Extended and Restrictive Application of the MFN Clause to the Substantive Treatment of Investments and Implications for China

Tian Longmei

Abstract: Most-favored-nation (MFN) treatment has become a universally incorporated rule in the standard of treatment of foreign investors in contemporary international investment agreements. The MFN clause contained in any given investment agreement acts as a chain linking the many scattered investment agreements concluded in order to ensure that the treatment provided under a particular investment agreement is not less favorable than that provided by the same contracting parties under other investment agreements in the same area. However, the excessive application of MFN treatment and expansive interpretations of arbitration agreements have seriously undermined the host country’s right to regulate, and exacerbated the fragmentation of IIAs and their arbitration. In addition to this, arbitral tribunals tend to interpret the other standards of protection introduced in a way that favors the protection of the investor. This approach carries the risk of negative multilateralization, endangering the host state’s legitimate right to regulate, and its public policy space. At the same time, broad judicial interpretations widen the scope of application of the MFN clause, causing the host state to take on unforeseen additional obligations as a result. Because of the problems arising from the extended or restrictive application of MFN clauses in substantive matters, and in light of China’s current “dual identity” in international investment, this article attempts to provide suggestions on how to avoid the risks of negative multilateralization in China’s outward investment, and for the introduction of foreign investment from the perspective of treaty-making.

Keywords: Most-favored-nation Treatment, International Investment Arbitration, International Investment Agreement, Substantive Obligations