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 – 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.

Adrian Zwoliński