TOWARDS A BALANCED AND LIBERAL CHINESE BILATERAL INVESTMENT TREATY REGIME IN THE CONTEXT OF ONE BELT ONE ROAD.

• Author: Ye, Yu-Ting

ABSTRACT

Chinese bilateral investment treaties (BITs) have adopted different levels of investment protection over different generations of BITs. This article elaborates on the evolution of Chinese bilateral investment treaties, considering both substantive and procedural requirements. While first-generation BITs contain general compensation clauses and conservative investor-state dispute resolution clauses, later generations of BITs contain specific compensation clauses and liberal investor-state dispute resolution clauses. (1) The innovations made in later-generation BITs reflect the development of China's external investment relations including the initiation of One Belt One Road. The changing role of China in international investment plays an important part in shaping a more balanced and liberal investment treaty regime. This article highlights the significance of a balanced and liberal approach to perfecting treaty standards and notes the potential legal risks for Chinese investors in Belt and Road Initiative countries under the current bilateral investment treaty regime. The article further provides viable solutions for Chinese investors to gain favorable investment protection under the BITs concluded between China and Belt and Road Initiative countries.

1. INTRODUCTION II. COMPENSATION AND EXPROPRIATION A. First Generation: Generic Expropriation Clauses B. Later Generations: Specific Expropriation Clauses III. INVESTOR-STATE DISPUTE SETTLEMENT A. First Generation: Conservative Dispute Settlement Clauses B. Later Generations: Liberal Dispute Settlement Clauses IV. WAYS TO RENDER THE CURRENT CHINESE BITS MORE EFFECTIVE FOR CHINESE INVESTORS IN THE CONTEXT OF ONE BELT ONE ROAD A. Invoking Futility, Ineffectiveness, and Other Customary International Law Exceptions B. Flexible Application on Grounds of Procedural Economy C. Importation of MFN Clause D. Nationality Planning V. POLICY OPTIONS FOR A NEW GENERATION OF CHINESE BITS UNDER THE CONTEXT OF ONE BELT ONE ROAD A. Balanced Expropriation Clauses Through the Importation of Proportionality B. Liberal ISDS Clauses with Strings Attached VI. CONCLUSION I. INTRODUCTION

   Before the late 1970s, China had few international investment engagements with other countries. (2) The lack of foreign investment, due in part to China's acquiescence to the Communist ideology denouncing the notion of private property, (3) did not afford China with prosperity. (4) By the late 1970s, the substantial social instability and economic distress that ensued had brought the Chinese national economy to the brink of collapse. (5) Against this background, China adopted the Open Door Policy in 1978 and restrictions on foreign investment relaxed. (6) For purposes of encouraging FDI flows, China implemented a two-tiered approach: promulgating local rules and regulations on the one hand, and increasing BITs on the other. (7) Pursuing economic recovery by means of attracting foreign investment characterized the Chinese investment treaty making regime. (8) Over the last 35 years, China has concluded 145 bilateral investment treaties, (9) which can be classified into 3 generations. (10)

   The first generation of Chinese BITs, which started to appear in 1982, adopted a restrictive approach with respect to both substantive and procedural investment protections. (11) The second generation of Chinese BITs materialized in 1998 and were characterized by more liberal and refined provisions on investment protection compared to the first generation. (12) The third generation of Chinese BITs, emerging in 2008, contained more state-friendly provisions (13) such as, in some instances, essential security exceptions and general exceptions modeled after Article XX of the General Agreement on Tariffs and Trade (GATT). (14)

   Throughout the evolution of Chinese BITs, changes to compensation and dispute settlement clauses have been prominent. (15) Admittedly, the evolution of substantive clauses other than expropriation provisions, such as those addressing fair and equitable treatment (FET) and national treatment (NT), is also worth noting. Yet, expropriation clauses remain the most frequently invoked provisions by investors under Chinese BITs. (16) In particular, as one of the host countries that has the largest amount of capital inflow and outflow, (17) China has always paid great attention to the issue of expropriation and has been exploring more liberal approaches to settle investor-state disputes. (18) Furthermore, since China has launched the One Belt One Road (OBOR) project in the hope of building a network of roads, railways, and other infrastructure projects to connect China to the world, (19) the main concern for Chinese investors wishing to invest in these projects relates to the level of investment protection afforded with regard to compensation and the promptness of settling investment disputes. (20)

   In this regard, this analysis of the evolution of expropriation provisions and investor-state dispute settlement (ISDS) clauses not only stands to benefit future investment treaty negotiations in the context of OBOR, but also assists Chinese investors in identifying viable solutions for obtaining maximum treaty protection under the active BITs concluded between China and Belt and Road Initiative (BRI) countries.

2. COMPENSATION AND EXPROPRIATION

   1. First Generation: Generic Expropriation Clauses

      The first generation of Chinese BITs lack a clear definition of indirect expropriation. (21) First-generation BITs refer to expropriation as measures that have the effect of expropriation or nationalization. (22) The terms "tantamount to ... expropriation" (23) and "other measures having similar effects to expropriation" (24) in the first-generation BITs provide arbitration tribunals with little guidance for identifying the scope of indirect expropriation.

      Due to the lack of guidance for applying treaty standards with respect to first-generation BITs, the application of customary international law by tribunals serves to clarify the scope of indirect expropriation. (25) Tribunals have asserted the doctrine of police powers to discern the difference between indirect expropriation and the state's legitimate regulatory measures. (26)

      In Saluka Investments B.V. v. Czech Republic, the tribunal viewed the police powers doctrine as part of customary international law and held that regulatory measures do not constitute expropriation when they are within a state's police powers. (27) The tribunal in Suez v. Argentina also endorsed the doctrine of police powers because in expropriation cases it is pertinent to strike a balance between investors' private property rights and the legitimate rights of a state to regulate. (28)

      Although the application of international law by tribunals offsets, to an extent, deficiencies in treaty standards, the silence of first-generation BITs' with respect to indirect expropriation creates uncertainty and potential legal risks for investors and host states alike. (29)

      With regard to compensation, certain first-generation BITs provide a common standard for lawful and wrongful expropriations. (30) Expropriation clauses of certain first-generation BITs resemble the general principle of full reparation that was developed in the Chorzow Factory case. These first-generation BITs, which are currently in force, provide that "the compensation ... shall be such as to place the nationals and companies in the same financial position ... be similar to expropriation or nationalization, had not been taken." (31) In Chorzow Factory, the Permanent Court of International Justice (PCIJ) determined that full reparation in a case involving wrongful expropriation requires the reestablishment of a situation as if the wrongful act not been committed. (32)

      The similar wordings of these first-generation BITs and the principle of full reparation together suggest that compensation standards under early BITs are interchangeable with lawful expropriation (internationally lawful acts) and wrongful expropriation (internationally wrongful acts). (33) A common compensation standard, however, has been criticized for bringing about contradiction within the customary international law of state responsibility because customary rules distinguish between reparation for wrongful acts and compensation for lawful ones. (34) In addition, this lack of distinction poses an ethical problem where a lawful expropriation conducted by a state in full compliance with the state's international obligations gives rise to the same amount of compensation as would an unlawful expropriation conducted by a state that commits a wrongful act. (35)

      By contrast, other first-generation (36) and later-generation BITs (37) apply different compensation standards to lawful expropriation and wrongful expropriation. The compensation standard for lawful expropriation under these BITs differs from the full reparation principle via the incorporation of the "fair and equitable" (38) or "just" (39) compensation standard for expropriation. Variations include: "real value," (40) "reasonable, effective and non-discriminatory compensation," (41) "equivalent to the value," (42) and "fair and reasonable compensation." (43) As a result of the New International Economic Order (NIEO) movement initiated by developing countries pushing back against developed countries, the just compensation standard represents something less than the "adequate, effective and prompt" standard. (44) "Prompt" refers to the notion that compensation must be paid without undue delay; "adequate" is defined as the fair market value of the taken property immediately before the taking; and "effective" conveys the point that compensation must be made in a freely transferable currency. (45) In the 1990s, however, just or appropriate compensation and "adequate, effective and prompt" compensation began to share the same meanings. (46) Article IV(2) of World Bank Guidelines on the Treatment of Foreign...