A Treaty Setting New Investment Rules
Exploring the merits of a bilateral investment treaty between the U.S. and China.
By Erin Ennis
December 13, 2014
The U.S. and China -- the world’s two largest economies -- are currently negotiating a bilateral investment treaty. Such treaties might seem obscure but are actually common and useful. A successful outcome for these negotiations would mean significant new opportunities for American companies in China’s market.
A bilateral investment treaty -- call it a BIT for short -- is an agreement between two countries that sets up rules of the road for investment in each other’s countries. BITs give U.S. investors better access to foreign markets and on fairer terms. The U.S. currently has BITs with more than 40 countries.
When countries enter into a BIT, each government agrees to provide protections for the other country’s companies that they would not otherwise have. A U.S.-China BIT would provide major benefits for American investors in China, including national treatment and fair and equitable treatment -- giving American companies protections equal to those for Chinese companies; also, they would have protection from expropriation and access to neutral dispute settlement.
Companies from New Zealand, Germany, and South Korea currently enjoy such protections because their governments already have investment agreements with China -- although not at the high standard of a U.S. BIT.
The promise of equal treatment applies to existing investments made before the BIT enters into force, and to new investments that occur afterward. Under a high-standard BIT, China would no longer be able to use investment restrictions such as ownership caps to prevent American companies from doing business in their markets. This is particularly important in China, which currently restricts investment in about 100 industry sectors, ranging from manufacturing to services to agriculture. The U.S. restricts foreign investment outright in only five sectors, and maintains 24 mostly minor conditions or restrictions that would be removed if the U.S. is given reciprocity in China’s market.
A BIT would ensure that U.S. companies would not have to meet unfair investment requirements, such as additional licensing standards that Chinese companies are not required to meet. U.S. investors often face difficulties, delays, and discrimination when applying for business licenses in China.
BITs also protect companies in other ways. BITs limit foreign governments’ ability to take over U.S. investments in their country. If an expropriation does happen, BITs ensure that investors are compensated in a fair and timely manner. BITs also curb governments’ ability to require American companies to meet burdensome conditions to operate in their markets. Finally, BITs ensure that American companies can move capital freely in and out of the country, as businesses do every day in the U.S.
When problems arise, BITs give American investors access to a neutral, third-party arbitrator to address them. This can be extremely helpful for companies operating in countries where the legal system is not mature or well established.
The benefits to American companies operating in China would be significant. While BITs are reciprocal, the dispute-settlement provisions do not give foreign investors more rights than those established in U.S. law. Dispute-settlement provisions are already in place in the 42 BITs that the U.S. has with other countries, but only 15 disputes have been brought against the U.S. over a 30-year period, and the U.S. has won each case.
While a BIT with China would be very valuable, it will not address every challenge that American companies face in China. For instance, a BIT would not address government subsidies to Chinese companies or give equal access to government procurement markets. Those issues must be addressed under separate initiatives, either bilaterally or through the World Trade Organization, such as finalizing China’s participation in the WTO’s Agreement on Government Procurement.
A BIT would, however, bar the Chinese government from granting preferential treatment to state-owned enterprises and private Chinese companies, which will help provide an additional leveling of the playing field for American companies.
The U.S. and China are still in the early stages of substantive negotiations on the BIT. When the text is finally agreed to and ready for implementation, the treaty will be submitted to the U.S. Senate for ratification, which requires that two-thirds of the senators vote in favor of the BIT. If U.S. negotiators are successful in achieving a high-quality agreement with China that genuinely improves market access for American companies doing business there, the U.S. Senate should pass it.
Beyond the benefits for American companies, a BIT with China would also help bring more foreign investment to the U.S. and create new opportunities here for American workers. U.S. government statistics show that foreign investment supports 5.6 million jobs in the U.S. -- a third of which are in the manufacturing sector -- and that U.S. companies with foreign investors pay employees more on average than their counterparts and competitors without investments from overseas.
Chinese investment in the U.S. remains relatively small compared with investments from other foreign countries. An analysis by the U.S.-China Business Council shows that the U.S. and China have less than a 5% share of investments in each other’s markets. Since these are the two largest economies in the world, that means there is significant room for growth.
A BIT is an essential tool for facilitating this growth, making the U.S. more competitive internationally, and creating a stronger economy here at home. A U.S.-China BIT is a valuable tool to address many of the level-playing-field issues American companies face in China.
Erin Ennis is vice president of the U.S.-China Business Council.