China-U.S. Investment Treaty: A Crucial Development for Chinese SWFs and SOEs

The Wall Street Journal reports:

Senior U.S. and Chinese officials agreed Thursday to restart stalled negotiations to reach an investment treaty between the world’s two largest economies that could dramatically expand business opportunities for both countries.

The deal could open up more than 100 Chinese industries to investment by U.S. businesses, such as automakers, banks, and chemical and energy companies, that face restrictions on investment in that country’s fast growing economy. Chinese companies would win smoother access to the U.S., though both nations are expected to keep some strategic sectors, such as defense, off the table.

U.S. Treasury Secretary Jacob Lew, speaking after two days of strategic and economic talks, called the agreement “a significant breakthrough” in trade talks, and said a treaty “would work to level the playing field for American workers and businesses by opening markets for fair competition.” Workers in the U.S. services sector and other industries could benefit from new business in China.

Chinese Commerce Minister Gao Hucheng said, “We have agreed to enter a substantive state of negotiations as soon as possible.”

There are many moving parts in this negotiation.  Sen. Chuck Schumer argues that “[i]n previous talks, [the Chinese] have always seemed to get the better of us. To not address issues like theft of intellectual property, inability of American firms to freely enter the Chinese market, and currency manipulation and, instead negotiate things that might be an advantage to the Chinese would be a huge mistake.”  

We are, of course, talking about a bi-lateral investment treaty, which should allow much greater access to Chinese markets by US firms.  On the Chinese side, however, an investment treaty will be a crucial step in clarifying how CFIUS review of Chinese investments will take place.  A main concern of Chinese officials has been the seemingly ad hoc nature of CFIUS review for investments by Chinese SOEs and SWFs; a treaty can help clarify what types of investments will be forbidden and which are likely to be fast-tracked.  A review of the failed deals of the recent past–the Hauwei, Sany, A123 Systems and Smithfield deals most importantly–show the need for a new approach (read an excellent report on these deals by the Congressional Research Service’s James Jackson here).

As I and others have argued, the differences in risks presented by different countries are substantial enough that country-by-country treatment may be necessary; merely setting out a more robust set of CFIUS guidelines is not enough to deal with the risks associated with Chinese investment, in particular.