There has been an interesting discussion lately about a China-US bilateral investment treaty (BIT) and its multilateral implications in the Columbia FDI Perspectives. Karl Sauvant and Chen Huiping argue that
More generally, a China-US BIT would provide a solution to the challenge of balancing the interests of a given country in its capacity as a (capital-importing) host country with its interests in its capacity of a (capital-exporting) home country. Meeting this challenge would represent a historic compromise between the traditionally quite diverging host and home country positions and (together with other important negotiations, e.g. involving the European Union, Japan, India, and a Trans-Pacific Partnership Agreement) might well become a platform on which, sooner or later, a multilateral framework could be built. These negotiations are therefore of crucial importance not only for the economic relations of the world’s two largest economies, but also for the evolution of the international investment law regime.
In order to reach such a “historic compromise” both countries would have to make compromises on issues such as market access, performance requirements, labor and environment standards and dispute settlement.
Shaun E. Donelly, a former policy-maker in the US State Department and the US Trade Representative’s Office now representing the US Council for International Business, argues that
Rather, both parties need a high-standard, comprehensive agreement that ensures real protections, real transparency, real dispute settlement, and real market-opening to investors from both sides. I believe the 2012 US Model BIT provides a template for such an agreement. […]But simply splitting the differences on core BIT protections as a quick path to a US-China BIT and a possible template for a multilateral investment agreement will not pass the “smell test” with US business, the US Administration or the US Congress. Let us all accept the reality that a US-China BIT is very important for both sides and for the world but it is not a short-term deliverable, it is not going to be an easy “feelgood” negotiation and it is not a split-the-baby proposition. […]It is really up to China at this point. If China is prepared to work with the US and other partners to move forward to an open, competitive investment regime, with real transparency, real market access and real rule of law, then a real BIT negotiation is possible, and it deserves the top priority of each side to get it done. But if China still believes that investment — inward and outward FDI — needs to be limited, screened, restricted, and subjected to forced localization, then real BIT negotiations will, unfortunately, not succeed. In that case, the US and China should continue an intensive investment dialogue and cooperation — but meaningful BIT negotiations will have to await a new day.
I am sympathetic to Sauvant and Chen’s notion that a US-China BIT might contribute to a more balanced international investment agreement. I am, of course, aware of the challenges facing US-China BIT negotiations especially given China’s current BIT policy (see my paper). More importantly, I am not sure whether it is expecting too much from negotiations of a standalone BIT to facilitate such a major compromise.
The piece by Donelly clearly shows what BITs have been good for: capital-exporting countries define the rules of the game (i.e. the model BIT) and apply them without making major changes during the negotiations. Capital-importing countries have to accept this offer or leave it. It is very difficult to develop a template for a multilateral investment treaty against such a background.
I would, therefore, expect that the investment rules of the 21st century are going to be negotiated between more equal partners, e.g. between the US and the EU in the Transpacific Trade and Investment Partnership. Both the US and the EU stress that they see the TTIP as a blueprint for future agreement with third countries (see my op-ed with Clara Brandi on this topic). Furthermore, given the spread of such “Mega-Regionals” (the Transpacific Partnership is another case in point) the days of standalone BITs – as important tools of foreign economic policy-making – seem to be numbered. Investment rules are increasingly integrated in bilateral and regional Trade and Investment Agreements. From an economic point of view this makes sense as trade and investment flows are increasingly intertwined (see UNCTAD’s recent report on GVC). Also, trade and investment agreements integrate different disciplines in one agreement and thus allow to make compromises across different areas of foreign economic policy-making.
The big question then is how China and other emerging and developing countries are going to react. Will they swallow the model agreement presented by the US and the EU (the EU, too, is going to start BIT negotiations with China this year) or will they develop their own set of rules applied in agreements with other third countries?