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AmCham China: The right time for a bilateral investment treaty

AmCham China | November 2012

Op-ed: The Right Time for a Bilateral Investment Treaty

Published in Caijing bilingual annual issue, Forecasts and Strategies, November 2012

By Ted Dean, chairman, AmCham China

A bilateral investment treaty should be high on the list of trade priorities for political leaders in the US and China.

Of late, there have been frustrations among businesspeople in both countries. The Chinese media paid close attention when a US Congressional Committee report took issue with two Chinese telecommunications providers. Heated rhetoric from US political candidates also received a great deal of coverage here.

At the same time, foreign investors in China voice growing concerns about policies that skew the playing field against them. Many believe that China has not advanced beyond its original WTO-era commitments to open markets and liberalize the economy.

Against this backdrop, a bilateral investment treaty would underscore each side’s commitment to fair treatment of the other.

From a Chinese perspective, such an agreement – which would need ratification by the US Senate — could serve to increase confidence for Chinese firms investing in the US. In fact, America’s laws and regulations are remarkably welcoming to foreign investors. Chinese investors are often surprised to learn that a greenfield investment in the US requires no government approvals. There are no joint venture requirements; there is no investment catalogue with prohibited sectors.

Yet at a time of lingering misperceptions, a bilateral commitment to cross-Pacific investment would help bolster confidence that the US welcomes Chinese enterprise.

Despite the alarmist headlines, Chinese FDI in the US is already growing rapidly, and we see an ever-growing stream of US governors and mayors traveling to China, eager to solicit investments for their home states or cities. Chinese investments in the US had already topped $6 billion as of the third quarter of 2012 – a record number, according to research firm the Rhodium Group.

As an example of myth versus reality, consider the example of CNOOC, which in China has come to symbolize the risks of investing in the US. True, a high-profile American acquisition bid by the company faltered in 2005. But since 2009 CNOOC has invested billions of dollars in energy projects in the US. Indeed, CNOOC is now a multi-billion dollar example of just how receptive the US is to investment from China.

Meanwhile, as more Chinese companies go global, it is increasingly important that China’s trading partners perceive it as a nation committed to treating foreign companies fairly on its home turf. Progress on market reforms in China has slowed in the past five years. We hope that a bilateral investment treaty would invigorate efforts to dismantle market access barriers in China and expand market-based reforms.

One issue at hand in BIT negotiations is that China has only agreed to equal treatment of foreign investors after they have established operations. China wants to retain a regulatory framework that effectively discriminates against foreign firms before they have even opened for business. For example, if foreign companies want to compete in the automotive sector, they must do a joint venture with a Chinese partner; if they want to set up a securities firm, they must team up with a Chinese company and aren’t allowed to hold a controlling interest, and so on.

For a bilateral treaty to pass muster, we would expect China to adopt the standard approach of market economies including the US: providing equal treatment to foreign and domestic companies, both before and after an investment.

China’s industrial policies were created to further national goals. But in practice, they tend to advance the interests of a small number of powerful state-owned enterprises and state champions. Indeed, it has become a point of some concern among China’s leading economists and thinkers that the nation’s household savings, public lands and other resources have all been leveraged to serve the needs of SOEs, to the detriment of its consumers and private sector.

While this development model for a time appeared congruent with strong economic growth, it is incompatible with the needs of a developed, innovative service economy. As China’s long-term GDP growth has begun to slow against the backdrop of an aging population, many leading domestic economists and thinkers say there is growing urgency for change in the nation’s economic structure.

A bilateral investment treaty would help by generating new momentum to open markets in China and the US. That would allow competition that would boost the quality of goods and services and drive down prices, benefiting consumers. As companies sought ways to differentiate themselves, they would be more likely to invest in R&D and innovate. This market liberalization would enable China to meet some of the important goals outlined in the 12th Five-Year Plan, such as boosting consumption and developing a more innovation-oriented economy. We believe the benefits of a thoughtfully-negotiated US-China trade agreement would be clear for both sides.

 source: AmCham China