Does the Comprehensive Agreement on Investment (CAI) Level the Playing Field Between the EU and China?

Does the Comprehensive Agreement on Investment (CAI) Level the Playing Field Between the EU and China?

[Rana Kassas is a public international law scholar and legal regulatory consultant. She is a Ph.D. candidate at Kent Law School, University of Kent, and her research focuses on the Public-Private Distinction in Investment Treaty Arbitration.]


The sharp imbalance between the legal and investment tools available to private investors and those that are available to government-backed investors in the context of the global investment dispute settlement framework has lately drawn attention and criticism by treaty drafters, negotiators, scholars, and international adjudicators alike. It is well-established that state-owned entities investing overseas are, in particular, in an advantageous position when it comes to investor-State Dispute Settlement (ISDS). A government can now heavily invest in one of its sectors, and its respective enterprises can hold claims against any other government it has signed a bilateral investment treaty (BIT) with, demanding huge sums of compensation in cases in which it can prove even the possibility of potentially lost profit. This could effectively undermine domestic regulations and public policies in place for the protection of the national interest, as well as those regulations that concern environmental security, public welfare, and human rights protection. 

This imbalance can be explored through a comparison of the situation of the European Union (EU) and Chinese companies under investment agreements. The most recent investment agreement negotiations on the EU level are those that were undertaken with the Chinese President Xi Jinping. The Comprehensive Agreement on Investments (CAI) between the EU and China has been approved in principle since 30 December 2020. EU-China investment negotiations have been in progress for years – specifically, commencing in 2012, and remain ongoing. China is deemed to have added competitive edge over European investors primarily due to its state-driven entities that benefit from fiscal advantages and subsidies offered by national authorities. While this agreement will have a comprehensive scope concerning bilateral investment relations between the EU and China, the 26 existing BITs are not, to this date, to be superseded or terminated by the CAI. This is reaffirmed by the CAI’s Article 15 on its relation with other agreements: 

Previous agreements between the Member States of the European Union and/or the European Community and/or the European Union and China are not superseded or terminated by this Agreement…[T]he present Agreement shall be an integral part of the overall bilateral relations.

Chinese companies have had (over a long period of time) extensive market access in European territories in proportion to the percentage of European companies operating in Chinese territories. While this market access has, in theory, been granted to European companies, the competitive edge of Chinese SOEs, operating both internally and overseas, leaves little room for fair competition. This competitive edge is majorly rooted in the Chinese companies’ ties with their home state. When China backs its investors fiscally and owns major capital shares in their assets, they expand into an investment force that faces little repercussion in the transnational legal economic sphere.

The Public-Private Distinction as Relating to “Investors” under the CAI

The question of the level of fairness in the playing field between Chinese privately owned entities (POEs) and Chinese state-owned entities (SOEs) has been in recent years repeatedly brought up and condemned as lopsided. While SOEs are greatly aided by the support of the state and its financial institutions in numerous contexts, the same cannot be said for POEs. At the local level, this is easily detected by the preferential treatment of these entities as regarding the licensing process, the facilitation of required paperwork, and the attainment of government procurement bids (among many others). The profits of the state-owned bank ICBC are estimated to be around $45 billion higher than most companies in the country. Prior to January 2008, foreign investors in China enjoyed favorable treatment (including profit tax rates and tax exemptions) in comparison to their local counterparts. This, however is no longer the case as the state’s 2008 policy has been to adjust these preferential tax rates to the regular rates applied to local entities (25%).

Conversely, in a global setting, the support for these entities manifests itself quite differently. The outcry of foreign competing markets and investors internationally has in current years reached a new high. Chinese SOE advocates claim that if these entities are performing abroad legally and in line with the host state’s systems and regulations, then there should be no opposition to their establishment and operation. Critics of such a stance have argued that China’s internal persecution of human right defenders and activists, as well as minorities such as the Uyghurs, is in violation of international standards of human rights, enshrined in documents such as the Universal Declaration of Human Rights and the UN Convention on the Prevention and Punishment of the Crime of Genocide. As a response to this criticism, China’s “Going Global” strategy has incorporated several laws and regulations covering SOE’s obligations with regards to human rights in an attempt to improve its global public image. Other corporate guidelines and benchmarks have allegedly been incorporated and pursued when investing and operating abroad. More visibly, the latest EU-China investment relations have witnessed further tensions as the EU-China summit was announced to be ‘pushed back until next year’ in December 2021 amidst rising debate concerning human rights standards and key areas of trade. 

Nevertheless, ‘normalizing’ these public entities’ commercial operations abroad is of most controversy when SOEs seek to attain the investment protection offered by BITs and other treaties. Attempting to keep these transactions and investments in the purely commercial realm is unfeasible without the political or regulatory involvement of the home state of the SOE in a disputed operation, action, or claim. This occurs when a SOE appears as a claimant in an investment arbitration proceeding even though it does not fall under the traditional understanding or definition of an ‘investor claimant’ operating in the host state as a commercial corporation. Some scholars have suggested that such a politicization may be avoided in the framework of dispute settlement if the Chinese government opts to embrace some form of  ‘SOE reform’ (especially for supranational investments). Some recommendations include aspiring for a substantial reduction of state-owned shares in a corporation or entity (for instance to below 50%). However, it would also be significant to decrease the exercise of control by the state over the entity, in addition to rendering internal decision-making processes and operations more transparent, and to facilitate due consideration being given to corporate social responsibility (CSR). All of these variables, as well as the overall purpose of the entity’s operations could be taken into consideration in assessing whether it could qualify as a rightful claimant in an investor-State dispute.  

If one were to formulate a juxtaposition between EU SOEs and Chinese SOEs, the gaping difference could not be wider. Firstly, EU SOEs are much smaller and generally encouraged in sectors suffering market failures. The key sector in which the potential BIT parties diverge vastly would be manufacturing. Compared to EU SOEs, Chinese SOEs invest and operate heavily in the manufacturing sector. Moreover, the government has introduced the ‘China Manufacturing 2025 Initiative’, which has ambitious goals for its SOEs and local entities, and additionally limits the opportunities for foreign investors looking to invest in China up to the year 2025 at least.

Focusing solely on company ownership is not a sufficient criterion for the EU to assess the private-public extent of an entity. The entire purpose of SOEs and mixed nature entities should be contextually explored. The two main areas according to the EU that require extensive negotiation and ‘reworking’ would be firstly, the EU’s regulatory competition policy, and secondly, the framework for dispute resolution under the treaty. If Chinese enterprises were to be backed by their government in lengthy dispute settlement proceedings strategically and fiscally, the ensuing judgments would likely be in their favor as well. While it is true that the opposing party would be a state, possibly one with equal standing and resources, the investment protective provisions would arguably provide leverage to China as the investment claimant, and limited immunities would be available to EU host states as the defending parties. 

The European Commission has already issued a statement addressing these concerns:

The CAI will help to level the playing field for EU investors by laying down very clear rules on Chinese state-owned enterprises, transparency of subsidies, and prohibiting forced technology transfers and other distortive practices…[c]onsistent with our practice in trade agreements, the CAI requires from SOEs engaged in the market to act according to commercial considerations.

Nonetheless, it remains to be seen how these concerns would be realized in the provisions of the finalized agreement. Presently, the wide margin for interpretation, as well as the loose wording for the requirement for SOEs to ‘act according to commercial considerations’ leaves much to be resolved. 

Dispute Settlement Procedures and the CAI

Interestingly, the EU has referred to the establishment of a Multilateral Investment Court (MIC) that would replace all other dispute settlement mechanisms for investor-State cases and would be applicable up until the date of operation of the MIC: 

The EU and its Member States support the establishment of a multilateral investment court (MIC), composed of a first instance and an appellate tribunal staffed by full-time adjudicators. UNCITRAL talks on ISDS reform started in 2017. In April 2019, the working group finalised the list of concerns regarding the current ISDS system and agreed that it was desirable to work on reforms.

In principle, China and the EU have agreed to reform the enforcement of investment protections by establishing such a court. While State-to-State dispute settlement is also mentioned in the negotiations, investor-State disputes are expected to be covered by the dispute settlement mechanisms of the MIC, replacing those in all applicable umbrella clauses and protections available in the standing BITs between the two parties. Notwithstanding the currently undeveloped and undisclosed operation of such a court system, the visionary new investment system implies that a foundational overhaul of the current investment framework is in the foreseeable future. 


The politicization of disputes under the currently available fora for ISDS has been subjected to wide critique. Ibrahim Shihata, an expert on international development and the Senior Vice President and General Counsel of the World Bank from 1983 to 2000, opined that ICSID was created by international convention “to provide a forum for conflict resolution in a framework which carefully balances the interests and requirements of all the parties involved, and attempts in particular to ‘depoliticize’ the settlement of investment disputes.” The public-private distinction explored in this piece highlights the deficiencies of the current investment system in ‘de-politicizing’ disputes. The lack of due consideration given to the role of state owned (or possibly controlled) entities and sovereign wealth funds on the home state’s end (such as China) only further aggravates this defect. The very standing and purpose of I-S claims is to ease tensions between disputing parties and between the home states of investors and the host states receiving the investment. Whether the investment system protects these claims from further political and diplomatic concerns that are tied to the category (capital importing vs. exporting) of involved home and host states by offering a neutral and objective adjudicative platform to I-S disputes has been profoundly questioned.

New institutional approaches such as the MIC that give regard to the level of involvement of the home state could better accommodate the comparative rights and obligations of investors and States. By epitomizing a holistic approach that represents the voices of involved states in the legislating and founding phase and not just in the implementation and execution stage, the establishment of a multilateral investment court could be an effective replacement for the unsynchronized investor-state provisions in numerous treaties, agreements, and conventions. The margin of treaty interpretation by the adjudicative authority under this framework would be curtailed, and, consequently, the public-private standard for the qualification of I-S parties (whether state-owned or private) harmonized. 

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