The Road to a Bilateral Investment Treaty

The Chinese foreign investment regulatory regime is notoriously restrictive. Multinational corporate giants in “vital industries and key fields” (Guiding Opinion Concerning the Advancements of State Capital and the Restructuring of State Owned Enterprises, PRC State Council, 2006; cited by 2010 Investment Climate Report, US State Department, 2010) such as telecommunications, aviation, and media find attempts to partner with and invest in Chinese companies repeatedly frustrated by Chinese government intervention. Conversely, Chinese firms benefit historically from the United States’ openness to foreign direct investment (FDI) by freely operating and acquiring American companies. This inequality in standards has led to considerable corporate outrage in the United States, and provoked vocal demands that the American government level the playing field. For example, Google has long been aghast at the PRC’s support for Baidu and interference with Google’s operations. Manufacturers have seethed as Chinese firms invest in the US but they are not permitted to do the same in China. Fortunately, the United States and China have been negotiating a bilateral investment treaty (BIT), an agreement establishing terms and conditions for mutual investment that can ensure fair treatment of investors from both nations, since 2009. While both sides have made progress, talks have recently stalled as tensions mount. In order to successfully negotiate such a treaty, however, the United States must be cognizant of when China is willing to cede ground and when their positions are non-negotiable.

First, it is important to understand the fundamental differences between the American and Chinese regulatory regimes governing foreign investment. While the American inter-agency regulatory body the Committee on Foreign Investment in the United States (CFIUS) only blocks investments that pose a clear threat to national security, the Chinese government chooses to restrict foreign investment in the name of protecting fledgling domestic firms and maintaining social stability, including both economic and political considerations in its policies. Typically, repressive regulatory regimes discourage investors and stifle economic growth. Yet, despite onerous regulations, the allure of access to China’s robust market continues to draw foreign investors into uneven exchanges in China’s favor, such as when Smithfield Food agreed to be purchased by the Shuanghui Group in exchange for Chinese market access.

Thus, China is not under economic pressure to liberalize its foreign investment regime, and holds a strong hand in any negotiations. To shift the power dynamics and incentivize continued negotiation, the United States can broaden CFIUS’s mandate. Currently, CFIUS is unable to block transactions that fail economic fairness models or result in excessive monopolization, placing American regulators at a severe disadvantage compared to Chinese regulators. If the American government empowered CFIUS to veto investments on economic grounds, just as the Federal Trade Commission and Department of Justice already can for domestic transactions, CFIUS will be able to crack down on egregiously anticompetitive foreign investment practices, and incentivize Chinese investors to pressure their government to accelerate negotiations.

While China is still likely to be in a strong negotiating position and capable of maintaining the status quo without suffering ruinous economic consequences, there are positive indications that China already recognizes the benefits of voluntarily liberalizing parts of its foreign investment regime. For example, China seems to be responding to the continued decline of its manufacturing industry by aggressively incentivizing investment in manufacturing instead of tightening its protectionist stance. In addition, China has opened experimental zones with reduced requirements called the “Pilot Free Trade Zones” (PFTZ), of which the Shenzhen Free Trade Zone is the most prominent.

China has recently taken steps to further liberalize manufacturing and mining investment in these PFTZs and open financial markets to additional foreign capital, in addition to expanding the number and size of PFTZs. Despite this, restrictions on industries governing information flows remain in place, suggesting that while industries previously protected for economic reasons may be liberalized, industries regulated for political reasons remain nonnegotiable. Thus, American negotiators may find it productive to focus discussions on less political sectors such as manufacturing rather than deeply political industries like media.

Thus far, this article has only accounted for domestic policy shifts in China, and has not taken into consideration the recent tensions between an ascendant China and the United States, and the broader geopolitical factors that may complicate the negotiation of a bilateral investment treaty. To see success, negotiators and leaders on both sides must avoid tying negotiations to the resolution of other political disputes, and instead emphasize the mutual benefits to be gained from a successful bilateral investment treaty. Chinese FDI into America has yielded qualitative and quantitative, social and economic benefits in both societies. For instance, Bloomberg reports that since 2009, Chinese investment in America has tripled and employment by Chinese-owned firms has increased nine-fold. Similarly, American investment in Chinese industries can create additional employment opportunities that are desperately needed as China’s next generation enters a tight job market. Although negotiators on both sides are already well-aware of the benefits of foreign direct investment, it remains important to frame the negotiations positively instead of resorting to sharp accusations and complaints about unfairness.

The road to a bilateral investment treaty is fraught with many perils, and there is no guarantee of success. However, failure is inevitable if the United States does not negotiate based on a realistic assessment of China’s willingness to concede. Rather than looking at the world as we want to see it, we must see the world as it is to have any hope of crafting a compromise that best serves the interests of businesses and communities across the globe.

Nikhil Manglik is a student at the University of Chicago. He can be contacted at

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