China’s New Foreign Investment Law: Many A Slip…

THE NEW FOREIGN Investment Law passed in March 2019 comes into effect on January 1, 2020. It will replace 1979-90-era laws on foreign-owned enterprises and joint ventures. These are no longer fit for purpose given the rebalancing of the economy from low-tech export manufacturing to high-tech sectors and domestic consumption, and the growing need to compete for foreign business investment with other countries in the region.

The new law also carries the high hopes of foreign firms for the protection of their intellectual property rights — copyrights, patents, trademarks, trade names, technical process, business secrets and goodwill — which it cannot bear.

Beijing needed to signal that China was improving its opaque and often closed business climate for foreign investors by putting them on the same footing as domestic investors and that it was listening to the grievances of trade partners, particularly the United States. Such complaints ranged from the forced transfer of intellectual property as the price of access to the Chinese market to exclusion from government procurement and patchwork implementation of existing legislation at the provincial and municipal level.

At the heart of the new Foreign Investment Law is the principle that foreign investors will be treated the same as domestic ones. That may have side benefits for company formation and flexibility in corporate governance; for example, the Byzantine process for foreign investors to form a corporate entity should become as quick and straightforward as it is for Chinese. Equal treatment in government procurement and standards-setting is also promised.

Redressing the issues around intellectual property will likely prove a different matter.

On the face of it, the new law and its implementing regulation published on December 31, appears to take steps in the right direction as it:

• explicitly bans forced technology transfers, i.e., expropriation;
• heralds an intellectual property rights regime closer to international practices; and
• imposes an obligation on local governments to standardise administrative actions on foreign investment and ensure local officials act lawfully — no more passing onto favoured local businesses information reported by foreign investors. At least in theory. This Bystander fears old habits will die hard, regardless of the tightening of central control.

Inconsistent interpretation of national law by local governments points to an eternal truth of Chinese laws. They are an overarching statement of intent but otherwise mostly a blank slate until the detailed rules and regulations are published and then implemented, frequently on an as-needed basis. We have little to guide us until then.

China has improved its intellectual property protections in line with its companies having more intellectual property of their own to protect and has signed onto most relevant multilateral treaties, but the need and desire to advantage domestic companies remain.

The new law provides at least a couple of loopholes to allow this.

First, the ‘negative list’ that sets out the industries in which foreign investment is proscribed or restricted remains. Beyond that is a web of licensing requirements that hamper foreign investment in critical areas.

Second, the exceptions to the explicit ban on expropriation of foreign investments are broad and vaguely defined: ‘special circumstances’ and ‘in the public interest’. Foreign investment will also remain subject to ‘national security’ reviews.

The greatest unknown for foreign investors will be the effectiveness of the process for seeking and enforcing redress. There are many cracks through which to fall. The new Foreign Investment Law becomes one of three co-existent spheres of intellectual property protections in China. The other two are those provided through bilateral investment treaties between China and other countries, and those that are provided by the World Trade Organization’s Trade-Related Aspects of Intellectual Property Rights (TRIPS), which mainly apply to patents.

There are indications if not confirmations that in the event of a dispute, whichever of the three spheres that provides the greatest intellectual property protections will take precedence. However, our learned friends advise, the runes offer no reading of whether foreign investors must exhaust the remedies provided by domestic law —and thus take their chances in China’s newish commercial courts — before turning to international law, or whether they can take a short cut to international arbitration.

The other question is how much meat the new law provides for the United States. Intellectual property protection and market-opening is the kernel of US firms’ trade beef with China, even though it is the politically sellable trade numbers that US President Donald Trump focuses on. Trump’s announcement that he will sign a ‘Phase One’ deal on January 15, suggests Beijing has provided a big-enough headline victory with its new law for Trump to claim as his own, regardless of the devilishness in the details.