US inches a BIT closer to China
ASIA TIMES ONLINE | 5 May 2010
US inches a BIT closer to China
By Benjamin A Shobert
The US-China Congressional Committee (USCC) in mid-April released a study that it had commissioned in June 2009 and was completed by the Economist Intelligence Unit for the purposes of investigating the background and presenting the reasons why the United States and China have not yet executed a bilateral investment treaty (BIT).
While the finished report is best understood as background material prepared at the request of the USCC, its findings provide the reader with some important insights into the current state of US-China trade policy.
At their simplest level, BITs are designed to create transparency and impose penalties between two countries by requiring each to agree to certain rules specifically engineered to protect investors in one-another’s market. Specifically, BITs tend to focus on the threat of expropriation, the act by a government - typically one in the throes of political revolution - to nationalize a particular sector of the economy. Given China’s communist past, and specifically China’s history with state-owned enterprises (SOEs), and the enormous amount of investment US businesses have made within China. it is particularly interesting to note that the US and China have not executed a BIT.
China very actively pursues BITs. As the report states: "Germany has more BITs than any other country (around 140), followed by China, with more than 120; the US has signed over 40 BITs." Given the central role access to export markets plays for both Germany and China’s economies, each country’s emphasis on BITs makes a certain amount of sense. Additionally, for a country like China with a strong (and not-too-distant) history of nationalizing key sectors of its economy, and with an ongoing blended strategy for how and where it maintains a national socialist versus capitalist approach, BITs serve an important role in calming the nerves of potential investors. This realization makes it all the more interesting that the US and China have gone so long, and done so much together, without the construct of a BIT in place.
The US perspective on BITs, and its fairly low participation in them, can partially be understood as the world’s leading economy not needing such treaties to further its own economic cause. The US also is able to avoid pursuing BITs as a historical consequence of its having a stable government and an established and robust rule of law. Some within the US also harbor fears that executing BITs introduces the possibility that regulatory decisions made by the US government could be litigated outside of the US court system, amounting to concerns of how BITs effect American sovereignty. Others have suggested BITs actually grant more rights to foreigners than citizens with respect to lawsuits against the US government.
Those countries that the US does have BITs with tend to be small, emerging countries (both from an economic and political perspective), that have little to show in recent years regarding stability or the rule of law. As Sarah Anderson, Fellow at the Institute for Policy Studies, wrote in December 2009, of the countries with which the US holds BITs, only Canada could be considered a significant "capital exporter". Attempts have been made previously to secure a US-China BIT, and when negotiations began, China could certainly have been understood to fit the stereotype of a country with which the US tends to conclude such treaties; but the China of today is atypical, a country with enormous investment resources of its own, and one that wants a BIT with the US in no small part because of the rights it would provide its own businesses.
Of the 40 active American BITs, almost all are held with countries such as Albania, Moldova, and Senegal. A more comprehensive review shows that most, if not all, of the countries the US holds BITs with tend to be countries that are coming out of particularly economic and politically vulnerable periods of time. From the US perspective, BITs play a role in trade normalization, and are deployed selectively with countries whose recent history suggests expropriation is a concern. Conversely, from the perspective of recipient countries, BITs tend to provide American investors with the legitimization of the US government in order to facilitate investment.
Within America, interest in a US-China BIT has waxed and waned over the past 20 years. In 1989, the US abandoned a US-China BIT as a consequence of the Tiananmen Square massacre. Negotiations were restarted in 2008, largely at the repeated requests and lobbying by those in the US business community. In July 2008, the US-China Business Council sent then-president George W Bush a letter enumerating their reasons for wanting the US government to pursue a BIT with China. The letter’s opening paragraph points both to the predominant reason for their desire, but also hints at what this leading business council saw as potentially troubling that equally motivated their desire for a BIT: "A high-standard BIT with China will help promote our broader national and economic interests and, importantly, send a signal to all our trading partners that the US remains committed to its leadership role in promoting open markets and the free flow of investment."
The timing of this request from the US-China Business Council is important, namely that it occurred within a deteriorating domestic economy and increasing wariness in the public over China’s role in America’s economic difficulties. These business leaders, conscious of how souring national politics regarding trade with China holds the potential to impact their businesses, also seemed to understand the role a BIT with China could play in sending a signal to other trading partners that American business understands, and remains committed to, the importance of international trade.
The Barack Obama administration has embraced this recommendation, and in early March announced that the draft text of a US-China BIT would be ready for review, the direct result of five months of highly motivated exchanges and negotiations between the two countries. While the BIT may not gather much notice in America’s political consciousness, the reasons it has gone forward so aggressively may have more to do with the Obama administration needing to offer China something it wants that Washington can actually deliver. Conversely, the BIT also becomes part of the "carrot" that can be extended to Beijing, while Washington uses "sticks" like currency reform and its ongoing frustration with China’s reforms on intellectual copyright.
China’s emphasis on BITs makes actually getting one, even if done with a long-standing trade partner such as the US, politically and practically important. What is perhaps most interesting is how China’s motives for obtaining a BIT with the US have changed since 1989.
Then, China understood the BIT as critical to further encouraging American investment dollars to find their way into the country. Now, China’s economic growth is such that it now has numerous domestic firms that want to invest in the US but have concerns over their ability to deal with unknown political considerations in the US such as the review process imposed by the Committee on Foreign Investment in the United States (CFIUS).
This body, known primarily for its role in rejecting China National Offshore Oil Corporation’s attempted bid for UNOCAL, remains a good example of the sorts of unknowns that large Chinese firms that might otherwise look at merger and acquisition activity in the US are still concerned about and the sort they believe a BIT might remedy. As the April 2010 report to the USCC writes, " ... a US-China BIT could be an opportunity to strengthen the principle of non-discrimination of Chinese investment in the US compared with other countries’ investment in the US".
Within the construction of a traditional BIT, countries are offered the opportunity to provide what is called a "negative list". This list stipulates particular sectors of the national economy that the BIT does not cover; in the case of a US-China BIT, it is likely to include particular defense-sensitive technology industries and particular natural resources. As a result, while the BIT does not supersede or hold any authority to prevent a CFIUS review, a well-written BIT will provide guidance to potential investors as to which sectors of the economy the administration has already given a green light for investment.
While the UNOCAL bid may be the best example of American politics negatively impacting Chinese investment in the US, China is not guiltless in these realms either. As the 2010 Economist report submitted to the USSC writes, "Many observers also viewed the rejection of Coca Cola’s bid for Huiyuan, a Chinese juice producer, in 2009 over monopoly concerns as highlighting the government’s wish to preserver ’national champions’. According to this argument, Huiyuan was simply too big for officials to allow it to be taken over by a foreign company."
If properly written, negotiated, executed and managed, a US-China BIT could present a new rule set that would not only prevent political judgments, such as those involved in the Coca Cola-Huiyuan deal, from killing potential agreements, but which would also further empower globalization, and signal to one-another and the world-round that further economic integration will continue.
After 20 years of an increasingly intimate trade relationship between the US and China, why is a BIT being advanced now on both sides of the Pacific? After all, as the report states, "The fact that many members of congress have voiced concerns about expanding trade and investment linkages with China is also likely to be a hindrance to the US-China BIT winning two-thirds majority support in the senate." What does something potentially so politically unpopular offer Washington? It may be that a US-China BIT remains one of the few positive trade deliverables the US can offer China over the next several years.
Amidst a still-ailing domestic economy, the Obama administration understands it must be seen as putting pressure on China to reform its currency and continue opening the country’s economy to outsiders; Beijing feels moderate ambivalence towards the latter and outright hostility towards the former. But President Obama also keenly understands the critical role China plays, both economically and with respect to his foreign policy goals regarding Iran and North Korea.
As a result, his administration needs to offer Beijing something it wants that also lines up with China’s economic needs, and the BIT in its own way does just this: it will be praised within China as a political victory (which in its own right it certainly is); it will be understood within the Chinese business and policy community as a signal that Washington still understands the critical importance of China in the US economy; and it will signal to the world that both countries still understand the central importance of the rule-sets that bind the two countries and economies together.
In the midst of the economic calamities of the past several years, moments when we seemed to find at every turn that our assumptions were wrong, this consideration has value beyond whatever regulations it enables or the transparencies it creates.
Benjamin A Shobert is the managing director of Teleos Inc (www.teleos-inc.com), a consulting firm dedicated to helping Asian businesses bring innovative technologies into the North American market.
