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A Brief Comparative Analysis of RCEP Investment Chapter

2020-12-01


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The Regional Comprehensive Economic Partnership Agreement ("RCEP") is an upgraded version of the existing agreement signed by the 10 members of the Association of Southeast Asian Nations—it combines them into a single multilateral pact with Australia, China, Japan, New Zealand, and South Korea. Chapter 10 of the RCEP governs investors and investment activities among parties to the agreement. This article makes a brief comparison between Chapter 10 of the RCEP and Agreement Among The Government of Japan, The Government of The Public of Korea and The Government of The People's Republic of China for The Promotion, Facilitation and Protection of Investment ("Trilateral Investment Agreement") as well as between Chapter 10 of the RCEP and Chapter 9 of Free Trade Agreement Between The Government of Australia and The Government of The People's Republic of China ("ChAFTA") to highlight both major improvements and temporary shortages of the RCEP Investment Chapter.


I.Narrowing Scope of Covered Investment


Article 10.1(c) of the RCEP defines "investment" as "every kind of asset that an investor owns or controls, directly or indirectly, and that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gains or profits, or the assumption of risk." Article 10.1(c) lists several forms of investments covered by the RCEP. Compared with the definition of investment in the Trilateral Investment Agreement and ChAFTA, RCEP's definition has one major difference.


Investment pursuant to the RCEP, the Trilateral Investment Agreement, and ChAFTA include equity investment of an enterprise. However, different from the definition under the Trilateral Investment Agreement and ChAFTA which include an enterprise or a branch of an enterprise, RCEP does not cover this form of investments. The lack of covering this form of investments may expose an investor to risks of being unable to seek damages based on losses of an enterprise; instead, it may have to reference to losses of equity investment which may not reflect the true losses the investor suffers.


II.Detailing National Treatment Standard


Article10.3 of the RCEP, Article 3 of the Trilateral Investment Agreement, and Article 9.3 of ChAFTA all require a contracting Party to accord to investors of another contracting Party and covered investments National Treatment— "a treatment no less favourable than that [the contracting Party ("the host country")] accords, in like circumstance, to its own investors and their investments." However, RCEP goes one step further by defining the National Treatment Standard accorded by a government of the host country other than at the central level.  Article 10.3(2) states "the [National Treatment] accorded by a Party [(the host country)] under [Article 10.3(1)] means, with respect to a government other than at the central level, treatment no less favourable than the most favourable treatment accorded, in like circumstances, by that government to investors, and to the investments of investors, of the Party of which it forms a part." This means an investor of a Party and its investments entitle to no less than the same treatment the local or regional government of the host country accords to its own investors and investments. Given RCEP provides investors with more opportunities to conduct investment activities across member countries, those investment activities are more likely governed by local or regional rules or regulations. Thus, the attempt of the RCEP in clarifying the National Treatment standard at local and regional level creates an investment environment with greater certainty.


III.Enlarging Scope of Most-Favoured-Nation Treatment


Article 10.4 of the RCEP, Article 4 of the Trilateral Investment Agreement, and Article 9 of ChAFTA require each Party (a host country) to accord to investors of another Party no less favourable than it accords to investors of any other Party or non-Party in like circumstances. All three agreements state that the Most-Favoured-Nation Treatment do not apply to any international dispute resolution procedures or mechanisms under other existing or future international agreements.


As to the difference, compared with the Trilateral Investment Agreement and ChAFTA, Most-Favoured-Nation Treatment under the RCEP has a wider scope of application. For instance, a Party to the Trilateral Investment Agreement or to ChAFTA is permitted to reserve the right to adopt the treatment to another Party solely based on the bilateral or multilateral international agreement involving aviation, fisheries, or maritime the Party entered or will enter with other non-Parties. However, a similar expression cannot be found under Article 10.4 of the RCEP—the Most-Favoured-Nation Treatment provision does not make the same reservations as the other two agreements. Furthermore, reservations to the treatment under RCEP is made in Annex III as a negative list provided by each Party to the RCEP. Annex III shows China no longer makes the abovementioned reservations in the same sectors other than Fisheries. Hence, it shows the determination of China to create an open and more transparent investment environment. Nonetheless, this approach does not mean that every country makes fewer reservations than they did before. Instead, some Parties may make more reservations than they did in other multilateral or bilateral agreements they have entered. For instance, Australian has more reservations to the treatment under RCEP than it made in ChAFTA.


IV.Clarifying Prohibited Performance Requirements Scenarios


Article 7 of the Trilateral Investment Agreement prohibits a Party (host country) from imposing performance requirements on investors of another Party. With respect to the criteria, Article 7.1 incorporates the provisions of the Agreement on Trade-Related Investment Measures ("TRIMs") in Annex 1A to WTO Agreement while Article 7.2 provides a general and abstract description of prohibited performance requirements—only "unreasonable or discriminatory" measures are prohibited.


Article 10.6 of the RCEP sets out a more elaborate description/illustration of prohibited performance requirements. First, RCEP groups performance requirements by two scenarios – 1) performance requirements as a condition for conducting investment activities and 2) performance requirements as a condition for receipt or continued receipts of an advantage. Second, RCEP provides an exhaustive list of prohibited performance requirements for each scenario. With respect to the first scenario—performance requirements as a condition for conducting investment activities, the prohibited requirements include requiring investors to export a given level of goods, achieve a percentage of domestic content, purchase or accord a preference to local goods, relating volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflow associated with investments of that investor, restricting sales of goods on the domestic market, and transferring a particular tech/a production process or other proprietary knowledge to a person of the host country, etc. In the second scenario, the list is much shorter, including requiring investors to achieve a level of domestic content, purchase or accord a preference to local goods, relating volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflow associated with investments of that investor, and restricting sales of goods on the domestic market. By providing more concrete illustrations of prohibited performance requirements, RCEP reduces uncertainty for prospective investors.


V.Adding Senior Management and Board of Directors Provision


The Trilateral Investment Agreement and ChAFTA do not have a provision concerning the appointment of Senior Management and Board Member of a juridical person. Article 10.7 of the RCEP on the one hand prohibits a party from requiring a juridical person of that party to appoint to a senior management position a natural person of any particular nationality. On the other hand, the same Article permits a party to require a majority of the board member of a juridical person of that party to be of a particular nationality or resident in the territory of that party so long as the requirement does not materially impair the ability of the investor to exercise control over its investment. This provision attempts to strike a balance between investors' control of their own businesses and legitimate national interests of a host country. It takes time to see how well the balance is achieved.


VI.Detailing Expropriation Provision


ChAFTA does not address the expropriation issue and Article 9.9(3) lists it as a goal for future negotiations between China and Australia. Article 13 of the RCEP and Article 11 of the Trilateral Investment Agreement have a similar expropriation provision. Both provisions prohibit a Party from expropriating or nationalizing a covered investment either directly or through measures equivalent to expropriation or nationalization unless the expropriation is 1) for a public purpose, 2) in a non-discriminatory manner, 3) on timely payment of compensation or payment of compensation and interests if payment is delayed, and 4) in accordance of due process of law. Given the possible earlier disclosure of proposed expropriation and its negative effects on the value of investments, both RCEP and Trilateral Investment Agreement require that the compensation must "not reflect any change in value occurring because the intended expropriation had become known earlier."


Moreover, RCEP provides a more elaborate compensation formula than it in the Trilateral Investment Agreement. Both RCEP and Trilateral Investment Agreement require compensation made in connection to expropriation to be equivalent to fair market value ("FMV") of the expropriated investment "at the time when the expropriation was publicly announced, or when the expropriation occurred, whichever is earlier [('date of expropriation')]. "The RCEP further defines" date of expropriation" on a country-basis in its footnotes. For instance, for the Philippines, the time when the expropriation was publicly announced for the purpose of calculating the FMV of the expropriated investment is the date of filing of the Petition for Expropriation, whereas, for Austria, Brunei Darussalam, Korea, Malaysia, New Zealand, and Singapore, the date means the date immediately before the expropriation occurs. This clarification of the date of expropriation of each contracting party reduces uncertainty about the calculation of compensation and thus increases the stability of the investment environment.


Last, Annex 10B of the RCEP gives a more detailed definition of expropriation than it in the Trilateral Investment Agreement and ChAFTA. It divided expropriation into two types: 1)direct expropriation—nationalization of a covered investment or direct expropriation through formal transfer of title or outright seizure and 2) indirect expropriation—an action or a series of related actions by a Party that has an equivalent effect to direct expropriation without formal transfer of title or outright seizure. Meanwhile, Annex 10B sets out elements that are used to determine whether an action or a series of related actions by a Party constitutes an indirect expropriation. Like the clarification of the date of expropriation for the purpose of calculation of compensation, the definition of expropriation under Annex 10B also contributes to creating a more stable investment environment among parties.


To sum, RCEP outlines more elaborate investment protection standards than the Trilateral Investment Agreement and ChAFTA, reduces uncertainty involved in the cross-border investments, and improves the stability of investment environment across contracting Parties. However, the RCEP does not encompass a provision of dispute resolution between a contracting Party and an investor of another contracting Party. This provision would be discussed by the Parties within two years after the date of entry into force of RCEP. During this period, investors may still be able to seek remedies. For instance, investors of Parties to the RCEP would be able to refer to existing bilateral or multilateral treaties/agreements such as, the Trilateral Investment Agreement or ChAFTA, for dispute resolutions between them and Parties to the RCEP, had those Parties and the country of origin of investors joined same treaties/agreements.


Authors:

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Hao JING   

                                          

Partner

 


                       

Mr. Hao JING (John King) is a senior partner of DeHeng Law Offices (Ningbo). John's main practice areas are Insurance & Banking, International Trade, Cross-Border Investment, International Commercial Dispute Resolution. Working Languages: English, Chinese.                       

E:jinghao@dehenglaw.com

(Mr. Yudong YU also contributed to this paper. )



Disclaimer:


This article was written by a lawyer of DeHeng Law Offices. It represents only the opinions of the author(s) and should not in any way be considered as formal legal opinions or advice given by DeHeng Law Offices or its lawyers. If any part of this articles is reproduced or quoted, please indicate the source.

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