US, China to seek bilateral investment treaty
MarketWatch | 18 June 2008
U.S., China to seek bilateral investment treaty
Mainland negotiators to meet with President Bush as talks wrap up
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The U.S. and China said Wednesday they have agreed to negotiate a treaty to protect private investment in their countries.
The agreement is part of the Strategic Economic Dialogue, two days of talks between the countries taking place in Annapolis, Md., that were scheduled to wrap up Wednesday.
The Chinese delegation met with President Bush at the White House before the talks concluded.
Bush wanted to discuss "the importance of the economic relationship" with the Chinese officials, said Tony Fratto, a White House spokesman..
U.S. officials said the coming negotiations would be tough but had a fair chance to achieve success.
"We believe we have got a reasonably good chance to negotiate an agreement with China that will meet the high standards typical of bilateral investment treaties," one official said.
Treasury Secretary Henry Paulson said a conclusion of a treaty would "send a strong signal that our two nations welcome investment and will treat each other’s investors in a fair and transparent manner."
Bilateral investment treaties are designed to spur foreign direct investment by corporations. They usually entail setting up mechanisms for resolving disputes that involve international arbitration.
Adam Siegel, a China expert at the Council of Foreign Relations, said there had been some expectation that the sides were going to announce that they had completed a treaty, not just that talks would continue.
A U.S. official said that the two countries have already been talking for 17 months laying the groundwork for negotiating a treaty.
Siegel said it’s significant that the two sides are pressing ahead in attempting to reach an agreement. "It is pretty important given the tension that the U.S. has had with China over its investments in the U.S.," he noted.
The Chinese are upset that two high-profile attempts to invest in the U.S. ran into a torrent of opposition and, some say, political grandstanding.
In 2005, Chinese oil major Cnooc Ltd. was forced to abandon an $18.5 billion offer to buy Unocal Corp. due to stiff political opposition, with some U.S. lawmakers threatening to derail the merger, citing potential threats to national security.
That was despite the amount of Cnooc’s bid being higher than a competing offer from Chevron Corp., which ultimately acquired Unocal.
Also, the attempted purchase of 3Com Corp. by the Chinese company Huawei Technologies and private-equity firm Bain Capital Partners, Huawei’s U.S. partner, was delayed after a federal review identified national-security issues related to the $2.2 billion deal.
Bain Capital eventually called off the deal because of lawmakers’ opposition.
Turnabout as fair play?
Recently, there has been growing concern in the U.S. that China is examining writing its own law protecting sensitive sectors, Siegel said.
Economists see China’s massive holdings of dollars as a global imbalance. One way to draw down the reserves is for Chinese companies to purchase real assets.
Treasury Secretary Henry Paulson has championed the Strategic Economic Dialogue, launched in September 2006, as a way to ease tension between the two sides.
Outside experts believe the talks are a good idea. "Most people hope that it will be continued under the next administration," Siegel said.
"It is a useful clearinghouse for problems that come up," he said.
Because most of the talks take place out of view, it is hard to gauge the progress.
Chinese Vice-Premier Wang Qishan sounded a discordant key at the start of the talks on Tuesday, saying he was going to press the U.S. delegation to explain the ins and outs of the subprime mortgage crisis.
And Zhou Xiaochuan, China’s top central banker, complained that the U.S. has mismanaged the foreign-exchange value of the dollar.
"A weak dollar will inevitably result in a rise in primary products including commodities, including oil," Zhou told reporters.
But Paulson dismissed reports that China was taking a new aggressive tone with the U.S..
"I don’t know why China can’t say anything about the weak dollar - everybody else seems to say it around the world," he joked.
Yuan moves to backburner
The most notable development of this round of talks might be that the issue of the value of China’s currency has moved to the back-burner for the first time in the Bush presidency.
"From our point of view, the yuan issue is pretty much a dead duck" because the explosive growth of exports from China to the U.S. "has stopped," said Carl Weinberg, chief economist at High Frequency Economics.
The yuan has appreciated against the dollar by more than 20% since China dropped its strict peg to the dollar in July 2005.
The European Union now has a problem with China’s currency because the euro has appreciated versus the yuan, and imports from China to Europe have spiked, Weinberg said.
Investment groups upbeat
Trade groups representing U.S. banks, securities, mutual funds, and insurance firms were upbeat about the two-day talks, even though they said only modest progress was made.
They urged both political parties to continue the talks in the next administration.
Greg Robb is a senior reporter for MarketWatch in Washington.
