chapter  1
24 Pages

Foreign investment and dispute resolution law and practice in Asia: an overview

ByVIVIENNE BATH, LUKE NOTTAGE

This book crit ically assesses patterns and issues in both the substantive law and the pol icy envir on ment impacting on foreign investment flows in major Asian eco nom ies, and inter na tional dispute res olu tion law and practice related to those flows. The main focus is foreign direct investment (FDI), although we also touch on (typ ic ally shorter-term) port folio investments. There are a number of different definitions of FDI. This book adopts that used by the United Nations Conference on International Trade Law (UNCTAD 2009: 35): ‘FDI can be defined as an investment made by a resident of one eco nomy in another eco nomy, . . . of a long-term nature or of “lasting inter est” ’.1 As well as inbound FDI, the book examines the recent growth in investments undertaken abroad by states in the Asian region (espe cially China) that have tradi tion ally been net capital importers. FDI flows have gen erally accelerated since the Asian Financial Crisis of 1998, paralleling the strong eco nomic growth in Asia that has kept the world economy afloat fol low ing the Global Financial Crisis of 2008 (GFC). However, the GFC has led to shifts in FDI and other capital flows, as well as reassessments of FDI restrictions and broader concerns about maintaining appropriate regu latory capa city and dis cre tion over market activity. The book is also timely and distinctive in paying par ticu lar attention to the burgeoning number of Bilateral Investment Treaties (BITs), as well as investment chapters increasingly incorp or ated into bi lat eral and regional Free Trade Agreements (FTAs), concluded by Asian states. (In this book, we have included Australia and New Zealand, which have become active particip ants in this treaty-making pro cess across the Asian region.2) Such investment treat ies have increased in both number and scope par ticu larly over the past two decades. Their purpose is not only to protect foreign investors against illegal host state activity (the traditional concern of BITs) but also increasingly to introduce substantive lib eralization to facilitate foreign investors’ access into host state markets (through FTA investment chapters). Both types of treat ies increasingly extend protections such as non-discrimination to the pre-establishment phase (that is, when investors are applying for host

state approval), and in some cases present the promise of broader preestablishment lib eralization of investment, as well as protecting foreign investments once made. These com mit ments are typ ic ally backed up by the agreement of states to allow foreign investors to bring arbit ra tion claims directly against host states, rather than having to persuade their home states to bring ‘diplomatic protection’ claims on their behalf. Yet there are growing concerns world-wide, par ticu larly but not exclusively among de veloping coun tries, that the sys tem created by these predominantly bi lat eral agreements – and its enforcement through the investor-state arbit ra tion (ISA) pro cesses and substantive prin ciples – fails adequately to balance the private and pub lic inter ests involved. This has been most noticeable in South Amer ica, with Bolivia and Ecuador withdrawing recently from the framework 1965 Convention on Settlement of Investment Disputes between States and Nationals of Other States (estab lishing the World Bank affiliated International Centre for Settlement of Investment Disputes, and therefore known as the ISCID Convention). The ICSID Convention facilitates enforcement of ISA awards resulting from arbit ra tions admin is tered under ICSID Arbitration Rules (last revised in 2006), if the host state has given ‘consent’ to arbit ra tion – a consent which is typ ic ally now provided through bi lat eral or regional treat ies (Dolzer and Schreuer 2008). In North Amer ica, Mexico still has not acceded to the ICSID Convention, while Canada has signed it, but not yet acceded to it or incorp or ated it into local law. This means that ISA disputes involving these states arising under the North Amer ican Free Trade Agreement (NAFTA 1994) must be conducted under other Arbitration Rules. The United States of Amer ica (US) has acceded to the ICSID Convention but has faced growing concern from citizen groups and others about adverse rulings and lack of transparency in ISA proceedings (Kelsey 2010). It agreed to omit ISA from the Australian-US FTA (2004), for example (Nottage and Miles 2009). No investment chapter was included at all between Australia and New Zealand when those countries concluded a FTA with ASEAN (AANZFTA 2009), and they omitted ISA in an investment protocol added on 16 Febru ary 2011 to their longstanding bi lat eral FTA (ANZCERTA 1982). More gen erally, the Australian Government’s Productivity Commission re com mended in Decem ber 2010 that treat ies concluded by Australia should not provide foreign investors with better pro ced ural and substantive rights than those avail able to local investors (PC 2010). In addition, reser va tions about the ISA sys tem have also been evid ent in Asian coun tries such as the People’s Repub lic of China, as outlined in Chapters 4 (Bath) and 5 (Eliasson). China has long been careful to restrict its obliga tions under its BITs (Bath) while working successfully to attract substantial amounts of FDI. China acceded to the ICSID Convention in 1993, well after it com menced signing BITs. Despite its willingness to enter into BITs, China’s earl ier treat ies substantially restricted the scope of its consent to ISA. It was only when China embarked on a program of exporting

FDI itself that it began to conclude ‘new generation’ treat ies (dating from the late 1990s) which allow for a much wider scope of ISA (Eliasson). More recently, the Philippines succeeded in having ISA consent omitted from the FTA it concluded in 2005 with Japan. As explained in Chapter 3 (Hamamoto), Japan had other wise included ISA in almost all its treat ies since 1977, with notice ably more pro-investor substantive protections added to its own ‘new generation’ treat ies (espe cially FTAs) from around 2002. The latter trend was partly triggered by the collapse of nego ti ations in the World Trade Organization (WTO), and earl ier in the Organization for Economic Coopera tion and Development (OECD), on a new multi lateral investment treaty. However, the wording of ISA pro vi sions provided par ticu larly in some of Japan’s older generation BITs may not provide clear consent to arbit ra tion, at least through ICSID (Hamamoto and Nottage 2010). This backdrop of treaty practice may help to explain another inter esting phenomenon in this region: Asian states appear disproportionately less likely to be formally involved as respondents in ISA proceedings, and only 13 known claims have ever been filed by Asian investors (including two recent cases by Chinese investors discussed by Eliasson). Nonetheless, as outlined in Chapter 2 (Nottage and Weeramantry), further ‘institutional bar riers’ deterring ISA filings (such as costs and availabil ity of suit able arbitrators) and other factors need to be con sidered as well. An assessment of such patterns and questions necessitates detailed comparative study attentive to socio-economic con text and competing theories of the role of law in Asia. Our book aims to fill this gap in the existing liter ature, which mostly comprises shorter works aimed at legal practitioners. It is also distinctive in combining comparative law ana lysis on host states’ do mestic legal sys tems with commentary on the increasingly signi fic ant inter na tional treaty obli ga tions impacting on those regimes. Contributions from both senior and up-and-coming aca demics with extensive countryspecific expertise (and often con sider able prac tical ex peri ence), as well as inter ests in inter na tional law, crit ically ana lyse the law and practice of investment treat ies and FDI regimes in Asia and tie this to do mestic law on investment in the case of a number of im port ant Asian jurisdictions. As well as the overviews provided in this chapter and the next, the concluding chapter (Sornarajah) draws extensive comparisons across the region. The book also focuses on de velopments in major destinations or sources of FDI in Asia: Japan (Chapter 3 by Hamamoto), China (Chapter 4 by Bath and Chapter 5 by Eliasson), Indonesia (Chapter 6 by Butt and Chapter 7 by Sitaresmi, taking as a case study the 2005 FTA – or ‘EPA’ (Economic Partnership Agreement – with Japan), Malaysia (Chapter 8 by Farrar and Chapter 9 by Coppens), India (Chapter 10 by Ranjan), the Repub lic of Korea (Chapter 11 by Kim) and Vietnam (Chapter 12 by Dang). For China, Indonesia and Malaysia, one chapter focuses on treaty-related issues and another on FDI regime de velopments more gen erally. Summaries of key issues and trends covered in each chapter are set out in Section 1.4 below, after our

more specific introduction to eco nomic de velopment and regu latory regimes (Section 1.2) and dispute res olu tion more gen erally (Section 1.3) throughout Asia.