UK-China investment and trade: what’s next?
Eric J Jiang
Jingtian & Gongcheng, Beijing
In the spring of 2011, I went to the UK to assist a Chinese client in negotiating and completing the acquisition of a European group of companies headquartered in the UK. At that time, Xi Jinping’s Belt and Road Initiative had not been proposed and the momentum for Chinese companies to invest in the UK and other countries was just being built. That summer, I went to the UK again to discuss an anti-dumping case with the UK representatives at the European Commission anti-dumping committee. At that time, the trade volume and value between the EU (including the UK) and China were rapidly growing. By summer 2015, David Cameron, then the Prime Minister, was heralding a ‘golden era’ for the trade and investment relationship between the UK and China.
How dramatically the situation has changed in a decade. The UK has exited the EU and fallen into diplomatic disputes with China, with the trade and investment flows between the two countries becoming unpredictable.
Surge of trade and investment activities between the UK and China
Let’s check some statistics first:
Source: National Bureau of Statistics of China and General Administration of Customs for data for 2020
Source: National Bureau of Statistics of China
By these statistics, the total value of trade between the UK and China reached US$92,368,670,000 last year, with room for the UK to increase its exports to China, and the total value of investment between the UK and China peaked at US$3,508,280,000 in 2018, then fell drastically in 2019.
Need for a UK-China free trade agreement
As such, and as the UK was exiting the EU, a free trade agreement (FTA) between the UK and China has since been proposed. An FTA could deal with market access, tariff concessions, trade in goods, trade in services, subsidies, investments, intellectual property protection and all other trade and investment related topics and would greatly increase the trade and investment flows between the contracting parties.
To date, there has been only a bilateral investment treaty (BIT) signed between the UK and China, back in 1986, and it now appears insufficient for the substantially increased trade and investment activities between the countries.
In contrast, the EU and China were able to reach in principle a comprehensive agreement on investment (CAI) at the end of last year. The CAI is indeed very comprehensive in that it contains not only the investment protection provisions that are typically included in today’s BITs, but also market access, sustainable development and other provisions that are normally seen in the FTAs. The CAI, if finalised and approved by both the EU and China, would provide a solid legal basis for the increase of the trade and investment flows between the EU and China.
A UK-China CAI?
As discussed, for the protection and facilitation of the surge of the trade and investment activities between the UK and China, there is only the 1986 BIT in place.
The BIT is outdated in many ways and needs to be modernised. A modernised BIT such as the EU-China CAI would contain detailed provisions on national treatment (NT), most-favoured nation treatment (MFN), fair and equitable treatment, full protection and security, freedom of transfer of funds, prohibition against unreasonable, arbitrary or discriminatory measures, prohibition of performance requirements, reasonable compensation for expropriation, facilitation of personnel entry and sojourn, transparency of laws and regulations, investor-state dispute settlement (ISDS) and other progressive provisions.
Although the BIT does contain some of those provisions, it fails to set them out in a modernised way. For example, it requires only post-establishment NT and MFN while today’s BITs require pre-establishment NT and MFN. It is actually very important to extend NT and MFN to the foreign investor before it sets up its investment in the hosting country. The BIT also is silent on and therefore does not require transparency of laws and regulations. Transparency has since become a hallmark requirement in FTAs and BITs. It also limits ISDS to the issue of the amount of compensation (for expropriation), but allowing ISDS for all relevant issues has become a standard requirement in today’s BITs.
It is assumed that increased trade and investment activities necessitate increased treaty protection and facilitation. FTAs and BITs are usually such treaties to negotiate and conclude. However, an FTA, such as the Regional Comprehensive Economic Partnership among Asia-Pacific countries, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Canada Comprehensive Economic and Trade Agreement could take some years to negotiate and approve. A BIT, on the other hand, could be negotiated and approved faster, and with the BIT in force and the EU-China CAI as a model, the UK and China could negotiate and approve a CAI relatively quickly. Given the difficult approval procedures at the EU, it is not impossible for such UK-China CAI to be concluded and approved before the EU-China CAI.
The only prerequisite is, of course, the political will and determination on both sides.
It is worth noting that, while the European Parliament voted to suspend its ratification process for the EU-China CAI on 20 May this year because of political disputes between the EU and China, both the UK and China have formally applied to join the CPTPP. The UK did so on 1 February this year, and China did so on 16 September. It has 11 members – Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam – and boasts the most comprehensive and progressive contents for a free trade agreement. Are such requests for accession a demonstration that the UK and China have shared perspectives on what should be included in a free trade agreement?