VZCZCXRO3914
RR RUEHCN RUEHGH RUEHVC
DE RUEHGZ #0120/01 2580511
ZNR UUUUU ZZH
R 150511Z SEP 06
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 3351
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/USDOC WASHDC
RUEAIIA/CIA WASHDC
RUEKJCS/DIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI

UNCLAS SECTION 01 OF 03 GUANGZHOU 030120 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
USDOC FOR 4420/ITA/MAC/MCQUEEN, CELICO, DAS LEVINE 
STATE PASS USTR 
STATE PASS FEDERAL RESERVE BOARD FOR SCHINDLER 
USPACOM FOR FPA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PREL CH
SUBJECT: APEC Workshop on Non-discrimination in Investment 
Agreements, September 1-3 
 
 
(U)  THIS DOCUMENT IS SENSITIVE BUT UNCLASSIFIED.  PLEASE 
PROTECT ACCORDINGLY.  NOT FOR RELEASE OUTSIDE U.S. 
GOVERNMENT CHANNELS.  NOT FOR INTERNET PUBLICATION. 
 
¶1.  (U) Summary:  Developing country representatives meeting 
at a September 1-3 APEC workshop in Xiamen on "Non- 
discrimination Treatment in Investment Agreements" expressed 
some concerns about new U.S. free-trade agreements in 
Southeast Asia.  The nine APEC countries attending the 
meeting focused on three investment issues:  most-favored 
nation status (MFN), national treatment in host countries 
and "fair and equitable treatment" clauses.  Most of the 
workshop discussions focused on information sharing, with 
participants generally agreeing on the necessity of non- 
discrimination treatment.  End summary. 
 
Outline of the Workshop 
----------------------- 
 
¶2.  (U) The Asia Pacific Economic Cooperation (APEC) 
Workshop on "Non-discrimination Treatment in Investment 
Agreements was sponsored by the Chinese Ministry of Commerce 
(MOFCOM).  In addition to the nine participating countries, 
experts from the United Nations Conference on Trade and 
Development (UNCTAD) also attended.  The term non- 
discrimination was used in workshop to refer to laws created 
to ensure a legal "level playing field" for investment in 
foreign countries. 
 
MFN 
--- 
 
¶3.  (U) According to UNCTAD Consultant Roberto Enchandi, MFN 
is "a standard that entitles investment or investors of a 
Contracting Party to a treatment by other Contracting 
Parties which is no less favorable than the treatment the 
latter grants to investments or investors of any other third 
State."  Therefore, MFN is the highest level of investment 
protection and is a core clause in international investment 
agreements (IIAs), though the scope can vary significantly 
among different IIAs.  For example, MFN can be granted 
negatively (top-down) or positively (bottom-up).  The 
negative approach means that MFN is granted in all 
situations unless there are exceptions or reservations.  In 
the positive approach, MFN is granted only if a specific 
individual commitment is made. 
 
¶4.  (U) Enchandi also distinguished between pre- and post- 
establishment investment phases of MFN.  Pre-establishment 
referred to market access provided an "investor", while post- 
establishment connoted the treatment an "investment" 
received after entering the country.  Currently only the 
United States and Canada have pushed for the more liberal 
pre-establishment phase MFN.  Even if MFN were granted in 
the post-establishment phase, many exceptions and 
reservations could be made on a general (public order or 
national security), subject-specific (taxation and 
intellectual property rights) or county-specific basis. 
 
¶5.  (U) Conference participants agreed that countries needed 
to clarify their policy towards MFN prior to entering 
negotiations.  Additionally, many participants complained 
that the MFN clause could be widely interpreted and the 
vagueness of the term necessitated the addition by drafters 
of more annexes to ensure clarity of meaning. 
 
¶6.  (U) One example of vagueness in MFN clauses was the use 
of the term "like circumstances".  Essentially the term 
means that an agreement between country "A" and "B" should 
also apply to country "C", if country "A" and "C" have an 
agreement of "like circumstances".  Thus, a country cannot 
borrow from human rights treaty and attach it to an 
investment treaty. 
 
The Drawbacks of FTAs 
--------------------- 
 
¶7.  (U) Ms. Deunden Nikomborirak, an academic from the 
Thailand Development Research Institute, warned that free 
trade agreements (FTA), which are currently popular in 
Southeast Asia, could be detrimental to developing 
 
GUANGZHOU 00030120  002 OF 003 
 
 
countries.  For example, if a developing country has a 
national policy protecting telecommunication services and 
suddenly signs an FTA with a developed country that would 
open all service sectors, the developing country would be 
handing over a "monopoly" opportunity to the developed 
country. 
 
¶8.  (SBU) Moreover, she warned that the fierce struggle 
among the major economies in ASEAN (Singapore, Malaysia and 
Thailand) to become Southeast Asia's economic "hub" would 
end up to the detriment of the region, and for the benefit 
of the United States.  All three of the ASEAN economies 
above currently have or are aggressively pursuing FTAs with 
the United States.  Nikomborirak predicted that MNCs based 
in the U.S. or with U.S. branches would simply increase 
their investments in the U.S.-based branches, where 
investment access was easy and transparent; they could gain 
better access to ASEAN markets through the United States. 
In essence, the United States would be the real hub for the 
region, with ASEAN nations as the spokes. 
 
Dispute Settlement 
------------------ 
 
¶9.  (U) As for dispute settlement of investment conflicts, 
one participant said "this could be a whole workshop by 
itself."  In other words, how does one apply MFN in dispute 
settlement? In some cases, such as Maffezini vs. Spain and 
Siemens vs. Argentina, international tribunals have ruled in 
favor of MFN applicability in a dispute settlement.  In 
other cases, such as Salini vs. Jordan, a bilateral 
investment treaty (BIT) referred explicitly to investors 
going through domestic courts to resolve disputes.  UNCTAD's 
Enchandi said that the use of dispute settlement depends 
greatly on the wording of the MFN clause.  More importantly, 
as one participant said, "it doesn't matter what you put in 
the treaty, it matters what the tribunal thought you put in 
the treaty." 
 
National Treatment 
------------------ 
 
¶10. (U) As for national treatment, Anthony Hinton from the 
Australian Treasury Ministry noted that a host country is 
obliged to extend to foreign investors treatment that is at 
least as favorable as the treatment that it accords to 
national investors in like circumstances."  Like MFN, 
national treatment contains exceptions and reservations, 
especially relating to national security, health and public 
order.  IIAs differ in particular whether the national 
treatment principle extends to the pre-establishment phase. 
 
¶11.  (U) UNCTAD's Enchandi emphasized the importance of 
treaty annexes in the interpretation of national treatment. 
Enchandi noted that the U.S.-Singapore FTA specifically 
explained the national laws on which it was based and thus 
favored U.S. companies.  However the U.S.-Chile FTA simply 
referred to Chile's interpretation of national treatment. 
 
"Fair and Equitable Treatment" 
------------------------------ 
 
¶12.  (U) Joachim Karl from UNCTAD said that an important 
part of fair and equitable treatment is the adherence to an 
international minimum standard, i.e., that there are certain 
international basic standards that must be ensured in all 
international agreements (something akin to the UN 
Declaration on Human Rights, but for investment).  Karl 
listed four core principles that might define the 
international minimum standard: 
-- transparency and the protection of investor's legitimate 
expectations; 
-- freedom from coercion and harassment; 
-- procedural propriety and due process; and 
-- good faith. 
According to Karl, because the notion of fair and equitable 
treatment is so controversial, it is likely that more BITs 
will include detailed explanations of its meaning, as in 
the U.S.-Uruguay BIT. 
 
Developing Country Concerns 
 
GUANGZHOU 00030120  003 OF 003 
 
 
--------------------------- 
 
¶13.  (U) This final session of the conference provided the 
liveliest response from participants.  Many of the 
developing country representatives (Malaysia, Thailand and 
China), raised objections to the definition of fair and 
equitable treatment and the use of "customary international 
law".  Lu Tao, the Chinese representative from the Ministry 
of Commerce, said that fair and equitable treatment is a 
very broad term that could include accusing the justice 
system of an entire country to be unfair.  The Chinese and 
other countries are cautious using this term.  Furthermore, 
Lu said that customary international law is "only practiced 
by 10-20 countries in the world, most of which are capital 
exporting countries;" these countries have an interest in 
working to improve investment climates.  Developing 
countries "were never involved with making these laws, yet 
are now bound by such laws."  Lu also said he had read many 
articles by American law professors who had actually argued 
against the notion of customary international law. 
 
¶14.  (U) UNCTAD's Enchandi, however, responded that 
"customary international law" actually provided better 
protection for developing countries because countries can 
drawn from the entire legal corpus of international 
investment agreements. 
 
Case Study:  China's Investment Strategy 
---------------------------------------- 
 
¶15.  (U) In its presentation about its investment policy, 
the Chinese representative noted that China does not have a 
reciprocal promotion and protection of investment agreement 
(RPPIA, essentially the Chinese BIT) with any North American 
country.  China's first generation of RPPIAs was negotiated 
between 1982 and 1997.  From 1997 onward, the Chinese have 
begun negotiating new agreements with updated mechanisms, 
such as national treatment and some dispute settlement 
mechanisms.  China has reservations about a number of issues 
including, pre-establishment phase investment protection, 
minimum standard of treatment in accordance with customary 
international law, transparency, performance requirement, 
intellectual property rights (IPR), environment, competition 
policy and labor standards.  Specifically, on IPR, the 
representative said that IPR "does not directly relate to 
investment" and China would seek a specific treaty on the 
issue. 
 
¶16.  (U) The Australian representative asked why the Chinese 
government was "so uncomfortable" with pre-establishment 
phase investment?  Lu Tao replied that China's lack of 
international dispute experience for China accounted for its 
hesitancy.  Moreover, the Chinese prefer working through the 
WTO, which only deals with government-to-government issues 
rather than international tribunals, where any investor or 
investment could raise a claim. 
 
Comment 
-------- 
 
¶17.  (SBU) Since the workshop focused on the background and 
basic issues of non-discrimination, the bulk of the 
discussion was on legal definitions and IIA process.  Only 
towards the end of each session did the comments become more 
focused and heated, most noticeably on the issue of 
"international customary law," about which we expect to hear 
more in the future. 
 
Goldberg