Two years of negotiations have finally resulted in the signing of the Cross-Strait Investment Protection and Promotion Agreement between Taiwan and mainland China on August 9, formally establishing an institutionalized cross-strait mechanism that strengthens protection of the lives and property of investors. The agreement encompasses Taiwanese businesses that invest through third areas, and marks a new milestone in cross-strait economic and trade relations.
Statistics compiled by the Investment Commission of the Ministry of Economic Affairs (MOEA) show that applications by Taiwanese businesses to invest in China amounted to a total of 39,891 cases with a total investment value of approximately US$117.4 billion between 1991 and the end of June this year. This accounted for about 63% of Taiwan’s total outward investment during the period, making China the biggest recipient of overseas investment by Taiwanese businesses.
Many Taiwanese companies have been struggling to develop their business in mainland China for years, and some have even moved the center of their operations there, but their investments have never enjoyed legal protections. Minister Shin-Yuan Lai of the Mainland Affairs Council (MAC) notes that the Cross-Strait Investment Protection and Promotion Agreement is a vital foundation for the protection of Taiwanese investors, “the first step in the establishment of safety,” and that it will help make the protection of Taiwanese businesses more complete and more institutionalized, and the investment environment healthier.
Kao, Charng, deputy minister of the MAC, said that when Taiwanese investors in mainland China encountered problems in the past, they had recourse only to the Law of the People’s Republic of China on Protection of Investment by Compatriots from Taiwan, with the Straits Exchange Foundation and the Association for Relations Across the Taiwan Straits helping to deal with matters regarding protection and compensation. There was no room for the governments to intervene. Under the new investment protection agreement the governments on the two sides of the Taiwan Strait will set up a liaison platform and mechanism so that, in the future, matters can be handled directly by the two governments. This will add an extra layer of protection for Taiwanese businesses.
Taiwanese companies will also be able to use the Joint Service Center that the MOEA has established, the Investment Working Group under the Cross-Strait Economic Cooperation Committee, and the Straits Exchange Foundation’s mechanism for the resolution of economic disputes to guarantee their investment rights in mainland China.
Multiple channels for the resolution of investment disputes
The protection of Taiwanese investors in mainland China has, in the past, been provided by China’s unilateral Law of the People’s Republic of China on Protection of Investment by Compatriots from Taiwan and its implementation by-laws. Statistics show that 65% of all cross-strait economic and trade disputes have been between investor and investor, with the remainder being between investors and local governments. The new investment protection agreement provides a settlement mechanism for those two types of disputes; and the protection of Taiwanese investors’ rights, and of their personal safety, can now be handled in accordance with the provisions of the agreement. This represents a major breakthrough in the comprehensiveness of protection.
In regard to disputes between investors and local governments, the Taiwan side originally wanted to use international arbitration. As it was finally signed, the new agreement provides five tracks for dispute settlement: amicable agreement between the two parties, negotiation on site or by the parties’ higher organizations, resolution by the Investment Working Group of the Cross-Strait Economic Cooperation Committee, mediation by a third party, and administrative remedy or legal procedure.
For mediation by a third party, an investor can turn a dispute over to the cross-strait investment dispute settlement organization for resolution. The cross-strait investment dispute resolution organization must submit a report on the resolution of investment compensation disputes to the Investment Working Group of the Economic Cooperation Committee twice a year.
The MOEA points out that mediation is limited to investment compensation. After the new agreement takes effect, Taiwan and China will exchange lists of arbitration agencies or mediation centers; when disputes occur, Taiwanese companies will be able to carry out mediation through the organizations on the lists. If the real-estate assets of a Taiwanese company in China are requisitioned by the Chinese government and the company is not satisfied with the compensation offered, for example, it can initiate the mediation mechanism. Government-to-government resolution of investorlocal government disputes can also be pursued through the Investment Working Group platform provided under the Economic Cooperation Framework Agreement (ECFA). The details of this process, however, have not yet been worked out.
For business disputes between investor and investor, the agreement stipulates resolution via arbitration. The two parties to a contract can agree to include an arbitration clause and choose an arbitration organization and mutually acceptable arbitration location on either side of the strait (in Taiwan, China, or Hong Kong). If a contract does not include an arbitration clause, when a dispute arises the two sides can agree to resolve it through arbitration.
The landlord of the Pacific Department Store’s reinvested operation in mainland China cut off the electricity and padlocked the doors to force a rental increase, and the Shin Kong Mitsukoshi Department Store Co. had an equity dispute with its local shareholders in China. In disputes like these, arbitration in a third area will be more favorable to Taiwanese companies.
Retroactivity clause provides better protection
Notably, the new investment protection agreement contains a retroactivity clause, meaning that it applies to investment cases that occur before as well as after it takes effect. If existing disputes such as the Shin Kong Mitsukoshi equity rights case remain unresolved, they can be handled in accordance with the agreement’s dispute settlement mechanism.
Earlier law required that Taiwanese investment in mainland China had to be carried out through a third area, and a lot of companies made this kind of indirect investment. The scope of coverage of the newly signed agreement encompasses those who invested through a third country as well as those who did so directly, thereby protecting various forms of investment by Taiwanese companies.
If a Taiwanese businessman’s personal liberty is restricted because of a criminal case, the Chinese authorities must notify the businessman’s family or invested enterprise in China within 24 hours. In addition, a liaison mechanism established in accordance with the Cross-strait Joint Fight against Crime and Mutual Legal Assistance Agreement will be used for the timely notification of “the competent authority designated by the other side.”
Academics and business people praise the new agreement
Academics and business people on both sides of the Taiwan Strait have expressed their approval of the investment protection agreement, and appeal to the governments of both sides to implement the related mechanisms.
Meng-Chun Liu, deputy director of the First Research Division (which focuses on the mainland Chinese economy) of the Chung-Hua Institution for Economic Research, commented that the signing of the Cross-Strait Investment Protection and Promotion Agreement is a good start, and that without a start there would be nothing further to talk about. If a Taiwanese investor in the mainland wants to upgrade its business, for instance, without an investment protection agreement the government will not be able to help with the upgrading process.
Rock Hsu, chairman of the Chinese National Federation of Industries (CNFI), noted that mainland Chinese investment in Taiwan amounts to only US$290 million so far, and that the increased transparency and institutionalization of crossstrait trade and economic ties following the signing of the agreement will boost the willingness of Chinese enterprises to invest in the island. The CNFI’s deputy secretary general, Tsai Horng-Ming, pointed out that the basic framework of the OECD’s Multilateral Agreement on Investment was consulted in designing a cross-strait investment protection agreement with binding obligations for both sides, and that like the Taiwan-Japan Bilateral Investment Agreement the agreement with China adopts a broad definition of the scope of coverage. Any kind of asset that has the nature of an investment, including invested movable property, real estate, company shares, and intellectual property, is protected by the agreement.
Li Dongxing, chairman of the big mainland Chinese consumer electronics company TCL, pointed out that the Cross-Strait Investment Protection and Promotion Agreement is favorable to both Taiwanese companies and to Chinese companies investing in Taiwan, and that the “extra layer of protection it provides on the institutional and legal levels” makes it an agreement of substantial import.
Waiho Leong, a Barclays Capital director and economist who once helped out with Singapore’s trade talks, feels that the investment protection agreement gives Taiwan an advantage over other countries in mainland China. He pointed out that China is a market that all countries must struggle for, and the agreement provides better protection for Taiwanese companies and will attract enterprises from Japan and other countries to cooperate with the island.
Taiwan’s Straits Exchange Foundation indicates that the investment protection agreement is the first accord to be signed as a result of the four major follow-up ECFA negotiations. It will serve to inspire further efforts, and its negotiating experience will provide impetus for progress in the other three areas of negotiation: trade in goods, trade in services, and dispute settlement.