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Testing Times for the Sino-US BIT Negotiation

Jul 31 , 2014

The two-day high-level Strategic and Economic Dialogue between China and the United States led to a timetable for talks on a bilateral investment treaty (BIT). Both sides tried to reach consensus on the language regarding the core issues of the bilateral investment treaty negotiations. They have demonstrated strong political will and pledged to start the second phase of negotiations in 2015 over the negative list, which specifies bans and restrictions on certain types of foreign investment. However, considering the complexity of the issues involved in negotiations, China and the U.S. still need to brace for mounting challenges. It’s too optimistic to predict that China and the U.S. could complete the BIT negotiation anytime soon.

Yu Xiang

First of all, the nature and history of bilateral investment treaties indicates that the China-US BIT negotiation will be a long journey. In order to create opportunities for Americans and grow the U.S. economy, the U.S. has signed many trade agreements. These can be divided into three categories: multilateral organizations, free trade agreements (FTAs), as well as trade and investment framework agreements. The first category includes institutions such as the World Trade Organization, as for the second category the United States has free trade agreements in effect with 20 countries and many of the free trade agreements are bilateral agreements between two governments, although, some are multilateral agreements among several parties. The third category, trade and investment framework agreements, provides frameworks for governments to discuss and resolve trade and investment issues at an early stage. But nowadays it is clearer that the trade and investment framework agreements are better designed in a way that is similar, or even identical, to the content associated with FTAs. 

The U.S. has signed BITs with 48 countries. In 1982 the U.S. signed its first BIT agreement with Panama, and most of the signed countries are either less developed or underdeveloped market economies. In the 1990s, after the collapse of the Soviet Union and Eastern Europe, the U.S. signed BIT agreements with countries in the Commonwealth of Independent States and most eastern countries en mass, in order to protect American investment interests in these areas. In the first ten years of the 21st century, the U.S. only reached two BIT agreements, one with Uruguay in 2005 and another with Rwanda in 2008 based on the 2004 version of the US Model BIT. In 2012 the U.S. government updated the 2004 version of the US Model BIT to the 2012 US Model Bilateral Investment Agreement after an extensive review process. The revised model BIT enhances transparency and public participation and expands obligations in the areas of labor and the environment, which means higher standards for developing countries. Since then, no BIT has been completed. The main difficulty to reaching a BIT agreement between China and the U.S., based on the new template, cannot be underestimated.

A large demand gap exists. Huge realistic and potential interests make China and U.S. recognize the benefits of a detailed series of rules to facilitate and protect investment in each other’s territory, but there is also a sense of caution in opening domestic markets further.

China hopes that the U.S. would protect the safety and interests of Chinese investment in the U.S, and officials would open the U.S. domestic market maximally. What the U.S. demands of China are almost identical with U.S. demands in the Trans-Pacific Partnership (TPP) negotiations, which include reforming foreign capital management, macroeconomic management systems, ownership structures, opening more sectors of the economy, SOE reform, and so on. Judging from the two sides’ bargaining positions, China’s demands are more superficial, the demands from each side are unequal, and the opportunities and challenges on each side are asymmetrical. As such, there will inevitably be obstacles to smooth negotiations.

On the U.S. side, many American elites worry the BIT with China will hold far greater potential risks for the United States than any BIT or FTA investment chapter since the conclusion of NAFTA’s Chapter 11.

On the Chinese side, some Chinese scholars have claimed that China should learn from South Africa’s experience with BITs. In the early 1990s, South Africa, in its eagerness to attract FDI and to join the international economic community, signed about 15 BITs. It soon discovered that there was no relation between signing BITs and the inflow of FDI. Worse still, it was later confronted with several legal challenges, under various BITs, brought upon them by private investors.

More importantly, according to the U.S. governing principle of the separation of powers, any treaty hammered out by the Trade Representative, Treasury Department and State Department need go to a vote in the Senate, and a bilateral investment treaty would need two-thirds of the votes for approval in the Senate. Given the political polarization in Washington and some concerns about national security interests and Chinese ownership in certain sectors of the economy, there is a possibility of the Senate not approving a BIT with China. A sizeable group of political analysts predict that the possibility of President Obama’s party losing Congressional seats in the mid-term elections is increasing. If Republicans take control of the Senate, then passage of the BIT would be difficult. This inevitably has an adverse impact on China’s incentives to speed up the BIT negotiations with the Obama administration.

Apart from the BIT itself, issues unrelated to the BIT negotiation could shift the direction of economic and trade discussions. Other trade treaties being moved forward by both countries, such as TPP, the Regional Comprehensive Economic Partnership (RCEP) and the Free Trade Area of the Asia Pacific (FTAAP), are competing with the BIT to some extent. The BIT negotiation process is undoubtedly being affected by these negotiations. Take TPP for example. If the TPP is going to be concluded soon, then China may feel an urgency to speed up the BIT talks.

Moreover, tensions between China and the U.S. have intensified recently, on such issues as the hacking of each others’ computer systems, China’s territorial disputes with U.S. allies in the South and East China Seas, the U.S. Department of Justice indictment of five officers in the People’s Liberation Army on charges of espionage, and widespread discomfort in the U.S. over an expectation that China will soon become the world’s largest economy. These issues further complicate the negotiating climate.

In addition, the U.S. mid-term elections in November and the 2016 presidential election could harden the attitude of politicians toward China, which often becomes a scapegoat in election years, slowing or halting the process on the American side.

All in all, a China-U.S. BIT is a noble goal to reach for, but considering the many factors that could impede negotiations, it is necessary for both sides to make more substantial efforts to move away from the possible obstacles to the BIT. This is not only in the interest of both China and the U.S., but it is in the interest of the world at large.

Yu Xiang is an Associate Fellow at the China Institutes of Contemporary International Relations.

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