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

Workshop – Liberalism vs authoritarianism: political ideas in Singapore and China

We cordially invite you to a workshop session “Liberalism vs authoritarianism: political ideas in Singapore and China”. The workshop is organized by Patrycja Pendrakowska and Maria Kądzielska at the Department of Philosophy, University of Warsaw on ZOOM.

Online Course: “Free Speech, Incitement and Hate Speech and their relevance in Poland’s political discourse and landscape” with Dr. Uki Maroshek-Klarman

The Adam Institute invites you to join us for a new engaging course, tailored to participants from Poland, taught on ZOOM.

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

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.

Patrycja Pendrakowska for Observer Research Foundation: “The Polish example: Defending the castle in the European East”

We would like to inform, that Observer Research Foundation has published article of Patrycja Pendrakowska - the Boym Institute Analyst and President of the Board.

Patrycja Pendrakowska for Observer Research Foundation: “Managing fear and easing lockdown in Poland”

We would like to inform, that Observer Research Foundation has published article of Patrycja Pendrakowska - the Boym Institute Analyst and President of the Board.

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.

From ‘strategic engagement’ to ‘competition’. Interview with William Yu

Ewelina Horoszkiewicz in conversation with Professor William Yu (UCLA) on USA, China and Europe. Professor William Yu  is an economist with the UCLA Anderson Forecast and specializes in the economies of Los Angeles and China.

Young Indo-Pacific: Forward-looking perspectives on the EU Indo-Pacific Strategy

The Boym Institute, working with other think tanks, organizes panel discussions on topics related to the European Union's Indo-Pacific strategy

The unification of the two Koreas: an ASEAN perspective

The aim of the paper is to discuss the role of the ASEAN as a critical component of the solution to the Korean unification. The Korean Unification refers to the potential reunification of both Koreas into a single sovereign Korean state led by the leadership of the two Koreas.

Indonesia – between religion and democracy

Indonesia is the largest Muslim democracy in the world. Approximately 88% of the population in Indonesia declares Islamic religion, but in spite of this significant dominance, Indonesia is not a religious state.

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 Observer Research Foundation: “Guiding democracy through Covid19: Poland shows us what not to do”

We would like to inform, that Observer Research Foundation has published article of Patrycja Pendrakowska - the Boym Institute Analyst and President of the Board.

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).

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

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.

Voices from Asia – introduction

We would like to cordially invites all to the new series "Voices from Asia" that is devoted to the Asian perspectives on the conflict in Ukraine. In this series, we publish analysis by experts based in Asia or working on Asian affairs who present their positions on this matter.

Charitable activities of the Vietnamese in Poland: their scope and sources

The scale of assistance provided to medics by the Vietnamese community during the 2020 pandemic inspires admiration and gratitude. It stems from the sense of belonging to Poland and deeply rooted in the culture order to help those in need and repay the debt incurred at the time when they themselves needed such help.

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.

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.

Why We Need Women in Politics, or the Scandal Solved Successfully in Uzbekistan with a Polish Woman in the Leading Role

Polish women do not often become the heroines of media reports in Central Asia. In February 2020, however, it was different. The story of Agnieszka Pikulicka-Wilczewska, a journalist, "heated up" the headlines of local news portals. More importantly, "between the lines" she talked a lot about contemporary Uzbekistan and the role of women in politics.

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.

Global Security Initiative and Global Development Initiative: Two Wings for Building a Community with a Shared Future for Mankind

Peace and development as the call of our day again face severe challenges on a global scale, with more prominent instability, uncertainty and complexity

Asia-Integration – Follow-up Report on Polish Policy Challenges Towards Asian Countries

The debate was the consequence of positive reactions to the open letter that the Boym Institute published in the summer of 2020. Many of its readers pointed out the necessity of broad consultations regarding the principles of the new multidimensional policy in order to reflect the diversity of perspectives, interests and conditions.