The UK’s bilateral investment treaty with China is not fit for purpose

Following the ongoing crackdown by Beijing on pro-democracy activists in Hong Kong, UK politicians have rightly called out the EU for rewarding China with an investment treaty, but going forward UK parliamentarians time would be better spent reviewing the UK’s own investment treaty which leaves much to be desired.

The UK-China Investment Treaty was negotiated and concluded back in 1986. Thirty-four years ago, China’s rise was not fully assured nor were the intentions of the Chinese Communist Party clear. Back then, the West held to the belief that economic engagement with China would lead to the liberalisation of its economy and its society, with its leader Deng Xiaoping considered a great moderniser.

This investment treaty, and similar treaties like it, were signed with this motivation in mind. At the time of signing, the UK’s GDP was three times the size of China, therefore one might be forgiven for the lack of foresight from UK policymakers when it came to the treaty’s content.

Under the treaty, China received Most Favoured Nation Status which allows Chinese state-owned enterprises and businesses the ability to operate in the UK on a level-play field. As part of the agreement Chinese companies operating in the UK are also able to seek redress through private arbitration against laws that are introduced which harm their profits.

This means in practice, that Chinese backed companies like Huawei can take the UK Government to court if they feel that it has introduced laws that directly harm its profits, particularly if these profits have been calculated to include future investments. This thorny issue may explain why Boris Johnson did not ban Huawei outright from the UK telecommunications network, but rather settled for a gradual phasing out of Huawei from the 5G network by 2027.

Outside of investor dispute settlement, the investment treaty has no transparency clauses, no health and environmental clauses, no corporate social responsibility clauses, corruption clauses, or clauses related to labour standards. There is no specific carve out for public health, public interest, or for that matter national security.

In short, the UK-China Investment Treaty reflects the era in which it was signed. It is devoid of any concern for China’s human rights record, the need for transparency, or to take into consideration the public health or public interest of the UK populace. Let alone any consideration that the Chinese Communist Party and Chinese state-owned enterprises may one day present a national security threat.

If not in response to China’s increased use of slave labour in its supply chain or Beijing’s growing encroachment of Hong Kong’s autonomy, the passing of time alone should be enough to warrant parliamentarians to consider reviewing this investment treaty.

Not least, because of the over £50 billion worth of Chinese investment that has poured into the UK in the last decade. Chinese state-backed companies have invested heavily in a range of strategic sectors from telecommunications, energy, steel, and transport. Take the case of the Chinese state’s sovereign wealth fund, China Investment Corporation, which owns nearly 9 percent of Thames Water and is part of a consortium that owns 61 percent stake in National Grid Plc’s gas division.

 According to the Henry Jackson Society, from 2010-2020 one hundred and fifteen UK companies were bought out by Chinese firms and over 40 percent of the foreign takeovers were in sensitive industries.

 With the roll-out of twinning schemes between UK and Chinese cities and with the former Chancellor turned banker, George Osborne, the mover behind both the “golden-era of relations with China” and the Northern Powerhouse, it is unsurprising that a substantial amount of this investment is happening at devolved and regional levels.

This includes the recent announcement that Beijing Construction Engineering Group had won a £20 million project to develop offices in Middleborough and a separate £130 million contract to redevelop a council-owned shopping centre in Wigan. In 2019, the Chinese state-owned enterprise also won a £330 million contract for the redevelopment of Crompton place shopping centre in Bolton and a £80 million contract to renovate the hotels around Manchester airport.

Sadly, many of these contracts are flying under the radar as local government scrutiny is under-funded, under-resourced, and its statutory powers are limited compared to Parliament. Most local governments focus on value for money and technical scrutiny, lacking the moral or the political scrutiny that would allow them to challenge the source of these funds.

It is no surprise that after a decade of cuts to local government budgets, leaders at devolved and regional levels warmly welcome any foreign investment and are not inclined to ask difficult questions about its source.

Looking at the continued levels of Chinese backed investment into the UK, it is clear that the death of the “golden era” in terms of simple economic investment is greatly exaggerated, even if diplomatic relations between the UK and China have chilled.

As tensions rise between the two countries over a variety of issues, this strategic and unchecked investment will carry even more influence, dampening the ability of the UK Government to act decisively in response to the crackdown in Hong Kong.

Parliamentarians would do well to call for this one-sided investment treaty to be reviewed and push for the inclusion of carve outs for public health, the environment, national security, labour standards, corruption, and corporate responsibility. As UK policymakers cannot advocate for foreign governments to reject investment treaties with China abroad, while turning a blind eye to the role of Chinese investment here at home.

Sam Goodman, Hong Kong Watch’s Senior Policy Advisor