The Lapse of China-Indonesia Bilateral Investment Treaty

Author: Reynard Kristian

(Universitas Gadjah Mada)

On 31 March 2015, Indonesia has unilaterally denounced the China-Indonesia

Bilateral Investment Treaty (BIT). This represents an act in a strategy to terminate
all of its reported sixty-seven bilateral investment treaties with other nations.
While such an act may appear to be of minor consequence at first glance, it has
significant implications in terms of Indonesia‟s obligations under international
law, as well as its rights as a sovereign state to act in the national public interest.
Consequently, the future economic cooperation between China and Indonesia
might be at its great peril with regards to the legal uncertainty – including the
possibility of hostile relationship between the two countries. This essay would
examine the significance of BIT on foreign investment, especially between China
and Indonesia. Further, the consequence of the termination would be thoroughly
scrutinized under the legal perspective. Lastly, the Author would construct a
moderate approach to mitigate the risks arising out of the lapse of the China-
Indonesia BIT – specifically for the negotiation of the new BIT.

The Importance of Bilateral Investment Treaties for China-Indonesia Relationship

Developing countries often compete for foreign investment with the hope that foreign
direct investment (FDI) will bring a wide range of economic benefits.1 The recent surge in
foreign investment may certainly help to explain the increased motivation for countries to use
bilateral investment treaties as a means of providing international investors with an attractive
investment environment.2
By definition, a bilateral investment treaty is an investment agreement signed by two
countries that legally binds the right and obligation in facilitating the investment entering to
each country.3 For capital importing countries BITs represent a tradeoff: states give up a
degree of policy autonomy, and do so in the hope it catalyzes foreign direct investment by
credibly assuring direct investors that their long term, illiquid investments will not be
undermined by adverse policy actions in the future.4 Therefore, the primary role of BITs is to

1
See Gordon Hanson, Should Countries Promote Foreign Direct Investment?, UN Doc.
UNCTAD/GDS/MDPB/G24/9 (G-24 Discussion Paper No. 9, 2001), available at http://
www.unctad.org/en/docs/pogdsmdpbg24d9.en.pdf.
2
See UN Conference on Trade and Development, World Investment Report 2003: FDI Policies for
Development: National and International Perspectives, UN Doc. UNCTAD/ WIR/2003 (Sept. 4, 2003),
available at http://www.unctad.org/en/docs/wir2003_en.pdf. for a review of recent trends in this area.
3
Andrew Stephson and Lee Carol, Protecting Foreign Investment by Using Bilateral Investment Treaty,
(Clayot UTZ, 2012) pg. 3.
4
Andrew Kerner, „What Can We Really Know About BITs and FDI?‟ (2018) ICSID Review, pg. 2.
reduce non-economic risk and thus open up investment opportunities5 by laying down the
terms and conditions under which nationals of one party to the BIT invest in the other one,
including their rights and protection thereof.6
Imagine if two entities amounted to roughly US$13.254 billion interacting with each
other – the whole economy system might be damaged by the lack of the rules governing that
interaction. That particular amount is actually the total sum of Indonesia‟s and China‟s gross
domestic product in 2017 based on data from World Bank.7 Indonesia has seen more and
more investments from Asian powerhouse China which is based on the fact that in 2017,
China was ranked as the country with the third-largest foreign investment in Indonesia at
US$3.36 billion, a significant increase from $2.66 billion in 2016.8 In other words, to level
the playing field and creating a rules-based foreign investment, therefore, a BIT is necessary
to govern those investments from China and to protect the Indonesia‟s interest.

The Consequence of China-Indonesia BIT Termination

BITs have been described as (and have also been criticized for being) asymmetrical. 9
The critics have long argued that there is ample evidence to show that these agreements to the
contrary merely allow transnational corporations more freedom to exploit workers and to
shape the national and global economies of the junior partners to suit the corporations‟
interests. In this case, the Indonesia‟s prominent arguments to terminate the BIT evolves after
having encountered some treaty-based investment dispute cases involving hundreds of
millions of dollars in claims and potential damages. Presently, the remarkably controversial
ICSID-base case, Churchill Mining PLC and Planet Mining Pty Ltd v Republic Indonesia
cases may have driven the government of Indonesia to review its current treaty portfolio,
including the China-Indonesia BIT.
In short, the China-Indonesia BIT has several flaws which could be identified as
follows:
1. The China-Indonesia BIT was materialized in 1994 (and entered into force on April
1996). The economy size and investment climate was very different compared to what

5
Michael R. Reading, „The Bilateral Investment Treaty in ASEAN: A Comparative Analysis‟ (1992) 42 Duke
Law Journal, pg. 680-681.
6
Anastasiia Koltunova, Etale Reagan and Marina Trunk-Fedorova, Termination of Bilateral Investment
Treaties: Alternatives for Least Developed Countries (TradeLab Law Clinics, 2018) pg. 1.
7
The data can be accessed in this website: https://data.worldbank.org/.
8
Rachmadea Aisyah, „Chinese Investments Trending in Indonesia‟, The Jakarta Post,
https://www.thejakartapost.com/news/2018/05/02/chinese-investments-trending-in-indonesia.html accessed
21 February 2019.
9
Todd Allee and Clint Peinhardt, “„Evaluating Three Explanations for the Design of Bilateral Investment
Treaties” (2014) 66 World Politics 47.
 it is currently. From Indonesia perspective, the BIT was driven by the liberalization
policy in New Order Regime to attract as many foreign capitals as possible. This led to
the overall terms and conditions of these BITs are not in favour of Indonesia‟s best
interest. The dependence of foreign government in order to sustain the economic
development has been largely reduced compare to the 1990s era. Therefore, the rule
must be changed to balance the relationship.
2. The China-Indonesia BIT used a broad asset-based definition of investment. In
instance, almost all Indonesian BITs were being interpreted to give better treatment to
foreign investors than its own domestic investors. The existing BITs were also being
interpreted to restrict states' sovereign right to regulate its own economy and society.
The best practices must include the test on the qualification that such asset must have
the characteristics of an investment.
3. Indonesia has recognised that its BITs are outdated and inconsistent with the more
recent investment treaties it has signed, in particular the ACIA and ASEAN+
Agreements.

Indonesia has formally terminated China-Indonesia BIT on 31 March 2015. However,

the impact on existing investors of a decision to terminate China-Indonesia BIT (even
without substituting them for alternative arrangements) would not be immediate. According
to Paragraph 1 Article XIII China-Indonesia BIT, under sunset clauses, existing investors
may still be entitled to rely on the BIT protections for a period of ten years after the
termination.10 Thus, Indonesia and China will still be liable for the violation under the China-
Indonesia BIT and may be brought to arbitration until March 2025.

The Paradigm Shift for Strengthening Indonesia-China Economic Cooperation

As a consequence of the termination, both Indonesia and China are required to

negotiate a new BIT deal with China before 2025. This is particularly important since China
and Indonesia would presume to take important role in global economy in the upcoming 25
years – not including the fact that the future economy would be harder to predict. This
negotiation might be one of the most prolific strategies to create a more harmonious
relationship between two countries.
There are arguments that suggest the new China-Indonesia BIT does not necessarily
have to be promulgated. This is predicated on the fact that there are existing treaties

10
Arguably, this is one of the criticisms to Indonesian current BIT that the sunset clause is too long.
underlying the investment relationship between China and Indonesia under the regional-based
treaties which are ASEAN-China Free Trade Area (ACFTA) and Regional Comprehensive
Economic Partnership (RCEP). Despite the existence of the multilateral treaties, a new BIT is
still necessary since BIT consists of the interlocking law, an investment legal instrument
under Indonesian law to connect the BIT as an international agreement and national legal
system. In particular, the Law No. 25/2007 concerning Investment gave the government of
Indonesia the flexibility to regulate in the international sphere. Such provisions might only be
conceptualized under a bilateral treaty, not the multilateral treaty.
The main author‟s proposition with regards to the new China-Indonesia BIT is to be
able to conceptualize Indonesia‟s economic capability in a long term and capitalize the
potential by negotiating the term. Indonesia should not be the „price-taker‟ under the new BIT
and actively engage the international forum to highly regard the problems in our hand. It was
proven such negligence would result to reprehensible, for instance, there are evidences of
debt trap arising from China‟s investment strategy. It is, therefore, of Indonesia‟s best interest
to build a structural communication and rule-based investment flow in order to safeguard our
national and vital resources and assets. There should be a balance between sovereignty of the
state and the pursuit of economic goal. Finally, a transparent and consistent approach to
national legislation may be as important as the issue of consistency with international
commitments – for the central government, the local government and other stakeholders.