US-China Bilateral Investment Treaty and the TPP

Economic cooperation has long been the glue of “interdependency” holding the United States and China together despite brewing differences in other areas. However, by no means has this precluded competition between the two when it comes to regional trade regimes. As the U.S.-backed Trans-Pacific Partnership (TPP) negotiations stumble forward, China continues to push for its free trade agreement of choice: APEC’s Free Trade Area of the Asia-Pacific (FTAAP). ASEAN’s Regional Comprehensive Economic Partnership (RCEP) negotiations are also ongoing; clearly, the region is not bereft of trade regime options.

As long as China continues to view the TPP as exclusionary, by design leaving Beijing out of the initial phase, these other partly competing and partly mutually reinforcing trade frameworks may lead to what some observers have dubbed an “economic Cold War.”

Meanwhile, the Obama administration enters its final two years paired with a Republican Congress fresh from routing the president’s party in the midterm elections. In contrast to almost every other major Obama administration foreign policy initiative, however, the TTP actually stands to benefit from additional Republican influence in Congress, as its domestic detractors have largely been protectionist Democrats. Given the Obama administration’s emphasis on the TPP as a diplomatic priority in the “rebalance” to Asia and its ostensible lack of foreign policy maneuverability in other areas, there is little reason to believe that the United States will back off from the arduous negotiation process over the coming years.

Amid these constraints, the Obama administration will have to convince China that the TPP is not intended to economically contain Beijing. The simplest way to do this is to continue to highlight the fact that China is welcome to join the negotiations after the conclusion of the initial round. However, a separate, more advantageous way to do this is to strengthen U.S. diplomatic efforts on the Bilateral Investment Treaty (BIT) with China. The BIT with China has been under negotiation since 2008. For an administration hemmed in by a hostile Republican Congress, this represents one of the more feasible bilateral goals in U.S.-China relations. Given Beijing’s concerns about the TPP and potentially losing dominance over key trading partners such as Vietnam, encouraging inbound investment from the United States should be natural priority. The BIT is also in line with the Chinese Communist Party’s current economic plan to shift the economy from over-reliance on state investment toward increased household consumption. Negotiating the BIT would be an important confidence-building measure between the U.S. and China, and should the TPP reach a point where Beijing’s inclusion becomes a real possibility, the diplomatic experience gained over BIT talks may ease that process.

Investment treaties are nothing new for Beijing. China currently participates in more than 100 government-to-government investment treaties of one kind or another. What makes the proposed U.S.-China BIT both enticing and controversial is the “negative list” approach to negotiations. The proposed BIT will address the usual gamut of investment treaty issues, including non-discriminatory market access and legal protections for investors. However, when it comes to determining what specific economic sectors will be open for investment, both countries have agreed to focus on the opposite: specifying which sectors will not be open to investment. This means that the United States can exclude industries with potential national security implications such as utilities, telecommunications, high technology, and defense, and China can do the same. China will present its list of excluded sectors to U.S. negotiators by early 2015.

Concluding the BIT is easier said than done, as there is considerable U.S. domestic opposition. Given a plethora of outstanding economic issues between the two countries – including U.S. accusations of corporate cyber espionage against China and rifts over issues such as anti-dumping duties – there are certainly political hurdles to attaining a sustainable and fair BIT. Additionally, as some more protectionist and economically nationalist commentators have noted, the investment imbalance between the U.S. and China leads to concerns that even the most “balanced” BIT would disproportionately advantage Chinese investors. Outside bonds, Chinese investors purchased record amounts of U.S equities in 2013 and are on track to do so again in 2014. Meanwhile, U.S investment in China, particularly in terms of corporate acquisitions, is at its lowest point in over a decade.

In approaching China, the Obama administration will have to be cognizant of its top constituents when it comes to the BIT: U.S. investors and firms. U.S. companies have made their concerns clear to the administration, highlighting issues such as intellectual property theft, cyber espionage, and unfair state subsidies. Indeed, part of the reason the United States’ Department of Justice decided to indict five high-ranking members of the People’s Liberation Army (PLA) earlier this year was to signal the government’s ongoing commitment to defending U.S. intellectual property against a Beijing – a move that cost the United States diplomatic capital with China but curried favor domestically. Similarly, before heading to China for the 2014 APEC Ministerial Meeting, U.S. Secretary of State John Kerry remarked that the United States will not “agree to disagree” with China on their differences, including cyber theft, adding that:

Foreign companies will invest more in China if they can be confident that when they do their intellectual property will be safeguarded. Chinese markets will be more attractive to international industries if China shows that it’s serious about addressing global cyber concerns. And China’s own industries will only prosper if they are generating their own intellectual property, ultimately, and if their government enforces the rules fully and fairly for everybody.

Despite their competing visions for regional trade agreements, the United States and China can encourage eventual convergence on economic issues by forging their own Bilateral Investment Treaty. In 2015, the BIT will remain at the top of their bilateral diplomatic agenda. For the Obama administration, the initiative represents both a feasible and rewarding diplomatic objective with China. Meanwhile, Beijing will look to ensure that it remains the world’s primary hub for trade and investment. Beijing has regularly claimed that any international economic agreement or regime that excludes China would be “incomplete.” With recent comments suggesting Beijing is interested in TPP talks, the diplomatic experience of negotiating the BIT could go a long way towards streamlining its eventual ascension to the TPP.