In China, Trump Leaves US Investors Exposed

The Trump administration is making no progress on a vital treaty that would protect US investors.

In China, Trump Leaves US Investors Exposed

The following is a guest contribution by Stephen Lock.

The Trump administration is making no progress on a vital treaty that would protect US investors.

 

Just before his West Wing departure, Trump ideologue Steve Bannon made no secret of his desire to rip out the East Asia team at the State Department. And it isn’t as if some corridors in the State Department already resemble the ghost-ship, Marie Celeste, with dozens of appointee vacancies and July’s first China-US Economic Comprehensive Dialogue achieved nothing (even the press conference was cancelled).

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Terms of trade with China is something that, when not pandering to Trump’s base, obsessed Steve Bannon as he openly talked about China fighting an economic war with the US. At the same time, it may be a surprise to many that Trump, the ‘businessman-President’ isn’t moving faster to give US investors in China better protection. Actually Trump has deeper business connections to China than is often realised: Bank of China is a major lender to his Tower at 1290 Avenue of the Americas, while state-owned bank, ICBC, is one of the largest tenants in Trump Tower. And all this is before the Kushner family’s controversial Chinese roadshow.

 

This may actually be an area where Steve Bannon was more right than wrong. US firms in which US pension funds and retail investors have put their savings have sunk over $228 billion into inward investment in China. Much of these rest on the fragile reliability of Chinese contracts administered by Chinese courts.

 

Weak rule of law was always foreseen as a problem with emerging market investments, which is why bilateral investment treaties (‘BITs’) were signed between states. The best of these contain an important investor protection: access to international arbitration. If you can’t trust the local courts, then international arbitration – like the World Bank’s ICSID process – is crucial for investor justice. But not all BITs are the same.

 

China only generally accepted international arbitration in BITs following its Zou Chu Qu (or outward investment) policy in its 2001-2005 five-year plan. But around 70 still in-force, pre-2001 BITs have little recourse to international arbitration (China only signed the ICSID convention in 1990).

 

Today, however, Chinese business wants to protect itself using ICSID, as problems have arisen in Africa (when suddenly ICSID looks a good idea). Critics, including us, would argue the Chinese applaud arbitration for their investments abroad, but less so for disputes involving foreigners in China.

 

Take the case of Boris Goh. Goh is a Singaporean businessman who was invited to invest in the Chinese city of Qingdao (pronounced Tsingtao, like the beer). Goh signed a contract, under the 1985 Singapore BIT, to buy over 5 km2 of land, to develop entirely new areas of the City. His developments included over 1,200 condos and over 100 other properties. In today’s values, this property empire would be worth up to US$10 billion. Goh says his investments were later stolen from him by officials from the regional Communist Party, for their personal enrichment, using forged documents and corrupt judges.

 

Goh fell victim to this massive alleged theft, having been ‘disappeared’, to a remote detention centre in the mountains. After seven months in prison, without charge or trial, he was released on the very day the last of his property was stolen (in a court hearing held behind his back).

 

There was nothing Goh could do about this outside of China because the 1985 Singapore-China bilateral investment treaty, under which Goh invested in China, offers no recourse to arbitration in the case of an investor-state dispute until all the Chinese legal options are exhausted. But, up against corrupt Communist Party officials, it was impossible for Goh to litigate in China (as well as potentially lethal for him). Goh’s case demonstrates that a bad BIT is almost as harmful for investors as no BIT at all. Amazingly, the USA doesn’t have its own BIT with China.

 

Why aren’t investment contracts in China respected? Behind much of this is a rather existential, but critical, difference between China and ‘the West’ concerning the status of a contract. Westerners view contracts as mutually binding rights and obligations: fixed as if carved on a tablet of stone. The Chinese, however, see contracts only as a starting point of expected rights and obligations.

 

In China, business obligations rely rather more on guanxi (or personal connections) than written contracts. Guanxi is not necessarily corrupt (and it is important not automatically to conflate the two); but within China it will trump contracts every time.

 

Ten to fifteen years after a step change in the amount of foreign direct investment into China, the truth of the relative weakness of contracts in China is starting to become clear. There is even a growing problem in some Chinese M&A and securities deals. Given the amount of US investment at risk in China, it would be negligent of the Trump administration not to fix investor protection as a high priority like many European countries have done, with strong BITs.

 

The United States and China have been long negotiating their own BIT, in a glacially-slow process. Just recently, the Chinese sought to speed things up. It is vital, if the United States is to ensure Rule of Law for US direct investments in China, that Trump insists upon automatic recourse to ICSID for all US investor-state disputes, bypassing the lottery of Chinese domestic courts. If he doesn’t then Donald Trump will have left US investors dangerously exposed.

 

 

By Stephen Lock, director of the Center for Justice in International Investment in China (‘CJIIC’): a non-profit campaign which aims to highlight the lack of access to impartial civil justice in China for foreign investors involved in investor-state disputes

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