Paving the Way to US-China Economic Engagement

by Natasha Kang

Natasha Kang is a senior at the University of California, Davis.

China, the fastest-growing economy in the world, [1] was already made headlines four years ago in 2010 when it overtook Japan as the world’s second-largest economy. [2] It took another leap forward when the International Money Fund declared China as the world’s largest economy in late 2014 as it overtook the United States. Of course, this is just in terms of purchasing power (the amount of goods and services that can be purchased), as China still has ways to go before surpassing the US in raw terms. [3] This development bears much value, as a bilateral investment treaty with China now takes more priority than ever before.

According to the United Nations Conference on Trade and Development, a bilateral investment treaty (BIT) is an agreement “between two countries for the reciprocal encouragement, promotion, and protection of investments in each other's territories by companies based in either country.” [4] BITs act as tools to break down market access barriers by setting terms and conditions for foreign investment while giving foreign investors special rights and legal protections. These substantial protections include foreign companies being treated as favorably as local ones, letting investors transfer funds in and out of a host country using the market exchange rate, and even limiting host governments from adopting inefficient practices that may harm trade. In addition, BITs give investors the right to submit an investment dispute with the government of the host country directly to international arbitration. [5]

A BIT between the US and China, two economic powerhouses, will certainly prove notable. The benefits for foreign investment a BIT offers and China’s willingness to negotiate seem to indicate China’s interest in accelerating growth with investments and in ensuring their protection. For the US, a BIT with China would mean that investors will have better access to Chinese markets and will be able to engage on better terms. The benefits of a BIT for American firms and investors include being treated like domestic Chinese companies, also known as “national treatment,” and potentially receiving the same preferences given by the Chinese government to other foreign investors in a market, also known as “most-favored nation” treatment. [6] This would mean that these investors would no longer have to deal with the legal difficulties of obtaining business licenses in China with which they currently contend.  Furthermore, in some sectors, American companies would no longer have to enter joint ventures or sign technological transfer agreements in order to be able to invest, [7] which would resolve the issue of protecting intellectual property in China. It is much easier to protect technology when investors do not have to share intellectual property rights in a required partnership.  


In regards to the dispute settlement provision, a BIT would mean that American investors would be able to turn to a neutral, third-party arbitrator when problems with another investor or the Chinese government arise. This provision of a BIT is usually found especially useful for investors in countries where the legal system is not mature or well established. [8].


Such an influential BIT surely has implications beyond projected economic improvement for the countries. This proves to be true, as the thousands of BITs in existence are believed by many scholars to influence customary international law, which pertains to obligations from established state practice, rather than obligations arising from formally written treaties [9]. BITs contribute to this field of law by consolidating existing rules of custom in international investment law. From this investment protection, BITs may add to the solidification of new rules in customary international law in the future [10]. Depending on the results of negotiation, this US-China BIT could set new examples for how countries with heavy restrictions on foreign investment structure BITs.


Negotiations for this BIT between the United States and China have been underway since 2008. So far, it has been decided that China will agree to a “negative list” approach, where it will allow foreign investment in all industries and sectors except those which it specifically indicates. Furthermore, China has shown a willingness to allow non-discriminatory access to its market at all stages of investment. [11] From here on, the two countries will have their work cut out to pave the way for the future of their economic engagement.


[1] China profile, BBC News, http://www.bbc.com/news/world-asia-pacific-13017877.
[2] Kevin Hamlin & Li Yanping, “China Overtakes Japan as World's Second-Biggest Economy,” Bloomberg, August 16, 2010, http://www.bloomberg.com/news/2010-08-16/china-economy-passes-japan-s-in-second-quarter-capping-three-decade-rise.html.
[3] Mike Bird, “China Just Overtook The US As The World's Largest Economy,” Business Insider, October 8, 2014, http://www.businessinsider.com/china-overtakes-us-as-worlds-largest-economy-2014-10.
[4] What are BITs?, United Nations Conference on Trade and Development, http://www.unctadxi.org/templates/Page____1006.aspx.

[5] The Basics of Bilateral Investment Treaties, Sidley Austin LLP, http://www.sidley.com/The-Basics-of-Bilateral-Investment-Treaties/.

[6] Stephanie Henry, “Bilateral Investment Treaties: What They Are and Why They Matter,” China Briefing, September 12, 2014, http://www.china-briefing.com/news/2014/09/12/bilateral-investment-treaties-matter.html.

[7] Kenneth Rapoza. China Says U.S. Investment Treaty on ‘Fast Track’,” Forbes, July 10, 2014, http://www.forbes.com/sites/kenrapoza/2014/07/10/china-says-u-s-investment-treaty-on-fast-track/.

[8] Henry, “Bilateral Investment Treaties: What They Are and Why They Matter.”

[9] Customary international law, Cornell University Law School Legal Information Institute, http://www.law.cornell.edu/wex/customary_international_law.

[10] Patrick Dumberry, “Are BITs Representing the “New” Customary International Law in International Investment Law?,” Kluwer Arbitration Blog, September 2, 2009, http://kluwerarbitrationblog.com/blog/2009/09/02/are-bits-representing-the-%E2%80%9Cnew%E2%80%9D-customary-international-law-in-international-investment-law/.

[11] Marney Cheek, “Why A U.S.-China Bilateral Investment Treaty Matters,” Investment Policy Central, http://www.investmentpolicycentral.com/content/why-us-china-bilateral-investment-treaty-matters.

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