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A High Standard Bilateral Investment Treaty

Jul 24 , 2014
  • He Weiwen

    Senior Fellow, Center for China and Globalization

The just concluded 6th China-US S&ED ended in over 300 results and has been cheered by both governments and media. On the economic track, both sides are committed to intensify the BIT negotiations and strive for the agreement on core issues and major articles of the treaty text by the end of 2014, and initiate the “negative list” negotiations early in 2015. 

He Weiwen

China and the US have experienced a number of divergences and differences over the past year. While it is extremely necessary to manage the differences, it is equally crucial to seek convergences and common interests.  A high standard BIT will be a keystone anchoring China-US bilateral trade and investment relationship on a transparent legal system and win-win basis, and in turn supporting a new mode of relationship between major powers. 

An Early BIT Is Anticipated 

China and the US have already spent too much time and energy on BIT talk. The talk was initiated as early as in the 1980’s, only suspended after 1989 and resumed again in 2008. The 5th China-US S&ED in Washington, D.C. in July 2013 already announced a major progress in BIT talk when both sides agreed to start the substantive negotiations on BIT based on pre-establishment national treatment (PNT) and negative list. Jacob Lew, the US Treasury Secretary, hailed it as “ break- through”. Now that a full year has elapsed, we are still working hard for the text itself. At the current point, both sides need to accelerate the talk on the text itself.  They are looking for agreement on the core issues and main articles by the end of the year, preferably to agree in principle on deliverables before APEC summit and President Obama’s China trip in November. In this context, the upcoming 14th round of negotiations in Washington, D.C. on July 31-August 1 will be even more indicative. 

China and the US cross border investment has been playing an increasingly essential role in their business relations in recent years. According to the 2013 white paper by AmCham, 71% of responded members put sales in China as the top reason for investment in China, compared to 66% in 2012 and 61% in 2011. In other words, the US multinationals rely increasingly on the expanding Chinese market for their global expansion, instead of a cost-cut solution. Therefore, they need a good BIT for a wide range of market access and fair competition. 

According to the latest MOFCOM statistics, China’s total FDI inflows grew by a modest 2.2% y-o-y, reaching $63.33 billion during the first half of 2014. The investment from the US, however, fell by 4.6%, to $1.74 billion. In absolute volume, it is just half of that from ASEAN ($3.42 billion) or the EU ($3.58 billion), although the latter two also fell by 19.2% and 11.2% respectively. The US accounted for only 2.7% of China’s total FDI inflows, compared to 11% over decade ago. The latest business environment survey by AmCham shows that 47% of the respondent members still put China among top 3 of their global investment destinations. Some of the US multinationals have complained that the Chinese investment environment has been less friendly to foreign businesses, with bias to domestic ones. 

On the other hand, the Chinese direct investment in the US has been exploding in recent years. According to the New York- based consulting company Rhodium Group, total stock of Chinese direct investment in the US reached $37.9 billion, with $14 billion in 2013 and $8.0 billion in Q1, 2014. Again, the Chinese investors are entangled with CFIUS security reviews and the political noises between times. They also need a transparent, fair BIT. 

It is estimated that, if well guaranteed by BIT, the US investment in China will likely pick up and hit $5.0 billion annually, with total stock reaching $100 billion by 2020. Chinese investment in the US will further accelerate, with total stock breaking $100 billion by 2020, creating roughly 330,000 jobs. An intensified mutual investment will make a closer division of labor in the whole global value chain. In that event, China-US business and the overall relationship will be stabilized on an intertwined interests sharing basis. 

National Treatment and Fair Competition Already Underway 

In order to hit a good BIT text, the core issues cover, among others, the national treatment and fair competition. The 6th China-US S&ED actually made good progress in this direction. Anti-monopoly practices in China, as one of the core issues, have been a key concern of the US multinationals, worrying about discrimination against foreign businesses to protect domestic competitors. It is of significant importance that both sides agreed at the 6th round of S&ED that the objective of the competition policy is to promote consumer welfare and economic efficiency, and that enforcement of their respective competition laws should be fair, objective, transparent and non-discriminatory. It means that the anti-monopoly practices in China will not serve to only protect domestic competitors at the cost of the foreign ones. Nor will it serve to protect the backward productivity. The three Chinese AMEAs will implement future cases equally on all businesses, domestic and foreign, without any discrimination to the foreign companies. Also, foreign respondents will have the right to justify by their own lawyers and present their own evidence. All these latest commitments are fully in accord of the high standard international rules, and will constitute an important part of the BIT text. 

This move also meets the overall requirements by the 3rd Plenum of CPC Central Committee on comprehensive deepening of reforms, which seeks the market forces playing a decisive role in the allocation of resources and guarantees a fair, open competition among all the businesses, domestic and foreign. In this sense, the intensification of BIT negotiations and ultimately a high standard BIT meets Chinese own needs and thus pushes on Chinese own reforms and opening up. 

Equally on the US side, CFIUS review has been a constant concern of the Chinese investors as an unfair obstacle to their investment in the US. The US side commits that CFIUS applies the same rules and standards to each transaction it reviews, without regard to the investor’s country of origin. The US also commits to treat all investors in a fair and equitable manner under law. These commitments are positive to the BIT talk as well, although deeds after words are expected. 

A Still Shorter Negative List is Desirable 

Shanghai FTZ just announced the 2014 version of negative list, cutting total items on the list from 190 to 139. A good progress though, it is still not open enough. There is no change at all regarding foreign ownership in banking and auto-making, or still remain the status quo as before the 3rd Plenum. It certain lags behind the tempo of globalization and Chinese open economy. There will certainly be a shorter list in its 2015 version. However, the BIT negotiations need not be bound by that list. It could even take the lead pushing forward the Shanghai FTZ opening up. From the perspective of the US, they also need to understand the differences in economic management systems and development levels, and recognize the differences and opening up by steps. It is anticipated that China and the US will have serious, intensified negotiations on the negative list, and reach a good BIT as early as possible. 

He Weiwen is co-director of the China-US/EU Study Center at the China Association of International Trade.

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