If the BIT Fits:  The Proposed Bilateral Investment Treaty between the United States and the People's Republic of China


If the BIT Fits: The Proposed Bilateral
Investment Treaty Between the United

States and the People's Republic
of China

INTRODUCTION'

Since the normalization of relations between the People's Repub-
lic of China (PRC) and the United States in 1979, the two govern-
ments have conducted a number of bilateral negotiations aimed at
establishing closer economic ties and greater mutual understanding.
These negotiations have yielded several trade- and investment-related
agreements including a bilateral trade agreement,2 several bilateral
income tax agreements,3 and a bilateral investment guarantee agree-
ment.4 However, after five years of intermittent negotiations, the two
sides have yet to come to terms on a bilateral investment treaty
(BIT).5

As the modem day successor to the post World War II treaties of
Friendship, Commerce, and Navigation (FCN), a BIT is a more spe-
cialized reciprocal agreement to encourage investment and provide
certain guarantees and formal protection for investment activities in a

1. Because the BIT between the U.S. and the PRC is still under negotiation, there is no
draft text per se to analyze. The respective positions of the United States and China are culled
from a variety of sources, including model treaties, published articles, interviews with involved
individuals, and similar treaties already concluded by each side with third countries.

2. Agreement on Trade Relations, July 7, 1979, United States-China, 31 U.S.T. 4651,
T.I.A.S. No. 9630 [hereinafter U.S-PRC Trade Agreement].

3. Agreement for the Avoidance of Double Taxation and the Prevention of Tax Evsion
with Respect to Taxes on Income, Apr. 30, 1984, United States-China (entered into force Jan.
1, 1987) - U.S.T. - , T.I.A.S. No. - ; Agreement Relating to Relief from Double
Income Tax on Shipping Profits, Nov. 18, 1981, United States-China (entered into force Jan. 1,
1981) - U.S.T. - , T.I.A.S. No. 10297; Agreement with Respect to Mutual Exemption
from Taxation of Transportation Income of Shipping and Air Transportation Enterprises,
May 3, 1982, United States-China (entered into force Jan. 1, 1981) - U.S.T. -, T.I.A.S.
No. .

4. Agreement on Investment Guarantees, Oct. 30, 1980, United States-China, 32 U.S.T.
4010, T.I.A.S. No. 9924 [hereinafter U.S.-PRC Investment Guarantee Agreement]. See infra
text accompanying notes 30-47.

5. Talks were initiated in June 1983. Bilateral Investment Treaty, U.S. Department of
State Briefing Paper, at 1 (on file at the Journal of Chinese Law). See also Lachica, China,
U.S. Agree to Hold Talks on Investment Treaty, Asian Wall St. J. (weekly), Mar. 21, 1983, at 4,
cOl. 1.



JOURNAL OF CHINESE LAW

foreign country.6 BIT negotiations with the PRC arose from three
sources. First, they follow a general campaign formulated by the U.S.
government in the late 1970s and initiated in 1981 to negotiate these
treaties with developing countries.7 Second, they respond to private
business pressure, both by individual companies and through organi-
zations like the National Council on U.S.-China Trade, to improve
treatment of foreign investment in China. And third, they reflect the
PRC government's own desire to improve the investment climate in
China so as to attract more foreign capital.9 However, since the ini-
tial negotiations began with China in mid-1983, six rounds of formal
talks' ° and several informal "exchanges of view" have not borne fruit.
Efforts to reach an agreement have bogged down because of apparent
strong disagreement on the fundamental principles underlying the
proper protections of foreign investment."

To a certain extent, the conflict reflects long-standing differences
of opinion between industrialized capital exporting countries and cap-
ital-importing developing countries. 12 But closer examination reveals
that this explanation is incomplete. Indeed, the U.S. has already suc-
cessfully negotiated and signed BITs with a number of other develop-
ing countries. 13 Likewise, the PRC has already signed its share of
agreements with industrialized countries. 4

The PRC's socialist planned economic system and extensive state

6. See infra text accompanying notes 58-105.
7. Bilateral Investment Treaties: Hearings Before the Senate Foreign Relations Commit-

tee, 100th Cong., 2d Sess. (Draft Statement of Eugene J. Mcallister, Assistant Secretary of
State for Economic and Business Affairs, Aug. 9, 1988, at 2 [hereinafter Mcallister statement].
For a general contemporaneous statement of U.S. policy in this regard, see United States Gov-
ernment Policy on International Investment, 19 WEEKLY COMP. PRES. Doc. 1214 (Sept. 9,
1983).

8. Lachica, supra note 5, at 5.
9. See Gu Ming, Investment Environment Seen as Favourable, BEIJING REV., July 16,

1984, at 16. At that time, Gu Ming was Deputy Secretary-General of the State Council of the
PRC.

10. For a brief summary of the then current status of the negotiations, see Frisbie, The
Investment Treaty Impasse, CHINA Bus. REV., Sept.-Oct. 1986, at 41.

11. Telephone interviews with Donald Eiss, Deputy Assistant U.S. Trade Representative
(Nov. 27 and Dec. 4, 1987) [hereinafter Eiss Interview]. Mr. Eiss said that because of the
serious and basic disagreements between the parties there does not seem to be any early pros-
pect for resumption of formal negotiations. Id. The November 1987 "exchange of views" was
just that - and no more.

12. See infra text accompanying notes 106-123; Heine, Impasse and Accommodation:
The Protection of Private Direct Investment in Developing States, 14 CASE W. RES. J. INT'L L.
465 (1982).

13. These countries are Bangladesh, Cameroon, Egypt, Grenada, Haiti, Morocco, Pan-
ama, Senegal, Turkey, and Zaire. See infra note 64. As of December 1986, only Panama had
ratified its treaty with the U.S.

14. China has signed over 20 BITs. See infra notes 161-163 and accompanying text.

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U.S-PRC BILATERAL INVESTMENT TREATY

ownership are important characteristics that distinguish it from other
U.S. BIT partners. Government price-setting and controlled alloca-
tion of resources in the PRC are an anathema to many foreign inves-
tors who want a flat playing field to compete on. In part precisely
because of China's uniqueness, the office of the U.S. Trade Represen-
tative (USTR), which co-chairs the U.S. negotiating team with the
Department of State, seems to have singled out negotiations with the
PRC as a forum to establish a precedent for future BITs with other
socialist countries.15

Negotiations with China are unique for other reasons. First,
because of the well-known abuses of China's sovereignty by Western
countries in the nineteenth and early twentieth centuries, China's
notion of the protective reach of the principle of sovereignty is gener-
ally much broader than that of Western countries. Consequently,
Chinese leaders are still unusually reluctant to discuss any agreement
that they believe might threaten that sovereignty.16 Second, the rela-
tively undeveloped condition of the PRC legal system not only causes
uncertainty among foreign investors, but at the same time may also
prevent the adoption of any complex international agreements
unsuited to the internal legal development.

These fundamental differences cause disagreements during nego-
tiations in three important areas: 1) the level of treatment to be
accorded to foreign investments, 2) expropriation processes and com-
pensation, and 3) dispute settlement.1 7 These areas will be discussed
in part III below. But in order to further understand the context in
which these issues arise, it is necessary, first, to review the background
of U.S. government efforts to protect American investments abroad
and, second, to present a summary of China's past experiences with
and attitudes towards foreign direct investment (FDI). 8

I. PROTECTING UNITED STATES INVEsTMENTS ABROAD

The flow of private capital across international borders has

15. Then Assistant U.S. Trade Representative for International Investment Policy, Har-
vey Bale Jr., was quoted in 1983 as follows: "If we can get a socialist country like China to
agree to some basic principles, our work will be easier elsewhere." Lachica, supra note 5, at 4.

16. See infra notes 175-190 and accompanying text.
17. The Model BIT addresses three other substantive areas that this note v,ill not look

into in depth: transfers, tax, and consultation and exchange of information.
18. FDI can be broadly defined as the investment of money, goods or services in a pro-

ject for entrepreneurial commitment. Such investment projects may include the establishment
of companies, capitalizing branches and plants, securing equity holdings sufficient to establish
management control of companies, and making long-term loans with low interest rates in con-
junction with acquisition of equity holdings. Note, The World Bank's Multilateral Investment
Guarantee Agency, 25 COLUM. J. TRANSNAT'L L 101, 104 (1986) [hereinafter Note, MIGA].

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expanded exponentially during the 20th century. In early years, host
country laws and investment contracts formed the primary legal pro-
tection for foreign investments, but often proved inadequate, from the
point of view of foreign investors. Customary international law also
failed to provide satisfactory protection. If disputes arose between
private investors and host governments over treatment of investments,
unless binding international arbitration was agreed upon or the local
courts provided acceptable solutions, often the only recourse for for-
eign investors was to ask their own government to press their claim
diplomatically by asserting the international law of state responsibil-
ity. This process proved only marginally successful at times, since,
especially in this century, many countries resisted and resented the
use of diplomatic pressure to resolve claims they believed to be solely
within their sovereign jurisdiction.

The U.S. government and other nations have sought to supple-
ment customary law with a number of guarantee programs and with
bilateral agreements, creating treaty obligations aimed at encouraging
and protecting FDI. Prior to the BIT program, investment was par-
tially protected by treaties of Friendship, Commerce, and Navigation
(FCN) between the U.S. and many other countries. More recently,
the U.S. government has founded and promoted a national insurance
mechanism, the Overseas Private Investment Corporation (OPIC), to
help encourage investment in developing countries. And in 1988 the
government approved participation in the Multilateral Investment
Guarantee Agency (MIGA), a multilateral cousin to national invest-
ment insurance programs like OPIC. Other U.S. government efforts
have included statutory attempts to protect investments through the
imposition of sanctions against countries that seize U.S. investments.
Most notable of these are the "First Hickenlooper Amendment" 19

and the "Gonzalez Amendment, ' 20 neither of which has been used
often nor appears to have produced desired results. 21

A. The FCN Treaty System

In the post World War II international commercial arena, the
primary bilateral mechanism utilized by the U.S. government to pro-
tect U.S. international trade and investment has been the FCN treaty.

19. Foreign Assistance Act of 1961, Pub. L. No. 87-195, 75 Stat. 424 (codified as
amended at 22 U.S.C. § 2370(e)(1) (1982). See Note, The BIT Won't Bite: The American
Bilateral Investment Treaty Program, 33 AM. U.L. REV. 931, 938 (1984) [hereinafter Note,
The BIT Won't Bite].

20. International Development Association Act, Pub. L. No. 92-247, 86 Stat. 60, (1971)
(codified at 22 U.S.C. § 2840) (1982).

21. Note, The BIT Won't Bite, supra note 19, at 939-940.

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U.S-PRC BILATERAL INVESTMENT TREATY

The U.S. has concluded 44 of these treaties with other countries; 15
have been signed since World War II, including a number with Asian
countries. 2 The U.S. signed a treaty with the Republic of China in
1946,23 but this treaty only remains in effect with regard to the
Nationalist government on Taiwan.

The typical FCN contains broad provisions covering a variety of
topics, including not only trade and investment, but also travel and
individual rights.24 These treaties, however, tend to emphasize
"friendship" and give more protection to individuals and their prop-
erty than to business investors.25 Most commentators agree that
FCNs are unsuited to the needs of contemporary international invest-
ment.26 For instance, a typical FCN expropriation clause does not
cover creeping expropriation. 7 Moreover, the arbitration clauses are
poorly drafted.28 In addition, FCNs have been associated with U.S.
economic expansionism and alleged imperialism, thereby making
them historically unappealing to developing countries where invest-
ments face high risk. 9

22. Aksen, The Case for Bilateral Investment Treaties, 24 PRIVATE INVESTORS ABROAD
357, 358-59, app. A (1982). The bulk of FCNs signed with Latin American countries date
from the 19th century. Bergman, Bilateral Investment & Protection Treatie" An Examination
of the Evolution and Significance of the US Prototype Treaty, 16 N.Y.UJ. INT'L L & PoL 1,
8 n. 37 (1983).

23. Treaty of Friendship, Commerce and Navigation, Nov. 4, 1946, United States-China
(Republic of China), T.I.A.S. No. 1871, 25 U.N.T.S. 69 [hereinafter U.S.-ROC FCN].

24. See Pattison, The United States-Egypt Bilateral Investment Treaty: A Prototjpe for
Future Negotiation, 16 CORNELL INT'L LJ. 305, 308 (1982). The substantive provisions of
most FCNs addressed the following topics, among others: 1) general national treatment in
administration of local laws, and national and MFN treatment for patents and trademarks and
the areas of taxation and products distribution and use; 2) individual rights, such as freedom of
movement and entry, right to counsel and a speedy trial, and protection from molestation;
3) private standing in national courts; 4) the enforceability of arbitration awards between pri-
vate parties; 4) national treatment when engaging in and operating a business; 5) the right to
freely purchase and lease land; 6) protection of property; protection of exchanges involving
scientific and technical knowledge; 7) the rights; exchange controls; 8) rules on customs
administration, import or export duties, and other charges; 9) transportation of goods and
services; 10) the right to compete with local monopolies; 11) freedom of commerce and naviga-
tion for ships; 12) bilateral consultation regarding competitive restraint practices; and 13) dis-
pute settlement between the treaty signatories. Id. See., e.g., Treaty of Friendship, Commerce
and Navigation, Apr. 2, 1953, United States-Japan, T.I.A.S. No. 2862.

25. Aksen, supra note 22, at 370-72.
26. See, eg., Aksen, supra note 22, at 367-68; Note, The BIT Won't Bite, supra note 19,

at 931-936; Pattison, supra note 24, at 309.
27. Bergman, supra note 22, at 8, citing SJ. RUBIN, PRIVATE FOREIGN INVESMENT:

LEGAL AND ECONOMIC REALrTIES 88 (1956); Aksen, supra note 22, at 377.
28. Id.
29. Pattison, supra note 24, at 309.

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B. Investment Guarantees: OPIC and MIGA

A second mechanism utilized by the U.S. government to
encourage U.S. investment overseas, particularly in less developed
countries (LDCs), is the Overseas Private Investment Corporation
(OPIC). OPIC, which was authorized by the Foreign Assistance Act
of 1969,3° succeeded a similar program offered by the U.S. Agency for
International Development since 1948.31 OPIC is a U.S. government-
funded corporation managed by a board of directors composed of rep-
resentatives from the government and the private sector.

OPIC's statutory mandate is to "mobilize and facilitate the par-
ticipation of United States private capital and skills in the economic
and social development of friendly LDCs, thereby complementing the
development assistance objectives of the United States."32 OPIC
guarantees function by insuring new investments in developing coun-
tries against a number of political risks, including inconvertibility of
earnings, loss of investment due to expropriation, nationalization, or
confiscation and loss due to war, revolution, insurrection, or civil
strife.

33

In the late 1970s this mandate faced increasing political pressures
from two fronts. Criticism focused first on the rising trade deficit,
alleging that OPIC exacerbated the trend.34 Second, organized labor
argued that OPIC, by assisting FDI, helped export 150,000 domestic
jobs a year.35 These criticisms resulted in some statutory modifica-
tion.36 But concerns about the loss of U.S. jobs to cheap labor mar-
kets in the developing world promise to continue to confront OPIC.
One of the recent amendments particularly relevant to investment in
the PRC is a provision aimed at withholding insurance for investment
"subject to performance requirements which would reduce substan-
tially the positive trade benefits likely to accrue to the United States
from the investment. ' 37 Performance requirements typically take the
form of host country stipulations that new foreign investment projects
export most or all of production. OPIC, however, has generally

30. Foreign Assistance Act of 1969, 22 U.S.C. §§ 2191-2200a (1982).
31. The Economic Cooperation Act of 1948, ch. 169, § III(b)(3), 62 Stat. 144.
32. 22 U.S.C. § 2191.
33. See OVERSEAS PRIVATE INVESTMENT CORPORATION, INVESTMENT INSURANCE

HANDBOOK 3 (1988). In 1987, OPIC insured a record 144 new projects. At year end, total
political risk insurance in force amounted to $9.422 billion. Id.

34. See Note, MIGA, supra note 18, at 111; Note, The BIT Won't Bite, supra note 19, at
937. According to a report submitted in Senate hearings, the negative effect of OPIC insur-
ance has on U.S. trade is slight. Note, The BIT Won't Bite, supra note 19, at 937 n. 47.

35. Note, MIGA, supra note 18, at 936-37 n. 47.
36. See 22 U.S.C. §§ 2191(k)(1), (1) (1982).
37. 22 U.S.C. § 2191(m) (Supp. III 1985).

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US.-PRC BILATERAL INVESTMENT TREATY

deflected the bulk of attacks on its development mandate.3"
OPIC coverage for investments in a given country is available

only after the U.S. government reaches ai investment guarantee
agreement with that country's government. 39 The bilateral agreement
provides that the host government recognize the subrogation of the
U.S. government if OPIC pays a claim. Typically, the bilateral agree-
ment provides that disputes will be resolved by negotiation between
the two governments. Disputes not settled by negotiation go to bind-
ing international arbitration. This provision formalizes in a bilateral
treaty obligation the application of the principle of state responsibil-
ity. Where in the past the home government might take up a private
investment dispute on an ad hoc basis, OPIC makes this subrogation
automatic and procures host country consent at the same time. But
by creating a formal mechanism for converting a private claim to a
state claim, OPIC dispute settlement provisions potentially increase
the likelihood of diplomatic rifts if host governments believe that a
given claim is outside the coverage of the investment guarantee
agreement.40

The U.S. and PRC governments signed an investment guarantee
agreement on October 30, 1980.41 In 1982, the first guarantee,
amounting to less than $1 million in value, was issued for a U.S.
investment in China.42 In 1987, the total insured amount had risen to
over $23 million.43 Like most such agreements, the U.S.-PRC agree-
ment makes OPIC insurance of projects or activities in China contin-
gent on PRC government approval.' Subrogation of the U.S.
government to the claims of the investor, provided for in article 3 of
the agreement, is qualified in part by a provision contemplating that
particular PRC laws may not permit certain property owned by the
investor in the PRC to be transferred to the U.S. government. In such
a case, the PRC government "will permit the investor and the Issuer
[OPIC] to make appropriate arrangements pursuant to which such
interests are transferred to an entity permitted to own such interests
under the laws of the [PRC]. ' 45

Only certain disputes will be negotiated. These pertain to the

38. Note, MIGA, supra note 18, at 119-20.
39. 22 U.S.C. § 2197(a) (1982).
40. See Note, The BIT Won't Bite, supra note 19, at 938.
41. U.S.-PRC Investment Guarantee Agreement, supra note 4.
42. OvERsEAs PRIVATE INVESTMENT CORPORATION, ANNUAL REPORT, 30 (1982).
43. OvERsEAs PRIVATE INVESTMiENT CORPORATION, ANNUAL REPORT, 40-41 (1987).

A total of 11 projects were insured in 1987. These projects range from hotels to fish procession
and rutile mining to sanitary articles. Id.

44. U.S.-PRC Investment Guarantee Agreement, supra note 4, art. 2.
45. Id. art. 4.

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JOURNAL OF CHINESE LAW

"interpretation" of the agreement or which "in the opinion of one of
the Governments, involves A question of public international law."'46

If negotiation fails, binding arbitratiofi can be requested by either gov-
ernment. The arbitral tribunal is bound to base its decision on the
"applicable principles and rules of public international law."47

MIGA 48 is an independent organization established under the
sponsorship of the World Bank.4 9 Although it responds to a number
of the same needs that led to the establishment of OPIC, there are
several distinguishing characteristics that may make MIGA a more
acceptable mechanism for both capital exporting and capital import-
ing countries. As a multilateral agency, MIGA is both managed by
its signatory states5 ° and capitalized with funds contributed by capital
importers as well as exporters.5" Both the U.S. and the PRC, among
other states, are members.52 Thus, greater commitment to the organi-
zation's purposes is achieved under MIGA as compared to a single
nation-based insurance system like OPIC. Moreover, MIGA's
independent status isolates it from the domestic political influences
that OPIC and similar programs must face. Therefore, MIGA should
be able to play a more neutral, and thus more effective role in promot-
ing capital-importing policies on behalf of developing countries look-
ing to encourage foreign investment which will conform with their
own development goals.5 a

46. Id. art. 6(a).
47. Id. art. 6(b)(ii).
48. See generally Note, MIGA, supra note 18, at 124-136; M. HOLTHUS, D. KEBsCHULL,

K. W. MENCK, MULTINATIONAL INVESTMENT INSURANCE AND PRIVATE INVESTMENT IN

THE THIRD WORLD (1954).

49. Convention Establishing the Multilateral Investment Guarantee Agency, Oct. 11,
1985 (into force Apr. 12, 1988), reprinted in 24 I.L.M. 1605 (1985) [hereinafter MIGA Con-
vention]. MIGA was inaugurated on June 8, 1988, and has yet to issue any guarantees,
although many applications have been received. Telephone interview with Christina Wes-
thold-Schroder, consultant to MIGA (Nov. 14, 1988) [hereinafter Westhold-Schroder
interview].

50. There are three levels of MIGA management: a Council of Governors consisting of
one member from each signatory country and charged with making structural changes and
voting on fundamental policy issues; a Board of Directors responsible for general operations
and elected under a formula giving some preference to states holding the largest number of
shares; and the President who will be elected by the board and conduct the daily business of
MIGA. MIGA Convention, supra note 49, arts. 30-33.

51. Each state's subscription in MIGA will be made in accordance with its relative eco-
nomic strength as measured in the allocation of the World Bank's capital. Id. art. 6.

52. The U.S. signed the convention on June 18, 1988, and its membership became effec-
tive as of April 12, 1988. China signed the convention on April 28, 1988, and its membership
became effective on April 30, 1988. Westhold-Schroder Interview, supra note 49. A number
of applications for MIGA guarantees of investments in China have been filed, but none of
them are from U.S. companies. Id.

53. Note, MIGA, supra note 18, at 129.

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In addition to guarantees for risks covered by OPIC, MIGA vAll
issue guarantees for breach of a "legal commitment" by the host-gov-
ernment. 4 OPIC's guarantee against expropriation may offer some
protection for related types of breaches, but this MIGA provision
should have the added benefit of covering a broader variety of host-
government actions and of encouraging a closer attention to the legal
details of foreign direct investment by both the investor and the host-
country.5 Because of this provision, investors will likely draft more
detailed contracts and seek written opinions and approvals from rele-
vant host country government agencies. Similarly, the host govern-
ment will pay closer attention to the commitments it makes, since it
will be bound to them under the MIGA agreement. Moreover, at
least in some cases, MIGA will provide insurance for risks that might
fail statutory eligibility tests for coverage under national programs
such as OPIC despite their developmental value to LDCs.56 The mul-
tilateral participation in MIGA should by itself reduce the number of
disputes arising under the Convention, however, its sturdy arbitration
system should further encourage settlement and successfully enforce
awards for those disputes that do arise. The arbitration mechanism,
which parallels that of the Convention on the Settlement of Invest-
ment Disputes (ICSID Convention), permits the exhaustion of local
remedies first, if preferred, and the application of local laws. 7 The
fact that guarantee claims will be subrogated to an international
organization and that the MIGA arbitral tribunal will also be interna-
tional in character should encourage confidence in MIGA and pro-
duce equitable resolution of disputes.

C. The United States BIT Program

The U.S. BIT program was developed as a coordinated effort by
various offices of the government with the help and support of the
private sector. The program attempts to deal with the inadequacies of
existing protection for U.S. investments abroad under FCN treaties
and OPIC. 8 BITs had originally been initiated by European coun-
tries with LDCs in the 1960s and early 1970s, focusing, unlike FCN

54. MIGA Convention, supra note 49, art. 11.
55. Note, MIGA, supra note 18, at 130.
56. HIGA Convention, supra note 49, art. 19 and comment 29. See Note, MIGA, supra

note 18, at 127.
57. MIGA Convention, supra note 49, annex f1. Compare Convention on the Settlement

of Investment Disputes Between States and Nationals of Other States, Mar. 18, 1965, art. 26,
17 U.S.T. 1270, T.I.A.S. No. 6090, 575 U.N.T.S. 159 [hereinafter ICSID Convention].

58. See generally Gann, The U.S. Bilateral Investment Treaty Program, 21 STAN. J.
INT'L L. 373 (1985); Note, An Examination of Compensation Terms in the U.S-Egypt Bilat-
eral Investment Treaty, 16 CASE W. REs. . INT'L L 287 (1984).

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treaties, exclusively on investments by nationals or companies of one
state party in the territory of another 9.5  During the 1970s, substantial
losses of American investments due to expropriations in Libya and
Iran added to the perceived need in the U.S. for stronger guarantees.
The U.S. government also reacted to pressure from individual firms
and to the strong urging by the Council of the International Chamber
of Commerce and other Western private trade and investment organi-
zations to help develop a more stable international investment frame-
work by adopting BITs.6

The U.S. government initiated BIT negotiations with several
countries in 1981,61 publicly issuing a proposed model treaty (herein-
after Model BIT) on January 11, 1982.62 The first BIT was signed
with Egypt on September 29, 1983,63 and BITs with nine other coun-
tries have been concluded since then. 64 Negotiations with at least
seven more countries, including the PRC, have been opened.65 How-
ever, in the past two years negotiations have slowed, as the Executive
Branch failed to win ratification from the Senate of any of the signed

59. Bergman, supra note 22, at 8-9.
60. Bergman, supra note 22, at 9.
61. McAllister Statement, supra note 7, at 2.
62. Treaty between the United States of America and Concerning the

Reciprocal Encouragement and Protection of Investment, Jan. 11, 1982, reprinted in 17 BNA
EXPORT WEEKLY 734 (March 23, 1981) [hereinafter Model BIT]; Revised Model Bilateral
Investment Treaty, February 24, 1984, reprinted in 20 BNA EXPORT WEEKLY 960 (May 15,
1984).

63. Treaty Concerning the Reciprocal Encouragement and Protection of Investments,
Sept. 29, 1982, United States-Egypt, reprinted in 21 I.L.M. 927 (1983) [hereinafter U.S.-Egypt
BIT].

64. Treaty Concerning the Treatment and Protection of Investments, Oct. 27, 1982,
United States-Panama, reprinted in 21 I.L.M. 1227 (1982) [hereinafter U.S.-Panama BIT];
Treaty Concerning the Reciprocal Encouragement and Protection of Investment, Dec. 6, 1983,
United States-Senegal (on file at the Office of the USTR) [hereinafter U.S.-Senegal BIT];
Treaty Concerning the Treatment and Protection of Investments, Dec. 13, 1983, United
States-Haiti (on file at the Office of the USTR) [hereinafter U.S.-Haiti BIT]; Treaty Concern-
ing the Reciprocal Encouragement and Protection of Investment, Aug. 3, 1984, United States-
Zaire (on file at the Office of the USTR) [hereinafter U.S.-Zaire BIT]; Treaty Concerning the
Reciprocal Encouragement and Protection of Investment, Dec. 3, 1985, United States-Turkey
(on file at the Office of the USTR) [hereinafter U.S.-Turkey BIT]; Treaty Concerning the
Reciprocal Encouragement and Protection of Investment, July 22, 1985, United States-
Morocco (on file at the Office of the USTR) [hereinafter U.S.-Morocco BIT]; Treaty Concern-
ing the Reciprocal Encouragement and Protection of Investment, Feb. 27, 1986, United States-
Cameroon (on file at the Office of the USTR) [hereinafter U.S.-Cameroon BIT]; Treaty Con-
cerning the Reciprocal Encouragement and Protection of Investment, Mar. 12, 1986, United
States-Bangladesh (on file at the Office of the USTR) [hereinafter U.S.-Bangladesh BIT];
Treaty Concerning the Reciprocal Encouragement and Protection of Investment, May 2, 1986,
United States-Grenada (on file at the Office of the USTR) [hereinafter U.S.-Grenada BIT].

65. In addition to those with the PRC, inconclusive negotiations have been conducted
with Malaysia, Costa Rica, Sri Lanka, Honduras, Gabon, and Uruguay as well. McAllister
Statement, supra note 7, at 2.

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U.S.-PRC BILATERAL INVESTMENT TREATY

BITs. When the Senate finally approved eight of the ten BITs in
October 1988,66 the approval was made contingent on an "under-
standing" offered by the Executive, underlining existing language in
the BITs reserving the right to either state party to take action con-
trary to the substantive terms of the treaties if necessary to protect
national security interests. Apparently, some Senators were con-
cerned that the treaties limited U.S. freedom to act in emergencies. 67

1. Substantive Provisions68

The most important substantive provisions of the U.S. Model
BIT cover four major investment-related areas. Three of these areas,
as they appear in the Model BIT, will be introduced here, but analysis
of BITs actually negotiated to date will be reserved for part Ill below.
First of all, article II of the Model BIT, regarding treatment of invest-
ment, seeks to create mutually favorable investment environments by
establishing several levels of protection relating to different stages of
investment and covering a specified list of investment-related activi-
ties. The first paragraph of the article provides for most favored
nation69 (MFN) or national treatment,70 whichever is more favorable,
towards the establishment and acquisition of investments.71 The same
standard of treatment is also applied to investments established prior
to the effective date of the treaty.72 The Model BIT then lists seven
groups of associated investment activities covered by the same stan-

66. The Senate gave its advice and consent to ratification on October 18, 1988. See 134
CONG. R C. S16939, S16940 (Oct. 20, 1988). The BITs enter into force 30 days after exchange
of ratification documents.

67. Interview with Claudia H. Serwer, Director of Investment Affairs, Office of the U.S.
Trade Representative, in Washington D.C. (Aug. 23, 1988) [hereinafter Serwer Interview].
Despite existing language in article X of the Model BIT and each of the signed BITs, Senate
staff delayed approval until the "understanding" was added. Id. The understanding reads as
follows: "(Senate advice and consent is contingent on the understanding that) "[u]nder article
X of the treaty, either party may take all measures necessary to deal with any unusual and
extraordinary threat to its national security." 134 CNG. REC. S16939, 16940 (Oct. 20, 1988)
Conscious of Senate concern evident in the need for such an "understanding," the Executive
Branch did not resubmit the Panama and Haiti BITs for ratification with the other BITs.
Considering the unstable economic and political condition of these two countries, it is unclear
when and if these BITs will be resubmitted. Id. See infra text accompanying notes 100-105.

68. See generally Gann, supra note 58, for a complete discussion of the provisions of the
Model BIT.

69. Under a most favored nation clause, a state signatory normally grants to the other
state, or in this case companies of the other state, the broadest rights and privileges which it
accords to any other state in treaties it has made or will make.

70. The obligation of national treatment means treatment no less favorable than treat-
ment accorded by the host party to its nationals and companies in like situations. Gann, supra
note 58, at 384 n. 46.

71. Model BIT, supra note 62, art. II, para. 1.
72. Id. para. 2.

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JOURNAL OF CHINESE LAW

dard of treatment.73

It is significant that the Model BIT excludes a considerable
number of economic sectors and other matters from national treat-
ment. These exceptions include all areas in which U.S. federal law
already distinguishes between foreign investors and U.S. nationals.
Sectors and matters traditionally left to the states or in which states
already discriminate against foreign investment are also excepted.74

As what seems to be a fall-back clause, the next paragraph of article
II establishes a non-contingent "fair and equitable" standard and for-
bids impairment of investments by "arbitrary and discriminatory"
measures. 7  Treatment, moreover, "shall in no case be less than that
required by international law," although this level remains
undefined. 6

Three additional clauses of article II are of particular interest in
relation to investment in the PRC. Paragraph six further defines the
national treatment provided for in the first two paragraphs. It stipu-

73. These activities include the following:
(a) the establishment, control and maintenance of branches, agencies, offices, facto-

ies or other facilities for conduct of business;
(b) the organization of companies under applicable laws and regulations; the acqui-

sition of companies or interests in companies or in their property; and the man-
agement, control, maintenance, use, enjoyment and expansion, and the sale
liquidation, dissolution or other disposition, of companies organized or
acquired;

(c) the making, performance and enforcement of contracts;
(d) the acquisition (whether by purchase, lease or otherwise), ownership and dispo-

sition (whether by sale, testament or otherwise), of personal property for the
conduct of business;

(e) the leasing of real property appropriate for the conduct of business;
(f) the acquisition, maintenance and protection of copyrights, patents, trademarks,

trade secrets, trade names, licenses and other approvals of products and manu-
facturing processes, and other industrial property rights; and,

(g) the borrowing of funds, the purchase and issuance of equity shares, and the
purchase of foreign exchange for imports.

Id.

74. See id., Annex, which reads as follows:
Consistent with Article II, paragraph 3, each Party reserves the right to main-

tain limited exceptions in the sectors or matters indicated below:
The United States

Air transportation; ocean and coastal shipping; banking; insurance; government
grants; government insurance and loan programs; energy and power production; cus-
tom house brokers; ownership of real estate; ownership and operation of broadcast or
common carrier radio and television stations; ownership of shares in the Communi-
cations Satellite Corporation; the provision of common carrier telephone and tele-
graph services; the provision of submarine cable services; use of land and natural
resources.

Id. See also Gann, supra note 58, at 387-89.
75. Model BIT, supra note 62, art. II, para. 4.
76. Id.

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U.S-PRC BILATERAL INVESTMENT TREATY

lates that when private companies established by nationals of one
state in the territory of the other are in competition with entities
owned or controlled by the other state party, conditions of "competi-
tive equality should be maintained.""7 Paragraph seven specifically
prohibits "performance requirements as a condition of establishment,
expansion or maintenance of investments," including requiring
exports or local purchase of goods and services.78 Paragraph eight,
finally, dictates that laws, regulations and other legal decisions relat-
ing to investment must be made public.7 9

The second area comprises the question of legitimate methods of
expropriation and nationalization and the level of compensation to be
paid. According to article III of the Model BIT, all manner and form
of expropriation and nationalization, including indirect measures, are
prohibited. The Model BIT offers this protection to all interests, large
and small, in any investment. 0 However, exceptions are allowed if
expropriation is undertaken for a public purpose; is accomplished
under due process of law; is not discriminatory; does not violate a
contractual provision between a national of one state party and the
other state party; and is accompanied by prompt, adequate, and effec-
tive compensation.81

"Prompt" compensation is defined as payment "without delay,"
and if there is delay, that interest at current international rates shall
be paid. 2 "Adequate" compensation, according to the U.S. Model
BIT, is equivalent to the fair market value of the expropriated invest-
ment on the date of expropriation. 83 This valuation, moreover, "shall
not reflect any reduction in such fair market value due to either prior
public notice or announcement of the expropriatory action, or the
occurrence of the events that constituted or resulted in the
expropriatory action." The term "effective" means that the compen-
sation must be realizable and freely transferable."

Each of these compensation requirements must be met. In other
words, even in the case that an expropriated domestic enterprise is not
compensated, the expropriation of a U.S. investment would still enti-
tle the owners to compensation. "Stabilization clauses" in contracts,
which stipulate that a contract shall be governed by laws and regula-

77. Id. para. 6.
78. Id. para. 7.
79. Id. para. 9
80. Id. art. II, para. 2.
81. Id. art. HI, para. 1.
82. Id.
83. Id.
84. Id.

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JOURNAL OF CHINESE LAW

tions in effect when the contract is concluded, must be enforced under
the Model BIT. A stabilization clause might, for instance, explicitly
state a formula for determining and providing compensation in the
event of expropriation.85 This clause must be enforced, regardless of
expropriation legislation purporting to vacate the entire contract.8 6

Chinese notions of the sovereign right of a state to expropriate if nec-
essary, which are discussed below, would likely disfavor any such
clause.

Dispute settlement is the third major substantive area encom-
passed by the Model BIT. The Model BIT provides detailed dispute
settlement principles and mechanisms for two types of disputes:
1) disputes between a state party to the treaty and a national or com-
pany of the other state party; 2) disputes between the two state gov-
ernments. The provisions regarding the former type of disputes are
designed to interact closely with the relevant parts of the Convention
on the Settlement of Investment Disputes between States and Nation-
als of Other States (hereinafter ICSID Convention), which established
the Centre for Settlement of Investment Disputes and the Additional
Facility, an alternate settlement mechanism.87 The inclusion of inves-
tor-state party dispute settlement procedures in article VII is intended
to reduce the need for the U.S. government to take up a claim of a
private investor by invoking the state-party provisions of Model BIT
article VIII. 8

Article VII defines three categories of private party investment
disputes:

[Disputes involving] a) the interpretation or application of
an investment agreement between a Party and a national or
company of the other Party; b) the interpretation or applica-
tion of any investment authorization granted by its foreign
investment authority to such national or company; or c) an
alleged breach of any right conferred or created by [the
treaty] with respect to an investment.8 9

However, disputes solely concerning interpretation or application of

85. According to Professor Schachter, some countries dispute the binding effect of stabi-
lization clauses. 0. SCHACHTER, INTERNATIONAL LAW IN THEORY AND PRACTICE 313-314
(1982) (unpublished offprint of the Academy of International Law) [hereinafter SCHACHTER,
THEORY & PRACTICE].

86. Thus, in the event of a taking, the investor would be entitled to the remedy restitutio
in integrum, rather than damages. See Gann, supra note 58, at 400 n. 127 and accompanying
text.

87. Gann, supra note 58, at 414, citing ICSID Convention, supra note 57.
88. Gann, supra note 58, at 421.
89. Model BIT, supra note 62, art. VII, para. 1.

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U..-PRC BILATERAL INVESTMIENT TREATY

securities and anti-trust and other local laws, which do not implicate
rights created by an investment agreement or authorization or by the
BIT, are not included.90

Settlement of investor-state party disputes through direct consul-
tation or negotiation is first encouraged. 91 At this stage, non-binding
fact-finding procedures of the Additional Facility of the Centre, as
provided by the ICSID Convention, may be used. If these non-bind-
ing third-party procedures fail, the Model BIT directs that the parties
to the dispute may resort to settlement procedures previously agreed
on by contract.9 2 If each of these preliminary efforts fail to resolve the
dispute, the investor may choose to submit the dispute to the Centre
or the Additional Facility for settlement by conciliation or binding
arbitration.93  Although submission is triggered by the investor's
request, according to the ICSID Convention, the state parties must
also agree. This agreement is accomplished by a specific consent
clause written into the Model BIT.94 In order to trigger the arbitra-
tion clause of the Model BIT, the following conditions must be met:
1) at least six months must have passed since the dispute arose; 2) the
dispute may not have been submitted for settlement in accordance
with any dispute procedures previously agreed to by the parties to the
dispute; and, 3) the investor may not have brought the dispute before
the courts or administrative organs of competent jurisdiction of the
host state party to the treaty.9s Two further provisions of the Model
BIT take into account alternate dispute settlement procedures in
other agreements that may have been made between the state parties,
those provided for in the OPIC agreement, for example.96

90. Gann, supra note 58, at 415.
91. Model BIT, supra note 62, art. VII, para. 2.
92. Id. Dispute procedures agreed upon by contract remain available despite any

expropriatory act. Similarly, awards made on such procedures would be enforceable under the
original contract, domestic law, or international agreements for the enforcement of arbitral
awards, such as the 1958 New York Convention. Gann, supra note 58, at 416.

93. Model BIT, supra note 62, art. VII, para. 3. Conciliation or binding arbitration shall
be in accordance with the provisions of the Convention and the rules of the Centre or of the
Additional Facility. Id. para. 3(c). If the parties to the dispute disagree as to which procedure
to use, the choice of the investor shall be followed. Id. para. 3(a).

94. Id. para. 3(b).
95. Id. para. 3(a).
96. The government party cannot assert as a defense that the investor has received or

will receive, pursuant to an insurance contract, indemnification or compensation. Id. para. 4.
This provision thus allows for subrogation of claims under an OPIC insurance policy or
Export-Import Bank contracts for insurance. Garn, supra note 58, at 419. If, however, dis-
pute resolution mechanisms are provided for in either of these two other programs, then this
article of the BIT shall not apply. Model BIT, supra note 62, art. VII, para. 6. The U.S.-PRC
agreement on Investment Guaranties does provide such an alternate dispute resolution mecha-
nism for any dispute regarding the interpretation of the investment guaranty agreement or

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JOURNAL OF CHINESE LAW

Article VIII deals with the settlement of disputes between the
state parties. It applies to any dispute between the state parties con-
cerning the "interpretation or application" of the treaty.97 However,
either government has the discretion to invoke this provision on
behalf of an investor, if article VII is unavailing.98 According to a
former USTR official, however, the U.S. government expects that
investors will invoke article VII rather than rely on the government to
invoke article VIII.99 The substance of this provision is largely con-
cerned with the procedure and make-up of the arbitral tribunal estab-
lished by the parties to resolve disputes.

It is important to note, finally, that the drafters of the Model BIT
were careful to include an escape clause in the treaty. Thus, article X
provides that the treaty shall not preclude measures by a party "nec-
essary for the maintenance of public order, the fulfillment of its obli-
gations with respect to the maintenance or restoration of international
peace or security, or the protection of its own essential security inter-
ests."' "c° These exceptions are intended, respectively, to allow for the
exercise of domestic police powers, the implementation of United
Nations Security Council measures, and the imposition of extraordi-
nary measures taken in times of national emergency or war. 01 With
respect to the third exception, relevant measures are defined by U.S.
statutes, such as the Trading with the Enemy Act1"2 and the Interna-
tional Emergency Economic Powers Act.1 1

3 Only a limited class of
actions in times of no national emergency or war are permitted. 1' 4

Concerned that this article still does not provide an adequate preser-
vation of U.S. government freedom of action in emergencies, such as
the recent political chaos in Haiti and alleged drug activities of Pan-
ama's General Noriega, the Senate had held up ratification of BITs
signed to date until an "understanding" emphasizing the exception
was added. 05 Whether the domestic legislation of U.S. BIT signato-
ries provides parallel definitions of and limitations on action permissi-
ble "for protection of essential security interests" is questionable. In a

which "in the opinion of one of the Governments, involves a question of public international
law." U.S.-PRC Investment Guarantee Agreement, supra note 4, art. 6.

97. Model BIT, supra note 62, art. VIII, para. 1.
98. Gann, supra note 58, at 421.
99. Id.
100. Model BIT, supra note 62, art X., para. 1. According to Professor Gann, article X

closely follows exceptions contained in most international trade and investment agreements.
Gann, supra note 58, at 424.

101. Gann, supra note 58, at 424-425.
102. 50 U.S.C. § I.
103. 50 U.S.C. App. § 1701. See Gann, supra note 58, at 425.
104. Gann, supra note 58, at 425.
105. Serwer Interview, supra note 67.

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U.S.-PRC BILATERAL INVESTMENT TREATY

crisis, a BIT signatory would likely take advantage of this language to
claim that the substantive BIT provisions are temporarily suspended.

2. The "Prompt, Adequate, and Effective" Standard in
International Law

One of the most contentious issues raised by the U.S. Model BIT,
as pointed out in the preceding section, involves the issue of the
proper conditions of compensation for expropriation. For the past
half century the U.S. government has consistently claimed that inter-
national law requires that any expropriation of foreign property by a
government within its borders must be made in a non-discriminatory
manner and accompanied by "prompt, adequate, and effective" com-
pensation.10 6 This principle, sometimes known as the Hull For-
mula,107 has been built into the U.S. Model BIT.103 However, the
Hull Formula has been long disputed by many LDCs, especially those
in Latin America who support the Calvo Doctrine. According to the
Calvo Doctrine, a state that expropriates the property of an alien is
obligated under international law to pay compensation only to the
extent that its own nationals are compensated,' 9 although most coun-
tries accept that discrimination directed specifically against foreign
investments is prohibited.' 0 The jurisdiction over expropriation-
related disputes, moreover, lies exclusively in the courts of the host
state. Similarly, socialist countries also generally maintain that the
regulation of alien property is exclusively the subject of municipal
law. 111

106. See Robinson, Expropriation in the Restatement (Revised), 78 A.M. J. INT'L L 176
(1984).

107. The Hull Formula was asserted in a series of diplomatic notes to the Mexican gov-
ernment over agricultural expropriations by Mexico. Notes of July 21 and August 22, 1938,
Secretary Hull to the Mexican Ambassador, L. HENKIN, R.C. PUGH, 0. SCHACHTER & H.
SM1T, INTERNATIONAL LAW 1044-45 (2d ed., 1987) [hereinafter HENKIN].

108. See Model BIT, supra note 62, art. III, para. l(e).
109. The 1985 Report of the Centre on Transnational Corporations on Work on the

Formulation of the United Nations Code of Conduct on Transnational Corporation, E/C. 10/
1985/S/2 (1985), para. 42 [hereinafter UN TNC Code Report], quotcd in HE NN, supra note
107, at 1049, 1050. The report defines the doctrine as embodying the following propositions:

a) international law requires the host State to accord national treatment to
aliens; b) national law governs the rights and privileges of aliens; c) national courts
have exclusive jurisdiction over disputes involving aliens, who may therefore not seek
redress by recourse to diplomatic protection; d) international adjudication is inadmis-
sible for the settlement of disputes with aliens.

Id.
110. See SCHACHTER, THEORY AND PRACTICE, supra note 85, at 314-321.
111. UN TNC Code Report, supra note 109, para. 43. Although socialist countries have

paid compensation arising from their expropriation of foreign property, Soviet legal dotrine
holds that property rights are not an international law issue. Socialist countries adhere to the

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JOURNAL OF CHINESE LAW

In the United Nations, there have been a number of important
statements regarding the proper standard of compensation. In 1962,
the U.N. General Assembly resolved that in the event of nationaliza-
tion, "appropriate compensation, in accordance with the rules in force
in the State taking such measures in the exercise of its sovereignty and
in accordance with international law.""' 2 The U.S. supported this
resolution but unilaterally interpreted it to mean that "prompt, ade-
quate, and effective" compensation was required.1 3 Since then, how-
ever, two other U.N. statements have chipped away at the meaning of
"appropriate." The 1974 resolution on Permanent Sovereignty over
Natural Resources'"' left the decision on "possible compensation"
totally up to the expropriating country.

The Charter of Economic Rights and Duties of States, however,
revived the word "appropriate.""' 5 Under the Charter, appropriate
compensation would be paid "taking into account the relevant regula-
tions and all circumstances" of the expropriating state." 6 Disputes
would be "settled under domestic law" unless otherwise "freely and
mutually agreed."' 17 The U.S. abstained from the vote on this article
after having failed to win approval of an alternate draft that would
have used the words "just compensation.""' 8

Professor Schachter argues persuasively that international law
has not adopted the "prompt, adequate, and effective"'' 9 standard of
compensation. He refers not only to the wide divergence of opinion
among states, evidenced in part by the above U.N. statements, but
also to various "traditional" decisions and to state practice. The tri-
bunal decisions recognize an international obligation to pay some
level of compensation, but contain no reference to the "prompt, ade-
quate, and effective" standard. 20 Thus, Professor Schachter points
out that in past negotiations on compensation it is doubtful that
the Hull Formula has had any real role "beyond preliminary

concept of absolute sovereignty, so that state action in expropriation is completely within that
states prerogative. Id. paras. 43-45.

112. Permanent Sovereignty over Natural Resources, G.A. Res. 1803, 17 U.N. GAOR
Supp. (No. 17) at 15, U.N. Doc. A/5217 (1962).

113. HENKIN, supra note 107, at 1052.
114. G.A. Res. 3171, 28 U.N. GAOR Supp. (No. 30) at 52, U.N. Doc. A/9030 (1973).

The United States and 15 other countries abstained.
115. G.A. Res. 3281, 29 U.N. GAOR Supp. (No. 30) at 50, U.N. Doe. A/9630 (1974).

The United States and five other countries voted against this resolution.
116. Id. at ch. II, art. 2, para. 2(c).
117. Id.
118. HENKIN, supra note 107, at 1054.
119. See generally Schachter, Compensation for Expropriation, 78 AJ.I.L. 121 (1984).

120. Id. at 122-23.

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U.S.-PRC BILATERAL INVESTMENT TREATY

incantation."' 121

In addition, if "prompt, adequate, and effective" compensation
was the standard under customary international law, there would be
little reason for the U.S. requirement of a contractual commitment to
the Hull Formula. Thus, U.S. insistence is arguably an indicator that
this principle is not merely declaratory of existing international obli-
gations. 122 Finally, it is trenchant to note that U.S. courts have
refused to agree that the Hull Formula is international law.'2 Given
the historical background and developmental stage of the PRC, it is
even less likely that the Chinese government will accept it.

II. CHINEsE EXPERIENCES WITH AND ATTITUDES REGARDING
FOREIGN INVESTMENT

China's recent policy of opening to outside trade and investment
(duiwai kaif'ang zhengce) is often translated in the West as the "open
door policy."' 24 However, the irony is that these are the very words
that stood for a policy of economic exploitation and territorial abuse
of China by Western countries during the second half of the 19th cen-
tury and the first half of the 20th century. By the middle of the 19th
century, a weakening Qing Dynasty could no longer fend off Western
pressures to join the international community and to open China's
economy to Western trade. Britain waged the First Opium War
against the Chinese largely so that British traders could continue and
expand opium imports into China. '2 A series of treaties creating uni-
lateral rights for Western powers were thereafter imposed on China.
Spheres of influence were carved out of China.126 Not until 1943 did

121. Id. at 126, citing Rogers, Of Missionaries, Fanatics and Lawyersw Some Thoughts on
Investment Disputes in the Americas, 71 AJ.I.L. 474 (1977), and S. RUBIN, PRIVATE FOREIGN
INVESTMENT: LEGAL AND ECONOMIC REALITIES 23-28, 85-88 (1956).

122. Schachter, Compensation for Expropriation, supra note 119, at 127.
123. See Banco National de Cuba v. Sabbatino, 376 U.S. 398, 428-29 (1964); Banco

National de Cuba v. Chase Manhattan Bank, 658 F. 2d 875, 872 (2d Cir. 1981).
124. See, eg., S.P.S. Ho & R.W. HUENaiANN, CHINAS OPEN DOOR POLICY: THE

QUEST FOR FOREIGN TECHNOLOGY AND CAPITAL (1984) [hereinafter Ho & Huenemann].
125. J.A. COHEN & H. CH1U, PEOPLE'S CHINA AND INTERNATIONAL LAWv 6 (1974)

[hereinafter COHEN & CHIU]. See generally I.C.Y. HS0, CHINA'S ENTRANCE INTO THE FAM-
ILY OF NATIONS: THE DIPLOMATIC PHASE, 1858-1880 chaps. 2-7 (1968). P.W. FAY, THE
OPIUM WARS IN CHINA, 1854-1860 (1975); J. BEECHING, THE OPIUM WARS IN CHINA, 1854-
1860 (1975); WAKEMAN, THE CANTON TRADE AND THE OPIUM NVAR and FAIRsANK, THE
CREATION OF THE TREATY SYSTEM,in 10 THE CAMBRIDGE HISTORY OF CHINA (J.K. Fair-
bank ed. 1978) 163-212, 213-63; G.S. GRAHlA, THE CHINA SITUATION: VAR AND DIPLO-
MACY, 1830-1860 (1978).

126. See generally J.C. VINCENT, THE EXTRATERRITORIAL SYST-M IN CHINA (1970).
Vincent describes 14 forms of special privileges claimed by western powers in China in addi-
tion to "consular jurisdiction" as follows. Among them were extraterritorial courts, a fixed ad-
valorem tariff, foreign-administered salt tax agency and maritime customs service, free sailing

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JOURNAL OF CHINESE LAW

Great Britain and the United States finally relinquish their extraterri-
torial jurisdiction in China. 127 With the strong memory of this period
of extraterritoriality and unequal treaties, often forced on China in the
name of "free trade" and international law, the PRC's present leaders
have vowed that China will never be taken advantage of again.

A. Early Practices Towards Foreign Investment in the People's
Republic

Communist victory and the declaration of the People's Republic
in 1949 was not a heartening sign to foreign investors and traders in
China. Major industries were nationalized. The 1949 Common Pro-
gram, 128 promulgated as a temporary constitution for the new Peo-

ple's Republic, however, spoke with mixed voices on the question of
the continuation of private enterprise, both domestic and foreign-
owned. 12 9 "Imperialist prerogatives" would be abolished,'3a but com-
mercial relations with foreigners were still envisioned.' 3' The State
would "control and regulate" all sectors of the economy 132 and
directly operate strategic enterprises1 33 and those of "bureaucratic
capital." 134 However, article 30 of the Common Program provided
that the government would "encourage the active operation of all pri-
vate economic enterprises beneficial to the national welfare and to the
people's livelihood and ... assist in their development."' 135 Yet article
31 counters that "whenever necessary and possible" the transforma-
tion of private capital into "state capital," or joint ownership and con-
trol, would be encouraged.1 36

In the early 1950s, the government's policy towards private capi-
tal not already confiscated, was one of attrition and gradual "socialist
transformation." Mao asserted that this policy was pragmatic; China

rights for foreign gunboats in inland waters, special missionary privileges, immunity from
direct taxation, and others. Id. at 2.

127. See W. FISHEL, THE END OF EXTRATERRITORIALI TY IN CHINA 1 (1952).

128. Zhonghua Renmin Zhengzhi Xieshang Huiyi Gongtong Gangling (The Common
Program of the Chinese People's Consultative Conference) (passed Sept. 29, 1949) [hereinafter
Common Program], reprinted in ZHONGYANG RENMIN ZHENGFU FALING HUIBIAN 1949.
1950 17 (1982) (collection of Laws and Decrees of the Central People's Government 1949-
1950) [hereinafter FALING HUIBIAN], tran& in THE CHINESE COMMUNIST REGIME: Docu-

MENTS AND COMMENTARY 34 (T.H.E. Chen, ed., 1967).
129. COHEN & CHIU, supra note 125, at 681.
130. Common Program, supra note 128, art. 3.
131. Id. art. 47.
132. Id. art. 26.
133. Id. art. 28.
134. Id. art. 3.
135. Id. art. 30.
136. Id. art. 31.

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U.9 -PRC BILATERAL INVESTMENT TREATY

needed private enterprise in the short term.1 37 The government used
laws such as the Provisional Regulations for Private Enterprises1 3

and a series of quasi- and extra-legal measures gradually to wrest con-
trol of smaller enterprises from their private owners. These measures
included tax pressures, credit rationing, capital levies, increased state
competition, and union demands.139 The 1954 Constitution, mean-
while, more clearly pronounced the national goal of abolishing private
ownership.' 4 By 1956, most domestic private enterprise had realized
the impossibility of continuing as totally private entities and began
"requesting" joint state ownership."' 1

At first, the confiscation of foreign-owned enterprises was accom-
plished through the "subtle" forms,'42 but this treatment was precip-
itously subsumed by the advent of the Korean War in June 1950. The
U.S. government began to further limit already restricted trade.1 43

On December 3, 1950, the U.S. Commerce Department halted virtu-
ally all exports to China.' 44 On December 17, the Treasury Depart-
ment, under the authority of the Trading with the Enemy Act, 45

froze all PRC assets in the U.S.' 46 The U.S. State Department justi-
fied this action on the grounds of Chinese Communist "intervention"
and assistance in unprovoked aggression in the Korean conflict but
claimed that the freeze would last only "[a]s long as a willful group of
Chinese Communist leaders are willing to subvert their national inter-
ests and the welfare of the Chinese people to the designs of interna-
tional Communist imperialism."' 47 Only after this did the PRC

137. J.N. HAZARD, COMMUNISTS AND THEIR LAW 177 (1969), citing THE PREsFrr
SITUATION AND OUR TASKS, (Dec. 24, 1947), in 4 SELECTED WORKS OF MAO TSE-TUNG 167
(1961).

138. Siying Qiye Zanxing Tiaoli (passed Dec. 29, 1950), in 1 FALNO HUIBIAN 1949-50,
supra note 128, 702.

139. EcKSTEIN, CHINA'S ECONOMIC DEvELoPMENT 196 (1975). See generally N.R.
CHEN & W. GALENSON, THE CHINESE ECONOMY UNDER COMUNISM (1960); N.R. CHEN,
CHINESE ECONOMIC STATISTICS (1967).

140. COHEN & CI, supra note 125, at 682. The 1954 Provisional Regulations for Joint
State-Private Industrial Enterprise implemented the government policy of encouraging the
merging of private enterprise into state ownership. Gongsi Heying Gongye Qiye Zanxing
Guiding, in 5 FALING HUmiAN 1954/1-9, supra note 128, at 81.

141. HsUEH MU-CHIAO, SU HsING, LIN TSE-Li, THE SOCIALsr TRANSFORMATION OF
THE NATIONAL ECONOMY IN CHINA 232.(1960).

142. J.S. PRYBYLA, THE PoLITCAL ECONOMY OF COMMUNIST CHINA 61 (1970).
143. See Lee & McCobb, United States Trade Embargo on China, 1949-1970: Legal Sta-

tus and Future Prospects, 4 N.Y.U.J. INT'L L. & PoL. 1, 4 (1971).
144. Id. at 5.
145. Trading with the Enemy Act October 6, 1917, c. 106, 40 Stat. 411 (codified as

amended at 50 U.S.C. app. §§ 1-44 (1982), amended by 50 U.S.C. app. §§ 5-44 (1988)).
146. Id. at 5. Foreign Assets Control Regulations 31 C.F.R. §§ 500.101-500.509 (1967).
147. Control of Economic Relations with Communist China, DEPARTMENr OF STATE

BULLETIN 23.599:1004 (Dec. 25, 1950), reprinted in COHEN & CHIU, supra note 125, at 685.

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JOURNAL OF CHINESE LAW[

government retaliate on December 28, 1950, to "control and inven-
tory all property of the American government and American enter-
prises.""" Within a year, most U.S. government and private assets in
China had been "controlled." By the end of 1952, most British and
French assets had also been seized. The last Western firms, mostly
West European shipping companies, were liquidated by 1960-61.1"9

B. The Open Policy and Legal Changes

The Third Plenum of the 11 th Party Central Committee of the
Communist Party in December 1978 heralded the beginning of a new
era in Chinese economic relations with Western traders and investors.
In July of the next year, the government promulgated the Sino-For-
eign Equity Joint Venture Law, 150 which launched a series of new
laws creating a legal regime for renewed foreign investment in China.
China's new opening should not be viewed as simply a repetition of
past periods of active foreign investment. The goal of the "Four Mod-
ernizations," to transform the nation's economy by the year 2000,
demands a broad spectrum of reforms. Among them, increasing
China's access to advanced technology and encouraging the growth
of export industries are seen by Chinese policy makers as vital
components. 151

After the promulgation of the Equity Joint Venture Law, an
ambitious, if cursory framework of laws and regulations relating to
foreign investment began to take shape.1 52 The most symbolically
important among them is the new 1982 Constitution, which in article
18 grants explicit recognition of and protection to foreign invest-

148. Government Administrative Council Issues Order for the Control of American Gov-
ernment and Private Property in China, New China News Agency-English Service (Dec. 28,
1950), reprinted in Survey of China Mainland Press, no. 38:1-2, U.S. Consulate, Hong Kong
(Dec. 28, 1950), reprinted in COHEN & CHIU, supra note 125, at 686. The term "expropria-
tion" was carefully avoided by the Chinese government.

149. J.S. PRYBYLA, supra note 142, at 61.
150. Zhonghua Renmin Gongheguo Zhongwai Hezi Jingying Qiye Fa (The Law of the

People's Republic of China on Joint Ventures Using Chinese and Foreign Investment)
(adopted July 1, 1979, promulgated July 8, 1979) [hereinafter Equity JV Law], trans in CHINA
LAWS FOR FOREIGN BUSINESS (CCH) 6-500 [hereinafter CHINA L. FOR. Bus.].

151. See Ho & HUENEMANN, supra note 124, at 21; Cohen & Valentine, Foreign Direct
Investment in the People's Republic of China: Progress, Problems and Proposals, 1 J. CHINESE.
L. 161, 164 (1987). The "four modernizations" (sixiang xiandaifianhua) is the national devel-
opment policy aimed at achieving advances in science, industry, agriculture, and defense. The
primary goal is to raise per capita income to US $1000 and quadruple GNP by the year 2000.

152. Many of these laws and regulations have been dealt with in depth elsewhere.
Rather than repeat this work unnecessarily, I will refer to the relevant parts of each law when
appropriate in part III below.

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US.-PRC BILATERAL INVESTMENT TREATY

ment.'53 A partial list also includes the Equity Joint Venture Regula-
tions,'54 the Wholly Foreign-Owned Venture Law and regulations,1 55

the Foreign Economic Contract Law, 156 the Provisions for the
Encouragement of Foreign Investment,15 the new Cooperative Joint
Venture Law,158 and various special provisions for the Special Eco-
nomic Zones.'59 The 1986 General Principles of Civil Law, while not
a comprehensive civil code, states and defines many of the basic prin-
ciples and legal relationships at the core of the new Chinese legal
system. 160

C. The Chinese BIT Program

The development of the Chinese BIT program has paralleled
reforms in the domestic legal system. The PRC signed its first BIT
with Sweden in 1982.161 Since then, some 20 more treaties have been
concluded with countries as divergent as Great Britain, the Soviet

153. Constitution of the People's Republic of China (Zhonghua Renmin Gongheguo
Xianfa) (1982) art. 18 [hereinafter PRC Constitution].

154. Zhonghua Renmin Gongheguo Zhongwai Hezi Jingying Qiye Fa Shishi Ti'oli
(Regulations for the Implementation of the Law of the People's Republic of China on Joint
Ventures Using Foreign Investment) [hereinafter Equity V Regulations], tranm in CHINA L
Fop. Bus., supra note 150, 6-550.

155. Zhonghua Renmin Gongheguo Waizi Qiye Fa (The Law of the People's Republic of
China Concerning Enterprises with Sole Foreign Investment) (adopted Apr. 1, 1986), tran in
id at 6-100 [hereinafter Wholly Foreign Owned Venture Law].

156. Zhonghua Renmin Gonghegno Shewai Jingji Hetong Fa (Foreign Economic Con-
tract Law of the People's Republic of China) (adopted Dec. 15, 1981), trans. in id at IT 5-550
[hereinafter Foreign Economic Contract Law].

157. Guowuyuan Guanyu Guli Waishang Touzi de Guiding (State Council Regulations
Concerning Encouragement of Foreign Investment) (promulgated Oct. 11, 1986), trans. in id
at T 13-509 [hereinafter 22 Articles].

158. Zhonghua Renmin Gonghegno Zhongwai Hezuo Jingying Qiye Fa (Law of the Peo-
ple's Republic of China on Sino-foreign Co-operative Ventures), Iran& in id. at 6-100 [herein-
after Cooperative J.V. Law].

159. See eg., Zhonghua Renmin Gongheguo Guangdong Sheng Jingji Tequ Tiaoli
(Regulations of the People's Republic of China on Special Economic Zones in Guangdong
Province) (approved Aug. 26,1970), trans. in id at 70-8001 Shenzhen Tequ Shewai Jingji
Hetong Guiding (Regulations of Shenzhen Special Economic Zone on Economic Contracts
Involving Foreigners) (promulgated Feb. 8, 1984), trans. in id at 73-505; Shenzhen Jingji
Tequ Jishu Yimjin Zanxing Guiding (Provisional Regulations of Shenzhen Special Economic
Zone Governing the Import of Technology) (promulgated Feb. 8, 1984), trans.in id. at 1 73-
510; Guanyu Jingji Tequ he Yanhai Shisi ge Chengshi Jianheng Mianzheng Qiye Suodeshui he
Gongshang Tongyishui de Zanxing Guiding (Provisional Regulations on Reduction and
Exemption of Enterprise Income Tax and Consolidated Industrial Income Tax for the 14
Coastal Cities and the Special Economic Zones) (promulgated Nov. 15,1984), trans. In iL at fj
70-845.

160. Zhonghua Renmin Gongheguo Minfa Tongze (General Principles of Civil Law of
the People's Republic of China) [hereinafter Civil Law Principles], trans in 34 AJ. Com,. L
715 (W. Gray & H.R. Zheng trans. 1986).

161. Agreement on the Mutual Protection of Investments, Mar. 29, 1982, China-Sweden,
reprinted in 4 E. ASIAN ExEc. REP., May 15, 1982, at 25.

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Union, West Germany and Thailand. Of particular note is the recent
signing with Japan, after unusually long and heated negotiations. 62

In some cases, the PRC has signed treaties with countries with which
China has exchanged little or no bilateral investment.1 63 In these
cases, at least, the treaties serve more as diplomatic talesmen than as
pragmatic investment tools.

Moreover, while all of the PRC BITs examined by this author
contain provisions concerning the most important investment topics
provided for in the U.S. Model BIT, they are uniformly less detailed
and, except for the PRC-Japanese BIT, fall considerably short of the
protection provided in the U.S. Model BIT in a number of substantive
areas. Unlike the U.S., China has not published a Model BIT of its
own. Thus it is also more difficult to deduce what form an ideal BIT
would take in the eyes of Chinese policy-makers and negotiators. Spe-
cific clauses of various provisions of Chinese BITs will be discussed in
conjunction with the analysis of major substantive differences between
the U.S. and the PRC in part III below.

Despite the summary character of the PRC BITs, they should
not be dismissed as useless instruments. With China's expanding par-
ticipation in other bilateral agreements and international organiza-
tions, a growing web of relationships and mutual obligations is
weaving itself increasingly tighter, making it progressively more diffi-
cult for China to withdraw from its commitments. The Chinese BIT
program should be viewed in conjunction with other investment-
related programs like OPIC and MIGA. In addition, it should be
viewed within the context of continuing gradual development and
increasing sophistication of the treaty provisions themselves, from the
PRC-Sweden BIT of 1982 to the most recent and exceptional BIT
with Japan.

D. Recent Landmarks in Relations with the US.

China's turnaround in diplomatic relations with the U.S., begin-
ning with the signing of the Shanghai Communique by President
Richard Nixon and Premier Zhou Enlai in 197214 and culminating

162. Agreement Concerning the Encouragement and Reciprocal Protection of Invest-
ment, Aug. 27, 1988, China-Japan, reprinted in EAsT ASIAN EXEC. REP., Dec. 1988, at 23
[hereinafter PRC-Japan BIT].

163. E.g., Romania, Finland, and the Belgium-Luxembourg Economic Union. Other
PRC BIT partners include: Australia, Austria, Denmark, France, Italy, Kuwait, Malaysia,
The Netherlands, New Zealand, Norway, Pakistan, Poland, Singapore, Sri Lanka, and
Switzerland.

164. Joint Communique, Feb. 28, 1972, United States-China, Dept. of State Bulletin,
Mar. 20, 1972, at 435, reprinted in I1 I.L.M. 443 (1972).

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U.S.-PRC BILATERAL INVESTMENT TREATY

with American recognition of the People's Republic in 1979,165 has
brought with it a resurgence in economic contacts. To facilitate these
contacts, a U.S.-PRC bilateral trade agreement was signed in 1979.166
Among other trade-related activities, the trade agreement encourages
the establishment of business offices by firms, 67 a first step on the
road to large investment. In addition, in order to facilitate the new
relations, Congress amended the sections of the Export Administra-
tion Act formerly limiting trade with China.1 68

As an important prerequisite to the reestablishment of bilateral
investment activities, a claims settlement agreement was signed on
May 11, 1979.169 In the agreement, the PRC government agreed to
pay the U.S. government a sum of $80.5 million for claims arising out
of de facto expropriation of U.S. property after October 1, 1949. In
exchange, the U.S. government agreed to unblock PRC assets in the
U.S. frozen on or after December 17, 1950.170 This agreement was
necessary to allow PRC entities to do business and acquire assets in
the U.S. free from the threat of attachment by U.S. investors with
claims against the PRC. However, the claims agreement did not put
the claims issue to rest, much to the consternation of the Chinese gov-
ernment. While the U.S. government received cash, the Chinese
obtained only a right to sue in U.S. courts for now unfrozen assets, as
much as $10-40 million of which were subject to adverse claims. 17 ' A
number of other suits in U.S. courts by former investors asserting
claims for compensation separate from or in addition to the claims
settlement funds threatened the developing U.S.-PRC investment
relationship. Among these suits, two are noteworthy. First, holders
of defaulted Qing Dynasty Huguang Railroad bonds asserted claims
against the PRC government in Jackson v. People's Republic of
China.172 In a second case, Shanghai Power v. United States, plaintiffs

165. Joint Communique on Establishment of Diplomatic Relations, Dec. 15, 1978,
United States-China, reprinted in 18 I.L.M. 272 (1979).

166. U.S.-PRC Trade Agreement, supra note 2.
167. Id. art. 111(c).
168. Foreign Assets Control Regulations, 31 C.F.R. § 500, et seq. (1970); The Export

Administration Act of 1969, 83 Stat. 841 (1969), as codified at 50 U.S.C. app. § 2410 (1985),
as amended 50 U.S.C. at § 2401 (1988). U.S. domestic controls on contacts and trade with the
PRC had been relaxed somewhat as early as 1969-70, with a series of amendments to the
Foreign Assets Control Regulations, supra.

169. Agreement on the Settlement of Claims, May 11, 1979, United States-China, 30
U.S.T. 1957, T.I.A.S. No. 9306 [hereinafter U.S.-PRC Claims Agreement], reprinted in 18
I.L.M. 551 (1979). See Recent Developments, 20 HARVARD INT'. L.. 681 (1979).

170. U.S.-PRC Claims Agreement, supra note 169, art. 11(b).
171. See, eg., PRC Aide Memoire, Feb. 2, 1983, reprinted in 22 I.LM. 81 (1983).
172. 550 F. Supp. 869 (N.D. Ala. 1982). Initially, due to non-appearance by the Chinese

side, a default judgment was entered. This judgment was later set aside when, on the urging of
the U.S. State Department, the Chinese made a special appearance. 596 F. Supp. 386 (N.D.

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JOURNAL OF CHINESE LAW

sought additional compensation over and above that provided by the
settlement agreement for claims arising out of the 1950 expropriation
of Shanghai Power Company's assets in China. The former case,
finally resolved in 1987,173 raised issues of successor government
assumption of debts and sovereign immunity, while the latter chal-
lenged the executive branch's power to settle private claims against
foreign governments. The PRC government viewed both these cases
as judicial meddling in areas that should be dealt with purely on a
state-to-state level. 174

E. Chinese Attitudes towards International Law

As the Jackson case illustrated, the Chinese understand sover-
eign immunity to be absolute175 in contrast to some western states
that support the restrictive notion of sovereign immunity. 176  This
view and other Chinese concepts of international law influence the
PRC government's approach to any treaty negotiation. Central to the
early formation of Chinese opinions of international law, in this con-
nection, were Marxism and China's historical experience in the inter-
national arena. Thus, some Chinese interpreted the role and effect of
international law through class analysis transported from the domes-
tic arena: "Bourgeois international law ... is mainly a weapon used
by 'civilized states' to control and oppress what they consider to be
'uncivilized states."1 77

This view is applied to analyze the investment of "bourgeois
imperialist states" in both the bilateral and multilateral contexts. For
example, the 1946 FCN treaty between the U.S. and the Nationalist
Chinese government is seen by one writer as exploitative, despite its
facially neutral rights and obligations, because of the imbalance in

Ala. 1984). The Court also held that the Foreign Sovereign Immunities Act was not intended
by Congress to apply retroactively. Id., at 389. The decision was affirmed on appeal. Id.,
aff'd, 794 F.2d 490 (1lth Cir. 1986), rehg denied, 801 F.2d 404 (1986) (en banc), cert. denied,
107 S.Ct. 1371 (1987). See generally Theroux & Peele, China and Sovereign Immunity: The
Huguang Railway Bonds Case, 3 CHINA L. REP. 129 (1983); Tarnapol, The Role of the Judici-
ary in Settling Claims Against the PRC, 25 HARVARD INT'L L.J. 355 (1984).

173. This decision was affirmed on appeal. Id. 4 Cl. Ct. 237 (1983), aff'd, 756 F. 2d 159
(Fed. Cir. 1985), cert. denied, 474 U.S. 909 (1985).

174. PRC Aide Memoire, supra note 171. See Tarnapol, supra note 172, at 378.
175. See Wang Houli, Sovereign Immunity: Chinese Views and Practices, I J. CHINESE

LAW 23, 29 (1987). "We hold that compulsory jurisdiction over a foreign state (by another
state's courts) is inconsistent with the principle of.sovereign equality among states enshrined in
the United Nations Charter." Id. (footnotes omitted).

176. See HENKIN, supra note 107, at 901-913, for a discussion of the restrictive form of
sovereign immunity.

177. Ying Tao, Recognize the True Face of Bourgeois International Law from a Few Basic
Concepts, 1 GuoJi WENTI YANJIU (Studies in International Problems) 43-44 (1960), reprinted
in COHEN & CHIU, supra note 125, at 29, 30.

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U8S.-PRC BILATERAL INVESTMENT TREATY

economic power between the two states.178 According to this analy-
sis, these "bourgeois imperialist" foreign states also manipulated prin-
ciples such as the protection of nationals abroad to force less powerful
states to give foreign citizens special treatment above that given to
their own citizens. 179 Similarly, the United Nations was seen in its
early years as a tool of the "bourgeois imperialist" states to carry out
their own purposes. The U.N. position on the Korean conflict was
taken as a classic illustration of this. 80

Since 1979, as the study of international law in China has been
rejuvenated, class analysis in international law has largely dropped
from the literature in favor of a more pragmatic approach."8" Of
course, some Chinese writers still characterize the international goals
of western countries ideologically as "hegemonic" or under the con-
trol of multinational corporations who search for "superprofits."' 82

On the whole, however, it appears that international law itself is now
being treated by Chinese commentators as a separate body of law gov-
erning the relations among states. 183

Largely tinchanged from the 1950s, however, is the preoccupa-
tion of Chinese scholars and political leaders with the overriding
importance of the principle of national sovereignty.184 The first and
the most important of China's so-called Five Principles of Peaceful
Coexistence, the principles upon which the PRC has publicly based
its foreign relations since the late 1950s, is the principle of mutual
respect for sovereignty and national territory. 85 The sovereign state
is the primary building block of the international system and cannot
be interfered with or violated in any way.186 Although these notions
are by no means novel, of course, their application by PRC legal
scholars and policy-makers to international investment in China is a
recent development.

178. Qian Si, A Criticism of the Views of Bourgeois International Law on the Question of
Population, 5 GuomI WENTi YANJIu 47-48 (1960), reprinted in COHEN & CHIti, supra note
125, at 683, 684.

179. Id. at 684-85.
180. Jung, Pi Wu, The Tenth Anniversary of the United Nations, PC, no. 14:6-8 (1955),

reprinted in COHEN & CHwu, supra note 125, at 129.
181. Kim, The Development of International Law in Post-Mao China: Change and Con-

tinuity, 1 J. CHINESE L. 117, 125 (1987).
182. See, eg., Yao Meizhen, Legal Protection of International Investment, in SE.LECrED

ARTICLES FROM CHINESE YEARBOOK OF INTERNATIONAL LA 147 (1983).
183. Kim, supra note 181, at 125, citing GUOJIFA (International Law) 1 (Wang Tieya ed.

1981).
184. Compare eg., Ying Tao, A Criticism of Bourgeois International Law Concerning the

Question of State Sovereignty, 3 Guoji WENTI YANJnU 50-52 (1960), reprinted in COHEN &
CHru, supra note 125, at 106, and GUOjiFA, supra note 183, at 84.

185. See Kim, supra note 181, at 148; GUOjIFA, supra note 183, at 69.
186. See Kim, supra note 181, at 148; GuOJIFA, supra note 183, at 84.

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Three relevant illustrations of the application of the Chinese
position on sovereignty are worth mentioning. First, the Chinese
believe that the principle of national sovereignty prevents the recogni-
tion of any international rule that binds a sovereign state to treat
aliens on its soil any better than it treats its own citizens. 187 Second,
absent unfair or discriminatory treatment, any dispute arising from
the treatment of a foreign individual or company on Chinese territory
is inherently within the exclusive jurisdiction of Chinese courts, unless
otherwise agreed upon by the Chinese government. Third, there is
the belief that third party adjudication of any dispute between a sover-
eign government and a foreign individual would place the individual
on an equal plane with states, which contradicts the fundamentals of
the international system and insults that state's sovereignty.

These positions gain even greater importance when viewed in
conjunction with domestic Chinese law relating to the effect of treaties
and international custom. Unlike U.S. treaties which can be pre-
empted for domestic law purposes by subsequent legislation, accord-
ing to the General Principles of Civil Law, PRC treaties always take
precedence over domestic civil law in "foreign civil relationships."'' 88

When treaties or domestic PRC law do not contain a provision rele-
vant to a situation, then "international practice" (guanli) may be
applied. 8 9 Given the poverty of domestic law provisions regarding
matters of concern to foreign investors such as takings of invest-
ments, 90 the definition and effect of "international custom" becomes
more important.

III. U.S.-PRC BIT NEGOTIATIONS

It is within the context of on-going trade and investment rela-
tions but persistent and intransigent differences on fundamental prin-
ciples that BIT negotiations between the U.S. and the PRC have
continued since mid-1983, with the last informal meeting in Novem-
ber 1987. Negotiations had also been stalled by the failure of the
Executive Branch to gain Senate passage of any of the previously
signed U.S. BITs until October 1988. In the meantime, however, the
Huguang Railroad Bonds case, a continuing irritant in investment
relations, has been resolved. China's legal and economic reforms have

187. COHEN & CHIU, supra note 125, at 683, 684.
188. Civil Law Principles, supra note 160, art. 142. The Foreign Economic Contract

Law, which applies to contracts made in the PRC between Chinese and foreign parties, con-
tains a similar provision. Foreign Economic Contract Law, supra note 156, art. 6.

189. Civil Law Principles, supra note 160. However, international custom is not applied
if there would be a violation of the "public interest" of the PRC. Id. art. 150.

190. See infra discussion accompanying notes 263-273.

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U.S-PRC BILATERAL INVFSTMENT TREA TY

also continued apace, though not without detours. And now Japan
has concluded a BIT with the PRC, containing a number of possible
breakthroughs.

But, after six rounds of formal talks on the proposed BIT, there
appears to be no sense of overwhelming urgency on the part of either
the U.S. or PRC. Thus the resolution of the outstanding disagree-
ments will more likely come from a change in the overall circum-
stances - economic, diplomatic, and political - rather than as a
result of sudden concessions, although the effect of the ratification of
the other U.S. BITs and the signing of the PRC-Japan BIT has yet to
be felt. On the other hand, both government parties and private
investors who will potentially be affected by conclusion of a U.S.-PRC
BIT may gain much from a more objective appraisal of just where the
differences lie and how extensive they really are.

The following analysis seeks to appraise how the U.S Model BIT
has been transformed through actual negotiations with various BIT
partners; how the PRC BITs with third countries deal with these
same issues; and whether, based on these separate experiences, the
U.S. and the PRC have any basis for reaching an agreement. As men-
tioned above, the three most important areas of disagreement in the
ongoing negotiations, which parallel important components of the
U.S. Model BIT, are: 1) treatment of foreign investments, 2) expropri-
ation processes and compensation, and 3) dispute settlement. These
areas will be discussed sequentially below.

A. Investment Treatment

American businessmen have long clamored that they have been
treated inequitably vis-a'-vis domestic Chinese firms in areas such as
access to and pricing of locally-sourced raw materials, transportation,
services, utilities, buildings, and labor.1 91 Performance requirements,
especially ceilings on domestic sales, have also frustrated investors
hungry for a piece of the billion consumer Chinese market. The arti-
cle of the Model BIT on treatment of investments, 192 if signed intact,

191. Frisbie, supra note 10. See generally Cohen & Valentine, Foreign Direct Investment
in the People's Republic of China.: Progress Problems and Proposals, 1 J. CHINESE L 161
(1987).

192. See supra text accompanying notes 69-79. The OECD also supports national treat-
ment. See Declaration on International Investment and Multinational Enterprises (1976)
[hereinafter OECD Declaration], art. IL, in D.C. Campbell and R.L Rowan, MULTINA-
TIONAL ENTERPRISES AND THE OECD INDUSTRIAL RELATIONS GUIDELINES 243, 244
(1983). For an attempt by African and Asian countries to construct a model BIT of their ovm,
see Asian-African Legal Consultative Committee: Model Bilateral Agreements on Promotion
and Protection of Investments [hereinafter AALCC] BITs, reprinted in 23 I.L.M. 237 (1984).

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JOURNAL OF CHINESE LAW

would answer U.S. investors' most optimistic dreams. For reasons to
be discussed below, this result seems unlikely.

Indeed, U.S. negotiators concede that there is no universal con-
sensus that states have an obligation to accord national treatment to
foreign investments, despite a growing recognition among developed
countries of the importance of this principle.1 93 Thus the clauses on
national treatment represent an ambitious attempt to attain a higher
level of bilateral economic relations with BIT partners. The Chinese
economy, with its high degree of state ownership and planned produc-
tion and the accompanying dual systems of domestic and foreign eco-
nomic laws, presents a particularly imposing challenge for U.S.
negotiators. But despite basic structural and linguistic similarities
between the treatment provisions of most of the ten U.S. BITs signed
thus far and those of the Model BIT, the U.S. has compromised con-
siderably in negotiations with a number of BIT partners.

To begin with, six of the ten BITs concluded by the U.S. thus far
do not explicitly stipulate that national treatment (or MFN treatment,
whichever is more favorable)' 94 shall be accorded to the establishment
and acquisition of investments. 95 In addition, the Panama, Turkey,
Morocco, and Egypt BITs contain qualifying language that seriously
undercuts any granting of national treatment to established invest-
ments. Both the Morocco and Turkey BITs only provide for national
treatment "within the framework of. . . exifting laws and regula-
tions."' 196 The Egypt BIT inserts the phrase "in applying its laws,
regulations, administrative practices and procedures."' 97 The Pan-
ama BIT creates the biggest loophole by allowing exceptions to
national and MFN treatment, resulting from preexisting laws which
establish preferences for domestic investments.19 8

Because investment can take many forms and comprises a large

193. Eiss Interview, supra note 11.
194. National treatment and MFN treatment are coupled in the Model BIT. This dis-

cussion shall refer predominantly to national treatment, since until the PRC-Japan BIT, dis-
cussed below, only MFN treatment but no form of national treatment had been granted.

195. See U.S.-Panama BIT, art. II; U.S.-Grenada BIT, supra note 64, art. II; U.S-Ban-
gladesh BIT, supra note 64, art. II; U.S.-Turkey BIT, supra note 64, art. II; U.S.-Morocco
BIT, supra note 64, art. II; U.S.-Zaire BIT, supra note 64, art. II. Article II of the U.S.-Zaire
BIT uses the word "established" but not the word "acquired." Id.

196. U.S.-Turkey BIT, supra note 64, art. II, para. 1; U.S.-Morocco BIT, supra note 64,
art. II, para. 1.

197. U.S.-Egypt BIT, supra note 63, art. II, para. 1. Gann argues that this language does
not undercut the obligation. Gann, supra note 58, at 384 n. 51.

198. U.S.-Panama BIT, supra note 64, art. II., para. 1. The "Agreed Minutes" to the
treaty illustrates one of these "rules and regulations": "Panama has incentive laws granting
benefits to duly constituted [domestic] companies which sign contracts with the government
in which they agree to meet the requirements established therein." Id. Agreed Minutes, art. II.

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US-PRC BILATERAL INVESTfENT TREATY

variety of commercial and financial activities, the Model BIT and all
BITs signed thus far accord the same treatment to activities "associ-
ated" with investment as to the investment itself. However, while the
Model BIT carefully defines seven categories of "associated activi-
ties," three BITs do not elaborate on the meaning of this term at
all. 199 Perhaps more significant are the exceptions to the standard of
treatment listed by several U.S. BIT partners. The U.S. exceptions
have stayed constant,20° but a majority of its treaty partners have
specified exceptions covering a broader range of sectors. The excep-
tions specified by Haiti, Panama, and Egypt are so broad as to make
the treatment obligation almost meaningless. °1

Every BIT signed thus far, except the Egypt BIT, duplicates the
Model BIT clause providing for, aside from national and MEFN treat-
ment, fair and equitable treatment of all investments, making some
reference to the minimum requirement of international law.202 But
the clause of the Model BIT prohibiting a party from allowing a state-
owned or controlled enterprise to compete unfairly against private
investments has been dropped from or qualified in four of the BITs
signed thus far.203 Although President Reagan has singled out the
elimination of performance requirements as conditions for the estab-
lishment and continuation of investment,204 six U.S. BITs contain
only precatory provisions serving this purpose.0 5

199. See U.S.-Morocco BIT, supra note 64; U.S.-Turkey BIT, supra note 64; U.S.-Haiti
BIT, supra note 64. The elaboration of "associated activities" appears in the formal text of
some of the BITs and in the attached protocol or minutes of others.

200. See supra note 74.
201. The U.S.-Haiti BIT excepts, inter alia, activities associated with certain areas:

banking and insurance, the production and distribution of basic commodities, the professions,
the agro-industrial sector, and the chemical industry. U.S.-Haiti BIT, supra note 64, Annex.
The U..-Panama BIT excepts, inter alia, retail trade, insurance, the practice of liberal profes-
sions, and banking. U.S.-Panama BIT, supra note 64, Annex. The U..-Egypt BIT excepts,
inter alia, air and sea transportation, banking and insurance, commercial activity such as dis-
tribution, wholesaling, retailing, import and export activities, commercial agency and broker
activities, and issuance of newspapers and magazines. U.S.-Egypt BIT, supra note 63, Annex.

The U.S.-Morocco BIT excepts no "associated activities" in Morocco, but it should be
noted that the treatment clause in this BIT is qualified by the phrase "within the framework
... of existing laws and regulations." U.S.-Morocco BIT, supra note 64, art. II.

202. See, ,,g., U.S.-Turkey BIT, supra note 64, art. II, para. 3: "Investments shall at all
times be accorded fair and equitable treatment and shall enjoy full protection and security, in a
manner consistent with international law." Id.

203. See, e.g., U.S.-Cameroon BIT, supra note 64; U.S.-Grenada BIT, supra note 64; and
U..-Morocco BIT, supra note 64. The U.S.-Egypt BIT prefaces this obligation with the
phrase, "[i]n the context of national economic policies." U.S.-Egypt BIT, supra note 63, art.
II, para. 6.

204. United States Government Policy on International Investment, supra note 7, at
1215. See also Model BIT, supra note 62, art. II, para. 7.

205. U.S.-Egypt BIT, supra note 63, art. II, para. 7; U.S.-Haiti BIT, supra note 64, art.
II, para. 7; U.S.-Morocco BIT, supra note 64, art. II, para. 5; U.S.-Turkey BIT, supra note 64,

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JOURNAL OF CHINESE LAW

It is clear from this review of the treatment provisions of the
BITs signed by the U.S. to date that U.S. negotiators have failed in
the majority of instances to obtain the desired level of protection as
set out in the Model BIT.

In contrast to the U.S., the PRC has never sought more than
MFN treatment.0 6 Generally speaking, as noted above, Chinese
BITs contain significantly less specific and comprehensive language
than the U.S. model. The treatment provisions typically do not
exceed three short paragraphs, whereas the U.S. Model BIT treat-
ment provisions comprise ten lengthy and detailed paragraphs. Arti-
cle 2 of both the PRC-Great Britain BIT and PRC-West Germany
BIT, for example, provides for "equitable and reasonable treatment"
(gongping, heli) at all times,20 7 echoing the "fair and equitable" stan-
dard of U.S. BITs. In both these BITs, investors are accorded general
MFN treatment, regardless of the existence of other treaties. But in
the case of the PRC-West German BIT, the most favored position is
measured only as against treatment granted any third state that has
concluded a similar agreement.2 0 8 The PRC-Singapore BIT even goes
to the extent of limiting MFN treatment only to investments that
have been individually approved by and registered with the receiving
state for treaty coverage.20 9 The PRC-West Germany BIT and the
PRC-Great Britain BIT, signed three years later, specify that the
"management, use, enjoyment or disposal" of investments are all

art. II, para. 7; U.S.-Zaire BIT, supra note 64, art. II, para. 7; U.S.-Bangladesh BIT, supra note
64, art. II, para. 6. See also Gann, supra note 58, at 396. Apparently, the Office of the USTR
believes that the most effective forum for forwarding the administration's goals on perform-
ance requirements might be GATT negotiations. Eiss Interview, supra note 11; Serwer Inter-
view, supra note 67.

206. See, e.g., Agreement Concerning the Encouragement and Reciprocal Protection of
Investments, Oct. 7, 1983, China-Germany (Federal Republic), arts. 2, 3, reprinted in CHINA
ECON. NEws, Apr. 14, 1986, at supp. no. 3 (Chinese text on file at the Journal of Chinese Law)
[hereinafter PRC-West Germany BIT]; Agreement Concerning the Promotion and Reciprocal
Protection of Investments, May 15, 1986, China-Great Britain, art. 3 (English and Chinese
texts on file at the Journal of Chinese Law) [hereinafter PRC-Great Britain BIT]; PRC-Japan
BIT, supra note 162, arts. 2, 3.

207. PRC-West Germany BIT, supra note 206, art. 2; PRC-Great Britain BIT, supra
note 206, art. 2, para. 2. In each case, however, even this treatment is accorded only in
"accordance with" or "without prejudice to its (the host country's) laws and regulations." Id.
The Protocol to the PRC-West Germany BIT defines discriminatory treatment as measures
directed specifically against the foreign investments and allows measures for "reason of prior-
ity in the arrangement" of a state party's national economy. PRC-West Germany BIT, supra
note 206, Protocol, para. 3(b). A standard exception for measures necessary for "reasons of
public security and order, public health or morality" also appears. Id. para. 3(c).

208. PRC-West Germany BIT, supra note 206, art. 3.
209. Agreement on the Promotion and Protection of Investments, Nov. 21, 1985, China-

Singapore, arts. 2, 4 [hereinafter PRC-Singapore BIT] (English text on file at the Journal of
Chinese Law).

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US.-PRC BILATERAL INVFSTMENT TREATY

associated activities covered by the MFN provision.21°

Significantly, Great Britain and China have pledged to seek
national treatment, though this aspiration is highly qualified by the
caveat "to the extent possible" and "in accordance with the stipula-
tions of (the host country's) laws and regulations." 211 The PRC-
Japan BIT, signed only in August 1988, goes even further towards a
credible statement of national treatment. To begin with, the treat-
ment articles of the PRC-Japan BIT offer considerably more specific-
ity. The treatment of the acquisition and establishment of investment
is distinguished from treatment of established investment.212 The for-
mer is accorded MFN treatment, while the latter is accorded both
MEN and - for the first time - national treatment.213 In addition,
"returns and business activities in connection with the investment"
are also accorded both MFN and national treatment. Moreover, this
BIT even lists and defines four types of "business activities" covered
by the provision.214 By virtue of MFN clauses in the other PRC

BITs, it should be remembered, this level of treatment will now be
extended to investments of all the other PRC BIT partners.

However, the force of these provisions is undercut by the sweep-
ing latitude given the signatories by exceptions in the Protocol
attached to the agreement. Paragraph 3 of the Protocol accompany-
ing the PRC-Japan BIT stipulates:

it shall not be deemed "treatment less favourable" for either
Contracting Party to accord discriminatory treatment, in
accordance with its applicable laws and regulations, to
nationals and companies of the other Contracting Party, in
case it is really necessary for reason of public order, national
security, or sound development of national economy.2 15

Furthermore, the Japan BIT contains no provision limiting per-
formance requirements and no provision providing for competitive
equality with state-controlled and operated industries, although the
latter is arguably implied in the granting of national treatment to
established investments.

It is yet to be seen how broad the scope of discriminatory meas-
ures necessary for the "sound development of the national economy"

210. PRC-Great Britain BIT, supra note 206, art. 3, par. 2; PRC-Vest Germany BIT,
supra note 206, Protocol, para. 3(a).

211. Id. para. 3.
212. PRC-Japan BIT, supra note 162, art. 2.
213. Id. art. 3, paras. 1. 2.
214. Id. para. 3.
215. PRC-Japan BIT, supra note 162, Protocol, para. 3.

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JOURNAL OF CHINESE LAW

is. Judging from the still highly centralized and planned nature of the
Chinese economy as well as from the strong belief of Chinese leaders
in China's sovereign right to control all aspects of that economy
regardless of foreign interests, it seems likely that this clause will be
interpreted very broadly. On the other hand, it should be noted that,
except for the economic development exception, this language
roughly parallels the escape clause in article X of the U.S. Model BIT.
Even if U.S. statutes put a detailed and restrictive gloss on the U.S.
provision while the PRC provision lacks statutory explication, it is
difficult and perhaps unfair to prejudge determinations by either gov-
ernment of their own nation's essential police and national security
interests.

The principle of national treatment, however qualified, appears
to have been accepted. Since the Chinese have traditionally laid more
emphasis on the negotiation of broad principles than on the intricate
qualifications and explications of those principles in contracts and
bilateral treaties, this clause of the PRC-Japan BIT might therefore
prove to be a much more significant achievement.

Even considering the advances of the PRC-Japan BIT, U.S.
negotiators express doubt that the Chinese position has changed
appreciably. 216 The PRC has rejected all past U.S. proposals for
broad national *treatment.217 The primary reason given is the "diffi-
culty" and "complication" of implementing such a standard in light
of China's planned economic system and varying degrees of state
ownership.2"8 It is argued, moreover, that foreign investment already
enjoys a number of preferences over domestic enterprises.219 Chinese

216. Telephone interview with Angus Simmons, Director for Chinese Affairs, Office of
the U.S. Trade Representative (Oct. 21, 1988) [hereinafter Simmons Interview]. One commen-
tator believes it is doubtful that the "fuzzy language" of the PRC-Japan BIT offers any sub-
stantially new protection to foreign investments. Sullivan, Do We Really Need a BIT?, CHINA
Bus. REV., Nov.-Dec., 1988, at 9. Mr. Sullivan is the president of the US-China Business
Council.

217. Some PRC leaders seem to confuse national treatment with equal treatment. Gu
Ming, then Deputy Secretary-General of the State Council, has commented that "It would not
do if the agreements were to include the clause that Chinese-foreign enterprises enjoy the same
national treatment as that enjoyed by Chinese enterprises." Gu Ming, supra note 9, at 18.
From this confusion arise arguments that point out the favorable tax treatment of foreign
investments compared with that of State enterprises, and imply that a national treatment pro-
vision would require the raising of these taxes to domestic levels. Id.

218. Liu Yimin, Waiguo Touzi de Youxiao Falu Baohu, (The Effective Legal Protection
of Foreign Investment), ZHONGGUO DuIWAI MAOYI 8 (Apr. 1985), reprinted in FALU (Chi-
nese People's University Reprinted Materials) 53 (Apr. 1985), trans. in CHINA'S FOREIGN
TRADE 8 (Apr. 1985). Liu Yimin was then vice-director of the Bureau of Treaties and Law in
the Ministry of Foreign Economic Relations and Trade.

219. Id. One example is favorable income tax treatment. See, e.g., 22 Articles, supra
note 157, arts. 7-10; Caizhengbu Guanche Guowuyuan "Guanyu Guli Waishang Touzi de

[2:405



U.S.-PRC BILATERAL INVESTMENT TREATY

officials also accurately note that other nations, including industrial-
ized countries, exclude foreign investment activities from certain
industrial sectors.2' If foreign investors want to enjoy the benefits of
investing in China, then they must also take on responsibilities 21

This means that if foreign enterprises want preferences equal to those
of state enterprises, they must expect to pay a similar level in taxes.

The PRC government has made it plain in public statements and
in laws governing foreign investments that such investments are wel-
come under specific conditions consistent with China's "open policy"
and general development goals.' The "open policy" stands on two
legs: investments should be either based on production for exports or
should introduce advanced technology into China. Approval of
investment projects, therefore, is implicitly, if not explicitly, m-' based
on their desirability as measured against these two legs. It is unlikely
that the PRC will give up these standards in the short run.

Despite this national development policy, there seems to be some
recognition by China that national treatment is feasible "in certain
areas." -

2 Some provisions of several laws and regulations already
stipulate that foreign investors are to be given treatment comparable
to that given state-run industries.225 But caps on pricing of products
sold on the domestic market,226 inconsistent and sometimes discrimi-
natory land-use fees, and inflated labor fees continue to frustrate some
foreign investors u. 22  These areas conceivably remain the focus of
negotiating efforts by the U.S. side.

What formulation could break this seeming impasse? First of all,

Guiding" zhong Shuishou Youhui Tiaokuan de Shishi Banfa (Measures of the Ministry of
Finance for the Implementation of the Preferential Tax Treatment Provisions of the State
Council Regulations Concerning Encouragement of Foreign Inyestment) (issued Jan. 31,
1987), tran. in CHINA L. FOR. Bus., supra note 150, 32-650.

220. Liu Yimin, supra note 218, at 8.
221. See infra text accompanying notes 171-190.
222. See, eg., 22 Articles, supra note 157.
223. See id. Only the Wholly Foreign Owned Venture Law makes advanced technology

or a high percentage of exports a prerequisite for government approval of the JV plan. Wholly
Foreign Owned Venture Law, supra note 155, art. 3. The Equity JV Law and implementing
regulations and the Cooperative IV Law give preference to but do not require advanced tech-
nology and exports. Equity V Law, supra note 150, art. 9; Equity IV Regulations, supra note
154, art. 4; Cooperative V Law, supra note 158, art. 4.

224. Gu Ming, supra note 9, at 18.
225. See, eg., 22 Articles, supra note 157, art. 5, which give priority to export and tech-

nologically advanced enterprises in obtaining water, electricity, and transportation services
and provides that fees shall be computed and charged "in accordance with the standards for
local state enterprises"; Equity V Regulations, supra note 154, art. 65, which give similar
preferences.

226. See, eg., Equity V Regulations, supra note 154, art. 66.
227. See generally Cohen & Valentine, supra note 191, at 194-198.

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JOURNAL OF CHINESE LAW2

the U.S. should recognize that it has achieved only meager success
with other BIT partners in this area, none of which have the pervasive
state-ownership and planned economy that China does. The U.S. has
acquiesced to limit national treatment of established investments
"subject to existing laws" in the Panama BIT and to similar formula-
tions in the Morocco, Egypt and Turkey BITs. The Model BIT pro-
vision on competitive equality with state-owned and state-operated
enterprises has been dropped or qualified in four BITs thus far. Like-
wise, the limitation on performance requirements has been qualified in
a majority of these BITS. Some of the U.S. BIT partners, moreover,
have excepted an extremely broad spectrum of their economies from
application of MFN and national treatment. There is clearly consid-
erable room for compromise from the U.S. Model BIT position.

China, for its part, must fully recognize that foreign investors,
who may not share China's goals, will not invest if they believe that
they will be treated unfairly or that such treatment is so inconsistent
or unfavorable as to eliminate profitability. Although an investment
treaty is not necessarily the proper mechanism to impose reforms on
the domestic economy, the introduction of foreign-invested enter-
prises not only functions to attract advanced technology and raise
export earnings but can also stimulate more efficient and higher-qual-
ity production by state-run enterprises. But this result is only possible
if domestic industries are forced to compete on an equal basis.

In addition, Chinese policy-makers may fear that China's body of
domestic economic laws presently lacks the comprehensiveness and
detail to limit effectively the pervasiveness of a national treatment
clause.22 Legal relationships between the government and enter-
prises, both domestic and foreign-invested, are only now being ade-
quately defined. Reforms in concepts of ownership, financing, price-
setting, and supervision of domestic enterprises, moreover, are contin-
uing apace. If the PRC government accepts treaty obligations to pro-
vide a certain level of treatment to foreign investments in this context,
then the possibility of disputes arising is high. But if PRC policy-
makers recognize that the elementary stage of legal development is,
indeed, an obstacle, then they must also recognize that such a legal
environment is not conducive to foreign investment - unless special
protection and guarantees are provided.

Thus, both sides must face negotiations with a more realistic atti-

228. Though PRC officials insist that Chinese laws provide full and adequate protection
for foreign investments, they also point out that China's legal system is in the process of early
development. See, eg., Bennett, U.S., China Face Problems Over Legal Agreements, ASIAN
WALL ST. J. (weekly), Apr. 9, 1984, at 8, in which then Premier Zhao Ziyang was quoted as
saying, "China honors contracts and keeps promises."

[2:405



U.&-PRC BILATERAL INVESTMENT TRE4TY

tude. Based on BITs signed by both the U.S. and the PRC thus far, a
compromise on the issue of treatment of investment is clearly possi-
ble. A draft acceptable to both sides might include the principle of
national treatment only for established investments, like the PRC-
Japan BIT and a number of U.S. BITs. In the alternative, the princi-
ple of national treatment for the acquisition and establishment of
investments could be adopted but only as applied to enumerated sec-
tors and industries. Instead of the PRC providing a lengthy list of
broad exceptions to national treatment, as some U.S. BIT partners
have done, the treatment provision might positively state the sectors
and industries to which national treatment would apply, excluding all
others. In this way, while the principle would be established, the
scope of application could be limited at first, only to be expanded
when the PRC government gives its approval. A provision on main-
taining competitive equality with state-owned and state-run industries
could similarly be limited by enumeration of applicable industries.
This compromise would clarify and delimit the effects of national
treatment and allow the domestic legal system to catch up. More-
over, it might also mitigate the multiplier effect 9 of MFN treatment
clauses in BIT treaties with other countries, an apparent worry of
PRC negotiators.2"'

The Chinese could also boost investor confidence by agreeing to
the U.S. list of "associated activities" covered by the treatment provi-
sions. Performance requirements, however, are a pivotal element of
current PRC development policy, so it would seem futile for the U.S.
to hold out for a restrictive provision on this issue.

B. Expropriation and Compensation

Both the U.S. and the PRC have considerable political capital
invested in their respective interpretations of what the proper
processes surrounding expropriation and nationalization are and,
especially, what the proper standard for measuring compensation is.
Each side, moreover, believes that its own interpretation is harmoni-
ous with international law. In practice, however, neither has consist-
ently negotiated its own self-conceived ideal, though U.S. BITs, on
the whole, tend to be more uniform.

Virtually every U.S. BIT signed to date follows the Model BIT in
providing that expropriation, or measures tantamount to expropria-

229. The multiplier effect of MFN clauses comes into play whenever a state grants a
more favored level of treatment to another state. This new level of treatment then btcomes the
standard for each of the other states with which the first state already shares similar agree-
ments and for states which will sign such treaties with the first state in the future.

230. Liu Yimin, supra note 218.

1988]



JOURNAL OF CHINESE LAW

tion, is legal only if it "is done for a public purpose," "is accomplished
under due process of law," "is not discriminatory," and "is accompa-
nied by prompt, adequate, and effective compensation. 231 However,
there have been exceptions: the U.S.-Egypt BIT stipulates that
"freely realizable" instead of "effective" compensation is to be paid,232

and the U.S.-Morocco BIT provides for prompt payment of "just and
effective compensation. ' 233 Four of the ten, moreover, do not include
a provision recognizing the binding effect of stabilization clauses in
contracts.234

"Prompt" compensation in most of the U.S. BITs, as in the
Model BIT, is defined as compensation paid "without delay." Several
BITs, however, redundantly use the word "promptly" to define
"prompt, ' 235 and the U.S.-Senegal and U.S.-Egypt BITs stipulate that
time must be allowed to carry out so-called "necessary formalities. '233
Normally, even in the best of circumstances, compensation is not paid
immediately, therefore, to maintain its full value, interest on the com-
pensation from the date of expropriation must be paid. The U.S.
Model BIT provision calls for the addition of interest at a rate
"equivalent to current international rates." That provision was substi-
tuted with the phrase "commercially reasonable rate" 237 in four BITs
and dropped completely from three BITs with Arab nations.238 These
variations raise the issue of how long "necessary formalities" can con-
tinue and whether "commercially reasonable" interest rates are
equivalent to international rates.

In addition, while the definition of "adequate" compensation is
"fair market value" in seven of the ten BITs, language in both the

231. U.S.-Haiti BIT, supra note 64, art. III, para. 1; U.S.-Panama BIT, supra note 64,
art. IV, para. 1; U.S.-Senegal BIT, supra note 64, art. III, para. 1; U.S.-Turkey BIT, supra note
64, art. III, para. 1; U.S.-Zaire BIT, supra note 64, art. III, para. I; U.S.-Grenada BIT, supra
note 64, art. III. para. 1; U.S.-Bangladesh BIT, supra note 64, art. III, para. 1.

232. U.S.-Egypt BIT, supra note 63, art. III, para. I.
233. U.S.-Morocco BIT, supra note 64, art. III, para. 2.
234. U.S. BITs with Turkey, Morocco, Panama, and Grenada do not contain this

provision.
235. U.S.-Haiti BIT, supra note 64, art. III, para. I.
236. U.S.-Senegal BIT, supra note 64, Protocol, para. 4; U.S.-Egypt BIT, supra note 63,

Protocol, para. 5.
237. U.S.-Panama BIT, supra note 64, art. IV, para. 1; U.S.-Senegal BIT, supra note 64,

art. III, para. 1; U.S.-Zaire BIT, supra note 64, art. III, para. I; U.S.-Grenada BIT, supra note
64, art. III, para. 1.

238. For Islamic religious reasons, presumably, BITs with Egypt, Morocco, and Turkey
do not mention the word "interest." However, each makes some allowance payment that
amounts to interest. For instance, the U.S.-Egypt BIT provides that compensation includes
"payments for delay as may be considered appropriate under international law." U.S.-Egypt
BIT, supra note 63, art. III, para. 1; See also U.S.-Morocco BIT, supra note 63, Protocol, para.
4; U.S.-Turkey BIT, supra note 64, art. III, para. 2.

[2:405



U.S-PRC BILATERAL INVESTMENT TREATY

U.S.-Haiti and U.S.-Panama BITs seriously loosens this standard.
The U.S.-Haiti BIT stipulates that "fair market value" will be set
"according to different methods of calculation as appropriate in each
specific case."2 9 In the "Agreed Minutes" of the U.S.-Panama BIT
the "full value" of the expropriated investment can be made using
"several methods of calculation depending on the circumstances
thereof." -4° Each of the other U.S. BITs contains substantially simi-
lar language recognizing that "fair market value" shall not reflect any
reduction in the value of the investment due to prior public notice,
announcement of the expropriation, or the occurrence of events that
brought about the expropriatory action.24'

The Model BIT definition of "effective" compensation as com-
pensation that is "freely transferable at the prevailing market rate of
exchange on the date of expropriation" has been almost universally
incorporated into the U.S. BITs signed thus far. Only the U.S.-Egypt
and the U.S.-Morocco BITs use slightly different language.242 The
U.S.-Egypt BIT speaks of the exchange rate for "current transac-
tions." The U.S.-Morocco BIT speaks of the exchange rate used for
"commercial purposes."

PRC formulations to date, taken as a whole, do not seem to pres-
ent significantly different threshold tests for legitimate expropria-
tion.243 Like U.S. BITs, PRC BITs not only apply to direct
expropriation but also to other measures that have an effect equivalent
to expropriation. 2 "4 The differences lie, primarily, in varying defini-
tions of certain terms and a lack of consistency among the Chinese
BITS, each of which seems to be missing one clause or another. The
PRC-Singapore BIT, for instance, allows for expropriation measures
"for any purpose authorized by law,""24 and the PRC-West Germany
BIT allows for action in a country's "public interests, ' 246 but the

239. U.S.-Haiti BIT, supra note 64, art. III, para. 1.
240. U.S.-Panama BIT, supra note 64, Agreed Minutes, para. 4, referring to art. IV,

para. 1.
241. However, the U.S.-Panama and U.S.-Turkey BITs abbreviate the Model BIT lan-

guage somewhat.
242. The U.S.-Egypt BIT speaks of the exchange rate for "current transactions." U.S.-

Egypt BIT, supra note 63, art. III, para. 1. The U.S.-Morocco BIT speaks of the exchange rate
used for "commercial purposes." U.S.-Morocco BIT, supra note 64, Protocol, para. 4.

243. The PRC BITs uniformly provide that the term "expropriation" as used in the
agreements is to include measures having effect equivalent or similar to expropriation. See,
eg., PRC-Great Britain BIT, supra note 206, art. 5, para. 1; PRC-Japan BIT, supra note 162,
Agreed Minutes, para. 3; PRC-West Germany BIT, supra note 206, Protocol, ad. art. 4, para.
a.

244. See ag., PRC-West Germany BIT, supra note 206, Protocol, para. 4(a).
245. PRC-Singapore BIT, supra note 209, art. 6, para. 1.
246. PRC-West Germany BIT, supra note 206, art. 4, para. 1.

19881



JOURNAL OF CHINESE LAW

PRC-Great Britain BIT refers more completely to expropriation
made for a "public purpose related to the internal needs of that
(party)."24 7 The PRC-Japan BIT, the most recent Chinese BIT
signed, also stipulates that a "public purpose" is necessary. 248

The requirement of legal process is absent from the PRC BITs
with Britain and Singapore, but does appear in the BITs with West
Germany and Japan. The PRC-West Germany BIT stipulates that
expropriation be "undertaken according to the legal procedure, 249

and the PRC-Japan BIT stipulates that expropriation be undertaken
"in accordance with laws and regulations. ' 250  No mention of the
non-discriminatory nature of any expropriation appears in the PRC
BITs with Britain and West Germany, while both the PRC-Japan and
PRC-Singapore BITs do contain such a term. Significantly, no PRC
BIT available to the author contains a provision enforcing stabiliza-
tion clauses in private contracts.

Where the PRC BITs consistently differ from U.S. BITs relates
to the question of the proper form of compensation. The PRC refuses
to use the U.S. slogan "prompt, adequate, and effective," to modify
"compensation." At least one PRC official rejects the U.S. formula as
extortionate.25 Several PRC BITs, including the PRC-Japan BIT,
omit any adjectives modifying "compensation. '252 However, several
others contain what appears to be the sole preferred adjective, "appro-
priate (shidang de), '2 53 or the adjective "reasonable (heli de) ' 254

before "compensation."
But what ultimately matters more than whether the U.S. lan-

247. PRC-Great Britain BIT, supra note 206, art. 5, para. 1. The PRC-GB BIT neither
mentions due process or related terms nor non-discrimination.

248. PRC-Japan BIT, supra note 162, art. 5, para. 2.
249. PRC-West Germany BIT, supra note 206, art. 4, para. 1.
250. PRC-Japan BIT, supra note 162, art. 5, para. 2.
251. "The terms 'full, timely and effective' have long been used in capitalist countries for

extorting compensations for liquidated assets." Gu Ming, supra note 9. In fact, however, the
expropriations over which Secretary Hull proclaimed this standard in 1938 led to a compensa-
tion payment of $40 million over several years on an estimated value of expropriated holdings
of $350 million. Other expropriations of oil properties valued at $260 million were compen-
sated for with payment of $24 million. HENKIN, supra note 107, at 1046 n. 1. See supra note
107 and accompanying text, for a discussion of the Hull formula.

252. See, eg., PRC-Singapore BIT, supra note 209, art. 6, para. 1; PRC-West Germany
BIT, supra note 206, art. 4, para. 1; PRC-Japan BIT, supra note 162, art. 5, para. 2.

253. See, e.g., Agreement Concerning the Reciprocal Encouragement and Protection of
Investments, May 30, 1984, China-France [hereinafter PRC-France BIT], art. 4, para. 2,
reprinted in 23 I.L.M. 550 (1984) (Chinese text on file at the Journal of Chinese Law). See also
Liu Yimin, supra note 218.

254. Agreement Concerning the Promotion and Reciprocal Protection of Investments,
June 4, 1984, China-Luxembourg & Belgium [hereinafter PRC-Luxembourg & Belgium BIT],
art. 5, para. I, reprinted in 24 I.L.M. 538 (1985); PRC-Great Britain BIT, supra note 206, art.
5, para. 1.

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guage is adopted word for word is whether and how the term "com-
pensation" is expressly defined in accompanying language in the PRC
BITs. Three recent PRC BITs with Britain, West Germany, and
Japan contain considerable elaboration defining the word "compensa-
tion." The PRC-West Germany and PRC-Great Britain BITs pro-
vide that compensation be made without "undue delay," while the
PRC-Japan BIT provides only that compensation be made "without
delay," dropping the word "undue." 255 Each of the three also pro-
vides that the compensation be "effectively realisable [sic]" or "in
convertible currency" (West Germany), and all three state that com-
pensation be "freely transferable." All three of these BITs sets the
time of valuation of the expropriated investment, 2 6 but only the
PRC-Great Britain BIT states that this value must be the "real value"
of the investment.257 Of the PRC BITs available to the author, only
the PRC-Japan BIT provides that interest be paid on the unpaid com-
pensation amount starting from the date of expropriation. It goes
without saying that valuation of investments in a largely non-market
economy is problematic. What "Market Value" would mean in this
context remains supposition2-18

The U.S. contends that even without using its formulation for
compensation, international law recognizes the standard enunciated
by the Model BIT,2s9 and that, by seeking to change the language,

255. PRC-Japan BIT, supra note 162, art. 5, para. 3. However, the Agreed Minutes
allow for "a reasonable period of time necessary for deciding amount, way of payment, and so
on." Id. Agreed Minutes, para. 4.

256. PRC-West Germany BIT contains the following provision: "[compensation] shall
be equivalent to the value of the investment expropriated immediately before the expropriation
was announced. PRC-West Germany BIT, supra note 206, Protocol, ad. art. 4, para. c. The
PRC-Japan contains the following provision: compensation is "equivalent to the value [of the
investment] ... at the time when the [expropriations] ... are publicly announced or when such
measure [sic] are taken, whichever is earlier." PRO-Japan BIT, supra note 162, Agreed Min-
utes, para. 3. The PRC-Great Britain contains the following provision: "[compensation] shall
amount to the real value of the investment expropriated immediately before the expropriation
or impending expropriation became public knowledge." PRC-Great Britain BIT, supra note
206, art. 5, para. 1.

257. PRC-Great Britain BIT, supra note 206, art. 5, pan. 1.
258. PRC-Japan BIT, supra note 162, Agreed Minutes, para. 3. The compensation

"shall carry an appropriate interest taking into account the length of time until the time of
payment." Id.

259. See Memorandum, Application of the Treaty of Amity to Expropriation in Iran,
reprinted in 129 Cong. Rec. S. 16055, S. 16056-57. See generally Smith, The United States
Government Perspective on Expropriation and Investment in Developing Countries, 9 VAND. J.
TRANSNAT'L L. 517 (1976); Schachter, Compensation for Expropriation, supra note 119. The
Restatement (Revised), uses somewhat softer language: "[compensation must] be equivalent to
the value of the property taken and must be paid at the time of taking or with interest from the
date and in an economically usable form." RESTATEMENT (REViSED) FOREIGN RELATIoNs
LAW OF THE UNITED STATES, § 712.

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JOURNAL OF CHINESE LAW

China is rejecting this internationally accepted formulation. 260 How-
ever, although the words "prompt, adequate, and effective" appear in
each of the U.S. BITs negotiated to date, it is clear from the preceding
analysis that the U.S. has failed to achieve complete incorporation of
its expropriation and compensation principles in every case. Never-
theless, there seem to be fewer crippling exceptions in U.S. BITs
regarding this issue than can be found regarding the treatment issue.
Furthermore, China, judging from the PRC-Japan BIT, seems to be
moving gradually closer to the U.S. position, notwithstanding strong
criticism of that position by Chinese officials.

However, there is one expropriation-related area over which the
U.S. and the PRC sharply disagree: where the jurisdiction for cases
of alleged expropriation lies. This topic relates to issues of dispute
settlement, which will be dealt with below. The U.S. clings to the
notion that the preconditions for expropriation and the requirement
of "prompt, adequate, and effective" compensation are based on inter-
national law, citing the 1962 U.N. resolution. Therefore, these dis-
putes, by definition, can be the subject of international adjudicatory
bodies. The PRC believes that based on the principle of national
sovereignty all questions relating to expropriation lie exclusively
within domestic jurisdiction,2 61 citing the Charter of Economic Rights
and Duties of States for support.262 It appears that the only conces-
sion the Chinese are willing to make is to allow international arbitra-
tion over the amount of compensation.

Considering these differences, it is worth asking what protection
the Chinese law actually provides against discriminatory and uncom-
pensated expropriation. As a preliminary matter, observers should
recall that the PRC has created a parallel body of "foreign economic
law" to apply to foreigners, whether individuals or companies. It is
still sometimes unclear which law applies in a given situation involv-
ing foreign investment, especially if the foreign economic law contains
no provision on point. In addition, the legal certainty of these laws is
reduced by the added complication of conflict between older more
general and newer more comprehensive replacements.263 Generally,
foreign investors either look to the body of laws designed specially for

260. Eiss Interview, supra note 11.
261. Liu Yimin, supra note 218. See supra notes 175-190 and accompanying text.
262. "In any case where the question of compensation gives rise to a controversy, it shall

be settled under the domestic law of the nationalizing State and by its tribunals, unless it is
freely and mutually agreed by all States concerned that other peaceful means be sought ......
G.A. Res. 3281, 29 U.N. GAOR Supp. (No. 131) at 50 (1974), U.N. Doc. A/9631, ch. II, art.
2, para. 2(c).

263. Recent economic and legal reforms have come piecemeal. Because of this evolving
process, it has been necessary to allow the continued application of certain existing laws to

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US.-PRC BILATERAL INVESTMENT TREATY

them or to distinct provisions within domestic laws addressed to
foreigners.

A survey of PRC statutes and regulations demonstrates that
domestic law related to expropriation of foreign investment, especially
indirect expropriation, is cursory. The primary provision of the PRC
Constitution regarding land ownership, for example, is article 10. It
provides that the state may expropriate (zhengyong) land in accord-
ance with the law if necessary for the public interest. But there is no
mention of compensation.264 Although a special provision of the
PRC Constitution is directed specifically at foreign investment, it only
makes the vague statement that the "lawful rights and interests [of
foreign investors] are protected" by PRC law.265 The General Princi-
ples of Civil Law contains a similar general provision stating that all
Chinese legal persons, which can include foreign invested companies,
are "protected by law." 266 The sections on ownership and property
rights cover the rights of collective, state, and citizens but not the
rights of foreigners. 267  Only one article addresses "co-ownership"
between two or more citizens and legal persons, but it only specifies
the division of rights and duties of the "co-owners" with respect to
that property, not of their rights vis-a-vis the state.268

Regarding substantive statutes and regulations that apply to for-
eign investments, expropriation is only mentioned explicitly in the
Wholly Foreign-Owned Venture Law. Expropriation or nationaliza-
tion of foreign-owned enterprises is allowed under "special circum-
stances" for "social and public interests" if accomplished according to
legal procedures and if "corresponding" (xiangying de) compensation

preexisting legal relationships, while the new laws are applied only prospectively to newly
established relationships. The laws relating to ownership rights exemplify this phenomenon.

264. PRC Constitution, supra note 153, art. 10. This article also provides that land must
be used "reasonably" (heli de). Id. The 1988 amendment of the Constitution amended article
10 to allow for the sale of land use rights but did not affect the clauses cited herein.

265. Id. art. 18. The entire article reads as follows:
The People's Republic of China permits foreign enterprises, other foreign eco-

nomic organizations and individual foreigners to invest in China and to enter into
various forms of economic co-operation with Chinese enterprises and other economic
organizations in accordance with the law of the People's Republic of China.

All foreign enterprises and other foreign economic organizations in China, as
well as joint ventures with Chinese and foreign investments located in China, shall
abide by the law of the People's Republic of China. Their lawful rights and interests
are protected by the law of the People's Republic of China.

Id. The "lawful rights and interest" of foreigners in general are protected under article 32. Id.
art. 32.

266. Civil Law Principles, supra note 160, art. 5.
267. Id. arts. 71, et seq.
268. Id. art. 78.

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JOURNAL OF CHINESE LAW

is paid. 26 9 The Equity Joint Venture Law and its implementing regu-
lations, the Foreign Economic Contract Law, and the new Coopera-
tive Joint Venture Law contain only general stipulations that might be
applicable in the case of expropriation. For example, article 2 of the
Equity Joint Venture Law reads, "The Chinese Government protects,
by the legislation in force, the resources invested by a foreign partici-
pant in a joint venture... as well as his other lawful rights and inter-
ests."' 270  The most important national legislation regarding the
transfer and requisition of land rights, the Chinese equivalent of emi-
nent domain, explicitly exempts foreign-invested enterprises from its
coverage. 71 Elsewhere, local regulations may provide some protec-
tion against unfair and uncompensated takings of foreign investments.

In Shanghai, for instance, recent regulations concerning the
transfer of land-use rights parallel the Wholly Foreign-Owned Ven-
ture Law provisions. They provide that the premature "recovery"
(shouhui) of land use rights can be undertaken by the Municipal Land
Bureau, but only under "special circumstances," if necessary for the
"social public interest," within six months prior notice, and for "rea-
sonable compensation" (heli de buchang).2 72 The amount of compen-

269. Wholly Foreign Owned Venture Law, supra note 155, art. 5. See Torbert, Wholly
Foreign-Owned Ventures Come of Age, CHINA Bus. REV., July-Aug. 1986, at 50, 52.

270. Article 2 of the Equity JV Law reads as follows, "The Chinese Government pro-
tects, by the legislation in force, the resources invested by a foreign participant in a joint ven-
ture ... as well as his other lawful rights and interests." Equity JV Law, supra note 150, art. 2.

271. Zhonghua Renmin Gongheguo Tudi Guanli Fa (Law of the People's Republic of
China Concerning Land Management) (adopted June 25, 1986, into effect Jan. 1, 1987) art. 55,
trans. in CHINA L. FOR. Bus., supra note 150, 1 14-715. This article provides that the State
Council will promulgate special regulations for the management of the use of land by foreign
invested enterprises. Id. The State Council has not yet acted.

Elsewhere in this law, which applies primarily to expropriation of state and collectively-
owned rural land for "state construction," two different methods are used to calculate compen-
sation. I) Compensation fees for cultivated land is calculated as between three and six times
the value of the average annual output of the land over the prior three years. 2) The standard
for compensation for other areas of land is left to the local administrative unit to make with
reference to the calculation of compensation for cultivated land. In addition, compensation for
planted land and for land with fixtures is also left up to the administrative unit. Id. art. 27. If
agricultural land is expropriated for State construction, resettlement subsidies (anzhi buzhufei)
for those living on the land are calculated in a similar manner with the level set at between two
and three times the value of the average output per mu (0.0667 hectares). Id. art. 28. See
Guojia Jianshe Zhengyong Tudi Tiaoli (Regulations Regarding the Requisition of Land for
National Construction) (approved May 4, 1982, promulgated May 14, 1982) art. 2, trans. in
CHINA L. FOR. Bus., supra note 150, % 14-590.

272. Shanghai Shi Tudi Shiyongquan Youchang Zhuanrang Banfa (Measures of Shang-
hai Municipality on the Compensatory Transfer of Land Use Rights) (promulgated Nov. 29,
1987), trans, in CHINA L. FOR. Bus., supra note 150, 91-034, art. 42. See also Shanghai Shi
Zhongwai Hezi Qiye Tudi Guanli Banfa (Measures Concerning Land Use Administration for
Sino-foreign Joint Equity Enterprises in Shanghai Municipality (issued Oct. 30, 1986), trans. in
id. at 91-033, where no mention of compensation for expropriation is made.

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U.S.-PRC BILATERAL INVEST211ENT TREATY

sation is determined through "consultation" between the land bureau
and the land-use owner "in accordance with" the remaining period of
the land-use contract, the nature of the land-use, the value of the
buildings and other attachments, and the original land-use fee. Dis-
putes over the amount can be taken to the People's Court."' This
formulation clearly leaves plenty of room open for interpretation and,
in particular, does not guarantee that improved property will be fairly
compensated. Moreover, Shanghai and Shenzhen appear to be the
only localities that have passed regulations that even address the tak-
ings issue.

It seems that the U.S. government is seeking to negotiate its
"prompt, adequate, and effective" standard into its BITs precisely
because there is disagreement between capital exporting and capital
importing countries over what exactly the international law and juris-
diction are in this area. Logically speaking, investors will not risk
their money without sufficient contractual, legal, and economic guar-
antees against losses through expropriation. Therefore, as Professor
Schachter observes, countries that wish to attract investment will gen-
erally give such guarantees when the foreign investment is perceived
as beneficial and the interests of both sides are mutual.2 74 Parties to
all the U.S. BITs thus far have accepted this Model BIT language
without major alterations. 275 Two of three drafts devised by the
Asian-African Legal Consultative Committee as model BITs for
developing countries also state that compensation should be "prompt,
adequate, and effective. '276

273. Shanghai Land Use Measures, supra note 272, art. 43. Other related Shanghai reg-
ulations, in particular the Shanghai regulations on the management of the dismantling and
removal of non-residential buildings stipulate, inter alia, that compensation for certain losses
incurred by units forced to relocate because of city infrastructure construction must be paid.
This compensation is based on the following four considerations: 1) compensation for current
replacement cost will be made based on the total land area, the size of existing structures, and
their current condition, providing the original structures were built according to legal proce-
dures and with legal approval; 2) compensation for land use fees will be made for land that is
presently subject to legitimate land use rights; 3) compensation will be paid for the expenssc
incurred in dismantling, moving, and reinstalling equipment; 4) in the case of collectively
owned and leased enterprises, compensation equal to one year of the salaries of workers who
are put out of work because of the removal or discontinuation of the business will be paid.
Shanghai Shi Caiqian Fangwu Guanli Ruogan Wenti de Guiding (Regulations of the Shanghai
Municipality on a Number of Issues Regarding the Administration of the Dismantling and
Removal of Buildings) (promulgated March 21, 1988) 5 XIN FAGuI 45 (1988). Significantly,
lost profits are not compensated. Id. It should be noted that while these measures on their
face apply only to Chinese units, they probably apply by analogy to foreign-invested property
if no relevant foreign economic measures exist.

274. Schachter, Conpensation for Expropriation, supra note 119, at 130.
275. See Gann, supra note 58, 401-403.
276. AALCC, supra note 192.

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JOURNAL OF CHINESE LAW

Just as the Reagan administration's free trade policy is part of a
larger political philosophy, the PRC government's broad political
agenda is not entirely in sync with its own stated goal of attracting
foreign investment. Claims that foreign investments are already suffi-
ciently protected by domestic law still ring hollow, as do patronizing
claims that contracts are never broken.2 7 Regardless of the content
or origins of international law on expropriation and compensation,
nothing in international law prevents a country from assuming
greater obligations by treaty without derogating from its sovereign
rights.2 78  Participation in OPIC and MIGA undoubtedly helps
assuage some of investors' fears, but insurance is a palliative and not a
cure. A recent experience of the China Tianjin Otis Elevator joint
venture illustrates, on a practical level, the very real uncertainties that
exist.

The Otis Case2 79

The China Tianjin Otis Elevator Company (Otis Tianjin), estab-
lished in 1984, is one of the largest Sino-foreign joint ventures (JVs) to
date in the PRC. It ran into trouble when it applied in the spring of
1985 for a building permit in order to begin a factory expansion pro-
gram planned since the inception of the JV. Although the JV's expan-
sion plans had been approved as part of the original JV proposal and
feasibility study, which specified allocation of land adjoining the now
operating factory for construction of a new paint line, the subsequent
building permit application was rejected by the Tianjin Transporta-
tion Department. 28 °

When officials at the JV inquired into the rejection, they were
told that the land had been earmarked for an off-ramp to the new
Tianjin ring road that was to be constructed as part of the Tianjin-
Beijing highway. Furthermore, when Otis Tianjin officials suggested
that they would accept compensation for the taking of the land-use
rights, the authorities not only told them that no compensation was

277. See (Zhao Ziyang quoted in) Asian Wall St. J., supra note 171. Other inconsisten-
cies must also be clarified. For instance, only the Joint Venture Law provides that businesses
with foreign investment are to be limited liability companies. Equity JV Law, supra note 150,
art. 5.

278. See SCHACHTER, THEORY & PRACTICE, supra note 85, at 299.
279. This account was related to the author by Jon Christianson and confirmed by Jay

Chen, both of whom worked at China Tianjin Otis Elevator Company during the beginning
phase of the joint venture [hereinafter Christianson & Chen].

280. See Tianjin Jingji Jishu Kaifa Qu Tudi Guanli Guiding (Regulations for Land Man-
agement of the Tianjin Economic and Technological Development Zone) (adopted July 20,
1985), trans. in CHINA L. FOR. Bus., supra note 150, 92-012.

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U.S.-PRC BILATERAL INVESTMENT TREATY

owed but that the TV would have to pay to tear down the existing
buildings to prepare the land for the highway construction.

The JV officials protested to the Transportation Department that
their own building plan and the land allocation had already been
approved at the start of the JV. The response said that internal plans
for the highway had existed even earlier in the transportation depart-
ment, therefore, the JV contract approval did not govern on this
point.281 A petition to the Tianjin mayor for special review of the
dispute failed. In the end, rather than resort to litigation, the JV
accepted the fait accompli by yielding in "mutually beneficial discus-
sions" over the matter. The JV will loose a section of its factory yard
and have to build several new buildings to replace the ones to be torn
down. No compensation was or will be paid.282

Indirect takings through administrative action like this one,
rather than direct expropriation or nationalization, are the most likely
hazards currently confronting foreign investors in China. Under the
U.S. Model BIT and most BITs negotiated by both the U.S. and the
PRC to date, measures like this one which "[have an] effect equivalent
to expropriation or nationalization," must be compensated.283

Clearly, one problem is that local implementation and enforcement of
national policies and laws pertaining to foreign investment still lack
consistency. Time, education, and experience are necessary before a
more widespread knowledge and consistent interpretation of foreign
economic laws can be expected. Meanwhile, rather than claiming
that domestic legal remedies are sufficient, Beijing should boost inves-
tor confidence by adopting standards more acceptable to prospective
investors. If signing a BIT with the U.S. terms intact is too unappeal-
ing, then at least, domestic legal protection must be strengthened
significantly.

281. Tianjin land-use regulations adopted after this dispute arose place an obligation on
land-users to ensure that construction or building "of an infrastructure nature" conform with
municipal plans. Obviously, however, an enterprise must have access to city or state plans if it
is reasonably expected to conform with this regulation. By implication, although the JV had
no prior notice of the highway plans, the authorities did have notice of Otis Tianjin's plans. Id.
art. 12.

282. Jay Chen observes that Otis Tianjin might have failed to force the Tianjin officials to
change their highway plans because to do so would have caused a similar dispute with a pro-
posed Sino-British JV which was negotiating rights to the adjacent land. Since the Otis Tianjin
JV was already underway, and the Sino-British JV still under negotiation, the latter could
wield more leverage for concessions from the Tianjin authorities. Christianson & Chen, supra
note 279.

283. PRC-Great Britain BIT, supra note 206, art. V, para. 1.

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C. Dispute Settlement

From the point of view of foreign investors, the lack of fair dis-
pute settlement mechanisms would render the discussion of compen-
sation for expropriation almost meaningless.284 Of the two types of
disputes covered by the U.S. Model BIT, those between an investor
and a state party to the'BIT and those between and investor and
another private party, negotiations between the U.S. and the PRC are
at an impasse only over the proper settlement of the former type of
dispute.285 Future PRC accession to ICSID may portend a change of
faith in this regard, however, considering the strong Chinese belief
that sovereignty prevents a state from being the subject of private
suits, a rapid change seems unlikely.

Although the positions of the two countries remain considerably
far apart, occasional modification in the language of BITs negotiated
to date indicates some flexibility on both sides. All U.S. BITs follow
the dispute settlement provisions of the Model BIT closely,286 except
in the case of two key provisions.287 The first of these two provisions
deals with the definition of the term "investment dispute." Both the
U.S.-Egypt and U.S.-Morocco BITs omit disputes over "the interpre-
tation or application of any investment authorization granted by a
party's investment authority, 28 8 the second category of the Model
BIT definition. For countries, like the PRC, whose governments are
extensively involved in investment project applications, authorization,
and supervision, the deletion of this clause creates considerably more
operating room in which the relevant host investment authority can
maneuver.

A second and less significant variation involves the ultimate
choice between the two possible mechanisms for resolving disputes,
conciliation or arbitration. Again, the U.S.-Egypt and U.S.-Morocco
BITs, joined now by the U.S.-Panama BIT, differ from the other U.S.
BITs, which follow the Model BIT in giving investors the deciding
role in choosing. Instead, these three BITs make no mention of how

284. See Cohen, Negotiating.Complex Contracts with China, in BUSINESS TRANSACTIONS
WITH CHINA, JAPAN, AND SOUTH KOREA sec. 2 (Saney & Smit, eds., 1984).

285. Frisbie, supra note 10.
286. See supra notes 87-99 and accompanying text.
287. Because neither Haiti nor Panama were contracting states to the ICSID Convention

at the time their BITs with the U.S. were signed, the investor-State dispute resolutions provi-
sions of each necessarily use alternative settlement mechanisms. The U.S.-Haiti BIT provides
for arbitration under the International Chamber of Commerce. U.S.-Haiti BIT, supra note 64,
art. VII, para. 3. The U.S.-Panama BIT provides for conciliation or arbitration proceedings of
the Additional Facility of the Centre. U.S.-Panama BIT, supra note 64, art. VII, para. 3(c).

288. See U.S.-Egypt BIT, supra note 63, art. VII, para. 1; U.S.-Morocco BIT, supra note
64, art. VI, para. 1.

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US.-PRC BILATERAL INVESTMENT TREATY

disagreement over whether to use conciliation or arbitration will be
resolved. Although hardly a major variation and possibly an over-
sight, these omissions could lead to a needless procedural deadlock
should a dispute reach this point in the dispute resolution process.

China's BITs, on the other hand, provide for international arbi-
tration of investor-state party disputes only over the issue of compen-
sation amount.28 9 These BITs typically begin by urging that any
disputes between a national or company of one party and the other
party shall, as far as possible, be settled amicably through negotia-
tions or consultations between the parties to the dispute.290 If a dis-
pute over the amount of compensation for an expropriatory action
cannot be resolved within six months, then binding international dis-
pute resolution can be resorted to. In the PRC-Japan BIT, which
contains the most comprehensive dispute resolution provisions, sub-
mission of a dispute over compensation amount and the choice of for-
mat, conciliation or arbitration, are made contingent on the request of
the investor. The conciliation or arbitration board shall be established
"with reference to" the ICSID Convention.291 But unlike the PRC
BITs with France, West Germany, and Britain, where special provi-
sion is made in side letters, the PRC-Japan BIT does not require an
additional protocol should the PRC become a signatory of the ICSID
Convention.

Within the scope of this author's research, there is no provision
in any PRC BIT making mandatory arbitration of any other type of
investor-state party disputes. The PRC-Japan BIT creates no obliga-
tion, but does offer the option, "upon mutual agreement," of submit-
ting any dispute concerning "other matters" to international dispute
resolution.292 Thus, unless the host government agrees, it seems that
all other investor-state party disputes should be settled by resort to
local courts.2 93 Alternatively, the government of the complaining
investor can take up the dispute on a government to government level.
PRC BITs generally provide for arbitration by an ad hoc tribunal of
disputes between the two governments over "interpietation and appli-
cation" of the BIT.294

289. See, eg., PRC-Great Britain BIT, supra note 206, art. 7; PRC-Singapore BIT, supra
note 209, art. 13; PRC-Japan BIT, supra note 162, art. 11. The PRC-West Germany BIT
contains no provision covering investor-state disputes. See PRC-West Germany BIT, supra
note 206. See also supra text accompanying notes 184-187.

290. PRC-Great Britain BIT, supra note 206, art. 7, para. 1; PRC-Singaporc BIT, supra
note 209, art. 13, para. 1; PRC-Japan BIT, supra note 162, art. 11, para. 1.

291. PRC-Japan BIT, supra note 162, art. 11, para. 2.
292. Id.
293. See Liu Yimin, supra note 218 at 55.
294. See, eg., PRC-West Germany BIT, supra note 206, art. 10; PRC-Great Britain

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JOURNAL OF CHINESE LAW

The PRC position against international arbitration of all inves-
tor-state disputes, except the issue of compensation amount, stems in
part from the belief that all domestic measures by a government lie
within the jurisdiction of domestic law and that any variation from
this principle would violate PRC sovereignty. Although the PRC
government has established a domestic arbitration facility under the
auspices of the China Council for the Promotion of International
Trade (CCPIT),295 this facility primarily arbitrates disputes between
private contracting parties, not between a party to a private contract
and the host government.2 96 The dispute resolution provisions of
both OPIC and MIGA, on the other hand, by their nature elevate
claims of private investors against host governments to the state level.
This subrogation may conform more closely to Chinese notions of
state sovereignty, but in highly politically sensitive cases, the potential
for diplomatic friction may actually increase. Without this mecha-
nism, a private claimant could be more easily ignored by its own
government.

A further interesting innovation of the PRC-Japan BIT involves
the establishment of a joint committee of representatives of the two
governments to review the implementation of the BIT and to consult
on the development of domestic laws and policies in each country
relevant to foreign investment. The committee will meet at the
request of either government, alternately in Tokyo and Beijing. While
this consultation committee concept may lack substantive appeal on
paper, it is possible that a mechanism such as this, which formalizes
government-to-government consultation outside the context of actual
investment disputes, may help channel government concerns about
internal reforms that affect foreign investment in a more effective
manner.

297

As the Otis Tianjin episode described above illustrates, govern-
ment approvals and the actions of supervisory authorities can have
considerable prejudicial effect on established investments. U.S. BIT
negotiators are seeking a clause that provides for international arbi-
tration over the very issue of when and if an expropriation has

BIT, supra note 206, art. 8; PRC-Singapore BIT, supra note 209, art. 14; PRC-Japan BIT,
supra note 162, art. 13.

295. The facility, called Foreign Economic & Trade Arbitration Commission, is located
in Beijing. See Cohen, The Role of Arbitration in Economic Co-operation with China in FOR-
EIGN TRADE, INVESTMENT AND THE LAW IN THE PEOPLE'S REPUBLIC OF CHINA (Moser
ed., 1984).

296. See id.
297. USTR is skeptical about the relative benefit of a consultative committee. Simmons

Interview, supra note 216.

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U.S.-PRC BILATERAL INVESTMENT TREATY

occurred.2 98 The U.S., however, itself excepts from application of the
relevant article of the Model BIT disputes within the jurisdiction of
regulatory agencies, including disputes solely concerning interpreta-
tion or application of securities and antitrust laws.2 99

Furthermore, while the U.S. government usually does not enter
into investment agreements or authorizations with foreign inves-
tors,3"" PRC laws stipulate extensive government involvement in the
investment approval process.301 The centralization of foreign invest-
ment approvals and even the adoption of each specific investment pro-
ject by a relevant responsible ministry or department create endless
opportunities for friction and dispute. It seems difficult to imagine
that the PRC government would allow disruption by an outside arbi-
trator of this whole system.

CONCLUSION

Recent retrenchment in China's economic policy has elicited
renewed warnings that some foreign economic contracts will be can-
celled, joint ventures terminated.30 2 PRC leaders have hastened to
deny the rumors and have pledged that all contracts already signed
and joint ventures already in operation will continue to be enforced
and protected.30 3 Foreign investors with experience in China may
recognize and understand the recurrent necessity for economic read-
justments and ignore the cacophony of publicity that national policy
detours elicit. But new and prospective investors, on hearing this
news, cannot but be forced to reassess the risks of investing in China.
A bilateral investment treaty between the U.S. and the PRC would
both give added protection to existing and future investments in
China as well as encourage these new investors to commit their
resources.

Currently, there are at least two schools of thought on what
course U.S. BIT negotiators ought to take in negotiations with the
PRC. One holds that the respective positions of each government are
too far apart and that, in any case, a bilateral treaty of this sort can
never offer any real protection.3 1 Even the strongest bilateral invest-

298. Frisbie, supra note 10.
299. Gann, supra note 58, at 415.
300. Id. at 415 n. 179.
301. See, eg., Equity JV Law, supra note 150.
302. See eg., Gargan, China Explains Policy Shift Retightening Economic Grip, N.Y.

Times, Oct. 28, 1988, at A14, col. 3.
303. See; e.g., Wo Jiang Baohu Shewai Jingfi Xiangmu, Renmin Ribao (Haiwal Ban),

Oct. 27, 1988, at 1.
304. See Sullivan, supra note 216, at 9. See also Council Recommendations to the Bush

Administration, CHINA Bus. R v. Jan.-Feb. 1989, at 6, 7.

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JOURNAL OF CHINESE LAW

ment treaty with broad arbitration provisions would be toothless in
the face of host country action perceived to be in the national interest.
Therefore, rather than prolong abortive negotiations, the U.S. should
merely work for a treaty that clarifies in simple terms the current level
of protection the PRC is willing and able to offer and acts as a symbol
of present and future cooperation.

The other school of thought holds that U.S. negotiators should
continue their struggle for BIT provisions that approach or match the
investment protection of the Model BIT. The Office of the U.S. Trade
Representative refuses to sign a treaty that does not "have real tangi-
ble value" and does not include binding commitments. 30 5 Negotiators
apparently believe that unless some of the positions elucidated in the
Model BIT are made into hard treaty law, U.S. investors will be better
served without a treaty than they would with an aspirational or
declaratory one. Whether this is merely a hard-line negotiating stance
is difficult to say right now.

This note has shown that both these positions may be based on
inaccurate observation and assumptions. Although significant differ-
ences of opinion still exist, the past treaty records of both govern-
ments indicate that they both may be willing to compromise on nearly
every disputed provision. Negotiations should not be as stymied as
they are made to appear in public. Five years of negotiations and the
passage of time appear to have yielded some important advances.
Moreover, each side has recently passed a significant landmark in its
BIT program development: in September 1988, the PRC concluded a
promising BIT with Japan after hard negotiations; and in October
1988, the U.S. Senate finally ratified eight of the U.S. BITs, some of
which had been awaiting action since 1982.

Thus, both sides should grasp this opportunity to renew formal
negotiations, but not without taking a strong dose of realism before
sitting down at the negotiating table. The PRC must recognize that
solid confidence cannot be built in the minds of foreign investors by
lofty claims of legality and promises of security unbacked by legisla-
tion or other legal protection. Demands from foreign investors for
fairness, nondiscrimination, and consistency as prerequisites to inten-
sified foreign investment are not unreasonable. As long as the often
accurate perception remains that laws and the actions of administra-
tive and judicial bodies do not adequately enforce these standards and
protect investment, then foreign investors will continue to press for
treaty provisions, like the Model BIT investor-state dispute provision,
that impose external standards or processes on the host state.

305. Eiss Interview, supra note 11.

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The U.S., for its part, must recognize that China is not going to
change over night. In a few short years, a skeletal framework of a
commercial legal system has been created, but considerable fleshing
out is needed. It will take still more time to iron out the inconsisten-
cies, fill in the gaps, and develop a body of consistent interpretation.
BITs can have some role in this development, but they arguably
should not be expected to be miracle cures. Considering the advances
in treatment achieved by the PRC-Japanese BIT, U.S. negotiators
must accept that the lack of a U.S.-PRC BIT may now result in
increased discrimination against U.S. investment, since without a BIT
the U.S. does not have the benefit of an MFN clause covering bilateral
investment.

The issues of national treatment of foreign investors, expropria-
tion and compensation, and investor-government arbitration are diffi-
cult ones because they strike at the heart of some of the basic
differences between capitalist and socialist economic outlooks and
because they elicit strong and principled protective responses on the
Chinese side and equally principled legal posturing on the U.S. side.
BIT negotiations between the U.S. and the PRC should be used as a
forum for honest communication and compromise. They are not the
proper forum to beat out an unrealistic or over-idealistic vision of
international investment law.

Timothy A. Steinert *

* J.D. 1989, Columbia University.

19881