International Investment Law and the Rule of Law: The Case of China

In a new article, I challenge the narrative that international investment agreements (IIAs) help secure and promote the rule of law at domestic level. Using China as an example, I argue that the role of international investment law in advancing the domestic rule of law is rather limited. The prevailing narrative was premised on some deeply flawed assumptions of the nature and function of international investment law as well as how international investment law may affect domestic legal change. 

The conventional account of international investment law’s positive impact on domestic rule of law is almost intuitive. To start with, the same principles required by the core rule of law requirements are embodied in IIAs. Fair and equitable treatment (FET), a core international investment law principle, offers the best example. Over the years, international investment arbitral tribunals have described FET as requiring host states to afford foreign investors a stable and predictable legal framework, due process, transparency, and the protection of legitimate expectation, all of which are essential rule of law requirements. Out of the desire to avoid draconian liability for breaches of IIAs, host states internalize their international investment law obligations and reform their policy-making process.  Furthermore, IIA rules represent the rule of law for foreign investment. The rule of law, however, is not easily compartmentalized to a single sector. It will create spillover effects on a host state’s legal system because the host state needs to gradually develop better rule-oriented governance practices to comply with IIA rules. In the end, domestic firms and citizens will benefit from the halo effect provided by stronger constraints on arbitrary government action.

This narrative of the relationship between international investment law and the rule of law is of particular relevance for China. It contributed to the Western enthusiasm that China’s integration into the liberal rules-based international economic order would instil a sense of the rule of law, trigger broader regulatory changes, and drive China towards liberal democratic values. However, this narrative runs counter to an emerging new consensus that China’s increased participation in the liberal international economic order had not effectuated China’s respect for the rule of law, as the term is defined in the Western world. Accordingly, the political will to deepen economic engagement to promote the rule of law in China has been significantly eroded.

I argue that the international investment law—rule of law nexus narrative was based on four  unfounded assumptions, including (1) IIAs possess the rule of law ideals; (2) investor-state dispute settlement (ISDS) is effective in guarding the rule of law values; (3) improving good governance and rule of law is part of the mandate of IIAs; and (4) the state is readily receptive to all direct and indirect influence of economic globalization. 

First, were international investment law to instill in host states a sense of the rule of law, one would expect international investment law, itself, to comply with the rule of law ideals.  A failure to do so would undermine the credibility of its external rule of law policies. Unfortunately, international investment law, in its current form, falls short of the rule of law benchmark of consistency, clarity, transparency, and predictability. Thus, its capacity to induce host states to adopt rule of law domestically is uncertain.

Second, even though China is a signatory of almost 150 IIAs in which comprehensive ISDS procedures are a common feature, foreign investors rarely utilize the ISDS mechanism against China. As a result, the deterrent force of ISDS is limited for China. One theory points to the fact that early Chinese IIAs often incorporate restrictive provisions with the practical effect of discouraging foreign investors to initiate ISDS against China. Yet another argument holds that a dearth of ISDS claims against China is precisely due to the lack of the rule of law in China. Foreign investors may fear that initiating an ISDS claim could jeopardize their relationship with the Chinese government and in turn put their business dealings in China at risk. Thus foreign investors may find greater benefits in non-adversarial means, such as negotiation and mediation, to resolve their disputes with the Chinese government.

Third, IIAs do not address substantive justice or any structural issues that hinder rule of law principles. They do not automatically become part of national law and consequently do not automatically have domestic legal effect in China. The implementation of IIAs in China is dependent on the enactment of appropriate domestic legislation and regulations incorporating those obligations. The complex mechanism that controls the domestic application of treaties in China enables the Chinese government to limit the effectiveness of implementation of IIA obligations within the domestic legal systems.

Fourth, the root problem of the prevailing narrative is that it implicitly assumes the state as docile, readily receptive to all direct and indirect influences of economic globalization. It assumes that national policies and identities could be easily transformed along liberal democratic lines.  After forty years of reform and opening up policy, China’s remarkable economic liberalization stands in marked contrast to its political conservativeness, characterized by the monopoly of political power by the Chinese Communist Party (CCP) and the blurred line between Chinese national interests and the security of the CCP regime. To ensure its iron-clad hold on state power, the party-state is constantly on the alert for threats—big or small, real or imagined—to its authority at home. When the CCP perceives potential threats to its power, such as the Western conception of the rule of law, it may slow down or block any spillover effects that international economic norms may have on the domestic rule of law.  In fact, this can be done effectively, efficiently, and constitutionally, at no discernible cost to China’s economic standing in the world community.

To conclude, I do not completely reject the positive role international investment law may play in promoting the rule of law in China.  Rather, my purpose is to challenge the degree, depth, and scope of such effects.  Regardless of how attractive it may be to link rule of law to IIAs it is merely one of many appealing hypotheses found in rule of law scholarship that has been repeated enough times that it has taken on the quality of a received truth.

Ming Du is a Professor at Durham Law School, UK and Co-Director of Durham Global Policy Institute.

The full article is available here.