McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai. This China Law Alert was authored by MWE China Law Offices lawyer Bryan Fu and McDermott lawyers Philip Bentley and Sabine Konrad.
Negotiations for a bilateral investment treaty between the European Union and China are expected to be formally launched during the EU-China Summit on 21 November 2013. However, the launch would be just the first step in a long negotiation process.
On 24 October 2013, the fourth meeting of the EU-China High Level Economic and Trade Dialogue was held in Brussels. Among other points, the most recent talk between the world’s two biggest traders reaffirmed the willingness to formally launch negotiations for a bilateral investment treaty (BIT) during the EU-China Summit to be held in Beijing later this week.
This move is significant for several reasons.
- There is huge potential for investment flow between the European Union and China.
According to provisional Eurostat data, in 2012 Chinese investments into the EU(27) amounted to €3.5 billion, and only accounted for 2.2 per cent of total foreign direct investment (FDI) flowing into the EU. By contrast, in the same year EU firms invested €9.9 billion in China, accounting for approximately 11.4 per cent of all China’s inward FDI. It is worth noting that the EU’s outward FDI to China only accounted for 2.4 per cent of total outbound investment flowing from the EU to the rest of world in 2012. By contrast, bilateral trade in goods and services is more than €1 billion per day.
- There are concerns regarding the Standards of Investment Protection and the fate of existing BITs between China and EU Member States.
China’s tremendous growth has led to a sea change in its BIT programme since it concluded its first BIT with Sweden in 1982.
The most recent generation of BITs, such as the BITs with Germany, the Netherlands , Belgium and Luxemburg, and Latvia, offer a high standard of protection, including, most importantly, access to investor-state arbitration. However, recent statements from European Commission officials have given EU investors cause for concern that new EU treaties may lower the standard of protection.
Another source of risk is Article 6(2–3) of the so-called Grandfathering Regulation (EU) No 1219/2012), which enables the Commission “to indicate the appropriate measures to be taken by the Member State concerned in order to remove the obstacles referred to in paragraph 2”, i.e., obstacles “to the negotiation or conclusion by the Union of bilateral investment agreements with third countries, with a view to the progressive replacement of the bilateral investment agreements.” This provision, which was debated hotly between the Member States, the Commission and the European Parliament, might be read as empowering the Commission to demand the termination of existing BITs.
European investors, especially those from Germany, the Netherlands, Latvia or Belgium, should watch the negotiations as well as future developments in the EU very carefully.
Chinese investors should also make sure that their interests as capital exporters to European states are adequately protected.
In the best case scenario, the EU-China BIT will adhere to the high standards reflected in the Netherlands and Germany-China BITs. This would indeed mean an upgrade for investors from all European states, rather than a lowering of standards.
- The negotiation of an EU-China BIT is likely to be a long process.
The negotiation of a BIT between two giant economic entities is likely to be a long process. For example, the China-US BIT negotiation is still in its preliminary stage more than 30 years after both parties opened the dialogue in 1980. The China-Canada agreement took 18 years and went through 22 rounds of formal negotiations.
The difficulties of these negotiations must not be underestimated. The EU negotiators are keen to include provisions on market access, including access to services, and on intellectual property. The negotiation process is likely to be complicated by calls from the European Parliament to include provisions on fundamental rights and values (social, environmental, consumer, etc.). In sum, if both parties formally launch the negotiations in November, it will be a small step in the negotiation process, but may be—in the best case scenario—a giant leap for upgrading the investment relationship between the EU and China.
For more information, please contact your regular McDermott Will & Emery or MWE China Law Offices lawyer or an author.