China-U.S. Investment Treaty Would Strengthen Economic Relations

Now that the Asia-Pacific Economic Cooperation meeting is completed, the two countries should promptly head back to the table to continue BIT talks.

An agreement will provide significant momentum toward the long-stated Bogor Goals of “free and open trade and investment in the Asia-Pacific region.” The Bogor Goals were announced by APEC members in 1994 at the summit that year in Bogor, Indonesia.

A BIT will increase investment between China and the United States, and the economic benefits to increased foreign direct investment (FDI) would be in line with needed structural reforms in both countries. Increased FDI in China’s services sector would facilitate the shift from a manufacturing economy to a services based one, and would drive productivity increases throughout the economy. The United States needs more investment throughout its economy, especially in areas like infrastructure.

Investment between China and the United States is much smaller than it should be. Total U.S. FDI abroad in 2013 was more than US$ 4 trillion, while U.S. investment in China is less than 2 percent of that. Likewise, China’s outward FDI was $600 billion, but just around 5 percent of that has been invested in the United States. Yet, China and the United States are the largest recipients of FDI, so there should be much more investing going on between these two countries.

Bilateral investment treaties are supposed to create fair, open and transparent investment environments, but in order to do so, the agreements must be comprehensive. Canada and China signed a BIT in 2012 that was finally ratified by Canada in September, and it has some similar commitments the United States would seek in a BIT with China. Investor-state dispute settlement (ISDS) is an important aspect of the Canada-China BIT, along with protection for legitimate public policy objectives, meaning the both countries will be free to regulate as they see fit, as long as the public policy cannot be considered an indirect expropriation.

China also signed a trilateral investment treaty with Japan and South Korea in 2012. While this CJK agreement makes progress for investment protections, is it still seen as short of what the United States is looking to achieve. China is also negotiating a BIT with the European Union, where areas like market access and dispute resolution will endure tough negotiations. ISDS is a controversial topic, but most investors see it as essential to putting some teeth in investment protections.

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