A Battle Over Game Rules
China and the United States held the 19th round of Bilateral Investment Treaty (BIT) talks in Beijing from June 8 to 12, when the two sides exchanged their proposed negative lists and officially began negotiations over the negative list. A negative list outlines sectors that are restricted for foreign investors. The latest progress signals a new phase of China-U.S. BIT talks, paving the way for substantive achievements. However, the two sides will inevitably have many rounds of battles over the list in the future.
The new round of global negotiations over investment treaties is in its essence a fight over global investment and trade rules. Free trade and investment rules proposed by developed countries usually have higher standards and cover a wider range of areas, including not only the cancelation or reduction of tariffs, but also regulations on safety standards, technical barriers to trade, health quarantine for animals and plants, competition policies, intellectual property rights (IPRs), government procurement, settlement of disputes and protection of laborers and the environment. In comparison, trade rules proposed by developing countries are more focused on basic investment interests such as the reduction of investment barriers and tariffs but rarely cover standards and regulations over labor rights, environment protection and IPRs.
China-U.S. BIT talks began in 2008, and 19 rounds of talks have been held thus far. In July 2013, both sides agreed to hold substantive negotiations on the premise of pre-establishment national treatment and the negative list. In July 2014, the two sides reached a consensus on core issues and major clauses of the BIT and promised to start negotiations over the negative list on the basis of lists proposed by two countries in early 2015.
Disagreements in BIT talks are mainly focused on three issues. First and foremost, the two sides disagree in the issue of market access, represented by the pre-establishment national treatment and the negative list, as they have vast differences in the length of the negative list. The other two issues are fair competition, mainly concerning China's state-owned enterprises, and guarantee of rights and interests, primarily involving financial services, tax revenue and subsidy standards.
To date, at least 77 countries have adopted a management model for foreign investment based on pre-establishment national treatment plus the negative list, and many regional trade arrangements have adopted this model as well. The model is taking the lead in the development of global investment rules.
As a top trading nation, China is being integrated into the global economic rules. The negative-list approach is a fundamental reform on China's foreign investment management.
China adopted a post-establishment national treatment and a positive list to manage foreign investment prior to 2013. Foreign investment had to be approved before being given market access. The Catalogue for the Guidance of Foreign Investment Industries outlines the industries that are encouraged, restricted and prohibited for foreign investors. After the Third Plenary Session of the 18th Central Committee of the Communist Party of China held in November 2013, China rolled out an overall comprehensive reform agenda aimed at creating a more open, fair and indiscriminative environment for foreign investment by changing from approval-based to filing-based management model. A recently issued circular by the State Council kept 122 restrictive areas on the negative list for China's pilot free trade zones (FTZs), shorter than the 190 items and 139 items on the previous two editions of the negative list adopted by the Shanghai FTZ.
The model investment treaty created by the United States sets the highest-level investment rules in the world. Their standards are much higher than that of China's foreign investment treaties. Since the global investment system doesn't have a set of universally accepted rules as the multilateral trade system, the China-U.S. BIT talks will face many uncertainties in setting the standards for investment rules.
The BIT will have a potential impact on China's domestic industries, which could lead to many rounds of discussion between China and the United States. For instance, the investment treaties participated in by the United States cover the service industry where the negative-list approach was adopted. It means anything that's not restricted on the list should be completely opened up to foreign investors. This makes it impossible for developing countries to foresee the future and protect domestic businesses.
In the meantime, IPRs are listed within the scope of investment in the treaty. If foreign investors think their IPRs have been violated or indirectly expropriated, they could demand compensation from the host country or even file a lawsuit against the government according to corresponding clauses in the investment treaty. This will pose a great challenge for China, a country which has yet to establish a good environment for IPR protection. Therefore, it's of great significance for China to establish a set of game rules fit for its own conditions after weighing the rights and obligations stipulated in the BIT.
This is an edited excerpt of an article by Zhang Monan, an associate research fellow at the China Center for International Economic Exchanges, published in Securities Times
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