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CAI and sustainable development: No sure-fire success

The European Union (EU) and China agreed on the draft of the Comprehensive Agreement on Investment (CAI) text in January 2021, after over seven years of negotiations. Both parties opine that a distinct feature of the CAI is the inclusion of a standalone Section on sustainable development (SD) and investment. While around a dozen EU trade agreements contain an SD Chapter, it is rather exceptional that an investment agreement includes comprehensive SD provisions. For China, the CAI is the first agreement that includes such a standalone SD section, though some Chinese trade and investment agreements contain environmental and labour protection clauses sporadically. The SD Section in the CAI has several subsections, dealing with various issues relating to corporate social responsibility (Sub-Section 1), environmental (Sub-Section 2) and labour (Sub-Section 3) protection, and addressing disagreements between the parties (Sub-Section 4). This Section has several distinct features and we explain them in the rest of this post.  

First, the SD Section does not impose many new substantive obligations on the parties. The parties’ commitments are largely based on the obligations already undertaken under existing international legal instruments. Examples include a commitment to ratify and implement the Paris Climate Accord. Nevertheless, the Section allows the parties to determine own SD policies and priorities, establish levels of domestic labour and environmental protection, and to adopt or modify its relevant laws and policies accordingly, consistently with its multilateral commitments in the fields of labour and environment (Article 1, Sub-Section 2). Furthermore, this Section also includes obligations not to reduce the levels of environmental and labour protection to attract investment and to effectively enforce labour and environmental laws (Article 2, Sub-Section 1). Thus, while this Section reaffirms the parties’ SD commitments and encourages the parties to adopt high standards, it does not add much value with regard to the parties’ existing SD obligations.

Second, unlike other Sections of the CAI, a large part of the obligations under the SD Section are best-endeavour and the parties are left with broad discretional power in implementing the Section. For instance, the parties are required to “strive to ensure that its laws and policies provide for and encourage high levels of environmental protection” and “labour protection”. Furthermore, parties should “work towards” ratifying all ILO Conventions which is all but a hard requirement. The weak enforceability of the SD Section has been criticized as a major defect of the CAI and an improper compromise the EU has made with China, as it disables the CAI of its potentials in requiring China to provide for higher levels of environmental and labour protection. Such criticism is particularly strong in Europe as some commentators argue that China’s human rights record is poor, and that the CAI could and should be used as a policy leverage for the EU in pressing China to improve its human rights situation.  

Third, the SD Section provides for a mechanism for addressing disagreements relating to investment and SD. While such a mechanism has been included in a number of EU trade agreements, it is the first time that China is subject to such a mechanism. Procedurally, as this mechanism appears similar to the WTO panel procedure, it doesn’t introduce much novelty. However, what this mechanism aims to address is not merely disputes, but a much broader range of “disagreements of any matter covered under this Section”, and the expert panel under this Section shall have exclusive capacity in addressing such disagreements. The recent decision of the expert panel under the trade and SD Chapter of the EU-Korea FTA seems to suggest that such a mechanism could be a helpful way in enforcing SD obligations under trade and investment agreements.

Fourth, the CAI allows participation of civil-society organizations in the implementation of the agreement. More specially, the Section not only requires both parties to hold regular dialogues with such organizations as ‘non-state stakeholders’ on the implementation of the agreement (Article 3, Sub-Section 1), but it also allows the organizations to participate in the expert panel procedures for addressing SD disagreements through delivering written amicus curiae submissions (Article 6, Sub-Section 4). While EU hosts many civil-society organizations, Chinese law imposes strict requirement on the establishment and operation of such organizations in its territory, especially foreign-funded ones. Such a situation potentially limits the role civil-society organizations could play in the implementation of the CAI. That said, however, civil-society organizations could also significantly influence the parties, especially the EU, in ratification and implementation of the CAI in the coming years, given the sensitivity of SD issues. In this regard, one could be reminded of the negotiation of the Transatlantic Trade and Investment Partnership (TTIP), which shows how strongly civil-society organizations could influence trade policymaking at both the EU and member state levels.

The inclusion of a standalone SD Section shows the progressiveness and innovativeness of the CAI, but the practical effects of this Section remain uncertain as the SD obligations are inadequately enforceable and the role of civil-society organizations could be strictly limited. Such ‘defects’ imply that not only the enforceability of the Section to a large extent depends on the goodwill of the parties to make progress on issues related to stronger environmental and labour protection, but that the EU could also face a difficult situation in the ratification process of the CAI in the future.

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