International Treaties Can Once Again Help China Advance

Twenty years ago Zhu Rongji, China’s former premier, shrewdly used negotiations over his country’s accession to the World Trade Organisation to open its domestic markets to greater competition and import international standards into its legal system. This produced more than a decade of strong growth, and gave China a greater stake in global trade.

Now China has another opportunity to advance internal reforms through international negotiations. The country is in discussions over bilateral investment treaties with the US and the EU. These would allow Chinese companies to invest and operate overseas more easily, in return for reciprocal access to Chinese markets. Such agreements can strengthen China’s economic governance and contribute to the creation of a rules-based international economy.

These negotiations should be the top priority for the high-level strategic and economic dialogue between the US and China. The proposed treaties would help foreign businesses to operate and compete fairly in China. They would improve transparency and help tackle corruption. The rules would help private enterprise in China, too. The agreements would provide opportunities for Chinese businesses to invest abroad, which would create western jobs – while respecting limits of national security.

High-quality bilateral investment treaties need to meet five conditions. First, there must be equal treatment of foreign and domestic companies, to prevent authorities from favouring local investors. Authorities must not discriminate against foreigners when they grant licences, enforce rules or decide how much of a company an investor can own.

Second, they must prohibit arbitrary and unfair treatment of foreign investors. There must be compensation at fair market value for any nationalisation or expropriation. The treaties should ban trade-distorting measures, such as requirements for local content, exports and technology transfer.

Third, investors should be able to transfer funds in or out of the country, without delay, at a market rate of exchange.

Fourth, the agreements should have broad scope. China has recently agreed that any sector should be presumed open to foreign investment unless the treaty specifically prohibits it. This is a welcome change from the previous approach, in which investment was confined to a narrow list of authorised sectors. Still, China will need to shorten its initial list of exclusions.

The agreements would provide opportunities for Chinese businesses to invest abroad

Finally, any treaty needs a system of international arbitration to enforce its rules and resolve disputes. Private parties, as well as countries, should be allowed to bring claims for monetary damages. Where such mechanisms have been put in place in the past, they have worked well.

Chinese reformers believe that bilateral investment treaties will help them fight favouritism and corruption, remove onerous regulations that choke market competition, improve uneven law enforcement, and shrink the advantages enjoyed by state-owned enterprises. As one Chinese official told me, if the authorities offer equal and fair treatment to foreigners, China’s private sector can demand the same. Reformers recognise that small and medium-sized enterprises would be the biggest winners from fairly enforced economic rules.

Inevitably, talks over bilateral investment rules will take time. So did the negotiations that culminated in China’s acceptance of the WTO rules. The US and the EU should co-operate to set high standards for their respective treaties. The process can be used to engage business groups, communities and local officials who see the advantages of investment, workers and farmers who benefit from open markets, and supporters of China’s reforms.

The Obama administration needs to make this case to Congress. A strong investment treaty is a necessary building block for other high-priority trade accords, such as the Trans-Pacific Partnership. Good strategy requires action as well as ideas. Bilateral treaties, technical though they might be, can be potent tools. They can assist China’s market reforms, deepen constructive economic ties with the west, and strengthen the international rule of law. They also offer a positive agenda to buffer inevitable differences.