Why China Wants a BIT with the United States

Negotiations over a US-China Bilateral Investment Treaty (BIT) have entered a new phase with China's formal submission of its negative list on June 12 and the upcoming September summit between President Xi and President Obama.  The BIT will be a focus of the annual Strategic and Economic Dialogue (S&ED) between China and the United States in Washington next week.  The key to answering "why China wants a BIT" is to understand what China would gain from such a treaty with the United States.  While the United States stands to gain more access and protections for its companies in China’s restricted market, , China has seemingly less incentive to grant the United States more market access and protection, as it may get relatively little in return from the already more open US investment environment.  However, there are still important reasons why China would want to reach a deal.

China has a lot to gain from a US-China BIT, the most obvious of which is a more dynamic economy.  China has ambitions to move up the value chain, going from assembler of the world’s cheap products to producer of complex, high-tech goods.  In order to do this, China must foster a more competitive business environment, which a BIT could facilitate.  But many obstacles stand in the way of an agreement, most importantly the US Senate, which must approve any BIT by a two-thirds majority.  The Senate won't pass a BIT unless China significantly opens its market to US investors.  China can do so by submitting a very short "negative list" of industries that are off limits to foreign investment.  China recently submitted its negative list to the US.  If China's negative list is acceptable to its US counterparts, both countries will stand to benefit enormously.  To be clear, the prospects for concluding a BIT before Obama leaves office are very low, as it’s not just the negative list keeping an agreement at bay but issues like intellectual property, technology transfer, competition policy, and China’s efforts to strengthen its national security regulations that also stand in the way.  However, the S&ED this month and the Xi-Obama summit in September will provide special opportunities to meaningfully advance the BIT negotiations.

1. Domestic Reforms – China, like many countries, uses international agreements to overcome vested interests and push for domestic reforms.  Under the cover of accession to the World Trade Organization (WTO), China pushed through a multitude of economic reforms that were strongly opposed by powerful groups that profited from the status quo.  A US-China BIT could help China open up its service sector, a necessity if China wants to extend the fast pace of economic growth it has seen over the past 25 years.  Parts of China’s services sector are dominated by many state-owned or state supported enterprises, especially in industries like telecommunications, finance, information technology, and health care.  The BIT could open these up to domestic and foreign private firms, which are much more efficient and profitable than the state firms.  Moreover, the BIT could provide the impetus to further simplify the complex regulatory environment in China.  Premier Li Keqiang recently stated that some agencies require you to “prove your mother is your mother,” in an attempt to describe the sometimes outrageous administrative hoops invented by government agencies.
2. The Committee on Foreign Investment in the United States (CFIUS) – China has long complained that the US national security review for foreign investments stifles Chinese investment in the United States. As we’ve shown in our February 2014 report on the US-China BIT, the data doesn’t show that CFIUS has been a huge hurdle.  Also, Rhodium Group’s recent report shows that Chinese investment in the United States has accelerated rapidly in the past couple of years.  However, because of a few high profile cases, the perception and reputation of CFIUS has discouraged some Chinese investors.  A US-China BIT is unlikely to make major changes to the CFIUS review process, but it might push for more transparency and possibly some clarity of the criteria needed to pass a CFIUS investigation for not only private Chinese enterprises, but also for state-owned enterprise, which still account for more than half of China’s outbound foreign direct investment (FDI).
3. Increased FDI – US investors account for less than 3 percent of FDI in China, and they are now are seeing more reasons to invest elsewhere than China: rising production costs, complex regulatory environment, competition policy issues, lack of enforcement of intellectual property, and increased competition. These, along with the prospect of a Trans-Pacific Partnership (TPP), which will have a strong investment chapter, could divert investments away from China and towards TPP countries.  A US-China BIT could improve the attractiveness of investing in China.
4. Market Economy Status – Recognizing China as a market economy is not directly related to the BIT but could be part of a side agreement. China believes that the United States and all other WTO members should qualify China as a market economy by the end of 2016, per China’s WTO accession protocol.  But the United States (along with the European Union), have refrained from guaranteeing that the United States will recognize China’s market economy status (and therefore the way it calculates antidumping and countervailing duties against some Chinese imports).  The United States could assure China that it won’t resist in this area if a BIT is agreed.
5. US High-Tech Exports to China– Also not directly related to a BIT, China has long complained about US restrictions on the export of many dual-use items related to military use. However, many of these products are already available for purchase for China from countries like France and Germany, so the United States could relax the restrictions on some of these items, which may partly satisfy this long-standing complaint China has with the United States.