China-US Investment Treaty Would Strengthen Economic Relations

Sean Miner (PIIE)

Op-ed in Caixin Online

November 21, 2014

It seems like the United States and China disagree on many issues, and there is little reason for the two economic heavyweights to become truly closer in the next few years. This pessimistic take overlooks the prospect of significantly increased bilateral investment. With the recent breakthrough between China and the United States in the negotiations on the global Information Technology Agreement, the prospects for a bilateral investment treaty (BIT) between the two have improved. In fact, the countries' negotiators should promptly head back to the table to continue BIT talks. An agreement will provide significant momentum toward the long-stated Bogor Goals of "free and open trade and investment in the Asia Pacific region" announced by Asia-Pacific Economic Cooperation members in 1994 in Bogor, Indonesia.

A BIT would increase foreign direct investment (FDI) between China and the United States. The economic benefits from increased FDI would flow both ways and encourage needed structural reforms in both countries. Increased FDI in China's services sector would facilitate the shift from a manufacturing economy to a more efficient and sustainable growth model and would drive productivity increases throughout the economy. The United States needs more investment throughout its economy, especially in infrastructure.

The recent breakthrough between China and the United States in negotiating the global Information Technology Agreement has improved the prospects for a bilateral investment treaty.

Investment between China and the United States is much smaller than it should be considering the economic and even geographic fundamentals. Total US FDI abroad in 2013 was more than US$ 4 trillion, but US investment in China was less than 2 percent of that amount. Likewise, China's outward FDI in 2013 was US$ 600 billion, but just around 5 percent of that was invested in the United States. Yet, China and the United States are among each other's largest trading partners. In addition, China and the United States are the world's largest recipients of FDI due to their large markets and opportunities for management and technological learning, so there should be much more investment going on between these two countries.

Bilateral investment treaties are intended to create fair, open, and transparent investment environments, but in order to do so the agreements must be comprehensive. Getting a comprehensive, high-quality deal on investment between the United States and China is not as far-fetched as some believe. Canada and China signed a BIT in 2012 that was ratified by Canada in September. The treaty contains some commitments equivalent to those that the United States would seek in a BIT with China. Investor-state dispute settlement (ISDS) is an important aspect of the Canada-China BIT, along with protection for the respective countries' public policy objectives.

China also signed a trilateral investment treaty with Japan and South Korea in 2012. While this "CJK" agreement also provided for some meaningful investment protections, it is short of what the US government is looking to achieve—and requires in such a treaty in order to get congressional support. China is also negotiating a BIT with the European Union, where areas like market access and dispute resolution will engender tough negotiations. ISDS is a controversial topic, even between the European Union and the United States, but that is part of setting a global standard for such protections for China to live up to. Most multinational companies and investors see comprehensive treatment of investor rights as essential to putting some teeth in investment protections.

Talks on a potential BIT between China and the United States picked up in 2013 with China's agreement to national treatment of US investors in the pre-establishment phase of investment, leveling the playing field for American and Chinese firms. Pre-establishment was one of the requirements listed on the updated US Model BIT in 2012—and the negotiators achieved it. In contrast, pre-establishment had been left out of the CJK treaty and the Canada-China BIT.

Not all the requirements for a BIT would be easily met. The United States would like to see a push toward a "one-stop" shop for regulatory agencies, rather than having foreign firms obtain permits and licenses from several Chinese agencies for a single investment. In addition, the increasing application of China's antimonopoly law in a strict fashion, since the ascension of President Xi Jinping, has become a major issue for large foreign firms in China, even if enforcement would be to China's benefit and aid global investors. The prohibition of performance requirements, including for indigenous innovation and technology transfer, is certainly another area of US government concern.

The United States would also like to see China adopt and issue a short negative list as opposed to the foreign investment catalogue that it issues every several years. Such negative lists, which spell out the encouraged, restricted, and prohibited industries for foreign investment, are currently being revised. The vice minister of finance, Zhu Guangyao, stated in a speech at the Peterson Institute for International Economics in October that China "faces a real challenge domestically" to trim the negative list. However, this is one of the most important issues for the United States. In order to significantly increase market access, the negative list, which lists only the industries that are off limits to foreign investment, must be relatively short.

China, on the other hand, would also like to have some enhanced investor protections when its businesses go into the United States. Chinese negotiators have also been clamoring for a clarification of the process some foreign investors must go through in the United States. The Committee on Foreign Investment in the United States (CFIUS) investigates any investments than may run up against US national security concerns in an admittedly somewhat arbitrary and opaque process—not just for proposed Chinese investments but perhaps especially so. Chinese investors would like to see more transparency in this process. The apparent randomness of rejections of proposed deals by Chinese firms is arguably deterring the growth of FDI to the United States, as well as souring economic relations more widely.

All of these challenges to the United States and Chinese negotiators of a BIT between the two countries are, however, surmountable. In fact, there are clear precedents in both countries' economic relations with other parties for the kind of compromises and reforms needed to close the deal. There is also clearly pent-up demand for investment in both directions that would emerge rapidly, were a deal to be struck. This seemingly technocratic and narrow measure of a bilateral investment treaty is not only attainable—such an agreement between Chinese and American negotiators would demonstrate the ability of the two economic powers to work together and the availability of common ground on economics.