Why A BIT Is Necessary for Both China and the US

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Qian Liwei

The China-U.S. negotiation on a BIT can be traced back to the 1980’s, but the talk was later stopped as bilateral relations encountered political difficulties. Since June 2008, both sides have resumed negotiation and experienced nine rounds of technical discussions, and the progress was reflected in the joint fact sheets of the previous rounds of S&ED. Today, a China-U.S. BIT is more necessary than ever, because it will not only greatly enhance the bilateral trade and investment relationship, but also release an important political signal of stronger strategic cooperation between the two countries to the rest of world.

The absence of a BIT doesn’t match the contributions that the U.S. and China make to the world economy, their weight in global trade, and their status in foreign direct investment (FDI). As the world largest and second largest economies, the U.S. and China’s GDP account for about one third of the global economy; and the cross-border trade volumes reached nearly 500 billion dollars, currently making them their respective second trading partners. But the bilateral investment is left far behind and significantly underweighted. Although the U.S. is China’s most important source of FDI, its investment in China is around 70 billion dollars in total compared with 4000 billion dollars of mutual investment between the U.S. and European Union (EU). According to the World Investment Annual Report 2013 released by the United Nations Conference on Trade and Development (UNCTAD), China’s FDI totaled 84 billion dollars and ranked third in the world, next to the U.S. and Japan. Although Chinese investment in America witnessed rapid growth in the past decade, it is merely 20 billion dollars, which accounts for less than one percent of total FDI that the U.S. has absorbed.

A future BIT will bring huge benefits to both China and America. After more than three decades of fast development, especially since its entry into the World Trade Organization (WTO), China’s economic weight and international influence are soaring, and the relationship enjoys a dual-surplus in trade and investment which has lead to huge foreign reserves of 3.5 trillion dollars to date. If not properly used, the excessive foreign reserves are a burden rather than an asset, from the mainstream perspective of Chinese government officials and experts. China has also launched a “Going Out” strategy by encouraging Chinese firms to enlarge its investment overseas, and by establishing the sovereign wealth fund (SWF) aimed at increasing the value of its foreign reserves. Years of great efforts have borne fruit, newly released report shows that among the Fortune 500，China ranked second with eighty-five multinationals on the list, while the U.S. occupied the first place with 132 companies. It properly reflects China’s weight and influence in the world economic field.

After the shock of the financial tsunami in 2008, the American economy suffered the most serious recession since the Great Depression in the 1930’s with the unemployment rate over 10 percent. With its economic deleveraging and “manufacturing regression”, the U.S. needs heavy overseas funding to jump-start its economy and to alleviate the unemployment. Chinese investment is so welcomed across America that state and local governments are providing a series of preferential policies including cheap land, low taxation and relaxed regulations. Dozens of U.S. governors and mayors crowded into major Chinese cities to promote trade and investment and this will revitalize the local economy, add government revenue and reduce the unemployment. Rhodium Group (RDG), a prominent investment consulting firm, reported that Chinese investment has covered more than thirty-five states, and has created 32,000 jobs in U.S. as of the first quarter of 2013.

A future BIT based on the mutual respect and mutually beneficial negotiation will also be a great push for Chinese and U.S. companies. More and more Chinese companies are interested in investing in U.S., but they often worry about the politicization of investment with an excuse of “national security” from the U.S. government and Congress. The Former Chinese Minister of Commerce Chen Deming once complained that roughly one of every three dollars China wanted to invest in U.S. got approved. A BIT will definitely reduce such dissatisfaction. U.S. companies in China have been expressing concerns on issues like market access, intellectual Property Rights (IPR) and technology transfer, etc. Although the super-national treatment they enjoyed for decades will soon come to an end, they may have more opportunities to compete with their Chinese counterparts in a more transparent and equitable, fair environment. With greater market access, removal of investment barriers, protections against technology transfer and increased openness, U.S. companies in the services sector and high-end manufacturing will eventually benefit from a more consumption-driven and increasingly mature Chinese market.

A future BIT will also have a potential spillover effect for both countries and regions economically. Last month, the U.S. kicked off negotiations on the Trans-Atlantic Trade and Investment Partnership (TTIP) with the E.U., and a Trans-Pacific Partnership (TPP) is also under way within the Pacific Rim. China recently signed the Free Trade Zone (FTA) agreement with Switzerland, and is negotiating a FTA with Korea and Japan in East Asia, and Australia and some European countries respectively. A BIT between China and U.S. will enhance their position in the current and upcoming trade talks.

The road to a successful BIT will no doubt be full of political uncertainties and economic bargains in the foreseeable future, but mutual openness of market and investment is allowing a new field of cooperation between China and U.S., and it will inject a great amount of positive momentum to the more balanced two-way trade and investment ties, which embody a new type of major power relationship.

Qian Liwei is Associate Research Fellow with China Institutes of Contemporary International Relations (CICIR).