Huawei Strikes Back: Challenging National Security Decisions Before Investment Arbitral Tribunals

• Citation: Vol. 37 No. 1
• Publication year: 2022

Huawei Strikes Back: Challenging National Security Decisions Before Investment Arbitral Tribunals

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Huawei Strikes Back: Challenging National Security Decisions Before Investment Arbitral Tribunals

Cover Page Footnote

As a direct reaction to rising investment from China amid the transformation of the geopolitical context in which China has emerged as a great power, Western countries, including the United States, have introduced new or reinforced existing national security screening mechanisms. Confronting weaponized national security reviews in host countries, Chinese investors have recently begun to challenge national security decisions before international investment arbitral tribunals, claiming that such decisions have breached host countries' obligations under international investment treaties. Chinese telecoms giant Huawei's investment treaty claim against the Government of Sweden before the International Centre for Settlement of Investment Disputes (ICSID) over its exclusion from the rollout of 5G network in January 2022 is one of the most prominent examples. This article takes stock of the whole body of arbitral awards rendered on national security decisions in investment arbitration and applies it to Huawei's ongoing complaint against the Government of Sweden. As the first critical analysis of whether the ban on Huawei from supplying 5G infrastructure on national security grounds violated the Government of Sweden's investment treaty obligations, this article argues that Huawei is likely to fight an uphill battle in persuading the arbitral tribunal that the Swedish national security decision is inconsistent with the China-Sweden bilateral investment treaty. The analytical framework provided in this article is useful to analyze all future investment disputes initiated by foreign investors regarding host countries' national security decisions. Moreover, this article argues that Huawei's challenge of the national security decision of the Government of Sweden is not an isolated incident, but an outgrowth of a long-brewing tension between China's state capitalism and the liberal international economic order. Whether the investment arbitral tribunal may handle the Huawei dispute adroitly is a litmus test of the resiliency of international investment norms to accommodate systemic friction between heterogeneous political-economic models and rising strategic distrust in the era of geoeconomics.

HUAWEI STRIKES BACK: CHALLENGING NATIONAL SECURITY DECISIONS BEFORE INVESTMENT ARBITRAL TRIBUNALS

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Abstract

As a direct reaction to rising investment from China amid the transformation of the geopolitical context in which China has emerged as a great power, Western countries, including the United States, have introduced new or reinforced existing national security screening mechanisms. Confronting weaponized national security reviews in host countries, Chinese investors have recently begun to challenge national security decisions before international investment arbitral tribunals, claiming that such decisions have breached host countries' obligations under international investment treaties. Chinese telecoms giant Huawei's investment treaty claim against the Government of Sweden before the International Centre for Settlement of Investment Disputes (ICSID) over its exclusion from the rollout of 5G network in January 2022 is one of the most prominent examples.

This article takes stock of the whole body of arbitral awards rendered on national security decisions in investment arbitration and applies it to Huawei's ongoing complaint against the Government of Sweden. As the first critical analysis of whether the ban on Huawei from supplying 5G infrastructure on national security grounds violated the Government of Sweden's investment treaty obligations, this article argues that Huawei is likely to fight an uphill battle in persuading the arbitral tribunal that the Swedish national security decision is inconsistent with the China-Sweden bilateral investment treaty. The analytical framework provided in this article is useful to analyze all future investment disputes initiated by foreign investors regarding host countries' national security decisions. Moreover, this article argues that Huawei's challenge of the national security decision of the Government of Sweden is not an isolated incident, but an outgrowth of a long-brewing tension between China's state capitalism and the liberal international economic order. Whether the investment arbitral tribunal may handle the Huawei dispute adroitly is a

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litmus test of the resiliency of international investment norms to accommodate systemic friction between heterogeneous political-economic models and rising strategic distrust in the era of geoeconomics.

Table of Contents

Introduction..............................................................................................3

I. The Weaponization of National Security Review in International Investment Law....................................................6

A. Explaining the Proliferation of National Security Review ............6
B. A Critique of Weaponized National Security Review: The United States as an Example ................................................................ 11

1. An Overview of National Security and Foreign Direct Investment in the United States............................................ 11
2. A Critique of U.S. National Security Review of Foreign Direct Investment........................................................................... 17

a. The Expansive Concept of National Security................. 17
b. Unpredictable, Discriminatory, and Politicized National Security Review ............................................................ 18

II. Challenging National Security Decisions before International Investment Tribunals........................................22

A. The National Security Exception before Investment Tribunals ... 26
B. Why didn't Chinese Investors Challenge National Security Decisions before Arbitral Tribunals? ........................................32

III. A Critical Analysis of Huawei Technologies Co., Ltd. v. Kingdom of Sweden......................................................................35

A. Huawei and National Security Concerns...................................35
B. Why did Huawei Bring ISDS Proceedings against Sweden? ......40
C. The Prospect of Huawei v. Sweden............................................42

1. Does the Huawei Ban Violate Substantive Treaty Obligations in China-Sweden BIT? ............................................................44
2. The Necessity Defense......................................................... 50

Conclusion...............................................................................................53

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Introduction

As the international economic order is transitioning away from a neoliberal order, in which deeper economic integration was viewed as contributing to mitigating conflicts and preserving world peace, towards a new geoeconomic order, in which economic interdependence itself is seen as a security risk, it is no longer possible to separate national security threats from economic issues.¹ Indeed, one of the most striking trends in investment policy over the past decade was that numerous countries have introduced new or reinforced existing national security screening mechanisms for foreign investment.² Recent examples include the United Kingdom's National Security and Investment Act 2021,³ the European Union's framework for screening foreign direct investment,⁴ the enhanced investment screening requirements that are embodied in Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) in the United States,⁵ and Measures for the Security Review of Foreign Investment adopted in 2020 in China.⁶ The COVID-19 pandemic has accelerated this trend in response to new national security concerns about foreign investment.⁷

It is no secret that the upgrading of investment screening mechanisms in some Western countries represents a direct reaction to rising investment from china in sensitive industries and, more broadly, to the transformation of the geopolitical context in which china has emerged as a great power.⁸ The Government of china has vehemently criticized national security review of foreign investment from China in some Western countries as discriminatory,

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arbitrary, and politicalized. For example, commenting on Australia's decision to block the acquisition of a major Australian construction company by a Chinese state-owned enterprise in 2021, the Chinese Embassy in Canberra accused the Australian government of "weaponizing" national security.⁹ China's Ministry of Commerce has also identified the abuse of national security review as a major regulatory hurdle for Chinese investors in the United States.¹⁰

To respond to the allegedly unfair and arbitrary national security reviews, Chinese investors have resorted to a range of formal and informal mitigating and remedial measures, including lobbying, media campaigns, diplomatic assistance, support from business associations, and contesting national security decisions in domestic courts of host states.¹¹ However, Chinese investors have rarely challenged national security decisions before international investment arbitral tribunals.¹² The lack of effective use of investor-state dispute settlement (ISDS) by Chinese investors stands in sharp contrast to the number of international investment treaties (IIAs) China has signed, many of which include most of the standard investment protections along with full advance consent to ISDS.¹³

Beneath the apparently calm surface, the situation is stormy. The presence of Chinese investors in ISDS proceedings has been rising fast in recent years. Since 2019, Chinese investors have filed nine investment arbitration cases against foreign host states, more than what Chinese investors had filed for nearly...