China and the United States have agreed to restart negotiations over a possible investment treaty that could substantially open the Chinese economy to more American companies.
During high-level talks over the past two days, Chinese officials agreed to drop a longstanding demand that negotiations over a Bilateral Investment Treaty would have to exclude sensitive or developing sectors of the economy that it wanted to protect.
Although many American companies have businesses in China, investment there is governed by a strict set of rules that often limits foreign ownership — a policy, U.S. officials argue, that will crimp China’s growth in the long term and which limits the benefits American companies and workers can gain from China’s economic expansion.
American officials characterized the change in negotiating policy as a major concession and a sign that the new Chinese government wants to speed economic opening.
The concession is no guarantee that a treaty will ever be signed, or that any future pact will be as comprehensive as U.S. officials and business executives hope. Indeed, BIT talks have technically been underway for five years but have been stalled for much of that time.
Still, “the commitment made today stands to be a significant breakthrough,” Treasury Secretary Jacob Lew said in a statement. It marks the first time China has agreed to talks that “include all sectors and stages of investment.”
The United States has BITs with 41 developing countries, from economic successes such as Poland to strategic allies such as Egypt and small countries such as Albania. While the world’s industrial countries are generally open to foreign investors and have trustworthy courts and political institutions, BITs are used to open up developing markets, encourage the flow of capital across borders and protect it once it gets there.
In China’s case, U.S. officials say they hope such a treaty would mark a turning point in U.S.-China economic relations — allowing American companies, particularly in services and other areas where they hold a competitive advantage, to benefit from China’s large population and growing wealth.
The announcement of the investment talks was the most prominent outcome of the Strategic and Economic Dialogue held over the last two days.
Although it may signal the reformist intentions of new President Xi Jinping, it also reflects China’s anxiety over the economic constraints it is starting to feel.
Foreign investment has been key to the country’s growth over the last 20 years, for example, but in the case of capital from the U.S. that has begun to flag.
According to figures from the Bureau of Economic Analysis, the value of U.S. direct investment in China more than doubled between 2006 and 2010, from $26 billion to $59 billion. However, it has fallen each year since, both because of the global economic downturn and, business officials and analysts maintain, because of the increasing costs of doing business in China and the mounting sense that the country had halted its process of economic opening.
Xi has said he wants to reverse that trend, and U.S. officials say they see Thursday’s announcement as a start, with more expected at a Communist Party plenum this fall.