreciation and admiration for the Ukrainian people’s will to defy power, resist aggression, and defend their nation.

Indonesian Day 2025

80th anniversary of Indonesian Proclamation of Independence and 70th anniversary of Poland-Indonesia diplomatic relations. April 23rd, at 10:00 am, aula im. prof. Waldemara Michowicza, ul. Lindleya 5A, Łódź.

Invest and cooperate with Serbia or Poland? A dilemma for South Korean companies

This paper explains why Serbia may replace Poland as a strategic outsourcing centre for South Korean companies in Central and Southern Europe.

Chinese work on the military use of artificial intelligence

Intensive modernization and the desire to catch up with the armed forces of the United States made chinese interest in the military application of futuristic technologies grow bigger.

The Boym Institute contribution to the Transcultural Caravan project

We are pleased to announce, that our analysts and contributors are among authors of the newest publication - "European Perspectives on the New Silk Roads – A Transcultural Approach".

Online Course: “Conflict Resolution and Democracy”

The course will be taught via interactive workshops, employing the Adam Institute’s signature “Betzavta – the Adam Institute’s Facilitation Method“, taught by its creator, Dr. Uki Maroshek-Klarman. The award-winning “Betzavta” method is rooted in an empirical approach to civic education, interpersonal communication and conflict resolution.

Dr. Nicolas Levi with a lecture in Seoul

On May 24 Dr. Nicolas Levi gave a lecture on Balcerowicz's plan in the context of North Korea. The speech took place as part of the seminar "Analyzing the Possibility of Reform and its Impact on Human Rights in North Korea". The seminar took place on May 24 at the prestigious Yonsei University in Seoul, South Korea.

Patrycja Pendrakowska as a founding member of the WICCI’s India-EU Business Council

By sharing knowledge, business opportunities, and best practices the Council generates awareness of women's contributions in developing the India-EU relations.

Patrycja Pendrakowska for Balkan Development Support: “Western European countries have benefited most from the Chinese capital, the benefits are mutual”

We would like to inform, that Financial Intelligence has published interview for Balkan Development Support with Patrycja Pendrakowska.

Book review: “North Korean Defectors in a New and Competitive Society”

Book review of "North Korean Defectors in a New and Competitive Society", written by Lee Ahlam - assistant professor in the Department of Educational Leadership and Human Resource Development at Xavier University Cincinnati, Ohio.

Roman Catholic cemetery in Harbin (1903-1958)

First burials of Catholics, mostly Poles but also other Non-Orthodox believers took place in future Harbin in the so called small „old” or later Pokrovskoe Orthodox cemetery in the future European New Town quarter and small graveyards at the military and civilian hospitals of Chinese Eastern Railway at the turn of XIX and XX century.

Book review: “Korean Diaspora in Postwar Japan – Geopolitics, Identity and Nation-Building”

Book review of "Korean Diaspora in Postwar Japan -  Geopolitics, Identity and Nation-Building", written by Kim Myung-ja and published by I.B Tauris in 2017.

India, China and the Shades of Grey

"We are at an inflection point in this century. Many of our traditional arrangements are failing. To achieve stability in this century we need to discover new solutions" - Interview with Samir Saran - Senior Fellow and Vice President at the Observer Research Foundation

Patrycja Pendrakowska as a participant of Women Economic Forum (WEF) in India

The interactive discussion covers recent projects and collaborations which have contributed to a greener economy in India

Liquidation of the Polish colony in Manchuria (north-eastern China)

Ms. Łucja Drabczak - A Polish woman born in Harbin, she spent her childhood in China. She returned to Poland at the age of 10. She is the author of the book 'China... Memories from my childhood'. She contacted us to convey special family memories related to leaving Manchuria in 1949.

Historical vs Current Emissions: Towards an Ethical and Political Synergy in International Climate Policy

Environmental problems transcend not only national borders but also historical periods. And yet debates on the necessary measures and timelines are often constrained by considerations of election cycles (or dynastic successions) in any given country.

China’s Social Credit System – How will it affect Polish enterprises in China?

The Social Credit System currently being rolled out in China may pose significant organisational and legal challenges for both foreign and Polish entities operating in China. We invite you to read our report, prepared in cooperation between the Boym Institute and Kochanski & Partners.

To free oneself from the Chinese embrace. On Indo-Russian relations with Nandan Unnikrishnan

Interview with Nandan Unnikrishnan, who has served for many years as a correspondent for Indian media in Russia. Currently he is a research fellow at the Observer Research Foundation in Delhi. The interview was conducted during the Raisina Dialogue 2019 in Delhi.

Polish-Asian Cooperation in the Field of New Technologies – Report

Polish and Polish-founded companies are already on the largest continent in sectors such as: IT, educational technology, finance, marketing, e-commerce and space. Despite this, the potential lying dormant in the domestic innovation sector seems to be underutilized.