Can China & the U.S. Conclude a ‘Bilateral Investment Agreement’?
A conversation with Chris Murck about US-China trade relations in 2017
The United States’ retreat from the TPP has put the focus back on bilateral investment agreements, while at the same time raising the bar for what a successful deal might look like. With genuine concerns about China’s willingness to commit to standards of labor, environment, and investment, negotiations risk becoming tedious and perhaps ultimately unsuccessful.
Here is the transcript of Chris' remarks.
Chris Murck: One of the impacts of the US’s withdrawing from TPP is that it places more emphasis on the BIT negotiations, the ‘Bilateral Investment Treaty’ negotiations that have been going on for some time between the US and China. I think it raises the bar for what will be regarded as a successful BIT.
The BIT will need to include some of the things that were achieved in the TPP document with respect to labor standards, environmental standards, and competitive neutrality, vis–à–vis State-Owned Enterprises. If it does not, I think the business community will be distinctly unenthusiastic about it, which would be a shame because the BIT has the capability or the potential of encouraging investment between China and the US and putting it on a more reciprocal framework.
Malcolm Riddell: What do you see as the obstacles to concluding the BIT?
Chris Murck: It's just a difficult negotiation. The TPP standards that were originally negotiated were not regarded as something that China would be willing to sign on to. While TPP was conceived as an open framework, the concept was that China or other countries that would be interested might join at a date when they felt ready to do so. No one really expected China to come onboard in the current round of TPP. Therefore, it makes the conclusion of a successful BIT, both more important and more difficult.
Malcolm Riddell: Let's go into some of the details here, both with the TPP and BIT standards. What are the problems that China has to overcome to be able to participate?
Chris Murck: China would have to come to some agreement about how labor standards work and how environmental standards work. China has been, in the past, one of the areas where critics of the relationship have argued that foreign companies are engaged in a race to the bottom, looking for, of course, cheap labor.
Also, looking for a place where they were free to pollute the environment in ways that they're not in the United States or other developed markets. That would not be absolutely solved by TPP-type standards, but it would be significantly improved. The question is, does China have the kind of environmental enforcement, for example, that would enable them to sign on to a BIT, which has standards like the TPP?
Malcolm Riddell: How far away is China from being able to meet these standards?
Chris Murck: It depends on political will, which is in short supply. Particularly right now, the Chinese reform effort has somewhat stalled. The Third Plenum reforms, which were very promising, don't seem to be going anywhere, particularly with respect to State-Owned Enterprises. It will be difficult.
Malcolm Riddell: Do you think State-Owned Enterprises will continue their resistance or will they see this kind of agreement being to their advantage?
Chris Murck: I think they will continue their resistance.
Malcolm Riddell: Now, you mentioned earlier about foreign companies going into China in a race to the bottom, to be able to pollute where they couldn't pollute, and to have labor standards that are lower than what they have in their home markets. Can you tell us a little bit more about that?
Chris Murck: I think it is an incorrect criticism, for the most part, particularly with respect to American multi-nationals. American multi-nationals face a stakeholder environment that essentially prohibits them from that kind of behavior. There are certainly small private companies, both foreign and domestic, in China that are able to operate quite freely in ways that they could not in the US.
The same is also true of some State-Owned Enterprises. They don't necessarily abide by even Chinese standards. For example, you've got something like a steel plant that has installed up-to-date scrubbers on its smoke stacks but then turns them off, except when they expect an inspection. I think that is fixable. How quickly it's fixable is a question mark.
Malcolm Riddell: Let's say we did have a successful BIT negotiation. What would it look like? What would the outcome look like?
Chris Murck: It would establish an investment environment in both countries that would protect investors and encourage investment because of that. The Chinese are very concerned about the U.S. CFIUS process.
Malcolm Riddell: What is CFIUS?
Chris Murck: CFIUS is the Committee on Foreign Investment in the U.S., which is an inter-agency process that reviews foreign acquisitions. Not greenfield investments but foreign acquisitions from the point of view of their potential impact on U.S. national security. It has been used to block a few, not very many, but a few Chinese acquisitions.
In the coming months, my expectation is that the remit of CFIUS will be expanded. It will be a more prominent barrier to Chinese investment in the U.S., which is probably appropriate. That makes the existence of a BIT, from the Chinese point of view, all the more important because that's one way in which they can regularize that process.
Malcolm Riddell: Rather than being what might be perceived from the Chinese point of view as arbitrary, would it become just an application process, and if the Chinese acquirer meets the standards, it would be permitted to make the investment?
Chris Murck: Yes. That's the hope.
Malcolm Riddell: Any other aspects of BIT that we should know about?
Chris Murck: No. Those are the key things and we have to wait and see how it comes about. What I fear is that it will be extremely difficult to close these negotiations. They've been going on for four or five years now, which is typical for one of these documents. It takes a long time to negotiate them. I think it will be quite difficult to close it, both because of the expectations that have been aroused with the respect to TPP and because on the US side - we don't yet have an administration in place on the trade front.
Malcolm Riddell: Now, if the BIT were successful, what would the impact be on foreign investment or U.S. investment in China?
Chris Murck: The impact would be to encourage it. But foreign investment is, at present in China, restricted and declining because of Chinese industrial policies. A BIT would not fully address that. One of the things that we would need to see an increase in foreign investment in China is the change in Chinese policy.