The Promise and Peril of a US-China Investment Treaty
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The Promise and Peril of a US-China Investment Treaty

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It seems that China’s economic slowdown has a silver lining for the United States. Earlier this month, China dropped objections to a bilateral investment treaty with the U.S., namely, efforts to exempt a number of its industries and sectors (including the service sector).

The announcement came at the end of the Strategic and Economic Dialogue talks in Washington last week, which was after 5 years of negotiations on the matter.  Treasury Secretary Jacob Lew commented that it was “a significant breakthrough and the first time China has agreed to do so with another country” in his closing remarks.

The agreement will open the door for discussions on establishing a bilateral investment treaty (BIT), though it is unclear when negotiations on such a treaty would begin.

According to China Daily, the U.S. agreed to “treat Chinese investment equally and fairly and to welcome investment from China, including that from State-owned enterprises,” and that reviews by the Committee on Foreign Investment would be solely based on national security.

The Wall Street Journal commented that an investment treaty would have innumerable benefits for the Chinese: “an investment treaty would give China a lot more clarity about the rules of the road, give it a way to appeal for compensation if a deal is blocked, and provide China something of an overall seal of approval.”  This is important since Chinese investment has hit a number of roadblocks over the years.  (In fact, an earlier post from The Diplomat elaborated on the difficulties the Chinese have had with investing in the U.S. market.) Meanwhile for the US, the treaty would further open market access to China, pleasing U.S. business interests.

However, this agreement is only the first step in what will most likely be a very long journey. The Heritage Foundation’s Derek Scissors doesn’t see a BIT implemented until 2017, noting a number of roadblocks, including Congressional opposition.  He believes that “American business and government may be seeing their hopes and dreams for the Chinese market rather than what is actually on the table.”  

Skepticism is not just coming from more conservative commentators either. Nicholas Lardy of the nonpartisan Peterson Institute for International Economics comments, “It’s a noble goal but one which will be very difficult to conclude in any reasonable time period and it might well fail.”

On the U.S. side, a bilateral investment treaty would need two-thirds approval in the Senate, and Chinese investment has sparked (and will continue to spark) concerns about national security interests and the wisdom of foreign ownership in certain sectors. For example, China’s Shuanghui International’s recent proposal to buy Smithfield Foods has ignited debate about Chinese involvement in U.S. food supplies, particularly in light of China’s own food safety challenges.  Indeed, an investment treaty would not put an end to American fears about Chinese investment in the United States. 

On the Chinese side, there is a persuasive argument that the Chinese cannot be counted on to carry out economic agreements. This is usually backed by the allegation that China has not fulfilled its obligations to the WTO after it became a member in 2001. China also has an enduring central-local problem, illustrated by the aphorism “the mountains are high, and the emperor is far away.” Simply put, even if the central government agrees to policies opening the door for U.S. investment, opportunities and policies at the local level may not match up — U.S. companies could still face significant challenges in localities. 

Finally, and this applies to both sides, the political wind could always shift direction. The U.S. presidential election in 2016 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. The willingness of the Chinese central government to work with the U.S. today could be eroded with time, particularly if reformists lose political capital or if the economic situation degrades significantly.

All in all, though immense challenges remain, this move forward represents just that: a move in the right direction. Most likely born out of China’s growing recognition of a need to diversify and expand its economy in light of economic transitions, it is a good sign for economic cooperation in the future.  

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