Part V - China and Investment Governance

18 A Comparison of Inbound and Outbound Investment Regulatory Regimes in China Focus on Environmental Protection

Matthew S. Erie and Jingjing Zhang

I Introduction

China is no longer only a major destination of foreign direct investment (FDI) but is one of the highest exporters of overseas direct investment (ODI) in the world. The two different legal and regulatory regimes for FDI and ODI are often conceptualized separately with the former being more advanced than the latter. The conventional explanation for this difference is that the former has simply had more time to develop, given that China opened to FDI in the 1980s, and it was not until the late 1990s that Chinese enterprises began investing abroad. We stake out a different position on the relationship between the FDI and ODI regimes. Rather than treat them as isolates, we juxtapose them (Bath, 2011) while recognizing that they are organized through different principles.

In accordance with a line of literature that conceptualizes domestic and foreign-related Chinese governance holistically (Foot, 2013; Ferchen, 2016; Shue, 2018; Erie, 2021), we compare the FDI and ODI regimes, finding that, at a general level, whereas the former has transitioned from restrictive to lenient, the latter has evolved in the opposite direction, from lenient to restrictive. The different trajectories cannot be explained solely in terms of the time lag in their respective development. While the primary reasons for change are domestic, we argue that one reason why the FDI regime is more advanced is because of the influence of the WTO accession of 2001. Whereas the FDI regime has become more streamlined, efficient, and coordinated, partly as a result of the WTO accession package, the ODI regime, which has not yet benefited from an analogous multilateral framework, remains bureaucratic, suboptimal, and disaggregated.

Our analysis is based on a data set of hundreds of normative documents that comprise the FDI and ODI regulatory regimes. For the most part, we have focused on normative documents issued by the People’s Republic of China (PRC) government that pertain to FDI or ODI governance to provide a more granular view than a focus on the level of China’s international investment agreements (Berger, this volume; Chi, this volume). For a number of reasons, including the breadth of documents that comprise these regimes and also our shared interest in China’s impact on the environment, we focus on the specific example of the regulation of the environmental impact of FDI and ODI. Environmental concerns are closely related to a host of problems that have emerged in recent years as the most pressing problems for international trade and investment law, including technology transfer, climate change mitigation and adaptation, the protection of biodiversity, and pandemics (Cottier, this volume). Our particular focus is on how the FDI and ODI regimes have disparately affected environmental impact in China and developing countries, respectively. We find that the environmental and social impact of Chinese ODI is inadequately regulated resulting in potential harm to Chinese investors and impacted communities in host states alike in the course of Chinese-financed projects overseas. The remainder of this chapter is organized as follows: in Part II, we provide a snapshot of China’s capital inflows and outflows; in Part III, we provide an historical overview of China’s regulation of FDI, finding a general transition from restricting FDI to encouraging it; in Part IV, we provide a similar historical appraisal of China’s regulation of ODI finding that the general trend works in the opposite direction; in Part V, we juxtapose the two regimes’ treatment of environmental impact; and in Part VI, we provide a brief discussion of implications, including for understanding the relationship between China’s domestic legal reform, outward-facing legal obligations, and the role of regulators in coordinating the foregoing.

II Trends in Chinese Capital Import and Export

As a preliminary matter, we recognize that FDI and ODI serve different purposes and do not assume that they should necessarily function in the same way; in fact, our comparison is meant to shed light on the different types of priorities a state may have in reforming the respective regimes. In considering the priorities that underlie the regimes, it is clear there are differences. For example, whereas FDI rules are designed to attract capital and technology, ODI rules aim to assist Chinese companies to obtain resources and to transfer excess capacity in manufacturing. There are some shared underpinning principles, however, even if they assume different levels of importance in the two regimes. These include both national security and the encouragement and protection of investment.¹ So while there are clearly different reasons for the capital flows, there is also some overlap.

The overlap also applies to the regulators who determine capital inflows and outflows as they are essentially one and the same; despite this commonality, the regimes have evolved in quite different directions. The regulators include inter alia the Ministry of Foreign Trade and Economic Cooperation and its successor the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC), the Ministry of Finance, the Ministry of Foreign Affairs, the State Administration for Industry and Commerce, the State Administration of Foreign Exchange, and the People’s Bank of China. It is important to note, however, that economists, political scientists, and other social scientists who study China have consistently shown that regulators in China do not act with one mind, but rather, may exhibit significant inter-agency competition (Lieberthal, 1992; Mertha, 2008; Jones and Hameiri, 2021; Tan, 2021). Moreover, in the face of these agency problems, scholars have argued that the WTO accession presented China with an opportunity to circumvent entrenched discoordination problems and to marshal resources across the ministries, departments, and related administrative divisions (Kim, 2002; Qin, 2007). Indeed, the WTO accession was an exercise in institutional learning and problem-solving that required an unprecedented level of coordinated action (Hsieh, 2010; Ji and Huang, 2011; Shaffer and Gao, 2017). Yet while regulators underwent a steep learning curve to reform the FDI regime in light of the WTO accession package, there was no comparative multilateral framework for China’s ODI regime and thus the same reformers have not undergone a similar process of coordinated learning. In the following sections, we take the FDI and ODI regimes in turn.

III China’s Regulation of FDI

At a general level, China’s regulation of FDI has gone from more restrictive to more lenient, and, while there are a number of factors that contributed to this shift and most of which are domestic in nature, we argue that one reason for this change is the requirements imposed on China through the WTO accession package, a multilateral framework that has no corollary in terms of China’s regime for regulating ODI. More specifically, China’s approach to regulating FDI was caused by its “opening and reform” policy and the country’s willingness to engage with global capital. China’s commitments to joining the WTO, including making China a market economy and opening the domestic market to foreign investors, should be seen in this broader context.

We construct a basic chronology of the evolution of China’s FDI regime. We find that China’s evolving FDI framework coincides with China’s national development plans as it transitioned from a command-control economy to one that increasingly integrated market principles without total privatization. This timeline can be broken down into five general phases: phase one (1979–1991), the establishment of a basic regulatory foundation for economic liberalization; phase two (1992–1999), an increased emphasis on economic efficiency causes legislative reform; phase three (2000–2008), the period of the WTO accession during which the government sought to internationalize by balancing economic efficiency with economic fairness; phase four (2009–2014) during which the government sought to balance internationalization with national security concerns; and phase five (2015-present) which is marked by not only efficiency and national security concerns but also greater openness and quality of cross-border business. In what follows, we trace China’s gradualist approach to investment reform with particular reference to the pivotal phase three during which China’s accession to the WTO shifted its FDI regime toward greater liberalization, yet one responsive to China’s specific political economy.

(i) Phase One (1979–1991): The Establishment of a Regulatory Foundation for Economic Liberalization

The first phase of building a house amenable to foreign investment began in 1979 and lasted until the early 1990s. At this early stage in modern China’s development, the PRC government sought to incentivize FDI to inject capital into the forces of production, specifically those in light industry, agriculture, and heavy industry. The landmark event of the Third Plenary Session of the Eleventh Central Committee of the Chinese Communist Party (CCP) explicitly promoted legislation for foreign investment. Subsequently, the Sino-Foreign Equity Joint Ventures Law was promulgated in 1979 as the first legislation of the “socialist market economy” (shehuizhuyi shichang jingji). Three years later, the 1982 PRC Constitution gave legal recognition to foreign businesses and foreign-invested enterprises.²

In this phase, China’s regulation of FDI is particularly strict and shows the following characteristics. First, regulators restricted access to foreign capital. The legislation establishes categories for investment (e.g., encouraged, permitted, restricted, prohibited), only some of which were slowly relaxed over time. Moreover, the regulations provide for approval and management of a number of areas, including the capital ratio of the parties involved,³ and approvals for foreign-invested enterprise contracts and articles of association,⁴ among other restrictions.⁵ Second, regulators further exercised strict approval for foreign investment. Foreign-invested projects were, for the most part, discouraged, and the approval authority was concentrated at the level of the central government. The process for approval was cumbersome.⁶ Third, foreign investment was not granted national treatment. Moreover, there were a number of restrictions placed on the purchase of raw materials as well as on the import and export of products,⁷ and, lastly, foreign exchange.⁸ Fourth, both the methods to encourage foreign investment and the ultimate destinations were limited. As for methods, the main approach was to provide preferential income tax treatment for foreign-invested enterprises.⁹ In terms of the permissible destinations for investment, the PRC government at this stage encouraged foreign investment only in designated locations.¹⁰ In summary, the first phase is one of tight restrictions on amounts, methods, industries, and destinations of foreign investment.

(ii) Phase Two (1992–1999): Economic Efficiency Spurs Legislative Reform

In the second phase, some of the investment rules became more consolidated around the need to increase efficiency which, in turn, generated the need for legislative and regulatory reform. This phase is characterized by a number of features. First, the system for foreign investors to access Chinese markets became more regularized.¹¹ Whereas the categories for foreign investment were ill-defined in the first phase, in this phase, they became clearer under the Catalogue for the Guidance of Foreign Investment Industries, specifically, its categories of “encouraged,” “permitted,” “restricted,” and “prohibited.” Second, the authorities simplified the foreign investment approval system.¹² Third, foreign investments began to receive national treatment, in certain circumstances. Some foreign-invested enterprises even received “super-national treatment” (chaoguo minteyu). For instance, the PRC Foreign-Invested Enterprise and Foreign Enterprise Income Tax Law grants foreign-invested enterprises the “two exemptions and three reductions” tax preference, and further stipulates that local governments can exempt or reduce local income tax.¹³ Fourth, authorities expanded both the scope of foreign investment and the permissible destinations. An example of the former is the inclusion of “build-operate-transfer” projects within the investment regime¹⁴ and the latter widened the type of destinations for foreign investment to include inland areas (Guojia tongji ju, 2002). In short, the second phase began greater liberalization but this process would not fully gain momentum until the WTO accession.

(iii) Phase Three (2000–2008): Internationalization through WTO Accession

In advance of its accession to the WTO in 2001, China began to reform its legislative and regulatory framework for FDI on a large scale in conformance with WTO expectations, and in particular, sought to meet the goals of both efficiency and economic fairness. The package agreement of the WTO had a significant influence on the reform of Chinese legislation, that is, the overall alignment of Chinese law with international norms, even if there was regulatory discoordination between different levels of government administration (Tan, 2000). According to the internal documents of the Working Party on the Accession of China, by November 9, 2000, the PRC government revised some 36 laws and regulations and 120 administrative rules for purposes of WTO compliance, including such statutes as the Contract Law of the PRC, Law of the PRC on Chinese-Foreign Equity Joint Ventures, and Law of the PRC on Chinese-Foreign Contractual Joint Ventures (Working Party on the Accession of China, 2000).

The changes to the investment regime were extensive. First, foreign investment access was expanded across industries, methods, and destinations. The Catalogue for the Guidance of Foreign Investment Industries was revised three times during this period to narrow the restricted and prohibited categories. Concurrently, separate policies were formulated for many industries to further expand opportunities for foreign investment, including in the financial, transportation, real estate, and entertainment industries.¹⁵ Second, legislative reform began focusing on fair value. In 2004, the State Council promulgated the “Decision on the Reform of the Investment System” which stated that a fair and orderly competitive market environment promotes both investment efficiency and overall social progress.¹⁶ Based on this direction, reforms were initiated in a number of areas. For instance, the 2007 Corporate Income Tax Law unified the income tax of domestic and foreign companies and abolished the “super national treatment” of some foreign-invested companies.¹⁷ Additionally, the Anti-Monopoly Law provided a basis for regulating foreign monopolies and mergers and acquisitions.¹⁸ Third, during this period, China’s policy orientation shifted from “encouraging foreign investment” to “relying on foreign investment.” This trend is illustrated in the use of foreign capital to reorganize SOEs and foreign mergers and acquisitions.¹⁹

(iv) Phase Four (2009–2014): Balancing Internationalization and National Security

The WTO accession continued to have transformative effects on the Chinese regulatory regime for FDI well beyond the third phase, and while efficiency continued to drive much of the reform, this requirement was balanced with additional concerns, including national security. The 2008 financial crisis increased international pressure on China to adapt its regulatory structure to resist exogenous shocks while continuing to benefit from FDI. Hence, on the one hand, foreign investment regulations maintained the goal of pursuing efficiency.²⁰ As part of this process, the approval system was further simplified to delegate approval to lower-level administrative levels.²¹

On the other hand, whereas the WTO era ushered in the notion of “reliance” on foreign investment, the worldwide financial meltdown of 2008 tempered this view. National security and economic sovereignty became important counter-weights to foreign investment dependence. Consequently, the Catalogue for the Guidance of Foreign Investment Industries was revised successively to incorporate national security, and a raft of regulations was issued to introduce greater oversight into the system of mergers and acquisitions.

(v) Phase Five (2015-present): Embracing “Quality” FDI

In the most recent phase, the government has sought to increase openness to FDI while also improving the overall quality of FDI. In 2015, the Central Committee of the CCP and the State Council jointly issued the “Certain Opinions on Building a New System of Open Economy” which required that while China should expand market access in the service industry and further open up manufacturing, it should improve the quality of foreign investment.²² This latter requirement led to adding a negative list to pre-access national treatment.

The NPC promulgated the Foreign Investment Law in 2019 which introduced major changes to unify the regimes for regulating domestic and foreign investment.²³ Specifically, the Foreign Investment Law abolished the trinity of WFOEs, equity JVs, and cooperative JVs. In their place, the new law permits investment from Chinese or foreign parties without the target company needing to change its legal form. Henceforth, corporate form and governance are determined by the Chinese company law, which relaxed some of the requirements foreign investors faced under the previous arrangement. Another purpose of the Foreign Investment Law was to further establish the national security review system for foreign investment. The most recent phase has also seen an encouragement of “quality” investment, particularly in the fields of science and technology. For example, the Foreign Investment Law encourages technical cooperation and includes the protection of IP rights.²⁴

In summary, this brief chronology of the reform of the legislative and regulatory framework for FDI shows how it has shifted over time from one that was initially restrictive to one that encouraged low-level foreign investment, without a screening mechanism, to the current phase that encourages quality investment, albeit with a screening mechanism in place. These changes over time reflect the general priorities of national development. Specifically, the PRC government viewed the WTO accession as a catalyst for creating a system that was more conducive to attracting FDI. Yet this need has been counter-balanced, over time, with the priority on safeguarding national security.

IV China’s Regulation of ODI

Compared with China’s legal and regulatory system for governing FDI, which has evolved from more restrictive to more lenient, the legal and regulatory system for ODI has shifted from one of greater lenience to more regulatory control. By control, we mean regulatory tightening; the control does not mean prohibition. Further, control in this sense is a response to a variety of chronic investment failures from speculative investing in luxury sectors in developed economies to high-risk investments in low-income states. In assessing the underlying principles of the ODI regime, one difference with the FDI regime is that the former prioritizes mitigating risks that could harm the national interest.²⁵ Chinese investors have incurred losses as a result of failed investments, and especially when the investments are state-owned, they potentially endanger state interests abroad.

In addition, poorly governed Chinese investments also generated negative externalities for host states. Whereas foreign investors in China must comply with Chinese environmental and social governance laws, the Chinese ODI regime does not have the corresponding safeguards. The lack of such compliance measures has caused human rights and environmental harm in a number of countries, particularly those with nascent legal systems. We argue the reason for the ODI regime’s change from lenient to strict is that, unlike the case of FDI, there was no external-facing process, such as the WTO accession, which reformed domestic priorities in line with international ones, specifically to balance home and host state interests in the course of cross-border capital outflows.

Many of the regulators for ODI are the same for FDI. Specifically, the administrative management of ODI is led mainly by the NDRC and MOFCOM. These entities often issue joint rules, including departmental regulations and other normative documents. However, additional departments may also participate in the drafting and issuance of these rules, including the Foreign Exchange Administration, People’s Bank of China, State-Owned Assets Supervision and Administration Commission (SASAC), Ministry of Finance, and Ministry of Foreign Affairs. One result of this pattern of multiple departments and administrators shaping the regulatory environment is inconsistency in rule design and enforcement as well as asymmetrical powers between departments. Likewise, given that each department issues rules within its purview (and sometimes jointly), there is no unified law regulating ODI. Moreover, policies that follow from scattered regulations and multiple and overlapping authorities lack clarity, stability, and rigor. In short, there was no WTO-centralizing force which could realign the authorities and coordinate their normative effects.

The current regulatory system for ODI can be divided into two historical phases. Phase one (1999–2015) was the formative period of China’s “going out” (zouchuqu) strategy and phase two (2015–present) features the “Belt and Road Initiative” (BRI). The phases show, at a general level, a shift from a more permissive and decentralized regime that encouraged ODI to one that is characterized by a more restrictive “encouragement catalogue and negative list” (guli mulu fumian qingdan).

(i) Phase One (1999–2015): The Formative Period of China’s “Going Out” Strategy

After the Asian financial crisis of 1997, the Chinese government implemented a strategy to expand exports. The “going out” strategy entered the national development plan in the Tenth Five-Year Plan for National Economic and Social Development, issued in 2000.²⁶ Six years later, the State Council adopted the Opinions on Encouraging and Regulating Foreign Investment and Cooperation among Chinese Enterprises.²⁷ During this period, the government promoted dual-direction development, namely, that of “going out” and also “attracting in [FDI]” ([张建平] and [刘恒], 2019).

The regulatory framework for ODI during this period was formulated chiefly by the NDRC and MOFCOM, reflecting their status as the leading twin ministries. The overall trend of the regulation was a process of gradual simplification for the administrative procedure for ODI. The NDRC’s regulations for ODI underwent two important changes. The first change occurred in 2004, under the Interim Measures for the Administration of Approval of Overseas Investment Projects, which reflected a shift from an audit to an approval (filing) system for Chinese enterprises engaged in ODI.²⁸ Subsequent normative documents further refined this system, including distinguishing those enterprises that rely on government funding as well as identifying approval systems for “special” or “sensitive” projects.²⁹ The second change occurred in 2014 when the NDRC established a “filing-based and approval-based” project management system, replacing the earlier 2004 decree. This regulation further specified two categories of “sensitive” projects, based on investment destination and industry, which required approval by the NDRC regardless of the investment amount.³⁰ The NDRC’s regulatory changes in 2004 and 2014 are roughly mirrored by those of MOFCOM which also decentralized the approval authority and simplified the approval process for ODI.³¹ In short, this early phase is characterized by a generally lenient approach to approval for ODI projects.

(ii) Phase Two (2015-Present): The BRI

In March 2015, three Chinese government ministries jointly issued the “Vision and Actions on Jointly Building Silk Road Economic Belt and the Twenty-First Century Maritime Silk Road” (hereinafter, “Vision and Actions”), inaugurating the BRI.³² Since then, China’s ODI administration and sectoral legislation have been closely tied to the BRI. The promotion of the BRI led to a peak in Chinese ODI and equity investment in 2016, an increase of 44 per cent from the year before (Bank, 2021). However, massive Chinese ODI in real estate, luxury hotels, sports and entertainment, and related industries not only failed to drive domestic economic development but also led to capital outflows not tied to state-led strategies, ultimately triggering the Chinese government’s concerns about financial security and the safety of state-owned assets.

Subsequent normative documents built upon the Vision and Actions which is mainly an agenda-framing document. Specifically, guidance from the ministries adjusted the “filing and approval” regulatory approach to one based on “encouraging development” alongside a negative list.³³ In particular, ODI was divided into the following categories: encouraged, restricted, and prohibited. NDRC decrees for their part defined eight categories of ODI, abolished the previous reporting system, and narrowed the scope of projects that can be approved.³⁴ These decrees also introduced a post-event reporting system that specifies that a report must be submitted within five days of a material adverse circumstance in an investment project (e.g., significant causalities among expatriates, significant loss of assets abroad, or damage to the diplomatic relations with the host state).³⁵ The NDRC further formulated the Catalogue of Sensitive Sectors for Overseas Investment in 2018 which requires approval.³⁶ The NDRC has, during this phase, consolidated its authority over ODI, and requires that overseas investment by domestic entities, whether financial or non-financial, direct or indirect, be uniformly included in the scope of filing and approval by the NDRC.

MOFCOM also assumed greater authority over ODI under the new direction of this second phase. MOFCOM, together with other ministries, jointly issued new measures for the filing and approval of ODI projects.³⁷ These measures standardized the management of ODI by requiring a summary report of approval, supervision during and after the project, and a model for ODI that was characterized by “encouraging development plus negative list.”³⁸ The summary report of approval must include inter alia information pertaining to any outbound investment and merger and acquisition, the progress of ODI projects, any problems encountered including compliance issues with local law and regulations, the protection of the environment, and the protection of employees’ rights.³⁹ Additionally, any adverse event or security incident (including security accidents, terrorist attacks, and kidnappings, social security mass incidents, major negative public opinion reports, etc.) must be reported to the relevant competent department which then informs MOFCOM.⁴⁰

Is it significant that the NDRC was not an issuing department for the measures led by MOFCOM? While the regulatory regime for FDI also demonstrates elements of inter-agency competition, the discoordination is greater in the ODI regime. The reason for this is not just the comparatively short period of evolution for the ODI regime but also that there was no external pressure put on the various departments and ministries to achieve greater coordination as was the case with the WTO accession. In the next section, we examine the extent to which the two regimes have integrated concerns about environmental impact.

V A Focus on Environmental Impact

China’s regulation of the environmental impact of FDI is much more developed than its environmental regulation of ODI, and while this difference can be explained, in part, by the long history of FDI in China, we argue that because regulation of the environmental impact of FDI grew out of a policy environment wherein China was integrating its national development plan into the global economy through multilateralism, this framework has led to a more robust result than regulation of the environmental impact of ODI. In this section, we briefly review the regulation of the environmental impact of FDI and then the regulation of the environmental impact of ODI to contrast the two regimes. We find that whereas the former suffers from a number of shortcomings, it nonetheless has gained some degree of traction in shaping foreign-invested enterprises conducting business in China. In contrast, the regime for ODI features far more severe “bugs,” including a fundamental structural flaw: the limited jurisdiction of the Ministry of Ecology and Environment (MEE).

(i) Regulation of the Environmental Impact of FDI

Whereas the regulation of the environmental impact of FDI has had a long gestation period, China’s trade obligations have further incentivized environmental considerations in the course of planning foreign-invested projects. In the early period of the “opening and reform,” regulations often did not explicitly state whether they applied to FDI as the operative concept at the time was territoriality, that is, as long as a project was undertaken within the PRC – regardless of the source of the capital (domestic or foreign) – then the environmental rules applied.⁴¹ The 1995 Catalogue for Guidance of Foreign Investment Industries further provided more detailed provisions for defining pollution-intensive industries and categories them accordingly (Zeng and Eastin, 2011, 58).

Consistent with phase three identified above (2000–2008), during the accession period, China adopted a number of laws including the Environmental Impact Assessment Law (hereinafter, “EIA Law”), passed in 2002, which further regulated FDI.⁴² The EIA Law was notable, in particular, for encouraging the public to participate in EIA.⁴³ Scholars have criticized the EIA Law for poor implementation, however, and have noted the disconnection between the EIA Law and China’s trade regime (Zhao, 2007, 80). In fact, progress made in China’s domestic environmental governance since the EIA Law was passed has been chiefly due to domestic reasons, namely, the severity of industrial pollution, the growth of political will and pressure from political leadership, and the emergence of China’s environmental movement (Economy, 2004, 62–75; Mertha, 2008, 6–12; Stern, 2013, 25–27).

While reforms, especially those across legal domains such as environmental protection and trade, do not unfold in a unilinear manner, in recent years, the EIA system has become much more stringent through streamlined administration, delegation of powers, and improved service (Yang, 2020, 890–891). The reform of the EIA occurred hand-in-hand with the establishment of the MEE, which replaced the Ministry of Environmental Protection, in 2018. The MEE differs from its predecessors in that it consolidates powers that were previously scattered throughout a number of different regulatory bodies (Yang, 2020, 890). The consolidation of authority under the MEE has been part of an increasing effort to refine the regulation of the environmental impact of investment (Karplus et al., 2021, 315–316), and, yet, as we argue below, there is still room for improvement.

(ii) Regulation of the Environmental Impact of ODI

China’s ODI regime is designed with the objectives of serving the BRI and safeguarding the safety of state-owned assets and their financial security. The environmental and social impact of offshore projects has not been a core concern of the Chinese government. As such, there is no legislation with enforcement effect to screen the environmental and social impact of overseas investment projects. Institutionally, the MEE, the main administrative agency in charge of environmental affairs in China, also does not have the mandate to regulate overseas projects.

There is no doubt that, rhetorically, there is a degree of BRI green-washing. The Vision and Actions, for example, state the need to “highlight the concept of ecological civilization in investment and trade, strengthen cooperation on ecological environment, biodiversity, and climate change, and build a green Silk Road.”⁴⁴ Accordingly, the MEE, either alone or jointly with other ministries, has issued a number of policies related to the environmental protection of overseas investments. However, common features of these policies are they are voluntary, not legally binding, and as such, lack enforceability (Boer, 2019; Coenen et al., 2020). Examples of these normative documents include the following: the CBRC’s Green Credit Guidelines of 2012,⁴⁵ the Environmental Protection Guidelines for Foreign Investment and Cooperation of 2013,⁴⁶ the Guiding Opinions on Promoting the Construction of the Green “BRI” of 2017,⁴⁷ the “BRI” Ecological and Environmental Protection Plan of 2017,⁴⁸ the Guidelines for Green Development of Foreign Investment Cooperation of 2021,⁴⁹ and the Ecological and Environmental Protection Guidelines for Overseas Investment Cooperation Construction Projects of 2022.⁵⁰

In summary, while these guidelines and codes of conduct signal an awareness for including environmental impact in ODI planning, they mostly fall short in affecting corporate governance. It should be noted that not only Chinese ministries but also private organizations including chambers of commerce have also issued such soft law sources. For example, the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters has developed industry guidelines related to environmental protection for ODI in the mining industry.⁵¹ The “Green Investment Principles [for the BRI]” which was jointly issued by the Green Finance Committee and the City of London Corporations’ Green Finance Initiative in 2018.⁵² Whereas some 37 financial institutions have signed on as of 2020, it is wholly voluntary. Strikingly, the Supreme People’s Court (SPC) has cited the Green Investment Principles in its own opinions, reflecting that the SPC has no national legislation to cite or enforce and instead must cite industry guidelines.⁵³

In contrast, among the legally binding regulations on overseas investment, there are few provisions for environmental and social impact assessment requirements. One exception is transboundary water resource development and use projects which are classified as sensitive by both the NDRC and MOFCOM, requiring approval rather than filing.⁵⁴ It is likely that the reason why transboundary water resource projects are listed as sensitive is the Myitsone Dam project in Myanmar. The Myitsone project, the world’s fifteenth largest hydropower plant, in which the China Power Investment Group began investing in 2006, was halted by the Myanmar government in 2011 due to opposition from the local population (Bian, 2018, 236–237). However, neither the NDRC nor MOFCOM requires environmental impact assessments for sensitive projects. Transboundary water resource projects are required to be registered for the purpose of protecting the security of Chinese overseas investment and risk mitigation, rather than on the basis of environmental impact considerations.

Lastly and related, in terms of both legislation and enforcing institutions, Chinese authorities are limited to governing environmental issues only within the PRC and not in the course of overseas projects. Both the Environmental Protection Law and the EIA Law apply to matters only within the PRC.⁵⁵ Likewise, whereas both the NDRC and MOFCOM have responsibilities for regulating overseas investment projects,⁵⁶ the MEE has no such responsibility and thus no authority to regulate environmental concerns in projects abroad. Thus, there are hard limits placed on both the reach of regulators and the legislative basis upon which regulators, namely, the MEE, could govern the environmental impact of ODI. The overall picture is that China is an outlier in a growing trend of states’ regulation of their overseas investments in terms of their impacts on host states’ environments and social governance, including human rights.⁵⁷

VI Implications

Comparing the reform trajectories of the FDI and ODI regimes has a number of implications for the study of Chinese domestic legal reform, its outward-facing legal obligations, and the role of regulators in coordinating the foregoing. Scholars have shown how the WTO accession process required Chinese regulators, policy makers, and academics to harmonize the WTO obligations with China’s national development plans (Gao, 2021; Shaffer, 2021). One result is a degree of coordination between ministries, departments, and administrative units that otherwise may not exist. The ODI regime presents in many ways the counterfactual: there was no similar multilateral framework through which the Chinese regulators learned to balance the needs of China’s national development with its obligations to host states. The result is discoordination and inefficiency that affects Chinese investors and host state alike.

This discoordination has specifically affected projects under the mantle of the BRI. As Min Ye (2020) has shown, the BRI was itself, in part, a response to state fragmentation. When Xi Jinping announced the BRI in 2013, it was a “whole-of-government and whole-of-society” call to implement projects that would support the BRI. Yet nearly a decade into the BRI, it is clear that inter-agency coordination has not been attained through internal efforts alone (Hale et al., 2020). To date, there has been no external framework through which BRI-related investment can undergo the type of institutional learning curve which Chinese regulators experienced through the WTO accession. Famously, proposals to conclude a multilateral investment treaty within the Organization for Economic Cooperation and Development (OECD) failed in 1998 due to civil society groups’ opposition (Joseph, 2013, 843).⁵⁸ China’s investment strategy remains reliant on piecemeal bilateral investment treaties, many of which are dated (Chaisse and Kirkwood, 2020). Inter- and intra-sectoral learning among enterprises remains nascent, compliance with local law remains a perennial problem, and, as a result, disputes arise that are addressed through international commercial arbitration, political intervention, or, increasingly, host state courts (Erie, 2021).

Perhaps ironically given the history of the failed OECD multilateral investment treaty, it is, in many cases, civil society groups in host states that are the source of Chinese enterprises’ learning about local law, including the environmental and social impact of investment through protest and litigation (see e.g., Reporters, 2017; Zhongguo lüfahui [China Greenification Society], 2019). Certainly, much of the responsibility for protecting the environment of host states falls on local regulators, and not Chinese ones, given that most Chinese investors incorporate companies under local law. Yet for the BRI-like projects to truly promote sustainable development, Chinese regulators, and, specifically, the MEE, can also provide greater guidance for outbound investment, but only if an enforceable ODI law granted them such authority. Indeed, the Fourteenth Five-Year Plan (2021–2025) states the government will “promote ODI legislation.”⁵⁹ Although it lacks details, it is hoped that the legislation would regulate highly polluted and carbon-intensive ODI projects and grant the MEE authority to screen the environmental, climate, and social impact of ODI projects in order to assure China’s climate pledge of carbon neutrality by 2060. While we applaud the inclusion of this ODI law in the future plan, along with communities in host states, we look forward to its practical implementation.

19 China’s International Investment Agreement Policy From Rule-Taker to Rule-Maker?

Axel Berger

I Introduction

There has been a long-standing debate whether China will assimilate into the global economic governance system built and shaped by Western countries, or whether it will challenge the system and impose its own rules on other countries. However, despite China’s phenomenal economic and political rise, it is still an open question as to whether and how China will reshape the current global economic governance system. In this respect, G. John Ikenberry pointedly asked already more than ten years ago: “Will China overthrow the existing order or become part of it?” (Ikenberry, 2008). This question refers to the debate between realists and liberal institutionalists about the effects of the power transition from Organization for Economic Co-operation and Development (OECD) member countries to emerging economies. From a realist perspective, one would expect that China will try to establish its own rules and organizations to better pursue its interests, thus challenging the current order set up by OECD countries. In contrast, Ikenberry argues from a liberal institutionalist perspective that it is more likely that China and other emerging economies will remain part of the current order, which he describes as “hard to overturn and easy to join” (Ikenberry, 2008). According to this perspective, China’s policies and approaches will converge with the established rules of the game.

Another useful conceptualization of China’s role in global economic governance in general and the international investment system in particular distinguished three possible roles it can pursue: rule-taker, rule-maker, or rule-breaker (Chin, 2014; Wang, 2017). While the two first categories would be in line with liberal institutionalist perspectives, the third one would be in line with the view that China challenges the existing status quo. Broadly speaking, we can observe all three positions being adopted in the ongoing transformation of the international investment regime (Bonnitcha et al., 2017). Some countries, in particular capital-exporting countries such as the US and the EU, are developing new model international investment agreements (IIAs) to better balance investor protection and host state regulatory space. Brazil, on the other hand, developed its own distinctive model of Cooperation and Facilitation Investment Agreements (CFIA) (Badin and Morosini, 2017). They clearly assume the role of a rule-maker. Other countries follow these new rules and templates and assume the role of rule-takers. And then there are countries such as Venezuela, South Africa, or India that exit important segments of the international investment regime through the termination of IIAs or the exit from the World Bank’s International Centre for Settlement of Investment Disputes (ICSID).

This contribution will investigate whether China assumes the role of a rule-taker, acts as a rule-maker, or even breaks with the system. This question has been investigated in other realms of global economic governance, such as world trade or international monetary relations (Chin, 2014; Gao, 2011), but investigations in the area of global investment governance are scarce. This lack of research is especially worrying in light of the upheavals of the global investment governance system that is facing a deep legitimacy crisis (Waibel, 2010). Given its significant FDI flows and economic as well as political clout, a better understanding of China’s ideas for and potential role in the reform of global investment governance is important.

The next section will divide China’s international investment policy into four distinct generations of IIA arguing that China has not made attempts to break up the existing system. Rather China acted as a rule-taker by broadly accepting the templates of its treaty partners while sticking to a number of defensive lines. The next two sections will investigate China’s current international investment policy-making. Section III analyses the outcomes of the China-EU Comprehensive Agreement on Investment (CAI). I will argue that China accepted the template proposed by its negotiation partner although not to the full extent. Section IV shows that China is one of the key drivers of the development of an alternative set of multilateral rules on investment facilitation under negotiation at the WTO. In this section, I will argue that China has been a key promoter lending diplomatic support to move the investment facilitation agenda forward but did not appear as the main rule-maker. Section V will conclude.

II Four Generations of Chinese Investment Treaties

China started to embrace IIAs as a tool of economic diplomacy and the promotion of foreign direct investment (FDI) right after its decision to open up in the late 1970s and early 1980s. This section will distinguish between four generations of Chinese IIAs.¹

Since the early 1980s, China had signed a total of 150 bilateral investment treaties (BITs), of which 13 have been terminated upon the entry into force of a newly negotiated treaty. Only the treaty signed in 1994 with Indonesia has been unilaterally terminated in 2015. Five BITs negotiated in the 1980s and 1990s have been amended by a protocol in order to update their provisions. With a total of 114 treaties that are legally in force, China has the second-largest BIT network in the world, behind Germany with 129 BITs.² China also includes BIT-like investment chapters in its preferential trade agreements (Berger, 2013). Since 2006, China has negotiated several preferential trade and investment agreements (PTIAs) with substantive investment provisions.

Figure 19.1 shows the development of Chinese IIAs signed since the early 1980s. During the 1980s, the growth of Chinese IIAs was rather slow with only a few treaties signed per year on average. Most of these treaties have been signed with European and Asian capital exporters. From the early 1990s onwards, China entered into an almost two-decade-long period of heightened treaty-making activity. In contrast to the 1980s, China signed most of its IIAs with developing countries during the 1990s. This trend to sign IIAs mainly with developing countries continued in the 2000s. During these years, China updated or amended a number of older treaties that it had signed with West European countries in the 1980s. Since the late 2000s, the number of newly negotiated treaties has declined substantially and China started to include more comprehensive investment rules in its PTIAs. Both trends are in line with the overall trends in the global investment regime.

Figure 19.1 Chinese IIAs signed per year and cumulatively, 1982–2017

To understand China’s motivations and preferences, it is important to focus both on the design of China’s IIAs and the characteristics of the partner countries. Based on these two characteristics it is possible to distinguish four phases of Chinese IIA policy-making (Berger, 2015).

In the first two phases during the 1980s and 1990s, China negotiated IIAs that included the standard provisions of the so-called “European” investment treaty template such as fair and equitable treatment (FET), most-favored-nation (MFN), and clauses on expropriation. The notable feature of these early Chinese treaties was the restriction of the scope of investor-state dispute settlement (ISDS) provisions to claims regarding the amount of compensation in the case of expropriation. With regard to substantive provisions, China permitted the transfer of funds only in accordance with national law and was reluctant to include national treatment clauses. China’s approach in the 1980s can be interpreted as cautious learning from the investment treaty templates proposed by developed countries. As a result, the design of the IIAs China signed in the 1980s was specific to the partner country. While most of the key provisions remained largely unchanged, it is apparent that China’s treaty practice became much more coherent in the 1990s, which is a sign that it has started to use its own treaty template during negotiations.

Despite these slight differences in design, Chinese IIA negotiations in the 1980s and 1990s can best be distinguished according to the respective partner countries. The first generation of Chinese investment treaties was negotiated in the 1980s mainly with capital-exporting countries from Europe and Asia. The focus of China’s second-generation IIAs during the 1990s shifted to developing countries. This marked difference indicates that different political economy motivations explain the negotiation of Chinese treaties in the 1980s and the 1990s, respectively.

From the late 1990s onwards, China changed its legal practice by including comprehensive ISDS provisions and, depending on the partner country, broader national treatment provisions (Berger, 2011). The first treaty of this third generation was the BIT signed in 1997 with South Africa, which included for the first time a comprehensive ISDS provision. This shift in China’s treaty-making practice received high attention among legal scholars (e.g., Cai, 2006; Gallagher and Shan, 2009; Schill, 2007; Shen, 2010). While comprehensive ISDS provisions were included in almost all subsequent Chinese IIAs,³ China’s approach towards granting national treatment to foreign investors was a more tailored one (Berger, 2011). Although China included national treatment provisions in almost all treaties signed in the third phase of its international investment policy, the exact wording of the national treatment clauses depended on the partner country: Chinese treaties signed with developing countries granted national treatment only subject to national law, limiting national treatment to a best-effort clause. In contrast, Chinese IIAs with developed countries featured national treatment clauses that were only restricted by the inclusion of an exemption for existing non-conforming measures and included a standstill commitment with regard to the adoption of new discriminatory measures. Interestingly, while the national law restriction in Chinese treaties signed with developing countries was a reciprocal provision, meaning that both contracting parties are allowed to discriminate against foreign investors in line with their respective national laws, the exemption of non-conforming measures in treaties with developed countries only applied to China. As a result, China was able to discriminate against foreign investors from the respective partner country in line with the legal framework in place at the entry into force of the treaty while Chinese investors enjoy full national treatment offered by the partner country (Berger, 2011).

In the fourth-generation IIAs that were signed in the late 2000s, China limited the scope of a number of treaty provisions in line with the global trend to rebalance investment treaties. This rebalancing was the result of a learning process about the effects of the increasing number of ISDS proceedings and at times the extensive interpretations of core substantive provisions like FET and indirect expropriation clauses by arbitration tribunals (Berger, 2013). Because of this international trend of rebalancing, China started to negotiate treaties with countries that base their IIAs on the more extensive and nuanced North American model.

It is, however, puzzling to observe that while China was introducing balanced provisions in a number of treaties signed in the previous years, it was at the same time continuing to negotiate investment treaties that completely lacked balanced provisions. These treaties that were in line with the traditional European model were signed not only with European countries like Switzerland and Malta but also with many developing countries. Given the fact that MFN clauses can be used by investors to import more extensive treatment standards from other treaties their host state has signed with third countries (Schill, 2009), the continuation of the signing of traditional IIAs contradicts the attempts to limit the scope of similar provisions in more balanced treaties signed with other countries. It has therefore become clear that China did not follow a coherent approach with regard to the rebalancing of investment treaties.

The notable aspect of the shift towards more balanced IIAs was that China followed a step-by-step approach towards the rebalancing of core IIA provisions and that this process is interlinked with the negotiation of investment rules in the context of preferential trade agreements in contrast to standalone investment treaties (Berger, 2013). The PTIA signed in 2008 with New Zealand was the first Chinese treaty that included a broader range of balanced provisions such as an FET clause subject to customary international law and general exception clauses. China’s adoption of these novel features, however, varied from treaty to treaty. Later treaties, such as the investment treaty with Canada, include a broad range of more balanced substantive and procedural provisions.

The analysis of this section makes clear that throughout the 1980s, 1990s, and 2000s, China negotiated on the basis of the European model. The evolution of the contents of China’s IIAs during this time – and especially the policy shift towards more legalized and liberalized investment rules at the turn of the millennium – indicates that China’s IIA policy has been converging towards the IIA policies adopted by most capital exporters, in particular from Western Europe. Since the late 2000s, China’s IIA policy has become (at least partially) “NAFTA-ized,” as China has adopted a number of provisions that were invented by North American Free Trade Agreement (NAFTA) countries as a response to a number of ISDS cases. Besides concluding IIAs with the NAFTA countries Mexico (in 2008) and Canada (in 2012), China has negotiated with a number of countries that have been influenced by the NAFTA approach. In other words, innovative IIA policy models have diffused to China and to a large extent – although not completely, as argued above – substituted the European model as China’s main treaty template. This assessment is supported by the most recent decision of China to accept the model IIA text of the US and the EU as the basis for investment treaty negotiations (see next chapter).

Thus, despite the large number of IIAs and the growing role as an FDI host and source country, China has not used its new important role as a global economic powerhouse and major source and destination of FDI flows to redefine the rules of the game in the international investment regime. In fact, China has been swimming with the tide of international investment rule-making, aligning its policies with the approaches of OECD countries.

III Towards a Fifth Generation? The China-EU Comprehensive Agreement on Investment

A fifth generation of Chinese IIAs appeared on the horizon when Beijing entered into investment treaty negotiations with the US in 2008 and with Europe in 2013. It seemed that China was willing to give up on the last line of defense in comparison to US and EU-style IIAs and to commit to investment liberalization. In July 2013, China agreed to negotiate with the US on the basis of the US model treaty which includes the general commitment to open up its markets and schedule exceptions according to a negative list approach, that is only those sectors or measures are exempted that are explicitly recorded. As a result, China changed its regulatory system for foreign investments from a catalog approach, which divides sectors into encouraged, permitted, restricted, and prohibited categories, to a negative list approach that was first tested in a limited number of special free trade zones. In January 2020 a new Foreign Investment Law, which was in the making since 2015, entered into force and applies the negative list approach to the Chinese economy as a whole. Despite these changes to China’s regulatory system for inward FDI, the China-US investment treaty negotiations have petered out during the Trump administration. Instead, the Trump administration focused on the Phase One Trade Deal with China that covered investment to a limited extent only, for example by liberalizing market access for US financial services or by regulating forced technology transfers.

The commitment to adopt the US model as a template for a China-US investment agreement is also of high relevance for the negotiations between China and the EU. The CAI should not only update the existing 25 investment protection agreements between individual EU member states and China but also extend their coverage to the market access of European investors in China. The decision to negotiate a so-called “Comprehensive Agreement on Investment” between China and the EU dates back to the 15th China-EU Summit in February 2012. The 16th China-EU Summit in November 2013 agreed on the official launch of the negotiations that started with a first round of talks in January 2014. After a staggering 35 rounds of negotiations, China and the EU agreed in principle on the CAI on December 30, 2020. The fate of the CAI, however, is uncertain in light of the recent worsening of diplomatic relations between China and the EU. As a result of the EU’s decision to impose sanctions on four Chinese officials over human rights abuses against the Muslim Uyghur minority in the Xinjiang region, China imposed sanctions on several European politicians and individuals. In turn, the European Parliament decided to freeze the ratification process of the CAI. These recent developments make it unlikely that the CAI will enter into force in the near future.

A key milestone in the negotiations was the agreement between China and the EU in January 2016 that the CAI should be ambitious and comprehensive, meaning that the envisaged treaty should go beyond the scope of the existing BITs between China and the member states.⁴ This important decision shows that the EU aimed at an agreement with China that should at least be on par with the BIT under negotiation between China and the US that intended to cover both pre-establishment and post-establishment investment protection. In addition to post-establishment protection provisions that should be updated in order to create a better balance between investor protection and host states’ right to regulate, the CAI would also address issues of market access and the right of establishment. Furthermore, the CAI should improve the regulatory environment such as transparency, licensing, and authorization procedures. In addition, the agreement should include environmental and labor provisions.⁵ Last but not the least, the ISDS provisions of the old 25 BITs signed between China and EU member states, from the perspective of the EU, should be replaced by the EU’s new investment court system. In sum, the negotiating agenda between China and the EU was highly complex and comprehensive and in a number of key issues, such as market access, sustainability issues, and dispute settlement, China’s interests diverge substantially from those of the EU (Li et al., 2019).

From an EU perspective, the main objective of a China-EU CAI was to improve and guarantee access of European investors to the Chinese market thus achieving reciprocity in light of the market access European countries already grant to Chinese investors. Technically speaking, the CAI should include national and most-favored-nation treatment provisions that apply to the pre-establishment and post-establishment phases. The actual liberalization should take place on the basis of a negative list approach. Apart from these modalities, there is the important question of how extensive the negative list should be. While China implemented a negative list approach domestically, it appears to be in favor of a cautious and circumscribed approach in contrast to the EU that favors an ambitious opening up of the Chinese market for foreign investors (Bickenbach and Liu, 2015). The CAI should, in addition, include restrictions on the use of performance requirements and include transparency obligations with regard to the operation of SOEs.

The difficult ratification process of the CAI notwithstanding, the agreement text provides insight into the current negotiation strategies and substantive preferences of China. The CAI is a peculiar investment agreement, one that mainly seems to address those issues that are of importance to the EU. In view of the fact that Europe is already open to Chinese investors – additional market opening is thus expected from China – EU preferences are mostly centered around issues of market access, the regulatory environment, and sustainable development. These are the issues that are at the core of the CAI text that includes three main chapters.⁶ The first substantive section focuses on investment liberalization where both parties commit to national and most-favored-nation treatment in the pre-establishment phase subject to reservations on non-conforming measures. China commits to opening up its markets in some sectors, including electric cars, private hospitals in Tier-1 cities, cloud services, and computer reservation systems.⁷ Despite this rather limited additional market access, it seems that most market access commitments of China in the CAI merely lock in those reforms that China has already undertaken unilaterally (Poulsen, 2021). Arguably, preventing the revocation of economic reforms in China is an important achievement in and by itself. Securing market access and locking-in reforms may be important outcomes, but they are unlikely to substantially increase two-way investment flows.

The second substantive section deals with the regulatory environment for foreign investments. This section of the CAI includes provisions that prohibit forced technology transfers and joint venture requirements. These provisions of the CAI appear more comprehensive than what China agreed to in its WTO accession protocol or in the Phase One Trade Deal with the US.⁸ In addition to technology transfer requirements imposed by the state, China and the EU also commit not to “directly or indirectly require, force, pressure or otherwise interfere with the transfer or licensing of technology between natural persons and enterprises”. Furthermore, the CAI includes a number of level-playing-field provisions that may improve the transparency of subsidies, enhance procedural transparency, predictability, and fairness of regulatory and administrative procedures, and regulate the operations of state-owned enterprises.

The third main section of the CAI includes provisions on sustainable development. While sustainable development sections are a common feature of EU trade agreements, the CAI is China’s first agreement with such a comprehensive section. As the CAI offers the EU much less leverage compared to a fully fledged free trade agreement (FTA), the inclusion of such a comprehensive section on sustainable development is a success. But the obligations under this section are mainly based on the parties’ existing commitments under other international environmental and labor treaties. Moreover, the wording of several key provisions characterizes such obligations as “best-effort” in nature (Berger and Chi, 2021).

The outcomes of the CAI do not address all the initial negotiation objectives of the EU. The CAI does not include sections on investment protection and investment dispute settlement. The EU’s insistence to replace ISDS with an Investment Court System, as well as the ongoing multilateral discussions on reform of ISDS, could explain this omission. While the parties will continue negotiating the sections on investment protection and ISDS and “endeavour” to conclude them within two years after the signature of the CAI, the 25 BITs with outdated ISDS rules between EU members and China remain in force and could possibly lead to unwanted ISDS claims for the time being. The CAI is thus stuck halfway in the development of China-EU bilateral investment relations. While it addresses important issues of market access, regulatory cooperation, and sustainable development, it does not replace the old BITs, nor contribute to the overall reform of the international investment regime. Both parties agreed to use the next two years to remedy this omission (Berger and Chi, 2021).

The CAI negotiation process reveals that China is willing to negotiate on the basis of treaty templates put forward by its partner countries. The key sections on market access, regulatory frameworks, and sustainable development are clearly revealing the preferences of the EU rather than China. In the case of the CAI, the section on market access offers the best insight into China’s negotiation strategy. China agreed to negotiate on the basis of the negative list approach favored by the US and Europe and initiated a domestic reform program that introduced this new regulatory approach first in a handful of pilot free trade zones before scaling it up to the entire economy and enshrining the principle in a new foreign investment law. The question, however, remains how extensive China’s commitment to opening up its markets is. The outcomes of the CAI suggest that China is mainly agreeing to lock in existing unilateral reforms and only to a limited extent to additional market access. While China can still be described as a rule-taker, adopting the templates of its treaty partners, this assessment needs to be marked with an Asterix as China accepts only those treaty commitments that are clearly in line with its domestic preferences.

IV Thinking Outside the Box: From Investment Protection to Facilitation

Traditional models of international investment governance, in particular rules on investment protection, liberalization, and ISDS enshrined in IIAs, are increasingly criticized as one-sided, illegitimate, and ineffective. One important alternative avenue countries, and in particular developing countries, have pursued in recent years is the negotiation of investment facilitation agreements. Investment facilitation can be understood as a set of practical measures concerned with improving the transparency and predictability of investment frameworks, streamlining procedures related to foreign investors, and enhancing coordination and cooperation between stakeholders, such as the host- and home-country governments, foreign investors, domestic corporations, and societal actors. The main forum for negotiations on investment facilitation is the WTO where over 100 Members are negotiating an Investment Facilitation for Development (IFD) Agreement.⁹ Furthermore, investment facilitation is becoming an integral part of regional as well as bilateral agreements or non-binding protocols (Schacherer, 2021).

China played an influential role in advancing the international agenda on investment facilitation. The concept was proposed by a group of experts in 2015 (Sauvant and Hamdani, 2015) and practiced by Brazil since 2015 in the so-called Cooperation and Facilitation Investment Agreements (CFIA) (Badin and Morosini, 2017). China played a critical role in placing the idea of investment facilitation at the center of the reform debate on international investment governance during the Chinese G20 presidency in 2016 (Sauvant, 2019). Discussions on investment facilitation were initiated during the Chinese G20 presidency and trade ministers welcomed “efforts to promote and facilitate international investment to boost economic growth and sustainable development”.¹⁰ Furthermore, the G20 encouraged international organizations such as “UNCTAD, the World Bank, the OECD and the WTO to advance this work within their respective mandates and work programmes, which could be useful for future consideration by the G20”.¹¹ Discussions within the G20 were continued during the German G20 presidency within the Trade and Investment Working Group. The German chair put forward a non-binding investment facilitation package which reaffirmed the Guiding Principles for Global Investment Policymaking adopted at the G20 Hangzhou Summit in 2016 and which stated that investment policy frameworks should be transparent, efficient, predictable, and consistent (Berger and Evenett, 2018). China was one of the G20 Members that promoted the package to lay the foundation for the initiation of talks on investment facilitation under the auspices of the WTO. While the investment facilitation packages were blocked by the US, South Africa, and India, a group of developing countries, led by China and Brazil nevertheless succeeded in launching so-called structured discussions on investment facilitation for development at the WTO 11th Ministerial conference in December 2017.

China is a key promoter of investment facilitation negotiations in the WTO. China submitted a proposal that suggests three elements of a framework for investment facilitation including measures to increase transparency, and enhance the efficiency of administrative procedures and options for responding to developing and least-developed members’ needs.¹² At the same time, China joined a group of emerging and developing country members, the so-called “Friends of Investment Facilitation for Development” (FIFD), to propose an informal WTO dialogue on investment facilitation for development.¹³ As the coordinator, China is the leading member of the FIFD group. At the 11th Ministerial Conference of the WTO in Buenos Aires, Argentina, China was among a group of 70 WTO members that signed a Joint Ministerial Statement calling for the start of Structured Discussions with the aim of developing a multilateral framework on investment facilitation. A second Ministerial Statement on investment facilitation was submitted by 98 WTO members during a trade ministers’ conference hosted by China in Shanghai.¹⁴

China participated actively in the structured discussions and negotiations on investment facilitation in the WTO. It submitted another proposal on the entry and temporary stay of business persons for investment purposes. Its role, however, should be characterized more as a facilitator of the negotiation process rather than as a rule-maker similar to the role Brazil played which not only invented the model for bilateral CFIAs but also submitted the first comprehensive agreement text in the WTO negotiations¹⁵ and influenced its regional partners’ position on investment facilitation (Perez-Aznar and Choer Moraes, 2017). China’s role was nevertheless important to help the concept of investment facilitation, as an alternative to traditional approaches of investment protection and ISDS, achieve a breakthrough at the multilateral level given its role as a G20 chair, as a host of important trade ministers’ meetings or the coordinator of the FIFD group.

V Conclusion

This article assesses China’s role in the global investment regime asking whether it can be characterized as a rule-taker, a rule-maker, or rather as a rule-breaker. China has signed a total of 150 BITs since the early 1980s and is an active participant in multilateral fora such as the negotiations towards an IFD Agreement in the WTO. Despite this active involvement in the global investment regime and its significant economic and political clout, China seems to continue to pursue the role of a rule-taker. This passive role is visible in the contents of Chinese IIAs negotiated over four decades and does not seem to be contingent on the partner countries. The most recent and significant agreement negotiated by China, the CAI signed in principle with the EU, seems to be following a template that largely reflects the preferences of its partner. China, however, does not adopt the templates of its treaty partners unchecked. On the contrary, China seems to have a number of defensive positions, for example, comprehensive liberalization commitments, that characterize its treaty-making practice.

In addition to the negotiation of IIAs, China is also an active negotiation party in multilateral fora such as the WTO negotiations on investment facilitation. China did submit a limited number of proposals, which, however, are less comprehensive than those of other negotiating parties such as Brazil or the EU. Despite these proposals, China’s role in the IFD Agreement negotiations should be characterized not as a thought leader but as a key promoter of dialogue and negotiations. China used its chairmanship of the G20 in 2016 and hosted a trade ministers meeting in 2019 to promote discussions on investment facilitation. China, furthermore, is part of an informal group of WTO Members, the so-called Friends of Investment Facilitation for Development that assumes an important role to move the investment facilitation agenda in the WTO forward.

What are the implications of this assessment of China as being (still) a rule-taker? First, given its active participation in global investment policy-making, it is not acting as a rule-breaker and pursues its interest within the existing global investment governance system. To paraphrase the words of Ikenberry quoted in the introduction, China gradually becomes a part of the existing system and is not likely to attempt to overthrow it. Second, if an international agenda aligns with its interests, such as in the area of investment facilitation, China can be a very powerful promoter of international dialogue and negotiations. Thirdly, although China is willing to negotiate on its partner countries’ treaty templates, it does not indiscriminately accept all provisions and commitments put on the negotiation table by its partners. On the contrary, the changes in the design of Chinese IIAs seem to be conditioned by policy developments within China, as underlined by the CAI. While China seems to be comfortable with lock-in unilateral reforms, it does not seem to accept treaty provisions that would imply additional economic policy reforms at home. At least in this sense, China’s investment policy-making is not that different from that of other economic powers such as the US and the EU.

20 China and Investor-State Dispute Settlement Experiences and Prospects

Manjiao Chi

I Introduction

China’s accession to the World Trade Organization (WTO) in 2001 is a milestone in its history.¹ Thanks to its WTO membership, China has grown into the world’s second-largest economy,² a major global trading power,³ and a leading investment-importing and investment-exporting state.⁴ Chinese enterprises have also grown into major international business players.⁵

China and its investors also face a growing risk of investment disputes. China has concluded a large number of international investment agreements (IIAs), including around 140 bilateral investment treaties (BITs) and around 24 bilateral and regional free trade agreements (FTAs) with an investment chapter or section.⁶ The majority of these IIAs allow investor-state dispute settlement (ISDS), investor-state arbitration (ISA) in particular, though their ISDS clauses may be different.⁷ Also, with the implementation of the Belt and Road Initiative (BRI), Chinese overseas investment has experienced a sharp expansion in recent years,⁸ which exposes Chinese investors to more disputes with the host states. It would not be surprising that more ISDS cases will be initiated based on Chinese IIAs in the future.

In the meantime, since 2016, an unprecedented ISDS reform has been initiated under the auspices of the United Nations Commission on International Trade Law (UNCITRAL).⁹ China is a major stakeholder in international investment governance and submitted a position paper on ISDS reform to UNCITRAL on 19 July 2019.¹⁰ China’s position on the ongoing ISDS reform could have a profound impact on both investors and the future ISDS landscape.

Against such a background, this chapter explores two interrelated issues: what could be learned from China’s ISDS experience (Part II), and what China expects from the ongoing ISDS reform (Part III). Part IV is a brief conclusion.

II Looking into the Past: China’s ISDS Experiences and Systematic Issues

According to the United Nations Conference for Trade and Development (UNCTAD),¹¹ China and its investors have encountered over a dozen ISDS cases relying on Chinese BITs in the past decade. All these cases arose in the new Millennium. As some legal issues relating to China’s ISDS experiences have been broadly discussed, the focus will be put on a few systematic and unique issues.

(i) A Skeletal Review of ISDS Cases Relying on Chinese IIAs

During the past decade, China has been involved in the following six ISDS cases as the respondent state:

1. a. AsiaPhos Limited v. People’s Republic of China (2020)(ad hoc arbitration under UNCITRAL Arbitration Rules), relying on the China-Singapore BIT (1985) (AsiaPhos v. China)¹²;

2. b. Goh Chin Soon v. People’s Republic of China (2020)(ICSID Case No. ARB/20/34), relying on the China-Singapore BIT (1985)(Goh v. China)¹³;

3. c. Macro Trading Co., Ltd. v. People’s Republic of China (2020)(ICSID Case No. ARB/20/22), relying on the China-Japan BIT (1988)(Macro v. China)¹⁴;

4. d. Hela Schwarz GmbH v. People’s Republic of China (2017)(ICSID Case No. ARB/17/19), relying on the China-Germany BIT (2003)(Hela Schwarz v. China)¹⁵;

5. e. Ansung Housing Co., Ltd. v. People’s Republic of China (2014)(ICSID Case No. ARB/14/25), relying on the China-Korea BIT (2007)(Ansung v. China)¹⁶;

6. f. Ekran Berhad v. People’s Republic of China (2011)(ICSID Case No. ARB/11/15), relying on the China-Malaysia BIT (1988)(Ekran v. China).¹⁷

The recent decade has also witnessed around a dozen ISDS cases initiated by Chinese investors against foreign states, including:

1. a. Qiong Ye and Jianping Yang v. Kingdom of Cambodia (2021)(ICSID Case No. ARB/21/42), relying on the ASEAN-China Investment Agreement (2009)(Ye and Yang v. Cambodia)¹⁸;

2. b. Fengzhen Min v. Republic of Korea (2020)(ICSID Case No. ARB/20/26), relying on the China-Korea BIT (2007)(Min v. Korea)¹⁹;

3. c. Wang Jing, Li Fengju, Ren Jinglin and others v. Republic of Ukraine (2020) (procedural details unknown), relying on the China-Ukraine BIT (1992)(Wang, Ren and others v. Ukraine)²⁰;

4. d. Jetion Solar Co. Ltd and Wuxi T-Hertz Co. Ltd. v. Hellenic Republic (2019)(ad hoc arbitration under UNCITRAL Arbitration Rules), relying on the China-Greece BIT (1992)(Jetion Solar et al. v. China)²¹;

5. e. Sanum Investments Limited v. Lao People’s Democratic Republic (II) (2017)(ICSID Case No. ADHOC/17/1), relying on the China-Laos BIT (1993) (Sanum v. Laos II)²²;

6. f. Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen (2014) (ICSID Case No. ARB/14/30), relying on the China-Yemen BIT (1998)(BUCC v. Yemen)²³;

7. g. Sanum Investments Limited v. Lao People’s Democratic Republic (2013)(PCA Case No. 2013-13), relying on the China-Laos BIT (1993)(Sanum v. Laos)²⁴;

8. h. Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium (2012)(ICSID Case No. ARB/12/29), relying on the China-BLEU BIT (1984) and the China-BLEU BIT (2007)(Ping An v. China)²⁵;

9. i. Beijing Shougang Mining Investment Company Ltd., China Heilongjiang International Economic & Technical Cooperative Corp., and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v. Mongolia (2010)(PCA Case No. 2010-20), relying on the China-Mongolia BIT (1991)(Beijing Shougang et al. v. Mongolia)²⁶;

10. j. Tza Yap Shum v. Republic of Peru (2007)(ICSID Case No. ARB/07/6), relying on the China-Peru BIT (1994)(Tza v. Peru).²⁷

The above list should not be deemed exhaustive. It is possible that a few ISDS cases are not included, due to lack of sufficient transparency of ISDS cases.

Without going into the details of these cases, a few general observations could be drawn. First, though the current number of cases remains small, there is a clear trend that China’s ISDS cases are on the rise. In 2020 alone, five ISDS cases were registered. As mentioned earlier, it is likely that more ISDS cases will be initiated. Second, somehow surprisingly, the majority of China’s ISDS cases are initiated by Chinese investors against foreign states, including a few developed states, such as Belgium. There is no clear reason to explain this phenomenon, but it has been observed that Chinese investors, SOEs in particular, have become growingly affirmative of and accustomed to resorting to international adjudication to “defend” their overseas interests.²⁸ Third, most of these cases have been submitted to the ICSID. This is not surprising, since the majority of Chinese IIAs allow investors to select ICSID arbitration, in addition to or in lieu of ad hoc arbitration under UNCITRAL Arbitration Rules.²⁹

An interesting observation is that China seems not frustrated by the ISDS cases against it. For instance, China’s Ministry of Commerce (MOFCOM), the principal government agency responsible for handling China’s ISDS and WTO cases for China, has never publicly commented on the ISDS cases; whereas MOFCOM spokesperson has frequently commented on China’s WTO cases.³⁰

China’s silence in commenting ISDS cases could be attributed to several factors. First, China has not been “defeated” in any major ISDS cases in the legal sense up to date. Among the six cases against China, three are pending (AsiaPhos v. China, Goh v. China, and Hela Schwarz v. China), two have been discontinued by a settlement agreement (Ekran v. China) or by the choice of the investor (Macro v. China), only one case has been decided (Ansung v. China) in the jurisdictional stage, in which the arbitral tribunal was in favor of China. Thus, from a practical perspective, these ISDS cases have not inflicted “real pain” on China in the sense of monetary compensation and legal defeat. There is no clear reason to explain China’s “success” in handling ISDS cases. A possible explanation is the helpfulness of negotiation between investors and the state. Different from many states, China is a centralized state. There is no clear constitutional division of administrative authority between China’s central and local governments. This essentially implies that the central government may deal with and even decide on investment issues that involve local governments. Thus, if necessary, China’s central government may negotiate with foreign investors to solve the investment disputes. Such negotiation could be quite effective and efficient given the authority and resources of the central government.

Second, all ISDS cases against China involve disputes between foreign investors and China’s local governments, most of these disputes relate to land-use rights issues. As a matter of fact, land disputes between private parties, both Chinese and foreign, and local governments have once been rampant in China in the past few decades, as a result of China’s aggressive and underregulated urbanization measures.³¹ Subsequent to China’s revision of the relevant laws and regulations in around 2010, land disputes have decreased dramatically, and are less likely to be a major concern of investors.³²

Third, China holds different perceptions of ISDS cases and WTO cases. To China, ISDS cases in general appear less sensitive than WTO cases. In WTO cases, what is challenged are China’s laws, regulations, or measures or even measures of the Chinese Communist Party. Some cases involve sensitive issues, such as media censorship,³³ and the export of strategic natural resources.³⁴ To China, these cases are not just trading disputes, but concern “national interests”, which could have a “systematic impact” on China’s economic and social governance.³⁵ Somehow, in contrast, China’s ISDS cases were mainly caused by administrative conducts of local governments. Even if China loses cases, it will only need to pay monetary compensation to foreign investors.³⁶ Thus, ISDS cases are not deemed as a threat to China’s national security and are less likely to have a systematic impact on China. This partly explains why, unlike some states that have been “hit” by ISDS cases, such as Australia, Germany, India, and Latin American states, China has not publicly commented on its ISDS cases.

On the other hand, China seems to hold a laissez-faire attitude towards ISDS cases initiated by its investors against foreign states. In practice, Chinese investors, similar to foreign investors, have discretion in initiating and handling investment disputes with the host states. In such cases, however, it is possible that the Chinese government be approached by investors or the foreign state for assistance. For instance, in Ping An v. Belgium, it is reported that Ping An has sought help from the Chinese Government to seek compensation from Belgium.³⁷ In Sanum v. Laos, as recorded in the judgment of the Court of Appeal of Singapore, the Laotian Ministry of Foreign Affairs sent a note to the Chinese embassy seeking China’s views on a major legal issue, and the Chinese embassy replied to the note.³⁸ While these cases do not necessarily prove that China has formed a fixed pattern of practice, they give rise to an interesting question: whether and how China could be involved in investment disputes between Chinese investors and foreign states. It is too early to answer this question with meaningful accuracy, but it surely deserves further observation.

(ii) Systematic Issues Raised in ISDS Cases Relying on Chinese IIAs

Many of the decided ISDS cases relying on Chinese BITs have been broadly discussed. This chapter does not present a comprehensive study of all these cases, but only focuses on a few systematic issues.

The first systematic issue is the applicability of Chinese BITs in Hong Kong and Macao. While this issue has been discussed, almost all existing literatures take the perspective of treaty law, especially treaty interpretation and state succession in respective treaties.³⁹ They fail to explain why China has been reluctant in clarifying its position on this issue over the years, especially through BIT-making. This issue will be discussed infra.

Hong Kong and Macao were handed over to China by the United Kingdom (U.K.) and Portugal in 1997 and 1999 respectively. Following the “One Country Two Systems” (OCTS) policy, China established special administrative regions (SARs) in Hong Kong and Macao after their handover. An important legal issue relating to the handover is the application of treaties in the SARs. Take Hong Kong for example, before the handover, a number of treaties to which the U.K. is a party were also applied to Hong Kong through extension. While such an application should be terminated once Hong Kong becomes a Chinese territory, the termination does not lead to the automatic application of Chinese treaties to Hong Kong. To deal with this issue, the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (HKBL) provides that the applicability of Chinese treaties to Hong Kong after the handover should be “decided by the Central People’s Government, in accordance with the circumstances and needs of the Region, and after seeking the views of the government of the Region”.⁴⁰

Notwithstanding the arrangement in the HKBL, China’s Central Government has never decided to apply its IIAs to Hong Kong. Besides, almost all Chinese IIAs are silent on their applicability to the SARs, with the China-Russia BIT (2006) as the only exception, which expressly excludes the SARs from its scope of application.⁴¹ As can be seen, the applicability issue is not only systematic as it pertains to almost all Chinese IIAs, but it is also unique and sensitive as it is linked with the OCTS policy.

The applicability issue has been discussed in two ISDS cases. In Tza v. Peru, the issue at dispute is, among others, whether the investors, Mr. Tza, a Hong Kong resident, could invoke the China-Peru BIT for protection. The tribunal essentially held that though Mr. Tza is a Hong Kong passport holder, he should be protected by the BIT as far as he has proven to be a Chinese national since the BIT protects “a national of a contracting state” as an investor.⁴² In Sanum v. Laos, the issue at dispute is whether the investor, Sanum, a company registered in Macao, could rely on the China-Laos BIT for protection. The arbitral tribunal recognized that China has not extended the BIT to Macao.⁴³ Then, relying mainly on the international law principle of “moving treaty frontier” in the VCLT,⁴⁴ the arbitral tribunal ruled that since Macao has been incorporated as a territory of China after the handover, it falls in the application scope of Chinese BITs, unless the BITs exclude Macao from its application scope, which is not the case of the China-Laos BIT.⁴⁵ As can be seen, the arbitral tribunals in both cases recognized that Chinese BITs can be applied to the SARs, if the SARs are not excluded from their application scope.

Despite these arbitral awards, China has not publicly clarified the applicability issue until its embassy in Laos replied to the Laotian government following the arbitration of Sanum v. Laos. In its note, it is stated that China’s concurrence with the Laotian view that the China-Laos BIT did not apply to Macao “unless both China and Laos make separate arrangements in the future”.⁴⁶ This position has been reiterated by China’s Ministry of Foreign Affairs. Referring to the HKBL, the Ministry confirmed that Hong Kong shall enjoy a high level of autonomy, including autonomy in concluding economic treaties with foreign states in its own name.⁴⁷ Thus, Chinese BITs “in principle do not apply to the SARs, unless otherwise decided by the Central Government after seeking the views of the SAR governments and consulting with the other party of the BIT”.⁴⁸

Though the award in Sanum v. Laos does not have binding force as precedence, it is likely to be relied on or referred to by SAR investors and arbitral tribunals in future ISDS cases. Yet, China’s diplomatic note seems to show a conflicting view on the applicability issue. China’s view could not only profoundly influence the adjudication of the applicability issue in future ISDS cases, it also implies that China will have less flexibility in dealing with the issue. While it remains unclear why China chose to clarify the applicability issue during the set-aside proceedings of Sanum v. Laos, China’s clarification does give rise to a number of interesting questions: why has China kept silent on the applicability issue for so long? Is China’s silence intentional? What could China expect to get from its silence?

In retrospect, several facts could show that China’s silence is intentional. Shortly before the handover of Hong Kong in 1997, some lawyers discussed whether Chinese treaties could be applied to Hong Kong after the handover, as the relationship between Hong Kong and China will have been changed from an “international” one to an “OCTS” one.⁴⁹ Such discussions imply that China and its lawyers have considered the applicability issue even before the handover. In addition, the China-Russian BIT (2006) explicitly stipulates that it shall not be applicable in the SARs unless otherwise agreed by the Parties.⁵⁰ Besides, the issue has been straightforwardly raised in 2008 by the initiation of Tza v. Peru. The above facts imply that China should have been aware of the applicability issue long before the initiation of Sanum v. Laos. Had China wished to clarify the issue, it could have had ample opportunities to do so. Yet, all of China’s recent IIAs remain silent on the applicability issue, such as the China-Canada BIT (2012) and the ASEAN-China Investment Agreement (2009). As mentioned, it was not until 2018 that China clarified its position on this issue in Sanum v. Laos upon the request of the Laotian government. And it remains unclear why China chose to clarify this issue after so many years of silence.

Practically speaking, China’s silence is not without merits. It should be understood from a broader policy perspective, and could have an impact of “killing two birds with one stone”. First, China’s silence could be seen as “constructive vagueness” in IIA-making, which could be helpful to SAR investors, as this allows them to rely on Chinese IIAs for protection. Such helpfulness could be especially significant considering that China has concluded a large number of IIAs, while the SARs only host a limited number of IIAs. For instance, Hong Kong has concluded 21 BITs and seven FTAs.⁵¹ Second, for historical reasons, the SARs, Hong Kong in particular, have played a key role in China’s economic development and opening up. Many Chinese mainland investors use Hong Kong as a gateway for business convenience and overseas investment; foreign companies also use Hong Kong as a launchpad to expand in Mainland China.⁵² In a sense, protecting SAR investment and investors have special significance to China.

A more complicated scenario of the applicability issue is where both the SAR and China have an IIA with a state. In such a case, are SAR investors allowed to select from a Chinese BIT and an SAR BIT? Up to the present, this treaty shopping issue has not emerged in reality. Thus, it remains unclear how arbitral tribunals, SAR investors, SAR Government, and China’s Central Government will address the issue. Here, it is of interest to note that treaty shopping is not prohibited under international investment law, as IIAs have a purpose of encouraging and protecting foreign investment.⁵³ But treaty shopping should not be encouraged since it could go against the principle of reciprocity, create an undue regulatory chill on countries and even give rise to legitimacy concerns over IIAs.⁵⁴ As a matter of fact, various types of IIA provisions have been introduced to help address the negative impacts of treaty shopping by investors, such as clauses of denial of benefits.⁵⁵ That said, however, if China clinches to its clarification made in Sanum v. Laos, it is unlikely to allow such treaty shopping practice.

To sum up, if China truly wishes to uphold its position on the applicability issue as clarified in Sanum v. Laos, it is advisable for China to consider revising the relevant IIA provisions when making or updating IIAs in the future. Preferably, an explicit language could be included to exclude IIAs to be applied to the SARs. Such exclusion could take the form of a refined definition of certain key terms, such as “territory” or “national”, or an insertion of a statement similar to that in the China-Russia BIT. Up to the present, China has not made such revisions in its IIAs. Therefore, the real issue seems how much weight arbitral tribunals would give to China’s clarification in Sanum v. Laos in future ISDS cases.

The second systematic issue relates to China’s state-owned enterprises (SOEs). While SOEs are not unique to China, China hosts a large number of SOEs at central and local levels.⁵⁶ In recent years, China’s SOEs have dramatically expanded their overseas investment as a result of BRI implementation. Because China’s SOEs are active players in global market, it is unsurprising that they initiate ISDS cases against foreign states. Typical such cases include BUCG v. Yeman and Beijing Shougang et al. v. Mongolia.

That SOEs could be involved in ISDS cases is not a novel issue.⁵⁷ In such cases, arbitral tribunals have routinely adopted the “Broches test” in deciding whether the SOEs could be qualified claimants. According to this test, an SOE should not be disqualified as a “national of another Contracting State” unless it is acting as an agent for the government or is discharging an essentially governmental function.⁵⁸ For instance, in BUCG v. Yemen, Yemen argued that BUCG does not qualify as a “national of another Contracting State”, since it as “a state-owned entity, is both an agent of the Chinese Government and discharges governmental functions even in its ostensible commercial undertakings”.⁵⁹ The arbitral tribunal, however, based on the facts of the case, decided that BUCG is a qualified claimant and that it has ratione personae over BUCG.⁶⁰

BUCG is but one of the many Chinese SOEs. In recent years, China seems to have strengthened its control over its SOEs. While the effectiveness and consequence of such control could only be evaluated on a case-by-case basis, China’s growing control over its SOEs could make it easier for foreign states to prove that the SOEs are an agent of the Chinese government or play a governmental function. This could be a challenge to China’s SOEs in proving themselves as qualified a claimant in future ISDS cases.

The third systematic issue relates to inconsistent treaty interpretation. This issue is not unique to China, as an inconsistent interpretation of IIAs is deemed a major reason for inconsistent arbitral awards and the legitimacy crisis of ISDS at a more fundamental level.⁶¹ Since many Chinese BITs, early ones in particular, contain similar or identical terms, diverse interpretations of these terms would not only lead to inconsistent arbitral awards but also result in uncertainty and unpredictability of China’s foreign investment protection standards in a broader sense.

In this respect, Beijing Shougang et al. v. Mongolia, Tza v. Peru and Sanum v. Laos are illustrative examples. All of these cases involve the interpretation of a key sentence in the ISDS clauses commonly seen in early Chinese BITs, namely “a dispute involving the amount of compensation for expropriation”. According to some Chinese scholars, this is a narrowly defined jurisdictional requirement, which reflects China’s cautious attitudes towards ISDS and grave concerns that ISDS could harm China’s “judicial sovereignty”.⁶² With respect to this sentence, the arbitral tribunals in these cases made conflicting decisions. In Tza v. Peru, while resorting to the rules of treaty interpretation in the VCLT, the arbitral tribunal held the following:

To give meaning to all the elements of the article, it must be interpreted that the words ‘involving the amount of compensation for expropriation include not only the mere determination of the amount but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions and requirements, as well as the determination of the amount of compensation due if any.⁶³

In contrast, the arbitral tribunal in Beijing Shougang et al. v. Mongolia held the opposite opinion, stating that:

Arbitration before an ad hoc arbitral tribunal would be available in cases where an expropriation has been formally proclaimed and what is disputed is the amount to be paid by the State to the investor for its expropriated investment. In other words, arbitration will be available where the dispute is indeed limited to the amount of compensation for a proclaimed expropriation, the occurrence of which is not contested.⁶⁴

The interpretation issue is unlikely to be a major challenge in ISDS cases relying on China’s recent IIAs since ISDS clauses in Chinese BITs concluded since the mid-1990s have been substantially broadened, so that “any dispute relating to an investment” may be submitted for ISA.⁶⁵ In retrospect, however, the interpretation of the ISDS clause in the China-Peru BIT was no less than a shock to China, especially because Tza v. Peru is the first case relying on a Chinese BIT. After the publication of the arbitral award, Chinese scholars have published a number of comments, and many argued that the arbitral tribunal’s interpretation is wrong and that the interpretative power of arbitral tribunals should be properly limited.⁶⁶ Today, while scholarly discussions on these cases have largely diminished, China remains “bothered” by the issue of inconsistent interpretation of its IIA provisions and deems “inconsistent decisions” as a major concern over the existing ISDS regime.⁶⁷

1 Looking into the Future: China’s Position on ISDS Reform

Since the late 1990s, ISDS has been subject to growing criticisms on a number of grounds, such as high cost and long duration, unintended restraint on state regulatory rights, and inconsistent arbitral awards.⁶⁸ Such a legitimacy crisis of ISDS has been amplified by some high-profile cases, notably Philip Morris Asia Limited v. The Commonwealth of Australia,⁶⁹ and Vattenfall AB and others v. Federal Republic of Germany,⁷⁰ and has provoked unprecedented public debate during the course of the negotiations of some major FTAs, such as the Transatlantic Trade and Investment Partnership between the U.S. and the EU (TTIP) and the Comprehensive Economic and Trade Agreement between Canada and the EU (CETA).⁷¹

To respond to the legitimacy crisis of ISDS, various measures have been taken. At the national level, some Latin American countries have denounced the Convention on Settlement of International Investment Disputes between States and the Nationals of Other States (ICSID Convention) and terminating their BITs,⁷² some have revised their existing BITs or IIA models with stress on domestic remedies for ISDS,⁷³ and some have proposed various ISDS alternatives, such as an investment court system.⁷⁴ At the international level, a global ISDS reform is in process, which features, among others, multilateral discussions and negotiations presided over by UNCITRAL Working Group III⁷⁵ and the fourth revision of ICSID Rules.⁷⁶

Especially, the UNCITRAL ISDS reform is mandated as a government-led process that aims at identifying the inadequacies of the existing ISDS regime and exploring ways to improve this regime.⁷⁷ The reform offers a precious opportunity to observe how states evaluate the existing ISDS regime and how their preferred regime should look like. China is a major stakeholder of international investment governance and an active participant in the ISDS reform, China’s position on ISDS reform thus deserves careful analysis.

2 China’s Major Concerns and Proposals on ISDS Reform

In China, MOFCOM is responsible for negotiating China’s IIAs and handling ISDS cases. It submitted a position paper on ISDS reform to UNCITRAL Working Group III on 19 July 2019, entitled “Recommendations of China Regarding Investor-State Dispute Settlement Reform” (Position Paper).⁷⁸ The Position Paper has three major parts, respectively explaining China’s concerns over the existing ISDS regime, its proposals for reforming this regime, and its vision for the future ISDS regime.

The Position Paper at the outset explains China’s major concerns over the current ISDS regime, which include the following:

1. a. arbitral awards lack an appropriate error-correcting mechanism;

2. b. arbitral awards lack stability and predictability;

3. c. arbitrators’ professionalism and independence are questioned;

4. d. third-party funding affects the balance between parties’ rights; and

5. e. time frames are overly long and cost overly high.⁷⁹

After explaining its major concerns, the Position Paper puts forward a number of proposals for ISDS reform, including,

1. a. to explore the possibility of establishment of a permanent appellate mechanism;

2. b. to maintain the right of the parties to appoint arbitrators;

3. c. to improve the rules relating to arbitrators;

4. d. to encourage the use of alternative dispute resolution measures;

5. e. to include pre-arbitration consultation procedures; and

6. f. to enhance transparency discipline for third-party funding.⁸⁰

The Position Paper also clarifies that China welcomes UNCITRAL ISDS reform, and impliedly stresses that the reform should be progressed on a multilateral basis.⁸¹

While the Position Paper is not an exhaustive elaboration of China’s view on ISDS reform, it is by far the only official document formally issued by MOFCOM on this important subject. Many of China’s concerns and reform proposals stated in the Position Paper are shared by other states and have been discussed widely. That said, China’s proposals do have some distinct features, which will be the focus of this Part.

3 China’s Preference for a WTO-Style Appeal Mechanism

A major proposal of China is to establish an ISDS appeal mechanism. Such an idea is not entirely new.⁸² Notably, it has been discussed during the third round of ICSID Rules revision between 2004 and 2006.⁸³ The major grounds for creating such an appeal mechanism include inconsistent treaty interpretation of IIA provisions and insufficiency of the existing award review mechanisms, particularly the annulment mechanisms under the ICSID Convention and the judicial review mechanism under the Convention on Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).⁸⁴

As discussed, China complains about the lack of predictability of arbitral awards in its Position Paper and shows a strong preference for an ISDS appellate mechanism. Though China does not elaborate on the proposed mechanism, it specifically points out that the mechanism should be “permanent” and “treaty-based”. It is noteworthy that China expressly refers to the WTO appellate body as a model for the proposed ISDS mechanism. A WTO-style ISDS appeal mechanism is not only different from the optional arbitral appeal mechanisms incepted in some commercial arbitration rules,⁸⁵ but also seems unique among existing ISDS reform proposals. It is of interest to discuss the rationale underlying China’s preference.

First, China’s preferred ISDS appeal mechanism is supposed to have a high degree of institutionality. The feature of “permanent” implies that the ad hoc ICSID annulment mechanism is not a desirable model for ISDS award review; while the feature of “treaty-based” implies that national courts (for award review under the New York Convention) or any other optional award review mechanism based on commercial arbitration rules would also be undesirable. Essentially, this proposal implies that existing award review mechanisms would not be considered by China for ISDS appeal.

Compared with existing award review mechanisms, the AB seems more “stable” and “predictable” for a number of reasons. The AB is a permanent adjudicative body composed of a fixed number of judges, the disputants are not allowed to “appoint” the judges, and the procedure is subject to a strict and clear statutory time limit,⁸⁶ while both ICSID annulment mechanism and judicial review mechanism lack such a level of procedural certainty. Besides, the AB also appears “powerful”, since it has the authority to review substantive issues, including errors of treaty interpretation,⁸⁷ while both the ICSID annulment mechanism and judicial review mechanism only allow procedural issues to be reviewed. As such, despite all the criticisms, the AB seems to be in a better position to ensure the consistency of its decisions and the efficiency of its adjudicative work.

Second, China’s preference for a WTO-style ISDS appeal mechanism is based on its nearly twenty-year experience of WTO litigation. Since its WTO accession in 2001, China has been involved in 63 WTO disputes as a complainant or respondent as of 30 September 2021.⁸⁸ All of these disputes involve China’s major trading partners, especially the U.S., EU, and Japan, and around half of the disputes have been submitted to the AB for appeal.⁸⁹ China has invested massively in WTO litigation capacity building to effectively participate in the multilateral trading system centering around the WTO regime.⁹⁰ By its tenth year of WTO membership, China has already emerged from a reluctant participant in WTO litigation to an active and formidable player that used the system to defend its interests.⁹¹ As China gets more experienced with WTO litigation, a WTO-style ISDS appeal mechanism seems to be a convenient option for China, as it could substantially save China’s ISDS capacity-building efforts.

Third, China’s such preference could also be understood as a potential support to its current foreign trade policy, especially in response to the unprecedented trade war with the U.S.⁹² Since the Trump administration, the U.S. has shifted its foreign trade policy towards protectionism and unilateralism.⁹³ Notably, the U.S. has repeatedly blocked the appointment of new AB members, resulting in the dysfunction of the AB, which is deemed as a major hurt to the multilateral trade system.⁹⁴ While the U.S. is the chief designer of this system, China has stood out to be a supporter of this system.⁹⁵ Against this backdrop, China’s preference for a WTO-style ISDS appeal mechanism not only conveys its view on ISDS reform but also impliedly enhances its self-portrayed image as a defender of trade multilateralism.

4 China’s Preference for an “ISA Plus” Model

In its Position Paper, China also proposes that, in addition to ISA, other alternatives should be explored for ISDS. Two alternatives are highlighted by China, that is mediation and compulsory pre-ISA negotiation between host states and foreign investors. China also states that “investors’ right of appointing arbitrators should not be denied”. China’s such statements send a clear signal, that is while China wants to have additional ISDS alternatives, it is not against ISA. To put it differently, China wants to keep ISA but hopes to provide certain flexibility by allowing other alternatives. In short, China has envisaged an “ISA plus” model for future ISDS. While this model is not entirely novel, it could have some unique implications on China and Chinese investors.

First, as mentioned earlier, despite that China has been sued in several ISDS cases by foreign investors, it has not encountered any major “defeat” up to the present. Unlike many other states, China seldom complains about the regulatory chill effects of ISA or the amount of compensation for ISDS cases. Given its successful ISDS experience, China does not need to hold a negative attitude towards ISA as a major ISDS alternative.

Second, China’s implied support for ISA as a major ISDS option seems to reflect its growing interest as a leading investment-exporting state in the world. As early as the 1990s, China adopted the “Going Abroad Strategy” and started to encourage its enterprises, SOEs in particular, to invest abroad.⁹⁶ Since its initiation in 2013, the BRI has quickly become a priority on China’s development and diplomatic agenda. While the BRI is not just an investment scheme, promoting trade and investment among BRI states is a major aspect of BRI implementation.⁹⁷ As Chinese overseas investment keeps expanding, disputes between Chinese investors and the host states are inevitable. Especially, as a large portion of Chinese investments is made in states that are environmentally vulnerable, politically unstable, economically underdeveloped, and culturally diversified,⁹⁸ effective and efficient ISDS seems imperative to China and its investors.

Third, in recent years, China is experiencing a dramatic deterioration of economic and diplomatic relations with many trade partners, especially leading economies in the world. As a result, Chinese investors nowadays face growing difficulty in acceding to and operating in many states.⁹⁹ And it is increasingly difficult for China to solve such difficulty with these states through diplomatic talks and bilateral negotiations. To many Chinese investors, ISA seems to be a reasonable choice for ISDS. It could particularly be the case as Chinese investors have got familiar with ISA and are affirmative in protecting their overseas interests. In light of this, it is pragmatic for China to support ISA as a major ISDS option, at least in the current situation.

Fourth, China’s preference for ISA as a major ISDS option also reflects its support for the ongoing “ISDS adventure” of its leading arbitration institutions. With the growth of Chinese overseas investment, Chinese arbitration institutions also show a growing interest in the ISDS business.¹⁰⁰ While these Chinese arbitration institutions are not listed in Chinese IIAs as an optional ISA forum, it is possible for them to be selected for contract-based ISDS cases, especially by Chinese investors.¹⁰¹ Since a decade ago, leading Chinese arbitration institutions, such as the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Commission (BAC), and the Shenzhen Court of International Arbitration (SCIA) have embarked on an adventure of exploring opportunities in the ISDS business.¹⁰² The ISDS adventure is not only prompted by commercial considerations but is also a measure of implementing China’s development strategy. For instance, CIETAC has stated that its adventure is a measure of “serving China’s BRI implementation”.¹⁰³ A notable achievement of the ISDS adventure is the publication of specialized ISA rules by CIETAC in 2017,¹⁰⁴ and by BAC in 2019.¹⁰⁵

Naturally, the historical ISDS adventure of Chinese arbitration institutions would only make sense if ISA remains to be a major ISDS option. Any ISDS reform proposal that could result in abandoning or marginalizing ISA would fundamentally go against the purpose of this adventure. In this sense, China’s proposal of an “ISA plus” model renders implied support to the ISDS adventure of its arbitration institutions. Besides, as shown by the draft amendment of the Chinese Arbitration Law recently published by China’s Ministry of Justice, China is considering removing some longstanding legal impediments to ISDS in its arbitration law, such as the lack of capacity of foreign states as a disputing party in arbitration in China.¹⁰⁶ Such an amendment could help legitimize ISA under Chinese law, paving the way for Chinese and foreign arbitration institutions to engage in the ISDS business.¹⁰⁷

III Conclusion

With a growing number of ISDS cases relying on Chinese IIAs, China and its investors have emerged as major stakeholders of ISDS. China’s ISDS cases have given rise to a few systematic issues, such as the applicability of Chinese IIAs in the SARs, the legal status of Chinese SOEs in ISA proceedings, and the interpretation of some typical IIA provisions. China seems not very concerned over the possible increase in ISDS cases. Rather, it shows a clear preference for ISA as a major ISDS alternative. In its Position Paper, China proposes an “ISA plus” model with a WTO-style appeal mechanism for the future ISDS regime. Such proposals are realistic and beneficial to China, as they are based on China’s ISDS and WTO litigation experiences, and also conform with its development strategy. As ISDS reform remains ongoing, it remains to be seen whether China will be challenged more profoundly in future ISDS cases, and whether China will change its position on ISDS reform.

21 Chinese Firms in the US-China Trade War

Soo Yeon Kim

How have Chinese firms responded to the US-China Trade War? The trade war between the world’s two leading economies is first and foremost a political war. China, since its accession to the World Trade Organization (WTO) in 2001, grew by 2010 to supersede Japan as the second-largest economy in the world and is now positioned to challenge the leadership of the United States in the multilateral trading system. Against this backdrop, the US-China trade war tests the limits of the multilateral trading system under the WTO. Can the multilateral trading system continue to flourish if its two largest economies are engaged in a trade war, imposing tariffs on each other’s exports and affecting supply chains as a result? This paper examines how Chinese firms have responded as the US imposed tariffs against imports from China. Responses can vary, from tariff-jumping FDI into the United States to shifting production to Southeast Asia, or even diverting economic exchange to other markets such as Europe. Even though the Phase One trade agreement, which was signed on 15 January 2020 and entered into effect the next month, on 14 February 2020, was expected to improve trade tensions, the US government has kept in place restrictive measures against Chinese firms, with more than 950 Chinese entities subject to sanctions.¹ In September 2022, the Biden administration announced it would maintain the tariffs imposed on Chinese imports pending an extended review.²

This chapter analyzes the shifts in the investment patterns of Chinese firms since 2010, focusing on changes since the official outbreak of the US-China trade war on 1 July 2018. The analysis tests four hypotheses concerning the response of Chinese firms. One is that Chinese firms have increased investments in the United States, much like the tariff-jumping investment activity observed in the 1980s during the US’ trade conflict with Japan (Belderbos, 1997; Blonigen, 2002). Second, Chinese firms also have incentives to shift investments and consequently production to Southeast Asia, especially to those countries that have close economic links with the United States, and can help Chinese firms to avoid tariffs at the center of the trade war. The third possibility is that Chinese firms may direct greater attention to markets outside the United States, especially Europe, predated by extensive investments already undertaken after the global financial crisis in 2008 (Ma and Overbeek, 2015; Meunier, 2019). Finally, the fourth possibility is that China has turned inward to leverage its own massive population and the market opportunities it provides. This is akin to the trend of ‘reshoring’ or bringing production back to a firm’s home country.

This analysis focuses on Chinese firms’ investment activities, with the expectation that investment decisions shape firms’ trading activities down the line. Data from the fDi Markets database on investment projects, which provides real-time information on greenfield foreign direct investment (FDI) projects around the world, are employed to investigate patterns in Chinese foreign direct investment in the years 2010–2020. The time frame covers the pre-trade war years 2010–2017 and the first three years of the trade war 2018–2020. Though the trade war does not officially start until July 2018, the trade tensions accompanying the International Trade Commission investigation were evident in the media and broader public domain. The analysis thus seeks to capture some of the behavior of Chinese firms in their investment activities that respond to these tensions and also anticipates the official actions to follow. As a contribution to this volume on China’s 20 years in the WTO, this chapter contributes to our understanding of China as the world’s second-largest economy, as a WTO member with obligations to comply with the rules of the multilateral trade regime, and its ability to influence trade and investment patterns in responding to its trade conflict and competition with the United States.

In terms of the main findings of this inquiry into Chinese firms’ investment activities before and after the onset of the US-China Trade War, the results indicate the following patterns:

• In terms of major investment destinations, the US, India, and Indonesia were the top three destinations before the trade war. Since 2018, however, the top three greenfield investment destinations have shifted to countries such as Russia and Brunei. The United States, though still a major investment destination, experiences a sharp drop in greenfield investment from Chinese firms

• On sectoral patterns, real estate; coal, oil, and gas; and metals remain the top three sectors for Chinese firms’ greenfield investment. Overall, however, there is a general decline in average annual Chinese overseas investments since 2018

• In investment activities, manufacturing, electricity, and construction are the top areas of investment activity, with investment in manufacturing rising sharply since 2018

• Chinese greenfield FDI has been concentrated in East Asia and Europe, which has seen significant gains with the onset of the trade war. Sub-Saharan Africa replaces South Asia as the third most popular investment destination for Chinese firms

• Over-time patterns across the regions show that the percentage of Chinese greenfield FDI declines for the US and rises for Europe in 2019. Chinese investment also increases substantially for East Asia and the Pacific in 2020 following a dip in 2019

I The Timeline

This section provides a brief chronology of the unfolding of the trade war. One general observation to offer at the start is that the US-China trade war is the formalization of a trade conflict that had already been ongoing since the beginning of this century. Trade tensions were apparent well before the election that brought Donald Trump to the White House. Signs that the trade conflict between the United States and China would be given greater attention were evident during Donald Trump’s campaign. At a campaign stop at Alumisource, a metals recycling facility, in Monessen, Pennsylvania in June 2016, Trump delivered his jobs plan speech, in which he described China’s accession to the World Trade Organization (WTO) as an event that enabled the ‘greatest jobs theft in history’.³ As part of his agenda to ‘Make America Wealthy Again,’ Trump laid out his plans, upon his election as President, to activate Sections 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. He intended to impose tariffs on Chinese exports to the United States, thus responding to ‘illegal activities’ in China’s trade. Trump’s speech also referred to the trade deficit with China, which had reached $800 billion by this time.⁴

Donald Trump made good on his promise in Monessen, Pennsylvania. Once elected as President of the United States. Trump’s first act in office, on 1 February 2017, was to withdraw the United States from the Transpacific Partnership (TPP) Agreement. He subsequently signed two executive orders in the next two months. They provided for stricter enforcement of tariffs imposed as part of anti-subsidy and anti-dumping measures. They also provided a full review of the United States’ trade deficits and their causes. At his first summit in April 2017 with Chinese President Xi Jinping at Trump’s Mar-a-Lago estate in Florida for a 24-hour visit, the two leaders agreed to 100 days of trade talks to address their differences on the United States’ trade deficit with China. The talks led to an agreement on 11 May 2017, which provided market access for American beef producers, credit rating services, and credit card providers. For China, the agreement provided market access to the United States for Chinese producers of cooked poultry. This trade deal was beneficial for some US industries; however, it did not resolve broader structural issues at the center of US-China trade relations. These structural issues included China’s requirements for technology transfer and the broader concerns and perception of US firms of unequal market access. The 100 days of trade talks, which ended on 19 March 2017, did not yield an agreement that addressed these structural problems in US-China trade relations.

On 14 August 2017, the Trump administration requested a Section 301 investigation on China to launch the US’ first direct trade measure. The United States Trade Representative’s (USTR) office announced the ‘Initiation of Section 301 Investigation; Hearing; and Request for Public Comments: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act’.⁵ Rather than focusing on dumping or other quantitative dimensions of Chinese exports to the United States, the investigation was directed instead at China’s behind-the-border practices in its trade regime.

In early 2018, while the USTR investigation was in progress, the Trump administration took additional trade measures, beginning with approval of global safeguard tariffs on imports of residential washing machines and solar cells and modules.⁶ Tariffs under global safeguard measures were to be imposed on washing machines for three years. In the first year, there would be a 20% tariff on the first 1.2 million machines, and a tariff of 50% would be imposed on machines above that number. For solar cells and modules, tariffs were approved for four years. There would be a tariff of 30% in the first year but it would be brought down to 15% by the fourth year. However, the approved measure also allowed for up to 2.5 gigawatts of unassembled solar cells to be imported annually with no tariffs. The approval and adoption of these global safeguard measures were the result of an earlier investigation that had already been ongoing. This investigation was undertaken by the independent and bipartisan U.S. International Trade Commission (ITC) under Section 201 of the US Trade Act.⁷ The ITC investigation determined that imports of washers and solar cells and modules during the years 2012–2016 were ‘a substantial cause of serious injury’ to domestic producers. The recommendation of the ITC report was to apply global safeguard tariffs on these products. The global safeguard tariffs were officially to be applied to all trade partners. However, it was apparent that these safeguard tariffs were specifically targeting imports from South Korea and China.⁸

In March 2018, the Trump administration adopted additional protectionist trade measures. President Trump signed two proclamations on 8 March for tariffs on imports of steel and aluminum, and these tariffs were implemented approximately two weeks later, on 23 March. The proclamations exempted Canada and Mexico as partners of the North American Free Trade Agreement (NAFTA). Imports of steel from the rest of the world were to be charged with a tariff of 25%, and imports of aluminum were subject to a tariff of 10%.⁸ These tariffs were imposed with the Trump administration’s activation of Section 232 of the Trade Expansion Act of 1962. Under this provision, for reasons of national security, tariffs were allowed to be imposed for an indefinite period of time. The invocation of Section 232 justified the tariffs imposed on the imports of steel and aluminum as critical sectors for defense munitions and economic security as well as the protection of these domestic industries.

With the signing and implementation of these proclamations, Trump was fulfilling one of his key campaign promises, that is, to address unfair trade practices from trade partners. As such, the tariffs were strongly supported by pro-Trump groups. At the same time, the protectionist measures caused significant conflicts within both the Trump administration and the Republican Party. From the House of Representatives, 107 Republican members signed a letter in opposition to the tariffs. Gary Cohn, who was director of the National Economic Council, disputed with the Trump administration and subsequently resigned from his appointment. On the day before the tariffs on steel and aluminum were to take effect, the Trump administration, on 22 March 2018, announced the conclusion of the USTR’s Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation, which had earlier been initiated through the US Trade Representative Robert Lighthizer. With the conclusion of the investigation, the Trump Administration announced also the trade measures to be taken specifically against China. The Memorandum signed by Donald Trump provided for three policy actions to be implemented to address ‘China’s acts, policies, and practices involving the unfair and harmful acquisition of U.S. technology’.⁹ First, the Memorandum directed the US Trade Representative to initiate a case under the WTO dispute settlement mechanism. The case would involve a trade dispute over China’s discriminatory technology licensing practices. Second, the Memorandum provided for an ad valorem duty of 25 per cent to be applied to Chinese exports to the United States. Products listed to be subject to this tariff included aerospace, information and communication technology, and machinery. Finally, the Memorandum also confirmed the investigation’s recommendation that the U.S. Treasury Department, in cooperation with other relevant Departments and agencies, design a set of restrictions to combat China’s investment strategy, which invariably sought to acquire sensitive technologies from the United States.

With the conclusion of the USTR Section 301 investigation and the subsequent proclamations adopting the recommendations of the report, the Trump Administration implemented the first set of China-specific tariffs on 6 July 2018. This day is regarded as the official start of the US-China Trade War. The trade conflict progressed with an escalation and exchange of tit-for-tat tariffs, all in all, a series of four rounds until September 2019. The Trump administration imposed significant tariffs on Chinese imports into the United States. Bown (2019) and Bown and Zhang (2019) estimate that through the reciprocal imposition of tariffs, the trade-weighted average tariff rate increased more than six times in two years. In the following year, on 15 January 2020, the US and China successfully negotiated and signed the phase one agreement to suspend current tariffs on each other’s exports. According to Chad Bown, who has been tracking trade flows throughout the trade war, tariffs remained high in March 2021. These higher tariffs appear to be the ‘new normal’ even with the signing and implementation of the phase one trade agreement (Bown, 2021).¹⁰

II Scholarship on Chinese Investment

Existing studies on Chinese foreign direct investment have highlighted how different Chinese investors are from investors from advanced industrial countries, especially those from the west (Buckley et al., 2007; Cheung and Qian, 2009; Han et al., 2014; Kang and Jiang, 2012; Ross, 2015; Yan et al., 2020). A common finding from these studies is that Chinese firms’ overseas investment activities do not readily conform to the characteristics of the prevalent ‘eclectic’ paradigm in studies of investment (Dunning, 2000, 2001). The eclectic paradigm distinguishes between market-seeking, resource-seeking, strategic assets-seeking, and efficiency-seeking investments. Chinese investors organize their businesses in ways that are distinct and different from the investment activities of firms from the advanced industrial countries of the west. Chinese firms appear to favor long-term profits over short-term profits. This is observable, in particular, in investments in infrastructure, which inherently require a long horizon for reaping economic gains (Alon et al., 2014). Wei’s (2010) study also notes that Chinese firms seek to exploit the country-specific advantages of investment locations more so than their own internal firm-specific advantages. This finding has been further supported by Wu’s (2005) firm-level survey. Studies have also found that Chinese firms are less averse to the risks of investing in countries that have problems with political stability, social stability, and economic vitality (Chen et al., 2015, 2018; Li-Ying et al., 2013). The explanation may be that Chinese investors do not rely on local networks or institutions in carrying out their economic activities. Rather, Chinese firms are more inclined towards utilizing the network of home country firms in the host country, that is, other Chinese firms that are already established in the host country (Li et al., 2017; Peng, 2012). Finally, highlighting the role of the home country government, Chinese investors overseas are strongly supported by the institutional and policy support of the Beijing central government. In this, the characteristics of Chinese firms’ overseas investment activities are more consistent with ‘institutional’ approach to understanding foreign direct investment (Yang and Stoltenberg, 2014).

In the twenty-first century and in the years before the onset of the US-China trade war, China’s overseas investment had been rapidly increasing. In the twentieth century, China’s position in the global investment landscape was as a major recipient of FDI. China was not a major outbound investor, recording low levels of foreign direct investment. China shifted to a net investor in 2015 when its outward foreign direct investment exceeded foreign direct investment inward (Yan et al., 2020). Even as China’s trade tensions with the United States were worsening, Chinese firms, both state-owned and private firms, remained active in their overseas investment activities. As noted above, consistent with the institutional paradigm of investment, Chinese firms’ overseas investments received policy support from the central government, through both domestic policies and international economic agreements. Jiang (2010) notes that the Chinese government’s various bilateral and plurilateral free trade agreement projects provided important institutional support and facilitated Chinese firms’ investment activities. On the domestic front, the central government actively encouraged Chinese firms to invest overseas by introducing in 2001 its ‘Go Out’ policy (Buckley et al., 2007; Wei, 2010).

The Xi Jinping government’s launch of the Belt and Road Initiative in 2013 also provided strong incentives for Chinese firms to coordinate their overseas expansion. The Chinese government’s Belt and Road Initiative (BRI), formerly the ‘One Belt One Road’ initiative, is regarded as a key indicator of China’s increasing assertiveness on the international stage (Chaisse and Matsushita, 2018; Cheng, 2016; Huang, 2016; Kim, 2022; Pencea, 2017). The BRI can be regarded as Beijing’s grand strategy in the service of national interest. It emphasizes economic statecraft to further China’s influence, both in the Asian region and globally (Callahan, 2016) to promote international economic cooperation centered on China. As such, BRI is compatible with Beijing’s overall policy of encouraging and incentivizing Chinese firms to expand their economic presence overseas.

The impact of the US-China trade war so far has been strong and far-reaching. Amiti et al. (2020) advanced expectations that the trade conflict would lead to lower investment in 2020. This decline would be due to the shocks on the stock market from policies of the two adversarial countries, which would depress returns to capital. Scholarship has also linked the trade conflict with the impact of uncertainty on the stock market (Cai et al., 2020; Chengying et al., 2021). Wang et al.’s (2021) study also investigated the effect of the trade conflict on stock market movements. They found that Chinese private firms experienced the most negative reactions on the stock market, much more so than state-owned firms. As expected, Chinese firms directly impacted by the Trump administration’s imposition of tariffs were especially vulnerable. Other studies such as Itakura (2020) as well as Li (2018) utilized computable general equilibrium models (CGE) to estimate the effect of the trade war on tariffs, investment, and productivity. Li found that the trade war had a negative impact on China’s trade. Itakura’s study found that both the United States and China had a lower gross domestic product (GDP), imports, and outputs as the trade war escalated. Itakura’s analysis also showed that the trade war’s impact on global value chains was even more significant. As the CGE model was further refined to account for agent-specific import demands, there was a drop in bilateral trade and a contraction of the global gross domestic product. Subsequent scholarship has largely corroborated the findings of studies using these simulations, focusing on the effects of the exchanges of tariffs between the United States and China on third parties that conduct trade along the international supply chain. Studies have found that third countries that are linked to China in the supply chain and also subject to US tariffs have been especially affected (Mao and Görg, 2020; Wu et al., 2021). The products from China subject to US tariffs were also likely to be intermediate inputs for goods produced in the United States. Such third countries were thus hurt downstream along the global supply chain. EU, Canada, and Mexico, the United States’ closest trade partners, have been identified as the third parties most negatively affected by the trade conflict.

It should also be noted that the US-China trade war is more than a trade conflict. It is, more broadly, a political war, a competition between the world’s leading economy and a rising challenger that is the second-largest economy in the world (Chong and Li, 2019; Kim, 2019; Liu and Woo, 2018). Concerns about the US’ own hegemonic decline may well have sparked the US’ initiation of the trade war by imposing the first set of tariffs. The trade conflict has effectively politicized China’s sustained trade surplus with the United States, directing more attention to unfair trade practices that have resulted in the loss of jobs and China’s acquisition of technology from the United States. Trade practices of Chinese firms and the Chinese central government have given rise to worries about national security and the standing of the United States as the leading economy in the world. On the other side, scholarship from China has even argued that the trade war is the Trump administration’s attempt to place obstacles in the way of China’s rise (Lai, 2019). In China’s foreign economic activities, Beijing pursues economic statecraft that involves the promotion of export-related foreign direct investment, security in the supply of national resources, building up the competitiveness of Chinese firms’ competitiveness, and maintaining strong and positive political ties with countries that are recipients of Chinese investment (Wei, 2010).

Finally, much of the existing scholarship has focused attention on the parties themselves, the United States and China, and how the trade conflict has impacted their trade. Chad Bown (2021) has tracked both the tariffs imposed by the two countries and their impact on bilateral trade. Tariffs and the resulting trade flows have been especially important since the negotiation and signing of the phase one agreement. The agreement was signed on 15 January 2020 and entered into effect on 14 February 2020.¹¹ As of 1 March 2021, Bown reported that Chinese tariffs on imports from the United States averaged 20.7%, and US tariffs on imports of Chinese goods averaged 19.3%. On the actual impact on US-China trade, as of 1 January 2021, 66.4% of US imports from China were subject to tariffs, and China imposed tariffs on 58.3% of goods imported from the United States. Bown’s analysis of China’s purchase commitments under the phase one agreement, namely to purchase US$200 billion worth of goods from the United States over two years and expected to reduce the US’ trade deficit with China, fell significantly short of the goal. In fact, China’s imports of goods from the United States were lower in 2020 than in 2017 and thus did not meet phase one targets. The COVID-19 pandemic may have affected these numbers. Nevertheless, even by July 2021, Bown’s analysis reported that China’s imports from the United States were still 30% lower than the phase one target, though this was still an improvement over 2020 when China’s imports from the United States were 40% short of the phase one target.¹²

III Patterns in Chinese Investment, 2010–2020

This section reports patterns of greenfield investment by Chinese firms, with a view to the hypotheses elaborated in the above sections of this chapter. As noted earlier, the analysis draws on data on greenfield investments obtained from the FDi Markets database, which provides real-time information on cross-border investment flows by project and by firm.¹³ The database includes a wide range of supplementary information at both the project and firm levels. The findings reported below take a descriptive approach to highlight the changes, if any, of patterns in the greenfield investment activities of Chinese firms since 2010. Firm-level data are aggregated at the national level to compare changes across states that are recipients of Chinese investments.

Figure 21.1 reports overall patterns in Chinese greenfield FDI in the years 2010–2020, inclusive. The data include both the total value of capital investment in current US dollars and the number of projects that have been undertaken by Chinese firms. For both the value of greenfield FDI and the number of projects, Figure 21.1 shows that Chinese firms’ investment worldwide has declined since the onset of the trade war. The investment did peak in the years 2013–2017; however, there is a downward trend that is correlated with the time of the Trump administration.

Figure 21.1 Chinese greenfield FDI, 2010–2020

The data indicate two interesting patterns in the investment behavior of Chinese firms. First, there is some anticipatory effect for the private sector ahead of the official start of the trade war in July 2018. There is a drop in the value of investment, and the number of projects also plateaus in 2017, as Trump begins his term and initiates Section 301 investigations against China. The launch of investigations signals the Trump administration’s intent to fulfill earlier campaign promises to address China’s unfair trade practices. The private sector may well have taken anticipatory action by holding back investments. Second, the decline in investment activity by Chinese firms is notable already in 2018 and before the onset of the COVID-19 pandemic. Chinese firms invest less and in fewer projects in the years 2018 and 2019, with a further drop occurring in 2020, which is the first year of the pandemic. Thus, in addition to an anticipatory decrease in Chinese investment dollars and the number of projects in 2017, the subsequent two years marking the first and second of the trade war also show a downward trend in Chinese firms’ investment activities. This pattern can also be associated directly with the trade war itself as it takes place before the onset of the COVID-19 pandemic.

With respect to the hypotheses concerning the increasingly inward orientation of the Chinese economy, Figure 21.1 provides indirect evidence. Figure 21.1 shows global totals for the value and number of projects in Chinese greenfield FDI, which have been declining since 2017. Assuming that the capital for investment available to Chinese firms has not changed significantly, one possibility is for this capital to be redirected to the domestic market. Though this claim would be stronger with data directly on Chinese firms’ domestic investment activities, the patterns in global investment activities suggest the possibility of such a re-direction inward.

Investment destinations for Chinese firms also see a dramatic change before and after the official onset of the trade war in 2018. Figure 21.2 provides information on the top ten recipients of Chinese greenfield FDI, divided between the periods before and after the start of the trade war. In the years preceding the trade war, the top destination for investment by Chinese firms was the United States. This was followed by India, Indonesia, Malaysia, and Pakistan. Four Asian countries were thus among the top five recipients of Chinese greenfield in the pre-2018 years. This pattern shifts significantly in the years 2018 and later. Though the data are drawn only from three years, Figure 21.2 shows that Russia became the top recipient of Chinese greenfield FDI once the trade war began. Russia is followed by Brunei and, in third place, is the United States. The top ten recipients also include three other Asian countries, namely Indonesia, the Philippines, and India.

Figure 21.2 Top ten recipients of Chinese greenfield FDI, 2010–2020

In terms of old and new destinations for Chinese greenfield FDI, the pre-trade war years include Malaysia, Pakistan, Egypt, South Africa, and the United Kingdom, which are not among the top ten recipients in 2018 and later. From Europe, the United Kingdom is displaced by Germany, in Africa, South Africa is displaced by Nigeria, and in Asia, Brunei, the Philippines, and Kazakhstan now figure among the top ten investment destinations for Chinese firms. The United States, India, Indonesia, Russia, and Brazil, though their ranking in terms of the value of capital investment received has shifted, remained among the top ten destinations for Chinese greenfield FDI.

(i) Sectoral Patterns

Figure 21.3 reports the top ten sectors in which Chinese firms have invested in the years 2010–2020, inclusive. The fDi Markets database classifies each project as belonging to one of 39 sectors. Figure 21.3 reports the sectors that received the largest capital investments from Chinese firms on an annual basis, between the periods 2010–2017 and 2018–2020. For the years 2010–2017, the top sectors for Chinese greenfield investment were real estate; coal, oil and gas; metals; renewable energy; automobiles original equipment manufacturing (OEM); communications; transportation and warehousing; chemicals; food and beverages; and electronic components. With the onset of the trade war, greenfield investment in coal, oil, and gas greatly increased while greenfield investment in real estate declined significantly in the amount of capital investment though it still remained among the top three sectors. Electronic components became the sector with the fourth-highest average annual greenfield FDI from Chinese firms, followed by communications, transportation and warehousing, automobiles OEM, textiles, and chemicals.

Figure 21.3 Chinese greenfield FDI by sector, 2010–2020

Overall, there was significantly less investment in automobiles OEM, and chemicals. Though transportation and warehousing ranked lower (seventh) in the trade war years, the average annual greenfield investment in this sector is higher in the value of the capital investment. Between the two periods, food and beverages, which ranked ninth in greenfield FDI, is replaced by investment in textiles in the first three years of the trade war. Food and beverages was the only sector that dropped out of the top ten from the pre-trade war years. Otherwise, the top ten sectors for Chinese greenfield FDI remained the same between the two periods though their relative ranking has shifted.

(ii) Type of Activities

Figure 21.4 reports the different types of business activities associated with Chinese firms’ greenfield FDI projects. The fDI Markets database relies on a proprietary industry classification system that combines the industry or sector classification above with its closely associated business activities. Specifically, every project is classified as belonging to a particular cluster, sector, sub-sector and business activity. There are a total of 39 sectors, 270 sub-sectors, 17 clusters, and 18 business activities. A business activity refers to the actual function of a project’s operations.

Figure 21.4 Chinese greenfield FDI activities, 2010–2020

In Figure 21.4, the pre-trade war years’ top ten business activities were, ordered according to the value of annual capital investments made by Chinese firms: manufacturing; construction; electricity; extraction; logistics, distribution and transportation; research and development; information, communication, and technology (ICT) and internet infrastructure; business services; sales, marketing and support, and headquarters. In the years 2018 and later, manufacturing remains the top function and sees a significant boost in investment; electricity and construction remain within the top three functions but see a significant decline and a shift in ranking that makes them more or less equal in terms of the dollar value of capital investments. Extraction falls to seventh in capital investments as the trade war gets under way, while logistics, distribution, and transportation; ICT and internet infrastructure; and research and development, in this order, become more prominent as the functions undertaken in investment projects. The last three in the top ten functions of investment projects in the trade war years are sales, marketing, and support; business services; and headquarters. Interestingly enough, these last three functions are those that are not directly associated with production but rather come at the end of the production process as goods are moved to the market or an organizational function (headquarters) for the firm in locating their investments.

Overall, there is no change in the most common functions of Chinese greenfield FDI projects. The top ten business activities remain the same before and after the onset of the trade war. What has shifted is a sharp rise in manufacturing activities as the main function of Chinese FDI projects, substantial declines in construction and electricity as business activities in investment projects, and an increase in business activities associated with logistics, distribution, and transportation, ICT and internet infrastructure, and research and development. The shifts in these business activities may be a consequence of the COVID-19 pandemic, as the pandemic intensified electronic commerce and brought physical challenges in the delivery of international trade.

(ii) Regional Patterns

Figure 21.5 reports Chinese greenfield FDI across the eight regions of the world. Between the years 2010–2017, before the onset of the trade war, the regional distribution of Chinese greenfield FDI was as follows, in order of average annual capital investment: East Asia and the Pacific; Europe, South Asia, North America; Middle East and North Africa, Latin America and Caribbean, sub-Saharan Africa, and Central Asia.

Figure 21.5 Chinese greenfield FDI by region, 2010–2020

Between the years 2018–2020 and the onset of the trade war, both East Asia and the Pacific and Europe saw large increases in Chinese FDI and also remained top destinations. Sub-Saharan Africa displaced South Asia as the third among regions receiving Chinese FDI, and Latin America and the Caribbean displaced North America as fourth among the regions in hosting Chinese investment. Chinese investments in South Asia fell steeply, from third to sixth among the regions. Chinese greenfield FDI in North America fell significantly and ranked fifth among the regions in the trade war years between 2018 and 2020. Similarly, Chinese investments in the Middle East and North Africa fell sharply in the amount of capital investment and from fifth to seventh among the eight regions. Finally, Central Asia remained last in rank among regions in receiving Chinese FDI; however, Figure 21.5 does indicate a rise in the average annual capital investment by Chinese firms in this region for trade war years, 2018–2020.

The regional patterns provide preliminary empirical support for the argument that Chinese firms have diverted their investment activities away from the United States, the adversary in the US-China trade war. Average annual capital investment in greenfield FDI from Chinese firms has declined in North America, which moved from the fourth to fifth most popular destination between the two periods, 2010–2017 and 2018–2020. There is also a notable drop in the quantum of investment as indicated in Figure 21.5. At the same time, Figure 21.5 shows large increases in Chinese FDI in East Asia and the Pacific, Europe, sub-Saharan Africa, and Central Asia. The patterns indicate that investments have intensified in regions that were already important destinations for Chinese FDI. East Asia and the Pacific and Europe have remained the top two regions for Chinese greenfield FDI. What is equally interesting to note is that sub-Saharan Africa and Central Asia have also become more prominent as regional destinations for investment. Sub-Saharan Africa moved from sixth to third among the regions. Central Asia, though it is still ranked last among the regions, shows a significant increase in Chinese greenfield FDI in the trade war years.

(iv) Regional Patterns over Time

The distribution of Chinese FDI across the regions can be more closely examined on an annual basis across the years of the analysis sample. They provide more detailed information on how Chinese greenfield FDI activities have evolved between the pre-trade war years and since 2018. Figure 21.6 illustrates these over-time trends across the eight regions as discussed in the previous section. The figures capture FDI in each region as a percentage of total Chinese greenfield FDI, as contrasted with the trends in the value of the annual average capital investment that is presented in Figure 21.5.

Figure 21.6 Longitudinal trends in Chinese FDI by region

Beginning with Central Asia, the region in terms of the percentage of total Chinese greenfield FDI sees a slight decline as the trade war begins. The high values of Chinese greenfield FDI that were observed in Figure 21.5 for East Asia and the Pacific are most notable for the period 2019–2020. For the first year of the trade war, 2018, there is a sharp drop in Chinese greenfield FDI in East Asia and the Pacific. The opposite pattern can be observed in Europe. Chinese greenfield FDI surged in 2018 but declined in the following year. There is nevertheless an overall upward trend in Chinese greenfield FDI in Europe. This trend is similar to Latin America and the Caribbean, where Chinese investment increased in the first year (2018) of the trade war but declined in the second year (2019). The Middle East and North Africa show no discernible change in the percentage of total Chinese FDI that they received. Following a significant decrease in 2017, Chinese investment levels out for the subsequent years as the trade war officially begins.

Chinese greenfield FDI patterns for North America are perhaps the most interesting. Figure 21.6 shows that Chinese greenfield investment peaked in 2013 but declined significantly in subsequent years. The onset of the trade war shows a further decline in Chinese investment, and it remains at the same level in 2019. In South Asia, the peak in Chinese greenfield FDI occurs in 2015; thereafter, the region receives far less Chinese investments and continues its decline through the trade war years. Finally, sub-Saharan Africa, though it does not receive a large percentage of Chinese greenfield investments, does show a consistent upward trend beginning in 2015. The trade war has maintained higher levels, but with a slight decline in 2019.

Overall, the longitudinal patterns in Chinese greenfield FDI reported in Figure 21.6 corroborate much of the distribution of Chinese FDI across the regions as reported in Figure 21.5. They provide more granular information on changes in Chinese greenfield FDI on an annual basis. They also apply a different measure of importance in the location of Chinese greenfield FDI, using the percentage of total Chinese greenfield FDI each year.

(v) Investment Locations

Figure 21.7 provides a visualization of Chinese FDI around the world, allowing for a comparison between the pre-trade war years and trade war years 2018–2020. The circles, in size and shade, represent the size of average annual capital investments made by Chinese firms. The maps put together information on both total Chinese greenfield FDI and their concentration in particular countries. As noted in Figure 21.1, overall Chinese greenfield FDI has declined with the onset of the trade war. The highest average in Chinese foreign capital investment before the trade war is recorded for the United States in the years 2010–2017, represented by the darkest large circle. In the years 2018–2020, there is no comparable level of Chinese greenfield FDI anywhere in the world.

Figure 21.7 Map of Chinese greenfield FDI, 2010–2020

In terms of regional concentration, average annual capital investments appears steady for Latin America. There is a greater distribution of greenfield FDI in Africa; that is, the map for 2018–2020 shows many more circles that indicate that Chinese firms have disbursed their investments in more countries with overall lower capital investments. Chinese greenfield FDI has also declined for Asia, though the value of average annual capital investments remains large relative to other regions. In Europe, the trade war resulted in some concentration of Chinese greenfield FDI as there are several larger circles representing larger values in capital investment. Consistent with information in previous figures, average annual capital investment in Chinese greenfield FDI has increased significantly in Russia in the trade war years 2018–2020, relative to the previous period, 2010–2017.

IV Conclusion

This chapter has examined China, a WTO member of twenty years that has grown to be the world’s second-largest economy. The focus has been on Chinese investment, a key economic activity that is very closely related to trade, and how it has shifted since the onset of the trade war with the United States, the world’s largest economy. This trade conflict extends well beyond the economic realm, of course, as it is emblematic of the political rivalry between the United States and China.

The analysis has examined several dimensions of China’s investment activities, utilizing project-level data available on greenfield investments that reflect how Chinese firms have responded to the trade conflict. One notable behavior that is identifiable from the data is that investment patterns indicate some degree of anticipation from the private sector. That is, overall investment patterns drop sharply before the actual start of the trade war. The decline coincides more closely with the start of the Trump Presidency in the United States and the initiation of the Section 301 investigation. The overall pattern suggests that Chinese firms, and possibly firms more generally, respond first to the overall political climate and do so well ahead of concrete policy changes. Other notable changes in Chinese firms’ investment patterns include regional distribution. Asia’s attractiveness as an investment destination grows with the escalation of trade tensions, but also notable is the increased diversion to Europe for locating Chinese investment. There is a marked decline in greenfield investment in the United States, and Russia emerges as an important recipient of Chinese greenfield investment. Manufacturing, electricity, and construction continue as mainstays of Chinese investment choices, and similarly, real estate; coal, oil, and gas; and metals are top investment sectors for Chinese firms.

As the trade war continues to unfold, there has been a change in the executive office in the United States, with President Biden taking up office in 2021. The Biden administration appears largely to have continued with its predecessor’s trade policy stance toward China. China also had its eighth trade policy review, as per the conditions of its accession to the WTO in 2001. While this chapter has identified some patterns in the investment activities of Chinese firms before and after the onset of the US-China trade war, there is much that remains uncertain about the role of both actors as the world’s largest economies and members of the World Trade Organization.

22 Technology Diffusion in the Triangle of China, the West and Developing Countries The Contribution of Common Concerns of Humankind

Thomas Cottier

I Introduction

Technology drives the law, and the law inherently tends to lag behind specific technological innovations and changes. International conflicts arise due to alleged and real deficiencies in the law and legal protection. The US-China tariff war was initiated by the Trump Administration in 2017. Still unsettled today, concerns of inadequate protection of intellectual property and losing leadership in the field of information technology mainly induced it, in particular in the field of information technology. The alleged theft of intellectual property rights has been paramount (Eberhard Tundang, 2020). The row on the banning of G5 equipment originating in China but jointly developed with western companies (Malkin, 2020) was fuelled by fears of espionage and national security concerns. It strongly added to the geopolitical tensions, resulting in random hostage takings and incarceration by Chinese authorities of two innocent Canadian nationals in response to arresting the financial CEO of Huawei in Canada on behalf of the United States over alleged violations of sanctions. While the persons concerned have been released in the mean-time, tensions and concerns have further increased. The problem is unresolved. Differences in handling electronic data and data protection create uneven conditions for developing artificial intelligence, much to the advantage of China, given the mass of data available. Large technology companies are increasingly regulated in China to respond to the needs and aspirations of the communist party and the government. China seeks losing dependence on imported advanced technology, while the US is increasingly concerned about national security and the effort to rebuild an industrial base and repatriating production (see Chapters 8–10, 17, 21).

These concerns much influence bipartisan US trade policy today and restrict multilateralism. Unilateral measures, based upon safeguards are of increasing importance and explain the failure to restore the Appellate body in the WTO. The rows over Taiwan, the South China Sea, systematic human rights violations in Xinyang province, the suppression of civil liberties in Hong Kong, and the war in Ukraine offer a grim background to this paper. Epochal tensions between democracy and increasingly autocratic and oligarchic regimes inform the debate. Geopolitically, it would seem that there is no or little common ground left to reflect on issues of technology diffusion between the US and China, as well as the rest of the World affected by rivalry and conflict.

At the same time, many Western companies remain invested in China and hope to make large profits in a huge and increasing domestic market. China, vice versa, while increasing home markets, continues to depend upon foreign exports and needs to protect her foreign direct investment, securing access to advanced technologies and research. Global value chains strongly integrate China also in technology development (Malkin, 2020) and make it an important partner. Consumers around the world benefit from these arrangements and international trade offering enhanced competition and lower prices.

Thus, geopolitical and commercial interests in East and West alike are not in line. Ideological differences between the US and China and competing systems of governance rival economic interdependence and business and consumer interests (Wu, 2016). Most countries find themselves uneasily caught in between the struggle of the two superpowers. This is also true for the European Union. Germany in particular strongly depends upon exports to, and investments in, China in order to protect the welfare of its economy. The same is true for Switzerland. Developing countries cannot afford to take sides. Unlike the Cold War with the former Soviet Union and Eastern Europe, strong economic interdependence forces governments to maintain economic cooperation and ties wherever this is possible. Rationally, common interests persist, despite ideological differences. Common concerns, in particular abating and mitigating the pandemic and climate change make such cooperation indispensable and a necessity. The revolution in energy supply and the containment of pandemics cannot be addressed and succeed without cooperation and joint action in technology diffusion.

Technology has been the main driver not only of the law but also of international trade and investment over centuries. It will continue to do so despite political tensions. It opens channels of communication and cooperation. Technology diffusion is not a one-way street. It is a complex human transaction. Advanced technologies often depend upon local adaptation and recognition, in particular in agriculture. They benefit from recourse to traditional knowledge and expertise. They depend upon servicing and thus the transfer of knowledge and education. It offers the hope and potential to bridge differences, much to the advantage of individuals and families around the world which, at the end of the day, international law and relations must serve.

With this backdrop, the paper discusses the importance and potential of existing WTO law in multilaterally regulating the transfer and diffusion of technology. It seeks to identify shortcomings and common grounds which provide the basis for talks, negotiations, and amendments. The paper is less concerned with specific bilateral US-Sino relations. It focuses on what is of interest to the global community, including China and the US, in particular in the context of climate change mitigation and adaption, biodiversity, and the global pandemic. While the basic struggle is about the epic tension between democracy, oligarchy, and tyranny ever since the typology was set out in classical Greek philosophy and history, the challenge in trade amounts to interfacing different systems of mixed economies within the multilateral trading system, including preferential trade and cooperation agreements.

II Taking Stock of WTO Law

It is worth recalling at the outset that WTO law, developed over a number of trade rounds, has increasingly addressed non-tariff barriers and thus issues of technology affecting international trade. WTO law, supplemented by preferential agreements building upon the common law of international trade (Cottier, 2015), has built a very substantial body of binding international law, comprising principles and rules applicable to technology (for a comprehensive analysis see Cottier, 2017). It essentially covers all areas of technology in the field of agriculture, industry, and services. It includes energy from electricity to fossil fuels. The constitutional principles of transparency, MFN, and national treatment in GATT apply to these fields. They allow addressing many problems relating to market access in the proliferation of technology, in particular where a new field has not been addressed by a more specialized agreement. Rules on tariffs and tariff reductions brought about greater access to foreign technology, and in some areas, such as information technology or chemical and pharmaceutical products, medical equipment, and information technology, members removed tariffs by means of sectoral initiatives and plurilateral agreements based upon critical mass. The following areas are of particular importance for the transfer and dissemination of technology.

(i) Intellectual Property

The WTO Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS Agreement) sets out the basic rules on ownership of technology in patent law and copyright (software) and the protection of trade secrets (see also Chapter 4). It establishes the legal framework for voluntary transfers by way of licensing. It allows countries to operate restrictions on contractual relations and abuse of dominant positions in competition law and policy. Fair use and compulsory licensing allow governments to protect public interests, mainly with their own territories. Overall, the multilateral IP system, including 26 WIPO treaties, offers a solid foundation for domestic law and commercial transactions, provided the law is properly implemented domestically and companies dispose of the necessary finance and funding (Lybecker and Lohnse, 2015). While skepticism against strong IP standards having adverse effects on to transfer of technology persists (Eberhard Tundang, 2020: 954), the TRIPS Agreement can be applied and construed in support of environmentally sound technologies (Zhuang, 2017). Unresolved challenges relate to developing and least-developing countries whose access to technology cannot be sufficiently secured by the TRIPS Agreement. Likewise, disciplines of protecting traditional knowledge supporting biodiversity have not yet materialized.

(ii) Technical Regulations

The Agreement on Technical Barriers to Trade (TBT Agreement) entails detailed disciplines on standards and regulations. It ensures that regulatory prescriptions and restrictions do not go beyond what is necessary to achieve a particular policy goal as defined by government and law. The Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) addresses food standards and thus technology related to this sector. The Agreement on Government Procurement (GPA) offers a framework for defining technologies requirements and non-discriminatory procedures with which government purchases need to comply. The Agreement on Subsidies and Countervailing Duties (SCM Agreement) defines the scope and range of governmental support in the research and development of new technologies. The Agreement on the Implementation of Article VI of the General Agreement on Tariffs and Trade (Anti-dumping Agreement) and the Agreement on Safeguards allow for the protection of domestic industries threatened by imports of cheaper competitive products. Finally, the Agreement on Services (GATS) includes disciplines and conditions of market access for technology-related services, such as engineering or telecommunications.

The WTO is not itself a standard-setting organization. Technical standards and regulations are the subjects of specialized organizations, such as ITU or the Codex Alimentarius of WHO/FAO, to which WTO rules relate too. Most of the technical standards, essential for interoperability and the quality of products, are enacted by private standardization organizations, such as CEN, CENELEC, or ETSI (Delimatsis, 2015). Compliance with such norms essentially presumes compliance with basic security standards set out by law. More specific sectors of technology, such as navigation or aviation are addressed by specialized international standard-setting organizations, such as IATA and IMO. These standards, in turn, inform the application of WTO rules and principles.

(iii) Committees, Trade Policy Review, and Dispute Settlement

Overall, existing WTO law and additional agreements offer a broad and sound basis and guidance for regulating technology in domestic law. The work of Committees, reviewing the operation of Agreements, discusses and explores the implications for newer technologies. New issues are flagged in the process of periodical trade policy review. It offers the possibility of dispute settlement between Members of the WTO, in particular in applying special agreements and foremost general principles of non-discrimination to newer fields of technology so far unregulated in greater detail.

Geopolitical tensions should not obscure the potential of peaceful dispute resolution in the WTO as a way and means to address technology-induced differences and maintain peaceful relations among different political systems. Both the US and China as technological rivals have used it extensively (see Chapter 11). Dispute settlement offers a bridge that must not be withdrawn. It is able to address the interface of different governmental and administrative systems, all of which today are characterized as mixed economies entailing the role of government and the state which varies from country to country and from sector to sector. Dispute settlement offers a detailed analysis of the regulatory framework of a Member in a particular context. It allows applying the law and gaining insights also for areas not yet addressed by particular rules and disciplines. Jurisprudence relating to the protection of the environment convincingly demonstrates that WTO law is able to address new issues within the bounds of existing agreements. For example, discrimination relating to new technologies can be addressed by recourse to existing law. Or, claims of theft of intellectual property can be properly addressed on the basis of existing protection of undisclosed information, to the extent that the transfer does not result from joint ventures voluntarily engaged into by companies investing abroad. Recourse to unfair competition rules of the Paris Convention and incorporated in the TRIPS Agreement can be made.

The case law of the WTO strongly contributed to consolidating the law on technology and offering guidance in addressing emerging conflicts and difficulties, such as renewable energy. It allows for making new distinctions in product and production which will be crucial in addressing climate change mitigation and adaption (Conrad, 2011). Taxation and tariffs can be shaped accordingly (Cottier, 2014b; Holzer, 2014). It has come a long way and is not static. The law is a living thing even within the bounds of particular agreements. Recourse to general principles of law and other, relevant agreements further widen the potential to address new challenges in dispute settlement while fully respecting existing commitments.

(iv) Prospects

Today’s WTO law essentially emerged from the 1995 Uruguay Round of multilateral trade negotiations, building upon eight previous rounds. Ever since, further progress in negotiations has been limited to government procurement, the revision of the TRIPS Agreement, and a new Agreement on Trade Facilitation. The Doha Development Agenda largely failed, leaving the impression of substantial loopholes and lacunae in the system. This in return informs the view that binding dispute settlement can only be resumed once these lacunae are successfully addressed. Current efforts, largely due to technological changes, no longer work on the basis of broad and comprehensive trade rounds, but incrementally address particular issues, such as fisheries subsidies. Some efforts are made formally outside the WTO, such as TISA or negotiations on electronic commerce and efforts for a framework of investment promotion. In sum, the law is not up to date, and much remains to be done on WTO reform (see Chapter 12) and, as suggested below, in developing a proactive agenda for negotiations on technology regulation and diffusion relating to climate change (Brewer, 2016; Brewer and Falke, 2012; Condon, 2009, 2017; Delimatsis, 2016). Yet, it is important to emphasize that the existing body of law amounts to an important solid foundation. It not only informs preferential trade agreements but also largely the legal status of new and emerging technologies.

Political stalemate, due to geopolitical tensions and a multipolar world dominated by US-Sino tensions, and the lack of progress in developing new disciplines in multilateral agreements today leads the US to reject binding dispute settlement by allowing for appeals to the void. The failure to reappoint Members of the Appellate Body, mainly induced by US criticism of a narrow reading of trade remedies, weakens the rule of law also in the field of technology management and diffusion. While panels continue to operate, binding arbitration today is limited to Members of the MPIA, the Multi-party Interim Appeal Arbitration Arrangement, to which 53 States, including the EU, today are members of and which is based on the arbitration clause of Art. 25 DSU. The first appeal based on the model took place in 2022. The US policy on WTO dispute settlement and all those following it ignore that both negotiations and dispute settlement work in tandem and are not a matter of sequencing, in particular in addressing issues of technology. They both contribute to solutions in tandem. Withdrawal from binding dispute resolution misses the potential to use international law in addressing tensions and differences. It forecloses a channel of communication in the courtroom and an instrument to apply rules and principles to emerging technologies in binding arbitration. It undermines multilateralism and fosters unilateralism and nationalism.

III A Focus on Common Concerns of Humankind

Given the geopolitical constraints and tensions among major powers and the end of an agenda dominated by a transatlantic alliance, which enabled the successful conclusion of multilateral trade rounds up to 1995, careful consideration should be paid to areas of common interest and concern shared by the global community. Specific bilateral and plurilateral problems among powers may be left to unilateral trade policy measures within the bounds of WTO law. Safeguards, the protection of human rights and labor standards, and recourse to national security are likely to increase unilaterally, in particular in areas of strategic importance to the balance of powers. In the field of technology regulation, cyberspace and the internet come to mind. Regulations strongly depend upon constitutional settings and political beliefs. It will be difficult to find common ground between democracy and autocracy in defining the rights and protection of individuals, or access to the internet and globally operating services. It will be difficult to agree on general and comprehensive rules of competition and antitrust, in particular for tech companies if such rules, on the one hand, protect markets and democracy, and control and primacy of state and party on the other hand. Perhaps, bilateral or plurilateral settlements may be found among those mainly affected by specific issues.

These caveats do not exclude addressing competition law and investment in future WTO negotiations. But here and elsewhere, the focus would need to be on shared and common interests in the fields and sectors of the economy where common ground and landing zones can be found. Foremost, the fields should be of interest to all the members of the WTO, and not limited to big powers.

It is submitted that the emerging principle of Common Concern of Humankind offers a foundation for future WTO negotiations. Areas covered by the principles inherently represent common problems and preoccupations, independently of a political system. All states share an interest to find common solutions. They cannot be found in isolation. Here, states inherently depend upon cooperation, comparable to the doctrine of comparative advantage which essentially relies upon reciprocity of trade concessions and is hardly sustainable in going unilateral and alone. Areas of common concern inherently require cooperation in producing global public goods (Cottier et al., 2014a). They are more narrowly defined than the shared and important principle of sustainability, balancing ecological, economic, and social interests (Bürgi-Bonanomi, 2015), or the broadly defined and comprehensive 2015 Sustainable Development Goals (SDGs). It is about addressing specific threatening problems, including by means of recourse to technology diffusion.

(i) Expressions in Treaty Law

The United Nations Framework Convention on Climate Change (UNFCCC) recognized climate change as a common concern of humankind. It was affirmed by the 2015 Paris Agreement and the 2021 Glasgow Climate Pact. The same holds true for the protection of biodiversity, and of preservation of cultural diversity. The WTO health regulations recognize the protection from pandemics a global concern. Other areas, such as the protection of the atmosphere, the problem of global migration, marine pollution, financial and monetary stability, or gross inequality within states come to mind (Cottier, 2021a). All these areas share the risk of serious threats to international peace and stability if left unattended. Most of them also share the trait of being transnational and cannot be addressed in isolation. It is of fundamental importance to note that measures are taken to benefit all and not only a single country. Vice versa, measures omitted harm all countries and the globe alike. Common Concern offers a fundamentally different logic from mercantilism and reciprocity underpinning the international trading system.

So far, the doctrine of Common Concern has been without any impact. A legal principle has not emerged, despite pressing needs. Policies on climate change have remained national and without sufficient coordination. Essential cooperation among the main emitters responsible for global warming, that is China, the United States, and the European Union, has not materialized in coordinating decarbonization and emission trading. As a result, the World in 2021 is heading for a 2.7°C increase in average global temperatures – far beyond the target of 1.5°C of the 2015 Paris Accord. In combating the pandemic, nations took recourse to trade restrictions and nationalism. Covax, the multilateral vaccine program of the World Health Organization is grossly underfunded and short of supplies, while industrialized countries have been hoarding vaccines way beyond their needs. It is obvious that neither climate change and biodiversity, nor the pandemic can be contained unilaterally and without effective international cooperation and coordination.

(ii) Toward a Legal Principle

It will be a long way to implement, recognize and establish a legal principle of Common Concern of Humankind (CCH) in response to policy failures and the fact that national jurisdictions cannot successfully address and solve certain problems on their own. Prospects are dim, but the principle as applied to specific areas is the only hope in times of increased international rivalry and nationalism. In anticipation of further failures detrimental to human welfare, it is imperative to push to the doctrine of common concern of humankind in civil society and politics, stress its recognition in respective fields, and work out legal implications, in particular for technology diffusion in fighting climate change and the pandemic. If States live up to commitments on human rights and sustainable development goals, much more needs to be done to disseminate essential vaccines and related technology to lower-income countries. Governments need to be reminded that they have accepted the areas of climate change, biodiversity, and international health as common concerns in treaties and are bound by them. The following legal implications are suggested and were developed (Cottier, 2021b):

Once a problem is recognized as a CCH in a process of claims and responses, legal doctrine suggests linking it to three types of obligations also applicable to technology diffusion (Ahmad, 2021a, 2021b) First, it entails an obligation to enhance cooperation beyond general public international law in addressing the shared problems. Secondly, it entails undertaking the necessary homework in addressing the problem at home; many of them require action locally, nationally, and internationally. Common Concerns are not limited to the realm of international law and relations. Climate change obviously informed this requirement. Thirdly, it entails obligations in compliance with international obligations. Failure to comply with obligations may trigger countermeasures and thus does not exclude unilateral measures against free-riding countries.

IV An Agenda of Common Concerns for the WTO

We submit that a future agenda for WTO negotiations should be placed under the realm of Common Concerns of Humankind. This essentially entails climate change mitigation and adaptation (Ahmad, 2021a, 2021b). It entails efforts in fighting global pandemics and diseases threatening mankind. It entails the protection of biodiversity. Fisheries negotiations, including technology and subsidy issues, made a good start.

The point is that in these areas all nations, despite the ideological divide, share a common problem. They share common interests to cooperate in trade and investment. They all are indirectly and directly affected. They cannot solve the problem on their own. They all depend upon cooperation and contributions made by others to successfully create public goods in the field. All benefit from negotiated results. They all share a common interest in compliance. Under the principle of Common Concern, WTO should develop a proactive agenda and take the lead on trade issues. Trade regulation amounts to a central, but not exclusive, component of an overall regime. Much of it entails access to, and dissemination of modern technology.

It is not a matter of addressing common concerns comprehensively and exclusively in the WTO. Goals and standards are set in other bodies and agreements. It is a matter of asking what contribution trade regulation can make. It is a matter of shaping the angles of international trade and investment in such areas of common interest with a view to supporting the attainment of goals and standards defined elsewhere. Principles and rules on trade and investment, subsidies, intellectual property, and possibly competition essentially address non-discrimination to, and on, foreign markets. This inherently entails disciplines on tariffs and taxation. They foster trade in products addressing the common concern and allowing for restrictions on harmful products. They make sure that restrictions are not overly broad and respond to the principle of necessity and proportionality. They focus on interconnecting different regulatory systems allowing for appropriate interfaces of technology. They contribute by fostering the dissemination of technology supporting sustainability by means of trade and investment abroad. While existing trade rules offer a solid basis, new disciplines are of particular importance in bringing about a proactive trade agenda and for the new field of sustainable investment promotion.

(i) Climate Change Mitigation and Adaption

Much of the issues on climate change mitigation and adaption relate to low-carbon technology (Ahmad, 2021a, 2021b, Brewer and Falke, 2012; Ockwell and Mallet, 2012; Ockwell et al., 2010). This is particularly true for energy, driving economies and the World, transportation, and agriculture. Central efforts on decarbonization and fostering renewable energy should be made at the WTO, in close cooperation with specialized international organizations. Such negotiations have not yet taken place as of 2021.

Decarbonization of the energy sector and the economy:

• The gradual reduction and elimination of fossil fuel subsidies in return for tangible benefits to consumers in health care and education of children. The agenda can build upon the model and modalities of the Agreement on Agriculture and negotiations on fisheries subsidies.

• Common Anti-trust rules on producer cartels in energy production and supplies.

• Defining the policy space for the financial support of research and development of renewable energy beyond the disciplines of the SCM Agreement. It entails the reactivation of well-defined non-actionable subsidies.

• Rules on the interconnection of renewable energy and the framework for a global electricity grid, enabling the rebalance of supply and demand of renewable electricity (wind, solar, hydropower, biomass, possibly nuclear energy) and derivatives (hydrogen, carbon-free kerosene, LNG).

• The creation of a multilateral framework on carbon tariffs for heavily polluting traded products, including reforming the HS, for border tax adjustment, and the interface of different emission trading systems or carbon taxes.

• Interfacing and mutual recognition of fuel efficiency standards of transportation (road, aviation, marine transportation).

• Policy space for tax incentives based upon carbon footprints.

• Policy space for the reduction of methane in agricultural production and tariffs based upon footprinting.

• The introduction of tax incentives for the transfer of technology to developing countries as a flanking measure to PPM-based measures (see below).

• Framework for the promotion of investment in technologies reducing greenhouse gas emissions in developing countries (see below).

• Liberalization of energy-related services (consulting, engineering), including mode 4.

• Framework on investment in renewable energy (see below).

• Modes of Cooperation with IEA, the Energy Charter, and other organizations.

Climate Change adaption in agriculture, trade in foodstuffs and nutrition:

• Climate change adaption requires negotiations revising the Agreement on Agriculture, bringing about better risk management, greater reliance on food imports, and equitable distribution in times of shortages, sourced from globally diverse sources.

• Disciplines on export restriction and fair sharing of food stuffs among countries in need.

• Support measures should be redirected to bring about diversity in crops, away from endangered monocultures in traded goods.

• A framework for trade in genetically engineered crops and food stuffs.

• Support of research and development for climate change-resisting plants.

• Disciplines on risk assessment and risk management in biotechnology regulation.

• Framework for investment in sustainable agriculture (see below).

• Liberalizing related services (consulting, engineering) including Mode 4.

• Modes of cooperation with FAO and other organizations.

(ii) Protecting Biodiversity

Trade-related efforts on protecting biodiversity have been limited at the WTO to intellectual property (Wager, 2008). They have not produced results, so far. Moreover, the list of issues to be addressed exceeds IPRs and entails rules on goods and services:

• Gradual reduction and phase out of fossil fuel subsidies for fisheries.

• Recognition of PPM-based rules on fishing techniques.

• Recognition of PPM-based rules on agricultural products, for example, palm oil production.

• Protecting traditional knowledge and cultural diversity in intellectual property.

• Recognition of agreed trade restrictions on endangered plant species.

• Disciplines on marine plastic pollution by way of limiting plastic packaging in international trade.

• Framework for rules and principles relating to the use and trade of pesticides and fertilizers in agriculture and trade products.

• Framework to encourage diversity of traded crops.

• Framework for labeling diversified foodstuffs.

• Framework of investment in crop and animal diversity (see below).

• Liberalizing related services (consulting, genetic engineering, plant, and animal breeding) including Mode 4.

• Modes of cooperation with UNEP, FAO, WIPO and Washington Treaty.

(iii) Combatting COVID-19 and Future Pandemics

A high-level dialogue between WTO and WHO commenced in 2021 (WTO, 2021a). A number of issues should be contemplated.

• Tightening rules on export restrictions on medical products and pharmaceuticals.

• Framework for financial support for research and development of vaccines.

• Regulatory and intellectual property framework for the production and international trade of vaccine and pharmaceutical components, value chains, and final products.

• Developing a legal framework for Private-Public-Partnerships (PPPs), in particular on IPRs.

• Recognition of framework requiring equitable distribution of, and access, to vaccines in terms of trade regulation.

• Liberalization of hospitals and services and access to jobs under Article VII:2 GATS, including mode 4.

• Liberalization of related services (vaccination, analytical, and testing), including mode 4.

• Framework for investment in health care services (see below).

• Modes of cooperation with WHO and International Health Regulation, international risk assessment, and national risk management in managing trade in medical products and equipment and movement of personnel.

V Strengthening Transfer and Dissemination of Technology to Developing Countries

Many of the issues and activities listed depend upon technology diffusion. Fundamental questions relating to access to technology have not been properly addressed in WTO law. While the framework is workable for commercial transactions, it fails to address the needs of lower-income countries short of finance and funding and a private sector able to engage forcefully by means of commercial acquisition of technology (Barton, 2017; Lybecker and Lohnse, 2015; Zhuang, 2017). As the dissemination of technology is at the heart of addressing common concerns of humankind, these issues move center stage. Two types of measures should be contemplated next to concessionary support programs:

(i) Tax Rebates for Technology Dissemination

Commitments and pledges on the transfer of knowledge and technology in international agreements ignore that governments rarely dispose of the technology that pertains to the private sector. Article 66:2 of the TRIPS Agreement obliges developed members “to provide incentives to enterprises and institutions in their territories for the purpose of promoting and encouraging technology transfer least-developed countries in order to enable them to create a sound and viable technological base.” This provision has largely remained a dead letter. Special and differential treatment here has remained an empty promise. This is because most governments making such promises do not legally dispose of the technology. It is in the hand of companies and the private sector. Financial incentives may be qualified as export subsidies beyond export credits and thus contrary to the SCM Agreement (Ahmad, 2021a). It is submitted that industries engaging in low-income countries by investment or trade should benefit from domestic tax reductions, in order to offset financial risks and difficulties encountered. This idea, introduced by Hoekman et al. (2005) still awaits implementation. Climate change is an excellent field, as such rebates can account for abatement measures abroad, contributing to agreed targets. It can also apply to other fields recognized as a common concern of humankind. This in return would require appropriate revisions in the SCM Agreement. A similar scheme could be extended to developing countries in general, or limited to particular sectors which are essential to commitments under the principle of common concern of humankind.

(ii) Tax and Tariff Revenues for Technology Dissemination

Tax revenues generated from import carbon tariffs and border tax adjustment should be used to fund technology dissemination to low and lower-income country producers with the aim to meet sustainable production standards and thus avoid further import restrictions. These funds could be accountable to abatement goals agreed upon by countries imposing tariffs and import restrictions in addressing the respective Common Concerns of Humankind. In addition, part of such income could be used to fund international programs supporting lower-income countries in readjusting to sustainable production standards.

VI Investment Promotion

While trade addresses cross-border activities, globalization entails the division of labor in producing components to products and thus the operation of global or regional value chains. Some 60% of all trade today is trade in components, sourced from a multitude of different sites and countries around the world. China plays a particularly important role in protecting corresponding investments (see Chapters 18–20, 21). Existing WTO rules on goods are almost silent on investment, while disciplines on services and intellectual property equally address and protect the foreign direct investment. Bilateral investment treaties address the protection of investment. In doing so, they indirectly promote investment. But they fall short of actively supporting it with a view to bringing about the sustainable production of exported products. Conditions of investment are largely left to transactional arrangements and projects, and multilateral disciplines are lacking. Developing countries are exposed to conditions imposed by major investors.

In superpower rivalry, it will be of interest to developing countries to develop a multilateral framework for investment and investment promotion which secures long-term benefits for their economies and people. Programs such as the Road and Belt Initiative of China, or the US response to the Build Back Better World Partnership should be subject to multilateral disciplines addressing conditions of investment for land use and natural resources, technology transfer and dissemination, local work content securing benefits accruing to the population. Developing countries – the vast majority of WTO members – are interested in bringing about the necessary safeguards against exploitation. Industrialized countries caught in between power blocks equally share an interest in creating level playing fields from the point of view of investors. Incentives and terms for sustainable technology diffusion in the context of global value chains and division of labor must be at the heart of the effort.

While negotiations, building upon the TRIMS Agreement, failed during the Doha Development Agenda, investment was taken up in bilateral cooperation and trade agreements. Since 2020, plurilateral negotiations on a framework of investment facilitation for development (MFIFD) are under way among WTO Members. They are supported by developing countries, China, and the EU. The effort addresses S&D, technical assistance, cross-border cooperation, facilitation of stay of personnel, and home country obligations for sustainable development (WTO, 2021a, 2021b). A comprehensive agreement should set the framework conditions which all investors need to respect and comply with in transactional agreements and investment programs in a transparent manner. Given geopolitical rivalries, this will be difficult to achieve. The framework agreement, however, could focus on recognized Common Concerns of Humankind, and expound on particular disciplines applicable to areas captured by this principle. The commonality of interests in addressing the concern should facilitate overcoming resistance to giving up power-based policy space and unilaterally imposing conditions to the benefit of addressing the concern, in particular climate change mitigation and adaption, the protection of biodiversity, and access to vaccines. An agreement addressing common concerns would address framework conditions for funding and returns, servicing loans, land rights, and use, labor conditions and mobility, protection of basic human rights, and finally for the transfer and dissemination of sustainable technology.

VII Conclusions

The existing body of multilateral trade rules offers a solid foundation for addressing the commercial dissemination of technology. Binding dispute settlement is able to authoritatively apply principles and rules to governmental regulation of emerging and new technologies. It offers a bridge to overcome superpower rivalries and protect the rights of Member States of the WTO, all being mixed economies in their own way. Shortcomings of the law relate to the dissemination of technology to developing countries lacking resources in the private sector. It is here that new disciplines are required and need to be developed. Given geopolitical rivalries, it is submitted that these efforts should focus on recognized Common Concerns of Humankind. It is here that we can identify globally shared common interests beyond power politics where Members of the WTO need to cooperate beyond unilateralism with a view to address these concerns effectively in their very own interest and thus allow for the dissemination and funding of appropriate technologies.

The WTO thus should develop a proactive trade and investment-related agenda for negotiations enabling and supporting recognized Common Concerns of Humankind, that is climate change mitigation and adaption, the protection of biodiversity, and the containment of global pandemics. Other topics may eventually be recognized and inform future negotiations. A substantial amount of topics for a proactive trade agenda of the WTO can be identified, and each of them is able to make a substantial contribution. They may result in amending existing agreements or bring about new treaties, in particular on energy and electricity, the reduction of fossil fuels subsidies, or the packaging of traded goods. Or they link up WTO law to agreements developed in other fora. Trade rules will increasingly distinguish products on the basis of sustainable modes of production. At the heart of this transition will have to be a mechanism to compensate for the necessary imposition of PPM-based trade restrictions by funding and allowing access to sustainable technology by developing countries with a view to leaving conventional modes of production behind. Such mechanism, using tax rebates or return of tax and tariff revenues will be accounted for the effort made in addressing the Common Concern and therefore is also in the interest of major markets and powers.

Given the structure of the world economy, additional rules need to address investment promotion for the benefit of developing countries, caught otherwise in between superpower rivalries. Agreed framework conditions, applicable to areas of Common Concern of Humankind, will create a level playing field for home countries, host countries, and investors. They secure that foreign direct investment is sustainable, non-exploiting with reasonable returns, and to the benefit of the population of the developing country concerned. Again, at the heart of this effort is that modern and sustainable technology is being deployed by foreign direct investors or donor countries in a cooperative manner and equally to the benefit of local welfare. Since such investment or financial support accounts for addressing a Common Concern, differences of interests and unilateralism, otherwise paramount in a World shaped by geopolitical rivalry, should rationally make way for international cooperation within the World Trade Organization and other international bodies. The emerging principle of Common Concern of Humankind offers the hope and potential that ideological differences and power play can cede to cooperation in limited areas of inherently shared interests and necessary cooperation in creating public goods in the pursuit of domestic and global welfare.