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Professor Ming Du, from our School of Law, explains investor-state dispute settlements that can challenge national security decisions.

British prime minister Rishi Sunak recently declared that the golden era of UK-China relations is over. The next day, the government removed China General Nuclear Power Group, a Chinese state-owned company, from the construction of the UK’s Sizewell C nuclear power station.

Other countries have made similar moves in recent years. In 2020, for example, then-US president Donald Trump attempted to ban social media platform TikTok in the US. The move was subsequently stopped by two US judges following a lawsuit by TikTok, and eventually dropped by current president, Joe Biden.

But such government decisions based on national security concerns could affect the future international growth of Chinese business. This is particularly important given that international investment and trade by China has increased in recent years, enabling it to emerge as a powerful challenger to the global economic order.

Indeed, Chinese companies and investors often refuse to take such national security changes lying down. With varying degrees of success, firms have mounted a range of formal and informal challenges in recent years. This includes lobbying, media campaigns and diplomatic assistance or support from business associations, but also contesting national security decisions in domestic courts.

A relatively new strategy for China, however, is to challenge national security decisions before international tribunals using a method called investor-state dispute settlement. These tribunals are usually set up to handle specific disputes, with arbitrators appointed and paid for by one or both of the parties involved. The suits tend to claim that national security decisions have breached host countries’ obligations to Chinese investors under bilateral investment treaties (BITs). These treaties grant foreign investors certain standards of treatment and allow them to sue host states for alleged violations.

Most recently, Chinese tech giant Huawei made an investment treaty claim against the Swedish government over its exclusion from the rollout of the country’s 5G network. And my research shows that Huawei’s legal challenge to Sweden’s ban might only be the tip of the iceberg since Huawei equipment is also currently banned in other countries that have signed BITs with China. In the UK, for example, the government has committed to exclude Huawei’s technology from the country’s 5G public networks by the end of 2027.

The outcome of Huawei’s dispute with Sweden could affect public interest there and in other countries like the UK. If the tribunal finds in Sweden’s favour, preventing the use of Huawei equipment could delay 5G rollout by years and inflate prices for mobile phone users.

It’s also worth noting a 2019 tribunal decision that ordered Pakistan to pay US$6 billion in compensation to an injured foreign investor, mining company Tethyan Copper. If Huawei wins this or any other similar legal challenge, financial liabilities could be passed on to taxpayers.

Defining ‘national security’

Huawei’s challenge of Sweden’s national security decision shows how brewing tensions and increasing distrust between China and western countries is affecting international trade and business.

Indeed, when countries adopt an expansive concept of “national security” in domestic law, companies might see it as a pretext for protectionism or a tool of geopolitical rivalry. Certainly, there is no conclusive evidence that Huawei products, for example, are inherently unsafe versus similar products from other companies, or that Huawei poses a national security threat.

To complicate matters further, some early Chinese BITs – between China and Sweden, and China and the UK for example – do not explicitly allow host states to prohibit foreign investment based on national security concerns. And so Huawei’s recent legal challenge should help determine:

  • when and why a host country can stop a foreign investment based on national security concerns
  • and how international arbitral tribunals are likely to review national security decisions in the future.

Challenging national security decisions

But what could this case mean for 5G rollout? In this specific example, Huawei is likely to fight an uphill battle to persuade a tribunal that Sweden’s decision is inconsistent with the China-Sweden treaty, for three reasons.

First, any potential threat to the security of 5G networks constitutes a national security risk because it means a country’s communications could be brought down by espionage, sabotage or system failure. Second, 5G networks are so complex that it is virtually impossible to find and eliminate every significant vulnerability. This means attempts by Huawei to argue for screening and control of software, for example, may not defuse national security concerns. And third, tribunals usually defer to a host country’s national security decisions.

Of course, tribunal decisions can go the other way. For example, several tribunals found against the Argentinian government that the country’s financial crisis in the 2000s was severe enough to qualify as a national security issue. But generally, these tribunals tend to decide that governments are best placed to make such judgements.

Huawei has not brought a case against the UK yet, but western countries generally should think about how to maintain and improve technology infrastructure – even if innovation comes from regions with which tensions are strained. Failure to do so could significantly impact consumer costs and access to cutting-edge technology.

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  • This article is republished from The Conversation under a Creative Commons license. Read the original article.

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