An Investment Treaty with China: Don’t Hold Your Breath

Shanghai-China-Nanjing-RoadThe U.S. and China yesterday announced that they are restarting talks on a bilateral investment treaty (BIT). Given China’s track record, it’s not clear that a BIT is a useful step now or in the near future. It may be a good thing, then, that one is not likely to be completed and put in effect for several years.

Chinese Commerce Minister Gao Hucheng is pleased about the restart of BIT talks. He has reason to be: China’s main complaint to the U.S. has been inconsistent treatment of Chinese investors here, exactly what a BIT is supposed to address.

The American business community is also pleased. It has some reason to be—some problems experienced by American firms, such as coercive technology transfer, could be addressed by a BIT. But others, such as regulatory protection of state-owned enterprises from competition, would require internal, difficult Chinese reform beyond the scope of a BIT.

American Treasury Secretary Jacob Lew says a BIT “would work to level the playing field for American workers and businesses by opening markets for fair competition.” Secretary Lew may be thinking of a free trade agreement—a very high-standard free trade agreement.

BITs are primarily about protecting investors from discriminatory government policies. They are not transformative instruments that change the nature of economies, especially not large economies. This is problem #1 with a BIT: American business and government may be seeing their hopes and dreams for the Chinese market rather than what is actually on the table.

One response is that a BIT is to some extent flexible, so fundamental reforms could be partly addressed. This brings us to problem #2 with a BIT: Why should the U.S. believe that the Chinese government wants to reform, especially in ways that suit American interests?

Bilateral BIT talks started in 2008. They foundered because the previous Chinese government had no interest in reform. The new Chinese government has talked about reform but has done nothing yet. Moreover, it faces a series of difficult challenges, hardly a situation where China will make policy choices to match American desires.

Problem #3 with a BIT is American politics. The main China issues that the U.S. Congress focuses on—the bilateral trade deficit, currency “manipulation,” and other trade distortions—are not likely to be addressed in an investment treaty. Further, Congress does not trust China to implement its pledges. China is not just any economic partner. A U.S.–China BIT is going to be debated—hotly.

The Senate already faces politically painful votes on Trade Promotion Authority (probably this year), the Trans-Pacific Partnership (probably next year), and, the Trans-Atlantic Partnership (possibly 2015). It would be very dubious politics to jump China ahead of American friends in the trade queue. But multiple political bloodlettings in a single year is almost as difficult to see as a pro-China vote during the 2016 presidential campaign.

Congress is unlikely to approve a BIT before 2017. The time between now and then should be used for the U.S. to set priorities that fit within the BIT framework and for the new Chinese government to show its commitment to reform.

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Source material can be found at this site.

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