An opportunity to set a new standard

China and the EU are preparing to launch negotiations for a bilateral investment agreement at the next EU-China Summit this November. The proposed agreement would replace existing bilateral investment treaties between EU member states and China. This is the moment to develop a more balanced international investment framework that would protect the sovereign power of both parties.

The current international framework for investment protection is increasingly perceived as a threat to national sovereignty and the protection of the rights and values of citizens. The risks associated with the dispute settlement clauses commonly included in these agreements are sparking an ever more urgent debate on a need for alternatives.

Dispute settlement in investment agreements typically enables foreign investors to unilaterally sue host governments behind closed doors before a triumvirate of arbitrators. ISDS allows foreign investors to challenge the laws and regulations enacted by sovereign governments by bypassing national courts. ISDS provides foreign investors with an option to go straight to an international arbitration process that carries an inherent bias in favour of the investors. The arbitrators are generally commercial lawyers or academics who make money out of these arbitrations, which can only be brought by foreign investors.

At the same time, the broad phrasing of the protections in investment agreements allow foreign investors to challenge almost any government measure that might impinge negatively on their projected profits. The clause guaranteeing the foreign investor a ‘fair and equitable’ treatment is particularly controversial because it can be stretched by the investor and the arbitrators to cover almost anything. Investment agreements also stipulate that foreign investors must be compensated for any kind of expropriation. Investment tribunals on various occasions have interpreted general public interest measures as indirect expropriations warranting compensation to the investor. Investors can challenge regulations from public authorities at all levels if they feel these may negatively affect their profitability.

Through the investor-state dispute settlement (ISDS) mechanisms, investment agreements can have a serious impact on policy space. Awards for damages can easily run into hundreds of millions of dollars, payable out of public budgets. And even if the state wins a dispute case, this is still a costly affair due to the costs of the arbitration and legal representation.

The Chinese audience may be aware of the investment dispute initiated by Chinese insurer Ping An initiated against the state of Belgium to claim compensation over damages arising from Belgium´s nationalization of Fortis Bank. It may thus look upon ISDS as a convenient tool to protect the interest of Chinese investors abroad. But if, as the EU wants, market access is included in the proposed investment agreement, China can also expect much more incoming investment from Europe, with European investors able to invoke the protections of the agreement and initiating cases against China if their investments are threatened.

International law firms, who discovered the opportunities of ISDS in the 1990s and are making big money out of dispute settlement cases, are actively raising awareness of the possibilities of investment arbitration with international investors and pushing them to file claims. The number of known investment cases has increased exponentially to arrive at a staggering 514 in 2012 – a number which probably only symbolizes the tip of an iceberg, as there is no obligation to publicly register an investment case, except for those brought before ICSID, the dispute settlement body of the World Bank.

China has already been at the receiving end of a number of WTO complaints, including over its raw materials policy. Without question, policies to boost domestic industries and reserve raw materials for domestic producers would also be challenged under an investment agreement, potentially leading to substantial and deep-cutting damages awards. ‘National treatment’ clauses typically included in investment agreements do not allow for this kind of ‘discrimination’ of foreign investors. An investment agreement would likely impact on other areas of policy-making as well. For example, environmental pollution is emerging as a major problem in China. But should China wish to introduce stricter environmental regulation, an EU-China investment deal would enable European investors to claim compensation if those new rules impinge in any way on their profit expectations.

Similarly, China’s ambition to build up a social welfare system will take time and require reregulation – which may be challenged by foreign investors. Multi-billion dollar compensation suits can be powerful lever to persuade governments to amend or abandon proposed legislation. Foreign investors can use ISDS to change regulations in the way that they want, instead of in the way the public interest, now and in the future, may require. And as investment treaties generally have a life span of decades, there are few exit options once an agreement is ratified.

A growing number of countries around the world feel the current framework for investment protection as a straightjacket, which is increasingly constraining their sovereign power to regulate. And resistance is mounting. Ecuador has recently announced an audit of its bilateral investment agreements because of their bias favouring multinational corporations, Australia has decided to no longer include ISDS in future investment agreements and countries like Canada are seeking to tighten up the legal phrasing of investment protection agreements to avoid overly wide interpretation of their protections by investment tribunals. Faced with a growing number of claims, India has decided to revisit its BITs, while Brazil has always categorically refused to implement any BITs.

South Africa, in a recent review of its BITs, concluded that their added value in attracting foreign investment was at best ambiguous, while their undermining effect on decision-making was significant. South Africa also expressed its concerns about standard BIT clauses on the free and unrestricted transfer of funds, as the current global economic crisis has highlighted the potentially destabilising effects of unrestricted capital movements.

In response to the growing critique, UNCTAD released an Investment Policy Framework for Sustainable Development (IPFSD), aimed at helping policy makers to connect the investment policy framework to domestic development policies and to ensure that investment supports sustainable development and inclusiveness objectives. Another alternative framework aimed at balancing investor rights with investor responsibilities is the Model International Agreement on Investment for Sustainable Development of the International Institute for Sustainable Development.

China would be wise to take note of proposals to reform the current investment protection framework by tightening up the legal phrasing and excluding ISDS before entering negotiations to liberalise its investment policy with the EU. China, as a key economic player, might set its ambition beyond merely seeking integration into existing investment protection standards. As civil society organisations, we call on both parties to seek out avenues to advance a new model that addresses the substantial problems associated with the current system for investment protection.

TNI is a member of the S2B network, which includes development, environment, human rights, women and farmers organisations, trade unions, social movements as well as research institutes form all over Europe.

Photo of Chinese money by Kevin Dooley