What is the implication of “National Treatment” for foreign investors in China under China’s new Foreign Investment Law?

In international trade, “national treatment” refers to the principle that foreign goods and services should be treated no less favourably than domestic goods and services in the importing country’s market. This means that foreign products should not be subject to higher tariffs or other trade barriers than domestic products, and foreign companies should not be subject to discriminatory regulations or different types of treatment that would give domestic companies an unfair advantage. 

China’s policy on “national treatment”

In the case of China, the country has committed to providing national treatment to foreign goods and services under various international trade agreements, including the World Trade Organization (WTO) Agreement on Trade-Related Investment Measures (TRIMs). In practice, however, some foreign companies have complained about being subject to discriminatory regulations or treatment in China, particularly in sectors where the Chinese government has placed restrictions on foreign investment or where state-owned enterprises dominate the market. 

China’s top legislature passed the new Foreign Investment Law on March 15, 2019. The new law takes effect on January 1, 2020. This new China Foreign Investment Law provides foreign investors with “national treatment,” the same treatment as Chinese enterprises, except for certain restrictions in limited sectors under the “Negative List.” According to this statutory confirmation, international investors can expect to have the same treatment as Chinese companies in terms of forming subsidiaries, M&As, doing business or bidding for contracts in most sectors, including cleantech, environmental services, biotechnology, software and agri-technology.

Although international companies have been allowed to set up 100% wholly-owned subsidiaries in China since 1986, in particular so-called “encouraged” and “permitted” areas, the list of “restricted” and “prohibited” areas for foreign investment (and sometimes, even in some “permitted” areas) was fairly long. In many scenarios, a foreign corporation had to find a local Chinese partner as a matter of law.

Although, as a matter of practice, it is worth a separate discussion regarding the pros and cons of setting up a wholly-owned subsidiary in China vs. a joint venture (JV) with a local Chinese partner, it is a positive consequence of the new Foreign Investment Law that foreign investors will have the “national treatment.” Therefore in most cases, foreign investors will no longer need the approval from, or filing with, the Ministry of Commerce (MOC) in Beijing (and in many cases, its local counterparts) before setting up their subsidiary or JV in China, closing an M&A deal or acquiring assets from another Chinese company.

Final thoughts on “national treatment”

Not needing MOC approval/filing means a shorter and smoother process and more certainty.  Of course, as in the U.S. and many other countries, national security review and merger clearance by a Chinese government authority (e.g. MOC) would still be applicable if a proposed transaction falls within the relevant scope, although most transactions initiated by an international small and medium-sized enterprise would probably not trigger those reviews.