Investment Treaty Practice of China, Japan and Korea

Arbitration Academy 2012: Class 1 (July2, 2012)Professor Hi-Taek Shin

Seoul National University School of Law

[work in progress: not to be quoted without permission]

Notes• The powerpoint files are provided to students of Arbi-

tration Academy 2012.• As these files are work under progress, no quotation

is permitted without the author’s written permission.• In preparing the lecture, the author draws upon the

expertise and previous studies by G. Wang, W. Shan and N. Gallagher (on Chinese practice), and S. Hamamoto and L. Nottage (on Japanese practice). However, all mistakes, if any, are the author’s own.

• The author recommends that students review the most recent data contained in World Investment Re-port 2012 released on July 5, 2012

China, Japan and Korea in the World Economy

GDP: 7,298 billions(USD)Population: 1348mil-lions

Beijing Seoul Tokyo

GDP: 1,116 billions(USD)Population: 50 mil-lions

GDP: 5,869 billions(USD)Population: 127 mil-lions

Source: IMFBase year: 2011

List of countries by GDP(Current, USD)

1 United States 15,094 billions2 China 7,298 billions3 Japan 5,869 billions4 Germany 3,577 billions5 France 2,776 billions6 Brazil 2,492 billions7 United Kingdom 2,417 billions8 Italy 2,198 billions9 Russia 1,850 billions

10 Canada 1,736 billions11 India 1,676 billions12 Australia 1,488 billions13 Spain 1,850 billions14 Mexico 1,154 billions15 Korea 1,116 billions

Source: IMFBase year: 2011

FDI Inflows into China, Japan, Ko-rea and other major countries

(USD millions) 2007 2008 2009 2010

inflowsrank-ing

inflowsrank-ing

inflowsrank-ing

inflowsrank-ing

United States 215,952 1 306,366 1 152,892 1 228,249 1

China 83,521 7 108,312 3 95,000 2 105,735 2

China, Hong Kong

54,341 11 59,621 8 52,394 4 68,904 3

United Kingdom 196,390 2 91,489 4 71,140 3 45,908 7

Russian Federa-tion

55,073 10 75,002 6 36,500 7 41,194 8

Korea 2,628 66 8,409 40 7,501 35 6,873 32

Japan 22,550 26 24,426 17 11,939 27 -1,251 207

World1,970,9

401,744,1

011,185,0

301,243,6

71

Source: UNCTAD

FDI Outflows from China, Japan, Korea and other major countries

(USD millions) 2007 2008 2009 2010

out-flows

rank-ing

out-flows

rank-ing

out-flows

rank-ing

out-flows

rank-ing

United States 393,518 1 308,296 1 282,686 1 328,905 1

Germany 170,618 3 77,142 7 78,200 3 104,857 2

France 164,310 4 155,047 4 102,949 2 84,112 3

China 22,469 19 52,150 13 56,530 6 68,000 5

Japan 73,548 8 128,019 5 74,699 4 56,263 7

Korea 19,720 22 20,251 21 17,197 19 19,230 18

United King-dom

272,384 2 161,056 3 44,381 7 11,020 27

World2,174,8

031,910,5

091,170,5

271,323,3

37Source: UNCTAD

Number of BITs

JapanKorea, Republic of

Belgium and LuxembourgItaly

NetherlandsEgypt

FranceUnited Kingdom

SwitzerlandChina

Germany

0 20 40 60 80 100 120 140 16016

92939498100101104

118127

136

Source: UNCTAD, MOFAT, METI, MOF-COM

China, Japan and Korea in Global Network of International Investment Agreements

BITs FTAs with Investment Chapter

Entered into force

Signed / not entered into force

Entered into force

Signed / not en-

tered into force

China 100 27 6 1Japan 15 1 13 0Korea 86 6 8 0

Source: UNCTAD, MOFAT, METI, MOFCOM

Recent FDI Flows and Stocks of China

2007 2008 2009 20100

100,000

200,000

300,000

400,000

500,000

600,000

700,000

83,521 108,312 95,000 105,735

22,469 52,150 56,530 68,000

327,087378,083

473,083

578,818

95,799147,949

229,600297,600

Inward FlowsOutward FlowsInward StocksOutward Stocks

(USD millions)

Source: UNCTAD

China: from Capital-importer to both Capital-importer and Capital-ex-porterChina

- the second largest economy in the world

- the second largest recipient of foreign in-vestment- the fifth in terms of outward direct invest-ment‣ the current Chinese investment policy-orien-tation is to promote both capital imports and capital exports.

In the late 1970s: China first adopted the ‘open-door’ policy• Attracting foreign direct investment (‘FDI’): one of the top policy prior-

ities in the open-door policy.– Legislated special foreign investment laws to promote and control inflow of

FDI into China.– The first BIT: with Sweden in 1982.

• The counter-parties of earlier BITs included Western capital-exporting States (U.K., Italy) and Japan

• The investment policy orientation of Chinese BITs: promote inward foreign investment

• Very cautious in offering the level of protections to foreign investors: – No national treatment commitment – Only disputes concerning the amount of compensation for expropria-

tion allowed for investor State arbitration.

In 1998: a ‘Going Abroad’ strategy fo-cusing on investing abroad• A more liberal BIT regime since 1998, after China adopted a ‘going

abroad’ policy.• Reflecting China’s increasing overseas investment, the new BIT

policy is set for the promotion and protection of both inward and outward investments.

• Chinese Model BIT– First Model BIT used in 1980s– Second Version adopted in early 1990s– Current Version implemented since late 1990s

• New generation of China’s BIT offers – enhanced protection standard on expropriation and national

treatment – All investor-State disputes to be referred to arbitration

China’s FTAs with Investment chapterPartner investment chapter Date of signature Date of entry into force

1 ASEAN

investment as part of Agree-

ment on Investment of the

Framework Agreement on

Comprehensive Economic

Cooperation Between the

PRC and ASEAN

2004. 11.

(2009. 8. signed

the Agreement on

Investment)

2005. 7.

2 Chile no investment chapter 2005. 11. 2006. 10.

3 New Zealand ch 11 2008. 4. 7 2008. 10. 1

4 Singapore ch 10 2008. 10. 23 ---

5 Pakistan ch 9 2009. 2. 21 2009. 10. 10

6 Peru ch 10 2009. 4. 28 2010. 3. 1

7 Costa Rica ch 9 2010. 4. 2011. 8. 1Source: MOFCOM

Recent FDI Flows and Stocks of Japan

2007 2008 2009 2010-100,000

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

22,550 24,426 11,939 -1,25173,548

128,01974,699 56,263

132,851203,372 200,141 214,880

542,614

680,331740,930

831,074

Inward FlowsOutward FlowsInward StocksOutward Stocks

(USD millions)

Source: UNCTAD

Japan: Traditional Capital-exporter

Japan

- a member of the G8, and the third largest economy in the world

- the seventh in terms of outward FDI

- ranked 207th in the world for inward FDI

‣ Japan’s investment policy reflected its posi-tion as a capital-exporter

Japan starts to pursue protection of in-vestment as a capital-exporter after 2002• Prior to 2002, rather passive in concluding BITs:

– Between 1977 (Egypt) and 2001 (Mongolia), only nine BITs.

• No model BIT • In 2002, policy shift in international investment treaty

practice – concluded its first FTA (with Singapore, including an

investment chapter) and the pro-investor BIT contain-ing liberalization commitment (with Korea).

– Since 2002, seven ‘new-generation’ BITs and thirteen FTAs with investment chapters.

– Japanese BITs seek market liberalization in addition to protection of investment

Japan’s FTAs with Investment chapterPartner investment chapter Date of signature Date of entry into force

1 Singapore ch 8 2002. 1. 13 2006. 11. 30

2 Mexico ch 7 2004. 9. 17 2005. 4. 1

3 Malaysia ch 7 2005. 12. 13 2006. 7. 13

4 Philippines ch 8 2006. 9. 9 2008. 12. 11

5 Chile ch 8 2007. 3. 27 2007. 9. 3

6 Thailand ch 8 2007. 4. 3 2007. 11. 1

7 Brunei ch 5 2007. 6. 18 2008. 7. 31

8 Indonesia ch 5 2007. 8. 20 2008. 7. 1

9 ASEAN ch 7 2008. 4. 14 2008. 12. 1

10 Viet Nam ch 12 2008. 12. 25 2009. 10. 1

11 Switzerland ch 9 2009. 2. 19 2009. 9. 1

12 India ch 8 2011. 2. 15 2011. 8. 1

13 Peru Art 2.3 refers to Japan-Peru BIT 2011. 5. 31 2012. 3. 1

Source: METI

Recent FDI Flows and Stocks of Korea

2007 2008 2009 20100

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2,628 8,409 7,501 6,87319,720 20,251 17,197 19,230

121,957

94,679

117,732127,047

74,777

97,911

120,441

138,984

Inward FlowsOutward FlowsInward StocksOutward Stocks

(USD millions)

Source: UNCTAD

Korea: converted to a net capital-exporter, but selectively maintains a capital-importer perspective

Korea - a capital-exporting country, seeking more investment opportunities and greater protection overseas

- a capital-importing country when negoti-ating with states such as Japan, the United States, and the EU, which are ma-jor sources of FDI into Korea

‣ This dual policy rec-ognizes both the po-tential benefits of IIAs in promoting and protecting Korean companies’ overseas investment and in creating a favourable invest-ment climate attrac-tive to foreign in-vestors in Korea.

Until the mid-1990s: a net capital-importing country• From 1964 to early 1980s: BITs with major

European capital-exporting countries.– BITs largely conformed with the standard

models of the respective European counterparty in an effort to promote pri-vate investment

• Since late 1970s, Korea started concluding BITs with other developing countries (since late 1980s with transition economies).

After mid-1990s: a net capital exporter

• From the 1990s, Korea’s BIT counterparties: di-verse countries in different stages of economic development.

• Model BIT developed in 2001• Since 2003, Korea started conclusion of FTAs (first

with Chile) which include comprehensive invest-ment chapters.

• Korea has FTAs with the U.S.A. and EU. • FTA negotiation with China has officially started.• Talks on tri-party FTA among China, Japan and Ko-

rea

Korea’s FTAs with Investment chapterPartner investment chapter Date of signature Date of entry into force

1 Chile ch 10 2003. 2. 15 2004. 4. 1

2 Singapore ch 10 2005. 8. 4 2006. 3. 2

3 EFTA Art. 1.4 2005. 12. 15 2006. 9. 1

4 ASEAN

Agreement on Investment under the Framework Agreement on Compre-hensive Economic Coop-eration among the Gov-ernments of the Republic of Korea and the Member Countries of the Associa-tion of Southeast Asian Nations

2009. 6. 2 2009. 9. 1

5 India ch 10 2009. 8. 7 2010. 1. 1

6 EU no investment chapter 2010. 10. 62011. 7. 1

(provisionally applied)

7 Peru ch 9 2011. 3. 21 2011. 8. 1

8 United States ch 11 2007. 6. 30 2012. 3.15Source: MOFAT

Tri-lateral Investment Agreement

• BITs in place by and between China, Japan and Korea:– China-Japan (1988)– China-Korea (1992, 2007)– Japan-Korea (2002)

• Tri-lateral Investment Agreement by and among China, Japan and Korea signed on May 13, 2012– in the process of domestic ratification process of

each state.

China, Japan and Korea:Common FTA Partner Countries

(1) Singapore

(2) Peru

investment chapter

Date of signa-ture

Date of entry into force

China-Singa-pore

ch 10 2008. 10. 23 ---

Japan-Singa-pore

ch 8 2002. 1. 13 2006. 11. 30

Korea-Singa-pore

ch 10 2005. 8. 4 2006. 3. 2investment chapter

Date of signa-ture

Date of entry into force

China-Peru

ch 10 2009. 4. 28 2010. 3. 1

Japan-Peru

Art 2.3 refers to Japan-Peru BIT 2011. 5. 31 2012. 3. 1

Korea-Peru

ch 9 2011. 3. 21 2011. 8. 1

Objective (1)• Encouragement (policy preference)• Protection

China-Japan (1988)

• Liberalization (legally binding com-mitment)

• ProtectionJapan-Ko-rea (2002)

• Promotion (policy preference)• protection

Korea-China (2007)

BIT

Objective (2)• Promotion (policy preference) (Art. 128)• Protection

China-Peru(2009)

• Liberalization (legally binding commitments)• Protection

Japan-Peru(2011)

• Liberalization (legally binding commitment)• Protection

Korea-Peru(2011)FT

A In

vest

men

t Cha

p-te

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• Promotion• Protection

China-Singapore(2008)

• Liberalization (legally binding commitments)• ProtectionJapan-Singapore (2002)

• Liberalization (legally binding commitments)• ProtectionKorea-Singapore (2005)FT

A In

vest

men

t Ch

apte

r