CHINAASEAN INVESTMENT NEGOTIATIONS PROBLEMS AND PROSPECTS：中国东盟投资谈判的问题和前景.doc

China-ASEAN Investment Agreement Negotiations: Problems and Prospects CHEN Huiping *I. INTRODUCTION China and the ten ASEAN countries are neighboring Asian countries.* Dr. CHEN Huiping, Associate Professor of Xiamen University School of Law (China). E-mail: daichen. This article was first drafted when the author was working as Visiting Research Fellow at East Asian Institute (EAI) of National University of Singapore during June to September 2005. The author would like to extend her thanks to Prof. John Wong and Prof. ZOU Keyuan at EAI for their insightful suggestions and encouragement. Gratitude is also extended to Ms. Amy Cheng-Wong for her kind help in correcting the English language. The Association of South-East Asian Nations (ASEAN) was formed in 1967 by Indonesia, Malaysia, Philippines, Thailand and Singapore, joined by Brunei in 1984 (known as ASEAN-6), and by Cambodia, Laos, Myanmar and Vietnam in the 1990s (known as CLMV or new ASEAN members). Due to political and economic considerations, as well as Chinas own initiative, the two parties decided to develop closer economic relations and establish a free trade area. ASEAN is negotiating the free trade agreements with China as one party. In November 2002, China and ASEAN signed the Framework Agreement on Comprehensive Economic Co-operation between the Association of South East Asian Nations and the Peoples Republic of China (“China-ASEAN Framework Agreement” or “Framework Agreement”) in Phnom Penh, Cambodia, which came into force on July 1, 2003. The specific goal of the Framework Agreement is to establish China-ASEAN Free Trade Area (CAFTA) by 2010 with the ASEAN-6 and by 2015 with the four new ASEAN members. This Framework Agreement serves as a roadmap for the future Free Trade Area. China-ASEAN FTA Factsheet, available at http:/www.mti.gov.sg/public/FTA/frm_FTA_Default.asp?sid=179&cid=1902, last visited July 23, 2004. Formal negotiations on the establishment of the CAFTA began immediately after the signing of the Framework Agreement. The CAFTA negotiations cover negotiations on trade in goods, services and investment. Negotiations on trade in goods resulted in the Agreement on Trading in Goods on November 29, 2004. Service negotiations and investment negotiations are currently being conducted.The investment negotiations began in 2003. General agreements have been reached as to the basic contents and the underlying principles of the future China-ASEAN investment agreement. However, procedural obstacles surfaced when the two parties touched upon the issue of the liberalization of investment. The investment liberalization issue is also the main substantive controversy between the two parties during the negotiations on specific agreement rules. Therefore, this article will first give a general introduction to the investment negotiations in Part II. In Part III, the procedural obstacles on the part of both China, ASEAN and between China and ASEAN will be analyzed; as well, some suggestions of strategies to overcome the obstacles will be offered. In Part IV, the substantive controversies over investment liberalization during the negotiations will be discussed. In Part V, a detailed study on some specific issues directly related to investment liberalization will be conducted and some approaches to tackle the issues will be suggested. This article will end with a conclusion by the writer.II. GETTING DOWN TO THE INVESTMENT AGREEMENT NEGOTIATIONSA. THE INITIATIVE OF INVESTMENT NEGOTIATIONSThe China-ASEAN Framework Agreement specifically mentions that its objectives include goals to “strengthen and enhance economic, trade and investment co-operation between the parties” and “progressively liberalize and promote trade in goods and services as well as create a transparent, liberal and facilitative investment regime”, and etc. Art. 1 (a) and (b) of the Framework Agreement on Comprehensive Economic Co-operation between the Association of South East Asian Nations and the Peoples Republic of China (ASEAN-China Framework Agreement). Therefore, it is clear that the Framework Agreement is to incorporate investment as an important and integrated part of the CAFTA.It is an international tendency to integrate investment issue into a free trade area, which, as the term suggests, seems to be a specified area only for free trade. With globalization and increased multilateral and regional cooperation as a backdrop, competition for FDI is no longer confined to “between countries”, but increasingly growing to “between regions”. Therefore, more countries are likely to submit to a regional approach in attracting FDI. Kee Hwee Wee & Hafiz Mirza, ASEAN Investment Cooperation: Retrospect, Developments and Prospects, in: The Future of Foreign Investment in Southeast Asia, Nick J. Freeman & Frank L. Bartels (ed.s), RoutledgeCurzon, 2004, p. 202. The first practice of incorporating investment rules into free trade agreements is the Northern American Free Trade Agreement (NAFTA).Being a free trade area, CAFTA follows the above international tendency. However, the China-ASEAN Framework Agreement has only one article (Article 5) dealing specifically but generally with investment. This article also requires the two parties to enter into investment negotiations so as to create a transparent, liberal and facilitative investment regime. The impending and detailed China-ASEAN investment agreement will be an inherent part of the CAFTA agreements. Article 5 specifies that “to promote investment and to create a liberal, facilitative, transparent and competitive investment regime, the parties agree to: (a) enter into negotiations in order to progressively liberalize the investment regime; (b) strengthen cooperation in investment, facilitate investment and improve transparency of investment rules and regulations; and (c) provide for the protection of investments”. This provision has set up basic contents and guidelines for the anticipated investment agreement between China and ASEAN. Specifically, the anticipated agreement will be a comprehensive investment agreement covering investment promotion, investment protection and investment liberalization. However, since this provision is very general and functions as a roadmap, a comprehensive, detailed and practical investment agreement needs to be further negotiated and formulated. The purpose of the investment negotiations is to create an investment agreement between China and ASEAN with a transparent, liberal and facilitative investment regime. Art. 1 (a) and (b) of the Framework Agreement on Comprehensive Economic Co-operation between the Association of South East Asian Nations and the Peoples Republic of China (ASEAN-China Framework Agreement).B. AN OVERVIEW OF THE NEGOTIATIONSThe investment negotiations started in June 2003. A China-ASEAN Trade Negotiation Committee Working Group on Investment (TNC-WGI) was established to execute the detailed discussions on the framework of the agreement. So far, TNC-WGI has held nine meetings. The Framework Agreement stipulates that the investment negotiations shall commence in 2003, See Art. 8 (2) of the China-ASEAN Framework Agreement. and is to be concluded as expeditiously as possible. See Art. 8(3) of the China-ASEAN Framework Agreement. However, no specific deadline has been imposed. It was originally set for completion by the end of 2004, China-ASEAN FTA Factsheet, available at http:/www.mti.gov.sg/public/FTA/frm_FTA_Default.asp?sid=179&cid=1902, last visited July 23, 2004. but failed. Then ASEAN insisted that a deadline should be set for the completion of the entire negotiations and expected to conclude negotiations by June 2005. However, China did not agree.These past nine TNC-WGI meetings touched upon a variety of investment issues. With ASEANs insistence, it was agreed that the Framework Agreement on ASEAN Investment Area (“AIA Framework Agreement”) would be used as a template for the negotiated investment agreement. China-ASEAN FTA Factsheet, available at http:/www.mti.gov.sg/public/FTA/frm_FTA_Default.asp?sid=179&cid=1902, last visited July 23, 2004. During the preliminary negotiations specific outline of the proposed investment agreement has been agreed upon. The outline lists all the elements and principles a comprehensive international investment agreement should have, including the definitions of terms such as “investment” and “investor”, the scope of coverage and objectives, rules for the liberalization of investments, rules for investment promotion and protection, dispute settlement mechanisms, and general provisions. C. PROBLEMS ARISING DURING THE NEGOTIATIONSHowever, further negotiations with regard to the issue of investment liberalization, i.e., the opening-up of industries and pre-establishment national treatment, were confronted with difficulties and hurdles. The ASEAN party insisted on full liberalization of investment; while China only agreed to progressive liberalization. ASEAN insisted on negative list approach for the opening-up of industries and pre-establishment national treatment; while the Chinese delegation said they had no vested authority from the State Council to negotiate on the two issues. From July 2004 until now, only two TNC-WGI meetings were held without any further progress. The investment negotiations were almost deadlocked.The threat of a deadlock in the investment negotiations is due to both procedural obstacles and substantive controversies between the parties. The procedural obstacles refer to the procedural difficulties betweenand withinChina, ASEAN and its member countries. The substantive controversies refer to the dissensions over the substantive rules of the agreement related to investment liberalization. III. POSSIBLE STRATEGIES FOR OVERCOMING PROCEDURAL OBSTACLES The key debate between China and ASEAN during the investment negotiations is over the investment liberalization. This debate should be tackled with efforts from both China and ASEAN. However, both parties have some procedural obstacles, which are unfavorable to the resolution of the debate.A. PROCEDURAL OBSTACLES FACING CHINAOn the part of China, the complex composition of the Chinese delegation, the conflict of interests and the authority vested into the delegates, , as well as the actual but underestimated difficulties of the investment negotiations, contribute to the low efficiency of decision-making on the part of China with regard to the debated issue of investment liberalization, and thus prolong the investment negotiations. The representatives of the Chinese delegation come from various ministries and departments representing different interests and authorities with regard to investment liberalization in China. The Chinese delegation comprised representatives from several different state agencies such as the Ministry of Commerce, Ministry of Foreign affairs, State Development and Reform Commission, Ministry of Finance, and the like. Representatives from MOC come from different departments such as the Department of International Trade and Economic Affairs, Department of Treaty and Law, Department of Foreign Investment Administration, and Department of foreign Economic Cooperation. The delegation was not conferred authority to negotiate on investment liberalization. Thus, any related issue would be reported to the State Council for resolution. Further, despite good intentions of Chinese leaders in the establishment of CAFTA, actual negotiations are proving to be more complex than expected. Moreover, the relatively small and imbalanced mutual investments between China and ASEAN countries prevented China from investing a greater interest in creating a liberalized investment regime. Both China and ASEAN are net recipients of foreign investment, and by comparison, ASEAN countries have more investments in China than China has in ASEAN. For example, the investment flows from ASEAN countries to China accounts for less than ten percent of the total FDI inflows to China during the period of 1998-2003. The ratio between the FDI flows from ASEAN countries and the total FDI inflows to China is 9.29% in 1998, 8.15% in 1999, 6.99% in 2000, 6.36% in 2001, 6.21% in 2002, and 5.47% in 2003. The figures are calculated according to the statistics provided in China Statistical Yearbook (2000-2004) published by China Statistics Press. The aforementioned procedural obstacles can be overcome. Firstly, if the Chinese government authorizes greater as well as uniform authority to its delegation and among the representatives from various state agencies, so that they are able to tackle the issue of investment liberalization, which is the key controversy of the negotiations, the negotiation process will be expedited. The reason is that the investment agreement with ASEAN should be viewed with a long-term perspective. A comprehensive high-standard investment agreement with gradual investment liberalization would benefit both China and ASEAN. Secondly, if China could be open-minded in seeing that the mutual investments between China and ASEAN are growing fast, she would be more willing and ready to create a liberal investment regime. In effect, the two-way investment between China and ASEAN nations has been greatly promoted with the regularly held China-ASEAN Expo and China-ASEAN Business and Investment Summit. MOFCOM, China-ASEAN Expo to be An Important Chance for Investment and Promotion, available at last visited 8 June, 2005. Further, Chinese outward investment in ASEAN countries has been on the rise in recent years with Chinas new policy of “going out”. By June 2004, ASEAN members have chalked up cumulative investment of US$34 billion, and China's investment in ASEAN has added up to US$1.037 billion. “Trade Relations with ASEAN Expand Rapidly”, China Daily November 4, 2004, available at last visited Oct. 10 2005. It can be expected that once the CAFTA is established by 2010, ASEAN countries will become a more important and attractive investment destination. Thirdly, China should realize that a liberal investment regime will promote more FDI inflows into the CAFTA. CAFTA will create the worlds biggest economic block with a population of around 1.8 billion including Chinas 1.3 billion and ASEANs 500 million. The investment agreement will bring China and ASEAN towards a closer economic relation. Both theory and practice show that the geo-economic changes in various parts of the world have helped in bringing about greater and different styles of competition for FDI, Kee Hwee Wee & Hafiz Mirza, ASEAN Investment Cooperation: Retrospect, Developments and Prospects, in: The Future of Foreign Investment in South