A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications

A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications

Updated January 12, 2018
A U.S.-China Bilateral Investment Treaty (BIT):
Issues and Implications
Over the past three decades, U.S.-China commercial ties
person of 10% or more of the voting securities of an
have expanded significantly. In 2017, China was the United
incorporated business enterprise or an equivalent interest in
States’ largest trading partner (with total merchandise trade
an unincorporated business enterprise, including a branch.
estimated at $633 billion), while the United States was
China’s largest trading partner. Yet the level of bilateral
The U.S. Bureau of Economic Affairs (BEA) is the main
foreign direct investment (FDI), while growing, is relatively
U.S. federal agency that collects and reports data on U.S.
small. In 2008, the United States and China launched
FDI outflows and inflows. It reported that Chinese FDI
negotiations for a bilateral investment treaty (BIT), an
flows to the United States in 2016, based on an ultimate
agreement that typically contains provisions to encourage
beneficiary owner (UBO) measurement, were $10.3 billion,
and provide reciprocal investment protections in order to
while U.S. FDI in China was $9.5 billion. BEA further
enhance bilateral commercial ties. In 2013, China agreed to
reported that the stock of Chinese FDI in the United States
negotiate a “high standard” BIT with the United States,
on a historical-cost (book value) basis through 2016 was
which would include opening new sectors to FDI and
$58.2 billion (UBO), while the stock of U.S. FDI in China
generally treating U.S.-invested firms in China the same as
was $92.5 billion.
Chinese firms. The two sides were unable to reach an
agreement by the end of the Obama Administration’s term,
Some analysts contend that BEA’s data do not reflect the
and the Trump Administration has not shown interest in
full value of Chinese FDI in the United States. They note,
restarting the talks. Many analysts contend that a BIT could
for example, that many of acquisitions of U.S. firms do not
significantly boost bilateral FDI and trade flows.
appear to be reflected in BEA’s FDI in the year the deal
was completed. They further contend that BEA data often
What Is a BIT?
attribute the source of the FDI inflows according to where
U.S. BITs address six core principles or issues for investors,
the funds originated from, such as offshore financial
including national treatment and most-favored nation
centers, which may not reflect the nationality of the actual
(MFN) treatment at all stages of investment, rules on
investor. The Rhodium Group (RG), a private consulting
expropriations and compensation if this occurs, ability to
firm, has sought to calculate its own estimates of U.S.-
transfer funds in and out of the country, limits on
China FDI flows, based on the value of completed
performance requirements (such as domestic content targets
transactions by Chinese-owned firms. Using this method, it
or mandated technology transfer), neutral arbitration of
estimates Chinese FDI flows to the United States in 2016 at
disputes, and freedom by investors to appoint their own
$42.6 billion (which was 4.5 times BEA’s estimate) and
senior officials. To take effect, BITs must be approved by
U.S. FDI in China at $13.8 billion (34% higher than BEA’s
the U.S. Senate by a two-thirds vote (see CRS In Focus
data).
IF10052, U.S. International Investment Agreements (IIAs),
by Martin A. Weiss and Shayerah Ilias Akhtar).
Figure 1. Estimates of U.S.-China FDI Flows in 2016
(in bil ions of dol ars)
Economic Theoretical Benefits of a BIT
BITs are intended to improve the investment climate among
the partners, promote free market policies, and expand
commercial ties. FDI inflows can boost a country’s
economy by creating (or sustaining) jobs, generating tax
revenues, enhancing domestic research and development
and access to technology, increasing domestic competition,
and expanding the types of goods and services available to
consumers. FDI outflows abroad may help firms become
more competitive by boosting their overseas sales of goods
and services, generating exports from the home country,
and expanding a firm’s access to foreign talent.

U.S.-China FDI Flows: Different Estimates
Sources: BEA and the Rhodium Group.
FDI is generally the most commonly used measurement of
In terms of the stock of Chinese FDI in the United States
international investment flows, although some contend such
through 2016, RG’s estimate, at $110.1 billion, was 89%
measurements do not cover all investments. According to
larger than BEA’s UBO estimate, while RG’s estimate of
the U.S. Code of Federal Regulations, FDI is defined as the
the stock of U.S. FDI in China, $240 billion, was 159%
ownership or control, directly or indirectly, by one foreign
larger than BEA’s data.
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A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications
Figure 2. Estimates of the Stock of FDI Flows between
BIT negotiations held in June 2015, each side submitted
the United States and China through 2016 ($billions)
their first negative list proposals, and later agreed to submit
a revised list in September 2015. During the July 2015
S&ED, the two sides also reaffirmed that reaching a BIT
remained a high priority and pledged to intensify
negotiations and exchange improved “negative list” offers.
While some progress was reportedly made in the September
2015 BIT talks, a breakthrough was not achieved in time
for President Xi’s summit visit to the United States. The

Wall Street Journal on September 18, 2015, reported that
Sources: BEA and the Rhodium Group.
China’s latest negative list contained 35 to 40 sectors. On
September 22, 2015, then-U.S. Trade Representative
China’s Investment Climate
Michael Froman stated that, although progress had been
made over the past 20 months to reach a BIT, there was “a
According to the United Nations, China was the third-
largest destination of FDI in 2016 (at $134 billion). BEA
substantial distance from the kind of high standard
agreement necessary to achieve our mutual objectives.”
estimates sales of foreign affiliates of U.S. firms in China
During the September 2015 U.S.-China summit, the two
totaled $482 billion in 2015. Over the past few years,
foreign-invested firms in China have reported that the
sides said they were “committed to intensify the
negotiations and to work expeditiously to conclude the
business climate in China is becoming increasingly
BIT.” However, no breakthrough was achieved by the end
challenging. For example, a 2017 survey by the American
of the Obama Administration’s term.
Chamber of Commerce in China of its members found that

81% of recipients stated that they “felt less welcomed than
While the Chinese government has indicated its support for
before.” Unclear laws, inconsistent regulatory enforcement,
continuing BIT negotiations, the Trump Administration has
and preferences given to domestic Chinese firms over
been less clear on its position. U.S. Secretary of Treasury
foreign firms are often cited as obstacles for U.S. FDI.
Steven Mnuchin was quoted by the publication Inside
Trade in June 2017 as follows:
According to the U.S.-China Business Council, China
It’s on our agenda; I wouldn't say it’s at the very top
imposes ownership barriers on nearly 100 industries. To a
great extent, China’s
of our agenda. I think what we're looking for is,
FDI restrictions appear to be linked to
industrial policies that seek to promote the development of
opposed to just negotiating a large agreement, we're
sectors identified by the government as critical to future
looking to negotiate very specific issues that deal
economic development. For example, since the early 1980s,
with market issues today, deal with market fairness
the Chinese government has encouraged foreign auto
today, deal with opening their markets to the same
companies to invest in China, but has limited FDI in that
extent that our markets are open, and that’s really
sector to 50-50 joint ventures with domestic Chinese
our focus.... Once we can make progress in that we
partners. In addition, the central government maintains a
can turn to the bilateral investment treaty.
“Guideline Catalogue for Foreign Investment,” which lists
FDI categories that are encouraged, restricted, or
Implications of a BIT Agreement
prohibited. U.S. firms also raise concerns about FDI
Many analysts believe that a high-standard U.S.-China BIT
regulations that discriminate against foreign firms,
could have a significant effect on boosting bilateral
condition investment approval to certain performance
commercial relations, such as by increasing U.S. exports to
requirements (such as technology transfers), and extend
China. As noted by one former Treasury official, a BIT
preferential policies (e.g., subsidies) to Chinese firms.
“could be a game changer in terms of unlocking new
opportunities and leveling the playing field for U.S. firms
Progress Toward a High-Standard BIT with China
and investors.” Some view China’s willingness to negotiate
During the July 2013 session of the U.S.-China Strategic
such an agreement as an indicator that it is serious about
and Economic Dialogue (S&ED), China agreed to negotiate
implementing comprehensive new economic reforms,
a high-standard BIT with the United States that would
although whether or not it can commit to such reforms on
include all stages of investment and all sectors,
paper remains unclear. Some analysts have raised concerns
commitments U.S. officials described as “a significant
over whether China could be relied on to fully implement
breakthrough, and the first time China has agreed to do so
the agreement, especially in regards to preferences it gives
with another country.” A press release by the Chinese
to many state-owned or controlled firms. Some critics
government stated that China was willing to negotiate a
question why China is negotiating a high-standard BIT with
BIT on the basis of nondiscrimination and a negative list,
the United States while at the same time seeming to impose
meaning the agreement would identify only those sectors
new FDI restrictions. It is unclear to what extent a BIT
not open to foreign investment on a nondiscriminatory basis
would boost Chinese FDI in the United States.
(as opposed to a BIT with a positive list, which would list
only sectors open to foreign investment).
Wayne M. Morrison, Specialist in Asian Trade and
During the July 2014 S&ED session, the two sides agreed
Finance
to a broad timetable for reaching agreement on core issues
IF10307
and major articles of the treaty text and committed to
initiate the “negative list” negotiation early in 2015. During
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A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications

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