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Daniel Michaeli

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Let's Negotiate an Investment Treaty with China

Posted: 04/08/11 03:39 PM ET

In recent years, Beijing has asked repeatedly for a treaty that would give U.S. investors in China greater and more enforceable rights. It is high time for the Obama administration to respond seriously -- by concluding its open-ended review of bilateral investment treaties and working one out with China. The U.S. and China should work aggressively over the next several weeks to prepare to announce a timeline for negotiations at the U.S.-China Strategic and Economic Dialogue in Washington next month.

American firms have nearly $50 billion invested in China, and a recent survey of companies investing in China indicates that most intend to increase their investments substantially this year. The performance of these investments is crucial to the U.S. economy: they enable American companies to access China's huge domestic market and catalyze American exports -- U.S. multinationals send half of their total exports from the United States to their own foreign affiliates. American corporations, when successful overseas, bring jobs and investment back to the United States. Recent data indicates that U.S.-based multinational corporations locate more than half of their employees in the United States, where they have 70 percent of their operations and spend 87 percent of their research and development budget.

U.S. companies face serious challenges operating in China. But the good news is that some of their most significant concerns cover areas effectively addressed in bilateral investment treaties, such as intellectual property theft, local content requirements, expectations of technology transfer, and regulatory discrimination. China has already signed 120 investment treaties around the world, including with Japan, Germany and the United Kingdom. The most recent ones have clauses providing foreign investors with the option to resort to binding international arbitration for intellectual property disputes, if Chinese local courts cannot resolve such issues satisfactorily (as, indeed, too often they cannot). Language already in China's existing treaties, promising foreign investors regulatory treatment equal to domestic investors, also provides remedies for foreign companies in China facing biased enforcement of regulations.

With $3 billion invested in the United States, Beijing has also sought negotiations on a treaty with Washington for several years, to protect its investments in the United States. It is in the U.S. interest to sign such a treaty. China is now the world's largest capital-surplus economy. Its annual flows of outward investment more than doubled between 2007 and 2009, and China is expected to become the second-largest source of global foreign direct investment within two years, after the United States. So even as protecting American investments in China is crucial, the U.S. economy would benefit greatly from increased Chinese investment in the United States, subject to proper national security considerations. A bilateral investment treaty would help lay the groundwork.

Chinese investment in the U.S. has so far been quite limited. An ongoing $3.6 billion investment of South Korea's Samsung Electronics in Austin, Texas, is larger than all the active Chinese investments in the United States combined, according to the most recent data. There is much more potential for Chinese investment that would create jobs and opportunities for American entrepreneurs to access China's massive financial resources. And China is eager to invest; despite the economic pessimism of many Americans, Chinese investors recognize there is still a lot of money to be made in the United States. At an investment forum in Beijing several days ago, a senior official with the China Investment Corporation revealed that the fund earned 40% returns on clever investments in American commercial real estate last year.

If U.S. does not begin negotiations now, the European Union, which in December began exploring the prospect of an investment treaty with China, might beat the United States to the punch. A better approach would be to coordinate treaty negotiations between the U.S. and the EU, as China's largest trading partners. By preparing for an announcement of negotiations at the Strategic & Economic Dialogue, the U.S. can work towards an investment treaty that would respect U.S. national security interests, level the playing field for U.S. firms operating in China, and attract Chinese investment -- signed and ratified by the end of 2011. Failing to act quickly could damage the U.S. economic position in China and harm longer-term prospects for the U.S. economic recovery.

 

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