Spotlight: China, U.S. commitment to new negative list offers underpins optimism in investment treaty talks

China and the United States made commitment this week to exchange improved negative list offers in early September and speed up talks on a bilateral investment treaty (BIT), giving experts a sense of optimism that the world's two largest economies could wrap up BIT negotiations under U.S. President Barack Obama's administration.

IMPORTANT MILESTONE

The two sides discussed their initial offers of negative lists, which outline sectors closed to foreign investment, and the next step in BIT negotiations during the seventh round of China-U.S. Strategic and Economic Dialogue (S&ED), China's Vice Finance Minister Zhu Guangyao said Wednesday here at a closing press briefing of the two-day high-level dialogue.

The two sides reaffirmed the treaty talks as "a top priority" in bilateral economic relations and recognized that the exchange of negative list offers in the latest round of talks is "an important milestone," according to a joint economic track fact sheet of this year's S&ED.

While China's initial negative list offer "may be longer than the U.S. wants," the negative list itself is already "a huge progress," Adam Posen, president of Peterson Institute for International Economics (PIIE), told Xinhua in a recent interview.

Zhang Xiangchen, China's deputy international trade representative and assistant minister of commerce, said Tuesday at a press briefing that "the negative list issue is more difficult for China," as it "represents a new challenge" and will " fundamentally change foreign investment administration regime in China."

Zhang said China has decided to "follow international practices with the negative list approach" in investment treaty talks with the United States because more than 70 countries in the world have already adopted this approach in foreign investment management.

China has "established an inter-ministerial mechanism" in the state council and "reviewed tens of thousands of laws, regulations and rules," which governed foreign investment in China with the positive list approach, to develop its negative list for investment treaty talks, the Chinese official added.

The negative list approach means all sectors are open to foreign investment except those specifically listed, while the positive list approach means that only listed sectors are approved for foreign investment. The former is generally viewed as a more liberal approach to foreign investment.

The investment treaty talks began in 2008 as China and the United States sought to increase mutual investment, which only accounted for a tiny share of their respective overseas investment.

But it was not until the 2013 S&ED meetings that the talks entered a substantial phase after the two countries agreed to conduct negotiations on the basis of pre-establishment national treatment with a negative list approach.

The two sides exchanged initial negative list offers at their latest round of talks in Beijing earlier this month, which ushered in a new phase of bilateral negotiations.

IMPROVED NEGATIVE LIST OFFERS

"The next issue will be the length and quality of the negative lists" after both sides exchanged initial offers, Zhang said, adding that both countries expressed their willingness to make further progress in the next two rounds of negotiations before September and make the negative lists "shorter and better."

Zhu said the two sides agreed to "exchange their improved negative list offers in early September" and would speed up bilateral and domestic consultations on the negative lists between now and then, noting that "we should be aware that there's still much room for improvement."

While Chinese officials had not spoken specifically of the contents of China's negative list, Zhang indicated that the list would be consistent with the overall comprehensive reform agenda announced at the third plenum of the 18th Communist Party of China Central Committee in late 2013. "We'll liberalize some sectors in an orderly manner, and we'll relax restrictions in some other sectors" according to the decisions of the third plenum, he said.

Zhang said China will further improve its negative list offer " according to the progress we've made in reform and opening up," noting that the experiences of investment liberalization it learnt from free trade zones in Shanghai and other Chinese cities will be incorporated into the negative list discussions.

The United States also needs to improve its negative list offer and its investment climate toward Chinese firms, as more and more Chinese investments have come into the country, he noted.

"There does indeed exist some investment barriers particularly in areas where Chinese companies have some advantages," citing the infrastructure sector, Zhang said, adding that Chinese state-owned enterprises (SOE) also face some investment restrictions in the United States.

Posen said a large number of Chinese business leaders were talking about the need for expanding the scale and scope of Chinese investments in the U.S. during his trip to China last month. "I think it would be good for the U.S. to figure out where it can be supportive of, where it can make it easier for Chinese companies investing in the U.S.," he said.

China is currently the fastest growing source of foreign direct investment (FDI) in the U.S. and total Chinese FDI stock in the U. S. increased 14 times from 2007 to 2013, according to the U.S. Treasury Department. Last year, Chinese firms completed transactions in the United States worth 12 billion U.S. dollars.

PRESIDENT XI'S STATE VISIT

Zhu said the second exchange of negative list offers in early September will be very important because it's in conjunction with Chinese President Xi Jinping's state visit to the United States in the same month.

He hoped the second negative list offers will have high quality and substantial improvement so that Xi and his counterpart Obama could confirm "major progress" made in BIT talks when they meet and give further clear instructions to both negotiating teams for concluding the talks. "Our objective is to conclude the China-U.S. BIT negotiations under Obama administration," Zhu said.

U.S. Treasury Secretary Jacob Lew also believed the upcoming Xi- Obama summit could inject new momentum to the BIT talks. "I think the fact that there's a leader's meeting happening will focus all of the efforts to make progress for that," Lew said Wednesday at a press briefing.

U.S.-China Business Council President John Frisbie shared the similar view. "Both governments should double their efforts to advance the negotiations on a bilateral investment treaty as much as possible before President Xi's state visit in September," Frisbie said in a statement. "A high-standard BIT, with strong provisions for market openings and equal treatment, would greatly benefit the commercial relationship."

"I think there's a 50 percent chance that the BIT will be concluded late this year or early next year. It all depends on Chinese willingness to agree on a short and specific negative list, " Gary Hufbauer, a former deputy assistant secretary for international trade at U.S. Treasury and a senior fellow at the PIIE, told Xinhua.

"However, President Obama will not send the BIT to Congress until TPP (Trans-Pacific Partnership) is ratified," Hufbauer said, referring to the Asia-Pacific trade deal, which covers 40 percent of the global economy and is nearing completion after more than five years of negotiations.

After weeks of fighting over the so-called fast-track trade legislation, U.S. Congress finally agreed this week to give the president authority to submit trade deals to Congress that cannot be amended, which could push forward the stalled TPP talks, a top priority of Obama's second-term economic policy.

The Obama administration wants to wrap up TPP negotiations in the next few months and bring the 12-country agreement to Congress for ratification by the end of this year, before the 2016 U.S. presidential campaign heats up.

Chinese officials have told the U.S. side that "we hope TPP negotiations will be concluded as quickly as possible," so that Washington can pay more attention to BIT negotiations with China, "because for any country the number of negotiators is limited," Zhang said.

Yukon Huang, a senior associate in the Asia Program of the Carnegie Endowment for International Peace, said an agreement on the TPP would provide guidance on how the China-U.S. BIT might be approached and formulated, as SOE rules, arbitrary standards and other investment issues are covered in both TPP and BIT negotiations.

Huang said it is necessary to realize that both sides want to have a BIT, as it will help address a number of investment concerns between the two countries, and investors from both sides will get better access to each other's markets.

BIT is also very important for moving forward China-U.S. economic relations as "it is only the documentary agreement dealing with international economic issues between the United States and China in the foreseeable future," Huang told Xinhua. Endite