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Why A U.S.-China Bilateral Investment Treaty Matters

By: Marney Cheek, Covington & Burling

A U.S.-China bilateral investment treaty (BIT) will serve as the cornerstone for the bilateral economic relationship between these two economic powerhouses for years to come.  It puts in place important rules that protect U.S. investors against discrimination and arbitrary treatment, with the United States promising the same for Chinese investments.  China remains one of the most challenging markets for U.S. investors. This is a deal worth doing, and worth doing right. 

BIT negotiations between the United States and China have been underway since 2008.  Last summer the talks gained new momentum.  The parties announced a major breakthrough when China signaled for the first time its willingness to protect U.S. investments at all phases of development and in all sectors and industries, except where specifically excluded.  China’s new openness to broader protection for investments, along with the reform agenda recently released by the new leadership of the Communist Party of China, signals China’s interest in accelerating its own economic growth through greater foreign investment and ensuring protection of Chinese outbound investment to the U.S. market.  While there is a long road ahead before the BIT is concluded, now is the time to identify unique challenges in the Chinese market so they can be addressed in the BIT negotiations.

What is a BIT and why is it important? 

A BIT is a government-to-government agreement that establishes binding rules covering the treatment of foreign investors and investments from each country.  As a practical matter, the BIT includes the legal rules that guarantee non-discriminatory access to the Chinese market and fair treatment of investments once established.  BITs provide substantive legal obligations that protect investors, such as protections against expropriation without compensation, protections from discriminatory or other arbitrary treatment, allowing investment-related capital to be freely transferred in and out of the country where the investment is made, and fair and equitable treatment of investments.  The BIT will restrict the imposition of performance requirements, such as requiring a certain level of local content be included in a product, as a condition for establishing or expanding an investment.  The BIT also will enhance transparency and opportunities for public participation in the regulatory process.

There are certain unique features of the Chinese market, including the dominance of state-owned enterprises and national champions, that may require unique disciplines in the U.S.-China BIT.  Transparency and an opportunity for public comment is another area that is particularly important in the Chinese market.    

What about the U.S.-China BIT is significant?

China has entered into over 100 BITs.  But the U.S.-China BIT will break with China’s traditional BIT model in at least two significant respects.  First, in its negotiations with the United States, China has agreed that it will negotiate on the basis of a “negative list.”  By agreeing to a “negative list” approach, China has signaled its willingness to allow foreign investment in all industries and sectors of its economy, except as specifically carved out.  This leads to much broader coverage generally, since China has to “opt out” of protections, rather than “opt in.”  Second, China signaled its willingness to allow non-discriminatory access to its market at all stages of investment.  This would protect pre-investment activities and is expected to open the China market to more U.S. companies and afford greater certainty for investments in various sectors.  These are serious and important advances that will benefit U.S. investors.  The U.S.-China BIT presents the most significant opportunity for U.S. companies to address barriers in the Chinese market since China’s accession to the World Trade Organization.

Where do we go from here?

The United States and China continue to negotiate and meet regularly on economic issues, including at the upcoming U.S.-China Strategic and Economic Dialogue in July.  The Chinese are currently developing their draft “negative list” of sectors they wish to exclude from their commitments under the BIT.  That should be presented to the United States later this year or early next year.  In the meantime, however, U.S. companies can proactively work to identify and prioritize the current laws, regulations and administrative practices that restrict or otherwise impede their operations in China and seek opportunities to share those with the U.S. Government.  The BIT, once concluded, will set the ground rules for economic engagement in China for years to come. It’s important to get it right.