A US-China bilateral investment treaty

What does the structure of the Chinese economy (and in particular the prominent role of state-owned enterprises in Chinese production) imply for how the US should negotiate a bilateral investment treaty with the country? In the presence of SOEs, would a conventional BIT serve US interests? Are there supplemental policies that are needed in light of SOEs? Or are China’s SOEs really not that big of a deal?

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2 Responses to “A US-China bilateral investment treaty”

  1. kmaskus Says:

    China’s SOEs remain significant entities in a number of industries in which US firms presumably would like to invest, though their share of output and employment continues to give way to private enterprise arrangements, including joint ventures and partially foreign-owned firms. While some SOEs remain burdened by various regulations concerning the provision of workforce and community services, many are dynamic and increasingly efficient in global competition. One can observe this in biotechnology, generic pharmaceuticals, microelectronics, software, transport equipment, materials and other industries. Presumably this growth is due both to significant investments in capital, skills and, especially, acquired and new technologies to meet market needs and to the implicit public support from the SOE status.

    In this regard, SOEs may be increasingly important in high-technology areas. They are increasingly both demanders of, and sources of, new technologies that are aimed at both domestic and export markets. US firms presumably could achieve gains if they were better able to link up with the more dynamic enterprises, perhaps through joint ventures, and also could compete with them in the Chinese market through investment in local affiliates.

    The limited literature on whether BITS really generate more, and more efficient, investment in partner countries does not tell a clear story and often finds little impact. But one can question that analysis, since it has been based largely on aggregate investment flows in countries where BITS have been easy to negotiate (a selection issue). That literature has generally ignored the operation of key BIT provisions, including non-discrimination, investor protection and intellectual property.

    It’s unclear whether this literature would say much regarding the potential gains from a BIT with China, about which one could reasonably claim the following. First, a BIT could open to international investors more sectors of the economy, including services, and offer more forms in which investments could be made. Second, the non-discrimination rules in a BIT could prompt the central and provincial governments to accelerate the privatization of SOEs, or at least reduce the supports that may disadvantage other firms. Third, to the extent that SOEs and other Chinese enterprises become more open to international licensing and even acquisitions, foreign firms should gain greater control over the leakage of their proprietary technologies. China’s relatively recent reforms in patents and trade secrets have done much to improve the legal protection of intellectual property but proprietary and confidential information still leaks quite rapidly to domestic enterprises. In turn, these enterprises, including SOEs, tend to enter product market competition faster than just about anywhere else.

    So to the extent that a BIT offers more leverage and legal guarantees that investment is more open and intellectual property is better protected, there could be significant gains for US and other multinational firms. Whether China’s government would want to negotiate such an arrangement seems another question.

  2. tradeobserver Says:

    The US and EU work from model BIT agreements. The US model was last updated in 2004. For those who want to read the text it can be found at:
    http://www.ustr.gov/assets/Trade_Sectors/Investment/Model_BIT/asset_upload_file847_6897.pdf

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