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What is Happening with the BIT?

by | December 20th, 2013 | 10:25 am
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In July 2013, the US-China Strategic and Economic Dialogue (S&ED) sent out rumblings about a “big breakthrough” in negotiations on a Bilateral Investment Treaty (BIT). The advance consisted of China’s agreement in principle to let companies make investments in China on the same terms as domestic companies. (This is known as a “pre-establishment” rule for investors.) China was also said to agree to list only those industries that foreigners cannot invest in, known as a “negative list” in the Foreign Investment Catalogue, as opposed to listing those areas that foreigners can invest in.

These developments were significant in light of the tortuous history of the investment negotiations. Recall that the BIT negotiations started in June 2008, were suspended in 2009, and only resumed at the S&ED meeting six months ago.  Yet surprisingly little has been said since then, even though the tenth round of BIT talks was held on October 21-25 in Washington.

What is holding up progress?  Not the lack of experience with BIT negotiations: China has over 100 BITs in force while the United States has 42.  The main cause, apparently, is the current US Model BIT, published in 2012, which places stringent requirements on countries where US business interests might invest, so far accepted by very few countries. They include:

  • Robust requirements that government agencies and state-owned enterprises be more transparent in their investment policies.
  • Advance publication of proposed new regulations and policies, allowing time for comment.
  • Firm commitment to avoid policies that favor domestic companies.
  • Commitments from the Chinese government on enforcing labor and environmental standards in connection with new investment.

Two-way direct investment has been asymmetrical. China’s FDI stock in the United States totals under $11 billion in 2012, and the US FDI stock in China totals more than $50 billion.  While the official figures for Chinese FDI stock may be understated, the true figure is remarkably small in relation to China’s economic size and foreign exchange reserves. Moreover, China is the number one source for US imports, and the number three destination for US exports.

How can the BIT talks come to a conclusion? The United States wants to accomplish several goals – and they all seem eminently reasonable, if Chinese leaders view greater foreign investment as an integral part of structural reform.

  • The United States wants China to specify exactly which industries are closed to foreign investment.
  • It wants fewer regulatory barriers, so investors can apply through one regulatory agency, like the National Development and Reform Commission (NDRC), rather than confront multiple hurdles.
  • It wants to address the expanded use of the NDRC as a vehicle for targeting foreign companies for alleged anti-competitive practices.
  • The United States wants to curtail the asymmetry of national security reviews: China’s process is regarded by investors as much more opaque than the US process.  The Chinese, for their part, would like clarification of the Committee on Foreign Investment in the US (CFIUS) process.

If concluded, the BIT should benefit both economies.  As China slowly rolls out reforms — exemplified by declarations at the recent Third Plenum of the Communist Party and the Shanghai Free Trade Zone — a BIT could facilitate their implementation by smoothing the path for inward direct investment.   Fresh investment in the Chinese service sector, which badly lags productivity levels abroad, would be especially important. Meanwhile, China wants to ramp up its outward direct investment.  US unemployment remains too high while productivity growth remains too low.  Fresh Chinese investment could contribute to job creation and productivity gains.

A future issue that deserves consideration is the US ratification process.  As a treaty, a BIT would require a two-thirds affirmative vote in the Senate for ratification, but the House would have no say.  It might be better to conclude an executive agreement rather than a treaty, change the name to a bilateral investment agreement (BIA), and seek ratification by majority vote in both chambers.  This would give the House of Representatives a say, and avert the possibility of a blocking minority in the Senate (34 senators).

If a BIT or BIA can be agreed between officials in both countries, and ratified by the respective legislatures, it could become a major building block for a new framework of US-Chinese economic relations.  Companion building blocks could include three agreements under discussion in the WTO:  the Information Technology Agreement (ITA), the Government Procurement Agreement (GPA) and the Trade in Services Agreement (TISA).  Together these building blocks would create a constructive framework for economic cooperation between two economic giants.