United States: The King (Of Asian Investment Treaties) Is Dead. Long Live The King?

For U.S. companies looking to protect their investments in Asia from political and regulatory risk, one large door may have closed, but another could be opening. While U.S. domestic politics seem to have put an end to the long-heralded Trans-Pacific Partnership (TPP) and its investment protection chapter, an even farther-reaching treaty promoted by China could take its place. And even though it appears for now that the United States will not be a part of that treaty either, resourceful American businesses may be able to benefit from it nonetheless.

As President Donald Trump has made rather clear, the United States will not be part of the TPP. That, in turn, may doom the TPP itself. Japanese Prime Minister Shinzo Abe has said that the treaty would be "meaningless" without the United States. Gone with the TPP will be its Chapter 9, which guaranteed various legal protections for companies from TPP member states (such as the United States) who invested in other member states (such as Japan, Malaysia and Vietnam), as well as the ability to enforce those rights through international arbitration.

What will take TPP's place for global companies seeking to protect their investments in Asia? One possibility is the Regional Comprehensive Economic Partnership (RCEP), a multilateral trade agreement spearheaded by China that would include the 10 member states of the Association of Southeast Asian Nations (ASEAN) (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) and the six states with which ASEAN has existing free trade agreements (Australia, China, India, Japan, South Korea and New Zealand). Negotiation of the RCEP began in 2012, with the aim of providing an alternative to the TPP. In fact, the scope of its coverage would be even greater than that of the TPP, potentially including more than 3 billion people (45 percent of the world's population), and a combined GDP of about $21.3 trillion, accounting for about 40 percent of world trade.

The text of the RCEP has not been published. Nonetheless, in April 2016, the negotiating text of a draft investment chapter of the treaty was leaked. The draft contains many of the common terms of investment treaties, including provisions on expropriation, nondiscrimination and other international law standards. In addition, the draft chapter provides for investor-state dispute settlement, including ICSID or UNCITRAL arbitration. If RCEP is ultimately enacted with those provisions included, it will have the broadest coverage of any investment treaty and could redefine the scope of legal protection for foreign investment within Asia.

It looks unlikely (to say the least) that the United States will either seek involvement in or be invited to join the RCEP in the near future. The same is likely true of the major European economic powers. Does that mean that companies from those countries will be shut out from the benefits of the RCEP's investment chapter, if it takes effect?

Not necessarily. The draft RCEP investment chapter provides that its protections are available to an "investor of a Party," which is defined to include a "juridical person" or "enterprise" of an RCEP member state that makes an investment in another RCEP state. What is a "juridical person" or "enterprise" of an RCEP state? The various negotiating states have proposed different definitions, but it appears that they may include "any entity" that is "constituted" or "organized" under the law of an RCEP state, including a corporation, trust, partnership, joint venture, sole proprietorship, association or branch, provided it carries out business activities in that state.

Thus, even a company from a non-RCEP member state (like the United States) could potentially gain protections under the RCEP by structuring its investment through an entity operating in an RCEP state. For example, a U.S. company with an operating subsidiary, joint venture or branch in Japan could invest in China through that Japanese entity, and the investment would then be covered under the treaty. If China then nationalized the investment, or discriminated against it and in favor of local competitors, or otherwise violated its rights under the RCEP, the Japanese entity could then initiate arbitration proceedings for monetary damages against the Chinese government. This approach could similarly be used with subsidiaries or branches in Singapore, Australia or other RCEP members, and would allow protection of investments in all other members, including not only China but also others such as India or Indonesia.

Some caveats are necessary. At least one negotiating state has proposed limiting coverage to business entities that have "substantial business activities" in the RCEP state whose nationality it claims, while another passage of the draft text indicates that the treaty will include a "denial of benefits" clause common to investment treaties. Those provisions could mean that a company seeking to gain treaty protection cannot structure its investments through a shell company, but instead must ensure that the investment vehicle has at least some genuine business presence in the country where it is based, including an office, employees and some degree of regular activity. That could create regulatory, tax and operational concerns in the country at issue. The type of structuring required would depend on the treaty text ultimately adopted.

The RCEP's potential to displace the TPP, and China's central place in that process, highlights the striking shift in roles among the world's economic powers. While until recently the United States was a leading champion of globalization, and particularly strong protections for foreign investment, it now appears that China may be taking its place. Recent statements by its senior officials have highlighted this point. While the steady and vast expansion of China's own overseas investments explains its side of the equation, the dramatic backlash against globalization on the U.S. side is a fairly sudden phenomenon.

Interestingly, another investment treaty, far less heralded than the TPP or the RCEP, remains under direct discussion between the United States and China, at least for now. The U.S.-China Bilateral Investment Treaty, if promulgated with terms similar to those in other U.S. treaties, could in some ways be even more consequential than the investment chapters of the TPP or the RCEP. In March 2016, former Chinese Commerce Minister Chen Deming announced that negotiations on the U.S.-China Bilateral Investment Treaty, underway for years, were nearly completed. Officials noted further developments over the summer and again in the fall of 2016. That, however, was before the U.S. election. Although President Trump has not publicly commented on the treaty, he has said that he intends to pursue bilateral trade agreements with other states, including the would-be members of the TPP. Whether that will also include China remains to be seen.

In the meantime, there are other, albeit more limited, options for treaty protection as to investments in China, India and other major Asian markets. China has in recent years signed modern and rather robust investment treaties with various states, including Canada, Germany, France, Switzerland and the Netherlands, which provide for enforcement through arbitration and allow for the possibility of structuring investments through offshore entities in order to gain coverage. India, too, has increasingly entered into investment treaties with a number of major developed states that allow for structuring to gain protection. Options (although fewer) exist for other Asian states (such as Indonesia, Malaysia and Vietnam) as well.

The United States' movement toward economic nationalism may complicate global companies' plans in a number of ways. But with a bit of creativity, firms can still benefit from investment protections afforded by existing treaties, and by the work of those states now seeking to fill the gap U.S. policy has left behind.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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