Heads Together on the China-U.S. Bilateral Investment Treaty

Negotiations on Track

As a bilateral treaty, the aim of the BIT is to encourage citizens of both countries to invest in one another and to promote and protect such investment. Its content encompasses protection, investment treatment, expropriation and compensation, currency exchange, and dispute resolution. Both China and the United States have signed BITs with other countries. As the top two world economies, they have, under a deep political and economic background, been doing their utmost to advance negotiations. Since the financial crisis of 2008, the international economy has gone through significant adjustment. New features are apparent in the economic situation and relations between China and the United States, and their domestic and foreign policies. The start and accomplishment of the BIT now seems to be in sight.

First of all, the treaty addresses both China and the United States’ need for economic reform. Following profound changes in demographic structure, production factor prices, and the international economic situation, the Chinese economy has bid farewell to its golden period of two-digit growth and entered a “new normal” of slower growth and an adjusted development mode. Releasing further reform dividends and promoting a higher-level of opening-up has become an important consensus of the new-generation Chinese leadership. This became evident during the Third Plenary Session of the 18th Central Committee of the Communist Party of China, when it was elevated to a national strategy. Having been hit hard by the financial crisis, the United States has started to reflect on its development mode. While strengthening its virtual economy management, the Obama administration must also revitalize the manufacturing industry in an all-out effort to reinvigorate the real economy. It can thus improve people’s well-being and consolidate its world “leading status.” Both sides require healthier, more sustainable development and better, safer investment to propel their reforms. The changes in the two countries’ economic structure and economic policies constitute the foundation for signing the bilateral investment treaty.

The treaty also adapts to changes in China-U.S. economic relations. The global economy downturn had a grim effect on China’s exports, which have picked up little since the American economy recovered. The excessive production capacity of some of China’s commodities, and U.S. protectionism towards China are significant factors in the slow growth of China’s exports to the United States.

China’s investment in the United States, however, has grown rapidly. Ministry of Commerce statistics show that it rose from US $1.88 billion in 2007 to US $9.3 billion in 2012. Meanwhile China’s direct investment in the United States reached US $8.023 billion in 2013, and the compound annual growth rate grew to 41.54 percent from 2009 to 2013, ranking first worldwide, according to U.S. Department of Commerce statistics. The U.S. Rhodium Group long-term follow-up study of Chinese investment shows that Chinese enterprises’ investment in the United States broke the US $10 million barrier in 2014, when it hit US $12 billion. The “going global” strategy of Chinese enterprises and capital tallies with the Obama administration’s “choose the U.S” policy of inviting outside investment. This has had profound impact on China- U.S. trade and investment relations. It is interesting to note that, due to multiple factors, the trend of U.S. direct investment in China in recent years appears to be that of stagnation or even decline. Maintaining its attraction for Western capital, including from the U.S., through reform and opening-up is part of China’s efforts to promote the bilateral investment treaty.

The treaty also offers a way of managing the two countries’ strategic relations. Since 2010, the U.S. has been promoting the Trans-Pacific Partnership Agreement (TPP) and Transatlantic Trade and Investment Partnership (TTIP). Both are efforts to reverse the negative effects of the financial crisis and globalization and to reinvent international trade and investment rules to impose higher standards more in line with American interests. China, which is excluded, seems to be facing a challenge similar to that of 2001 when it sought to join the WTO. Under the backdrop of intensified Sino-U.S. strategic competition, growing risks of military confrontation and mounting economic and trade frictions, decision-makers in both countries have proved their leadership skills by controlling bilateral relations. To China, the benefits of proactively promoting Regional Comprehensive Economic Partnership (RCEP) and Sino-EU and Sino-U.S. bilateral investment treaty negotiations are twofold: both are (1) conducive to strengthening its economic strength and influence and (2) to maintaining the role of trade and economy in stabilizing the bilateral relations. They also contribute to building new major-country relations. The combination of multiple subjective and objective factors thus places the item, “forming a unified management standard for foreign capital entering the other country” firmly on the agenda.

Coexistent Opportunities and Challenges

Negotiations are mainly to do with investment market access, transparency, state-owned enterprises, security interests, labor protection, and environmental standards. China has long operated the examination and approval system of managing foreign capital whereby it awards post-establishment national treatment. Since the strategic deployment of comprehensive deepened reform agreed at the Third Plenary Session of the 18th Central Committee of the Communist Party of China, however, China has adopted the principle of “pre-establishment national treatment plus negative list” to push forward relevant negotiations with the United States.

This shows that China accepts the management standards set by the United States, and also that China is “promoting reform through opening-up.” Pre-establishment national treatment and negative list signifies that foreign investment projects will switch from the approval system to the filing system. This will simplify examination and approval procedures for foreign investment into China, and make the admission of foreign capital more transparent and efficient. By streamlining administration and delegating power to lower levels China expects to promote its reform of domestic capital management on the same basis as reforms to the foreign capital management system. It will thus eventually “let the market play the decisive role in resource allocation,” and create an upgraded version of the Chinese economy.

After the establishment of the Shanghai Free Trade Zone in August 2013, the State Council approved in April 2015 the establishment of three more pilot free trade zones in Guangdong, Tianjin, and Fujian. This was under the stipulation that all four free trade zones would adopt the management mode of pre-establishment national treatment plus negative list. Like the special economic zones of the 1980s, these pilot free trade zones will undoubtedly play an experimental role in the new round of reforms. When the conditions are suitable and the time is right, the China-U.S. Bilateral Investment Treaty, like the Permanent Normal Trade Relations (PNTR), will act as a ticket and passport for China to further integrate into the world economy and access high-standard FTA rules and practice.

The considerable differences between the two countries’ political and economic systems, extent of development, degree of market openness, and enterprise competitiveness make the Sino-U.S. BIT negotiations an opportunity to “use the exterior to promote the domestic.” They might also affect the economic and institutional foundation of the China-U.S. power game. As it took six years – from 2008 to 2014 – for China and the United States to reach agreement on the core articles and main issues of the BIT text, however, negotiations are obviously not easy.

During these negotiations both sides must maximize benefits and minimize risks and losses. The BIT will eventually hit a new balance according to the contrasts between national strength and price demand. It can then promote trade and investment and protect the economic and social security of either host country. Negotiation is a process of resolving differences and reaching a compromise, and hence entails many focuses. Several items merit attention. Although China is committed to the reform of state-owned enterprises, it upholds the principal status of public ownership and the leading role of the state-owned economy. It will not, therefore, unconditionally embrace the U.S. principle of “competitive neutrality” with regard to state-owned enterprises.

As to the high U.S. labor and environment standards, to avoid loss of competitive power China will insist on appropriate arrangements geared to Chinese conditions. Whether or not the BIT can resolve misgivings that exist in the two countries is vital. For instance, there are worries in Chinese academic circles about transnational companies’ monopoly of China’s daily chemical industry and soft drinks industry. Will the BIT aggravate this trend? The U.S. Foreign Investment Review Board’s rejection of Sany Heavy Industry and Huawei’s Greenfield investment and merger and acquisition project applications makes clear that the United States is sensitive to and suspicious of China’s investment.

China and the United States have now compiled negative lists and are prepared to exchange them. Frequent discussions and revisions of these lists will undoubtedly ensue. Both sides will haggle over such items as the scope of prohibited or restricted fields and industries, enhanced transparency of special management measures, rationality of relevant state security examination procedures, and even adjustments of the proportion of certain industries’ foreign equity.

The international trade negotiation process is a two-level game that involves both countries’ domestic interest groups as well as negotiation teams. The China-U.S. BIT may, like negotiations on China’s PNTA, also trigger changes in domestic interest patterns, and related effects cannot be ignored. Decision-makers face the problems of whether or not the U.S. administrative department can acquire fast-track authority from Congress, whether or not changes in the political ecology will influence the future of the BIT, and whether or not TTP and TTIP negotiations will affect the China-U.S. BIT negotiations.

Even when negotiations are concluded and the agreement comes into force, a number of contingency questions will still remain. For instance, taking into account the uneven economic development between various provinces, will a transitional period in which to apply the accumulated pilot FTA experience of foreign capital management be necessary? Will there be any impediments to reducing the examination and approval authority of a dozen or more government departments, including the Ministry of Commerce, the National Development and Reform Commission, China Banking Regulatory Commission, and China Insurance Regulatory Commission, so breaking the interests of these sectors and the inertia of their thinking? The United States needs funds from all over the world to support its economic recovery and prosperity. Bearing in mind the particularity of China-U.S. relations, however, when China’s capital enters the U.S.’s fields of information and communications technology, energy, foodstuffs, and real estate, and participates in mergers and acquisitions of American enterprises, will there be any recurrence of adverse reactions from conservative politicians and dissatisfaction among the populace? How best to plan, control the risks, promote the beneficial and abolish the harmful will test the wisdom of both countries’ policy-makers.

China’s Positive Efforts

No matter the risks and challenges, China’s practical measures provide the answers. Premier Li Keqiang told visiting U.S. Secretary of Commerce Penny Pritzker on April 13 that the Chinese government will expand the opening-up of the service and general manufacturing industries and halve the restraints on foreign investment. The State Council stipulated in its recently documented approval to build three pilot free trade zones that all four free trade zones will adopt the new negative list of 122 items with special management measures–60 plus items fewer than the first Shanghai Free Trade Zone list released in 2013.

Meanwhile, the Chinese leadership has also expressed confidence in preventing risks through improvements to the national security review system, and by perfecting the during-process and after-event supervision. A hero is nothing but a product of his time. While seizing the opportunities of a new round of foreign investment industry layouts and coping with the new risks attendant upon foreign investments entering the country, the Chinese government must also provide political support and institutional guarantees for Chinese nationals and legal persons investing overseas. In 2014, China’s outbound investment amounted to US $140 billion, surpassing inbound investment by US $20 billion. China thus became a net capital exporting country, according to the China Two-way Investment Development Report 2014. The USA Asia Society predicts that by the year 2020, China’s direct investment throughout the world will surpass US $ one trillion, and that a great proportion of it will go to developed countries such as the United States. Creating for Chinese entrepreneurs an open, just and transparent competitive market overseas, and helping them safeguard their legitimate rights and interests when disputes arise is a new embodiment of governing for the people.