5 things you need to know about China-U.S. BIT

Global Business

A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state.
This type of investment is called foreign direct investment (FDI). BITs are established through trade pacts.

US BIT.png

US Bilateral Investment Treaties. Dark green: in force, light green: not ratified/in negotiations Credit:Wikipedia

  • BITs typically guarantee investors nondiscriminatory treatment, so that the host government cannot favor local investors at the expense of foreign investors. This obligation applies to all government actions relating to foreign investment, from decisions to grant operating licenses and the enforcement of laws and regulations to marketing approvals for goods and services. If a host government accords the foreign investor less favorable treatment, it is in violation of the non-discrimination obligation.
  • BITs also typically give foreign investors the right to transfer funds into and out of the host country without delay, using a market rate of exchange. This obligation covers all transfers related toan investment, including interest,proceeds from liquidation, repatriated profits and infusions of additional financial resources after the initial investment has been made. These treaties ban trade distorting measures such as local-content requirements,which require investors to use domestic inputs or suppliers when manufacturing goods or supplying services, as well as export quotas, which require investors to export locally produced goods.
  • BITs contain a suite of protections grounded in international law, protecting investors from unfair or arbitrary treatment and requiring that any expropriation or nationalization be accompanied by fair market value compensation.
  • Finally, and most important, BITs permit investors to bring claims for treaty breach and to seek monetary damages before an independent arbitral tribunal. Permitting investors to pursue international arbitration effectively depoliticizes investment disputes and ensures that every investment dispute will not automatically result in legal or political tensions between the two states. Governments in general have a good track record of paying such awards, which, if necessary, may be enforced in any of the 136 countries that are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards.


A BIT is a particularly good starting point for reinvigorating the bilateral economic relationship, especially when contrasted with alternative approaches. A US-China free trade agreement (FTA), while more comprehensive than a BIT, is not a realistic goal at present because the differences between the two sides are too significant to expect the successful negotiation of such an agreement.

Strategic and Economic Dialogue (S&ED), chaired by the US Secretaries of State and Treasury with a Chinese vice premier and State Councilor, play a vital role in strengthening working relationships, coordinating macroeconomic policy, and resolving sector-specific concerns. They are, however, no substitute for a legally binding, economy-wide agreement.

A BIT, by contrast, could serve as a powerful and achievable foundation upon which to build a new affirmative economic agenda. A BIT presents the opportunity to negotiate and agree on common standards for the treatment of investors and their investments in both countries. It is a legal instrument that will enable investors in both countries to mitigate political, legal, and regulatory risks, thereby encouraging even greater cross-border investment flows. And, as an agreement that would further open the Chinese market to US investment, it has the potential to reinforce China’s ongoing domestic reforms. A successful BIT would allow the US-China economic relationship to be defined less by its disputes and more by its potential. It would also serve as a template for how the two countries can work together as leaders on rules-based approaches to economic policy issues.

In addition to strengthening bilateral cooperation, the negotiation and completion of a BIT would present the United States and China—the world’s two largest economies—with the opportunity to shape global investment rules. New trade and investment rules are being written in various negotiations, including in the Transatlantic Trade and Investment Partnership (TTIP), TPP, and RCEP. If the United States and China can successfully negotiate a BIT, they will be at the forefront with other leading nations setting investment standards for the 21st century.

Although the market access issue has thus far proved to be a roadblock, creativity and a concerted effort by both sides certainly could produce a solution. And there is reason to believe that China might be willing to reconsider its position. For example, China is in the process of transferring some authority to approve foreign investments from the central government to the provincial and local governments and is transitioning some requirements for approval into requirements for simple registration.
In recent months, Chinese officials have loosened restrictions on foreign investment in Chinese capital markets and signaled the potential for further liberalization. In addition, China has
agreed to launch BIT negotiations this fall with the European Union, which will seek market access commitments similar to those in US BITs, according to public statements by EU Trade Commissioner Karel De Gucht. These developments, coupled with Beijing’s renewed interest in BIT negotiations with Washington, suggest that China may be prepared to discuss market access as well as investment protection in the context of BIT talks with the United States.

Benefits of a BIT to China
With China having completed a leadership transition, it now stands at an economic crossroads. Some in China argue that the country has benefited in recent years from stronger state guidance following the global financial crisis and that the government should increase its control over the economy to spur the next era of growth. Yet other leaders clearly believe that China should
accelerate the pace of economic reform away from a state-centric model. Simply put, there remain divisions among Chinese policymakers about the pace and scope of reforms. China faced a similar decision point more than a decade ago when it negotiated the terms of its accession to the WTO. At that time, former President Jiang Zemin and former Premier Zhu Rongji used the market opening commitments required by WTO accession to propel and accelerate domestic economic reforms. In a similar fashion, the current leadership of President Xi Jinping and Premier Li Keqiang could use a BIT with the United States, and perhaps TPP in the longer term, to reinforce policies that reduce domestic economic distortions, increase market access and transparency for all, and allow greater freedom for businesses from every country, including Chinese private businesses, to compete.

By increasing the volume and scope of cross-border investment between the United States and China, the BIT would help China to rebalance its economy away from an overemphasis on investment in fixed assets and towars greater reliance on consumption, especially by households. To succeed in its transition, China must move up the value chain into innovative industries that pay higher wages and facilitate greater consumption for the average employee. This process will be accelerated if more Chinese firms have exposure to experienced American firms and learn from their more developed managerial and technical expertise.

By making cross-border capital flows and investments easier, a BIT will also help reorient the Chinese economy toward the private sector by increasing the pool of capital available to private companies, which will help them become more innovative and efficient. The increase in capital will be especially beneficial for small- and medium-sized enterprises that often have difficulty securing loans and are forced to rely on the informal lending market. Increasing the growth of private sector firms will give more Chinese citizens the opportunity to create wealth and facilitate healthy competition with state-owned enterprises (SOEs), so that they evolve into more efficient and dynamic companies.

Finally, a BIT would place China’s investment relations with the United States on a stable treaty basis. This would not only mitigate the uncertainty created by the sometimes shifting political winds on attitudes toward inbound Chinese investment, but would also make
American companies more comfortable investing in China at a time when concerns about indigenous innovation, cyber theft, and rising labor costs have led to growing wariness.

Benefits of a BIT to U.S.
A BIT would help to level the playing field for US firms competing with Chinese companies and prohibit China from using regulations to favor Chinese firms, whether private or state-owned. Most important, the non-discrimination obligation would prohibit the Chinese government from giving special advantages to Chinese state-owned firms (as well as private firms) that are not available to US investors. In fact, the non-discrimination obligation would address one of the most persistent and widespread concerns of US companies operating in China.

According to the US-China Business Council, favoritism toward Chinese companies, both private and state-owned, is a factor in five of the top ten challenges that US companies face in the China market: administrative licensing, competition with Chinese enterprises, uneven enforcement and implementation of laws and policies, investment restrictions, and standards and conformity assessment procedures. A BIT would prohibit any Chinese government measures adopted in one of these areas, or in any other area of regulation, that discriminate against US investors.

The BIT would also address another important competitive concern: the use of government authority by SOEs in China to advance their own commercial interests or disadvantage US firms. In some cases, the Chinese government may delegate to an SOE the authority to regulate the same sector in which in operates. In those circumstances, the BIT rules apply equally to the actions of SOEs as they apply to the government itself. If an SOE, for example, has the authority to grant operating licenses, promulgate regulations, or establish product standards, those activities of the SOE are subject to the rules of the BIT, including the requirements to accord non-discriminatory treatment, fair and equitable treatment, and to compensate US investors in the event of an expropriation. The BIT would also end the occasional practice of requiring US firms, as a condition for approving their investments or taking advantage of local incentives, to transfer their technology to local Chinese companies or to use Chinese technology.

US companies would benefit greatly from expanded access to the Chinese market to increase their revenue amid sluggish growth at home and in other advanced markets. For American workers, enhancing the ability of US companies to invest in the Chinese market will create, not eliminate, jobs in America. Academic research has repeatedly found that expansion abroad by affiliates of US multinationals tends to preserve and support their American parent jobs, not destroy them. This is especially true when affiliates expand to serve new customers—long the primary goal of many US multinationals in China. In 2009, the manufacturing affiliates of these companies in China sold about two-thirds of their output to local Chinese customers, not into global markets. Indeed, the share of these Chinese affiliates’ sales back to the United States fell from 16.3 percent in 1999 to just 10.2 percent in 2009.

The bottom line is that US companies need to invest in China and other foreign markets to compete successfully in the global market. And BITs help them to do so by mitigating the political, legal, and regulatory risks associated with those investments. In the case of China, US firms can ill afford delay in concluding a BIT and leveling the playing field with their UK, Dutch, Korean, and Japanese competitors whose investments already enjoy BIT protections.

Credit to BIT BY BIT“(pdf) by Daniel M. Price and Michael J. Smart