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Course on Investment Treaty Practice of China, Japan and Korea: A Comparative Analysis of Standards of Protection and Investor-State Dispute Settlement Provisions in International Investment Agreements Hi-Taek Shin Year 2012 Official citation Hi-Taek Shin, Investment Treaty Practice of China, Japan and Korea, in COLLECTED COURSES OF THE INTERNATIONAL ACADEMY FOR ARBITRATION LAW, Year 2012, Volume 1, at 1 (2015) Hi-Taek Shin Professor of Law and Director of Center for International Economic and Business Law, Seoul National University School of Law. Yale Law School, LL.M., J.S.D., Seoul National University, LL.B., LL.M. The author wishes to express his deep appreciation to H. A. Kang and S. H. Cho for their invaluable research assistance in the initial preparation of the lectures, and Homin Lee for helping me convert the text of the lectures into this publication. The many discussions I had with Homin throughout the conversion process have significantly enriched the content of this publication. Preface In July 2012, I had the privilege of offering a special course titled, “Investment Treaty Practice of China, Japan and Korea,” at the Arbitration Academy in Paris. The course was composed of five lectures over four days. This book is an outcome of those lectures and the lively exchange of views and ideas I engaged in with the bright future arbitration lawyers and scholars who attended the 2012 Arbitration Academy. The special lectures were intended to present a comparative analysis of the investment treaty practices of three of Asia’s largest economies: the People’s Republic of China (China), Japan, and the Republic of Korea (Korea). In planning the lectures, I attempted to deliver an overview of key substantive and procedural protection features typically embedded in contemporary international investment agreements (IIAs) and how China, Japan, and Korea have adapted such standard features to accommodate their specific needs and circumstances. A comparative examination of the specific treaty provisions adopted by these three East Asian countries should provide insight into key substantive protections, dispute settlement mechanisms in IIAs in general, and the particular legal implications of such protections as they are practiced by the three major East Asian economies. As such, this discussion is not intended to be a comprehensive treatise or textbook covering all aspects of China, Japan, and Korea’s IIAs. Rather, it will focus on some of the key provisions intended to grant substantive protections to foreign investors, such as protection against discrimination (under national treatment and mostfavored nation treatment standards), protection against expropriation, provision of fair and equitable treatment, and the investor-state dispute settlement mechanisms through which an investor may realize the protections afforded by these IIAs. The reasoning behind the selection of these three Asian economies extends beyond their geographical proximity. First, China, Japan, and Korea have become major participants in the cross-border investment process. Based on their successful economic development during the past few decades and current established status as key players in the global economy, further 1 expansion of their respective and collective roles in the realm of international investment is not difficult to envision. An important, interrelated aspect of such economic development is the evolution of each state’s international investment policy. Recent Chinese IIAs capture the ambivalence of China’s economic policy—on the one hand, fully acknowledging the need to promote inward foreign investment and recognizing the need to protect its own investors overseas, but on the other hand, simultaneously hesitating to make what it considers to be currently unrealistic commitments in exchange for corresponding economic benefits. As a traditional capital exporter, Japan has consistently shown a willingness to offer a significant amount of protection to foreign investors, in the interest of maximizing the level of comfort offered in return to its citizens investing overseas. In contrast to China and Japan, Korea has experienced a fundamental change in foreign investment policy, as it has shifted from being a net-capital importer to a net-capital exporter over the course of several decades. Analyzing each country’s distinctive investment policy, each occupying a different position along the international investment policy spectrum, will help us develop a more comprehensive understanding of the broader global investment landscape. Moreover, the IIAs of these three East Asian states address issues commonly found in most IIAs. A comparative overview of key IIA provisions, such as those relating to expropriation and dispute settlement, and how each state has responded to these issues is, to a large extent, reflective of various divergent investment practice tendencies of states in different stages of economic development. Second, China, Japan, and Korea have been actively involved in enriching the global network of IIAs. In recent years, each of the three states has shown increasing enthusiasm in negotiating bilateral investment treaties (BITs) and free-trade agreements (FTAs, also referred to as economic partnership agreements, or EPAs), which typically include detailed investment chapters. In terms of the absolute number of BITs it has ratified, for example, China ranks second only to Germany. In 2013, Japan joined negotiations for the Trans-Pacific Partnership, which includes comprehensive investment rules. Korea, which has signed 93 BITs to date, concluded an FTA with the United 2 States in 2007 that includes a comprehensive investment chapter. Further, the three states have not only concluded BITs between each other, but on May 13, 2012, they signed a trilateral investment treaty among themselves that entered into force on May 17, 2014. While the number of investment arbitrations filed by foreign investors against these three countries or by their own investors against other states has thus far been limited, a rise in the number of direct and indirect investment dispute claims involving China, Japan, or Korea is most likely inevitable, given the continuous increase in foreign direct investment inflows into and outflows from the Northeast Asian region. From a practitioner’s standpoint, developing a firm understanding of procedural and substantive protections and their legal implications relating to the IIAs of China, Japan, and Korea will provide guidance in resolving complexities embedded in crossborder transactions involving them as host states or involving their investors. 3 I. Introduction Before delving into specific legal provisions and ensuing interpretations of international investment law, this section will describe the general economic landscape (e.g., GDP, trends in FDI inflows and outflows) in China, Japan, and Korea, respectively, and examine each state’s recent past and current investing environment in an attempt to provide a better understanding of the context in which each investing participant operates. Macroeconomic Status of China, Japan and Korea A preliminary look at the population and GDP of each of these three East Asian states should provide a general sense of the degree to which each state contributes to the global economy. As of 2013, China’s total population exceeded 1.38 billion,1 and its GDP at current prices and per capita GDP amounted to $9.1 trillion and over $6,000, respectively. 2 According to statistics released by the World Trade Organization (WTO), China’s merchandise exports and imports were valued in 2013 at US$2.209 trillion and US$1.949 trillion, respectively.3 Japan is one of the ten most populous countries in the world, with more than 127 million4 people, and its GDP and per capita GDP have been measured at approximately US$4.9 trillion and US$39,000, respectively.5 Its export and import of merchandise reached US$715 billion and US$833 billion in 2013.6 Korea stands with a population over 50 million,7 a GDP of US$1.3 trillion, and a per capita GDP of US$26,000.8 The value of its exports of merchandise in 2013 approached US$560 billion, with imports approaching US$516 billion.9 From a comparative perspective, International Monetary Fund statistics show that China’s GDP has surpassed Japan’s, and China currently ranks as the second largest economy in the world. 1 U.N. Department of Economic and Social Affairs, Population Division, World Population Prospects: The 2012 Revision, Key Findings and Advance Tables, at 9, Working Paper No. ESA/P/WP.227 (2013) [hereinafter World Population Prospects]. 2 U.N. Statistics Division, National Accounts Main Aggregates Database (2014), http://unstats.un.org/unsd/snaama/resCountry.asp (last updated Dec. 2014). 3 Trade Profiles, WORLD TRADE ORGANIZATION, http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=CN ,KR,JP (last updated Sept. 2014). 4 World Population Prospects at 11. 5 National Accounts Main Aggregates Database. 6 Trade Profiles, WORLD TRADE ORGANIZATION. 7 World Population Prospects at 12. 8 National Accounts Main Aggregates Database. 9 Trade Profiles, WORLD TRADE ORGANIZATION. 4 Japan stands firmly in third, and Korea occupies the thirteenth slot. With the exception of India, these three neighbors are the only Asian countries among the world’s top fifteen economies as of 2014.10 In May 2012, the then-leaders of the three economies, Chinese Premier Wen Jiabao, Japanese Prime Minister Yoshihiko Noda, and Korean President Lee Myung-bak, convened in Beijing and announced the commencement of trilateral free trade negotiations among their states, in an attempt to eventually construct one of the world’s largest free trade zones. Wen expressed that a trilateral free-trade agreement would “unleash [the] economic vitality of the region and boost economic integration.”11 Their signing of a trilateral investment agreement on May 13, 2012, and the treaty’s entry into force on May 17, 2014, represents a significant leap forward toward increased economic integration. The size of the combined market created by the agreement may very well rival that of the EU and NAFTA regions. FDI Inflows A specific examination of statistics more directly relevant to the main subject matter of this paper involves an analysis of data on FDI inflows and outflows, the status of BITs/FTAs that each of the three states has entered into, and the implications of such data on each state’s investment policy. With regard to FDI inflows, the World Investment Report annually released by the United Nations Conference on Trade and Development (UNCTAD) shows that FDI into China has continually increased, making China the world’s second-largest recipient of FDI behind only the United States. In 2013, FDI inflows into the United States and China reached US$188 billion and US$124 billion, respectively.12 Furthermore, China is the top prospective 10 Int’l Monetary Fund, Report for Selected Countries and Subjects, World Economic Outlook Database (April 2015). 11 Aaron Back, Toko Sekiguchi and Yuka Hayashi, Asia Powers Agree on Free-Trade Negotiation, WALL STREET JOURNAL (May 13, 2012), http://www.google.co.kr/url?sa=t&rct=j&q=japan%2Bchina%2Bkorea%2Bwall%2Bstreet %2Bjournal%2Bfreetrade%2Bnegotiations&source=web&cd=1&ved=0CCwQqQIwAA&url=http%3A%2F%2Fo nline.wsj.com%2Farticle%2FSB10001424052702303505504577401843152321480.html&ei =_sHfUZzxEsKeiQeC34CgDw&usg=AFQjCNFCL4hNol38leQSQ5v04W7a0uAh1w&bvm=b v.48705608,d.aGc&cad=rjt (First round negotiation of this FTA was held in Seoul from March 26 to March 28, 2013.). 12 UNITED NATIONS CONFERENCE ON TRADE AND DEV. [UNCTAD], WORLD INVESTMENT REPORT 2014, Annex tbl. 1, at 205-06. 5 destination for FDI, surpassing the United States in an UNCTAD ranking of transnational corporations’ top prospective host economies for 2013-2015.13 With respect to the other two East Asian neighbors, FDI inflows into Korea show a steady increase in recent years, whereas the amount of FDI flowing into Japan has been relatively insignificant considering the size of its economy. FDI inflows into Korea have increased during the past few years from US$8.961 billion in 2007 to US$12.221billion in 2013.14 On the other hand, Japan’s FDI inflows totaled US$2.304 billion in 2013.15 The East Asia region as a whole recorded FDI inflows of approximately US$221 billion, compared to US$188 billion in the United States and US$246 billion flowing into the European Union.16 FDI Outflows In contrast to the recent past, in which traditional capital-exporting states such as the United States, Germany, and France occupied top-ranking positions on lists measuring FDI outflow, statistics for 2013 present the United States (US$338 billion), Japan (US$136 billion), and China (US$101 billion) as the three largest investor economies in terms of FDI outflow.17 In addition, Hong Kong18 and Korea were ranked 5th (US$92 billion) and 12th (US$29 13 UNITED NATIONS CONFERENCE ON TRADE AND DEV. [UNCTAD], WORLD INVESTMENT REPORT th 2013, at 22 (In the same survey, Japan ranked 10 ). 14 Id. at 206. 15 Id. at 205-06. 16 Id. (FDI inflows into Japan are not accounted for in the World Investment Report statistics for the East Asia region (which includes China, Hong Kong, North Korea, South Korea, Macao, Mongolia and Taiwan as the constituent states), as the country is separately classified as one of the five “other developed countries” (in addition to Australia, Bermuda, Israel and New Zealand). Therefore, the statistics for the East Asia region and Japan have been integrated in reaching the $221 billion East Asia FDI inflow figure.). 17 Compare UNCTAD, WORLD INVESTMENT REPORT 2011, U.N. SALES NO.E.11.II.D.2 (2011), at 9, with UNCTAD, WORLD INVESTMENT REPORT 2014, at xv. 18 The WORLD INVESTMENT REPORT 2014 excludes data for the Hong Kong Special Administrative Region (SAR) from the statistics for China. Investment statistics for Hong Kong are often separated from those for China, as this SAR retains authority to enter into IIAs in accordance with Article 151 of the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China. However, information pertaining to the Hong Kong SAR is not irrelevant in analyzing the role of China, Japan and Korea in the larger global investment market. For our purposes, the applicability of Chinese BITs to Chinese nationals residing in Hong Kong carries particular significance. This jurisdictional issue was addressed in the Sr. Tza Yap Shum v. Republic of Peru decision (to be examined in subsequent chapters), and after examining the relevant Agreement between the Government of the Republic of Peru and The Government of the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investments, ChinaPeru, June 9, 1994, http://unctad.org/sections/dite/iia/docs/bits/peru_china.pdf 6 billion), respectively, placing all three East Asian neighbors in the world’s topfifteen investor economies. Such strong capital export performance further supports the view that the importance of these East Asian economies to the cross-border investment process is growing. First, China’s meteoric rise to top-five capital exporter status has been remarkable. In 2010, the absolute amount of Chinese overseas investment exceeded that of Japan, and between 2007 and 2012, the amount of Chinese overseas investment more than tripled. 19 FDI outflow from Japan and Korea has similarly increased significantly during a similar period, although not to the extent of China’s exponential growth. FDI outflow from Japan and Korea increased from US$128.020 billion and US$19.633 billion in 2008, to US$135.749 billion and US$29.172 billion in 2013, respectively.20 In sum, FDI outflow from the East Asia region (including Japan) amounts to approximately US$372 billion, exceeding that of the United States (US$338 billion) and the European Union (US$250 billion).21 Membership of International Conventions and Organizations The active involvement of China, Japan, and Korea as members of international conventions and organizations is another essential indicator of the three Asian states’ participation in and contribution to the global investment process. For example, with respect to investment policies and practices, accession to the Organisation for Economic Co-operation (OECD) indicates that a state is, in effect, committing itself to a higher level of liberalization obligations in its investment policies, as are set forth in the Code of Liberalisation of Capital Movements, the Code of Current Invisible [hereinafter China-Peru BIT (1994)], the Tribunal determined that the Claimant was indeed a Chinese national in accordance with the Chinese Nationality Act, regardless of his place of residence. The Tribunal further suggested that Chinese BITs shall apply to Chinese nationals with Hong Kong residence irrespective of Hong Kong’s treaty status, provided that the Chinese BIT concerned does not expressly “exclude Hong Kong residents from its scope of application.” Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence (June 19, 2009), para. 74. The applicability and precedential value of this decision to future cases are unclear, but a Chinese national with Hong Kong residence may reasonably expect to benefit from protections offered by Chinese BITs, unless otherwise excluded from coverage. 19 Compare UNCTAD, WORLD INVESTMENT REPORT 2013, at 214 (FDI inflows into China were recorded at $26.510 billion in 2007), with UNCTAD, WORLD INVESTMENT REPORT 2014, at 206 (FDI inflows into China were recorded at $123.911 billion in 2013). 20 UNCTAD, WORLD INVESTMENT REPORT 2014, at 205-06. 21 Id. 7 Operations, and interrelated transparency requirements.22 Japan joined the OECD in April 1964, and Korea followed suit in December 1996.23 Japan and Korea also have been members of the WTO since 1995, and China’s accession took place a few years later in 2001.24 China’s accession to the WTO marked a critical occasion to level up its trade and investment related regulatory framework and transparency. With respect to the International Centre for Settlement of Investment Disputes (ICSID) Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), Japan and Korea became Contracting States in 1967, and China signed the ICSID Convention in 1990 and became a Contracting State in 1993.25 Finally, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 was ratified by Japan in 1961, by Korea in 1973, and by China in 1987.26 In addition to accounting for a sizeable amount of international movement of capital and investment, China, Japan, Korea, and their investors are expected to make significant contributions to the development of international investment law and practice. For example, investors from these countries may very well emerge as claimants in FDI-related disputes, and any of the states could be named as a respondent in arbitrations arising out of claims brought by foreign investors under investment treaties. So far, the investment claims that have been submitted to arbitration against China, 22 See Organisation for Economic Co-Operation and Development (OECD) Code of Liberalisation of Capital Movements 2013, available at http://www.oecd.org/daf/inv/investment-policy/CapitalMovements_WebEnglish.pdf, and OECD Code of Liberalisation of Current Invisible Operations 2013, available at http://www.oecd.org/daf/fin/private-pensions/InvisibleOperations_WebEnglish.pdf. 23 See List of OECD Member Countries, available at http://www.oecd.org/general/listofoecdmembercountriesratificationoftheconventionontheoecd.htm. 24 See World Trade Organization Members and Observers, available at http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm. 25 Japan signed the ICSID Convention on September 23, 1965, and the agreement entered into force on October 14, 1966. Korea signed the document on April 18, 1966, and the entry into force took place on March 23, 1967. China signed the Convention on February 9, 1990, and the agreement entered into force on February 6, 1993. For a list of ICSID Contracting Parties and respective dates of accession for each state, see https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=Co ntractingstates&ReqFrom=Main. 26 For a list for the current status of and signatories to this Convention, see United Nations Commission on Int’l Trade Law [UNCITRAL], Status: Convention on the Recognition and Enforcement of Foreign Arbitral Awards, available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention_status.html. 8 Japan, or Korea, or brought by their investors against other states, have been few in number, though not insignificant in terms of their implications for future investment. As of the end of 2014, Chinese investors have filed four investment arbitration cases, against Peru,27 Mongolia, 28 Belgium,29 and Yemen, 30 and China has been named a state respondent in two arbitrations, one filed by a Malaysian investor31 and another filed by a Korean company.32 Japan has not faced any investment arbitration claims as of yet, although a Dutch subsidiary of a Japanese securities firm has brought investment claims against the Czech Republic.33 The first investment arbitration claim against Korea was filed in late 2012, by an investor invoking the Korea-Belgium-Luxembourg BIT.34 In order to better comprehend current policy choices and future expected attitudes toward international investment and interrelated dispute settlement, it is critical to examine the decisions China, Japan and Korea have made in the recent past and the inclinations those decisions reveal. A. China As discussed above, FDI flow into China has been on a steady rise and Chinese overseas investment has sharply increased, particularly in the past five years. Despite rapid growth in FDI outflow, however, China remains a net capital importer in terms of both FDI flow and stock. In 2013, FDI inflows were approximately US$124 billion, compared to US$101 billion in FDI outflows, and levels of FDI inward stock (US$957 billion) far exceeded those of outward stock (US$614 billion).35 Nevertheless, based on the recent exponential 27 Sr. Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence (June 19, 2009) (to be examined in further chapters). 28 China Heilongjiang International Economic & Technical Cooperative Corp, et al. v. Mongolia (more details relating to this pending case at the Permanent Court of Arbitration available at http://www.pca-cpa.org/showpage.asp?pag_id=1378). 29 Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium, ICSID Case No. ARB/12/29. 30 Beijing Urban Construction Group Co. Ltd. v. Republic of Yemen, ICSID Case No. ARB/14/30. 31 Ekran Berhad v. People’s Republic of China, ICSID Case No. ARB/11/15. 32 Ansung Housing Co., Ltd. v. People’s Republic of China, ICSID Case No. ARB/14/25. 33 Saluka Investments BV v. Czech Republic, IIC 210 (2006), available at http://www.pcacpa.org/showpage.asp?pag_id=1149. 34 LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37 (2012), available at http://www.italaw.com/cases/2022. 35 UNCTAD, WORLD INVESTMENT REPORT 2014, at 206-10. 9 growth of China’s levels of FDI outflow, Chinese overseas investment may well surpass FDI into China sometime in the near future. At the Third Plenum of the Eleventh Central Committee of the Communist Party of China, held in December 1978, Deng Xiaoping called for Economic Reform and Openness (Gaige Kaifang) and openly embraced attracting FDI as one of the top policy priorities of the Chinese government. In an attempt to promote and control the flow of such FDI into China, the Chinese government enacted special foreign investment laws and simultaneously engaged in concluding BITs; the first BIT China concluded was with Sweden in 1982.36 Subsequent BITs during this earlier stage of reform were primarily negotiated and concluded with Western developed economies.37 This specific inclination toward industrialized, capital-exporting counterparties revealed China’s underlying policy goal of promoting inward foreign investment. In contrast, the Chinese government adopted a cautious stance with respect to the level of protection offered to foreign investors. For instance, the Chinese government refused to sign off on substantive national treatment commitments and restricted the scope of disputes allowed to be submitted for arbitration to the amount of compensation for expropriation.38 36 See, e.g., Agreement on the Mutual Protection of Investments, China-Swed., March 29, 1982, http://arbitrationlaw.com/files/free_pdfs/china-sweden_bit.pdf (China had concluded treaties of friendship with communist bloc comrades, such as the Soviet Union in 1950—“Treaty of Friendship, Alliance and Mutual Assistance”—and North Korea in 1961—“Mutual Aid and Cooperation Friendship Treaty” —which touched upon economic cooperation and investment, but it would be very difficult to characterize these agreements as BITs under the strict definition of the term). 37 For instance, China concluded BITs with France in 1984 (Agreement between the Government of the French Republic and the Government of the People’s Republic of China on Encouragement and Reciprocal Protection of Investments, China-Fr., Mar. 30, 1984, http://investmentpolicyhub.unctad.org/Download/TreatyFile/734), Italy in 1985 (Agreement between the Government of the Italian Republic and the Government of the People’s Republic of China on the Promotion and Mutual Protection of Investments, China-It., Jan. 1, 1985, http://investmentpolicyhub.unctad.org/IIA/country/103/treaty/916), the United Kingdom in 1986 (Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China Concerning the Promotion and Reciprocal Protection of Investments with Exchange of Notes, China-U.K., May 15, 1986, http://investmentpolicyhub.unctad.org/Download/TreatyFile/793 [hereinafter China-U.K. BIT (1986)]), and Japan in 1988 (Agreement between Japan and the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investment, ChinaJapan, Aug. 1, 1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/747 [hereinafter China-Japan BIT (1988)] (albeit not a “western,” but evidently a “developed” economy)). 38 China-U.K. BIT (1986) art. 7 (“(1) A dispute between a national or company of one Contracting Party and the other Contracting Party concerning an amount of 10 Over time, China gradually steered away from this disposition favoring inward investment and embraced a more liberal BIT regime, adopting the ‘Go Abroad Policy’ (Zouchuqu Zhanlue, also referred to as either the ‘Go Out’ or ‘Going Global’ Strategy) in 1999. The Chinese government realized that sharp appreciation in the renminbi was, in large part, attributable to the massive foreign reserves it had accumulated as a result of increasing FDI inflows. In order to contain rapid rates of inflation, the Chinese government encouraged outbound investment and acquisition of assets overseas. The new BIT policies capture this dual concern, focusing on the promotion and protection of both inward and outward investments. At the same time, this policy reflects China’s successful transition to sizeable capital-exporter status. With respect to BIT text itself, China has composed and utilized three versions of its Model BIT over the years: (1) the first Model BIT relied on in the 1980s; (2) the second version adopted in the early 1990s; and (3) the current version implemented since the late 1990s. 39 Specific details and policy orientations revealed therein will be discussed in the following chapters. Despite experiencing several shifts in their specific content and general focus, the Chinese Model BITs largely track China’s dramatic transition from a closed economy to an increasingly globalized market economy. As an example, more recent BITs depart from a protectionist stance and unveil China’s focus and interest in promoting overseas investment. Two of its most recent IIAs, the trilateral investment treaty among China, Japan and South Korea and the BIT between China and Canada,40 feature the most liberal positions on investment that the Chinese government has taken to date. At the same time, even these more liberal agreements reflect a very cautious approach, both in a substantive and procedural sense. Moreover, heightened scrutiny of the treaty negotiation and ratification process is not compensation which has not been amicably settled after a period of six months from written notification of that dispute shall be submitted to international arbitration.”). 39 See Norah Gallagher & Wenhua Shan, China, in COMMENTARIES ON SELECTED MODEL INVESTMENT TREATIES 131-182 (Chester Brown ed., Oxford University Press 2013) (comprehensive analysis and actual text of Version III of the Chinese Model BIT). 40 Agreement between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments, Can.China, Sept. 9, 2012, http://investmentpolicyhub.unctad.org/Download/TreatyFile/600 [hereinafter Canada-China BIT (2012)]. 11 necessarily a tendency exclusive to the Chinese side. China’s IIA treaty counterparts and their domestic constituencies, in particular, often approach negotiation with a great amount of sensitivity and express serious concern with possible threats to sovereignty that an IIA with China might pose. In response to the signing of the China-Canada BIT in September 2012, at least 74,000 Canadians submitted notes to their government seeking rejection of the BIT. 41 Regardless of its general conservative stance, China has been actively involved in the IIA negotiation process: as of June 1, 2013, it has signed BITs with 128 nations,42 and as of August 2013, it has entered into nine FTAs.43 B. Japan Japan’s reputation as a traditional capital exporter has been established since the early 1980s. Its investment policy, not surprisingly, has reflected this position. As mentioned above, the amount of FDI activity flowing into Japan has been modest considering the large size of its economy. For instance, FDI inflows into Japan reached approximately US$2.3 billion in 2013, compared to outward flows of US$136 billion in that same year.44 Inflow and outflow in terms of stocks display a similar disparity: in 2013, the amount of Japan’s overseas stock investment was over four times greater than the amount of inward stock movement, as there was approximately US$993 billion of FDI outward stock compared to US$171 billion of FDI inward stock. 45 Shotaro Hamamoto and Luke Nottage caution against attributing this relatively low level of inward investment activity to the domestic legal regime, noting that “Japan’s traditionally low inflows and stocks of inbound FDI seem to reflect broader socio-economic factors rather than any particularly strict legal restrictions on FDI flows into Japan,” and adding that the Japanese 41 Gus Van Harten, Taking Apart Tories’ Party Line on China-Canada Treaty, THE TYEE.CA (Nov. 5, 2012), available at http://tcktcktck.org/wp-content/uploads/2012/11/Gus-VanHarten-Tyee.pdf (Van Harten points out several concerns relating to state sovereignty caused by entering into the China-Canada BIT, such as limiting the ability of Canadian governments to confer benefits with respect to domestic resource extraction upon its own citizens.). 42 A comprehensive list of Chinese BITs available at http://investmentpolicyhub.unctad.org/IIA/CountryBits/42#iiaInnerMenu. 43 A comprehensive list of FTAs China entered into and those currently undergoing negotiation available at http://fta.mofcom.gov.cn/english/fta_qianshu.shtml. 44 UNCTAD, WORLD INVESTMENT REPORT 2014, at 205. 45 Id. at 209. 12 government has, in fact, intensified its efforts to attract FDI into Japan.46 Significant increases in the amount of FDI inward stock over the past decade illustrate Japan’s liberalized regulatory regime, as figures have increased from $50.3 billion in 2000, to $171 billion in 2013.47 The magnitude of Japanese overseas investment notwithstanding, Japan has been rather passive in pursuing BITs for protection of its investors and investment abroad. During the twenty-five year time span between 1977 (Egypt) and 2001 (Mongolia), Japan only concluded nine BITs.48 From the late 1990s onwards, however, major Japanese business interest organizations and corporations began imploring the government to enter into EPAs embracing comprehensive investment chapters, which contain a binding legal commitment to liberalize markets to Japanese investors. As Japan realized that this liberalization commitment and enhanced protection of overseas investment were unattainable through the multilateral trade channels offered by the WTO framework, Japan developed its own “new generation investment treaty” program.49 To that end, Japan shifted gears and adopted a more aggressive stance toward protecting its investors by pursuing bilateral commitments through BITs and investment chapters embedded in FTAs. In 2002, Japan concluded its first significantly pro-investor BIT, with Korea.50 From 2002 to February 2015, Japan concluded 29 investment treaties, encompassing both BITs and FTAs.51 Despite this recent change in stance, however, Japan’s 46 Luke Nottage & Shotaro Hamamoto, Japan, in COMMENTARIES ON SELECTED MODEL INVESTMENT TREATIES 347-348 (Chester Brown ed., Oxford University Press 2013). 47 UNCTAD, WORLD INVESTMENT REPORT 2014, at 209. 48 See Agreement between Japan and the Arab Republic of Egypt Concerning the Encouragement and Reciprocal Protection of Investment, art. 2(1), Egypt-Japan, Jan. 28, 1977, http://arbitrationlaw.com/files/free_pdfs/egypt-japan_bit.pdf [hereinafter EgyptJapan BIT (1977)] and Agreement between Japan and Mongolia Concerning the Promotion and Protection of Investment, Japan-Mong., Feb. 15, 2001, http://www.bilaterals.org/IMG/pdf/japan_mongolia.pdf [hereinafter Japan-Mongolia BIT (2001)]. 49 See Luke Nottage & Shotaro Hamamoto, Japan, in COMMENTARIES ON SELECTED MODEL INVESTMENT TREATIES, at 347-349. 50 Agreement between the Government of the Republic of Korea and the government of Japan for the Liberalisation, Promotion and Protection of Investment, Japan-S. Kor., Mar. 22, 2002, http://unctad.org/sections/dite/iia/docs/bits/korea_japan.pdf [hereinafter JapanKorea BIT (2002)]. 51 These include BITs with Korea (Id.), Vietnam (Agreement between Japan and the Socialist Republic of Viet Nam for the Liberalization, Promotion and 13 investment treaty agenda is still limited in scope and lags behind other FDIexporting states such as the United States and Germany, in terms of the absolute number of IIAs it has ratified. The lack of a Japanese model BIT may, Protection of Investment, Japan-Viet., Nov. 14, 2003, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1738 [hereinafter Japan-Vietnam BIT (2003)]), Cambodia (Agreement between Japan and the Kingdom of Cambodia for the Liberalization, Promotion and Protection of Investment, Cambodia-Japan, Aug. 31, 2002, http://www.kh.embjapan.go.jp/political/nikokukan/invest-agree.pdf [hereinafter Cambodia-Japan BIT (2002)]), Laos (Agreement between Japan and the Lao People’s Democratic Republic for the Liberalisation, Promotion and Protection of Investment, JapanLaos, Jan. 16, 2008, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1729 [hereinafter Japan-Laos BIT (2008)]), FTAs with Singapore (Agreement between Japan and the Republic of Singapore for a New-Age Economic Partnership, Japan-Sing., Jan. 13, 2002, http://www.bilaterals.org/IMG/pdf/JSEPA_JP-SG_FTA_2000_.pdf [hereinafter Japan-Singapore EPA (2002)]), Mexico (Agreement between Japan and the United Mexican States for the Strengthening of the Economic Partnership, Japan-Mex., Sept. 17, 2004, http://www.mofa.go.jp/region/latin/mexico/agreement/agreement.pdf [hereinafter Japan-Mexico EPA (2004)]), Malaysia (Agreement between the Government of Japan and the Government of Malaysia for an Economic Partnership, Japan-Malay., Dec. 13, 2005, http://www.mofa.go.jp/region/asiapaci/malaysia/epa/content.pdf [hereinafter Japan-Malaysia EPA (2005)]), The Philippines (Agreement between Japan and the Republic of the Philippines for an Economic Partnership, Japan-Phil., Sept. 9, 2006, http://www.mofa.go.jp/region/asia-paci/philippine/epa0609/main.pdf [hereinafter Japan-Philippines EPA (2006)]), Chile (Agreement between Japan and the Republic of Chile for a Strategic Economic Partnership, Japan-Chile, Mar. 27, 2007, http://www.mofa.go.jp/region/latin/chile/joint0703/agreement.pdf [hereinafter Japan-Chile EPA (2007)]), Thailand (Agreement between Japan and the Kingdom of Thailand for an Economic Partnership, Japan-Thai., Apr. 3, 2007, http://www.mofa.go.jp/region/asia-paci/thailand/epa0704/agreement.pdf [hereinafter Japan-Thailand EPA (2007)]), Brunei (Agreement between Japan and Brunei Darussalam for an Economic Partnership, Brunei-Japan, June 18, 2007, http://www.mofa.go.jp/region/asia-paci/brunei/epa0706/agreement.pdf [hereinafter Brunei-Japan EPA (2007)]), Indonesia (Agreement between Japan and the Republic of Indonesia for an Economic Partnership, Indon.-Japan, Aug. 20, 2007, http://www.mofa.go.jp/region/asiapaci/indonesia/epa0708/agreement.pdf [hereinafter Indonesia-Japan EPA (2007)]), Vietnam (Agreement between Japan and the Socialist Republic of Viet Nam for an Economic Partnership, Japan-Viet., Dec. 25, 2008, http://www.mofa.go.jp/region/asia-paci/vietnam/epa0812/agreement.pdf [hereinafter Japan-Vietnam EPA (2008)]), and Switzerland (Agreement on Free Trade and Economic Partnership between Japan and the Swiss Confederation, Japan-Switz., Feb. 19, 2009, http://www.mofa.go.jp/region/europe/switzerland/epa0902/agreement.pdf [hereinafter Japan-Switzerland EPA (2009)]). Japan also entered into a FTA with ASEAN in 2008 (Agreement on Comprehensive Economic Partnership Among Japan and the Member States of the Association of Southeast Asian Nations, Apr. 2008, http://www.mofa.go.jp/policy/economy/fta/asean/agreement.pdf [hereinafter ASEAN-Japan FTA (2008)]). 14 in part, be attributable to this latecomer status. As of March 2015, Japan has signed 25 BITs and fifteen FTA/EPAs.52 C. Korea In contrast to Japan, a longtime capital exporter, and China, a traditional net capital importer despite its recent surge in FDI outflows, Korea presents an interesting case, as it has successfully transformed itself from capital importer to net capital exporter status both in terms of FDI flow and stock movement. For instance, Korea’s outward flows of FDI in 2013 were recorded at US$29.2 billion, outweighing its inward flows of US$12.2 billion, and Korea’s outward stock flow of US$219 billion exceeded its inward stock flow of US$167.4 billion.53 In the 1960s, the Korean government was primarily focused on recovering from the devastation left behind by the Korean War and relied heavily on international public aid. When international public aid began to noticeably decline, the Korean government recognized a need to resort to private sources of capital in order to finance its economic reconstruction and development. In response, the Korean government enacted the first special FDI legislation in 1960, designed to attract foreign capital and investment by offering various investor incentives and protections. Korea’s first BIT was concluded in 1964 with what was then West Germany, and BIT negotiations with other Western developed economies subsequently followed.54 Until the 52 For updates on negotiations, meetings and statuses relating to Japanese FTA/EPA/IIAs, see http://www.meti.go.jp/english/policy/external_economy/trade/FTA_EPA/index.html. 53 UNCTAD, WORLD INVESTMENT REPORT 2014, at 206, 210. 54 Treaty between the Republic of Korea and the Federal Republic of Germany Concerning the Promotion and Reciprocal Protection Investments, Ger.-S. Kor., Feb. 4, 1964, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1351 [hereinafter GermanyKorea BIT (1964)]. BITs entered into force with other western developed economies include Belgium (Agreement between the Republic of Korea, on the One Hand, and the Belgo-Luxemburg Economic Union, on the Other Hand, on the Encouragement and Reciprocal Protection on Investments, Belg.-S. Kor., Dec. 20, 1974, http://investmentpolicyhub.unctad.org/Download/TreatyFile/2948 [hereinafter BelgiumSouth Korea BIT (1974)]); France (Agreement between the Government of the French Republic and the Republic of Korea on Encouragement and Reciprocal Protection of Investments, Fr.-S. Kor., Dec. 28, 1977, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1239 [hereinafter FranceKorea BIT (1977)]); United Kingdom (Exchange of Notes between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Korea concerning the extension to the Bailiwicks of Jersey and Guernsey and the Isle of Man of the Agreement for the Promotion and Protection of Investments, signed at Seoul on 4 March 1976, S. Kor.-U.K., Aug. 23, 1983, 15 mid-1990s, Korea remained a net capital-importing market, and the BITs Korea entered into from the 1960s until the 1980s were negotiated to create a favorable investment climate for foreign investors from major European capital-exporting economies. For that reason, the BITs ratified by Korea during this period largely conformed to the respective Model BITs of its European counterparties. Korea’s parameters for inbound and outbound investment expanded as a result of the industrialization and modernization of its economy. In the late-1970s, Korea began to conclude BITs with other developing countries, and by the late-1980s, the scope of its economic partnerships further extended to include transition economies.55 Since the 1990s, Korea has welcomed a wide variety of countries in different stages of economic development as BIT counterparties.56 http://investmentpolicyhub.unctad.org/Download/TreatyFile/1843 [hereinafter KoreaU.K. BIT (1983)]); Denmark (Agreement between the Government of the Republic of Korea and the Government of the Kingdom of Denmark Concerning the Encouragement and the Reciprocal Protection of Investments, Den.-S. Kor., June 2, 1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1011 [hereinafter DenmarkKorea BIT (1988)]); Italy (Agreement between the Government of the Republic of Korea and the Government of the Republic of Italy Concerning the Encouragement and the Reciprocal Protection of Investments, It.-S. Kor., Jan. 10, 1989, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1685 [hereinafter ItalyKorea BIT (1989)]); and Spain (Agreement on the Mutual Promotion and Protection of Investments between the Republic of Korea and the Kingdom of Spain, S. Kor.-Spain, Jan. 17, 1994, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1831 [hereinafter Korea-Spain BIT (1994)]). 55 For instance, Korea signed an “Agreement for the Promotion and Reciprocal Protection of Investments” with then-Soviet Union on December 14, 1990 (http://unctad.org/sections/dite/iia/docs/bits/korea_ussr.pdf) and a similar BIT with China on September 30, 1992. 56 See, e.g., Agreement between the Government of the Republic of Korea and the Government of the Islamic Republic of Pakistan for the Promotion and Protection of Investments, Pak.-S. Kor., May 25, 1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1816 [hereinafter PakistanKorea BIT (1988)]; Agreement between the Government of the Republic of Korea and the Government of the Islamic Republic of Pakistan for the Promotion and Protection of Investments, El Sal.-S. Kor., May 25, 1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1131 [hereinafter El Salvador-Korea BIT (1988)]; Agreement on the Promotion and Protection of Investments between the Government of the Republic of Korea and the Government of the Kingdom of Morocco, Morocco-S. Kor., Jan. 27, 1999, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1811 [hereinafter MoroccoKorea BIT (1999)]; Agreement between the Government of the Republic of Korea and the Government of the Republic of Nicaragua for the Promotion and Protection of Investments, Nicar.-S. Kor., May 15, 2000, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1813 [hereinafter Nicaragua-Korea BIT (2000)]; and Agreement between the Government of the Republic of Korea and the Government of the Sultanate of Oman for the Promotion and Reciprocal 16 By the mid-1990s, Korea had emerged as one of the world’s major trading countries, with total overseas investment growing large enough to exceed the FDI inflow. According to the World Investment Report, FDI outflows from Korea in 1995 (US$3.552 billion) had already at least doubled the amount of FDI inflows for the same year (US$1.776 billion).57 This increase in overseas investment can be attributed to the strategic focus of Korean corporations on expanding their business overseas. Further accelerating this trend was Korea’s accession to the OECD in 1996. Currently, Korean overseas investment, both on an annual basis and a total accumulated basis, far exceeds the inflow of FDI, rendering Korea a net capital exporter. In 2001, a model BIT was developed in an attempt to accommodate the increase in capital outflow, while simultaneously retaining high levels of investment from abroad. Today, Korea’s investment policy has characteristics of both a capitalimporting and capital-exporting economy, and aims to accommodate both the inflow and outflow of capital. In recent BITs and FTAs entered into after 2000, Korea has generally positioned itself as a capital-exporting country, seeking more investment opportunities and greater protection overseas. On the other hand, Korea assumed a capital-importing stance when negotiating with certain highly industrialized markets such as the European Union, Japan, and the United States, all major sources of FDI flowing into Korea. This dual policy recognizes both the potential benefits of entering into investment treaties that promote and protect Korean corporations’ overseas investments, and of creating a favorable investment climate attractive to foreign investors. On a final note, as of December 2014, the total number of BITs and FTAs with investment chapters signed by Korea approached 93 and twelve, 58 Protection of Investments, Oman-S. Kor., Oct. 8, 2003, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1815 [hereinafter KoreaOman BIT (2003)]. 57 UNCTAD, WORLD INVESTMENT REPORT 1998: TRENDS AND DETERMINANTS, U.N. SALES NO.E.98.II.D.5 (1998), at 364, 370. 58 Free Trade Agreement between the Republic of Colombia and the Republic of Korea, Colom.-S. Kor., Feb 21, 2013, http://www.sice.oas.org/TPD/Col_kor/Draft_Text_06.2012_e/June_2012_Index_PDF_e.as p [hereinafter Colombia-Korea FTA (2013)] (Korea signed its tenth FTA with Colombia on February 21, 2013 and is awaiting entry into force of this agreement. The first nine have all entered into force.). 17 respectively, making Korea the second most-prolific BIT-contracting state in Asia.59 Annexes A, B, and C provide a list of BITs and FTAs with investment chapters ratified by China, Japan, and Korea, respectively. 59 The Korean Ministry of Foreign Affairs regularly updates international investment treaties at: http://www.mofa.go.kr/trade/treatylaw/treatyinformation/bilateral/index.jsp?mofat=001 &menu=m_30_50_40. For a list of FTAs Korea entered into to date, see http://www.fta.go.kr/new2/ftakorea/ftakorea2010.asp. 18 II. Protection Against Discrimination Under international law, it is under the exclusive competence of a sovereign state to decide whether or not to admit foreign investors into its territory, and once admitted, to determine the treatment it will afford to such investors and their business conduct. Many developing states have enacted special legislation governing the admission and treatment of foreign investments through detailed regulation. Most of these laws and regulations provide for control mechanisms through which foreign investment may be admitted selectively. In general, these mechanisms lay out criteria to determine eligibility for admission and further stipulate screening processes, approval requirements, joint venture requirements, maximum allowable rates of foreign equity, and other conditions to be imposed upon approval of admission. Certain foreign investment legislation also offers guarantees of non-discrimination as well as incentives to foreign investors meeting a particular set of criteria. However, host states are not subject to any obligation under international law to extend to foreign investors or investment treatment equivalent to that which is offered to their own nationals, their own investments, or those of a third state. From the perspective of foreign investors, securing non-discriminatory treatment and a level playing field with competitors, whether local or foreign, is of paramount importance to staying competitive in the market. Almost all modern-day BITs and investment chapters of FTAs aim to secure mutual promises from the counterparties not to discriminate on grounds of nationality against foreign investors or investments, as compared to the treatment each party offers to its own nationals or to investors from a third-party state. The former is referred to as “national treatment,” whereas the latter is termed “most-favoured-nation (MFN) treatment.” This section focuses on the investment treaty practices of China, Japan, and Korea relating to these two standards of treatment. A. National Treatment Clauses on national treatment constitute an essential component of international economic treaties. The simple goal of national treatment provisions is to preclude a host state from differentiating between foreign and 19 local investors, thereby securing for the benefit of foreign investors the same level of protection nationals of the host state receive. Traditionally, European BITs have generally refrained from inserting any qualifying language limiting the scope of national treatment provisions. Conversely, investment treaties concluded by the U.S. or those modeled after the U.S.’s example have usually specified that national treatment will only apply when either “like situations” or “like circumstances” exist.60 One of the key issues in the discussion of national treatment is whether national treatment is (a) provided to investors throughout the entire investment process, including at the investment establishment and acquisition stages (known as pre-entry or pre-establishment national treatment), or (b) offered only after the given investment is actually admitted into the host state (known as post-entry or post-establishment national treatment). If national treatment is extended to the establishment and acquisition stages, the host state is obligated, in accordance with the applicable investment treaty, to admit foreign investors so that they may have an opportunity to establish or acquire investments in the host state’s territory. This more expansive variation of national treatment is typically offered when the parties to the BIT or FTA seek to establish a legally-binding commitment to liberalize cross-border investment. Traditionally, the United States has adopted a more liberal stance toward including this right of establishment in national treatment and MFN treatment clauses. For example, the U.S.-Chile FTA extends national treatment and MFN treatment to the “establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory.”61 Jeswald Salacuse points out two main concerns 60 See Rudolf Dolzer and Christoph Schreuer, PRINCIPLES OF INTERNATIONAL INVESTMENT LAW 179 (Oxford University Press 2008) (general discussion of the possible differences in nuance between these two terms). 61 The United States-Chile Free Trade Agreement, U.S.-Chile, June 6, 2003, http://www.ustr.gov/trade-agreements/free-trade-agreements/chile-fta/final-text [hereinafter U.S.-Chile FTA (2003)] (Emphasis added): 1. Each Party shall accord to investors of the other Party treatment no less favorabl e than that it accords, in like circumstances, to its own investors with respect to t he establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than 20 with this “liberalized entry model.”62 The first problem involves politically motivated restrictions on foreign investment in certain industries controlled by influential domestic constituencies. Second, host states often reserve certain preferential treatment for the benefit of national entities, particularly in industries where domestic firms lack competitiveness compared to foreign enterprises. If, on the other hand, national treatment is limited to post-entry investment and business activities, the host state retains discretion to deny admission to any given investor from the treaty counterparty state. Such determinations may be made in accordance with laws and regulations or other policy objectives of the host state. In general, European BITs embrace this “controlled entry model,”63 in which the admission of foreign investment is determined in accordance with applicable domestic laws and regulations. In contrast to the “liberalized entry model,” which applies national treatment to the “establishment and acquisition” of investments, the admission of foreign investment under this controlled approach is “subject to [the host state’s] right to exercise powers conferred by its laws.”64 Regardless of whether national treatment is granted to foreign investors in all phases or only to limited phases within the investment process, treaty signatories often seek to leave room for certain circumstances in which they may refuse to give national treatment. As a result, an explicit carve-out may be drafted to provide for certain exceptions to the provision of national that it accords, in like circumstances, to investments in its territory of its own inv estors with respect to the establishment, acquisition, expansion, management, c onduct, operation, and sale or other disposition of investments. 62 Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES 196 (Oxford University Press 2010) (Salacuse describes the “grant of a relative right of admission or establishment” as the “liberalized entry model”; UNCTAD, ADMISSION AND ESTABLISHMENT, U.N. SALES NO.E.99.II.D.10 (2002), at 16 (explains the basic idea of this “liberalized entry model” resonating with concepts found in the “selective liberalization model.” This selective liberalization model allows for the rights of entry and establishment to certain industries enumerated on a “positive list.”)). 63 Id. at 196. (Salacuse characterizes the “admission of investment according to host country law” as the “controlled entry model.” This controlled entry model is coterminous with the “investment control model” explained in Admission and Establishment at 16.). 64 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Hashemite Kingdom of Jordan for the Promotion and Protection of Investments, Jordan-U.K., Oct. 10, 1979, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1772 [hereinafter JordanU.K. BIT (1979)]. 21 treatment. The extent to which a contracting party offers national treatment is highly, if not exclusively, dependent on its set of governing investment policies and laws. The utilization of such carve-outs, therefore, depends largely on the specific investment policies and control mechanisms each contracting state relies upon to screen incoming foreign investment projects. An UNCTAD report on national treatment refers to this carve-out mechanism as the “opt-out” or “negative list” approach and points out that, under this approach, “it may be difficult to identify with precision all the industries and activities to which national treatment should not apply.” 65 An alternative would be to adopt a “positive list” approach, which would clarify a (typically narrow) range of areas to which national treatment applies. Consequently, the scope of national treatment is likely to be much more limited under this latter approach, and thus a more gradual, less liberalized investment regime may be expected. With respect to these carve-out provisions, the position China assumes is substantially different from that of Japan and Korea, as will be examined below. As to the application of and reliance on national treatment clauses in arbitration cases, a recent study indicates that, as of January 2010, claimants advanced national treatment claims in ten decided ICSID cases, out of which such claims were upheld in four NAFTA-related arbitrations under the ICSID Additional Facility Arbitration Rules.66 1. National Treatment in Chinese BIT Practice Scope of Coverage National treatment has historically not been commonly adopted in Chinese BIT practice, due in part to China’s long-standing planned economy status, and in part to the need to encourage national industries in the course of implementing China’s successive economic development plans. China’s first Model BIT did not include any reference to national treatment, and the first instance in which China accepted national treatment provisions in its investment treaty practice was in 1986, when it signed a BIT with the United Kingdom: 65 UNCTAD, NATIONAL TREATMENT, U.N. SALES NO.E.99.II.D.16 (1999), at 64. LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION 83, 386 (Table II D, Appendix 10). 22 66 Article 3 Treatment of Investment (3) In addition to the [MFN provisions] of this Article either Contracting Party shall, to the extent possible, accord treatment in accordance with the stipulations of its laws and regulations to the investments of nationals or companies of the other Contracting Party the same as that accorded to its own nationals or companies. Article 3(3) of the China-U.K. BIT hints at China’s cautiousness toward this standard of protection and embeds several mechanisms through which the scope of national treatment offered could be limited. First, the “to the extent possible” language, which could, at best, be read as requiring “best endeavors” national treatment, confines the provision of national treatment to an unclear, but limited extent. Furthermore, the China-U.K. BIT inserts an additional qualification conferring national treatment only to the extent that it is “in accordance with the stipulations of its laws and regulations.” This could be interpreted to mean that national treatment shall be accorded by a host state only if its laws and regulations stipulate as such. In effect, China could maintain under this provision close control over the actual level of protection and treatment offered to foreign investors and incoming investment, as it would be able to determine when national treatment is, or is not, feasible or desirable in the stipulations of its laws and regulations. For a foreign investor unfamiliar with the complications inherent to the Chinese domestic legal system, such treaty language may be perceived as a symbolic gesture, rather than providing much, if any, practical comfort. China’s second Model BIT, and the treaties it ratified during that stage of its investment policy development, did not extend national treatment beyond the parameters of “best endeavors” national treatment. Even during this second Model BIT period, quite a number of Chinese BITs, such as the China-Lithuania BIT (1994), did not contain national treatment clauses at all.67 67 See Agreement between the Government of the Republic of Lithuania and the Government of the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investments, art. 2(1), China-Lith., Nov. 8, 1993, http://investmentpolicyhub.unctad.org/Download/TreatyFile/756 [hereinafter China-Lithuania BIT (1993)]. See also, Agreement between the Government of the People’s Republic of China and the Government of the Socialist Republic of 23 The third and most recent version of the Chinese Model BIT, however, adopts a more liberal investment regime in which the national treatment protections offered to foreign investors and investments are more tangible. Article 3(3) of Version III specifies the extent to which national treatment applies: Without prejudice to its laws and regulations, each Contracting Party shall accord to investments and activities associated with such investments by the investors of the other Contracting Party treatment not less favorable than that accorded to the investments and associated activities by its own investors.68 As is seen here, earlier “to the extent possible” language is omitted from the current Model BIT, and a different form of qualifying language is embedded in its place: national treatment is provided to the extent that there is no “prejudice to [the Contracting Party’s] laws and regulations.” In theory, the Chinese government may take measures under this provision that discriminate against foreign investors and their investments to the extent that Chinese laws and regulations enable the government to do so. This clause protects foreign investors and investments from discriminatory practices of officials or governmental agencies that lack a legal or regulatory basis. From that perspective, this approach is a step forward from the stance taken in the Vietnam concerning the Encouragement and Reciprocal Protection of Investments, China-Viet., Dec. 2, 1992, http://investmentpolicyhub.unctad.org/Download/TreatyFile/795 [hereinafter China-Vietnam BIT (1992)]; China-Mongolia BIT (1991); Agreement between the Government of the People’s Republic of China and the Government of the Hellenic Republic for the Encouragement and Reciprocal Protection of Investments, art. 2, China-Greece, June 25, 1992, http://investmentpolicyhub.unctad.org/Download/TreatyFile/738 [hereinafter China-Greece BIT (1992)]; China-Estonia BIT (1992), art. 2; and Agreement between the Government of the People’s Republic of China and the Government of the Republic of Slovenia Concerning the Encouragement and Reciprocal Protection of Investments, art. 3(2) China-Slovn., Sept. 13, 1993, http://investmentpolicyhub.unctad.org/Download/TreatyFile/779 [hereinafter China-Slovenia BIT (1993)] (signed and entered into effect during this Second Model BIT phase, maintains the formulation found in Version I of the Model BIT: “Either Contracting Party shall to the extent possible, accord treatment in accordance with the stipulations of its laws and regulations to the investments of investors of the other Contracting Party the same as that accorded to its own investors.”) (Emphasis added). 68 Model BIT, Version III, Art 3(3). 24 China-UK BIT. The China-Uzbekistan BIT (2011) reflects the new Model BIT approach: Article 3 National Treatment Without prejudice to its applicable laws and regulations, with respect to the management, conduct, maintenance, use, enjoyment, sale or disposal of the investments in its territory, each Contracting Party shall accord to investors of the other Contracting Party and associated investments treatment not less favorable than that accorded to its own investors and associated investments in like circumstances.69 In addition to confining the provision of national treatment within the boundaries of the domestic legal system, this treaty text specifies that national treatment shall apply exclusively “in like circumstances.” In a significant number of other recent Chinese BITs, this qualification relating to domestic laws and regulations has been removed from the treaty text. On the other hand, China also includes in its treaties a “grandfather provision,” carving out non-conforming measures existing at the time of entry into force with a “freezing clause,” so as not to impose restrictions on such non-conforming measures. To the extent that the overall level of inconsistency is unaffected, such clauses allow China to maintain certain nonconforming measures in its BITs.70 China has, however, agreed to gradually 69 Italics added. Agreement between the People’s Republic of China and Bosnia and Herzegovina on the Promotion and Protection of Investments, China-Bosn. & Herz., June 26, 2002, http://investmentpolicyhub.unctad.org/Download/TreatyFile/465 [hereinafter ChinaBosnia-Herzegovina BIT (2002)] (the Protocol to the China-Bosnia-Herzegovina BIT (2002) provides that national treatment does not apply to: “a) any existing nonconforming measures maintained within its territory; b) the continuation of any nonconforming measure referred to in . . . a); c) an amendment to any non-conforming measure referred to in . . . a) to the extend (sic) that the amendment does not increase the non-conformity of the measure, as it existed immediately before the amendment, with those obligations.”). See also Agreement between the People’s Republic of China and the Federal Republic of German on the Encouragement and Reciprocal Protection of Investments, art. 2(2), China-Ger., December 1, 2003, http://investmentpolicyhub.unctad.org/Download/TreatyFile/736 [hereinafter ChinaGermany BIT (2003)] and Agreement between the Government of the Republic of Finland and the Government of the People’s Republic of China on the Encouragement and Reciprocal Protection of Investments, art. 4, China-Fin., November 15, 2004, http://arbitrationlaw.com/files/free_pdfs/china-finland_bit.pdf [hereinafter China-Finland BIT (2004)]. 25 70 phase out any such non-conforming measures, as is reflected in the text of the trilateral investment treaty among China, Japan, and Korea which entered into force in May 2014:71 Article 3 National Treatment 1. Each Contracting Party shall in its territory accord to investors of another Contracting Party and to their investments treatment no less favorable than that it accords in like circumstances to its own investors and their investments with respect to investment activities. 2. Paragraph 1 shall not apply to non-conforming measures, if any, existing at the date of entry into force of this Agreement maintained by each Contracting Party under its laws and regulations or any amendment or modification to such measures, provided that the amendment or modification does not decrease the conformity of the measure as it existed immediately before the amendment or modification. Treatment granted to investment once admitted shall in no case be less favorable than that granted at the time when the original investment was made. 3. Each Contracting Party shall take, where applicable, all appropriate steps to progressively remove all the nonconforming measures referred to in paragraph 2. Note: The People’s Republic of China confirms that its measures referred to in paragraph 2 shall not be inconsistent with paragraph 2 of Article 3 72 of, and paragraph 3 of the Protocol73 to, [the China-Japan BIT]. 71 Agreement Among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment, May 2012, http://www.meti.go.jp/press/2012/05/20120513001/20120513001-3.pdf (not yet in force) [hereinafter Trilateral Investment Agreement among China, Japan and Korea (2012)] . The Protocol to the China-Bosnia-Herzegovina BIT (2002) also provides that China “will be endeavoured to progressively remove the non-conforming measures.” 72 China-Japan BIT (1988) (“The treatment accorded by either Contracting Party within its territory to nationals and companies of the other Contracting Party with respect to 26 At first glance, paragraph 3 appears to express the Contracting Parties’ intent to address and eventually remove all non-conforming measures. However, a more careful examination of interrelated documents (e.g., the China-Japan BIT) reveals China’s reluctance to offer a more expansive variation of the national treatment clause. In the Note excerpted above, China assures that non-conforming measures shall not be inconsistent with Paragraph 3 of the China-Japan BIT Protocol. But Paragraph 3 of this earlier investment treaty’s Protocol conveys China’s willingness to deny national treatment if “it is really necessary for the reason of public order, national security or sound development of national economy.”74 Considering these provisions in the aggregate, China is effectively reiterating its intent to maintain steadfast control over a vague, yet wide range of activities pertaining to “public order and security, and [the] sound development” of its economy. This “sound development” language may theoretically prove to be particularly problematic, in that any arbitrary measure adopted by the Chinese government in the form of laws and regulations to minimize the competitive disadvantage of national enterprises may be construed as necessary for the sound development of the Chinese economy. Thus, although China has taken a step forward from its previous national treatment stance, the degree of its increased liberalization may not be as dramatic as it appears to be on the surface of recent investment treaty texts. Stage of Application With respect to the specific stage of investment at which national treatment is triggered, China has not yet agreed to apply national treatment protection standards to the establishment and acquisition of investments. As an example, the China-Austria BIT (1986) captures the Contracting Parties’ investments, returns and business activities in connection with the investment shall not be less favourable than that accorded to nationals and companies of the former Contracting Party.”). 73 Id. (“For the purpose of the provisions of paragraph 2 of Article 3 of the Agreement, it shall not be deemed “treatment less favourable” for either Contracting Party to accord discriminatory treatment, in accordance with its applicable laws and regulations, to nationals and companies of the other Contracting Party, in case it is really necessary for the reason of public order, national security or sound development of national economy.”) (Emphasis added). 74 China-Japan BIT (1988), para. 3 of Protocol. 27 reluctance to extend national treatment protections to the admission of foreign investment: Article 2 Promotion and Protection of Investment 1. Either Contracting Party shall encourage investment in its territory by investors of the other Contracting Party and permit such investment in accordance with its laws and regulations.75 Instead, both Contracting Parties retain discretion to selectively admit foreign investment and to rely exclusively on domestic administrative and legal procedures in the decision-making process. The maximum extent to which China has been willing to extend national treatment has been with regard to the “expansion” of foreign investments, as is evidenced in paragraph 1 of Article 3 of its more recent BIT with Korea:76 Article 3 Treatment of Investment 1. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments (hereinafter referred to as “national treatment”) with respect to the expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments (hereinafter referred to as “investment and business activities”).77 The exact meaning of the word “expansion” in the China-Korea BIT is not entirely clear. It could be interpreted to refer to any of a wide range of investor activities in the host state, from the injection of additional capital, to 75 Agreement between the People’s Republic of China and the Republic of Austria Concerning the Encouragement and Reciprocal Protection of Investments, Austria-China, October 11, 1986, http://investmentpolicyhub.unctad.org/Download/TreatyFile/179 [hereinafter Austria-China BIT (1986)] (Emphasis added). 76 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Korea on the Promotion and Protection of Investments, China-S. Korea, September 8, 2007, http://www.mofa.go.kr/incboard/faimsif/treaty_popup.jsp?ITEM_ID=A9E34474D9812D42 49257355002B2728&ITEM_PARENT_ID=5227BBB15C5B8F02492573530019F24B [hereinafter China-Korea BIT (2007)]. 77 Italics added. 28 further development in the same industry of an already-established “investment” in the host state, to the opening of new branches, or to growth into related or new industries, all of which may not be accurately captured by the words “establishment and acquisition.” All of these interpretations, however, are limited in scope in the China-Canada BIT (2007), which provides that the concept of “expansion” applies only to certain sectors for which a domestic prior approval process is not required: Article 6 National Treatment 3. The concept of “expansion” in this Article applies only with respect to sectors not subject to a prior approval process under the relevant sectoral guidelines and applicable laws, regulations and rules in force at the time of expansion. The expansion may be subject to prescribed formalities and other information requirements. Limiting the application of an “expansion” provision to sectors that do not require a prior approval process manifestly dilutes the level of national treatment being offered by China. Although China has shown significant progress toward liberalizing its protection standards, foreign investors may easily find themselves empty-handed if changes in the national treatment standard are not accompanied by corresponding revisions to Chinese domestic laws and regulations. As long as China maintains, through its special foreign investment laws, a high level of control over the inflow of FDI, 78 it will be very difficult for China to accept national treatment provisions with respect to the establishment and acquisition of foreign investments. 2. National Treatment in Japanese BIT Practice The national treatment provision has traditionally constituted an essential element of Japanese BITs, and it serves as a key indicator of the progress that has been achieved in Japanese international investment treaty practice. Prior to 2002, Japan embraced the European-style “controlled entry model,” and thus did not seek in its BITs national treatment protection with respect to the establishment and acquisition of investments. For example, the Japan-Egypt BIT (1977) provides that each Contracting Party shall “admit . . . 78 See supra pp. 10-13 (China’s governmental policies relating to the admission of FDI inflows). 29 investment [of the other Contracting Party] in accordance with [its own] applicable laws and regulations.”79 In other words, as to the admission of foreign investment, Japan chose to rely on internal domestic guidelines instead of embracing a more expansive variation of national treatment. More recently, however, Japan has been pursuing the insertion of a more aggressive national treatment provision extending the scope of application to include establishment and acquisition of investments. The first investment treaty in which Japan successfully secured national treatment with respect to establishment and acquisition was its BIT with Korea, which entered into force on January 1, 2003.80 Reflecting the fact that it includes a legally binding commitment to grant the right of establishment on a national treatment basis, the treaty is titled, “Agreement for the Liberalisation, Promotion and Protection of Investment,” in contrast to “controlled entry model” European BITs, which typically follow a treaty title formulation along the lines of “Agreement for Promotion and Protection of Investment.” Article 2(1) of the Japan-Korea BIT sets out the contours of national treatment in the following manner: Article 2 1. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments . . . with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments . . . .81 In principle, the national treatment provisions in the most recent Japanese investment treaties concluded after 2002 largely track that of the Japan-Korea BIT, albeit with minor differences in specific form and language. For example, the Japan-Colombia BIT (2011) is reflective of a more 79 Egypt-Japan BIT (1977). Agreement between the Government of the Republic of Korea and the Government of Japan for the Liberalisation, Promotion and Protection of Investment, Japan-S. Korea, Mar. 22, 2002, http://unctad.org/sections/dite/iia/docs/bits/korea_japan.pdf [hereinafter Japan-Korea BIT (2002)]. 81 Italics added. 30 80 contemporary approach to “liberalized entry.” This more recent treaty first defines the term “investment activities” to include the establishment and acquisition of investments in a separate provision, contrary to its predecessor, in which the definitions for “national treatment” and “investment activities” are lumped together in the same provision. Thereafter, “national treatment” is defined as follows: Article 1 Definitions For the purposes of this Agreement: (e) the term “investment activities” means the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment and sale or other disposal of investments; Article 2 National Treatment 1. Each Contracting Party shall in its Area accord to investors of the other Contracting Party and to their investments treatment no less favorable than the treatment it accords in like circumstances to its own investors and to their investments with respect to investment activities.82 As was briefly touched upon in the Japan-Korea BIT discussion above, the BITs Japan has signed after 2002 generally include the term “liberalization” in the title, hinting at Japan’s desire to create a more expansive and open investment environment in the territories of its counterparties. In these recent BITs, exceptions to national treatment are specified in so-called “negative lists,” which identify existing non-conforming measures under the national treatment standard and enumerate all industry sectors or activities to which the national treatment obligation does not apply.83 82 Agreement between Japan and the Republic of Colombia for the Liberalization, Promotion and Protection of Investment, Colom.-Japan, Sept. 12, 2011, http://unctad.org/sections/dite/iia/docs/bits/Japan_colombia%20BIT.pdf [hereinafter Colombia-Japan BIT (2011)]. See also Brunei-Japan EPA (2007). 83 For instance, see Japan-Korea BIT (2002), at Annex I (“Exceptional Sectors or Matters to Article 2 (Article on national treatment and MFN protection)” excludes “fisheries within the territorial sea and internal waters” and the “explosives manufacturing industry,” among others, from the application of national treatment.). See also Cambodia-Japan BIT (2002), art. 7; Agreement between Japan and the Republic of Uzbekistan for the Liberalization, Promotion and Protection of Investment, Japan-Uzb., Aug. 15, 2008, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1737 [hereinafter JapanUzbekistan BIT (2008)]. 31 The inclusion of a national treatment obligation relating to the establishment and acquisition of investment tends to make treaty negotiations difficult. Capital-importing states such as China generally express reluctance to agree to legally-binding commitments to liberalize FDI or to put foreign investors and investments on equal footing with Chinese nationals throughout all phases of investment activity. Thus, when Japan fails to secure national treatment with respect to establishment and acquisition from its capital-importing counterparties, Japan typically resorts to securing MFN treatment as to the establishment and acquisition of investment as a minimum, so that its nationals will not find themselves in a disadvantageous position in relation to other foreign investors. This allows Japan to look to the national treatment standards that have been accorded by the capitalimporting counterparty to the investors or investments of other countries. Under such circumstances, it would not be unreasonable for Japan to expect to benefit indirectly from national treatment protections offered to thirdparty Contracting States, as Japan could argue that its MFN status should place its investors and investments in a position no less favorable than those of a country to which national treatment has been granted.84 In a few exceptional cases, Japan has been unable to obtain either national treatment or MFN treatment with regard to the establishment and acquisition of investments.85 3. National Treatment in Korean BIT Practice Stage of Application: Difference in Korean BITs and FTAs With the sole exception of its BIT with Japan, 86 Korea has not sought application of the national treatment standard to the establishment and 84 For a more detailed description of a hypothetical in which Japan’s MFN status may operate to expand the scope of national treatment coverage with a given counterparty state, see supra pp. 49-52. 85 See Agreement between the Government of Japan and the Government of the Independent State of Papua New Guinea for the Promotion and Protection of Investment, Japan-Papua N.G., Apr. 26, 2011, http://unctad.org/sections/dite/iia/docs/bits/JapanPNG%20BIT%2026042011.pdf [hereinafter Japan-Papua New Guinea BIT (2011)]. 86 Japan-Korea BIT (2002), art. 2(1) (“Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments…with respect to the establishment, 32 acquisition of investment in its stand-alone BITs. In general, national treatment in Korean BITs is limited to the post-establishment phase, and the standard formulation guarantees national treatment only to the extent of the “management, maintenance, use, enjoyment or disposal” of investments: Article 3 2.Each Contracting Party shall in its territory accord investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments treatment not less favourable than that which it accords to its own investors or to investors of any third State, whichever is more favourable.87 In contrast, when negotiating investment chapters as an integrated part of FTAs, Korea has typically been willing to extend national treatment protection to the establishment and acquisition of investment. Article 10.3 of Korea’s first ratified FTA, the Korea-Chile FTA, states: Article 10.3 National Treatment 1. Each Party shall accord to investors of the other Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of the other Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments . . . .”) (Emphasis added). 87 Italy-Korea BIT (1989), art. 3(2) (Emphasis added). See also, Agreement between the Government of the Republic of Korea and the Government of the Republic of South Africa on the Promotion and Protection of Investments, S. Afr.-S. Kor., July 7, 1995, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1830 [hereinafter KoreaSouth Africa BIT (1995)], Agreement between the Government of the Republic of Korea and the Government of the Democratic People’s Republic of Algeria for the Promotion and Protection of Investments, art. 3(2), Alg.-S. Kor., Oct. 12, 1999, http://investmentpolicyhub.unctad.org/Download/TreatyFile/53 [hereinafter AlgeriaKorea BIT (1999)], Agreement between the Government of the Republic of Korea and the Government of the Hashemite Kingdom of Jordan for the Promotion and Protection of Investments, art. 3(2), Jordan-S. Korea, July 24, 2004, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1739 [hereinafter JordanKorea BIT (2004)]. 33 establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.88 This text addresses foreign investors and their investments each in two separate paragraphs, and extends national treatment to the establishment, acquisition, and expansion stages of investment. Korea’s rationale for taking such different approaches to national treatment in its stand-alone BITs and in FTA investment chapters is not clear. One possible explanation is that most of Korea’s earlier BITs were concluded with European states whose negotiating template did not seek a legallybinding commitment to national treatment with regard to investment establishment, and that Korea’s subsequent BITs with non-European states were drafted against the backdrop of this tradition. Another possible factor is that the FTAs Korea has negotiated since the late 1990s were modeled after the NAFTA, which includes a detailed set of investment liberalization and protection provisions as one of its essential chapters. As FTAs intend to create free trade areas between two contracting states, the inclusion of a legallybinding commitment for the admission of foreign investors or investments from each contracting party constitutes an integral and inseparable component of the treaty negotiation process. One recently ratified BIT indicates, at the very least, gradual progress toward increased liberalization in Korea’s investment transactions with its East Asian neighbors. The amended Korea-China BIT (2007) expands the scope of national treatment to cover the expansion of investment, in contrast to former Korean BITs, which limited such application to only the “management, maintenance, use, enjoyment or disposal” of investment.89 Although subsequent Korean investment treaties have retreated to the standard, more conservative formulation,90 Korea’s BITs with China and Japan 88 See also, Free Trade Agreement between the United States of America and the Republic of Korea, art. 11.3(1), U.S.-S. Korea, June 30, 2007, http://www.ustr.gov/tradeagreements/free-trade-agreements/korus-fta/final-text [hereinafter U.S.-Korea FTA (2007)]. 89 See China-Korea BIT (2007), pp. 8-9 (text indicating application of national treatment to the expansion of investment). 90 See, e.g., Agreement between the Government of the Republic of Korea and the Government of the Kyrgyz Republic for the Promotion and Protection of Investments, art. 3(2), Kyrg.-S. Korea, Nov. 19, 2007, http://www.mofa.go.kr/incboard/faimsif/treaty_popup.jsp?ITEM_ID=3331E6A5F25ADD33 34 point to its willingness to expand the reach of national treatment to either the expansion or the establishment and acquisition stages as necessary.91 National Treatment Text Formulation In its negotiations, Korea has been extremely flexible in accommodating its counterparties’ preferences as to the appropriate level of national treatment. Recognizing China’s hesitance to accept an expansive national treatment provision, Korea agreed to China’s proposed unilateral qualification language, which limits the national treatment protections that would be afforded to Korean investment in China: Article 3 Treatment of Investment 2. [T]he paragraph 1 of the Article 3 [national treatment provision] do[es] not apply to any existing non-conforming measure maintained within its territory of . . . China or any future amendment thereto provided that the amendment does not increase the non-conforming effect of such a measure from what it was immediately before the amendment took effect . . . . The People’s Republic of China will take all appropriate measures to progressively remove all non-conforming measures.92 Although the inclusion of a “freezing clause” may indirectly discourage China from resorting to extreme non-conforming measures, the practical reach of this soft restriction, in the absence of a specific time frame to remove all non-conforming measures, is unclear. The acceptance of such amorphous non-conforming measures at China’s request points, by itself, to Korea’s openness to adjusting the precise scope of national treatment coverage. 492573E500320B7F&ITEM_PARENT_ID=3CF71C3F97518AC8492573B40003A36D [hereinafter Korea-Kyrgyzstan BIT (2007)] and Agreement between the Government of the Republic of Uruguay and the Government of the Republic of Korea on the Promotion and Protection of Investments, art. 3(1), S. Kor.-Uru., Oct. 1, 2009, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1845 [hereinafter KoreaUruguay BIT (2009)]. 91 See Trilateral Investment Agreement among China, Japan and Korea (2012), art. 1(5) and art 3 (Interestingly, the Trilateral Investment Agreement does not extend national treatment to the expansion of investment, and maintains the traditional formulation applying national treatment to the “management, conduct, operation, maintenance, use, enjoyment and sale or other disposition of investments.”). 92 China-Korea BIT (2007), art. 3(2). 35 On the other end of the spectrum, the Korea-U.S. FTA provides an example in which Korea intended to limit the scope of national treatment protections offered to its treaty counterparty. This treaty text includes a highly detailed formulation specifying exceptions to the national treatment standard. Article 11.12 of the Korea-U.S. FTA investment chapter, titled “Non-Conforming Measures,” clarifies that national treatment does not apply to “any existing non-conforming measures that are maintained by a Party” as specified in each signatory’s schedule to Annex I, and adds that national treatment is inapplicable to any future measure “that a Party adopts or maintains with respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II.”93 B. Most-Favoured Nation Treatment Virtually all investment treaties contain an MFN clause. The MFN clause lays out the contracting parties’ mutual promise not to discriminate among foreign investors and investments on the basis of nationality. The underlying purpose of this clause is to secure equal, or at the very least, nondiscriminatory treatment compared to third-party foreign investors and investments. In contrast to the general reluctance to offer national treatment (primarily out of concern for domestic industries), contracting parties have been more willing to grant MFN treatment, which they view as less threatening to domestic national enterprises and investors.94 This relative lenience may be attributable to the amorphous nature of the MFN clause. So long as a state does not grant any significant benefit to its treaty counterparties, the MFN standard of protection may not carry much, if any, weight. However, the utilization of an MFN clause is not without peril. Once a given state offers a certain benefit to one contracting party, it will be obliged to extend such treatment to the other contracting parties to which it provided MFN treatment. Thus, in order to gauge the specific reach and coverage of an MFN clause, a careful examination of the full range of that state’s investment treaties is necessary. Similar to national treatment, MFN treatment may be limited in scope and may not apply to the establishment 93 U.S.-Korea FTA (2007). See UNCTAD, Most-Favoured Nation Treatment, U.N. Sales No. 10.II.D.19 (2010) (for a comprehensive, introductory explanation of the origins and function of an MFN clause). 36 94 and acquisition of investments, depending on the specific wording of the applicable treaty text. Furthermore, BITs typically include a regional economic integration organization (REIO) exception, in order to preserve the special treatment particular states have agreed to accord each other in the context of regional integration organizations or customs unions,95 and to a certain extent, REIO exceptions dilute the principle of non-discrimination. As UNCTAD has pointed out, whether a REIO member is willing to extend the benefits of a REIO investment regime to a counterparty outside the region “would seem to depend on the relationship between, on the one hand, the degree of internal integration in investment matters in the REIO and, on the other, the degree of investment liberalization established in the IIA.” 96 Alternatively, a REIO member state may rely on carve-outs to specify exclusions pertaining to benefits intended to apply only within the REIO investment regime, and to which MFN treatment will not apply. Another common exception to MFN treatment is the double-taxation treaty, a specific type of agreement between two contracting states to avoid double taxation. Investors rely on MFN treatment in the context of their substantive rights. Another important but controversial issue related to the MFN treatment obligation is whether it applies to procedural clauses in the respective investment treaty, and in particular, to investor-state arbitration clauses. Since this question was first addressed in the Maffezini v. Spain case,97 it has become one of the most controversial issues on which tribunals and arbitrators have failed to reach any consensus. According to Reed, Paulsson and Blackaby, as of January 2010, no fewer than eleven ICSID tribunals had considered the issue, with differing results obtained depending upon the particular terms used in the treaty text and the nature of the MFN treatment sought.98 In terms of disputes relating to the scope of MFN 95 See UNCTAD, The REIO Exception in MFN Treatment Clauses, U.N. Sales No.05.II.D.1. (2004) (comprehensive discussion of the REIO exception in IIAs). 96 Id. at 2. 97 Emilio AgustÍn Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Decision of the Tribunal on Objections to Jurisdiction (25 January 2000). 98 nd LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION 85 (2 ed. 2011). See Impregilo S.p.A. v. Argentine Republic, ICSID Case No. ARB/07/17, Award (21 June 2011) (detailed discussion on the applicability of MFN clauses to dispute resolution). 37 treatment, claimants generally invoke the MFN clause in order to import more favorable treatment standards from the respondent host state’s other IIAs with third parties, rather than to claim breach of the MFN treatment clause per se. This issue will also be briefly touched upon in discussion below, in order to show the scope of MFN protection each East Asian state offers. While a comparative analysis of the standard MFN clauses adopted by China, Japan, and Korea reveals similarities in content and scope, it also illuminates the different approaches through which each state controls its respective level of market liberalization. 1. China Scope of Coverage In contrast with China’s limited and inconsistent adoption of the national treatment provision, the MFN treatment clause is commonly found in all Chinese BITs. MFN provisions applicable both to “investments” and to “activities associated with such investments by the investors” are found in all three versions of the Chinese Model BIT.99 The standard Chinese format first presents this general rule of applicability and proceeds to limit the scope of coverage by specifying exclusions where MFN treatment is not mandatory. Version III of the Chinese Model BIT specifies that: Article 3 Treatment of Investment 3. Neither Contracting Party shall subject investments and activities associated with such investments by the investors Id.; See also Concurring and Dissenting Opinion of Professor Brigitte Stern available at https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&actionVal=viewCa se&reqFrom=Home&caseId=C109. 99 See also Free Trade Agreement between the Government of the People’s Republic of China and the Government of New Zealand, art. 139, China-N.Z., April 7, 2008, http://images.mofcom.gov.cn/gjs/accessory/200804/1208158780064.pdf [hereinafter China-New Zealand FTA (2008)]; Bilateral Agreement for the Promotion and Protection of Investments between the Government of the Republic of Colombia and the Government of the People’s Republic of China, art. 3, China-Colom., Nov. 22, 2008, http://arbitrationlaw.com/files/free_pdfs/colombia-china_bit.pdf [hereinafter ChinaColombia BIT (2008)]; and Agreement on the Trade in Goods of the Framework Agreement on Comprehensive Economic Co-Operation between the People’s Republic of China and The Association of Southeast Asian Nations, art. 5, November 5, 2002, http://fta.mofcom.gov.cn/dongmeng/annex/xieyi2004en.pdf [hereinafter ASEAN-China FTA (2002)]. But see Agreement between the Government of the United Mexican States and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, China-Mex., July 11, 2002, http://arbitrationlaw.com/files/free_pdfs/mexico-china_bit.pdf [hereinafter China-Mexico BIT (2009)] (presents an alternative approach as it breaks out two clauses and addresses investors and investments separately in articles 4(1) and 4(2)). 38 of the other Contracting Party to treatment less favorable than that accorded to the investments and associated activities by the investors of any third State. 4. The provisions of Paragraph 3 of this Article shall not be construed so as to oblige one Contracting Party to extend to the investors of the other Contracting Party the benefit of any treatment, preference or privilege by virtue of: (a) any customs union, free trade zone, economic union and any international agreement resulting in such unions, or similar institutions; (b) any international agreement or arrangement relating wholly or mainly to taxation; (c) any arrangements for facilitating small scale frontier trade in border areas.100 As opposed to the national treatment standard, which does not extend beyond the “expansion” of investment (Art. 3(1) of amended ChinaKorea BIT (2007)), the scope of the MFN treatment standard is generally more expansive. The China-Finland BIT (2006) presents a relevant example and captures the comparative difference in coverage: Article 3 Treatment of Investments 2. Each Contracting Party shall accord to investments by investors of the other Contracting Party treatment no less favourable than the treatment it accords to investments by its own investors with respect to the operation, management, maintenance, use enjoyment, expansion, sale or other disposal of investments that have been made. 3. Each Contracting Party shall accord to investments by investors of the other Contracting Party treatment no less favourable than treatment it accords to investments by investors of any third State, with respect to the establishment, acquisition, operation, management, maintenance, use, enjoyment, expansion, sale or other disposal of investments. Further, neither Contracting Party 100 Italics added. Chinese Model BIT, Version III, Art 3(3). 39 shall impose unreasonable or discriminatory measures on investments by investors of the other Contracting Party concerning local content or export performance requirements.101 Article 3(2) determines that the national treatment standard shall apply only to the “operation, management, maintenance, use enjoyment, expansion, sale or other disposal of investments,” whereas the subsequent Article 3(3) includes the “establishment and acquisition” of investments in addition to the basic scope of national treatment coverage. As mentioned above, exceptions to the general rule are often utilized to limit the scope of MFN treatment. As an example, language in the ChinaGermany BIT signed in 2003 mirrors Paragraph 4(a) of Article 3 in the Model BIT quoted above and specifies that MFN treatment does not apply to “any association with any customs union, free trade zone, economic union, or common markets,” or double taxation agreements.102 The more recent China-Canada BIT contains an entire article of exceptions to which national treatment and MFN protection do not apply, such as bilateral or multilateral agreements relating to “aviation, fisheries, or maritime matters including salvage,” among others: Article 8 Exceptions 1. [The MFN provision article] does not apply to: (a) treatment by a Contracting Party pursuant to any existing or future bilateral or multilateral agreement: (i) establishing, strengthening or expanding a free trade area or customs union; or (ii) relating to aviation, fisheries, or maritime matters including salvage; (b) treatment accorded under any bilateral or multilateral international agreement in force prior to 1 January 1994. 2. [The MFN treatment article and national treatment article] do not apply to: 101 102 China-Finland BIT (2004) (Emphasis added). China-Germany BIT (2003), art. 3(4). 40 (a) (i) any existing non-conforming measures maintained within the territory of a Contracting Party . . . ; (b) the continuation or prompt renewal of any nonconforming measure referred to in sub-paragraph (a); or (c)an amendment to any non-conforming measure referred to in sub-paragraph (a), to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment . . . . 3. Articles 5, 6 and 7 do not apply to any measure that a Contracting Party has reserved the right to adopt or maintain pursuant to Annex B.8. 4. In respect of intellectual property rights, a Contracting Party may derogate from Articles 3, 5 and 6 in a manner that is consistent with international agreements regarding intellectual property rights to which both Contracting Parties are parties. 5. Articles 5, 6 and 7, do not apply to: (a) procurement by a Contracting Party; (b) subsidies or grants provided by a Contracting Party, including government-supported loans, guarantees and insurance. This text encompasses a wide assortment of limitations to MFN treatment. Paragraph 1 carves out a REIO exception and excludes bilateral or multilateral agreement relating to certain sensitive domestic industries, which are generally recognized through deals specifically reached among the contracting parties. Further, subsection 1(b) presents an interesting variation from the standard limitations: in effect, the Contracting Parties are taking out any MFN treatment protections offered under less-refined pre-1994 investment treaties. As a result, the Contracting Parties may focus on more recent IIAs in assessing the specific scope of MFN treatment offered under this BIT. 41 Paragraph 2 introduces a “grandfather provision” dealing with nonconforming measures. In other Chinese BITs, non-conforming measures were carved out as an exception to national treatment. However, in the ChinaCanada BIT, non-conforming measures are also an exception to the MFN standard. In addition, the subsequent paragraphs in this Article address issues such as intellectual property rights, procurement and subsidies. Assuming that this latest BIT most accurately reflects the current stance of Chinese investment treaty practice, one may presume that China is increasingly espousing a higher level of detail and precision in its IIAs, and willingly employing specific carve-outs in their drafting.103 Whereas exceptions are specifically enumerated, the exact contours of MFN coverage are not as clearly defined. For instance, the MFN clause does not expressly specify whether such treatment applies to dispute resolution. Therefore, it is not clear whether the MFN clause in the current Model BIT, Version III, may be extended to apply to procedural rights, e.g., investor-state arbitration clauses. Considering that recent Chinese BITs now enable investors to resort to ICSID arbitration for investor-state disputes, the precise scope of applicability of the MFN provision carries particular weight to foreign investors in China and Chinese investors in foreign counterparty states. In an attempt to provide clarification, China has included in recent investment treaties a specific provision excluding dispute resolution mechanisms from MFN treatment. The China-Canada BIT examined above, for example, clarifies that “[f]or greater certainty, [MFN treatment] does not encompass the dispute resolution mechanisms . . . in other international investment treaties and other trade agreements.”104 Whether China will continue to explicitly exclude provisions relating to dispute resolution from MFN treatment is unclear. Given the increasing level of specificity revealed in recent Chinese international investment treaty practice, however, a significant deviation from such tendencies is hard to imagine. 103 Contrarily, this increased level of detail may simply reflect Canada’s cautious approach in its investment treaty practice. 104 Canada-China BIT (2012), art. 5(3). See also, China-New Zealand FTA (2008), art. 139(2) and ASEAN-China Investment Agreement (2009), art. 5(4). 42 Another interesting facet of the scope of MFN coverage involves a familiar qualification. Previous practice has been not to include the phrase “in like circumstances,” (typically used to specify the subject of comparison in applying MFN protection). However, more recent investment treaties have occasionally incorporated such wording. 105 The China-Canada BIT, for example, states that “[e]ach Contracting Party shall accord to investors of the other Contracting Party treatment no less favourable than that it accords, in like circumstances, to investors” of the home state.106 Ultimately, the carveouts and qualifying language employed in Chinese investment agreements are reflections of China’s modern investment policy of cautious liberalization. Tza Yap Shum Decision In 2009, an ICSID tribunal rendered a decision relating to an MFN clause in the BIT between China and Peru.107 Tza Yap Shum marked the first instance in which an ICSID tribunal issued a decision interpreting provisions of an investment treaty with China. Given the size and growth of the Chinese market, and the corresponding massive inflow of new and prospective incoming foreign investment into China, this decision carries particular significance to current and potential investors who may seek to benefit from protections offered by the various investment treaties that China has ratified. The claimant of the dispute, Tza Yap Shum, a Chinese national resident of Hong Kong, was a ninety percent shareholder of TSG Peru SAC (TSG), a Peruvian food products company engaged in the manufacture, import, export, and distribution of fish flour, operating indirectly through an offshore entity in the British Virgin Islands. In December 2004, the Superintendencia Nacional de Administración Tributaria (SUNAT), Peru’s national tax authority, imposed back taxes and fines on TSG amounting to approximately US$4 million, based on the determination that TSG had underreported its sales volumes. TSG subsequently filed a challenge to 105 See also China-Mexico BIT (2009), art. 4, and Trilateral Investment Agreement among China, Japan and Korea (2012). 106 Italics added. 107 Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence (June 19, 2009). See also Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Final Award on Merits (July 7, 2011); Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Annulment (Feb. 12, 2015) (denying Peru’s request for partial annulment of the award against it). 43 SUNAT’s finding and tax imposition. While this legal challenge was pending, SUNAT imposed a lien on TSG’s bank accounts in order to ensure payment of unpaid taxes. TSG initially turned to various Peruvian administrative and judicial procedures in order to challenge SUNAT’s actions, but these efforts ultimately proved to be fruitless. Claiming that SUNAT’s tax determination and lien effectively paralyzed TSG’s business, Tza filed claims with ICSID relying on the 1995 China-Peru BIT. Tza alleged that the “unlawful and arbitrary” tax lien amounted to a violation of the “Requirement of fair and equitable treatment to investments;” “Requirement of protection to investments;” “Requirement of compensating in case of expropriatory or similar measures;” and “Requirement of allowing the transfer of capital and earnings”108 provided under the China-Peru BIT. In response, Peru raised a number of objections relating to the ICSID tribunal’s jurisdiction. The tribunal was presented with two main jurisdictional issues: the first issue involved the scope of disputes that may be referred to ICSID arbitration, and the second dealt with the scope of the MFN clause. The first issue will be revisited in Chapter Three of this paper, and the discussion here will focus on the second jurisdiction issue, i.e., treatment of the MFN clause. As to the applicability of the MFN provision, Peru argued that the instant claims were beyond the scope of the dispute settlement clause of the China-Peru BIT. With respect to dispute settlement, Article 8, Paragraph 3 of the China-Peru BIT provides that: If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations as specified in Paragraph 1 of this Article, it may be submitted at the request of either party to the international arbitration of the [ICSID] . . . . Any disputes concerning other matters between an investor of either 108 Id. at para. 31. 44 Contracting Party and the other Contracting Party may be submitted to the Center if the parties to the disputes so agree . . . .109 With the exception of several recent treaties,110 the vast majority of Chinese BITs contain dispute settlement provisions very similar to the ChinaPeru BIT provision excerpted above. Such dispute settlement provisions (which also appear in numerous Soviet-era Russian and Eastern European BITs) typically allow arbitration only of claims relating to the amount of compensation for expropriation. As such, the question presented was whether the tribunal could exercise jurisdiction over Tza’s claims not concerning compensation for expropriation, such as his claim of breach of the requirement of fair and equitable treatment. Tza argued that the apparent limitation evident in the text of the China-Peru BIT could be overcome by operation of the treaty’s MFN treatment clause.111 According to Tza, this MFN clause entitled him to import a less-restrictive dispute settlement provision from Article 12 of the Peru-Colombia BIT,112 thus allowing for “any legal dispute,” including his own, to be referred to ICSID arbitration. There, he would be able to litigate his claim of violation of the provision on fair and equitable treatment. In response, Peru relied on the plain meaning of the treaty text and objected to the ICSID tribunal’s jurisdiction over issues unrelated to the amount of compensation for expropriation. Peru specifically pointed to the 109 China-Peru BIT (1994). See Agreement on Encouragement and Reciprocal Protection of Investments between the Government of the People’s Republic of China and the Government of the Kingdom of the Netherlands, China-Neth., November 26, 2001, http://arbitrationlaw.com/files/free_pdfs/china-netherlands_bit.pdf [hereinafter ChinaFinland BIT (2001)] and China-Korea BIT (2007). 111 China-Peru BIT (1994), art. 3(2) (“The treatment and protection… shall not be less favorable than that accorded to investments and activities associated with such investments of investors of a third State.”). 110 112 Agreement between the Government of the Republic of Colombia and the Government of the Republic of Peru on the Promotion and Reciprocal Protection of Investments, art. 12(3), Colom.-Peru, April 26, 1994, http://investmentpolicyhub.unctad.org/Download/TreatyFile/798 [hereinafter Colombia-Peru BIT (1994)] (The dispute settlement clause of the Peru-Colombia BIT provides that “the dispute may be submitted . . . to the [ICSID]. Either Contracting Party hereby consents to submit to the Centre any legal dispute between a Contracting Party and a national or company of the other Contracting Party in connection with an investment in the territory of the former for settlement through conciliation or arbitration…”) (emphasis added). 45 following rules of treaty interpretation laid out in the Vienna Convention on the Law of Treaties: Article 31 General rule of interpretation 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended. Article 32 Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to 46 determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable. The respondent argued that “supplementary means of interpretation,” in accordance with Article 32 above, were inapplicable to its case, as the meaning of the treaty left no noticeable ambiguity or obscurity as to the scope of the dispute settlement provision. Even if the preparatory work of the treaty were to be taken into consideration, such documents only reaffirmed the contracting parties’ intent to limit the applicability of ICSID jurisdiction. Furthermore, Peru presented supporting documentation on treaties signed by China during the 1990s and argued that the default practice in Chinese BITs was to limit disputes to issues around the amount of compensation. 113 According to these Chinese treaties, all other issues would necessitate prior consent by both parties to the dispute, thus supporting the claim that China did not intend the dispute settlement clause to apply to issues other than the amount of compensation. The tribunal sided with Peru and rejected Tza’s jurisdictional argument on the interpretation of the MFN clause. Instead, the tribunal embraced the plain meaning of the treaty text, relying on the aforementioned interpretive principles established by the Vienna Convention on the Law of Treaties. The language of the dispute settlement provision in the China-Peru BIT clearly specified that arbitration of claims other than the amount of compensation for expropriation would require a separate agreement between the parties to the dispute, and in this case, Peru had not given its consent. The tribunal therefore concluded that this specific treaty text overrode the broader construction providing for extension of the MFN clause to dispute settlement provisions. As a result, Tza’s claims other than those relating to the amount of compensation for expropriation were dismissed for lack of jurisdiction. 113 Sr. Tza Yap Shum v. Republic of Peru, Decision on Jurisdiction and Competence, paras. 131-137. 47 The Tza decision may have potentially far-reaching implications for foreign investors in China. The future application of the MFN clause in Chinese BITs, however broadly drafted, is likely to be similarly restricted in scope, causing claims arising out of substantive rights, such as fair and equitable treatment, to be rejected for lack of jurisdiction.114 2. Japan The vast majority of BITs and FTAs to which Japan is a party contain an MFN clause. While Japan’s practice until 2002 was not to seek national treatment protection for the admission of investment, Japan has a long history of seeking to extend MFN treatment to admission activities. As an example, the Japan-Sri Lanka BIT (1982) confers MFN treatment on the admission of investment: Article 2 1. Nationals and companies of either Contracting Party shall within the territory of the other Contracting Party be accorded treatment no less favourable than that accorded to nationals and companies of any third country in regard to the matters relating to the admission of investment.115 Since 2002, Japan has consistently taken the position that MFN treatment should be extended to pre-establishment investment activities.116 Common exceptions to which MFN treatment does not apply in Japanese practice include differential treatment granted by virtue of the establishment of a customs union, free trade area, monetary union or double-taxation treaties. For instance, the Japan-Vietnam BIT (2004) states: Article 22 3. The [MFN provision] shall not be construed so as to oblige a Contracting Party to extend to investors of the other Contracting Party and their investments any preferential 114 The Tribunal rendered its award on this dispute on July 7, 2011, and the ICSID Secretary-General registered an application for annulment of the award filed by the Republic of Peru on November 9, 2011. 115 Agreement between Japan and the Democratic Socialist Republic of Sri Lanka Concerning the Promotion and Protection of Investment, Japan-Sri Lanka, March 1,1982, http://www.bilaterals.org/IMG/pdf/srilanka_japan.pdf [hereinafter Japan-Sri Lanka BIT (1982)]. 116 Japan-Singapore EPA (2002), Japan-Papua New Guinea BIT (2011), and Japan-Thailand EPA (2007). 48 treatment resulting from its membership of a free trade area, a customs union, an international agreement for economic integration or a similar international agreement.117 In other words, certain preferential treatment and advantages are reserved exclusively for the benefit of other members with whom Japan has concluded a specialized international agreement. With the exception of two recent investment treaties, the Japan-Peru BIT (2008) and the Japan-Switzerland FTA (2009), neither Japanese BITs nor Japanese FTAs specify whether or not the MFN clause extends to the dispute settlement provision.118 Shotaro Hamamoto and Luke Nottage point out that many older generation BITs and recent BITs and FTAs separately address the applicability of national treatment and MFN treatment with regard to access to courts of the host state, and argue that such practice is an indication of Japan’s understanding that the MFN clause does not extend to dispute settlement unless explicitly specified otherwise.119 3. Korea The 2001 Korean Model BIT states that the MFN treatment standard applies to investment after establishment and to investors with respect to the management, maintenance, use, enjoyment or disposal of their investments. MFN treatment does not extend to the establishment, acquisition, or expansion phases of investment. As an example, the Korea-Jamaica BIT (2007) states: Article 3 Treatment of Investments (2) Each Contracting Party shall in its territory accord to investors of the other Contracting Party, as regards management, maintenance, use, enjoyment or disposal of their investments, treatment which is . . . not less favourable than that which it 117 Japan-Vietnam BIT (2003). Agreement between Japan and the Republic of Peru for the Promotion, Protection and Liberalisation of Investment, art. 4(2), Japan-Peru, November 22, 2008, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1733 [hereinafter JapanPeru BIT (2008)] (“It is understood that the [MFN Treatment] to be accorded with respect to investment activities does not encompass dispute settlement mechanisms . . . .”). See also Japan-Switzerland EPA (2009), art. 88(2). 119 LUKE NOTTAGE & SHOTARO HAMAMOTO, COMMENTARIES ON SELECTED MODEL INVESTMENT TREATIES 360 (Chester Brown ed., Oxford University Press 2013). 49 118 accords to its own investors or to the investors of any third State.120 The Korea-Japan BIT and the investment chapters of the Korea-U.S. FTA, on the other hand, extend the scope of national treatment and MFN treatment to cover the establishment, acquisition, and expansion stages of investment, and provide detailed lists of non-conforming measures in the annexes to the respective main agreements. For instance, the Korea-Japan BIT provides that: Article 2 1. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments (hereinafter referred to as “national treatment”) with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments (hereinafter referred to as “investment and business activities”). 2. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to investors of any third country and to their investments (hereinafter referred to as “most-favoured-nation treatment”) with respect to investment and business activities.121 Here, the treaty first defines the scope of investment and business activities, and thereafter in the subsequent paragraph applies MFN treatment to this relatively expansive definition of investment. In general, Korean BITs do not explicitly address whether the MFN clause applies to investor-state dispute settlement provisions. A Korean 120 Agreement between the Government of the Republic of Korea and the Government of Jamaica for the Promotion and Protection of Investments, Jam.-S. Kor., June 10, 2003, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1720 [hereinafter JamaicaKorea BIT (2003)] (emphasis added). 121 See also, U.S.-Korea FTA (2007), art. 11.12. 50 official who participated in the Korea-Japan BIT negotiation process stated that the two Contracting Parties shared an understanding that MFN treatment (found in Article 2, Paragraph 2 of the Korea-Japan BIT) would not apply to dispute settlement procedures; this common understanding was memorialized in the record of discussion prepared during the negotiation.122 4. MFN Applicability among China, Japan, and Korea The varying scope of the national treatment provisions and MFN clauses offered by and to China, Japan, and Korea in the respective BITs among them illustrates how MFN treatment provisions operate in practice. In the Japan-Korea BIT, Korea and Japan mutually grant national treatment and MFN treatment with respect to the establishment, acquisition, and expansion of investment: Article 2 1. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments (hereinafter referred to as “national treatment”) with respect to the establishment, acquisition, expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments (hereinafter referred to as “investment and business activities”).123 2. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to investors of any third country and to their investments (hereinafter referred to as “most-favoured-nation treatment”) with respect to investment and business activities. On the other hand, China and Japan accord each other MFN treatment with respect to the admission of investment and “matters in connection 122 CHANSIK HAN, ET AL, HANIL TUJA HYUPJUNG HAESUL [COMMENTARY ON KOREA-JAPAN BILATERAL INVESTMENT AGREEMENT] 120-121 (Korea Institute of Industry Research 2003). 123 Italics added. 51 therewith” (Art. 2(2) of China-Japan BIT (1989)),124 and no national treatment is provided as to the admission of investment (Art. 3(2)-(3)).125 Similarly, China and Korea extend to each other MFN treatment, but not national treatment, of the admission of investment.126 However, the MFN provisions China has obtained in its respective investment treaties with Japan (Article 3(1) of ChinaJapan BIT) and Korea (Article 3(3) of China-Korea BIT), can be read in relation to the national treatment obligations Japan and Korea have exchanged with each other, in accordance with Article 2(1) of their BIT introduced above, Chinese investors may, by invoking MFN clauses embedded in China’s BIT with either Japan or Korea, as is appropriate, claim treatment not less favorable than that accorded to Japanese investors in Korea and Korean investors in Japan. In short, Chinese investors may claim national treatment with respect to the establishment and acquisition of their investment in Japan 124 China-Japan BIT (1988) (“Nationals and companies of either Contracting Party shall within the territory of the other Contracting Party be accorded treatment no less favourable than that accorded to nationals and companies of any third country in respect of the admission of investment and the matters in connection therewith.”). 125 China-Japan BIT (1989), arts. 3(2)-3(3): 2. The treatment accorded by either Contracting Party within its territory to nationals and companies of the other Contracting Party with respect to investments, returns and business activities in connection with the investment shall not be less favourable than that accorded to nationals and companies of the former Contracting Party. 3. The term “business activities in connection with the investment” referred to in the provisions of the present Article includes: (a) the maintenance of branches, agencies, offices, factories and other establishments appropriate to the conduct of business activities; (b) the control and management of companies which they have established or acquired; (c) the employment and discharge of specialists including technical experts, executive personnel and attorneys, and other workers; (d) the making and performance of contracts. 126 See, China-Korea BIT (2007), art. 3(1) and art. 3(3): 1. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments (hereinafter referred to as “national treatment”) with respect to the expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments (hereinafter referred to as “investment and business activities”). 3. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments and activities associated with such investments by the investors of the other Contracting Party treatment no less favourable than that accorded in like circumstances to the investors and investments and associated activities by the investors of any third State (hereinafter referred to as “mostfavoured nation treatment”) with respect to investments and business activities, including the admission of investment. 52 and Korea. In contrast, China has yet to offer national treatment on the establishment and acquisition of investment to any contracting party. Accordingly, Japanese and Korean investors will only be able to rely on their MFN status, and will thus be incapable of seeking national treatment relating to the establishment and acquisition of their investments in China. On the other hand, Japanese investors may use the MFN treatment it has secured with China to take advantage of a comparatively lenient provision embedded in the China-Korea BIT (2007). This latter treaty extends the application of national treatment and MFN treatment to the “expansion” of investment: Article 3 Treatment of Investment 2. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments treatment no less favourable than the treatment it accords in like circumstances to its own investors and their investments . . . with respect to the expansion, operation, management, maintenance, use, enjoyment, and sale or other disposal of investments (hereinafter referred to as “investment and business activities”). 3. Each Contracting Party shall in its territory accord to investors of the other Contracting Party and to their investments and activities associated with such investments by the investors of the other Contracting Party treatment no less favourable than that accorded in like circumstances to the investors and investments and associated activities by the investors of any third State . . . with respect to investments and business activities, including the admission of investment. Thus, through the operation of the MFN clause in Article 3(1) of the Japan-China BIT, Japanese investors may claim the same treatment Korean investors and investments in China receive with respect to the expansion of investment. C. Summary 53 This Section focused on analyzing the investment treaty practices of China, Japan, and Korea with respect to two standards of protection, i.e., national treatment and MFN treatment. In terms of national treatment, China gradually distanced itself from a planned economy legacy in which the mutual exchange of national treatment assurances was virtually nonexistent. However, the specific extent to which China will offer protection under the current formulation largely depends on the degree to which its domestic legal system differentiates locals and foreigners. With respect to the application of MFN treatment, China has adopted a more liberal approach compared to its stance toward national treatment. However, the more recent China-Canada BIT displays a lack of willingness to relinquish control over the level of protection offered to foreigners. At the same time, China’s increasing utilization of specific carve-outs resembles that of developed economies, albeit in form rather than content, and shows a heightened awareness of the treaty practices of other states. The evolution of national treatment provision drafting in Japanese investment treaties reveals a general progression toward market liberalization. For instance, national treatment coverage has been expanded to encompass the establishment and acquisition stages. Meanwhile, Japan has been careful to carve out certain domestic sectors associated with strong political constituencies or security concerns, such as fisheries and the explosives industry. Korea has displayed a course of purposeful flexibility, in which it adopts different stances in negotiations with capital-importing and with capital-exporting states. As such, Korea has demonstrated a certain level of adjustability in its investment treaty practice, often accommodating specific requests when unavoidable, but at the same time seeking to maximize the level of protection offered to its outbound investors when possible. 54 III. Expropriation and the Fair and Equitable Treatment Standard This section focuses on absolute protection standards embedded in the investment treaties of China, Japan, and Korea. The discussion begins with the issue of expropriation and subsequently proceeds to analyze the “fair and equitable treatment” (FET) standard. A. Expropriation One of the main concerns common to all foreign investors involves political risk, i.e., the possibility that a host government may unduly interfere with the ownership, management and business activities of a foreign investor within the given host state. The most extreme form of such interference occurs when the host state physically seizes the assets of foreign investors located in the host state’s territory, or deprives the investors of legal or beneficial title thereof. The twentieth century witnessed the occurrence of a significant number of such expropriations.127 Since the execution of the first BIT by and between Germany and Pakistan in 1959, protection from expropriation without compensation has been a core subject matter of European BITs. Even in the 2000s, however, governmental expropriation of foreign investors’ property and business has not been uncommon in certain parts of the world; a significant number of arbitration cases arising out of investment treaty provisions have been brought by foreign investors seeking compensation for such state actions. According to Reed, Paulsson, and Blackaby, as of January 2010, expropriation claims had been advanced in 53 decided ICSID investment treaty cases, out of which the tribunal involved found expropriation in 15 cases.128 127 A substantial amount of cases on expropriation adjudicated by the Iran-US Claims Tribunal and other ad hoc arbitral institutions is readily available. See, e.g., AMOCO International Finance Corp. v. Government of Islamic Republic of Iran, Award of 14 July 1987, 15 Iran-US CTR 189; Philips Petroleum Company Iran v. Islamic Republic of Iran, Award of 19 June 1989, 21 Iran-US CTR 79; Mobil Oil Iran, Inc. v. Government of the Islamic Republic of Iran, Award of 14 July 1987, 16 Iran-US CTR 3; The American Independent Oil Co. v. The Government of the State of Kuwait, Award of 24 May 1982, 21 ILM 976 (1982); Libyan American Oil Co. v. The Government of Libyan Arab Republic, Award of 12 April 1977, 62 ILR 141 (1982). 128 Reed, Paulsson and Blackaby at 90. See, e.g., Nykomb Synergetics Technology Holding AB, Stockholm v. The Republic of Latvia, ARB SCC, Award of December 16, 2003; Occidental Exploration and Production Company v. The Republic of Ecuador, LCIA Case No. UN3467, Award of July 1, 2004; EnCana Corporation v. Republic of Ecuador, LCIA UN3481, Award of February 3, 2006, and Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Final Award on Merits, dated July 7, 2011. 55 While outright expropriation or nationalization continues to takes place, host-states often manipulate their legislative and regulatory authority in more subtle ways, with an objective to interfere with a foreign investor’s property rights or investment operations. In extreme cases, such interference may rise to the level of an indirect expropriation, even as the investor maintains nominal possession or ownership of its investment. In an attempt to address this issue, a majority of IIAs include the concept of indirect expropriation in their definition of expropriation. The investment practices of China, Japan, and Korea are generally in line with this modern trend.129 Following the introduction of the U.S. Model BIT in 2004, serious efforts have been exerted in the investment chapters of certain FTAs to determine the dividing line between protecting investors’ property rights and preserving host-state governments’ legitimate right to regulate foreign investment. However elaborate the treaty language may be, the appropriate point of differentiation has been hard to ascertain. An analysis of the KoreaU.S. FTA, to be discussed below, will serve as an illuminating example of such difficulties. In general, most IIAs condition the legality of an act of expropriation on four requirements, which are considered to reflect customary international law. Rudolf Dolzer and Christoph Schreuer succinctly summarize these four conditions as follows: - The measure must serve a public purpose . . . . - The measure must not be arbitrary and discriminatory within the generally accepted meaning of the terms. - [T]he procedure of expropriation must follow principles of due process. - The expropriatory measure must be accompanied by prompt, adequate, and effective compensation . . . .130 Dolzer and Schreuer point out that determining “the measure of compensation has been by far the most controversial” element of these conditions. 131 After a few decades of debate over what constitutes an 129 See, e.g., China-Korea BIT (2007), art. 4 and Japan-Korea BIT (2003), art. 10(2). Dolzer and Schreuer at 91. 131 Id. 56 130 appropriate level of compensation, the fair market value determination method has been established as the generally accepted standard. The phrase, “prompt, adequate, and effective” also known as the “Hull formula,” has been embraced as the representative terminology relied upon to refer to the fair market value standard.132 As has been the case with European traditional capital-exporting states, Japan and Korea have increasingly shown a willingness to embrace this Hull formula in their BITs.133 In contrast, Chinese BITs employ a rather conservative approach, requiring that “compensation shall . . . be made without delay, be effectively realizable and freely transferable.”134 However, in recent years, China has gradually become more receptive to the Hull formula. The following discussion will explore the parameters of the expropriation clauses found in Chinese, Japanese, and Korean BITs. 1. Expropriation in Chinese BITs Each of the three versions of China’s Model BIT includes an expropriation clause. Some experts point to the expropriation clause as one of the most controversial aspects of China’s attitude toward foreign investment.135 Assessing the validity of such claims necessitates a greater level of scrutiny of the specific language the most recent Model BIT, Version III, employs: Article 4: Expropriation 1. Neither Contracting Party shall expropriate, nationalize or take other similar measures (hereinafter referred to as 132 Dolzer and Schreuer further discuss the difficulty involved in determining specific method of valuation in accordance with the fair market value standard. For a more detailed examination on the issue of expropriation, see id. at 89-118. 133 See, e.g., Agreement between Japan and the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investment, art. 5(3), Japan-Turk., Feb. 12, 1992, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1736 [hereinafter JapanTurkey BIT (1992)]; Agreement between the Government of Hong Kong and the Government of Japan for the Promotion and Protection of Investment, art. 5(1), H.K.Japan, May 15, 1997, http://www.bilaterals.org/IMG/pdf/hongkong_japan.pdf [hereinafter Hong Kong-Japan BIT (1997)]; Japan-Korea BIT (2003), art. 10(3); Agreement between the Government of the United Mexican States and the Government of the Republic of Korea for the Promotion and Reciprocal Protection of Investments, art. 5(2), Mex.-S. Kor., Nov. 2000, http://www.sice.oas.org/Investment/BITSbyCountry/BITs/MEX_Korea_e.asp [hereinafter Mexico-Korea BIT (2000); and Morocco-Korea BIT (1999), art. 5(2). 134 Chinese Model BIT, Version III, Art 4(2). 135 Kong Qingjiang, Bilateral Investment Treaties: The Chinese Approach and Practice, 1998-1999 ASIAN YEARBOOK OF INTERNATIONAL LAW (Vol. 8) 106, 125. 57 ‘expropriation’) against the investments of the investors of the other Contracting Party in its territory, unless the following conditions are met: (a)for the public interests; (b) under domestic legal procedure; (c) without discrimination; (d) against compensation.136 Version III of the Chinese Model BIT addresses both direct expropriation and “other similar measures,” which may be interpreted as incorporating the concept of “indirect expropriation” into the scope of coverage for protection against expropriation. As is standard in expropriation clauses in the BITs of other states, four prerequisites are delineated so as to enable expropriation under certain limited circumstances. However, conditions (b) and (d) cited above, relating to domestic legal procedure and compensation, respectively, unveil a not insignificant variation from the international standard. First, contrary to a significant number of expropriation clauses in the IIAs of other states, no reference is made in the most recent Chinese Model BIT to the requirement that an expropriation be conducted in compliance with “due process.” Instead, the Model BIT specifies that expropriation shall be made in accordance with “domestic legal procedure.” The degree of divergence between the terms “due process” and “domestic legal procedure” is not clear, and the significance of such difference is yet to be determined. It is possible to infer, at the very least, that the level of divergence will not be great if Chinese domestic legal procedures concerning expropriation satisfy customary international law standards regarding due process. If, however, this is not the case, it is more likely that there exists a significant distance between the Chinese domestic standards for expropriation and the commonly accepted international practice in this area. On the other hand, Shan and Gallagher express doubt as to whether any significant difference exists between Chinese legal procedure and international due process standards, since the domestic law in China relating 136 Chinese Model BIT, Version III, Art 4(1). 58 to expropriation requires that certain commonly accepted prerequisites be met, e.g., that the given expropriation be made for the public interest and that appropriate compensation be paid.137 As will be discussed below, in more recent treaties introduced after the adoption of Version III of the Chinese Model BIT, China has shown a willingness to adapt to more common due process terminology and international standards. China’s second noticeable deviation from the more widely accepted international expropriation formulation involves China’s reluctance to include in its BITs any reference to certain accepted principles, such as “prompt, adequate and effective compensation.” Instead, the Model BIT employs a rather vague “against compensation” formulation. In providing further clarification as to this principle of valuation, Paragraph 2 of Article 4 adds to the excerpt above: 2. The compensation mentioned in Paragraph 1 of this Article shall be equivalent to the value of the expropriated investments immediately before the expropriation is taken or the impending expropriation becomes public knowledge, whichever is earlier. The value shall be determined in accordance with generally recognized principles of valuation. The compensation shall include interest at a normal commercial rate from the date of expropriation until the date of payment. The compensation shall also be made without delay, be effectively realizable and freely transferable.138 Here, the Chinese Model BIT once again distinguishes itself from the international norm – in this case, the norm of referring to “fair market value” and the Hull formula to determine the appropriate level of compensation. As was the case in the analysis above of the Model BIT’s “domestic legal procedure” language, one may similarly inquire into the significance of such different wording. Since the Model BIT requires timely, realizable compensation with liquidity, it may be that the actual compensation provided 137 Norah Gallagher & Wenhua Shan, China, in COMMENTARIES ON SELECTED MODEL INVESTMENT TREATIES, at 163. 138 Italics added. 59 in response to expropriation under this treaty text is not substantially different from the “prompt” and “effective” compensation the Hull formula requires. It is unclear what specific distinction China intended to effect as a result of this differentiated phrasing and absence of reference to “fair market value.” Shan and Gallagher are of the opinion that “[o]n balance . . . China’s position on expropriation and the laws that an international tribunal would apply are not so different to most other States.”139 If, as Shan and Gallagher suggest, the compensation computation formula provided for under domestic legal procedures is consistent with international standards in actual practice, one may question why China prefers to rely on its specific text formulation, when it could raise uncertainty for foreign investors who would otherwise take more comfort in the common formulation referring to “fair market value” and “prompt, adequate and effective” compensation. Applying the Model BIT to Recent IIAs The China-Uzbekistan BIT, which entered into force on September 1, 2011, captures the essence of the Version III Model BIT approach while simultaneously reflecting an increased level of comfort with global standards relating to expropriation.140 Article 6 of this BIT provides as follows: Article 6 Expropriation 1. Neither Contracting Party shall expropriate, nationalize or take any other measure the effects of which would be equivalent to expropriation or nationalization against the investments of the investors of the other Contracting Party in its territory (hereinafter referred to as expropriation), unless the following conditions are met: (a) for the public interests; (b) in accordance with domestic legal procedure and relevant due process; (c) without discrimination; 139 Norah Gallagher & Wenhua Shan, China, in COMMENTARIES ON SELECTED MODEL INVESTMENT TREATIES, at 163. 140 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Uzbekistan on the Promotion and Protection of Investments, China-Uzb., Apr. 19, 2011, http://tfs.mofcom.gov.cn/article/h/au/201111/20111107819511.shtml [hereinafter ChinaUzbekistan BIT (2011)]. 60 (d) against compensation. “Measure the effects of which would be equivalent to expropriation or nationalization” means indirect expropriation. 2. The determination of whether a measure or a series of measures of one Contracting Party constitutes indirect expropriation in Paragraph 1 requires a case-by-case, factbased inquiry that considers, among other factors: (a) the economic influence of a measure or a series of measures, although the fact that a measure or a series of measures of the Contracting Party has an adverse effect on the economic value of investments, standing alone, does not establish that an indirect expropriation has occurred; (b) the extent to which the measure or the series of measures grant discrimination in scope or application over investors and associated investments of the other Contracting Party; (c) the extent to which the measure or the series of measures cause damage to reasonable investment expectation of investors of the other Contracting Party: such expectation arises from the specific commitments made by one Contracting Party to the investors of the other Contracting Party; (d) the character and purpose of a measure and a series of measures, whether it is adopted for the purpose of public interest in good faith, and whether it is in appropriation to the purpose of expropriation. 3. Except in exceptional circumstances, such as the measures adopted severely surpassing the necessity of maintaining corresponding reasonable public welfare, non- discriminatory regulatory measures adopted by one Contracting Party for the purpose of legitimate public welfare, such as public health, safety and environment, do not constitute indirect expropriation. 61 4. The compensation mentioned in Paragraph 1 of this Article shall be equivalent to the fair market value of the expropriated investments immediately before the expropriation is taken or the impending expropriation becomes public knowledge, whichever is earlier. The compensation shall also include interest at a reasonable commercial rate until the date of payment. The compensation shall be made without unreasonable delay, be effectively realizable and freely transferable.141 Notice, for example, that in addition to the traditional “in accordance with the local legal procedure” language, Article 6(1)(b) adds the phrase “relevant due process” as a necessary component of the second prerequisite to legitimate expropriation.142 As examined above, the “due process” phrase is commonly used in numerous other IIAs, and thus, the inclusion of such a phrase may be indicative of China’s intent to follow other advanced economies’ treaty practices, to the extent practicable. The Korea-China BIT (2007) goes a step further in referring to the international standard, requiring that the expropriation be “in accordance with domestic law and international standard of due process of law.”143 It is also noteworthy that Paragraph 4 of the BIT states that compensation “shall be equivalent to the fair market value.” At the same time, Paragraphs 2 and 3 limit the scope of indirect expropriation and adopt a case-by-case approach to corresponding determinations, in line with the formula set forth in Annex B of the 2004 US Model BIT, with some minor modifications.144 Paragraph 3 further clarifies 141 Italics added. See, e.g., Trilateral Investment Agreement among China, Japan and Korea (2012), art. 11(1)(c) (China’s demonstration of “due process” formulation acceptance). 143 China-Korea BIT (2007), art. 4(1). 144 Annex B Expropriation (a) The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by case, fact-based inquiry that considers, among other factors: (i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect 62 142 that measures adopted “for the purpose of legitimate public welfare, such as public health, safety and environment, do not constitute indirect expropriation.”145 In other words, China is treading carefully in the vast waters of indirect expropriation, an issue that inevitably entails a high level of political sensitivity. As such, recent Chinese investment treaty practice reveals both a greater degree of awareness toward the global norm, and simultaneously a higher level of precision in limiting the scope of protections China intends to offer, when the provision of certain benefits (relating, in general, to state sovereignty) are impracticable. Indirect Expropriation Claim in Tza Yap Shum Case Returning to the Tza Yap Shum case, in which a Chinese claimant invoked an indirect expropriation claim against Peru, Tza claimed that SUNAT’s audit conclusions and subsequent imposition of interim measures, which precluded Peruvian banks from conducting regular transactions with TSG, amounted to an unjustified indirect expropriation in breach of the expropriation clause embedded in the China-Peru BIT.146 The text of the expropriation clause in the China-Peru BIT provides that: Article 4 1. Neither Contracting Party shall expropriate, nationalize or take similar measures (hereinafter referred to as “expropriation”) against investments of investors of the other Contracting Party in its territory, unless the following conditions are met: (a) for the public interest; expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action. (b) Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations. 2004 US Model BIT available at: http://www.state.gov/documents/organization/117601.pdf. 145 China-Uzbekistan BIT (2011), art. 6(3) (Emphasis added). 146 China-Peru BIT (1994). 63 (b) under domestic legal procedure; (c) without discrimination; (d) against compensation. The Tribunal found that the interim measures imposed by the Peruvian tax authority were arbitrary and thus constituted an indirect expropriation, due to, among other reasons, the severe impact caused by requiring Peruvian banks to freeze TSG-related funds and SUNAT’s failure to abide by its own guidelines and procedures. In so determining, the Tribunal recognized the regulatory and administrative authority of SUNAT and concluded that the audit conducted by SUNAT did not itself constitute an expropriation, as it did not deviate significantly from audits of previous years. With respect to the interim measures, however, the Tribunal pointed to TSG’s heavy reliance on Peruvian banks for business transactions and noted that TSG’s sales dropped approximately S/. 76.6 million in 2005-2006. On the question of noncompliance with internal procedures, the Tribunal pointed out that SUNAT is allowed to impose interim measures to ensure tax payment in “exceptional circumstances.” According to the Tribunal, however, SUNAT’s allegation that inaccurate total sales volume were recorded on TSG’s books lacked precise identification and detailed evidentiary support.147 The Tza Yap Shum decision thus sheds light on what sort of measures may constitute indirect expropriation in violation of IIAs with China. In the instant case, ordering banks to retain a foreign investor’s funds for taxation purposes amounted to illegal expropriation. As to the question of the appropriate level of compensation, the treaty text found in Article 4(2) of the China-Peru BIT provides as follows: 2. The compensation . . . shall be equivalent to the value of the expropriated investments at the time when expropriation is proclaimed, be convertible and freely 147 Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Final Award on Merits (July 7, 2011) (Other reasons in support of the arbitrariness determination include: (i) the ineffectiveness of SUNAT’s interim measures; (ii) lack of effective due process; and (iii) the fact that TSG had mitigated its damages and did not act in bad faith.); see also Tza Yap Shum v. Republic of Peru, ICSID Case No. ARB/07/6, Decision on Annulment (Feb. 12, 2015) (denying Peru’s request for partial annulment of the award against it). 64 transferable. The compensation shall be paid without unreasonable delay. Pursuant to this provision, the Tribunal required that the Claimant be put in the same position he would have been placed in had the expropriation not occurred. The Claimant and Respondent agreed in theory that the appropriate level of compensation should cover the value of TSG. The Tribunal rejected Tza’s proposed discounted cash flow method and embraced an “adjusted book value” valuation, concluding that the applicable interest rate should be tied to the average monthly figure on 10-year U.S. treasury bonds.148 As a result, whereas Tza had initially sought approximately US$25 million, he was eventually awarded US$786,306.24 in compensation, plus interest awarded until the date of the Award of an additional US$227,201.30.149 2. Expropriation in Japanese BITs In general, Japanese practices regarding expropriation track those of the model treaties of Western European capital-exporting states. Article 10 of the Japan-Korea BIT provides an example of Japan’s approach toward the issue of expropriation in its investment treaties: Article 10 2. Neither Contracting Party shall expropriate or nationalize investments in its territory of investors of the other Contracting Party or take any measure tantamount to expropriation or nationalization (hereinafter referred to as “expropriation”) except: (a) for a public purpose; (b) in a non-discriminatory manner; (c) upon payment of prompt, adequate and effective compensation; and (d) in accordance with due process of law. 3. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation occurred. The fair market value shall not 148 149 Id. at 8-9. Id. 65 reflect any change in value occurring because the expropriation had become publicly known earlier. The compensation shall be paid without delay and shall carry an appropriate interest, taking into account the length of time until the time of payment. It shall be effectively realisable and freely transferable and shall be freely convertible into the currency of the Contracting Party of the investors concerned, and into freely usable currencies as defined in the Articles of Agreement of the International Monetary Fund, at the market exchange rate prevailing on the date of expropriation. 4. Without prejudice to the provisions of Article 15 [Investment Dispute Provision], the investors affected shall have a right of access to the courts of justice or administrative tribunals or agencies of the Contracting Party making the expropriation for a prompt review of the investors’ case and the amount of compensation in accordance with the principles set out in this Article.150 All of Japan’s BITs and FTAs expand the scope of expropriation regulation to include both direct and indirect expropriation. This is achieved by including broadly drafted language, such as the “any measure tantamount to expropriation” phrase used above, to define expropriation. All Japanese BITs and FTAs, with the exception of the Japan-China BIT, present four conditions, in accordance with customary international law, to be satisfied in order to constitute lawful expropriation. As seen in the treaty text above, direct or indirect expropriation is not lawful unless it is (i) undertaken for a public purpose, (ii) carried out on a non-discriminatory basis, (iii) conditioned upon payment in line with the Hull formula and (iv) carried out in accordance with due process of law. The Japan-China BIT, on the other hand, accommodates China’s particular stance as analyzed in the preceding section,151 by replacing the standard “due process of law” language with an “in 150 151 Japan-Korea BIT (2002) (discussion of Fair and Equitable Treatment.) Emphasis added. China-Japan BIT (1988), pp. 56-58. 66 accordance with laws and regulations” formulation, one which omits the word “domestic” generally preferred in Chinese investment treaty practice: Article 5 2. Investments and returns of nationals and companies of either Contracting Party shall not be subjected to expropriation, nationalization or any other measures the effects of which would be similar to expropriation or nationalization, within the territory of the other Contracting Party unless such measures are taken for a public purpose and in accordance with laws and regulations, are not discriminatory, and, are taken against compensation. 3. The compensation referred to in the provisions of paragraph 2 of the present Article shall be such as to place the nationals and companies in the same financial position as that in which the nationals and companies would have been if expropriation, nationalization or any other measures the effects of which would be similar to expropriation or nationalization, referred to in the provisions of paragraph 2 of the present Article, had not been taken. Such compensation shall be paid without delay. It shall be effectively realizable and freely transferable at the exchange rate in effect on the date used for the determination of amount of compensation. 4. Nationals and companies of either Contracting Party whose investments and returns are subjected to expropriation, nationalization or any other measures the effects of which would be similar to expropriation or nationalization, shall have the right of access to the competent courts of justice and administrative tribunals and agencies of the other Contracting Party taking the measures concerning such measures and the amount of compensation in accordance with the applicable laws and 67 regulations of such other Contracting Party.152 Furthermore, instead of requiring application of the Hull formula, the China-Japan treaty text simply states that the expropriation shall not be taken “against compensation,” and specifies that such compensation shall be “effectively realizable and freely transferable.” Although Japanese investment treaty practice has shown consistently with other industrialized western states, Japan has also been willing to accommodate certain Chinaspecific treaty formulations. Standard of Compensation With respect to the standard of compensation, Article 12 of the JapanCambodia BIT (2007) captures the essence of the standard protections offered in Japan’s newest generation of investment agreements. Key concepts include compensation (i) at the “fair market value of the expropriated investments at the time the expropriation was publicly announced or occurred, whichever is earlier,” (ii) “paid without delay,” and (iii) “effectively realizable and freely transferable:”153 Article 12 2. Compensation shall be equivalent to the fair market value of the expropriated investments at the time when the expropriation was publicly announced or when the expropriation occurred, whichever is earlier. The fair market value shall not reflect any change in value occurring because the expropriation had become publicly known earlier. 3. The compensation shall be paid without delay and shall include interest at a commercially reasonable rate, taking into account the length of time until the time of payment. It shall be effectively realizable and freely transferable and shall be freely convertible into the currency of the Contracting Party of the investors concerned, and into freely usable currencies as defined in the Articles of Agreement of the International Monetary Fund, as may be 152 Id. (Article 5(1) lays out a general principle that investment shall receive protection and security in the other Contracting Party’s territory.) (Emphasis added). 153 Cambodia-Japan BIT (2002), art. 12(2)-12(3). 68 amended, at the market exchange rate prevailing on the date of expropriation.154 In short, the basic principles of compensation for expropriation set out in the Hull formula and interrelated, generally accepted methods of fair market value determination are commonly found in recent Japanese treaties.155 Taxation and Expropriation As to the issue of whether taxation may constitute expropriation, Japanese investment treaty practice has not revealed any noticeable consistency. Certain BITs and FTAs simply state that a taxation measure may amount to expropriation.156 For instance, Article 23(1) of the Japan-Peru BIT first introduces a principle that “[n]othing in this Agreement shall apply to taxation measures except as expressly provided for in this Article.” 157 Thereafter, Article 23(3) explicitly lays out a few articles, including a provision on expropriation, that apply to taxation measures. Other more recent investment treaties exclude taxation measures, to varying degrees, from protection against expropriation. For instance, the Japan-India FTA (2011) generally takes the issue of taxation measures out of the scope of the investment treaty itself: “Unless otherwise provided for in this Agreement, the provisions of this Agreement shall not apply to any taxation measures.”158 Neither the Chapter on Investment nor any other provision in this agreement expressly links investment and expropriation to taxation measures, thus rendering expropriation inapplicable to taxation. In contrast, the Japan-Mexico FTA (2005) takes a different approach: Article 170 Taxation 4. (b) The investor shall refer the issue . . . to the competent authorities of both Parties to determine whether such measure is not an expropriation. If the competent 154 Id., emphasis added. China-Japan BIT (1988), art. 5(3) (serves as an outlier to this general treaty practice of Japan). 156 See, e.g., Japan-Singapore EPA (2002), art. 87; Japan-Malaysia EPA (2005), art. 81(5); Cambodia-Japan BIT (2002), art. 22; Japan-Peru BIT (2008), art. 23(3). 157 Japan-Peru BIT (2008). 158 Comprehensive Economic Partnership Agreement between Japan and the Republic of India, art. 10(1), India-Japan, Feb. 16, 2011, http://www.mofa.go.jp/region/asiapaci/india/epa201102/pdfs/ijcepa_ba_e.pdf [hereinafter India-Japan EPA (2011)]. 69 155 authorities of both Parties do not consider the issue or, having considered it, fail to determine that the measure is not an expropriation within a period of 180 days of such referral, the investor may submit its claim to arbitration under Article 79 [Provision on Submission of a Claim to Arbitration].159 This FTA first defers the issue of taxation to the competent authorities of both the host and home states, and provides that investor-state arbitration is not available with respect to taxation measures determined not to be expropriation by these authorities. If the competent authorities of the contracting state involved fail to timely respond or determine that a taxation measure is an expropriation within a 180-day time frame, the foreign investor is entitled to submit a claim to arbitration. In sum, Japanese investment treaty practice relating to the issue of expropriation has generally tracked that of major European capital exporting economies, with the exception of its BIT with China, in which Japan accommodated certain deviations from common international practice that were insisted on by China. 3. Expropriation in Korean BITs Korea’s investment treaty practice relating to expropriation is generally consistent with that of western capital-exporting states. The term “expropriation” in this practice incorporates both direct and indirect expropriation. For instance, the 2001 Korean Model BIT states: Article 5: Expropriation 1. Investments of investors of one Contracting Party shall not be nationalized, expropriated or otherwise subjected to any other measures having effect equivalent to nationalization or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other Contracting Party except for public purpose and against prompt, adequate and effective compensation. The expropriation 159 Japan-Mexico EPA (2004). See also, Japan-Chile EPA (2007), art. 194(5); Japan-Thailand EPA (2007), art. 110(3); Indonesia-Japan EPA (2007), art. 73(4); and Japan-Peru BIT (2008), art. 23(5). 70 shall be carried out on a non-discriminatory basis in accordance with legal procedures. 2. Such compensation shall amount to the fair market value of the expropriated investments immediately before expropriation was taken or before impending expropriation became public knowledge, whichever is the earlier, shall include interest at the applicable commercial rate from the date of expropriation until the date of payment, and shall be made without undue delay, be effectively realizable, and be freely transferable. In both expropriation and compensation, treatment no less favourable than that which the Contracting Party accords to its own investors or to investors of any third State shall be accorded. 3. Investors of one Contracting Party affected by expropriation shall have a right to prompt review by a judicial or other independent authority of the other Contracting Party, of their case and of the valuation of their investments in accordance with the principles set out in this Article. 4. Where a Contracting Party expropriates the assets of a company which is incorporated or constituted under its laws and regulations, and in which investors of the other Contracting Party own shares, debentures or other forms of participation, the provision of this Article shall be applied. As such, “any other measures having an effect equivalent to nationalization or expropriation” may constitute expropriation, even if the specific form may not amount to direct expropriation.160 As presented above, most of the BITs to which Korea is a party enumerate four conditions under which an expropriation may be deemed lawful, i.e., that such measures shall (i) 160 See also, Agreement on the Promotion and Protection of Investments between Government of the Republic of Korea and the Government of the Arab Republic of Egypt, art. 5(1), Mar. 18, 1996, http://arbitrationlaw.com/files/free_pdfs/korea-egypt_bit.pdf [hereinafter Egypt-Korea BIT (1996)]; Morocco-Korea BIT (1999), art. 5(1); NicaraguaKorea BIT (2000), art. 5(1). 71 be for a public purpose, (ii) entail prompt, adequate and effective compensation, (iii) be carried out on a non-discriminatory basis, and (iv) be in accordance with legal procedures.161 With respect to this third condition, that the expropriation be executed on a non-discriminatory basis, Paragraph 2 in the excerpt above specifies that national treatment and MFN treatment will apply to both expropriation and the corresponding compensation. As to the fourth condition, requiring that the expropriation be “in accordance with legal procedures,” Korean investment agreement practice reveals a number of variations in its approach. A more detailed approach, similar to that of the 2004 U.S. Model BIT, is reflected in the expropriation clause in the investment chapter of the KoreaU.S. FTA: the expropriation or nationalization, whether direct or indirect, must be in accordance with due process of law and in accordance with customary international law, including FET treatment and full protection and security.”162 Here, the rather vague “in accordance with legal procedures” language in Article 5(1) of the aforementioned 2001 Korean Model BIT is replaced with a more specific reference to due process of law as well as customary international law encompassing the FET standard and general protection and security issues. Another interesting example is found in the Korea-China BIT (2007), in which the Contracting Parties employ unusually strict wording for a China-ratified investment treaty, requiring that lawful expropriations be “in 161 See, e.g., Agreement between the Government of the Republic of Korea and the Government of the Republic of Latvia for the Promotion and Reciprocal Protection of Investments, art. 5(1), Lat.-S. Kor., Oct. 23, 1996, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1803 [hereinafter LatviaKorea BIT (1996)]; Agreement between the Government of the Republic of Korea and the Government of the Kingdom of Sweden on the Promotion and Reciprocal Protection of Investments, art. 5(1), S. Kor.-Swed., Aug. 30, 1995, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1833 [hereinafter KoreaSweden BIT (1995)]; and Agreement between the government of the Republic of Korea and the Government of the Republic of Bolivia and the Reciprocal Promotion and the Protection of Investments, art. 6(1), Bol.-S. Kor., Apr. 1, 1996, http://investmentpolicyhub.unctad.org/IIA/country/111/treaty/586 [hereinafter BoliviaKorea BIT (1996)]. 162 U.S.-Korea FTA (2007), art. 11.6(1)(d). 72 accordance with domestic law and international standard of due process of law.”163 Standard for Compensation Most BITs ratified by Korea require that expropriation be accompanied by prompt, adequate, and effective compensation and are thus generally in line with the Hull formula. For instance, the Korea-Jordan BIT (2004) reads: Article 5 Expropriation 1. Investments of investors of one Contracting Party shall not be nationalized, expropriated or otherwise subjected to any other measures having an effect equivalent to nationalization or expropriation . . . in the territory of the other Contracting Party except for public purpose and against prompt, adequate and effective compensation. The expropriation shall be carried out on a nondiscriminatory basis in accordance with due process of law. 2. Such compensation shall amount to the fair market value of the expropriated investments immediately before expropriation was taken or before impending expropriation became public knowledge, whichever is the earlier, shall include interest at the applicable commercial rate from the date of expropriation until the date of payment and shall be made without undue delay, be effectively realizable and be freely convertible and transferable. In both expropriation and compensation, treatment no less favorable than that which the Contracting Party accords to its own investors or to investors of any third State shall be accorded.164 As shown here, in determining the adequacy of compensation, Korean BITs typically use the standard formula of “fair market value of the expropriated investments immediately before expropriation was taken or before impending expropriation became public knowledge, whichever is the earlier.”165 The Korea-Japan and Korea-China BITs of 2003 and 2007 further 163 China-Korea BIT (2007), art. 4(1). Jordan-Korea BIT (2004). 165 See also, Korean Model BIT (2001), art. 5(1). 73 164 clarify the process of how fair market value is determined. The texts of the treaties between these two neighbors state that “fair market value shall not reflect any change in value occurring because the expropriation had become publicly known earlier.” 166 With respect to the effectiveness of compensation, most Korean BITs follow the text in Article 5(2) of the 2001 Model BIT and permit free transferability and convertibility into freely usable currencies. The text of the treaty with Jordan presents this standard formulation, requiring that compensation for expropriation be “effectively realizable and be freely convertible and transferable.” As was noticeable in Japan’s case, Korean treaty practice with respect to protection against expropriation does not deviate from the standard practice of Western European economies. Indirect Expropriation The Korea-U.S. FTA of 2011 devotes an entire annex to the issue of expropriation, a significant portion of which concentrates on specifying whether a particular measure constitutes an indirect expropriation: Annex 11-B 3. The second situation addressed by Article 11.6.1 [indirect expropriation] is indirect expropriation, where an action or a series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. (a) The determination of whether an action or a series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that considers all relevant factors relating to the investment, including: (i) the economic impact of the government action, although the fact that an action or a series of actions by a Party has an adverse effect on the economic value of an investment, standing 166 Japan-Korea BIT (2002), art. 10(3) and China-Korea BIT (2007), art. 4(2). 74 alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations . . . and (iii) the character of the government action, including its objectives and context. Relevant considerations could include whether the government action imposes a special sacrifice on the particular investor or investment that exceeds what the investor or investment should be expected to endure for the public interest. (b) Except in rare circumstances, such as, for example, when an action or a series of actions is extremely severe or disproportionate in light of its purpose or effect, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, the environment, and real estate price stabilization (through, for example, measures to improve the housing conditions for low-income households), do not constitute indirect expropriations.167 The great level of precision observed in the treaty text above indicates the Contracting Parties’ heightened levels of sensitivity, particularly with respect to differentiating legitimate governmental regulation from unlawful indirect expropriation. First, Paragraph 3(a) indicates that an expropriation determination “requires a case-by-case, fact-based inquiry that considers all relevant factors relating to the investment.” Second, Paragraph 3(b) clarifies that certain non-discriminatory measures based upon public welfare objectives do not constitute indirect expropriation, specifically excluding real estate price stabilization from being considered expropriation. In so doing, 167 U.S.-Korea FTA (2007), Annex 11-B (Emphasis added). 75 the treaty text goes so far as to provide an example of housing condition improvements for low-income households. As such, the FTA with the U.S. represents a case in which Korea adopted a highly detailed approach in order to clarify the precise scope of protections offered under the treaty, while preserving sufficient room to accommodate legitimate regulation and policymaking. Finally, recent Korean BITs generally do not directly address the issue of whether taxation measures may constitute expropriation.168 The KoreaJapan BIT (2003) serves as an exception to this tendency, as it explicitly states that nothing in the BIT “shall apply to taxation measures except as expressly provided in paragraphs 2, 3 and 4 of this Article.” 169 The subsequent paragraph adds that Article 10, i.e., the provision that addresses the issue of expropriation, “shall apply to taxation measures.”170 The investment chapter in the Korea-U.S. FTA (2011) includes an annex clarifying whether taxation measures constitute expropriation. In Annex 11-F, it is provided that “[t]he determination of whether a taxation measure, in a specific fact situation, constitutes an expropriation requires a case-by-case, fact-based inquiry that considers all relevant factors relating to the investment” and that the following issues that should be taken into consideration in such a determination: (a) The imposition of taxes does not generally constitute an expropriation. The mere introduction of a new taxation measure or the imposition of a taxation measure in more than one jurisdiction in respect of an investment generally does not in and of itself constitute an expropriation; (b) A taxation measure that is consistent with internationally recognized tax policies, principles, and practices should not constitute an expropriation. In particular, a taxation measure aimed at preventing the avoidance or evasion of taxation measures generally does not constitute an expropriation; 168 See, e.g., Korea-Libya BIT (2007), art. 5; Jamaica-Korea BIT (2003), art. 5; KoreaKyrgyzstan BIT (2007), art. 5. 169 Japan-Korea BIT (2002), art. 19(1). 170 Id., art. 19(2). 76 (c) A taxation measure that is applied on a nondiscriminatory basis, as opposed to a taxation measure that is targeted at investors of a particular nationality or at specific taxpayers, is less likely to constitute an expropriation; and (d) A taxation measure generally does not constitute an expropriation if it was already in force when the investment was made and information about the measure was publicly available.171 Summary As has been examined above, the approaches to expropriation taken by China on the one hand, and Japan and Korea on the other hand, have displayed substantial divergence. In particular, China’s investment treaty practice relating to expropriation has revealed a heightened level of caution, reflecting its discomfort with delegating this sensitive political issue to standards established in accordance with international law. As a result, modern Chinese investment treaties often tweak standard international investment treaty formulations (e.g., using the “domestic legal procedure” phrase in lieu of the “due process” language, and avoiding the commonly adopted “prompt, adequate and effective” phrase) in an attempt to retain interpretive control. On the other hand, Japan and Korea have generally been receptive to international standards governing the issue of expropriation. Each state embraces the generic four-condition formulation under which expropriation may be lawful and accepts compensation standards conforming to the Hull formula. The contrast between their approach and China’s may be attributable, in part, to the fundamentally different economic systems found among the three East Asian states, or more specifically, to differences in each market’s capital flows (Japan and Korea, as net capital exporters, may be less concerned about the issue of domestic control over expropriation compared to China, one of the two largest capital importers), and to differences in the general standards of compensation each state applies to its domestic 171 U.S.-Korea FTA (2007), Annex 11-F. 77 expropriation cases. However, as discussed above, China’s recent IIAs unveil China’s gradual progression toward international norms on expropriation. B. Fair and Equitable Treatment The promise to secure “fair and equitable” treatment (FET) to foreign investors and investments is a core concept found in modern investment treaty practice.172 Although the precise formulation of the FET provision varies by each individual investment agreement, it is almost universally embraced in modern international investment treaties. While the term itself is rarely defined in IIAs, FET is one of the most oft-invoked treatment standards in the course of investor-state arbitrations.173 As a result of the repetitive invocation of this standard in numerous arbitrations, a substantial body of arbitration decisions and awards interpreting and applying this principle has accumulated. According to Reed, Paulsson, and Blackaby, as of January 2010, FET claims had been advanced in 50 decided ICSID cases, out of which ICSID tribunals upheld FET claims in 26 cases.174 Tribunals have encountered difficulties in interpreting and applying this elusive “fair and equitable” language. Jeswald Salacuse points out three factors compounding such complexities. The first and second factors involve the inherent vagueness of the term itself, and the interrelated issue that the treaty provisions in which the FET standard is found fail to provide a clear definition or guideline for applying the standard. With respect to the third factor, Salacuse emphasizes that the “application of the [FET] standard is so tied to the facts of the specific cases as to limit the utility of the arbitral decisions and doctrinal analysis.”175 In order to make sense of this vague language, Dolzer and Schreuer examine a wide range of factual situations to which tribunals have responded and identify several guiding principles, the violation of which would likely constitute a breach of the FET standard.176 The several principles introduced 172 For a theoretical discussion and background information relating to the fair and equitable treatment standard, see Dolzer and Schreuer, pp. 218-244. 173 See R. Dolzer, “Fair and Equitable Treatment: A Key Standard in Investment Treaties,” 39 INT’L LAWYER 87 (2005). 174 LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION, at 75. 175 Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES, at 221. 176 For a more detailed discussion of these principles, see Dolzer and Schreuer at pp 133149. 78 by Dolzer and Schreuer include: (i) transparency, stability, and the corresponding protection of the investor’s legitimate expectations; 177 (ii) observance of contractual obligations; 178 (iii) fair procedure; 179 (iv) good faith;180 and (v) freedom from coercion and harassment.181 Regardless of whether a host state has promised protection in accordance with the national treatment and MFN treatment standards, foreign investors may still believe that such level of protection is insufficient, particularly when the nationals of the host state and investors from other most favored nations are perceived as receiving an inadequate level of protection. In such cases, the FET standard ensures that the foreign investor will receive, at the very least, a minimum level of protection based on widely accepted notions of fairness and equity. In international investment treaty arbitrations, claimants typically advance multiple, simultaneous claims based upon direct expropriation, indirect expropriation, and/or violation of the FET standard. Reed, Paulsson, and Blackaby point out that “[t]he reluctance of many ICSID tribunals to find States liable for expropriation by indirect measures has contributed to the growing prominence of the fair and equitable treatment standard.”182 FET Standard and International Law One of the key issues relating to the FET standard as to which treaty practice has shown divergence is the relationship between the FET standard and international law – in particular, the minimum standard of treatment 177 The basic principle clarifies that such legitimate expectations shall be grounded on the relevant laws and regulations of the host state as it stands at the time of acquisition of investment by the investor. Id. at 134. Case law related to this principle includes, see, e.g., Mondev v. USA, Award, October 12, 2002, 42 ILM (2003) 85, Azinian v. Mexico, Award, November 1, 1999, 39 ILM 2000, Maffezini v. Spain, Award on the Merits, November 13, 2000, 16 ICSID Review-FILJ (2001) 248. 178 For relevant case law, see, e.g., SGS v. Philippines, Decision on Jurisdiction, January 29, 2004, 8 ICSID Reports 518; Noble Ventures v. Romania, Award, October 12, 2005; RFCC v. Morocco, Award, December 22, 2003, 20 ICSID Review-FILJ (2005). 179 For relevant case law, see, e.g., Metalclad Corp. v. Mexico, Award, August 30, 2000, 5 ICSID Reports 209; Middle East Cement v. Egypt, Award, April 12, 2002, 18 ICSID ReviewFILJ (2003) 602. 180 For relevant case law, see, e.g., Bayindir Insaat Turizm Ticaret Ve Sanayi A. S. v. Pakistan, Decision on Jurisdiction, November 14, 2005, Saluka v. Czech Republic, Partial Award, March 17, 2006. 181 For relevant case law, see, e.g., Pope & Talbot v. Canada, Award on Merits, April 10, 2001, 122 ILR (2002) 352, TECMED v. Mexico, Award, May 29, 2003, 43 ILM (2004) 133. 182 LUCY REED, JAN PAULSSON, AND NIGEL BLACKABY, GUIDE TO ICSID ARBITRATION, at 92. 79 under customary international law. Salacuse introduces two different approaches to understanding the nature of the FET standard: (i) that FET “merely reflects the international minimum standard,” and (ii) that the FET standard is “autonomous and additional to general international law.”183 The narrower former interpretation is represented in the 2004 U.S. Model BIT: Article 5: Minimum Standard of Treatment 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights.184 First, the heading of the article, i.e., “Minimum Standard of Treatment,” suggests that the provision is concerned primarily with setting the baseline of treatment and does not guarantee treatment beyond the prescribed minimum level of protection. Second, the treaty text indicates that the minimum standard of treatment is clearly tied to customary international law and does not extend beyond such parameters. On the other hand, a substantial number of other BITs provide for FET as an autonomous standard without linking it to international law, while still others link FET with the rather vague notion of international law. This formulation could be interpreted to embrace the FET standard as a higher standard of treatment as compared to customary international law, and Salacuse suggests that the difference between the two may be that the former is “intended to provide investors with a basic level of protection in situations where the other substantive provisions of international and national 183 Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES, at 222. (For a comprehensive discussion on the differing concepts of the FET standard, see pp. 222-228). 184 2004 U.S. Model BIT, Art 5(1)-(2). (available at: http://www.state.gov/documents/organization/117601.pdf) 80 law are inapplicable.”185 The broader conception of the FET standard may thus be understood as a catch-all or fall-back provision, intended to fill the gaps not directly addressed under customary international law or specific treaty provisions. In general, recent investment treaties of China, Japan, and Korea commonly include the FET standard. The specific formulation of such FET provisions (e.g., their reference to international law) differs treaty by treaty, in large part depending on the relative leverage and position of the treaty counterparties. 1. FET in Chinese Treaties A number of earlier Chinese investment treaties did not include any reference to the FET standard. This approach was embraced in China’s BITs with its two East Asian neighbors. For example, the China-Japan BIT (1989) simply states: Article 5 1. Investments and returns of nationals and companies of either Contracting Party shall receive the most constant protection and security within the territory of the other Contracting Party. The China-Korea BIT of 1992 (preceding the 2007 amendment) adopts a similar stance and does not mention the FET standard in its text.186 The standard language employed in later Chinese BITs resembles the following text from Version III of the Model BIT: “Investments of investors of each Contracting Party shall all the time be accorded fair and equitable treatment in the territory of the other Contracting Party.”187 One of the most significant conceptual differences between China’s traditional approach toward the FET standard and that of other states has been the fact that China purposefully avoids tying the FET standard to customary international law. 188 As an example, the China-Chile BIT (1995) states: 185 Jeswald W. Salacuse, THE LAW OF INVESTMENT TREATIES, at 227. China-Korea BIT (2007), art. 5(1). 187 Model BIT, Version III, Art 3(1). 188 See N. Gallagher and W. Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009), paras 3.1-3.13 (discussion of interpretive methodology relating to such Chinese FET provisions). 81 186 Article 3 Treatment and Protection 1. Investment and activities associated with investments of investors of either Contracting Party shall be accorded fair and equitable treatment and shall enjoy protection in the territory of the other Contracting Party. 2. The treatment and protection referred to in Paragraph 1 of this Article shall not be less favourable than that accorded to investment and activities associated with such investments of investors of a third State.189 In addition, the above model treaty text ties the MFN concept to the FET standard. In contrast to earlier investment treaties, the incorporation of explicit references to an “international law minimum standard of treatment” in certain, more recent Chinese BITs represents, to a certain degree, an increasing level of comfort with this widely accepted international investment treaty practice. For example, the China-Mexico BIT (2009) embeds this phrase in its FET provision: Article 5 Minimum Standard of Treatment 1. Each Contracting Party shall accord to investments of investors of the other Contracting Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, this Article prescribes the international law minimum standard of treatment to be afforded to investments of investors of the other Contracting Party. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by 189 Agreement between the Government of the People's Republic of China and the Government of the Republic of Chile concerning the Encouragement and the Reciprocal Protection of Investment, Chile-China, Mar. 23, 1994, http://www.wipo.int/wipolex/en/other_treaties/text.jsp?file_id=248721 [hereinafter ChileChina BIT (1994)]. See also China-U.K. BIT (1986), art. 2(2) and Austria-China BIT (1986), art. 2(2) (both accept the FET standard, but include neither general nor specific reference to international law). 82 the international law minimum standard of treatment of aliens as evidence of State practice and opinion juris.190 The China-Mexico BIT thus generally tracks the 2004 U.S. Model BIT formulation and similarly uses the “Minimum Standard of Treatment” title. As another variation, the Trilateral Investment Agreement among China, Japan, and Korea displays creative maneuvering by the Contracting Parties, as the “generally accepted rules of international law” phrase is used in lieu of the “international law minimum standard language:” Article 5 General Treatment of Investments 1. Each Contracting Party shall accord to investments of investors of another Contracting Party fair and equitable treatment and full protection and security. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond any reasonable and appropriate standard of treatment accorded in accordance with generally accepted rules of international law. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not ipso facto establish that there has been a breach of this paragraph.191 This clause resembles the language in the Note of Interpretation192 issued by the NAFTA Free Trade Commission on July 31, 2001, interpreting the NAFTA minimum standard of treatment provision and the FET standard, i.e., Article 1105, except for the fact that references to international minimum 190 Italics added. Trilateral Investment Agreement among China, Japan and Korea (2012), emphasis added. See also China-Mexico BIT (2009), art. 5(2) (Although embedded in a provision titled, “Minimum Standard of Treatment,” the text reveals that the international law standard is set as the maximum required level of treatment: “The [concept] of “fair and equitable treatment” do[es] not require treatment in addition to or beyond that which is required by the international law minimum standard of treatment of aliens as evidence of State practice and opinio juris.” Emphasis added.). 192 Notes of Interpretation of Certain Chapter 11 Provisions (NAFTA Free Trade Commission, July 31, 2001): Minimum Standard of Treatment in Accordance with International Law 1. Article 1105(1) prescribes the customary international law minimum standard of t reatment of aliens as the minimum standard of treatment to be afforded to inves tments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the c ustomary international law minimum standard of treatment of aliens. 83 191 standard of treatment under customary international law have been replaced in the Trilateral Agreement with “generally accepted rules of international law” language. As a result, at a certain point, either the three Contracting Parties or a tribunal presented with an investment dispute arising out of this Agreement may necessarily have to address what such “generally accepted rules of international law” entail, i.e., whether they are the same as the international minimum treatment standards under customary international law or something else. In addition, a handful of recent Chinese investment agreements include examples of what the FET standard specifically refers to. For instance, the China-ASEAN Cooperation Agreement states that “fair and equitable treatment refers to the obligation of each Party not to deny justice in any legal or administrative proceedings.”193 In addition, the China-Uzbekistan BIT (2011) similarly provides more color to this inherently vague standard of treatment: Article 5 Fair and Equitable Treatment 1. Each Contracting Party shall ensure to accord to investors of the other Contracting Party and associated investments in its territory fair and equitable treatment and full protection and security. 2. “Fair and equitable treatment” requires that investors of one Contracting Party shall not be willfully rejected to fairly judicial proceedings by the other Contracting Party or be treated with obvious discriminatory or arbitrary measures. This treaty text expressly sets out two circumstances which would constitute a violation of the FET standard, i.e., willful rejection to fair judicial proceedings and discriminatory or arbitrary treatment. The former circumstance is consistent with the definition of the FET standard provided in the China-ASEAN Cooperation Agreement. The latter, on the other hand, does not provide much clarification and could be understood as overlapping, to a certain extent, with the national treatment and MFN protection against discrimination examined in Chapter Two. Nevertheless, these efforts to specify FET coverage signify a growing eagerness to make more sense of an 193 ASEAN-China FTA (2002), art. 7(2)(a). 84 otherwise amorphous standard of protection. In essence, China’s treatment of the FET standard has shown a gradual progression from categorical exclusion to qualified acceptance and detailed specification. 2. FET in Japanese Treaties The application of FET in Japanese investment treaties has not been consistent. For instance, certain earlier BITs did not even include any form of FET clause.194 Even among the majority of agreements which do provide for FET, the specific extent and form of FET inclusion has been incoherent. A minority approach is reflected in the Japan-Korea BIT (2003), in which the FET standard and the concepts of “full and constant protection and security” are lumped together, without any reference to international law.195 The most basic form of FET clause requires each Contracting Party to accord FET to the other Contracting Party and generally embraces international law as the standard to follow: Article 4 1. Each Contracting Party shall accord to investments of the other Contracting Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.196 Another variation of FET clause relies on “notes” to provide further specification (often in the form of qualifications). As an example, a note in Article 59 of the Japan-Brunei FTA stipulates that “[t]he concepts of ‘fair and equitable treatment’ and ‘full protection and security’ do not require treatment in addition to or beyond that which is required by customary international law minimum standard of treatment of aliens.”197 The content of 194 Egypt-Japan BIT (1977); Japan-Sri Lanka BIT (1982) (For instance, in Article 5(1) of the Japan Sri-Lanka BIT, only reference to the “most constant protection and security” is included, and no explicit provision relating to the FET standard is found.); China-Japan BIT (1988); Japan-Turkey BIT (1992); Agreement between Japan and the People’s Republic of Bangladesh Concerning the Promotion and Protection of Investment, Bangl.-Japan, Nov. 10, 1998, http://www.bilaterals.org/IMG/pdf/bangladesh_japan.pdf [hereinafter Bangladesh-Japan BIT (1998)]; Agreement between Japan and the Islamic Republic of Pakistan Concerning the Promotion and Protection of Investment, Japan-Pak., Mar. 10, 1998, http://www.bilaterals.org/IMG/pdf/pakistan_japan.pdf [hereinafter Japan-Pakistan BIT (1998)]; Japan-Mongolia BIT (2001). 195 Japan-Korea BIT (2002), art. 10(1). See also Japan-Uzbekistan BIT (2008), art. 3(1)-3(3). 196 Cambodia-Japan BIT (2002). 197 How this language, as applied in practice, differs from the text in the Japan-Cambodia BIT above is unclear. 85 this note generally follows the format of the 2004 U.S. Model BIT and serves the function of limiting the expansive applicability of the FET standard. A handful of more recent Japanese investment treaties provide further clarification as to the scope of FET coverage. The Japan-Chile FTA (2007) represents this more detailed approach toward the provision of FET to foreign investors and investment.198 The Article begins with the basic formulation of requiring that treatment in line with customary international law shall be conferred: Article 75 General Treatment Each Party shall accord to investments made in its Area by investors of the other Party, treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. After setting out the general principle, the provision proceeds to clarify the precise scope of FET in three separate Notes. As examined above in the China-Mexico BIT (2009) example, the first notes of Article 75 delineate the maximum extent, i.e., the “customary international law minimum standard of treatment of aliens,” to which FET is required:199 Note 1: Article 75 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments made in the Area of a Party by investors of the other Party. The customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. Note 2: A determination that there has been a breach of another provision of this Agreement, or of a separate international 198 199 Japan-Chile EPA (2007). See also Japan-Peru BIT (2008), art. 5(2) Note. See China-Mexico BIT (2009), pp. 80-83 (discussion of the Chinese investment treaty practice with respect to setting an FET “cap”). 86 agreement, does not establish that there has been a breach of Article 75. Finally, Note 3 points to what FET is intended to cover; in the instant case, the Contracting Parties explicitly refer to procedural justice, as they require non-discriminatory access to courts and administrative tribunals and agencies: Note 3: Each Party shall accord to investors of the other Party, non-discriminatory treatment with regard to access to the courts of justice and administrative tribunals and agencies of the former Party in pursuit and in defense of rights of such investors. As such, Japanese investment treaty practice relating to the FET clause has experienced a course of evolution similar to that of China, moving from general omission to cautious inclusion, with the most noticeable divergence between the two states being their different attitudes toward referring to customary international law. 3. FET in Korean Treaties Korean practice relating to the FET standard of protection reveals a certain level of flexibility. Earlier Korean BITs, particularly those concluded with Western European capital-exporting states, generally accept the template of Korea’s Western treaty counterparty on the issue of FET. For instance, the Korea-U.K. BIT (1976) reads: Article 2 Promotion and Protection of Investment 2. Investment of nationals or companies of either Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party. Each Contracting Party shall ensure that the management, maintenance, use, enjoyment or disposal of investments in its territory of nationals or companies of the other Contracting Party is not in any way impaired by unreasonable or discriminatory measures. Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party. 87 As such, the Korea-U.K. BIT juxtaposes the issues of FET and the guarantee of “full protection and security,” but does not provide further guidance as to the scope and applicability of the FET standard.200 Similarly, the FET clause in the 2001 Korea Model BIT is free from qualifying language: Article 2 Promotion and Protection of Investments 2. Investments made by investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.201 A few more recent Korean BITs have added specificity to this Model BIT language and base the FET standard on principles of international law. For example, the Korea-Kuwait BIT (2007) reads as follows: Article 2 Promotion and Protection of Investment (6) Investments by investors of either Contracting Party shall at all times enjoy fair and equitable treatment and full protection and security in the territory of the other Contracting Party in a manner consistent with recognized principles of international law and the provisions of this Agreement. Neither Contracting Party shall in anyway impair by arbitrary or discriminatory measures the use, management, operation, maintenance, enjoyment, or disposition of investments.202 This treaty text ties the FET standard to “recognized principles of international law,” and the paragraphs immediately subsequent to the provision present concrete examples explaining the content of the FET standard: (7) Each Contracting Party shall, in accordance with its laws and regulations, promptly publish, or otherwise make publicly available, its laws, regulations, procedures, 200 See also, Belgium-South Korea BIT (1974), art. 1(1) and 1(2). Article 2(1) addresses the admission of foreign investment and 2(3) prohibits arbitrary or discriminatory measures in the “operation, management, maintenance, use, enjoyments or disposal” of foreign investments of the other Contracting Party. 202 Agreement between the Government of the Republic of Korea and the Government of the State of Kuwait for the Promotion and Protection of Investments, Kuwait-S. Kor., July 15, 2004, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1801 [hereinafter Korea-Kuwait BIT (2004)] (emphasis added). 88 201 directives, guidelines and administrative rulings and judicial decisions of public application as well as international agreements which pertain to or may affect the operation of the provisions of this Agreement or investments in its territory of investors of the other Contracting Party. (8) Each Contracting Party shall provide effective means of asserting claims and enforcing rights with respect to investments. Each Contracting Party shall ensure to investors of the other Contracting Party, the right of access to its courts of justice, administrative tribunals and agencies, and all other bodies exercising adjudicatory authority, and the right to mandate persons of their choice, who qualify under its laws and regulations for the purpose of the assertion of claims and the enforcement of rights with respect to their investments. (9) Investments by investors of either Contracting Party shall not be subjected in the host Contracting Party to sequestration, confiscation or any other similar measures except under process of law and in conformity with applicable principles of international law and other relevant provisions of the Agreement. For instance, Paragraph 7 emphasizes the importance of transparency, whereas Paragraphs 8 and 9 deal with the issues of fair procedure, due process, and freedom from coercion. On the other hand, the investment chapter of the Korea-U.S. FTA generally follows the approach espoused in the 2004 U.S. Model BIT and requires FET amounting to no more than a generally accepted baseline, i.e., the customary international law minimum standard of treatment of aliens: Article 11.5 Minimum Standard of Treatment 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens 89 as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a) “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world . . . . Summary In sum, the investment treaty practices of the three East Asian states embrace the FET standard in principle, but with different formulations. It is noteworthy that in recent IIAs, the three states generally follow the recent trend of inserting qualifications to clarify the scope of this rather elusive protection standard in order to limit potential expansive interpretations of this standard by arbitration tribunals. 90 IV. Investor-State Dispute Settlement A. Introduction Limitations of Domestic Judicial Proceedings and Diplomatic Channels This Chapter examines dispute settlement provisions embedded in the IIAs of China, Japan, and Korea. While the IIAs of the three countries include state-to-state dispute resolution mechanisms, as is common in IIAs, this paper focuses exclusively on the issue of how investor-state investment disputes may be resolved. Under customary international law on foreign investment, investors who suffer loss to their investment as a result of actions in violation of international law by the host state have no effective means to recover such losses. Investors may turn to local courts of the host states, but they will most likely face direct and indirect disadvantages of having to litigate as a foreign entity. Dolzer and Schreuer point out a few reasons why reliance on domestic courts of the host state may be either insufficient or problematic. First, the outcome of proceedings may be influenced by the lack of an independent judiciary or executive involvement in the domestic judicial proceedings. In particular, when the host state takes drastic measures affecting foreign investment, such as nationalization or expropriation, the neutrality of local courts of such host state would correspondingly be put to serious question. Moreover, local laws, which could be politically motivated, may come into play to preclude the application of international legal rules securing the rights of investors. In addition, the local court concerned may not possess the requisite level of competence to address international investment disputes, particularly where large amounts of money or highly technical issues are involved.203 The usefulness of ordinary local courts of the host state may thus be limited. Under public international law, upon exhaustion of local remedies in the host state, foreign investors may rely on diplomatic channels for redress of injury. However, the decision of the International Court of Justice in the Barcelona Traction case, in which Belgium brought action against Spain on behalf of its citizens, the principal shareholders of a Canadian investor in Spain, 203 Dolzer and Schreuer at 214. 91 demonstrates the inadequacy of such diplomatic protections in securing effective remedies for foreign investors. 204 Furthermore, diplomatic protection carries the potential to unnecessarily escalate an investment dispute and engender serious diplomatic tensions between the host and home states without according any effective remedies to private investors. In order to address this issue in an effective manner, the Executive Directors of the International Bank for Reconstruction and Development (World Bank) formulated a multilateral treaty, i.e., the ICSID Convention. The Convention was aimed toward removing major impediments to the international movement of capital and investment and was intended to create an impartial international forum for the resolution of international investment disputes. The Convention entered into force on October 14, 1966. Shortly thereafter, IIAs began to incorporate clauses providing for the settlement of investor-state disputes via ICSID arbitration. The Netherlands-Indonesia BIT, signed on July 7, 1968, was the first to include an ICSID clause. It provided for the submission of investment disputes “either to the judicial procedures provided by the Contracting Party concerned or to international arbitration or conciliation,” and further effected consent on the part of each Contracting Party, “to submit any legal dispute arising between that Contracting Party and a national of the other Contracting Party concerning an investment of that national in the territory of the former Contracting Party” to ICSID.205 Numerous subsequent IIAs followed suit, and now, a substantial number of IIAs provide for a dispute settlement mechanism, allowing an aggrieved investor to directly submit a request for arbitration 204 The dispute involved Barcelona Traction, Light and Power Company, a Canadian utility company operating business in Spain, but with a majority of shares owned by Belgians. Barcelona Traction issued corporate bonds to foreign investors, but as a result of the Spanish Civil War, the Company was disallowed from paying interest to its bondholders in British pounds, the initially designated bond currency. A few Spaniards acquired some of these bonds and brought a bankruptcy filing under the Spanish legal system for failure to pay the above bond interest. The Spanish court declared the Company bankrupt, and its corresponding assets were sold through a public auction. The proceeds from the auction were first distributed to the creditors, and the minuscule remainder was allotted to shareholders, most of whom were Belgians. Belgium brought a suit before the International Court of Justice on behalf of its citizens to no avail. See, Belgium v. Spain, Judgment of February 5, 1970, ICJ 3 (1970). 205 Agreement between the Government of the Kingdom of the Netherlands and the Government of the Republic of Indonesia on Promotion and Protection of Investment, art. 9(4), Indon.-Neth., Apr. 6, 1994, http://arbitrationlaw.com/files/free_pdfs/netherlandsindonesia_bit.pdf [hereinafter Indonesia-Netherlands BIT (1994)]. 92 against a host state. At the very least, this provision presents a means for resolving disputes and securing payment of compensation to injured investors without the involvement of home states. Furthermore, this mechanism may, to a certain extent, deter host states from disregarding treaty commitments to foreign investors, in fear of the tangible possibility of being subjected to arbitration. In addition to the ICSID Convention, the United Nations Commission on International Trade Law (UNCITRAL) adopted the UNCITRAL Arbitration Rules on April 28, 1976, further enriching the body of procedural rules upon which international methods for dispute settlement relating to investment may be developed. Upon such adoption, the UNCITRAL rules have also been frequently included in the arbitration clauses of IIAs. The first instance of investor-state arbitration before ICSID recognizing an IIA dispute settlement clause as a basis for jurisdiction was the AAPL v. Sri Lanka case of 1990.206 According to a recent UNCTAD report, the total number of known treatybased investor-state dispute settlement cases amounted to 514 as of the end of 2012.207 Process of Investor-State Dispute Settlement In terms of specific process, IIAs generally delineate a two-step procedure for dispute settlement. The preliminary stage involves investorstate consultations and negotiations, typically a prerequisite to filing an arbitration claim. A number of IIAs provide for a cooling-off period for this consultations and negotiations process, with the required duration ranging from three to eighteen months. If negotiations fail, the investor may proceed and submit a request for arbitration or conciliation. In certain cases, resort to domestic courts may have to precede submission of a case to arbitration. Under public international law, foreign investors traditionally were subject to the requirement to exhaust local remedies in accordance with the host state’s judicial system before seeking diplomatic protection from their home states. Article 26 of the ICSID Convention, in principle, removed this requirement as a pre-condition to filing 206 See AAPL v. Sri Lanka, Award of June 27, 1990, 4 ICSID Reports 256 (1997). UNCTAD, UNCTAD IIA Issues Note No.1, May 28, 2013, at 1, available at http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d3_en.pdf. 93 207 an arbitration. The Convention, however, adopts a permissive, yet nonmandatory stance, as Article 26 provides that a Contracting State may establish the “exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under [the ICSID Convention]”.208 In actuality, however, such conditions are not commonly adopted by host states. The jurisdictional basis for dispute settlement via arbitration is established by mutual consent of the parties involved, and the context of investor-state arbitration is not an exception to this general principle. As an example, the ICSID Convention’s jurisdictional provision stipulates as follows: Article 25 (1) The jurisdiction of [the ICSID] shall extend to any legal disputes arising directly out of an investment, between a Contracting State . . . and a national of another Contracting State, which the parties to the dispute consent in writing to submit to [the ICSID]. When the parties have given their consent, no party may withdraw its consent unilaterally.209 In many cases, the investor-state arbitration clause in international investment treaties functions as a Contracting State’s consent to embrace arbitration as a means to deal with investment disputes. However, some IIAs simply provide for an obligation of the Contracting States to consent. Furthermore, the specific scope and conditions to which the Contracting States are willing to be subject are stated in the arbitration clause. Therefore, a particular foreign investor may request arbitration against a Contracting State in reliance on, and in accordance with, such an arbitration clause. The requirement for the “parties to consent in writing” will be satisfied by an investor’s election, in writing, to file arbitration against a Contracting State which has given its consent in an IIA. While some IIAs allow both an investor and a host state to file an arbitration, a majority of recent IIAs allow only investors to file an arbitration. Prior to analyzing the specific treaty language that has been adopted with respect to dispute settlement and arbitration by China, Japan, and Korea, 208 ICSID Convention, Regulations and Rules, Apr. 2006, ICSID/15, available at https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf. 209 Id. (emphasis added). 94 their statuses as ICSID Member States will be briefly touched upon. The specific timing of each state’s membership, to a certain degree, reflects its stance toward and level of comfort with international arbitration as a means to resolve investment disputes with private foreign investors. The ICSID Convention was put to signature by participating states in March 1965, and went into effect in October 1966. As of April 2015, there are 159 signatory and contracting States to the ICSID Convention.210 Among the three East Asian states, Japan was the first to have signed the Convention (September 23, 1965), but in terms of the date of entry into force, Korea preceded Japan by a few months.211 China signed the Convention in February 1990, and its membership entered into force in February 1993. The following paragraphs will discuss how the issues of investor-state dispute settlement and arbitration have been approached in Chinese, Japanese, and Korean investment agreements. B. Investor-State Arbitration involving China The investor-state dispute resolution clauses adopted in China’s BITs have engendered a substantial amount of debate and skepticism in the past. The controversy has largely centered on the limited scope of the disputes China was willing to subject to arbitration. Prior to the late 1990s, most Chinese BITs conceded to arbitration as a means of dispute settlement solely on issues relating to ascertaining the appropriate amount of compensation for expropriation.212 Also, instead of accepting any institutional international 210 For a comprehensive list of the signatories, date of signature, ratification and entry into effect for each respective state, see https://icsid.worldbank.org/ICSID/FrontServlet?requestType=ICSIDDocRH&actionVal=Sh owDocument&language=English. 211 ICSID Convention entered into force for Korea and Japan on March 23, 1967 and September 16, 1967, respectively. 212 See, e.g., Agreement between the Government of the Democratic Socialist Republic of Sri Lanka and the Government of the People’s Republic of China on the Reciprocal Promotion and Protection of Investments, art. 13(3), China-Sri Lanka, Mar. 13, 1986, http://investmentpolicyhub.unctad.org/Download/TreatyFile/781 [hereinafter China-Sri Lanka BIT (1986)]; Agreement between the Government of the People’s Republic of China and the Government of the Argentine Republic on the Promotion and Reciprocal Protection of Investments, art. 8(3), Arg.-China, Nov. 5, 1992, http://investmentpolicyhub.unctad.org/Download/TreatyFile/79 [hereinafter ArgentinaChina BIT (1992)]; Agreement between the Government of the Republic of Indonesia and the Government of the People’s Republic of China on the Promotion and Protection of Investments, art. IX(3), China-Indon., Nov. 18, 1994, http://investmentpolicyhub.unctad.org/Download/TreatyFile/743 [hereinafter ChinaIndonesia BIT (1994)]; Agreement between the Government of the Lebanese Republic 95 arbitral proceedings, or international arbitration rules, earlier Chinese BITs relied heavily on the use of an ad hoc tribunal for the settlement of disputes. As a capital-importing state, China approached the issue of investor-state dispute settlement with a high level of cautiousness, and thus attempted to limit the scope of disputes that could be submitted to international arbitration. The China-U.K. BIT (1986) provides a vivid example of these two characteristics: Article 7 Settlement of Disputes between a National or Company and a Host State (1) A dispute between a national or company of one Contracting Party and the other Contracting Party concerning an amount of compensation which has not been amicably settled after a period of six months from written notification of that dispute shall be submitted to international arbitration. First, the China-U.K. BIT text specifically refers to disputes “concerning an amount of compensation,” but does not include investment disputes arising out of other issues within the scope of the investor-state dispute settlement provision. As such the BIT does not identify how all other non-compensation related investor-host state disputes are to be resolved. Furthermore, Article 7(1) requires an initial time period of six months for the purpose of encouraging mutual communication and amicable settlement prior to submission of a dispute to international arbitration. and the Government of the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investments, art. 8(3), China-Leb., June 13, 1996, http://investmentpolicyhub.unctad.org/Download/TreatyFile/755 [hereinafter ChinaLebanon BIT (1996)]; Agreement between the Government of the People’s Republic of China and the Government of the Syrian Arab Republic concerning the Reciprocal Promotion and Protection of Investments, art. 9(3), China-Syria, Dec. 9, 1996, http://investmentpolicyhub.unctad.org/Download/TreatyFile/785 [hereinafter China-Syria BIT (1996)]; Agreement between the Government of the Kingdom of Cambodia and the Government of the People’s Republic of China for the Promotion and Protection of Investment, art. 9(3), Cambodia-China, July 19, 1996, http://investmentpolicyhub.unctad.org/Download/TreatyFile/571 [hereinafter CambodiaChina BIT (1996)]. As examined in Section III, the ICSID tribunal in the Tza Yap Shum case interpreted this qualification to cover “not only the mere determination of the [compensation] amount but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions . . . .” Tza Yap Shum V Peru (ICSID Case No ARB/07/6, Decision on Jurisdiction and Competence of 19 June 2009), para 188. 96 Second, China’s preference for ad hoc arbitration is reflected in Paragraph 2: (2) Where the dispute is referred to international arbitration, the national or company and the other Contracting Party concerned in the dispute may agree to refer the dispute either to: (a) an international arbitrator appointed by the parties to the dispute; or (b) an ad hoc arbitral tribunal to be appointed under a special agreement between the parties to the dispute; or (c) an ad hoc arbitral tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law. This treaty text presents a set of options with respect to the method of arbitration to the parties involved, of which the first relies on a sole arbitrator, whereas the remaining two involve ad hoc arbitral tribunals. A number of other earlier China BITs lay out the process of establishing an ad hoc arbitral tribunal, usually composed of three arbitrators. For instance, the ChinaSingapore BIT (1986) specifies that “each party . . . shall appoint an arbitrator. The two arbitrators shall appoint a third arbitrator as Chairman . . . .”213 As a final resort, if all aforementioned processes fail after three months have passed since referral to arbitration, the China-U.K. BIT requires that said investment dispute be submitted to arbitration in accordance with the UNCITRAL Arbitration Rules. One of the main reasons for China’s reliance on ad hoc tribunals for arbitration, as opposed to utilizing ICSID tribunals, was because it was previously not a member of the ICSID Convention. Before China became a 213 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Promotion and Protection of Investments, art. 13(4), China-Sing., Nov. 21, 1985, http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/968 [hereinafter ChinaSingapore BIT (1985)]. See also Agreement between the Government of the Kingdom of Thailand and the Government of the People’s Republic of China for the Promotion and Protection of Investments, art. 9(3)(a), China-Thai., Mar. 12, 1985, http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/981 [hereinafter ChinaThailand BIT (1985)]. 97 member to the Convention in 1993, a substantial number of Chinese BITs included a clause specifying that the ad hoc tribunal would “determine its own arbitral procedures with reference to the ICSID Convention.”214 Essentially, the ICSID Convention was used as a nonbinding reference point in conducting the arbitration procedures of dispute resolution. After China obtained ICSID membership in 1993, its investment treaty practice relating to dispute settlement reveals a gradual progression from use of the ICSID merely as a reference point to selective acceptance, but only to the extent that China and its counterparties provide prior mutual written consent as to the institution’s jurisdiction.215 For instance, the China-Greece BIT (1993) stipulates: Article 10 Settlement of Disputes between an Investor and a Host State 1. Disputes between an investor of a Contracting Party and the other Contracting Party concerning an obligation of the letter under this Agreement, in relation to an investment of the former, shall, as far as possible, be settled by the disputing parties in an amicable way. 2. If such disputes cannot be settled within six months from the date either party requested amicable settlement, the investor concerned may submit the dispute either to the competent court of the Contracting Party, or to an international arbitration tribunal if 214 China-Singapore BIT (1985), art. 13(6). See also Austria-China BIT (1986), Protocol art. 3(2); Agreement between the Government of the People’s Republic of China and the Government of the State of Kuwait for the Promotion and Protection of Investments, art. 8(3), China-Kuwait, Nov. 23, 1985, http://investmentpolicyhub.unctad.org/Download/TreatyFile/752 [hereinafter ChinaKuwait BIT (1985)]; China-Sri Lanka BIT (1986), art. 13(6); Agreement between the Government of Australia and the Government of the People’s Republic of China on the Reciprocal Encouragement and Protection of Investments, art. 12(4), Austl.-China, July 11, 1988, http://investmentpolicyhub.unctad.org/Download/TreatyFile/148 [hereinafter Australia-China BIT (1988)]; China-Malaysia BIT (1990), Art 7(4); Agreement between the Republic of Hungary and the People’s Republic of China Concerning the Encouragement and Reciprocal Protection of Investments, art. 10(3), China-Hung., May 29, 1991, http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/910 [hereinafter ChinaHungary BIT (1991)]; China-Yemen BIT (1998), art. ___ (“[O]ther disputes [not relating to amount of compensation] shall be submitted to ICSID on agreement between the parties.”). 215 The first BIT entered into force after China obtained ICSID membership with Papua New Guinea (entry into force on February 12, 1993) does not present ICSID arbitration as an option, and the second BIT with Hungary (entry into force on April 1, 1993) specifies in the Protocol that the Contracting Parties will enter into a separate, supplementary agreement in order to address and clarify issues that may be submitted to ICSID for arbitration. 98 the dispute concerns the amount of compensation referred to in Art. 4. Any other dispute between an investor and a Contracting Party, may be submitted to an international arbitration tribunal, only by mutual consent. Each Contracting Party herewith declares its acceptance of such an arbitration procedure . . . . 4. In the case both Contracting Parties have become members of the . . . [ICSID] Convention . . . , disputes between either Contracting Party and the investor of the other Contracting Party . . . may, by mutual consent be submitted for settlement by conciliation of arbitration to the International Centre for Settlement of Investment Disputes.216 In short, the China-Greece BIT allows for submission of disputes to an international arbitration tribunal for issues concerning the amount of compensation, but additionally requires mutual consent between the investor and host state concerned for any other disputes to be submitted to an international tribunal. Paragraph 4 of Article 10 further specifies that ICSID arbitration in particular may be available upon both China and Greece becoming members of the ICSID Convention,217 so far as both parties to the dispute mutually provide consent as to ICSID jurisdiction. Tza Yap Shum Case and the Scope of Dispute Resolution The limited scope of the disputes China has been willing to subject to arbitration was an essential issue at play in the Tza Yap Shum case. The Chinese claimant argued that the applicable “dispute involving the amount of compensation for expropriation” language 218 allowed him not only to 216 Italics added. The “Agreement between the Government of the People’s Republic of China and the Government of the Hellenic Republic for the Encouragement and Reciprocal Protection of Investments,” was signed on June 25, 1992, and entered into force on December 21, 1993, available at http://unctad.org/sections/dite/iia/docs/bits/china_greece.pdf. 217 The ICSID Convention entered into force on May 21, 1969 for Greece, and therefore, by the time the China-Greece BIT entered into force, both Contracting States had become members to the ICSID Convention, thus rendering Article 10(4) effective. 218 The investor-state dispute settlement provision in the China-Peru BIT (1995) reads as follows: Article 8 1. Any dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute. 99 “determine the amount [of compensation] but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions . . . as well as the [above determination].”219 The claimant’s application of the MFN provision, in an attempt to incorporate into his case the more expansive provisions of Article 12 of the Peru-Colombia BIT, was rejected by the Tribunal.220 However, the Tribunal was willing to closely examine the aforementioned treaty’s language on jurisdiction, determining that in addition to conferring jurisdiction over the basic determination of the value of compensation owed, the “dispute involving the amount of compensation for expropriation” clause also conferred jurisdiction over the determination of whether an expropriation had in fact taken place under the applicable BIT.221 Contemporary Chinese Approach In contrast with China’s past practice, the currently adopted Version III of the Chinese Model BIT further expands the reach of the investor-state arbitration clause and reveals China’s willingness to be subject to ICSID arbitration in a wider range of disputes. China’s investment treaty practice relating to dispute settlement and ICSID arbitration thus has been a multistep process of evolution, moving from minimal utilization of the ICSID Convention as a reference point, to selective use of the Convention, limiting 2. 3. If the dispute cannot be settled through negotiations within six months, either party to the dispute shall be entitled to submit the dispute to the competent court of the Contracting Party accepting the investment. If a dispute involving the amount of compensation for expropriation cannot be settled within six months after resort to negotiations as specified in Paragraph 1 of this Article, it may be submitted at the request of either party to the international arbitration of the International Center for Settlement of Investment Disputes (ICSID), established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, signed in Washington D.C., on March 18, 1965. Any disputes concerning other matters between an investor of either Contracting Party and the other Contracting Party may be submitted to the Center if the parties to the disputes so agree. 219 Tza Yap Shum v Peru, Decision on Jurisdiction and Competence, para 188 (unofficial translation). 220 See supra pp. 41-46 (comprehensive discussion of the MFN treatment issue in the Tza Yap Shum case and the application of the MFN provision to the issue of dispute resolution). 221 Tza Yap Shum v. Peru, paras 143-188. 100 its applicability to disputes relating to the amount of compensation unless there was mutual consent as to ICSID jurisdiction over other kinds of disputes, to broader acceptance of the international arbitration tribunal as a viable option generally available to the parties involved. The main driving force behind such development has been the exponential increase of Chinese overseas investment. The most recent Model BIT dispute settlement provision covers “any legal dispute between an investor of one Contracting Party and the other Contracting Party,”222 without limiting eligible disputes to those based upon the violation of the treaty. As such, it can be interpreted as even going beyond current standard international BIT practice: Article 9: Settlement of Disputes between an Investor and a Host State 1. Any legal dispute between an investor of one Contracting Party and the other Contracting Party in connection with an investment in the territory of the other Contracting Party shall, as far as possible, be settled amicably through negotiations between the parties to the dispute. 2. If the dispute cannot be settled through negotiations within six months from the date it has been raised by either party to the dispute, it shall be submitted by the choice of the investor: (a) to the competent court of the Contracting Party that is a party to the disputes; (b) to [ICSID] under the [ICSID Convention], provided that the Contracting Party involved in the dispute may require the investor concerned to go through the domestic administrative review procedures specified by the laws and regulations of that Contracting Party before the submission to ICSID.223 222 223 Model BIT, Version III, Art 9(1), (2). Italics added. 101 Once the investor has submitted the dispute to the competent court of the Contracting Party concerned or to ICSID, the choice of one of the two procedures shall be final. In contrast to certain earlier treaties in which submission to arbitration was limited to the issue of compensation for expropriation, recent China IIAs have generally followed the model above and introduced a more liberal stance. The specific language used to convey such broad coverage takes various forms. For instance, Article 8(1) of the China-Uganda BIT (2004) mirrors the Model BIT text by addressing itself to “[a]ny legal dispute . . . in connection with an investment,” whereas the China-Finland BIT (2004), Art 9(1) opens “[a]ny dispute arising out of an investment” to arbitration. After experimenting between the more liberal “any legal dispute . . . in connection with an investment” language and the more specified “any dispute arising out of an investment” clause, more recent Chinese treaties have generally settled on the latter model, revealing a preference for greater specificity. As an example, the China-Korea BIT (2007) states: Article 9 Settlement of Disputes between Investors and One Contracting Party 1. For the purposes of this Article, an investment dispute is a dispute between one Contracting Party and an investor of the other Contracting Party that has incurred loss or damage by reason of, or arising out of, an alleged breach of this Agreement with respect to an investment of an investor of that other Contracting Party. As such, the disputes that may be submitted for resolution under international arbitration must be tied to investment and a specific breach of the IIA concerned. The China-Uzbekistan BIT (2011) takes the level of detail a step further: Article 12 Settlement of Disputes between Investors and One Contracting Party 2. If the dispute that an investor of one Contracting Party claiming that the other Contracting Party has breached an obligation under Article 2 through 9, or Article 13, cannot be 102 settled through negotiations within six months from the date it has been raised by either party to the dispute, the disputing investor who incurred loss or damage from that breach may, by his choice, submit the claim [to either domestic litigation of host state or international arbitration].224 Instead of merely providing a standard definition for the term, “investment dispute,” specific “causes of action” are laid out in this treaty text, meaning that investors can explicitly claim only the breaches of obligations which are stipulated within “Article[s] 2 through 9, or Article 13” (encompassing standard BIT content, such as the FET or MFN standards) of the China-Uzbekistan BIT. Local Remedies China limits the ability of an investor to submit an investment dispute to arbitration by relying on the following language: “provided that the Contracting Party involved in the dispute may require the investor . . . to go through the domestic administrative review procedures specified by the laws and regulations of that Contracting Party before the submission to ICSID.”225 In other words, if China is involved in an investment dispute as a host state, it retains discretion to require the investor concerned to exhaust Chinese domestic remedies prior to resorting to ICSID. This requirement is intended to give an opportunity to the host state to revisit the problem raised by the private investor and to resolve the disputes without delay. To minimize the time lag caused by such domestic review procedures, certain BITs impose short time limits, such as three months (China-Finland BIT) or four months (China-Mexico BIT), within which domestic administrative review must be completed.226 An investor may proceed to international arbitration only after that specified time period has passed. Nevertheless, complying, however briefly, with such domestic requirements may be difficult for investors lacking understanding of what the administrative review procedures specified by 224 Italics added. Model BIT, Version III, Art 9(2)(b). 226 China-Finland BIT (2004), Protocol to art. 9 and China-Mexico BIT (2009), Annex C and para. 2. 103 225 Chinese law precisely entail. Requiring exhaustion of local remedies may, in effect, hinder a foreign private investor from receiving timely redress. Governing Law China has inserted clauses in its investor-state dispute settlement provisions specifying the governing law to be relied upon in the resolution process. The China-Uzbekistan BIT (2011) includes the following clause: Article 12 Settlement of Disputes between Investors and One Contracting Party 6. The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the disputing parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting Party to the dispute (including its rules on the conflict of laws), and such rules of international law as may be applicable, in particular, this Agreement. Unless the disputing parties agree to a particular set of rules in advance, the default governing law is the law of the host state to the dispute, along with such rules of international law as may be applicable. The treaty text above reveals an increasing level of comfort with international law by identifying it as a valid source of law. The China-Canada BIT (2012) takes specificity to an unprecedented level and adopts a highly detailed approach with respect to the investor-state dispute settlement mechanism: Article 30 Governing Law 1. A Tribunal established under this Part shall decide the issues in dispute in accordance with this Agreement, and applicable rules of international law, and where relevant and as appropriate, take into consideration the law of the host Contracting Party. 2. Where a disputing Contracting Party asserts as a defence that the measure alleged to be a breach is within the scope of the reservations and exceptions set out in Article 8(1), (2) and (3), on request of the disputing Contracting Party, the Tribunal shall request the interpretation of the Contracting 104 Parties on the issue. The Contracting Parties, within 60 days of delivery of the request, shall submit in writing their joint interpretation to the Tribunal. The interpretation shall be binding on the Tribunal. If the Contracting Parties fail to submit an interpretation within 60 days, the Tribunal shall decide the issue.227 As was seen in the China-Uzbekistan example, the China-Canada BIT embraces “rules of international law” as a source of governing law. As opposed to the China-Uzbekistan BIT, however, in which the law of the host state assumes a primary role, the China-Canada BIT downplays the status of domestic laws by specifying that the law of the host Contracting Party shall be “[taken] into consideration,” “where relevant and as appropriate.” 228 Moreover, the treaty recognizes the authority of the Contracting Parties to interpret its provisions and asserts that their interpretations “shall be binding on the Tribunal.” C. Investor-State Arbitration involving Japan Japan has focused on entering into IIAs with developing states and has yet to execute a BIT with a Western European capital-exporting state. As a result, Japan has entered into BIT treaty negotiations assuming the position of a capital exporter, and has thus primarily concentrated on securing protection for its investors. Correspondingly, the investor-state dispute resolution provisions in Japanese BITs have generally adopted a liberal, pro-investor stance. With the exception of the Japan-Philippines FTA (2008), all of Japan’s international investment agreements include investor-state arbitration provisions, and even this sole exception does not rule out arbitration, as the FTA specifies that “the Parties shall enter into negotiations after the date of entry into force of this Agreement to establish a mechanism for the settlement of an investment dispute between a party and an investor of the 227 Emphasis added. The specificity of the China-Canada BIT is, in part, attributable to the detailed investment treaty practice of the Canadian government. This BIT with China raised a great degree of concern within the Canadian civil society, particularly with respect to the issue of state sovereignty. 228 Canada-China BIT (2012), art. 30(1). 105 other Party.”229 As such, Japan and the Philippines may still designate arbitration as a means for dispute settlement in follow-up negotiations. In contrast to earlier Japanese BITs, which allow referral to arbitration for “any legal dispute that may arise out of investment[s]”230 made by a foreign investor, recent new-generation Japanese investment agreements are introducing highly detailed and elaborate provisions dealing with the scope of investor-state arbitration. For example, the Japan-Korea BIT (2003) inserts a separate provision defining the precise scope of “investment dispute”: Article 15 1. For the purposes of this Article, an investment dispute is a dispute between a Contracting Party and an investor of the other Contracting Party that has incurred loss or damage by reason of, or arising out of, an alleged breach of any right conferred by this Agreement with respect to an investment of that other Contracting Party.231 Consent to Arbitration The issue of consent to arbitration similarly reflects an increasing level of specification. Japan’s first BIT in 1978 (Japan-Egypt) simply required the host state to consent to arbitration at the request of the foreign investor involved: Article 11 Each Contracting Party shall consent to submit any legal dispute that may arise out of investment made by a national or company of the other Contracting Party to conciliation or arbitration, in accordance with the provisions of the [ICSID Convention], at the request of such national or company . . . . In the event of disagreement as to whether conciliation or 229 Japan-Philippines EPA (2006), art. 107. Egypt-Japan BIT (1977), art. 11. See also Hong Kong-Japan BIT (1997), art. 9(1). Not surprisingly, the Japan-China BIT serves as an exception to this general tendency of Japanese treaty practice in the past. Submission to arbitration is restrictively permitted only for “a dispute concerning the amount of compensation” or by mutual agreement between the foreign investor involved and the host state, China-Japan BIT (1988), art. 11(2). 231 Japan-Korea BIT (2002), art. 15(1). 106 230 arbitration is the more appropriate procedure the national or company affected shall have the right to choose.232 On the surface, the above language appears to provide the injured investor with significant leverage, requiring the host state concerned to consent to conciliation or arbitration, as is requested by the investor, and further enabling the investor to choose between conciliation and arbitration. However, the treaty text overlooks the possibility that the host state may, in actual practice, refuse to provide such consent contrary to the treaty text.233 In order to address this potential issue, more recent BITs adopt wording amounting to immediate consent to international arbitration and ICSID procedures. For instance, the Japan-Korea BIT (2003) assumes a permissive stance toward arbitration and provides three main options: (i) ICSID arbitration under the ICSID Convention, (ii) arbitration in accordance with the UNCITRAL Arbitration Rules, or (iii) any other arbitration institution or arbitration rules as is agreed upon by the parties. Thereafter, the treaty text clarifies that “[e]ach Contracting Party hereby gives its consent to the submission of an investment dispute to international arbitration” in accordance with either of the two primary arbitration choices available to the foreign investor involved:234 Article 15 3. If the investment dispute cannot be settled within three months from the date on which the investor requested the consultation or negotiation in writing and if the investor concerned has not submitted the investment dispute for resolution under paragraph 2 (a) of this Article or judicial or administrative settlement, the investor concerned may submit the investment dispute for settlement by binding arbitration: (a) to the Centre, if both Contracting Parties are parties to ICSID Convention; 232 Egypt-Japan BIT (1977). For similar consent-by-default approach, see also Japan-Turkey BIT (1992); JapanPakistan BIT (1998); and Japan-Mongolia BIT (2001). 234 Japan-Korea BIT (2002), art. 15(3). See also Japan-Singapore EPA (2002), art. 82(4); and Japan-Uzbekistan BIT (2008), art. 17(4). 107 233 (b) in accordance with the UNCITRAL Arbitration Rules; or (c) if agreed by both parties to the dispute, to any other arbitration institution or in accordance with any other arbitration rules. Unless otherwise agreed by both parties to the investment dispute, once the investor concerned submits the investment dispute for resolution under paragraphs 2 and 3 of this Article, the investor concerned may not submit the investment dispute for settlement by any of the other alternatives set out in paragraphs 2 and 3 of this Article. Each Contracting Party hereby gives its consent to the submission of an investment dispute to international arbitration as set out in sub-paragraphs (a) and (b) of this paragraph.235 Instead of merely requiring host states to consent to the submission of investment disputes to arbitration, such investment agreements by themselves directly provide such consent. Moreover, Japanese negotiators seem to make efforts to cover or clarify issues of potential controversy in the treaty text. For instance, the Japan-Cambodia BIT (2008) goes a step further and specifies that certain fundamental requirements of international arbitration conventions pertaining to the issue of consent must be satisfied: Article 17 (a) Each Contracting Party hereby consents to the submission of investment disputes by a disputing investor to conciliation or arbitration set forth in paragraph 4 chosen by the disputing investor. (b) The consent given by subparagraph (a) and the submission by a disputing investor of a claim to arbitration shall satisfy the requirements of: (i) Chapter II of the [ICSID Convention], for written consent of the parties to a dispute; and 235 Italics added. 108 (ii) Article II of the [New York Convention], for an agreement in writing. In addition to the consent to submission of investment laid out in paragraph (a), paragraph (b) specifies that the requirements of Chapter II of the ICSID Convention and Article II of the New York Convention must also be satisfied. As the Japan-Cambodia BIT effectively serves as written consent in accordance with the ICSID Convention and the New York Convention, a foreign investor seeking relief under this BIT would not face any problem as to the issue of host state consent in submitting an investment dispute to conciliation or arbitration. Forum and Rules of Arbitration With respect to the choice of forum and rules of arbitration, certain more recent Japanese investment agreements have provided for a broad range of forum choices for arbitration. For instance, the Japan-Cambodia BIT (2008) presents the following five different options: Article 17 4. (a) If any investment dispute cannot be settled through such consultation or negotiation, the disputing investor may submit the investment dispute to one of the following alternatives: (i) competent courts of justice or administrative tribunals or agencies within the Area of the disputing Party; (ii) conciliation or arbitration in accordance with the [ICSID Convention], so long as ICSID Convention is in force between the Contracting Parties; (iii) conciliation or arbitration under the Additional Facility Rules of the [ICSID], as may be amended, so long as ICSID Convention is not in force between the Contracting Parties; (iv) arbitration under the Arbitration Rules of the [UNCITRAL], as may be amended; and (v) if agreed with the disputing Party, any arbitration in accordance with other arbitration rules.236 236 Cambodia-Japan BIT (2002). 109 A distinctly pro-investor approach toward the selection of forum for dispute resolution is noticeable here, as the primary choice of forum determination is conferred upon the foreign investor, and a comprehensive set of alternatives is offered. Cooling-Off Period As to a cooling-off period required prior to submission of a dispute to arbitration, the durations specified in Japan’s BITs vary from three months (Japan-Korea BIT) to seven months (Japan-Colombia BIT).237 According to the Korea-China BIT (2007), the three-month cooling-off period begins on the date “on which the investor requested the consultation in writing.”238 D. Investor-State Arbitration involving Korea A majority of recent Korean BITs include a provision on investor-state dispute settlement mechanisms and provide for submission of disputes to arbitration. Changes in the specific content of the investor-state dispute settlement provision in Korean IIA practice has tracked the evolution of Korea’s economy from a capital-importing to a capital-exporting state. Earlier in its economic development, Korea adopted a pro-investor approach to investor-state dispute settlement as part of its efforts to create a more palatable investment environment for incoming foreign investors. Since the 2000s, this liberal stance has been further reinforced in order to protect the interests of Korean investors and their outbound investments. As an example, the Korea-Mexico BIT (2002) and Korea-Vietnam BIT (amended in 2004) both address the issue of investor-state arbitration in multiple articles under a separate chapter dealing with settlement of disputes.239 Another investment treaty, the Korea-U.S. FTA (2011), similarly includes a highly detailed and comprehensive investor-state dispute settlement provision. During the ratification process, concerns over the litigious nature of U.S. investors (as 237 Japan-Korea BIT (2002), art. 15(3) and Colombia-Japan BIT (2011), art. 27(5). Japan-Vietnam BIT (2003), art. 14(3). 239 Mexico-Korea BIT (2000), arts. 7-15 and Agreement between the Government of the Republic of Korea and the Government of the Socialist Republic of Vietnam for the Promotion and Protection of Investments, arts. 8-16, S. Kor.-Viet., Sept. 15, 2003, http://www.kluwerarbitration.com/CommonUI/document.aspx?id=ipn29547 [hereinafter Korea-Vietnam BIT (2003)]. 110 238 perceived by the general Korean public) had generated serious political controversy.240 In terms of the scope of disputes subject to the possibility of arbitration, Article 8(1) of the Model BIT casts a wide net and refers to “[a]ny dispute between a Contracting Party and an investor of the other Contracting Party including expropriation or nationalization of investments.” This language is similar to, and arguably even broader than, earlier Japanese investment agreements relying on the “any legal dispute that may arise out of investment” 241 formulation. The Model BIT text explicitly includes expropriation and nationalization as subject matters that may be submitted to arbitration, but does not expressly require that disputes submitted to arbitration arise out of any particular investment. Furthermore, the Korean Model BIT language does not necessarily require any correlation between a dispute submitted to arbitration and to the specific provisions of the investment treaty involved. Nonetheless, the title of Article 8, “Settlement of Investment Disputes,” suggests that disputes submitted to arbitration in accordance with the above Model BIT text should be limited to those cases relating to investment disputes. The actual text of the 2001 Korean Model BIT is presented below in order to provide a clearer illustration: Article 8: Settlement of Investment Disputes between a Contracting Party and an Investor of the Other Contracting Party 1. Any dispute between a Contracting Party and an investor of the other Contracting pParty including expropriation or nationalization of investments shall, as far as possible, be settled by the parties to the dispute in an amicable way . . . . In actual Korean investment treaty practice, the scope of the investorstate dispute settlement provision varies drastically across BITs. A number of 240 See Lee Joo-hee, ISD remains a sore spot in Korea-U.S. FTA, THE KOREA HERALD, Nov. 22, 2012, available at http://www.koreaherald.com/view.php?ud=20121122001006 (detailed discussion of the partisan clash over the investor-state dispute settlement clause in the U.S.-Korea FTA (2007)). 241 Egypt-Japan BIT (1977), art. 11. See also Hong Kong-Japan BIT (1997), art. 9(1). ChinaJapan BIT (1988) (Not surprisingly, the Japan-China BIT serves as an exception to this general tendency of Japanese treaty practice in the past. Submission to arbitration is restrictively permitted only for “a dispute concerning the amount of compensation,” or by mutual agreement between the foreign investor involved and the host-state.). 111 BITs wholly embrace the Model BIT approach and do not include any qualifications to the scope of investor-state dispute settlement. As an example, the Korea-U.K. BIT (1976) allows “any legal dispute” relating to the investment in the host state to be submitted to arbitration.242 In contrast, a more narrowly drafted alternative version of the provision enables submission to arbitration only to the extent that an investment “has incurred loss or damage by reason of, arising out of, an alleged breach” of the given BIT.243 This limited approach has been followed in certain recently concluded BITs, such as those with Kuwait and China.244 For example, the Korea-Kuwait BIT (2004) provides that: Article 8 Settlement of Investment Disputes between a Contracting Party and an Investor of the Other Contracting Party (1) For the purposes of this Article, an investment dispute is a dispute between a Contracting Party and an investor of the other Contracting Party that has incurred loss or damage by reason of, or arising out of, an alleged breach of any right conferred by this Agreement with respect to an investment of an investor of that other Contracting Party. In other words, this particular BIT requires that there be (i) a breach; (ii) of a right conferred by the respective BIT; (iii) with respect to an investment of the foreign investor concerned. Regardless, the dominant approach to arbitration in Korea’s existing BITs remains the less-restrictive version of investor-state dispute settlement found in the 2001 Korean Model BIT. As has been the case in other areas of investor protection, the KoreaU.S. FTA (2011) is an outlier when compared to other Korean investment treaties. To permit arbitration, Article 11.16 of the Agreement requires a breach of an obligation under the investment chapter therein, an investment 242 Korea-U.K. BIT (1983), art. 8(1). See also Agreement between the Government of the Republic of Korea and the Government of the Republic of Uzbekistan for the Promotion and Reciprocal Protection of Investments, art. 9(1), S. Kor.-Uzb., June 17, 1992, http://investmentpolicyhub.unctad.org/Download/TreatyFile/1846 [hereinafter KoreaUzbekistan BIT (1992)]. 243 Korea-Kuwait BIT (2004), art. 8(1). 244 Korea-Kuwait BIT (2004), art. 8(1) and China-Korea BIT (2007), art. 9(1). 112 authorization or an investment agreement, and that the “claimant . . . incurred loss or damage by reason of, or arising out of, that breach . . . .”245 In sum, Korean investment treaty practice with respect to dispute settlement enables, for the most part, a highly general, wide-ranging scope of cases to be submitted to arbitration. A minority of treaties retreat to a more reserved, detailed approach and specify that only breaches relating to rights arising out of the given agreement may be subject to arbitration. Local Remedies With respect to the issue of local remedies, the 2001 Korean Model BIT does not necessitate exhaustion of domestic procedures prior to proceeding with arbitration. Instead, it offers local remedies to foreign investors on the basis of either national treatment or MFN treatment, whichever provides a more favorable option: 2. The local remedies under the laws and regulations of one Contracting Party in the territory of which the investment has been made shall be available for investors of the other Contracting Party on the basis of treatment no less favourable than that which would be accorded to investments of its own investors or investors of any third State, whichever is more favourable to investors. 3. If the dispute cannot be settled within six (6) months from the date on which the dispute has been raised by either party, and if the investor waives the rights to initiate any proceedings under paragraph (2) of this Article with respect to the same dispute, the dispute shall be submitted upon request of the investor of the Contracting Party to the [ICSID]. The Model BIT does, however, assume a “fork-in-the-road” stance, presenting the foreign investor with a choice between two mutually exclusive options, i.e., either (i) international arbitration or (ii) local legal proceedings in accordance with either national treatment or MFN treatment. Submission of an investment dispute to ICSID arbitration thus effectively precludes litigation in local judicial institutions. 245 U.S.-Korea FTA (2007), arts. 11.16(1)(a)(i)-(ii). 113 More recent Korean BITs exclude the above reference to local remedies being based on either the national treatment or MFN standard. Instead, recent BITs with Japan and Kuwait replace such language with what amounts to a choice among three dispute settlement alternatives: (i) dispute settlement in accordance with specific dispute settlement procedures agreed to in advance; (ii) judicial or administrative local remedies; or (iii) investorstate arbitration.246 In terms of investor-state arbitration, the following three options are presented: (i) ICSID; (ii) an arbitral tribunal established under the UNCITRAL rules; and (iii) an arbitral tribunal established in accordance with arbitration rules agreed to in advance. Moreover, the amended Korea-China BIT of 2007 further clarifies that once an investor submits an investment dispute in accordance with one of these three options, its choice is final: “Once the investor has submitted the dispute to the competent court of the [host state], to ICSID, or to the ad hoc arbitration tribunal . . . , the choice of one of the three procedures shall be final.”247 As was seen above in the discussion on China’s investment practice relating to dispute settlement, the Korea-China BIT enables the host state to retain a certain amount of control over investment disputes by providing an option to require domestic administrative review procedures prior to the submission of a dispute to arbitration.248 On the opposite end of the spectrum, BITs with the United Kingdom and Hungary, representing the minority stance, do not include a provision adopting the “fork-in-the-road” approach. Another interesting approach is found in the Korea-U.S. FTA (2011), which, on the one hand, requires a written waiver from a Korean investor claimant, and on the other, precludes arbitration when an investor of the United States “has alleged . . . breach of an obligation . . . before a court or administrative tribunal of Korea.” 249 In the aggregate, these few examples may be considered anomalies in Korean 246 Japan-Korea BIT (2002), arts. 15(2)-15(3) and Korea-Kuwait BIT (2004), arts. 8(2)-8(3). 247 China-Korea BIT (2007), art. 9(4). China-Korea BIT (2007), art. 9(3). 249 U.S.-Korea FTA (2007), art. 11.18(2)(b) and Annex 11-E(1). 114 248 investment treaty practice, and the general position of Korea as to the issue of local remedies has been to adopt a “fork-in-the-road” approach. Forum and Rules of Arbitration As to choice of forum and rules of arbitration, the 2001 Korean Model BIT and certain earlier Korea BITs restrict the submission of investment disputes to ICSID.250 Certain more recent Korean investment agreements have allowed for more choice, permitting an investor claimant to submit disputes in accordance with ICSID, the UNCITRAL Arbitration Rules, or other alternatives to which the disputing parties have agreed in advance.251 For example, according to the Korea-U.S. FTA, an investor claimant may submit a claim under the ICSID Convention and the ICSID Rules of Procedure, ICSID Additional Facility Rules, UNCITRAL Arbitration Rules, or “to any other arbitration institution or under any other arbitration rules” to which the parties have agreed to.252 Consent 4. Each Contracting Party hereby consents to the submission of a dispute to arbitration in accordance with the procedures set out in this Agreement. Article 8(5) of the 2001 Korean Model BIT provides that by entering into the particular BIT, the Contracting Parties are effectively giving consent to arbitration. As such, an arbitrable agreement comes into effect when the foreign investor concerned provides its consent to arbitration. A majority of Korea’s more recent BITs follow the sample text introduced in the Model BIT.253 On the other hand, the Korea-Hungary BIT (1988) distinguishes disputes arising out of nationalization and expropriation from any other kind 250 Korea-U.K. BIT (1983), art. 8(1); Agreement between the Government of the Republic of Korea and the Government of the Democratic Socialist Republic of Sri Lanka for the Promotion and Protection of Investments, art. 10(1), S. Kor.-Sri Lanka, Mar. 28, 1980, available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/1832 [hereinafter Korea-Sri Lanka BIT (1980)]; Agreement between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Encouragement and Reciprocal Protection of Investments, arts. 10(3)-10(4), Hung.-S. Kor., Dec. 28, 1988, available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/1528 [hereinafter HungaryKorea BIT (1988)]. 251 Japan-Korea BIT (2002), art. 15(3) and China-Korea BIT (2007), art. 9(3). 252 U.S.-Korea FTA (2007), art. 11.16(3). 253 See, e.g., Korea-Iran BIT (2006), Art 12(7); Korea-Kuwait BIT (2004), art. 8(5); KoreaDominican Republic BIT (2008), Art 8(5). 115 of dispute and allows for unilateral decision-making on the part of the injured investor in determining whether or not to submit such cases to arbitration: Article 10 3. If any dispute concerning expropriation or nationalization cannot be settled within six months from the date either party requested amicable settlement, it shall upon request of either the investor or the Contracting Party be submitted to the [ICSID]. 4. If a dispute not referred to in paragraph 3 of this Article cannot be settled within six months from the date either party requested amicable settlement, it shall be submitted, upon agreement on such submission by both parties to the dispute, to the [ICSID]. In essence, this treaty text differentiates expropriation or nationalization from other types of government measures and makes submission to ICSID relatively easier for the former kind of disputes. Disputes relating to expropriation or nationalization thus do not require the consent of the opposing host state, in contrast to other disputes which necessitate mutual agreement as to the submission of a dispute to arbitration. This BIT represents a minority case in which Korea may have accommodated Hungary’s hesitance to agree to investor-state arbitration beyond issues of nationalization and expropriation, similar to China’s earlier state practice. Cooling-Off Period and Further Developments With respect to the cooling-off period required prior to the submission of a dispute to arbitration, the durations specified in Korea’s BITs vary from three months (Korea-U.K. BIT) to twelve months (Korea-Sri Lanka BIT).254 According to the Korea-China BIT (2007), the four-month cooling-off period begins on the date either Contracting Party seeks consultation relating to the investment dispute.255 A number of recent BITs build on the text of the 2001 Korean Model BIT and incorporate specific details and clarification on issues such as notice of arbitration and effective deadlines for submitting disputes to arbitration. For 254 255 Korea-U.K. BIT (1983), art. 8(1) and Korea-Sri Lanka BIT (1980), art. 10(2). China-Korea BIT (2007), art. 9(2). 116 instance, the Korea-Japan BIT introduces what may be interpreted as a “statute of limitations” for arbitration, that bars the foreign investor concerned from submitting a dispute “if more than three years have elapsed from the date on which the investor first acquired, or should have acquired, knowledge that the investor had incurred loss or damage.”256 In addition, specific issues such as procedures, consolidation, awards and enforcement are elaborated in the Korea-Vietnam BIT. E. Summary This chapter was devoted to a detailed discussion of investor-state dispute settlement provisions embedded in the investment treaties of China, Japan, and Korea. As has been the case with respect to other treaty provisions, the dispute settlement mechanism espoused by China has evolved from a previous stance of cautious and restrictive acceptance (e.g., limiting jurisdiction to cases arising out of the amount of compensation for expropriation) to the current position of cautious internationalization (e.g., embracing ICSID arbitration as one of the main fora) without limiting the scope of disputes to issues pertaining to the amount of compensation. Japan, on the other hand, has traditionally sought to include dispute settlement clauses in its BITs providing for submission of investment disputes to ICSID or other international arbitration tribunals. In addition, certain of its recent treaty provisions aim to make the dispute submission process more convenient for the aggrieved foreign investor by clarifying potentially unclear technical points which may be raised in the arbitration or recognition and enforcement procedures. The Korean international investment practice relating to dispute resolution shows similarities to the Japanese equivalent, but may arguably be even more liberal in terms of the scope of legal conflicts potentially covered by the dispute settlement provision. At the same time, Korea has not adopted a categorical, uniform standard in terms of treaty text formulation, and has shown flexibility in key theoretical concepts such as whether or not to adopt a “fork-in-the-road” approach. 256 Japan-Korea BIT (2002), art. 15(5). 117 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 Annex A Bilateral Investment Treaties of China Country Date of Entry into Force Sweden March 29, 1982 Denmark April 29, 1985 Norway July 10, 1985 Thailand December 13, 1985 Singapore February 7, 1986 United Kingdom May 15, 1986 Austria October 11, 1986 Kuwait December 24, 1986 Sri Lanka March 25 ,1987 Italy August 28, 1987 Australia July 11, 1988 Poland January 8, 1989 New Zealand March 25, 1989 Japan May 14, 1989 Malaysia March 31, 1990 Pakistan September 30, 1990 Ghana November 22, 1991 Papua New Guinea February 12, 1993 Hungary April 1, 1993 Ukraine May 29, 1993 Laos June 1, 1993 Vietnam September 1, 1993 Mongolia November 1, 1993 Greece December 21, 1993 Tajikistan January 20, 1994 Uzbekistan April 12, 1994 Estonia June 1, 1994 Lithuania June 1, 1994 Turkmenistan June 4, 1994 Croatia July 1, 1994 Argentina August 1, 1994 Kazakhstan August 13, 1994 Turkey August 20, 1994 Bulgaria August 21, 1994 United Arab Emirates September 28, 1994 Slovenia January 1, 1995 Belarus January 14, 1995 Peru February 1, 1995 Georgia March 1, 1995 Moldova March 1, 1995 Armenia March 18, 1995 Azerbaijan April 1, 1995 Indonesia April 1, 1995 Chile August 1, 1995 Oman August 1, 1995 Albania September 1, 1995 Kyrgyzstan September 8, 1995 118 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 Philippines Egypt Jamaica Bolivia Serbia Iceland Saudi Arabia Mauritius Ecuador Lebanon Macedonia Uruguay Zimbabwe South Africa Sudan Barbados Morocco Cambodia Qatar Bahrain Ethiopia Cape Verde Syria Mozambique Yemen Cyprus Myanmar Algeria Trinidad and Tobago Netherlands Guyana Bosnia and Herzegovina Iran Democratic People’s Republic of Korea Germany Latvia Czech Republic Tunisia Guinea Finland Slovakia Madagascar India Republic of Korea Spain Portugal Cuba Israel Gabon Malta 119 September 8, 1995 April 1, 1996 April 1, 1996 September 1, 1996 September 13, 1996 March 1, 1997 May 1, 1997 June 8, 1997 July 1, 1997 July 10, 1997 November 1, 1997 December 1, 1997 March 1, 1998 April 1998 July 1, 1998 October 1, 1999 November 27, 1999 February 1, 2000 April 1, 2000 April 27, 2000 May 1, 2000 January 1, 2001 November 1, 2001 February 26, 2002 April 10, 2002 April 29, 2002 May 21, 2002 January 28, 2003 May 24, 2004 August 1, 2004 October 26, 2004 January 1, 2005 July 1, 2005 October 1, 2005 November 11, 2005 February 1, 2006 September 1, 2006 July 1, 2006 November 15, 2006 November 15, 2006 May 25, 2007 June 1, 2007 August 1, 2007 December 1, 2007 July 1, 2008 July 26, 2008 December 1, 2008 January 13, 2009 February 16, 2009 April 1, 2009 98 98 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 Russia May 1, 2009 Mexico June 6, 2009 Mali July 16, 2009 Romania September 1, 2009 Belgium and Luxembourg December 1, 2009 Nigeria February 18, 2010 Switzerland April 13, 2010 France August 20, 2010 Uzbekistan September 1, 2011 Colombia July 2, 2013 Canada October 1, 2014 BITs not yet entered into force, as of March 2015 Zambia Signed on June 21, 1996 Democratic Republic of Congo Signed on December 18, 1997 Belize Signed on January 16, 1999 Congo Signed on March 20, 2000 Botswana Signed on June 12, 2000 Brunei Signed on November 17, 2000 Sierra Leone Signed on May 16, 2001 Kenya Signed on July 16, 2001 Jordan Signed on November 15, 2001 Cote d’Ivoire Signed on September 23, 2002 Djibouti Signed on August 18, 2003 Benin Signed on February 18, 2004 Uganda Signed on May 27, 2004 Equatorial Guinea Signed on October 20, 2005 Namibia Signed on November 17, 2005 Vanuatu Signed on April 7, 2006 Seychelles Signed on February 10, 2007 Costa Rica Signed on October 24, 2007 Chad Signed on April 26, 2010 Libya Signed on August 4, 2010 Democratic Republic of the Congo Signed on August 11, 2011 Tanzania Signed on March 24, 2013 1 2 3 4 5 6 7 8 9 10 An updated full list of BITs China has concluded may be found at: http://www.unctad.org/sections/dite_pcbb/docs/bits_china.pdf Free Trade Agreements of China Country Date of Entry into Force Chile April 1, 2004 Singapore March 2, 2006 EFTA September 1, 2006 ASEAN September 1, 2009 India January 1, 2010 EU July 1, 2011 Peru August 1, 2011 United States of America March 15, 2012 Turkey May 1, 2013 Colombia Signed on February 21, 2013 (not yet in force) 120 For up-to-date information on FTAs China entered into, see: http://fta.mofcom.gov.cn/english/fta_qianshu.shtml 121 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 1 2 3 4 5 6 7 8 9 10 11 12 13 Annex B Bilateral Investment Treaties of Japan Country Date of Entry into Force Egypt January 14, 1978 Sri Lanka August 4, 1982 China May 14, 1989 Turkey March 12, 1993 Hong Kong June 18, 1997 Bangladesh August 25, 1999 Russian Federation May 27, 2000 Mongolia March 24, 2002 Pakistan May 29, 2002 Republic of Korea January 1, 2003 Vietnam December 19, 2004 Cambodia July 31, 2008 Laos August 3, 2008 Uzbekistan September 24, 2009 Peru December 10, 2009 Papua New Guinea January 17, 2014 Kuwait January 24, 2014 Myanmar August 7, 2014 Mozambique August 29, 2014 BITs not yet entered into force, as of March 2015 Colombia Signed on September 9, 2011 Iraq Signed on June 7, 2012 Saudi Arabia Signed on May 1, 2013 Kazakhstan Signed October 23, 2014 Uruguay Signed January 26, 2015 Ukraine Signed February 2, 2015 Country Mexico Malaysia Singapore Chile Thailand Indonesia Brunei Philippines Switzerland ASEAN Vietnam India Peru Free Trade Agreements of Japan Date of Entry into Force April 1, 2005 July 13, 2006 November 30, 2006 September 3, 2007 November 1, 2007 July 1, 2008 July 31, 2008 December 11, 2008 September 1, 2009 December 1, 2009 October 1, 2009 August 1, 2011 March 1, 2012 Updated information on IIAs Japan concluded may be found at: 122 http://www.meti.go.jp/english/policy/external_economy/trade/FTA_EPA/index.html and http://unctad.org/sections/dite_pcbb/docs/bits_japan.pdf 123 Annex C Bilateral Investment Treaties of Korea Country Date of Entry into Force 1 Germany January 15, 1967 2 Netherlands June 1, 1975 (amendment: March 1, 2005) 3 Tunisia November 28, 1975 4 Great Britain March 4, 1976 5 Belgium-Luxembourg September 3, 1976 (amendment: December 20, 2006) 6 France February 1, 1979 7 Sri Lanka July 15, 1980 8 Senegal September 2, 1985 9 Denmark June 2, 1988 10 Bangladesh October 6, 1988 11 Hungary January 1, 1989 12 Malaysia March 31, 1989 13 Thailand September 30, 1989 14 Poland February 2, 1990 15 Pakistan April 15, 1990 16 Mongolia April 30, 1991 17 Russian Federation July 10, 1991 18 Austria November 1, 1991 19 Italy June 26, 1992 20 Uzbekistan November 20, 1992 21 China December 4, 1992 (amendment: December 1, 2007) 22 Paraguay August 6, 1993 23 Vietnam September 4, 1993 (amendment: June 5, 2004) 24 Lithuania November 9, 1993 25 Indonesia March 10, 1994 26 Peru April 20, 1994 27 Turkey June 4, 1994 28 Spain July 19, 1994 29 Romania December 30, 1994 (amendment: January 11, 2008) 30 Czech Republic March 16, 1995 31 Tajikistan August 13, 1995 32 Greece November 4, 1995 33 India May 7, 1996 34 Finland May 11, 1996 35 Laos June 14, 1996 36 Portugal August 11, 1996 37 Argentina August 24, 1996 38 Philippines September 25, 1996 39 Kazakhstan December 26, 1996 40 Latvia January 26, 1997 41 Cambodia May 12, 1997 42 Egypt May 25, 1997 43 Bolivia June 4, 1997 44 South Africa June 6, 1997 124 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 Sweden June 18, 1997 Hong Kong July 30, 1997 Belarus August 9, 1997 Ukraine November 3, 1997 United States of America July 30, 1998 Nigeria February 1, 1999 Qatar May 16, 1999 Morocco May 8, 2001 Nicaragua June 22, 2001 Honduras July 19, 2001 Algeria September 30, 2001 Panama February 8, 2002 El Salvador May 25, 2002 Mexico June 27, 2002 Guatemala August 17, 2002 Costa Rica August 25, 2002 Japan January 1, 2003 Saudi Arabia February 19, 2003 Israel June 19, 2003 Brunei October 30, 2003 Trinidad and Tobago November 27, 2003 Oman February 10, 2004 United Arab Emirates June 5, 2004 Jordan December 25, 2004 Slovakia February 7, 2006 Iran March 31, 2006 Albania May 18, 2006 Croatia May 31, 2006 Mauritania July 21, 2006 Guyana August 20, 2006 Bulgaria November 16, 2006 Lebanon December 21, 2006 Libya March 28, 2007 Kuwait August 31, 2007 Jamaica November 5, 2007 Azerbaijan January 25, 2008 Mauritius March 7, 2008 Dominican Republic June 10, 2008 Kyrgyz July 8, 2008 Gabon August 9, 2009 Burkina Faso April 14, 2010 Tanzania July 3, 2011 Republic of Congo August 13, 2011 Uruguay December 8, 2011 Rwanda February 16, 2013 BITs not yet entered into force, as of March 2015 90 Brazil Signed on September 1, 1995 125 91 Democratic Republic of Congo 92 Zimbabwe 93 Colombia 1 2 3 4 5 6 7 8 9 10 An updated full list of BITs Korea concluded may be found at: http://unctad.org/Sections/dite_pcbb/docs/bits_korea_republic.pdf Country Chile Singapore EFTA ASEAN India EU Peru United States of America Turkey Colombia Signed on March 17, 2005 Signed on May 24, 2010 Signed on July 6, 2010 Free Trade Agreements of Korea Date of Entry into Force April 1, 2004 March 2, 2006 September 1, 2006 September 1, 2009 January 1, 2010 July 1, 2011 August 1, 2011 March 15, 2012 May 1, 2013 Signed on February 21, 2013 (not yet in force) For up-to-date information on FTAs Korea entered into, see: http://www.mofat.go.kr/ENG/policy/fta/status/overview/index.jsp?menu=m_20_80_10 126 Bibliography and Recommended Reading 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