Transfer of funds in China‐US BIT negotiations: comparing the Articles of Agreement of the IMF
| Date | 23 March 2012 |
| Pages | 6-26 |
| Published date | 23 March 2012 |
| DOI | https://doi.org/10.1108/14770021211210669 |
| Author | Qiao Liu,Xiang Ren |
| Subject Matter | Economics |
Transfer of funds in China-US
BIT negotiations: comparing the
Articles of Agreement of the IMF
Qiao Liu
T.C. Beirne School of Law, University of Queensland, Brisbane, Australia and
School of Law, Xi’an Jiaotong University, Xi’an, China, and
Xiang Ren
School of Law, Xi’an Jiaotong University, Xi’an, China
Abstract
Purpose – The purpose of this paper is to explore discrepancies between transfer provisions in the
US model BIT, employed as a working text in the ongoing China-USA BIT negotiations, and relevant
Articles of the Agreement of the IMF, to which both China and the USA are signatories, with a view to
advising on China’s possible strategies for negotiation.
Design/methodology/approach – The approach taken is doctrinal and comparative analysis and
treaty interpretation of the US model BIT, the Articles of the Agreement of the IMF, the Chinese model
BIT and some earlier versions of these instruments.
Findings – A detailed analysis of several major discrepancies between these instruments finds that a
differentiated treatment of capital transfers and current transfers is desirable and, in respect of current
transfers, a properly formulated “temporary derogation” exception should be adopted.
Originality/value – The paper conducts a unique substantial comparison of two most influential
instruments governing transfer of funds in international investments. It reveals the common rationale
shared by the transfer provisions under both instruments.
Keywords China, United Statesof America, International investments, Capital markets,
InternationalMonetary Fund, China-US BIT negotiation, Free transfer,Transfer of fund,
Capital transactions, Current transactions, Capital transfers, Current transfers
Paper type Research paper
I. Introduction
Following almost 20 years’ cessation, the China-US bilateral investment treaty (BIT)
negotiations resumed on June 2008 during the two countries’ fourth Strategic Economic
Dialogue meeting. The USA has made it clear that it will negotiate on the basis of its own
model treaty, the current version being the 2004 US model BIT[1], which reflects high
standards of investor protection[2]. Meanwhile, China is expected to use its current
working text for BIT negotiations, the 1997 Chinese model BIT Version III[3], which has
been the result of a great liberalization of its BIT practices over the past 30 years. In view
of significant differences in these two model BITs and the two nations’ conflicting
interests and positions, the China-US BIT negotiation may prove to be a difficult and
prolonged one (Kong, 2010; Berger, 2008). Further, voices have been uttered that a
China-US BIT may not be in China’s urgent need as its particular effectiveness lies in
protecting foreign direct investment (FDI), which accounts for only a relatively low
proportion of total investments flowing in either direction between China and the USA
(Tian, 2008). Nevertheless, given that the Chinese Government is committed to
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1477-0024.htm
JITLP
11,1
6
Journal of International Trade Law
and Policy
Vol. 11 No. 1, 2012
pp. 6-26
qEmerald Group Publishing Limited
1477-0024
DOI 10.1108/14770021211210669
continuing liberalization, or even “Americanization”, of its investment treaties and also
provided that both countries are willing to make important compromises, one has reason
to believe that a deal will eventually be pulled off (Cai, 2009).
One of the principal obstacles to the successful conclusion of a China-US BIT is the
free transfer provision, which permits funds, including capitals and profits, to move
into and out of the host state. Most notable of the differences between the two model
BITs in this respect is that the US model BIT, whose transfer provision was adopted in
its exact form in both the US-Rwanda BIT and the US-Uruguay BIT[4], imposes a
general obligation to permit free transfer of funds qualified only by a list of
narrowly-articulated specific restrictions, whereas the Chinese model BIT explicitly
subjects such transfers to a much more open-ended proviso, the host state’s “laws and
regulations”, most relevantly those concerning China’s exchange control policy and
closed-capital-account system (Gallagher and Shan, 2009). In this regard the US model
BIT has been compared unfavourably with the European model BIT in that the latter is
said to have achieved a more equitable balance between conflicting interests, with
proper regard to the host state’s monetary reserve and development objectives (Robin,
1984). It is, however, unlikely that the US Government will succumb to the Chinese
version of transfer controls. The Chinese Government, at the same time, has shown
remarkable flexibility, as exemplified by the 2003 China-Germany BIT[5], in moving
towards unrestricted transfer of funds by dropping out the “subject to its laws and
regulation” proviso (Gallagher and Shan, 2009). Although this suggests a possible
Chinese capitulation on this matter, it is doubtful that this will be a wise course of
action for the Chinese Government to take.
This paper attempts to offer a critical analysis of the transfer provision under the
US model BIT from a unique perspective. It conducts a substantial comparison with
relevant Articles of the Agreement of the International Monetary Fund (“the IMF
Agreement”). Both China and the USA are members of the Fund and as such are bound
by the IMF Agreement. One of the main purposes of the IMF Agreement is to eliminate
foreign exchange restrictions that hamper the growth of world trade[6]. Nevertheless,
it makes economic sense to allow a host state to retain certain degree of control over the
transfer of funds. For example, despite findings in support of the general negative
effect of capital controls on FDI (Desai et al., 2005), they have proved to be conducive in
developing countries’ battle against financial crisis (Ostry et al., 2010). The Fund
recognizes this fact and its Agreement appears to strikes a widely accepted balance by
leaving some leeway for member states to impose controls on transfers. At the same
time, essential constraints are explicitly provided in order to prevent such leeway from
being abused. It is true that incompatibility commonly exists between multilateral
agreements and regional and bilateral agreements in this area, as the former normally
allow for the imposition of transfer restrictions, say, temporary and non-discriminatory
restrictions for balance-of-payments reasons in the case of current transactions (United
Nations Conference on Trade and Development (UNCTAD, 2000)). Such
incompatibility has recently caused the European Union (EU) to bring legal action
against three of its new member states to preserve Union power to impose similar
restrictions[7] (Denza, 2010). Of course, any potential incompatibility of the China-US
BIT with relevant Articles of the IMF Agreement cannot constitute a cause of action in
any international or domestic court. But inconsistency with the IMF Agreement does
seem to be undesirable. Blanket prohibitions on capital restrictions under two recent
China-US BIT
negotiations
7
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