A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications

Updated January 12, 2018

A U.S.-China Bilateral Investment Treaty (BIT):

Issues and Implications

Over the past three decades, U.S.-China commercial ties

have expanded significantly. In 2017, China was the United

States’ largest trading partner (with total merchandise trade

estimated at $633 billion), while the United States was

China’s largest trading partner. Yet the level of bilateral

foreign direct investment (FDI), while growing, is relatively

small. In 2008, the United States and China launched

negotiations for a bilateral investment treaty (BIT), an

agreement that typically contains provisions to encourage

and provide reciprocal investment protections in order to

enhance bilateral commercial ties. In 2013, China agreed to

negotiate a “high standard” BIT with the United States,

which would include opening new sectors to FDI and

generally treating U.S.-invested firms in China the same as

Chinese firms. The two sides were unable to reach an

agreement by the end of the Obama Administration’s term,

and the Trump Administration has not shown interest in

restarting the talks. Many analysts contend that a BIT could

significantly boost bilateral FDI and trade flows.

What Is a BIT?

U.S. BITs address six core principles or issues for investors,

including national treatment and most-favored nation

(MFN) treatment at all stages of investment, rules on

expropriations and compensation if this occurs, ability to

transfer funds in and out of the country, limits on

performance requirements (such as domestic content targets

or mandated technology transfer), neutral arbitration of

disputes, and freedom by investors to appoint their own

senior officials. To take effect, BITs must be approved by

the U.S. Senate by a two-thirds vote (see CRS In Focus

IF10052, U.S. International Investment Agreements (IIAs),

by Martin A. Weiss and Shayerah Ilias Akhtar).

Economic Theoretical Benefits of a BIT

BITs are intended to improve the investment climate among

the partners, promote free market policies, and expand

commercial ties. FDI inflows can boost a country’s

economy by creating (or sustaining) jobs, generating tax

revenues, enhancing domestic research and development

and access to technology, increasing domestic competition,

and expanding the types of goods and services available to

consumers. FDI outflows abroad may help firms become

more competitive by boosting their overseas sales of goods

and services, generating exports from the home country,

and expanding a firm’s access to foreign talent.

U.S.-China FDI Flows: Different Estimates

FDI is generally the most commonly used measurement of

international investment flows, although some contend such

measurements do not cover all investments. According to

the U.S. Code of Federal Regulations, FDI is defined as the

ownership or control, directly or indirectly, by one foreign

person of 10% or more of the voting securities of an

incorporated business enterprise or an equivalent interest in

an unincorporated business enterprise, including a branch.

The U.S. Bureau of Economic Affairs (BEA) is the main

U.S. federal agency that collects and reports data on U.S.

FDI outflows and inflows. It reported that Chinese FDI

flows to the United States in 2016, based on an ultimate

beneficiary owner (UBO) measurement, were $10.3 billion,

while U.S. FDI in China was $9.5 billion. BEA further

reported that the stock of Chinese FDI in the United States

on a historical-cost (book value) basis through 2016 was

$58.2 billion (UBO), while the stock of U.S. FDI in China

was $92.5 billion.

Some analysts contend that BEA’s data do not reflect the

full value of Chinese FDI in the United States. They note,

for example, that many of acquisitions of U.S. firms do not

appear to be reflected in BEA’s FDI in the year the deal

was completed. They further contend that BEA data often

attribute the source of the FDI inflows according to where

the funds originated from, such as offshore financial

centers, which may not reflect the nationality of the actual

investor. The Rhodium Group (RG), a private consulting

firm, has sought to calculate its own estimates of U.S.China FDI flows, based on the value of completed

transactions by Chinese-owned firms. Using this method, it

estimates Chinese FDI flows to the United States in 2016 at

$42.6 billion (which was 4.5 times BEA’s estimate) and

U.S. FDI in China at $13.8 billion (34% higher than BEA’s

data).

Figure 1. Estimates of U.S.-China FDI Flows in 2016

(in billions of dollars)

Sources: BEA and the Rhodium Group.

In terms of the stock of Chinese FDI in the United States

through 2016, RG’s estimate, at $110.1 billion, was 89%

larger than BEA’s UBO estimate, while RG’s estimate of

the stock of U.S. FDI in China, $240 billion, was 159%

larger than BEA’s data.

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A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications

Figure 2. Estimates of the Stock of FDI Flows between

the United States and China through 2016 ($billions)

Sources: BEA and the Rhodium Group.

China’s Investment Climate

According to the United Nations, China was the thirdlargest destination of FDI in 2016 (at $134 billion). BEA

estimates sales of foreign affiliates of U.S. firms in China

totaled $482 billion in 2015. Over the past few years,

foreign-invested firms in China have reported that the

business climate in China is becoming increasingly

challenging. For example, a 2017 survey by the American

Chamber of Commerce in China of its members found that

81% of recipients stated that they “felt less welcomed than

before.” Unclear laws, inconsistent regulatory enforcement,

and preferences given to domestic Chinese firms over

foreign firms are often cited as obstacles for U.S. FDI.

According to the U.S.-China Business Council, China

imposes ownership barriers on nearly 100 industries. To a

great extent, China’s FDI restrictions appear to be linked to

industrial policies that seek to promote the development of

sectors identified by the government as critical to future

economic development. For example, since the early 1980s,

the Chinese government has encouraged foreign auto

companies to invest in China, but has limited FDI in that

sector to 50-50 joint ventures with domestic Chinese

partners. In addition, the central government maintains a

“Guideline Catalogue for Foreign Investment,” which lists

FDI categories that are encouraged, restricted, or

prohibited. U.S. firms also raise concerns about FDI

regulations that discriminate against foreign firms,

condition investment approval to certain performance

requirements (such as technology transfers), and extend

preferential policies (e.g., subsidies) to Chinese firms.

Progress Toward a High-Standard BIT with China

During the July 2013 session of the U.S.-China Strategic

and Economic Dialogue (S&ED), China agreed to negotiate

a high-standard BIT with the United States that would

include all stages of investment and all sectors,

commitments U.S. officials described as “a significant

breakthrough, and the first time China has agreed to do so

with another country.” A press release by the Chinese

government stated that China was willing to negotiate a

BIT on the basis of nondiscrimination and a negative list,

meaning the agreement would identify only those sectors

not open to foreign investment on a nondiscriminatory basis

(as opposed to a BIT with a positive list, which would list

only sectors open to foreign investment).

During the July 2014 S&ED session, the two sides agreed

to a broad timetable for reaching agreement on core issues

and major articles of the treaty text and committed to

initiate the “negative list” negotiation early in 2015. During

BIT negotiations held in June 2015, each side submitted

their first negative list proposals, and later agreed to submit

a revised list in September 2015. During the July 2015

S&ED, the two sides also reaffirmed that reaching a BIT

remained a high priority and pledged to intensify

negotiations and exchange improved “negative list” offers.

While some progress was reportedly made in the September

2015 BIT talks, a breakthrough was not achieved in time

for President Xi’s summit visit to the United States. The

Wall Street Journal on September 18, 2015, reported that

China’s latest negative list contained 35 to 40 sectors. On

September 22, 2015, then-U.S. Trade Representative

Michael Froman stated that, although progress had been

made over the past 20 months to reach a BIT, there was “a

substantial distance from the kind of high standard

agreement necessary to achieve our mutual objectives.”

During the September 2015 U.S.-China summit, the two

sides said they were “committed to intensify the

negotiations and to work expeditiously to conclude the

BIT.” However, no breakthrough was achieved by the end

of the Obama Administration’s term.

While the Chinese government has indicated its support for

continuing BIT negotiations, the Trump Administration has

been less clear on its position. U.S. Secretary of Treasury

Steven Mnuchin was quoted by the publication Inside

Trade in June 2017 as follows:

It’s on our agenda; I wouldn't say it’s at the very top

of our agenda. I think what we're looking for is,

opposed to just negotiating a large agreement, we're

looking to negotiate very specific issues that deal

with market issues today, deal with market fairness

today, deal with opening their markets to the same

extent that our markets are open, and that’s really

our focus.... Once we can make progress in that we

can turn to the bilateral investment treaty.

Implications of a BIT Agreement

Many analysts believe that a high-standard U.S.-China BIT

could have a significant effect on boosting bilateral

commercial relations, such as by increasing U.S. exports to

China. As noted by one former Treasury official, a BIT

“could be a game changer in terms of unlocking new

opportunities and leveling the playing field for U.S. firms

and investors.” Some view China’s willingness to negotiate

such an agreement as an indicator that it is serious about

implementing comprehensive new economic reforms,

although whether or not it can commit to such reforms on

paper remains unclear. Some analysts have raised concerns

over whether China could be relied on to fully implement

the agreement, especially in regards to preferences it gives

to many state-owned or controlled firms. Some critics

question why China is negotiating a high-standard BIT with

the United States while at the same time seeming to impose

new FDI restrictions. It is unclear to what extent a BIT

would boost Chinese FDI in the United States.

Wayne M. Morrison, Specialist in Asian Trade and

Finance

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IF10307

A U.S.-China Bilateral Investment Treaty (BIT): Issues and Implications

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