Mark Schwartz Op-Ed, The Wall Street Journal Asia: 'A BIT of Help for the U.S. and China'
Reprinted from The Wall Street Journal Asia © 2014 Dow Jones & Company, Inc. All rights reserved.
These are challenging times for world leaders seeking to stimulate the global economy. The G-20 wants to see $2 trillion of global GDP and tens of millions of jobs added by 2018 through what officials described in Sydney in February as "ambitious but realistic policies." Multilateral talks are already underway to drive growth by further liberalizing trade, which are important initiatives but which have yet to bear fruit. So businesses will be particularly encouraged to see dialogue restarting that aims to give cross-border investment a boost, especially since the talks involve the world's two largest economies.
The talks concern the U.S.-China Bilateral Investment Treaty, or BIT. Such an agreement would clarify the rules for investment between the two countries while removing many barriers that remain to such investments -- rather like a free-trade agreement for capital flows instead of goods and services. A high-standard BIT will help remove ambiguities that detract from greater investment and broader economic activity, and give the U.S. and China increased stakes in each other's success. In the interest of stability and predictability, the BIT should be a strategic imperative for both countries.
A comprehensive investment treaty would be good business for both sides. In general, investment treaties prohibit favoritism for local investors; protect foreign investors from arbitrary treatment (by requiring fair compensation for any expropriation or nationalization of assets); provide for dispute resolution in international arbitration; and protect foreign-invested enterprises from local content requirements and export quotas.
For the U.S., the case for attracting more inbound Chinese foreign direct investment (FDI) is compelling. Out of the $175 billion in FDI into the U.S. in 2012, China, as the world's second-largest economy, accounted for a mere $4 billion of that amount. A BIT would help bring greater transparency and clarity to investment approval processes.
Recent research suggests that Chinese-owned companies provided more than 70,000 full-time jobs in the U.S. in 2013, a more than eight-fold increase compared to 2007. More two-way investment under a successful BIT means many more American jobs.
The BIT also would increase the global reach of American businesses, allowing them to invest in Chinese markets in industries that are largely restricted today, such as financial services, transportation and telecommunications. This treaty would allow American manufacturing and agricultural exporters to establish critical distribution platforms in China to facilitate their sales of American products into that market. As a condition of restarting the talks, Beijing has agreed to put almost all industries on the table, dropping its earlier desire to shelter a large number from American investment.
The protections of a BIT are especially important in markets where Chinese state-owned enterprises dominate, because it will require that those companies act based on commercial and not political principles. For example, state firms' access to non-commercial financing would be challenged. The BIT would also end the occasional Chinese practice of requiring American firms that manufacture in China to transfer their technology to Chinese businesses or use local technology in their manufacturing processes. This would help to address the concerns about intellectual-property theft that often discourage American investment.
For China, the BIT will help advance the economic reform goals reiterated by its leaders at last month's National People's Congress. It can help China achieve these goals by increasing capital available to private firms (especially small- and medium-sized businesses), which often rely on informal lending. The foreign capital, and the management expertise that so often comes with it, would promote innovation and entrepreneurship, which are critical to any economy's long-term success. Deploying private capital also helps foster healthy competition, making state-owned enterprises more efficient and better suited to compete in the global marketplace.
Nor are business benefits the only advantage to a U.S.-China investment treaty. There would also be considerable political advantages to concluding a deal. The difficulties faced by each country's investors in the other's economy have created significant friction between Washington and Beijing over the years. This is the case both when Chinese investments in the U.S. generate political controversy, and when American companies discover they aren't allowed to invest in booming Chinese industries. An investment treaty would help ratchet down such tensions by improving market access and ensuring greater predictability.
Leaders of the two largest economies in the world should focus on policies and initiatives big enough to result in meaningful economic growth but modest enough to be achieved. The U.S.-China investment treaty is one such initiative. Both sides have a great opportunity to advance their countries' interests and the global economy. The business communities on both sides of the Pacific have much to gain and should come together to play a constructive role supporting the negotiations and seizing the opportunity to do our BIT for global growth.