U.S. And China Agree To Resume Investment Treaty Negotiations
July 30, 2013

During the annual Strategic and Economic Dialogue earlier this month, top U.S. and Chinese officials agreed to resume bilateral investment treaty (BIT) negotiations. Treasury Secretary Jack Lew described the development as “a significant breakthrough” and stated that the comprehensive negotiations will address all stages of investment and all industrial sectors.

BITs are international agreements that provide binding legal rules regarding one country's treatment of investors from another country.  BITs provide investors with improved market access; protection from discriminatory, expropriatory, or otherwise harmful government treatment; and a mechanism for investors to pursue binding arbitration against host governments for breaches of the treaty.  There are over 3,000 BITs worldwide, of which the United States is party with only 41 countries.

The U.S.-China BIT negotiations had been stalled since 2008, while the Obama Administration completed a review and update of the U.S. Model BIT.  The Model BIT was completed in April 2012, and modifications clarify its applicability to state-owned enterprises (SOEs) and include new disciplines on performance requirements, labor rights, environmental protections, and regulatory transparency.

U.S. companies are interested in a BIT with China to eliminate investment and ownership restrictions in China covering approximately 100 industries, including the automotive, banking, chemical, communication, energy and telecommunications sectors.  Chinese companies are interested in the BIT to address what they perceive as significant political obstacles and national security investigations to which the U.S. government subjects their investment attempts.  According to the U.S. Department of Commerce, China invested $5.15 billion directly in the United States last year, while U.S. direct investment in China was $51.4 billion.

Whether your company is focused on the U.S. market or expanding operations in China, staying abreast of the upcoming BIT negotiations could be critical to your business in several ways -- some beneficial and some adverse.  A BIT with China has the potential to increase market access through foreign investment protections and increased regulatory transparency in China as it transforms from an economy focused on exporting manufactured goods to one driven by a growing consumption-driven middle class.  The enhanced disciplines on labor rights and environmental protection will likely require China to enforce such laws in its home market, ensuring that U.S. companies have a level and transparent regulatory playing field.  Further, disciplines included in the new U.S. Model BIT prevent forced technology transfer and other discriminatory performance requirements on U.S. companies that want to invest abroad.  On the other hand, once in effect, a U.S.-China BIT will likely result in increased inbound investment into the United States, including by Chinese SOEs, and thus increased competition for sensitive domestic products and services.

For more information about the contents of this newsletter, or about Kelley Drye's International Trade Practice, please contact practice group chair Kathleen Cannon or partner Paul Rosenthal, who acts as editor of this publication.