Country & Economic Research 

Evaluating a potential US-China 

bilateral investment treaty 

Background, context and implications 

 

 Prepared for the 

 US-China Economic and Security Review Commission 

 

March 30th 2010 

The Economist Intelligence Unit 

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Briefing paper: Evaluating a potential US-China BIT 3 

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Overview 

This paper, prepared by the Economist Intelligence Unit for the US-China Economic 

and Security Council, summarises the context, current discussions and implications of 

a potential US-China bilateral investment treaty (BIT). The paper is organised in six 

sections: 

I. Existing US BITs 

II. China’s current BITs with other countries 

III. The potential US-China BIT 

IV. Major regulatory and transparency issues 

V. Implications for the US economy 

VI. Interviews 

Simply defined, a BIT is a treaty between two countries designed to promote and 

protect investments between the two signatory states. A BIT provides investors with a 

safer and more transparent investment environment by guarding against the risk of 

expropriation by the host state. Many countries, especially the larger economies, sign 

BITs with their main trading partners, both to ensure that companies from their 

country receive proper protection when they make investments abroad and to ensure 

that their rights can be protected and enforced through binding international 

arbitration. 

There are over 2,500 BITs in operation worldwide today, following on from the first 

BIT signed between Germany and Pakistan in 1959. Germany has more BITs than any 

other country (around 140), followed by China, with more than 120; the US has signed 

over 40 BITs. 

Most major economies have their own BIT model. The core elements of the US BIT, 

according to a recent interview with the US-China Business Council, require the 

partner-country government to provide US investors with: 

• the right to fair and equitable treatment, including neutral arbitration; 

• the right to full protection and security, including that provided by international 

law; 

• a non-discriminatory environment compared with domestic investors, based on 

the principles of national treatment and most-favoured-nation clauses; 

• the ability to move capital in and out of the country freely; 

• the right to full compensation in the event of expropriation or nationalisation; 

• the removal of performance requirements. 

China is now established as the leading recipient of foreign direct investment (FDI) in 

the developing world. It had FDI receipts of just under US$150bn in 2008 

(representing 390% growth on the 2000 figure). A key factor in this growth has been 

the increase in the overall number and sophistication of China’s BITs. China’s latest 
4 Briefing paper: Evaluating a potential US-China BIT

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investment treaties conform to international best practice, giving foreign investors a 

high level of protection from interference by government. 

China has signed BITs with most of the world’s most significant trading and investing 

countries, including Japan, Germany and the UK. A major omission is a US-China 

BIT; discussions were terminated following the Tiananmen Square massacre in June 

1989. Rising trade and investment flows between the two nations led them to resume 

negotiations in June 2008, following the fourth Strategic Economic Dialogue (SED) 

meeting. The talks have continued under the Obama administration with a new title, 

the Strategic and Economic Dialogue (S&ED); these will be discussed in Section III. 

I. Existing US bilateral investment treaties 

Introduction 

The US BIT programme, initiated by Ronald Reagan in 1981, is intended to encourage 

and protect US investments abroad, promote the adoption of market-directed policies 

in other countries and support the development of standards of international law. 

As at September 2009, the US was party to 40 active BITs with developing countries 

in all regions of the world. Several other treaties have been signed by the US but not 

by the partner country; still others are in the process of negotiation, potentially leading 

to a formal agreement. Though the first US BIT went into force more than 20 years 

ago, the US is party to far fewer agreements than other major economies. China, 

France, Germany, Italy, South Korea and the UK, for example, have signed more than 

twice the number of BITs as has the US. 

The US has BITs with the following countries: Albania, Argentina, Armenia, 

Azerbaijan, Bahrain, Bangladesh, Bolivia, Bulgaria, Cameroon, Democratic Republic 

of Congo, Republic of Congo, Croatia, Czech Republic, Ecuador, Egypt, Estonia, 

Georgia, Grenada, Honduras, Jamaica, Jordan, Kazakhstan, Kyrgyz Republic, Latvia, 

Lithuania, Moldova, Mongolia, Morocco, Mozambique, Panama, Poland, Romania, 

Senegal, Slovakia, Sri Lanka, Trinidad & Tobago, Tunisia, Turkey, Ukraine and 

Uruguay.1 More information concerning the date these BITs came into force is in 

Appendix 1. 

US BITs, once ratified by both parties, remain in force for ten years. Following the 

initial ten-year period, either party may terminate a BIT with one year’s notice. For ten 

years following the date of termination, however, the articles contained in the BIT will 

continue to apply to covered investments made during the time the agreement was 

active.2 

 1 List of BITs now in force see http://tcc.export.gov/Trade_Agreements /Bilateral_Investment_Treaties/index.asp 

2More detail on the 2004 model US BIT discussion can be found at 

http://www.state.gov/documents/organization/117601.pdf . 

US BIT programme dates

from 1981

BIT negotiations resumed in

2008
Briefing paper: Evaluating a potential US-China BIT 5 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

All US BITs are based on a model BIT that was last revised in 2004. The model is in 

the process of another revision, however, by the US Department of State and the 

Office of the US Trade Representative (USTR), which jointly lead the US BIT 

programme. A public forum on the matter was held in late July 2009. The major 

concerns voiced at that time included the following: 

• The 2004 model BIT provides weaker protection for US commercial interests 

compared with the 1994 model 

• The current investor-state dispute-resolution process is inadequate. 

• The distinction between government regulatory action and indirect expropriation 

is unclear and, as such, potentially harmful to US commercial interests. 

• There is a need to develop enforceable rules within BITs, beyond national 

regulations, in terms of labour and the environment. 

• Restrictions on capital controls in the current model BIT are potentially outdated.3 

It is unclear whether the prospective US-China BIT agreement would be based on the 

2004 model or on a new one, since the Obama administration is now conducting a 

review of the BIT programme. This inter-agency review of the US model is focused on 

its role as a template for negotiations, and is being conducted concurrent with the BIT 

negotiations with China, India and other countries. An official at the US-China 

Business Council in Washington noted in a September 2009 interview that the present 

goal is to fashion a high-standard BIT, similar to those the US has negotiated with 

other developing countries. US business groups view this type of BIT as providing the 

best level of market access, legal recourse, competitive practices and equitable 

treatment, given China’s large state-owned sector. 

In September 2009, at the request of the Department of State and the USTR, the State 

Department’s Advisory Committee on International Economic Affairs (ACIEP) 

established a subcommittee to analyse the US model BIT. The ACIEP subcommittee’s 

work centred on three areas in particular: dispute-settlement provisions, state-owned 

enterprises (SOEs) and financial-services issues. 

On the matter of dispute settlement, which was the topic of particularly “robust” 

discussion, subcommittee members were split in several directions. Some members 

strongly support the investor-state dispute-settlement provisions contained in the 2004 

model BIT, arguing that such provisions are contained in almost all of the 2,600 BITs 

currently in effect and as such provide an “objective, fair and non-politicised forum” for 

investors seeking redress for breaches of the BIT, and that not using investor-state 

dispute-settlement mechanisms would put the US at a competitive disadvantage. Other 

members firmly believe that the international dispute mechanism in the model BIT 

presents significant risks because international arbitrators working on cases brought 

under the mechanism may not have a full understanding of local laws and societal 

values. In addition, some subcommittee members support exhaustion of domestic legal 

systems before investors have the option to pursue international arbitration, whereas 

others believe that would be contrary to present international legal practice. 

 

3 Source: Minutes, July 29th 2009 US Dept of State and USTR meeting.

The 2004 model BIT is the

starting point for revisions

The current review of the US

model BIT 

The release of the

September 2009 ACIEP

report 
6 Briefing paper: Evaluating a potential US-China BIT

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Regarding SOEs, the subcommittee recommended that the US administration assess 

whether the model BIT requires countries to ensure that their SOEs accord national 

treatment and most-favoured-nation treatment to covered investments. 

On financial-services issues, where the analysis focused on whether exceptions to the 

free transfer of capital for covered investments should be made during balance-ofpayments crises, the subcommittee was unable to reach consensus. The subcommittee 

did conclude, however, that a claimant should be permitted to submit claims involving 

breach of national treatment and most-favoured-nation obligations vis-à-vis financial 

services4. 

Among the many topics covered in a meeting between President Obama and President 

Hu of China during Mr Obama’s mid-November 2009 visit to China—the nascent 

global economic recovery, climate change, energy issues, nuclear non-proliferation—

were issues related to trade and investment. A joint US-China statement issued 

following the meeting indicated that “the two sides agreed to work proactively to 

resolve bilateral trade and investment disputes in a constructive, co-operative and 

mutually beneficial manner. Both sides will expedite negotiation on a bilateral 

investment treaty.” 

Despite the joint US-China statement issued during President Obama’s November 2009 

trip that BIT negotiations will be expedited, it does not appear that a US-China BIT will 

be finalised in the near future. Negotiations are proceeding on a technical, but not yet a 

political, level. On the matter of politics, some observers note historical difficulties in 

reaching agreement on foreign investment and trade agreements during an economic 

downturn. The fact that many members of Congress have voiced concerns about 

expanding trade and investment linkages with China is also likely to be a hindrance to 

the US-China BIT winning two-thirds majority support in the Senate. 

Should the model-BIT review extend far into 2010, it will delay negotiations with 

China, since the US needs to have a model treaty solidly in place before moving to 

finalise specifics of a US-China treaty. During the ACIEP discussions, several business 

representatives proposed that the committee endorse the 2004 model BIT to expedite 

finalisation of BIT negotiations with China and other countries—a move that was 

rejected by representatives of labour unions. 

In addition to not having a BIT with China, the United States also does not have active 

agreements with the other three BRICs (Brazil, Russia or India), the group 

constituting the world’s four largest emerging economies. A BIT with Russia, signed 

by the US in 1992, has not been ratified by Russia and thus has never gone into force. 

Discussions on a BIT with India have been underway since 2008, although a formal 

agreement does not seem likely in the near future. And although formal negotiations 

towards a BIT with Brazil have not yet begun, the topic was recently addressed at a 

high-level forum of Brazilian CEOs in Washington, DC. (Brazil is not party to any 

BITs; its reluctance to accede to such agreements may centre on whether Brazilian law 

would allow them.) 

 

4 A number of other topics were covered in the ACIEP report. The report is available at: 

http://www.state.gov/e/eeb/rts/othr/2009/131098.html

The US does not have an

active BIT with any of the

BRICs

President Obama’s November

2009 trip to China

Status of the current 

negotiations 
Briefing paper: Evaluating a potential US-China BIT 7 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

A BIT with China, the world’s third-largest economy in nominal GDP terms (at more 

than US$3.8bn in 2008), would represent by far the largest economy with which the 

US has a BIT. Turkey, the world’s 17th-largest economy (at nearly US$800m), is now 

the biggest economy with which the US has an active investment treaty. A US-China 

BIT would be only the second international investment agreement the US has signed 

with a major capital exporter. 

Major themes and issues in US BITs5

Under the model US BIT, each party is required to provide investors and covered 

investments (that is, investments of a company or national of one party of a US BIT in 

the territory of the other party) “treatment no less favourable than it accords, in like 

circumstances, to its own investors with respect to establishment, acquisition, 

expansion, management, conduct, operation, and sale or other disposition of 

investments in its territory.” This constitutes the principle of national treatment. 

Though market-entry provisions are generally included in any BIT, the US BIT model 

is unique in that it provides so many levels of post-establishment protection to 

investors. 

Additionally, the US model BIT contains an article on most-favoured-nation (MFN) 

treatment that provides the same protections for BIT-partner countries as it does, in 

like circumstances, for countries with which it does not have a BIT. In general, US 

BITs require the use of the more favourable of national or MFN treatment for 

investments of the other party. 

In the US-Turkey BIT, which entered into force in 1990, Turkey insisted that MFN 

treatment be used for the establishment of investments. In practice, this means that all 

subsequent stages in the life cycle of an investment (acquisition, expansion, etc.) are 

undertaken using the more favourable of national or MFN treatment. The same 

qualification was used in the US-Morocco BIT. 

The model BIT also provides clear protection against expropriation or nationalisation 

of an investment (by either party) except for public purpose, which must be 

undertaken in a non-discriminatory manner and with “prompt, adequate, and effective 

compensation.” For expropriation, the model BIT specifies that compensation must be 

made at the fair market value of the expropriated investment immediately before the 

date of expropriation and that compensation must include interest. The annexes to 

individual BITs spell out further terms regarding a potential expropriation. 

In the US-Turkey BIT, the language on expropriation was revised to say that interest 

on an expropriated investment be repaid at the “government borrowing rate” rather 

than at a “commercially reasonable rate”. 

US BITs as well as investment chapters of US free-trade agreements (FTAs), such as 

NAFTA’s Chapter 11, provide certain standards for foreign-investment protection. 

Article 2.1 of the model BIT stipulates that national or federal governments can be 

 5 Information in this section is based on the text of the 2004 model US BIT found at: http://www.state.gov/ 

documents/organization/117601.pdf and individual US BITs found online at: http://tcc.export.gov/ 

Trade_Agreements/Bilateral_Investment_Treaties/index.asp 

Reciprocal market access

State, local and county-level

rules

Expropriation and

nationalisation

clauses
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liable for breaches of these standards even when these arise from actions taken by 

state, provincial and county-level governments. 

There may indeed be circumstances in which a foreign investor could sue the US 

government for monetary damages under a BIT based on a local government’s 

restrictions that prevent the investor from obtaining the intended benefits of its 

investment. Under many US BITs, this is done by submitting a claim to an 

independent, international arbitration tribunal indicating that the local government’s 

actions breached one or more standards of foreign-investment protection in the BIT. 

[More discussion of this issue can be found in the section on arbitration processes on 

p. 10.] The claim would be for monetary damages for harm to the investor or the 

investment. The case would be made that there was an issue or breach of the 

following: 

• National Treatment: If local regulations were uniquely applied to foreign 

investors, there could be a BIT violation; 

• MFN treatment: If local regulations applied to foreign investors from one country 

and not from another, there could be a BIT violation; 

• Minimum Standard of Treatment: Tribunals have reached different conclusions 

about what constitutes the minimum standard of treatment; a BIT violation could 

occur if government regulations were imposed in a way that abused due legal process 

or denied justice to the foreign investor (such as for sham administrative or legal 

proceedings); 

• Expropriation: The investor might have a valid BIT claim if government 

regulations constituted an expropriation of the foreign investor’s property, and the 

expropriation (a) was not done for a public purpose; (b) was done in a discriminatory 

manner (for example, simply because the investor was foreign); (c) did not result in 

adequate and effective compensation paid in a timely manner; or (d) was without due 

process of law. 

Within the confines of the 2004 US model BIT, article 7 obliges both the US and the 

partner country to permit the transfer of capital related to a covered investment (profits, 

dividends, capital gains, proceeds from the sale of an investment and several other 

categories) “freely and without delay”, and in to and out of its territory at the market 

exchange rate. Recently, however, there has been much discussion of whether the US 

should revise this article to allow for exceptions to free movement of capital during 

balance-of-payments crises. Large current-account and capital-account imbalances 

between the United States and China and the possibility that these imbalances may 

contribute to future balance-of-payments instability point to the likelihood of serious 

consideration about such exceptions during US-China BIT negotiations. 

Some language on capital transfers has been adjusted. Because of Turkey’s concerns 

about the volatility of its exchange rate, for example, the US-Turkey BIT states that 

“in exceptional financial or economic circumstances related to foreign exchange”, 

Turkey may delay the transfer of proceeds from the sale or liquidation of an 

investment until foreign-exchange reserves have risen to a more acceptable level, and 

that the delay may extend up to three years. 

Capital transfers
Briefing paper: Evaluating a potential US-China BIT 9 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

Active US BITs do not address which sectors are more or less important than others in 

terms of investment. Instead, they employ a “negative list” approach, specifying which 

sectors are off limits for partner countries. If the US does not list a sector, the other 

BIT party presumably has the right to invest in it at will. 

In the US-Panama BIT, for example, the US includes on its negative list, among other 

sectors, air transport, shipping, banking, insurance, broadcasting, telephone services 

and satellite communications. Panama, likewise, limits investment in many of the 

same sectors. 

In the US-Uruguay BIT, the first signed following the 2004 revision of the model text, 

the US placed limitations on investments in the air transport, banking, insurance, 

mining, radio/satellite communications and cable-television sectors, among others. 

Uruguay puts limitations on investments in sectors such as air, rail, road, and port 

infrastructure and services; financial services; water and gas; fisheries; and radio and 

television. 

Outside the realm of BIT stipulations, the Committee on Foreign Investment in the 

United States (CFIUS) reviews foreign investments in the US. In recent years, review 

and rejection by the CFIUS of a number of major proposed investments has caused 

tension with several countries, including China. 

Whether a US-China BIT takes a “negative list”, a “positive list” or some other approach 

towards sectors open to mutual investment, the general sentiment among observers of 

the US-China BIT negotiations is that the US will insist that a BIT not limit nationalsecurity (that is, CFIUS) reviews of proposed investments currently in place. That said, 

pending foreign investments in the US are submitted for review CFIUS on a voluntary 

basis. However, CFIUS does have the power to review pending investments that are not 

submitted. 

By some accounts, a US-China BIT could be an opportunity to strengthen the principle 

of non-discrimination of Chinese investment in the US compared with other countries’ 

investment in the US. 

The US model BIT prohibits the imposition of performance requirements, including 

domestic-content targets, export and import quotas, and technology transfer (among 

other areas) as a condition for the establishment, acquisition, expansion, management, 

conduct, operation or sale of an investment covered under a BIT. 

In some instances, such as in the BIT with Panama, exceptions have been made. The 

US-Panama BIT allows Panama to grant benefits to investors under its established 

incentive laws. 

The model US BIT contains clauses regarding both environmental and labour 

concerns. The clauses indicate that it is “inappropriate to encourage investment by 

weakening or reducing the protections afforded” in domestic environmental and 

labour laws, adding that labour laws include regulations related to the rights of 

association and collective bargaining, prohibition of forced labour, labour protections 

for children and young people, and acceptable work conditions. The model BIT does 

not, however, establish environmental or labour restrictions in addition to existing 

national laws. 

Strategic sectors and 

the “negative list” 

approach 

Performance requirements

Labour and the

environment

The role of CFIUS
10 Briefing paper: Evaluating a potential US-China BIT

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US BITs encourage initial efforts at dispute resolution to be made through consultation 

and negotiation between the claimant and respondent. Disputes that cannot be resolved 

through that process are settled under procedures established by the World Bank’s 

International Centre for the Settlement of Investment Disputes (ICSID), assuming 

both the claimant and defendant countries are party to the ICSID Convention. If a 

dispute is not resolved through consultations or diplomatic channels, government-togovernment dispute settlement (that is, in national courts) would still be available to 

investors that encounter trouble. 

Some BITs have been revised to capture shifts in arbitration procedures. The USUruguay BIT contains two such annexes: the first bars US investors from submitting 

certain types of claims under BIT channels that have already been submitted before a 

Uruguayan court or administrative tribunal; and the second bars investor cases 

claiming that a “negotiated restructuring” of a sovereign-debt instrument breaches any 

obligation under Section A of the BIT except national and most-favoured-nation 

obligations. 

In another instance, at the time of the 1982 US-Panama BIT (which entered into force 

in 1991), Panama was not party to the ICSID Convention, and the agreement was 

signed using the ICSID Additional Facility as the forum for arbitration. Following 

Panama’s accession to the ICSID Convention, the BIT was amended in 2000. 

During the early days of the North American Free-Trade Agreement (NAFTA), parties 

within the US were concerned that the use of international tribunals in cases brought 

by foreign investors under free-trade agreements (FTAs) and BITs would open the US 

to a deluge of claims. Further criticism surrounded the fact that, in contrast to US 

judges, the international tribunals were beyond the reach of US democracy and that 

many of the arbitrators would be foreign nationals with the power to render monetary 

judgments against the US government—the damages of which would ultimately be 

paid with taxpayer revenues. Such fears have proven unfounded. In the more than 15 

years since NAFTA entered into force, there have been only 15 cases brought against 

the United States, not one of which has required the US to pay a monetary award. 

Michael Snarr, counsel at Baker Hostetler, interviewed for this paper, describes an 

example of the process of bringing a property dispute by a foreign investor against the 

US as follows: “As for raising the BIT in court, the challenge would not be to a trade 

court. The US Court of International Trade has a special, limited jurisdiction and 

would not have jurisdiction over a claim property dispute with a local, state or federal 

government, even if an argument were made about a BIT. Even if one were to go to a 

regular US federal district court, the case likely would be dismissed because the BITs 

or FTAs are explicit in limiting the rights of private persons to invoke the obligations 

in those agreements to the dispute-settlement mechanisms contained in the 

agreements. In other words, the district court would say that to the extent a foreign 

investor may claim any relief under the BIT, such relief is provided explicitly through 

the arbitration mechanisms in the agreement and not to be applied in US courts except 

to enforce an arbitration award rendered by a tribunal under the agreement.” 

Negotiation and ratification of US BITs follows a linear process. First, the US secretary 

of state authorises the negotiation process. Negotiation with the partner country on the 

terms of the individual BIT then proceeds. Once the two countries’ negotiators come to 

agreement on the terms and the secretary of state authorises the transmittal, the BIT goes 

Arbitration processes

Ratification process

in the US
Briefing paper: Evaluating a potential US-China BIT 11 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

to the president for signature. Following presidential signature, the Senate Foreign 

Relations Committee considers the treaty, reporting its findings to the full Senate. The 

BIT then requires approval by a two-thirds majority in the Senate, at which point it 

enters into force. It is not uncommon for the elapsed time between the president’s 

signing of the treaty and Senate’s ratification of it to be several years, and for that period 

to straddle presidential administrations.6

Impacts of BITs 

Overall, US BITs open channels for US companies to develop and expand their 

commercial interests internationally. BITs pave the way for US companies to set up 

export-distribution networks, provide services directly through branch and affiliate 

offices in situ, and engage in research and development to meet the demands of local 

needs while expanding sales markets. US BITs have positive effects on partner 

countries: US companies invest with more confidence (especially in countries that 

have had weak foreign-investment-protection measures); it opens bilateral 

communication channels on trade and investment; and these channels may lead to 

future agreements, such as a bilateral free-trade agreement. 

An analysis of US BITs with developing countries shows that when BIT agreements 

are in force (compared with those signed but awaiting ratification), there is an 

observable positive effect on the increase of inflows of US foreign direct investment 

(FDI). One such study, conducted at the University of Illinois at Chicago, examined 

investment-flow data from 1977-2004. This study shows that an active BIT increases 

the level of US FDI to a partner country, whereas a US BIT that is signed but not yet 

in force does not. There is often a two-to-three-year gap between the time an 

agreement is signed and the time it comes into force. 

Because of data constraints, it is difficult to examine the effect of BITs on FDI into 

specific sectors. Research in 2005 found that a higher number of BITs increases FDI 

flows into a developing country. Though the finding that BITs in some manner 

increase the level of FDI between signatories is the most common outcome of such 

studies, other reports reach different conclusions. One recent analysis, for example, 

finds “little evidence that existing international agreements—trade and investment 

framework agreements (TIFAs), BITs or preferential trade agreements (PTAs)—tend 

to increase investment in partner countries from the United States.”7 Data available 

from the US Bureau of Economic Analysis is included in the dataset accompanying 

this report. 

 

6 http://www.unctad.org/en/docs/webiteiia20069_en.pdf 

 

7 See http://psweb.sbs.ohio-state.edu/intranet/gies/Haftel_GIES.pdf; http://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=616242 and http://www.asil.org/files/ielconferencepapers/peinhardt.pdf 
12 Briefing paper: Evaluating a potential US-China BIT

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II. China’s current BITs with other countries 

Introduction 

China has emerged in recent years as the leading destination in the developing world 

for foreign direct investment (FDI). Moreover, China is also an increasingly important 

source for outward FDI, especially for developing countries in Africa, Latin America 

and Asia. Less-well noticed, however, has been the fact that China has now signed 

more than 120 bilateral investment treaties (BITs) with other countries, ranking second 

in the world after Germany. These treaties are increasingly regarded as crucial not 

only for foreign investors in China, but also for Chinese companies investing abroad, 

providing them with the confidence to invest overseas without the risk of 

expropriation. 

China’s approach to BITs has changed significantly over the years, and the country’s 

BIT policy can be divided into three different periods. The first stage was from 1949 

(with the foundation of the People’s Republic of China) to 1981, the start of the period 

of openness and reform. During these years, China adopted an aggressive and hostile 

approach to foreign direct investment (FDI) and BITs in line with its overall ideology, 

including an opposition to concepts of private property. During this period, 

expropriations were frequent and without compensation. 

The second stage, 1982-97, witnessed a change in China’s attitude towards foreign 

investment, as the country opened up to the rest of the world following more than 30 

years of economic isolation. Eager to attract FDI, economic development became a 

priority for the government. As a result, China signed its first-ever BIT with the 

government of Sweden in 1982. Over the next 15 years, attitudes towards FDI evolved 

as the level of legal protection for foreign investors gradually increased, and by midChronology of China’s BITs
Briefing paper: Evaluating a potential US-China BIT 13 

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1998 China had signed a total of 80 BITs. Despite this, the overall level of protection 

offered in these BITs was still fairly low. 

Since 1998, China has entered into increasingly sophisticated BITs. Indeed, China has 

now signed BITs with most of the world’s capital-exporting countries, including the 

UK, Japan, Germany and France. There is no BIT in force with the US; negotiations 

were terminated in 1989 following the Tiananmen Square massacre. Reflecting 

China’s increasingly important role as source of FDI in the developing world and the 

demand from Chinese companies for greater protection for their overseas investments, 

China has also now signed BITs with many developing countries in Asia, Africa, 

Eastern Europe and South America. 

As China has overcome its traditional and long-held scepticism towards international 

law, China’s BITs since 1998 have increasingly followed international best practice, 

and they are comparable to those found in more developed countries. These BITs 

provide a high level of protection to foreign investors, as well as unlimited access to 

dispute-settlement mechanisms, provisions on most-favoured-nation treatment and 

national treatment of foreign investors. This includes the recent high-profile BITs 

signed with the Netherlands in 2001 and Germany in 2003. 

Major themes and issues in China’s BITs8

China was initially reluctant to consent to arbitration as a way to settle disputes in its 

BITs. Indeed, the first BIT with Sweden contained no investor-dispute provisions at 

all. But the lack of an effective and working arbitration process undermined the 

effectiveness of the BITs as a means of investor protection. 

This changed following the signing of a new generation of BITs in the late 1990s, 

when China began to agree to a proper dispute-settlement mechanism. The first BIT 

that provided for genuine dispute settlement was signed with Barbados in 1998. The 

fact that the first such BIT was signed with a developing country is significant: it 

implies that pressure from Chinese investors, concerned about the lack of protection 

they receive when investing abroad, might have persuaded the Chinese government to 

change its stance and to allow proper access to arbitration. An arbitration clause was 

also included in the June 2000 BIT signed with Botswana, when China consented to 

allow for international arbitration “for any dispute between an investor of one 

Contracting Party and the other Contracting Party” either through an ad hoc tribunal, 

or through the ICSID Convention. 

Dispute-resolution provisions were included in other BITs with developed countries, 

including that signed with Germany in 2003, whereby “any dispute concerning 

investments shall at the request of the other contracting state be submitted for 

arbitration”. Under the terms of this arbitration, investors are given the right to have 

their case referred to the World Bank’s International Centre for Settlement of 

Investment Disputes (ICSID). Under ICSID, dispute resolution is fully 

 8 Information for this section was drawn from a number of sources including: 

http://jiel.oxfordjournals.org/cgi/content/abstract/jgp020, 

http://www.asil.org/files/teleconferencepapers/berger.pdf, http://law.bepress.com/expresso/eps/1928, and 

http://www.amchamchina.org/article/4135. 

Arbitration
14 Briefing paper: Evaluating a potential US-China BIT

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comprehensive, and member states must “recognise an award ... as binding, and 

enforce it ... as if it were a final judgment of a court”. 

More discussion of this issue can be found in Section IV, p. 33. 

 

The most-favoured-nation (MFN) treatment clause has been included in all of China’s 

most recent BITs. The inclusion of this clause has important implications, since under 

the MFN China is obligated to extend all the benefits of its new-generation BITs to 

countries that signed the more restrictive, old-generation BITs. 

The MFN clause aims to create a more equal and competitive landscape for all foreign 

investors regardless of nationality. This clause is especially important given that 

China’s most recent BITs grant substantially more access and protection to foreign 

investors, yet signatories of the old-generation, more restrictive BITs can now enjoy 

these benefits. 

Traditionally seen as one of the core guarantees provided in modern BITs, the 

extension of national treatment implies the creation of a level playing field for foreign 

and local investors alike to ensure fair and equal competition. Under nationaltreatment provisions, governments must ensure that foreign governments provide 

equal treatment to foreign investors and that there is no discrimination on the grounds 

of nationality. 

China’s pre-1998 BITs typically did not include full national treatment. This reflected 

a determination within the Chinese government to promote Chinese companies as 

“national champions” and to ensure that the government could maintain as much 

control over the economy as possible. It was also a recognition that Chinese 

companies would struggle to compete against more-sophisticated, world-class 

companies. 

The first BIT to include a mention of national treatment was the China-UK BIT of 

1986. Even under the terms of this BIT, however, the provision was included whereby 

“the Contracting Party shall to the extent possible, accord (national) treatment”. The 

inclusion of the phrase “to the extent possible” was designed to ensure that no binding 

restrictions would be imposed. 

China’s newer generation of BITs, from 2001 onwards, began to include stricter 

national-treatment provisions, starting with the BIT signed with the Netherlands. Even 

in this case, though, there were still qualifications ensuring that the provisions were 

not completely binding. 

Indeed, China finally agreed to grant full and unqualified national-treatment 

provisions without reservations only for the BIT with the Seychelles, which was 

signed in 2007. The decision to allow national treatment was a major development in 

China’s BIT practice, and it has served to underline China’s increasing commitment to 

BIT best practice. It has also served as a mechanism to enforce the continued opening 

of the domestic economy to foreign competition. 

Significantly, since all of China’s BITs include most-favoured-nation clauses, the 

concessions offered in the Seychelles BIT are available to all foreign investors. 

A security-protection guarantee is standard in China’s BITs and requires the state to 

provide protection against physical interference—such as rioting and 

Most-favoured-nation 

treatment 

National treatment

Security protection
Briefing paper: Evaluating a potential US-China BIT 15 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

demonstrations—in the host country. This guarantee is especially valuable for lessstable regimes in Africa, where destruction of physical assets is more likely to be a 

problem. 

Protection against expropriation is an especially important guarantee in China, 

following the large-scale seizure and nationalisation of foreign assets after the Chinese 

Communist Party came to power in 1949. Although expropriation is much less likely 

to be an issue for foreign investors at the moment, the guarantee is included in all 

China’s BITs. 

China’s old generation of BITs did not often adhere to best practice in the area of 

compensation, which under the most modern and comprehensive BITs demands 

“prompt, adequate and effective compensation”. China’s new-generation BITs have 

clarified this issue. The 2003 China-Germany BIT, for example, requires that 

“compensation shall be equivalent to the value of the investment immediately before 

the expropriation is taken” and that the “compensation is paid without delay and shall 

carry interest.” Foreign investors remain concerned, however, over the calculation of 

the exact level of compensation under China’s present BIT terms. 

In China’s old generation of investment treaties, capital-transfer provisions were strict 

by design. China aimed to ensure control over all foreign exchange entering and 

exiting the country in order to maintain control over the exchange rate. Yet the country 

increasingly recognised that capital-transfer restrictions were not compatible with the 

goal of encouraging FDI into the country, since companies are unwilling to invest in a 

country that does not allow repatriation of profits. Capital-transfer provisions were 

gradually eroded, and in the 2003 China-Germany BIT they were broken altogether, 

allowing for unlimited capital transfer. Most-favoured-nation provisions also add to 

the scenario for foreign investors with their concurrent favourable provisions. 

Foreign investors can open and maintain foreign-exchange accounts if approved by 

the State Administration of Foreign Exchange (SAFE). SAFE will determine the 

amount of foreign exchange that a company needs; deposits exceeding this level must 

be converted to local currency. Authorised foreign investors can retain foreign 

exchange equivalent to 50% of their export earnings. China now has a relatively 

liberal approach, allowing foreign investors to repatriate legally earned profits if the 

company involved can produce the appropriate paperwork. Foreign businesses in 

China rarely mention the issue as a major problem, which may be partly because most 

companies in China reinvest the vast majority of their earned profits in their Chinabased ventures. Nevertheless, the government has gradually been stepping up its 

monitoring of some of the channels used to repatriate profits, which has raised the 

administrative burden associated with these paths. Transfer pricing, for example, is 

increasingly subject to regulatory scrutiny to ensure that intra-company pricing is 

reasonable; some companies think that the authorities’ judgment of what is reasonable 

is at odds with their own. Another example is royalty payments. As mentioned 

elsewhere in the report, some foreign investors have reported that the government is 

putting pressure on them to reduce royalty payments, registering more intellectual 

property in their China-based vehicles. Capital-account transactions are more tightly 

restricted under China’s closed capital-account system, and they require case-by-case 

approval. As a result, foreign investors report that receiving regulatory approval for 

injections of capital to expand businesses can sometimes be difficult (especially if the 

authorities are trying to limit inflows of liquidity into the economy from abroad). 

Protection against

expropriation

Amount of compensation 

Capital transfer

Capital movement 

and profit 

repatriation 
16 Briefing paper: Evaluating a potential US-China BIT

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

One of the most controversial aspects of BITs has been the introduction of the socalled “umbrella clause”, now included in about half of all of China’s BITs. Most BITs 

cover areas such as the violation of national-treatment provisions and expropriations, 

which typically involve protection against interference from government power. 

However, there are many cases where an investor may be more concerned about the 

willingness of another company, and not of the government, to fulfil its contractual 

obligations. 

Protection against commercial breaches of contract can be covered under the umbrella 

clause of a BIT, which according to the Germany-China BIT stipulates that “each 

Contracting Party shall observe any other obligation it has entered into with regard to 

investments in its territory by investors of the other Contracting Party”. Although 

China was traditionally wary of allowing such clauses into its BITs, the newgeneration BITs typically include such provisions. 

The clause means that a foreign investor can take to arbitration any company in breach 

of an investment contract. This provides significant benefits to a foreign company, 

which will be able to depend on a transparent, international-dispute-resolution 

mechanism, rather than on the local Chinese arbitration courts, which have been 

criticised as slow and lacking in transparency. 

Impacts of BITs 

As noted earlier, the level of inflows of foreign direct investment (FDI) into China 

have increased rapidly in recent years, making China the largest recipient of FDI in 

the developing world. FDI inflows into China were just US$400m (on a balance-ofpayments basis) in 1982, increasing to US$11.2bn in 1992, US$44.2bn in 2001 (the 

year of China’s entry into World Trade Organisation), and then to a record 

US$147.8bn in 2008. Meanwhile, outward FDI, which was just US$44m in 1982, 

grew to US$913m in 1991 and US$6.9bn in 2001; it has ballooned over the past 

couple of years, reaching US$17.8bn in 2006 and a record US$53.4bn in 2008.9 

 9 Data for this section from National Bureau of Statistics. 

Umbrella clause
Briefing paper: Evaluating a potential US-China BIT 17 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

Inflows of FDI into China have increased for a number of reasons: 

• the increasing number and sophistication of China’s BITs; 

• explosive growth in China’s economy, which has encouraged more companies to 

invest in the country as a way to access the booming domestic market; 

• China’s low labour costs (see table on the next page), efficient workforce and 

improving infrastructure, which has allowed China to establish itself as a 

manufacturing export power-house, attracting billions of US dollars in FDI from 

foreign companies in the process; 

• China’s entry into the World Trade Organisation in late 2001. 
18 Briefing paper: Evaluating a potential US-China BIT

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0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Brazil China Germany India Indonesia United States

Note: 2009-14 are EIU forecasts.

Source: Economist Intelligence Unit.

Average monthly wage

(US$)

The investment environment in China has greatly improved since the country’s WTO 

accession in December 2001, tariff reductions have been implemented on schedule 

and most market-access measures are in operation. As a result, a significant number of 

markets have been opened to investment. In the banking sector, for example, 

restrictions on local-currency business by foreign banks have been eased, and 

geographical and customer restrictions on renminbi services have been removed. 

Foreign companies involved in logistics and distribution have expanded their business 

scope, with restrictions lifted on foreign ownership for freight forwarding, 

warehousing and other operations. The protectionist telecoms sector has also seen 

major changes, with foreign-equity limits raised. In addition, regulatory restrictions on 

foreign investment in tourism were lifted as from July 1st 2007, in line with China’s 

WTO commitments to allow foreign travel agencies to set up branch offices 

nationwide. Since 2004, foreign investors have also been allowed to take full 

ownership of hotels. 

China’s entry into the WTO in 2001 has also driven changes in the pharmaceuticals 

sector, where innovative pharmaceutical companies can now carry out research and 

development (R&D) because of fewer concerns over poor intellectual-property 

protection. Foreign investment in this sector has boomed, and most of the world’s 

largest foreign companies have established R&D centres in China. These companies 

include GlaxoSmithKline and AstraZeneca (both of the UK), Roche and Novartis 

(both of Switzerland) and Bayer (of Germany). However, the foreign pharmaceutical 

company with the biggest presence in China is Pfizer (of the US), which has a total 

staff of around 4,000 and production plants in Dalian, Suzhou and Wuxi. Overall, 

Pfizer has invested more than US$500m in China. Significantly, all of this has 

occurred in the absence of a US-China BIT; suggesting that not having a BIT signed 

and enacted with China does not present a huge obstacle for foreign companies. The 

same is also true in China’s automotive sector, which has received billions in foreign 

investment in recent years, and where one of the biggest investors has been General 

Motors (also of the US). 
Briefing paper: Evaluating a potential US-China BIT 19 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

Aside from the United States, China has signed BITs with most of the world’s 

developed countries. The emphasis most recently has been on signing BITs with lessdeveloped countries, especially oil- and commodity-rich countries in Africa and Latin 

America that can provide much needed inputs for China’s booming economy. From 

the perspective of a Chinese company, many of which have little experience investing 

in foreign countries, the increased confidence and legal support available through a 

BIT (giving Chinese companies the right to appeal for international arbitration, for 

example, in the event of the expropriation of a mine in a foreign country) explains 

much of the surge in outward FDI by China to the developing world in recent years. 

WTO Commitments 10 The US Trade Representative (USTR) released its annual 

report in late December, assessing how well China is doing in meeting the 

commitments it signed up to as part of its WTO accession agreement of 2001. 

Although the overall message of the report was mixed, and though some “concrete 

results” had been achieved over the past year, big concerns remained on how well 

China is complying with its WTO obligations. The main complaint focused on 

concerns that China is not taking adequate measure to enforce its own intellectualproperty laws, despite a number of anti-piracy campaigns that it has launched in recent 

years. Altogether, the USTR estimates that US software and music companies suffered 

losses of around US$3.5bn as a result of poor enforcement of the laws. 

The report was also critical of other aspects of China’s trade regime. In agriculture, 

where China has generally met all of its commitments, US companies still suffered 

from unpredictable practices, which in 2009 led to shipments of agricultural products 

from the US being held up at customs in China. China was also guilty of limiting 

market access for foreign companies, such as through the inclusion of the “Buy 

China” policies included in the government’s stimulus package, along with 

complicated new standards in telecommunications, which were designed for the 

benefit of Chinese telecoms companies. The USTR report was also critical of China’s 

new postal law, which the report claims excludes foreign companies from a 

“significant” part of the rapid-delivery market in China. 

Conclusion 

Although the Chinese government has traditionally been slow to grant significant 

rights to foreign investors that could be enforced through international arbitration, this 

is now changing. The past few years has seen a number of developments to China’s 

BIT regime. These changes have significantly extended the protections offered to 

foreign investors in China from interference from the government. 

Although China signed a number of BITs in the 1980s and early 1990s, it was not until 

the late 1990s that the basis for the present agreements emerged. With China’s role as 

a leading destination for foreign direct investment, and with growing demands by the 

international community for greater foreign-investment protection, the country 

eventually agreed to comprehensive expansion of the protections offered to investors. 

China’s most recent BITs are now comprehensive and include all of the rights found in 

the most substantive BITs in force around the world today. These include the 

following: 

 10 See http://www.ustr.gov/webfm_send/1572 for more information. 
20 Briefing paper: Evaluating a potential US-China BIT

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

• protection against expropriation and discriminatory action from the 

government; 

• unhindered transfer of profits back from China; 

• the right of investors in China to start binding-arbitration proceedings against 

the government, which can be enforced by the World Bank. 

III. The potential US-China BIT 

Key issues 

China continues to make progress in fighting intellectual piracy11 . However, the 

degree of protection of intellectual piracy remains well below the level that most of its 

trading partners expect, and this is likely to remain a major source of dispute. Piracy 

problems are still common in almost every sector of the Chinese economy, including 

media, software, electronics, industrial goods, consumer goods, pharmaceuticals and 

food products. Indeed, the US Trade Representative (USTR) estimated that 85-93% of 

all copyright products sold in China in 2007 were pirated, showing little improvement 

over the previous year. 

Despite the poor level of overall intellectual-property-rights (IPR) protection, China 

has not stood still in its efforts to address the IPR issue. Since joining the World Trade 

Organisation in December 2001, Beijing has worked hard to strengthen its IPR 

regime, including the revision of major laws on patents, copyrights and trademarks in 

line with the requirements of the Trade-Related Aspects of Intellectual Property Rights 

(TRIPs) agreements of the WTO. China is already party to several other major 

international conventions on IPR. The government has issued numerous official 

notices and amendments on specific areas, such as pharmaceuticals, Internet domain 

names and software piracy. In some, especially where these involve trademark 

infringement, solid remedies are available against infringers, and the situation 

continues to improve, especially in large urban areas. Patents, too, can often be 

effectively protected, though the enforcement procedure is tortuous. However, 

copyright protection, especially for music, films and computer software, remains a 

weak area. 

Although the range of enforcement options open to victims of piracy in China 

continues to increase, the reality is that even though the central government wants to 

stop counterfeiting, its ability to enforce rules, especially in remote regions, is limited. 

Factors that hamper enforcement efforts include local protectionism, insufficient 

manpower and the absence of effective deterrent measures. 

Moreover, the situation is unlikely to change soon for several reasons, including the 

following major issues: 

 11 Intellectual-property-protection information derived from the Economist Intelligence Unit’s China Hand: 

http://portal.eiu.com/ 

index.asp?layout=displayIssueTOC&toc2=no&issue_1024946887&publication_id=870003687. 

Intellectual-property

protection

Fragmented regulatory

environment
Briefing paper: Evaluating a potential US-China BIT 21 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

• Toothless agencies: most lack the funding—and often the willpower—to 

implement laws; 

• Costs of litigation: the costs and complexities of pursuing counterfeiters through 

China’s legal system are often prohibitive; 

• Lack of training, and inadequate, non-transparent processes. 

More generally, it is hard to escape the conclusion that enforcement of intellectualproperty rights is a low-priority issue for most government officials. 

The US is by far the largest of China’s trade partners, with a relationship that is also 

the most problematic. China’s massive trade surplus with the US is a strain on bilateral 

relations. Nonetheless, under the Clinton and Bush administrations, the US maintained 

a policy of “strategic dialogue”, with both presidents arguing that it is better to talk 

with China than confront it. The Obama administration has begun a review of the 

process but is unlikely to change this overall stance. 

Chinese statistics traditionally underestimate the size of Sino-US trade, as they do not 

distinguish between direct exports and transshipments through Hong Kong, whereas 

US statistics overestimate the size by combining both figures. Regardless of which 

statistics are used, the bilateral trade deficit between the US and China grew rapidly in 

2005-08. However, the size of the bilateral trade deficit is forecast to shrink over the 

next few years, with import growth into the US likely to be blunted by the need for 

households to rebuild their savings, following a collapse in property and share prices 

over the past year. Meanwhile, continued strong growth in China (albeit down from 

the levels in 2003-07) should support relatively buoyant import growth in that country. 

The US government will continue to press for a much greater appreciation of the 

Chinese currency this year, which it cites as the main cause of the bilateral trade 

deficit. However, American criticism of China will be blunted by the need to win the 

latter’s support in several areas, not least in budget financing—China was the top 

buyer of US Treasury bonds in 2008. Meanwhile, the Chinese will be reluctant to 

allow a rapid appreciation of the currency amid concern on how this would affect the 

competitiveness of its exports. 

The US Trade Representative’s annual report to Congress on China’s WTO 

compliance, released in December 2008, maintained the relatively conciliatory note 

struck the previous year. While noting the various areas in which China continues to 

fall short, it also emphasised the progress made in bilateral talks, which had improved 

the access of US companies to Chinese markets for agricultural and other products. 

The Chinese government abandoned the renminbi’s decade-old fixed exchange rate in 

July 2005, when it revalued the currency by 2.1% and replaced the peg to the US 

dollar with a managed float. The move came in response to strong pressure from the 

US government and a booming trade surplus. 

Despite strong pressure from China’s main trading partners to allow the renminbi to 

appreciate faster against the US dollar, the Chinese currency has remained fixed 

against the dollar since July 2008. The Chinese government will probably remain very 

cautious in the operation of its exchange-rate policy, and it is highly unlikely to bow to 

pressure from trade partners for a large-scale revaluation or even a faster rate of 

appreciation. The Economist Intelligence Unit forecasts that, as part of a gradual 

The trade balance

The RMB exchange rate
22 Briefing paper: Evaluating a potential US-China BIT

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tightening, the government will adjust its policy stance, allowing the renminbi to 

resume a slow but steady rise against the US dollar from around mid-2010 onwards. 

Despite the problems that it causes for exporters, appreciation of the renminbi is 

desirable, as it should help to cut the huge surpluses on China’s capital and current 

accounts, which are contributing significantly to global economic imbalances. A BIT 

agreement between China and the US would give the US no extra leverage over 

China’s exchange-rate policy. Indeed, the BIT negotiations would not be the best 

forum for the US to pressure China on the exchange rate. Instead, these discussions 

should occur during the Strategic and Economic Dialogue (S&ED) negotiations. 

The US government and China’s other main trade partners have consistently argued 

that the renminbi is undervalued. In making these arguments, they have pointed to 

three factors, namely China’s huge foreign-exchange reserves, the country’s vast 

current-account surplus and the fact that goods in China are still much cheaper than in 

the US. The US and China’s other major trade partners may put further pressure on the 

Chinese government to allow faster appreciation of the renminbi. However, China’s 

crucial role in resolving the ongoing global financial crisis means that both the EU and 

the US will be careful not to alienate the Chinese authorities through the use of 

threats. 

There remains significant debate within the Chinese government over the rate at which 

the government should allow the currency to rise. The Ministry of Commerce, for 

example, would prefer to see a much slower rate of appreciation in order to support 

exporters. Despite the problems that a faster appreciation rate may cause for exporters, 

a further rise in the value of the renminbi is desirable since it should help to cut the 

huge surpluses on China’s capital and current accounts, which are contributing 

significantly to current global economic imbalances. By cutting the cost of imported 

goods, the renminbi’s appreciation should also help the rebalancing of China’s 

domestic economy, by encouraging private consumption. But the government will 

remain wary of the potential social costs of a continued strengthening of the renminbi, 

and in the event of a major slowdown in economic growth, the pace of appreciation 

may be slowed or possibly even reversed. 

By almost any standards, China’s environmental problems are severe12. Air and water 

pollution, water scarcity, desertification, land contamination and health problems 

among residents of heavily polluted areas are major issues. China’s cities are among 

the most polluted on earth, with the country home to 16 of the 20 most-polluted cities 

in the world, according to the World Bank. Water pollution is just as serious a 

problem. This is exacerbated by the fact that only around 50% of urban sewage is 

treated, and some 278 of China’s 661 cities had no sewage-treatment plants as at end2005. 

The prevailing political culture and regulatory structures have exacerbated 

environmental problems. One of the features of China’s economic boom over the past 

decade and a half has been a rapacious growth-first mentality among businessmen and 

politicians. With officials largely rewarded for attracting investment and delivering 

strong economic growth, this has led to the approval of countless projects without due 

regard for their environmental impact. Simply put, China’s present position is 

 12 Economist Intelligence Unit: Asia Regional Overview, July 2006 article by Mary Boyd, found at 

http://www.eiu.com. 

Environmental standards

and regulations
Briefing paper: Evaluating a potential US-China BIT 23 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

unsustainable. Without more-efficient use of energy and water, its environmental 

problems will worsen as the economy continues to grow rapidly and as per-capita 

prosperity rises. 

China’s government is unquestionably paying closer attention to environmental 

sustainability. Thus far, however, it has failed to meet the main targets for reducing 

pollution, and structural constraints continue to hamper it. The most fundamental 

change is that an environmental agenda is now more clearly articulated in high-level 

policy. The 11th Five-Year Plan (covering 2006-10) emphasises sustainable GDP 

growth and the quality, not quantity, of economic output. The plan sets specific 

environmental targets, including for energy efficiency, discharges of major pollutants, 

forest cover, as well as improvements in the efficiency of industrial and agricultural 

water use, and more waste-water treatment. 

China is doing a lot to tackle its environmental crisis, but it faces a colossal task. The 

central government recognises the seriousness of the situation and is adjusting policy 

accordingly. But whether it has the ability and political will to effect change on the 

scale needed is far from certain. For one thing, though spending has increased, China 

is not spending enough money; the government invested only 1.3% of GDP on 

environmental-protection treatments in 2005, still below the 2% recommended by the 

World Bank. 

Nevertheless, efforts to introduce cleaner technology, to reduce emissions and to 

increase penalties for environmental transgressions will continue to gain momentum. 

At the same time, a drive to increase massively the use of nuclear power and 

renewable energy sources will continue. More progress would be possible if China 

improved its institutional framework. It should aim to consolidate supervisory 

agencies and give more power to key bodies such as the Ministry of Environmental 

Protection (MEP), the main environmental-regulatory authority. 

Foreign-invested enterprises (FIEs) face the same environmental and building 

restrictions that apply to domestic enterprises—though many complain that they face 

more-rigorous enforcement of the rules. Part of the official rationale behind such 

double standards is that foreign companies have longer experience with environmental 

protection and should therefore meet stricter requirements. State-owned enterprises 

(SOEs) generally pose a far greater threat to the environment, but realistically, SOEs 

are probably too well connected with local authorities to face strict requirements on a 

level anywhere near the ones imposed on FIEs. 

China’s film, entertainment and broadcasting sector remain largely off-limits to 

foreign investors. 13 Liberalisation of this sector will probably lag behind others. 

Indeed, following China’s entry to the WTO in 2001, the film and media sector was 

one of those that remain most protected from foreign competition. The restrictions 

facing foreign companies in this sector are wide-ranging, including a restriction that 

allows just 20 foreign films to be legally shown in China each year; a sophisticated 

Internet firewall that prevents most western news websites from being viewed in 

China; and a media business (including radio and TV stations, newspapers, magazines 

and film production) that is largely off-limits to foreign companies. 

 13 Information for this section is drawn from http://www.amchamchina.org/article/4135. 

Service access (film,

entertainment and 

broadcasting
24 Briefing paper: Evaluating a potential US-China BIT

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Although the government claims that these restrictions are in place to protect China’s 

domestic companies from foreign competition, the reality is that the media sector in 

China is viewed as being too politically sensitive to be thrown completely open to 

foreign companies. The government’s overwhelming priority is to maintain social 

stability; this is achievable only if the government can maintain a tight grip on all 

public access to information. As a result, the liberalisation of this sector will probably 

lag significantly behind the rest of the economy. 

Labour standards are improving across China, and the country already has a number of 

pieces of legislation in place designed to protect worker’s rights in the country.14

However, although China has introduced much new legislation in recent years, the 

unhealthy relationship between corrupt local officials and local businessmen will 

remain the main stumbling block in the path of progress on labour rights. China also 

has only a patchy ability to implement existing law. Breaches are often investigated 

only when senior officials order action; the realities of the political system heavily 

compromise efforts by the police and other agencies that are meant to detect illegal 

behaviour. 

The most important piece of labour legislation China has introduced in the reform era 

is the Labour Contract Law (LCL), which took effect on January 1st 2008. The new 

law replaces one put into place in 1995. Although China has emerged since then as an 

attractive manufacturing base, concerns have grown over poor labour conditions—

hence, the new law that, on paper, dramatically changes the balance of power between 

workers and employers 

Companies will need written contracts with all full-time employees, and anyone who 

works for more than four hours a day will probably be considered a full-time 

employee. Once they are full-time, employees who are laid off must be bought out at a 

multiple of their average monthly salary. It is permissible to make more than 20 

employees, or 10% of the workforce, redundant, but this must be done on the basis of 

seniority, not merit. The law is supposed to provide greater job security. Workers with 

ten years or more of service will have open-ended contracts, and companies will have 

to inform unions before sacking anyone. Employers fear the law will mean bigger 

severance payments. 

The new law has been a boon to the All-China Federation of Trade Unions (ACFTU), 

an umbrella organisation for all China’s unions, which in many ways acts as an arm of 

government. But the ACFTU it has seen its power eroded in recent years as stateowned industries have collapsed and the private sector has flourished, eschewing 

niceties such as unions and Communist Party cells. Despite strong claims by the 

ACFTU, it is not expected to emerge as a new champion of workers’ rights. 

Independent trade unions will remain in effect illegal; China has no plans to 

reintroduce the right to strike, which it abolished in 1982. 

One of the main complaints is that the new law does nothing to improve the lot of tens 

of millions of migrant workers from the countryside. They make up most of the 

unskilled labour in urban areas and are the most frequent victims of poor labour 

conditions. China’s official trade unions have yet to build a network among such 

workers. Moreover, many companies will continue efforts to evade the law or else 

 14 Source: Economist Intelligence Unit’s China Hand. 

Labour standards
Briefing paper: Evaluating a potential US-China BIT 25 

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simply ignore it. Moreover, the law was introduced in mid-2007, when the economy 

was still growing strongly and many companies could afford the increased provisions. 

However, the sharp economic downturn at the end of 2008 (which has left many 

companies struggling to survive) has meant the enforcement of the law can be 

described as patchy at best. 

Following China’s entry into the World Trade Organisation, foreign banks have 

gradually been allowed greater scope for their investments in permissible business and 

geographical areas. Foreign banks, long limited to doing business in local currency 

with foreign companies, were allowed to conduct business in the local currency with 

Chinese enterprises as from December 1st 2003. They gained access to renminbi 

business with local individuals in December 2006. Foreign banks’ geographical scope 

for renminbi business was fully liberalised in late 2006. 

Nevertheless, it will be cumbersome for foreign banks to take full advantage of the 

opening of the banking sector mandated by the WTO. Under these rules, foreignfunded or joint-venture banks will have to incorporate in China with registered capital 

of Rmb1bn (US$145m). For each branch they open, they will have to allocate another 

Rmb100m in operating capital. The WTO agreement also specifies that foreign 

financial institutions, in order to be allowed to do renminbi business, must have a 

three-year record of accomplishment for operations in China and must have been 

profitable for two consecutive years prior to application. 

July 2009 Strategic and Economic Dialogue 

The latest incarnation of US-Chinese talks, which took place in Washington DC on 

July 27th-28th, emphasised both sides’ hopes for greater co-operation, but they 

ultimately agreed upon little of substance.15 The US-China Strategic and Economic 

Dialogue, as these subtly renamed talks are now called, produced a memorandum of 

understanding on climate change and routine statements of commitment to free trade, 

balanced economic growth and security co-operation. But despite the lack of specific 

measures, the tone of the talks was encouraging. It suggests that the US and China 

recognise their increased mutual dependence and see the value of being less combative 

in future discussions. 

Emphasising the rising profile of Sino-US relations, the talks opened with a speech by 

Barack Obama. The US president stressed the importance of increased co-operation 

between the world’s sole superpower and the world’s fastest-growing major 

developing country. The new talks supersede the Strategic Economic Dialogue format 

launched in 2006, adding an “and” to the title to highlight a shift in focus from purely 

economic issues to a broader range of economic, environmental and diplomatic topics. 

Whereas the old format was spearheaded, on the US side, by the Treasury department 

and focused on resolving economic disputes between the two countries—most notably 

over China’s exchange-rate policy—the new talks had a strong foreign-policy angle as 

well. This was visible in the prominent involvement of the US secretary of state, 

Hillary Clinton, in addition to the Treasury secretary, Timothy Geithner. 

Relaunching the talks with a broader agenda reflects unspoken recognition that the old 

format did not work that well. In part, this may have reflected Chinese frustration with 

 15 Information derived from http://ustreas.gov/initiatives/us-china. 

Financial market

access
26 Briefing paper: Evaluating a potential US-China BIT

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the US’s fixation on a single issue—the exchange rate—and a feeling that the 

supposed “dialogue” was more like a twice-yearly lecture on currency policy. 

However, the fall-out from the global financial and economic crisis has made it harder 

for the US to advocate its economic world view, and there is a chance that the new 

Strategic and Economic Dialogue could offer more genuinely two-sided debate. 

A key focus of discussion in Washington was global warming and climate change. 

China’s booming economy, huge population and energy-intensive, inefficient 

industrial sector have made the country the world’s largest emitter of carbon dioxide. 

As a result, China is now central to any global climate-change initiative. There is 

growing recognition in China’s government of the seriousness of the country’s own 

environmental problems, as well as of the potentially dramatic consequences of failing 

to halt global warming. Nevertheless, China’s central role in the search for a coordinated multilateral solution to global warming will probably be awkward, given the 

concurrent need for China’s leadership to sustain rapid economic growth. This 

dilemma has big consequences for international co-operation. China (along with India) 

is strongly opposed to any plan that would impose binding emissions targets on all 

countries. China has argued that since developed countries are historically responsible 

for the high levels of carbon dioxide already in the atmosphere, they should pay the 

majority of the costs of any clean-up. This attitude, despite its undeniable logic, will 

make even harder the task of finding a viable solution to the problem of climate 

change. 

The United States, under President Obama, is committed to combating climate change, 

but it is well aware that any global solution must involve not just the US (and other 

developed economies) but also China and other large developing countries. Although 

the positions of developed and developing countries remain entrenched, China will not 

want to be labelled the world’s environmental villain. 

Unsurprisingly, given the two countries’ continuing differences, there were no major 

agreements at the Strategic and Economic Dialogue. But the two sides signed a 

memorandum of understanding committing to more bilateral discussions in future. 

Both the US and China are keenly aware of the importance of achieving progress at 

the UN climate-change summit in Copenhagen later this year. That said, China is 

unlikely to make substantial concessions in terms of targets in Copenhagen. 

Possible co-operation over North Korea was also high on the agenda in Washington. 

The US is increasingly concerned over the irrational behaviour of North Korea, which 

carried out another nuclear test on May 25th and subsequently tested a number of 

short-range missiles. The US would like China, North Korea’s one-time close ally, to 

exert more pressure on the regime. From China’s viewpoint, North Korea’s behaviour 

is increasingly embarrassing. Although China’s influence over North Korea is often 

overstated, China alone has the economic leverage to force the regime back to the 

negotiating table. Amid concerns in China that the threat from North Korea may 

encourage Japan to abandon aspects of its pacifist constitution, China may consider 

putting more pressure on North Korea. However, China remains concerned over the 

implications of regime collapse in North Korea. This could result in a massive 

humanitarian crisis, with hundreds of thousands of starving North Koreans streaming 

over the border into China. This concern, and the fear in China that tougher measures 

on North Korea could exacerbate the regime’s erratic belligerence, means that China is 

not likely to exert as much pressure as the US would like. 

Climate change and 

global warming

North Korea
Briefing paper: Evaluating a potential US-China BIT 27 

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Of the economic issues that were discussed, the most important was the rebalancing of 

Chinese GDP growth away from its traditional dependence on exports and investment. 

The US hopes that if the Chinese economy is driven more by private consumption, it 

will boost Chinese import demand and help to lift the US and other economies out of 

recession. The Chinese increasingly recognise that the growth model that has served 

China so well in the past (a cheap currency, strong exports and super-powered 

investment growth) will not be viable until the US and EU economies recover their 

previous vigour. Even then, it will be in China’s long-term interest to achieve morebalanced growth. 

China is gradually introducing measures to support private consumption, such as the 

establishment of a comprehensive social-security system (which should help reduce 

consumers’ incentive to save). However, these measures will take many years to be 

effective, and are unlikely to have much effect on supporting demand in the short 

term. Meanwhile, the Chinese government has shied away from bolder measures, such 

as allowing a faster appreciation of the renminbi. A big revaluation of the local 

currency would lift consumers’ real purchasing power and give companies an 

incentive to shift resources into production for the domestic market. However, with 

exports still plunging, policymakers in China are reluctant to let the renminbi rise too 

fast. 

Also high on the agenda at the forum was the safety of Chinese investments in the US. 

This comes amid concern that record low interest rates in the US, and the country’s 

huge fiscal deficit, will eventually lead to the re-emergence of inflation, hitting the 

value of China’s investments. Owing to China’s exchange-rate policy, which has seen 

the renminbi closely track the US dollar, the value of China’s foreign-currency 

reserves exceeded US$2trn in the second quarter of 2009, after the Chinese 

government was forced to intervene in foreign-exchange markets to prevent the 

renminbi from appreciating against its US counterpart. Although such measures have 

enabled the US to keep interest rates low, they have left the Chinese holding an 

estimated US$800bn worth of US Treasuries, the value of which is vulnerable to a fall 

in the US dollar or to the re-emergence of inflation. 

The latest Strategic and Economic Dialogue may end up being remembered not for 

what was discussed, but for what was not. Whereas discussions of the renminbi and 

China’s mounting trade surplus with the US dominated previous meetings, those 

issues barely figured this time. This is despite the fact that the renminbi has not 

appreciated at all against the US dollar over the past 12 months, having been stuck at 

Rmb6.83:US$1 since July 2008. The US has traditionally blamed the “under-valued” 

Chinese currency as a major cause of the US trade deficit, and of the global 

imbalances that arguably contributed to the current crisis. The fact that this issue did 

not feature reflects the lack of economic leverage that the US now has over China, and 

the US’s dependence on Chinese purchases of its debt to fund its huge fiscal deficit. 

The Americans remain aware that a decision by China to allow its currency to float 

freely would necessitate less Chinese intervention in foreign-exchange markets. This 

could lead to a sharp rise in US interest rates, which would risk deepening the US 

recession. 

Economic rebalancing

No discussion of the renminbi
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Obama visit in November 200916. US President Barack Obama paid his first visit to 

China on November 15th-18th 2009, and though the BIT talks were not the focus of 

the trip, both sides did agree to expedite the negotiations. Despite Mr Obama’s visit, 

trade frictions between the United States and China have continued to rise. The overall 

tone of Mr Obama’s visit to China was of an increasingly assertive China listening, 

but clearly not paying much heed, to US concerns. The US president’s addresses were 

not televised live in the country, whereas China delivered a volley of demands and 

criticism of its own. 

The meeting between the US president and China’s top leaders may have built a base 

for future improvements in relations. Optimists note that Mr Obama’s strategy of 

limiting to private discussions criticism of China’s policies in areas such as human 

rights may be more productive than public dressings-down. However, the two sides 

were able to point to remarkably few areas of agreement on the main issues of 

controversy, such as China’s exchange-rate regime and its policy towards Iran, or US 

tariffs on Chinese products, such as tyres. A few minor deals were reached on 

promoting co-operation in fields such as space exploration and measures to tackle 

climate change, but these represented unimpressive results for so high profile a visit. 

Areas of controversy 

The negotiations between the US and China over a BIT are likely to be long and 

tortuous. As with the negotiations for China’s entry to the WTO in 2001, the US will 

probably demand a number of wide-ranging concessions from China. At the same 

time, however, China has emerged as an increasingly important investor in the US and 

will itself demand some concessions from the US before any agreement is made. 

There are three issues, however, that look to cause the most amount of disagreement 

and controversy. 

China is growing increasingly concerned that its investments in the US are being 

hampered by national-security restrictions. Under the terms of the Committee on 

Foreign Investment in the United States (CFIUS; an inter-agency committee of the 

United States government), all foreign investments into the US are reviewed in order 

to consider their national-security implications for the US. This follows the failure in 

2008 of a US$2.2bn bid for 3Com, a US Internet equipment maker, by a Chinese 

company, Huawei Technologies. The bid failed over concern in the US government 

over Huawei’s relationship with China’s military and government. The failed bid drew 

comparisons with the high-profile failure, also on national-security grounds, of the 

attempt in 2005 by China National Offshore Oil Corp (CNOOC) to take over Unocal, 

a US oil company, in a deal valued at US$18.5bn. 

The failure of these deals sent the message that these large national companies are 

considered to be controlled by the Chinese Communist Party (CCP), and as such are 

potential tools for the Chinese government in achieving its strategic objectives. There 

was concern that allowing the CCP access to a strategic energy source such as oil (as 

in the CNOOC case), or sensitive information technology (as in the Huawei example) 

would have constituted a national-security risk. 

 16 http://www.economist.com/world/asia/displaystory.cfm?story_id=14915086. 

Committee on Foreign

Investment in the US
Briefing paper: Evaluating a potential US-China BIT 29 

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Protectionism in the area of government procurement is another issue that may cause 

controversy in the negotiations. This follows the unveiling of massive fiscal-stimulus 

packages in both the United States and China in order to support their economies 

during the current global economic downturn, and the appearance of “Buy America” 

and “Buy China” clauses in their respective fiscal-stimulus packages, which raised 

concerns over each country’s commitment to free trade. Despite the controversy 

caused by the appearance of the “Buy China” clause, Chinese law at present allows 

government purchasing from foreign suppliers only under “exceptional” 

circumstances. 

Under the terms of China’s accession to the World Trade Organisation in 2001, it 

promised to apply to join the government-procurement agreement (GPA; a trade pact 

that prevents member countries from discriminating against each other’s goods and 

services in government-procurement projects). Despite these promises, China is now 

only into its second year of negotiations to join the GPA. China appears in no great 

rush to join, since the present system allows the government to discriminate in favour 

of Chinese companies when giving out contracts under its own US$586bn fiscalstimulus package. The government would be very reluctant to give up this system, 

since it lets the government influence and promote certain strategic sectors, such as 

technology and energy, by awarding certain big contracts to favoured companies. 

The risk of rising protectionism from the US (following President Obama’s decision to 

impose tariffs on imported tyres from China) will make China increasingly keen to 

secure market-economy status (MES) from the US. On joining the WTO in 2001, 

China agreed to be recognised as a transition economy for 15 years before 

automatically being granted MES in 2016. Eight years after China’s accession, some 

79 countries have already granted it MES. However, the US, EU and Japan have not 

done so. Without MES, it is easier for countries to bring anti-dumping cases against 

China. Under WTO rules, most countries can be found guilty of dumping if they 

export products at lower prices than those charged in their domestic markets. But 

because of China’s status as a transition economy, when WTO members try to 

determine market rates for Chinese goods, they can use costs from “surrogate” trading 

partners, which usually have higher production and labour costs than China. This 

almost invariably causes Chinese prices to appear artificially low, making dumping 

allegations easier to prove. 

China embarked on a high-profile campaign in 2004 to persuade its trading partners to 

recognise it as a market economy, citing the economic reforms that it has 

implemented. China was especially piqued that Russia, which has still to be admitted 

to the WTO, has been accorded MES by the US in its ongoing WTO application 

process. Indeed, it appeared as though the EU was ready to grant China MES in 2009, 

but it gave up owing to objections from the US. Having made little progress, China 

appeared to have abandoned its mission and concentrated its efforts on negotiating 

bilateral free-trade agreements with individual countries or regional groupings. 

However, the Chinese once again appear keen to gain MES. At the recent Strategic 

and Economic Dialogue between China and the US in July, the US promised to 

“consult through the JCCT” (Joint Commission on Commerce and Trade). 

Market-economy status

Government

procurement
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IV. Major regulatory and transparency issues 

Introduction 

China’s World Trade Organisation accession protocols, as noted in the previous 

section, were a landmark for the country’s trade relations with other nations, but they 

also provided a significant boost to the liberalisation of China’s investment 

environment. Tariffs on inputs were substantially reduced; local-content requirements 

and mandates to export a proportion of production were—for the most part—

withdrawn; many new industries were completely opened up to foreign businesses, 

and in others, the caps on their holdings in joint ventures were raised. Despite this, the 

regulatory system governing investments remains generally weak, plagued by 

inconsistent application of standards and laws, numerous grey areas within existing 

legislation and a lack of transparency within the system. Many foreign investors 

perceive a widespread and growing degree of discrimination on the part of official 

agencies that favours domestic businesses17. 

Advocates of a Sino-US BIT argue that it would provide new avenues and new 

authority for companies to address these issues18, and they hope that it could transform 

the local investment environment. Clearly, a high quality BIT would bring many 

advantages. Not least, these could potentially include extra protection against 

expropriation, the liberalisation of restrictions on corporate transfers of funds, the 

removal of content and technology-transfer requirements on investments, and access 

to international arbitration in cases of disputes between businesses and the sovereign. 

Nevertheless, as significant disputes remain over China’s implementation of its WTO 

accession promises, so too a BIT would be unlikely to remove all current sources of 

disagreement. BITs do not tend to cover all fields in detail, and the burden of proving 

breaches of treaty commitments can be difficult. Fundamental clashes will also remain 

between the push from businesses to liberalise the investment environment and the 

policy agendas of the two governments. On the Chinese side, there exists a 

determination to build companies able to compete at the global level and a desire, on 

the part of the government, to retain control over the “commanding heights” of the 

economy, not least to aid macroeconomic policy management. These ambitions favour 

state-owned enterprises (SOEs) especially. Moreover, both the US and China share a 

desire to protect strategically important sectors, such as defence, from investments that 

might undermine their sovereign authority. 

Regarding the US, many in China feel that this position has been taken too far, with 

the review process of the Committee on Foreign Investment in the United States 

(CFIUS) serving as a block to investments—for example, Huawei’s attempted buy an 

interest in 3Com—that are politically rather than strategically sensitive. Although 

 17 For example, the 2009/10 European Chamber of Commerce in China Position Paper notes that “European 

companies believe that their Chinese competitors are benefiting from infrequent audits or—in many cases—not 

being audited at all. This discretionary application of environmental regulations amounts to a hidden subsidy for 

non-compliant Chinese companies”. 

18 Interview Erin Ennis 
Briefing paper: Evaluating a potential US-China BIT 31 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

some US parties share this view, a large constituency in the US also feels that the 

CFIUS review system is an essential tool for safeguarding national security, so 

adjustments to the system would be controversial. 

Although a BIT cannot resolve all the regulatory complications facing businesses 

investing in the two nations, it may still be able to make a positive contribution in 

many areas. The extent of any improvement in the business environment created by a 

BIT will obviously depend on the type of agreement signed. The traditional BIT forms 

adopted by the Chinese and US governments differ significantly, making it 

particularly hard to judge the possible benefits that may be gained. The analysis below 

looks at some of the main regulatory and transparency issues that a Sino-US BIT 

might address, and it attempts to flesh out some of the possible implications that a 

treaty could have if agreement in these areas might be reached. 

Key findings 

Protection from expropriation is one of the most standard elements of any BIT. 

Standard US and Chinese BITs include clauses that provide for swift, transferable and 

fair-market-value compensation for investments that are expropriated, and both 

require that the process is to be done in accordance with the law. 

Nevertheless, this clause would not be without controversy. The biggest disagreement 

would probably emerge over the concept of indirect expropriation—that is, where an 

action has an effect equivalent to direct expropriation, even without the transfer of title 

or outright seizure. In standard US BITs, this is explicitly addressed (for example in 

Annex B of the Rwanda-US BIT); in Chinese ones, it is not addressed—although 

exceptions such as the China-India BIT of 2006 do address indirect expropriation, in 

terms that seem to have borrowed from the US model BIT19. 

In China’s case, indirect expropriation is a particular concern, owing to a number of 

situations that are already on the horizon. US companies are concerned over a 

provision in China’s anti-monopoly law (AML), which came into force in 2008, that 

allows for compulsory licensing of intellectual property (IP) if abuse of monopoly 

authority occurs. The American Chamber of Commerce in China has noted: 

“The AML does not, however, clarify the distinction between legitimate exercises of 

IP rights and abuses. US companies are particularly concerned that unsound 

approaches to market definition may lead to findings that IP holders are “dominant” in 

markets for their own technology and that their unilateral refusal to license their IP to 

competitors or charging of royalties commensurate with the commercial value of their 

IP may be condemned as abusive”20. 

As China’s policy makers seek to address the challenges facing them, the temptation 

to resort to compulsory licensing might well be strong. Would a technology company 

like Qualcomm be forced to provide access to its technology, for example, to help 

China move up the value chain? Less commercially aggressive examples are also 

 19 Cai Congyuan, China-US BIT negotiations and the future of investment treaty regime: a grand bilateral bargain 

with multilateral implications, p.22 

20 American Business in China 2009 white paper p.39 

Expropriation
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conceivable. The compulsory licensing of medical intellectual property (IP) to address 

a medical crisis has already been seen in many emerging countries like Thailand and 

Brazil as they dealt with AIDS: if China faced an emergency viral outbreak, it too 

could feel obliged to resort to compulsory licensing. In addition, there has been some 

speculation that environmental technology could come under compulsory licensing as 

part of an effort to address China’s emissions. For these reasons, US businesses would 

view provisions to protect against indirect expropriation as an important part of any 

high-quality BIT. 

Direct expropriation of intellectual property is, of course, also a concern for US 

companies in China. In AmCham-China’s 2009 Business Climate Survey, 72% of 

respondents viewed enforcement of IP rights as ineffective, despite some recent 

incremental improvements. Some 12% found it “totally ineffective”21. In so much as 

appropriation is carried out by the government, or by government-linked entities and 

individuals, cases could be brought under a BIT seeking remedy for appropriation of 

IP. To take hypothetical examples, if a Chinese state-owned enterprise was producing 

pirated Microsoft software or manufacturing cars using IP stolen from GM, a case 

could theoretically be brought for redress under a BIT. In practise, however, such 

behaviour is already illegal. Poor enforcement and weak punishments for violators of 

the law are among a number of lingering obstacles preventing an improvement in IP 

protection. Although a BIT might strengthen the IP environment by allowing investors 

to bypass the local legal system and go to international arbitration, its effectiveness 

would be partly determined by the conditions stipulated in the treaty. If the document 

required that investors first attempt to seek redress via the local regulatory system, its 

effect in this field might be muted. 

China is a relative newcomer to the concept of national treatment (that no 

discrimination should exist between the treatment of investments by domestic and 

foreign parties)22. Although there were some exceptions (notably with developednation treaties) through the 1980s and 1990s, most of China’s BITs merely adhered to 

the most-favoured-nation (MFN) principles—that is, investments by companies from 

the BIT signatories would receive treatment no less favourable than that accorded to 

any third party. 

Even since 1998 when this practice seems to have changed, China has often inserted 

clauses that weaken the strength of the national-treatment provision. For example, the 

China-Botswana BIT of 2000 precedes the commitment to national treatment with the 

phrase “without prejudice to its laws and regulations”, which “limits the effectiveness 

of the national-treatment provision to a best-effort clause”23 (see endnotes for source). 

Although there is often some contrast between the treatment China offers to 

developing countries and that available to OECD governments, in the latter case too 

China still tends to hedge its bets on national treatment. Its 2005 BIT with the Czech 

Republic, for example, contains an exemption (seen in a similar form in many other 

recent BITs) for any existing regulation that does not conform to national treatment, as 

well as the continuation and even the possible amendment of non-conforming 

 21 American Business in China 2009 white paper p.39 

22 Axel Berger, China’s new bilateral investment treaty programme: Substance, rationale and implications for 

international investment law making, p.9 

23 Ibid, p.12 

National treatment and

MFN status
Briefing paper: Evaluating a potential US-China BIT 33 

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legislation. China makes a commitment to “take all appropriate steps in order to 

progressively remove the non-conforming measures”24, but in practice many observers 

feel that there has been little effort to adhere to this legal platitude. 

Although national-treatment and MFN clauses have not proved so far to be a means 

for removing existing discriminatory treatment, it is possible that they could serve as a 

useful tool for preventing the imposition of further discriminatory treatment. As 

foreign companies in China become more concerned about the risk of unequal 

treatment, and as new industries potentially emerge in future, this could become an 

important argument in favour of a BIT with China. In addition, under the MFN clause, 

countries that have secured a BIT can be reasonably confident that they will enjoy any 

benefits that subsequent negotiations deliver to other investor nations if China makes 

further concessions in future. 

The fact that a BIT gives an investor a legal-party status and the ability to take a 

foreign government to international arbitration is among the treaty’s most fundamental 

benefits. US companies have won awards in a number of cases challenged under 

BITs—for example, Duke Energy’s successful claim against Ecuador in 2008 25 . 

Particularly for a country like China, which is very cautious about giving up any 

aspect of its sovereignty, granting the right for a company to take it to an international 

court is no small step. Indeed, following growing concern among Chinese officials 

about the vagueness of fair-and-equal-treatment conditions, some recent bilateral 

economic treaties have begun trying to provide more clarity. On the positive side, 

some of these efforts are drawing it closer to US practice: in the China-Mexico BIT of 

2008, Article 5 on minimum standards of treatment draws from the US 2004 BIT 

Model on fair and equal treatment26. 

For US firms in China, the right to fair and equal treatment with Chinese investors 

will be among the most important aspects of this legal protection. It is true that 

Chinese courts have sometimes ruled against local authorities in legal cases. 

Nevertheless, such examples are few and far between, and given that the legal system 

is explicitly subservient to the Chinese Communist Party, it would be hard to envisage 

the courts ruling against the central government in a high-profile case. China is of 

course not the only country where foreign businesses would feel more comfortable 

taking their cases to an unbiased international tribunal. Fair-and-equal-treatment 

clauses are among the most relied upon clauses in claims by investors under BITs—

and also among the most successful27. 

One particular field of equal treatment worth highlighting relates to denigrating 

publicity campaigns. In 2008 the Biwater v Tanzania case saw a tribunal rule that a 

series of public announcements denigrating the investor’s poor performance and 

announcing that a new public entity would be taking over the service were in violation 

 24 Article 3, Agreement between the Czech Republic and the People’s Republic of China on the promotion and 

protection of investments 

25 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor No.1, International Investment 

Agreements, p.7 

26 Cai Congyuan, China-US BIT negotiations and the future of investment treaty regime: a grand bilateral bargain 

with multilateral implications, p.13 

27 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor No.1, International Investment 

Agreements, p.8 

International legal protection

and fair and equal treatment
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of the fair-and-equal-treatment standard—even given the investor’s poor record, due 

process was found to be due28. Given state-control over the media, and the country’s 

tendency to launch campaigns against foreign companies in the press before they 

reach the courts (for example, the recent anti-bribery case concerning Rio Tinto), a 

BIT might provide useful support. Nevertheless, other tribunal judgments have 

stressed that their decisions must take into account the circumstances prevailing in the 

host state, which investors would have taken into consideration when making their 

investment. 

Role of BIT in challenging policies favouring SOEs 

Within China, there are a number of government policies designed to favour domestic 

companies, especially state-owned enterprises (SOEs), which do appear to clash with 

the principle of equal treatment for investments. Industrial-development policies can 

provide preferential access to land and financing29, lower duties on imported inputs, 

and subsidies for research and development30 to which foreign-invested firms in China 

might not have access. Indeed, particularly with regard to financing, SOEs in China 

are thought to enjoy better access even than their counterparts in the domestic private 

sector. The proliferation of active policy support for sectors like automotives and 

electronics in the wake of the economic slowdown of 2008-09 raises the concern that 

support issued under such measures may in practice be restricted, or 

disproportionately allocated, to domestic enterprises 31 . Policies like the “home 

appliances to the countryside” programme (subsidising appliances for sale in rural 

areas), which are based on approved supplier lists, are particularly vulnerable to 

unequal treatment—though several foreign manufacturers appear on the lists of 

approved products under this particular policy. 

The effect of a BIT on policies designed to favour “national champions” and SOEs 

will of course depend on the phrasing of the treaty. Some governments have 

specifically included clauses to protect their ability to maintain policies that favour 

domestic enterprises. Morocco’s investment treaty with the UK, for example, includes 

a provision exempting it from providing national treatment in the case of benefits 

resulting from “government aids reserved for its own nationals in the context of 

national development programmes and activities”. These sorts of exemptions are not 

typically included in BITs that China has signed to date, so optimists might hope that a 

potential BIT’s clauses on national treatment and fair and equal treatment could prove 

a useful tool in curbing policies that favour SOEs. 

However, it is questionable whether a BIT would be able to provide investors with an 

important tool to fight this discrimination in favour of SOEs and domestic firms. First, 

the jump between there being a widespread perception of unequal treatment and 

proving it would be difficult to make (see Transparency and uniformity of regulations 

below). Second, China has a marked tendency towards aggressive responses when 

challenged. Countries that impose sanctions on Chinese goods may find themselves 

 28 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor No.1, International Investment 

Agreements, p.6 

29 Economist Intelligence Unit, China Country Finance 2009, p.101-102 

30 American Business in China 2009 white paper p.96-98 

31 For additional details on examples of industrial policies under this plan see Economist Intelligence Unit, China’s 

stimulus plan, a six-month report card, p.19-20 
Briefing paper: Evaluating a potential US-China BIT 35 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

facing disproportionately large sanctions in retaliation 32 . Similarly, companies 

operating within China fear that if they took on the government in a major court case, 

their business within China would be irretrievably damaged—even if they won. 

An extreme example of the Chinese authorities’ strong response to companies that are 

perceived to challenge its interests was provided in 2009, when several executives 

from Rio Tinto, an international mining giant, were arrested. The incident followed 

Rio Tinto’s rejection of a bid by Chinalco, China’s state-owned aluminium giant, to 

raise its stake in Rio Tinto, as well as Rio Tinto’s refusal to accept a reduction in ironore contract prices during negotiations with China in 2008-09. Although charges of 

espionage against the Rio Tinto executives were eventually dropped to bribery, the 

case clearly attracted political interest at the highest levels. 

It is thus quite likely that only a company willing to write off its commercial future (at 

least in the short- to medium-term) in China would be willing to take advantage of the 

potential for international arbitration. And given the growing importance of the 

Chinese market, there are few foreign investors who would fall into this category. 

Against this background, it is not really a surprise that despite the fact that China has 

signed the second-largest number of BITs after Germany, it has yet to have a single 

investment-treaty claim filed against it (as at end-2008) 33 . By contrast, the US 

government is frequently taken to court (even by its own citizens!), and foreign 

companies feel little compunction in taking it to court under investment-treaty 

commitments—12 cases had been filed against it as at end-200834. 

The Chinese government would probably resist strongly any efforts to use a BIT as a 

tool to undermine its ability to favour SOEs and build up national champions. This is 

partly because it is keen to protect and promote Chinese SOEs for reasons of national 

pride (see Market access for more discussion). But another important reason for this 

stance is the government’s belief that its influence over these “commanding heights” 

of the economy is one of its most important tools for managing the economy. It is 

possible that this situation will change as the country develops and other 

macroeconomic policy tools—like interest rates—become more effective, but this will 

probably take many years. 

Most bilateral investment treaties allow investors to take disputes with the host state to 

binding international arbitration under the UN Commission on International Trade 

Law (Uncitral) Arbitration Rules or the International Centre for Settlement of Investor 

Disputes (ICSID), although other options exist. The process of arbitration frameworks 

bypassing national courts is naturally somewhat controversial. Although this allows an 

level playing field that grants protection to investors in both of the signatory states to a 

BIT, it simultaneously impinges on the sovereignty of those same states to make 

subsequent changes to their regulatory environments—or at least increases the cost of 

making such changes, owing to the need to compensate affected investors. This can 

reduce states’ flexibility to pass laws in response to specific circumstances. Singapore, 

for example, wished to include provisions in its BIT with the US allowing it to limit 

 32 In 2000, for example, China responded to a rise in South Korean tariffs on imports of Chinese garlic by banning 

imports of South Korean mobile phones and polyethylene. 

33 UNCTAD, Latest Developments in Investor-State Dispute Settlement, IIA Monitor No.1, International Investment 

Agreements, p.13 

34 Ibid, p.13 

Arbitration and China’s

existing BITs
36 Briefing paper: Evaluating a potential US-China BIT

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

short-term investments in emergency circumstances (see p. 40). Some feel that 

arbitration decisions made under BITs have interpreted the contents of the treaties 

beyond their original intentions. This could be a growing concern, since BITs are often 

short and vague relative to other international treaties, allowing leeway for broad 

interpretation. Others worry that BITs that apply to post-establishment protection of 

investments may result in governments becoming more cautious about screening the 

types of investment that they let in. 

China’s BITs appear to prefer arbitration through the ICSID mechanism. Most 

investors regard ICSID favourably, thanks to its links with the World Bank—a 

connection suggesting that failure to comply with an arbitration ruling would result in 

the unfavourable attention of the World Bank, which might affect its decisions on 

financing. Allen & Overy35 note that states that sign up to ICSID resolution (including 

the US and China) “are not able to challenge awards in their courts and must enforce 

the pecuniary obligations of awards as if they were a final judgment of their own 

highest court”. However, the ICSID Convention does not override domestic laws 

relating to sovereign immunity from execution of awards, and arbitration decisions 

can be revised or annulled on review. Full proceedings under ICSID often run for two 

to three years. 

There is no known example of a case being brought by an investor against China 

under a BIT. An important reason for this is likely to be the fear that doing so would 

imperil an investor’s future business prospects in China, although other considerations 

may be a lack of awareness of the possibility, law firms’ reluctance to promote this 

option and concerns about the reliability of the process. To date, foreign investors 

seem to have shown a preference for pushing their governments to protect their 

investments by encouraging China to enforce fully the terms of its WTO accession 

commitments. Lobbying by US entertainment companies, for example, was a factor 

behind the US move to bring a case against China under the WTO over the 

deficiencies in its intellectual-property-rights legal system (a decision, largely against 

China, was reached in January 2009). Chinese investors, by contrast, have been known 

to pursue claims under China’s BITs. For example, under the terms of the China-Peru 

BIT, Tsa Yap Shum launched a claim that actions undertaken by Peru’s tax authority in 

2004 undermined his business. 

In line with its WTO accession protocols, particularly under the Agreement on TradeRelated Investment Measures (TRIMs), China has already revised many laws relating 

to performance requirements associated with investment, including those that affect 

export performance, local-content requirements and technology transfers. By and 

large, foreign investments are no longer required to adhere to local-content or exportperformance requirements before being approved. Nevertheless, this sometimes may 

unofficially be a factor in officials granting approval36. This is partly because foreign 

investors are free to sign up informally to such commitments. (It is possible that 

contracts with such “voluntary” clauses could be challenged under WTO auspices, but 

as noted above few foreign companies are willing to face the repercussions of bringing 

legal cases against the authorities in China.) The range of performance requirements 

banned under US BITs can be wider than that secured under the TRIMs agreement, 

 35 See http://www.allenovery.com/AOWeb/binaries/51290.pdf 

36 Confidential interviews conducted by the Economist Intelligence Unit. 

Performance requirements
Briefing paper: Evaluating a potential US-China BIT 37 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

but in practice problems in China today seem related more to the poor implementation 

of existing protection. 

An increasing number of foreign investors in China are aware of growing pressure to 

transfer technology to their China-based vehicles. Given the high degree of discretion 

Chinese officials enjoy in approving foreign investments, many businesses feel that 

encouragement of such transfers in practice often amounts to requirement. The 2009 

American Chamber of Commerce’s white paper notes that “China has long made 

technology transfer a requirement of approvals for investments and sales in support of 

large-scale projects, particularly for those that are publicly funded” 37. Its point is reemphasised by the European Chamber of Commerce’s position paper, which adds that 

the authorities can sometimes require companies to provide highly confidential 

information for product or plant approval. Indeed, the experts who look at this 

information to evaluate the approval sometimes also work for, or have links with, 

competitors of the foreign companies concerned, leading to leakage of technology38. 

In some sectors, foreign investors are required to have proprietary technology. In 

sectors like steel where this condition is complemented by caps that limit foreign 

companies to minority stakes, this arguably would result in an effective requirement 

for the transfer of technology39. 

A BIT that clearly ruled out making investments conditional upon technology transfers 

might give individual companies an extra avenue for pursuing claims against the 

Chinese government when these became an issue (although as mentioned earlier, 

whether they would wish to challenge the government like this is another matter). 

However, a BIT would be unlikely to influence policies that promote technology in 

investments without discrimination between foreign and local companies—such as the 

granting of tax incentives to companies whose investments held desirable or hightechnology intellectual property. Given the existing protection that the TRIMs 

agreement should offer, the problem lies at least in part in the flexibility that local 

officials have—unofficially—in approving or denying investments. Proving under a 

BIT that such behaviour was discriminatory would be tough (see Transparency and 

uniformity of regulations below). 

In theory, there is not a big gap between the standard US and Chinese BITs regarding 

payments on transfers related to investments and returns, despite the complication of 

China’s capital-account restrictions. China already allows businesses to repatriate 

profits and make other legitimate business-related payments. Nevertheless, foreign 

investors in China have raised concerns over the Chinese government’s monitoring of 

capital flows. Transfer-pricing arrangements and royalty payments can come under 

particular scrutiny, causing delays and regulatory hassle for businesses. Questions on 

royalty payments in particular may sometimes be designed to encourage companies to 

transfer technology into China-invested enterprises. It remains questionable whether 

standard BITs would be able to offer much additional support for free transfers of 

funds by foreign-invested companies. 

 37 American Business in China 2009 white paper, p.18. 

38 2009/10 European Chamber of Commerce in China Position Paper, p.77 

39 Terence P Stewart, US-China Economic and Security Review Commission testimony, p.5. Accessed at 

http://www.uscc.gov/hearings/2009hearings/written_testimonies/09_03_24_wrts/09_03_24_stewart_statemen

t.pdf 

Capital flows
38 Briefing paper: Evaluating a potential US-China BIT

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Meanwhile, China has some concern about the additional limitation that a BIT might 

impose on that country’s ability to impose restrictions on financial transfers during 

times of economic crisis. The government is keen to maintain an ability to prevent 

both potentially destabilising inflows of speculative capital and sudden outflows of 

funds. The memory of the impact that volatile financial flows had during the Asian 

financial crisis of 1997-98 looms large, and such fears would probably have to be 

assuaged if a BIT were to be successfully concluded. The recently concluded ChinaMexico BIT, for example, includes an exemption permitting the temporary imposition 

of controls on currency convertibility if threats emerge to the balance of payments40. 

With regard to system-destabilising outflows, Article 20 of the US model BIT might 

potentially provide the basis for permitting special-case restrictions (especially if 

applied equally to Chinese and US institutions). However, the sensitivity of limiting 

transfer flows is highlighted by the fact that the US rebuffed Singapore’s efforts to 

include a special exemption in their bilateral FTA allowing Singapore to limit shortterm investment activities in exceptional circumstances41. 

China suffers from an immature and unsatisfactory regulatory regime, despite 

substantial improvements over the last few decades, which would pose problems for 

implementing a high-quality BIT. Foreign investors are concerned at the lack of 

consultation that often precedes new regulations, especially at the local level in many 

parts of China. The recent agreement under the Strategic Economic Dialogue (now 

Strategic and Economic Dialogue) to allow all draft regulations affecting business to 

be released for a one-month commentary period is welcome in this regard, but it 

appears it is only being implemented with patchy effectiveness42. 

When it comes, legislation is often vague and the implementation of regulations 

within China is usually a matter for local authorities, leading to a high degree of 

discretion in enforcement and thus widely varying practices in terms of 

implementation across different regions. Clarifying regulations sometimes come out 

long after the laws to which they apply, and the laws themselves are often changed 

with unnerving frequency. The lack of reliable and consistent enforcement of laws is 

of particular relevance to the aspects of a BIT dealing with national-treatment and 

most-favoured-nation status. Discrimination favouring local companies would be 

especially hard to prevent if courts do not enforce regulations strictly and consistently. 

(Courts in China are subordinate to regional governments, whose local officials may 

have commercial or other interests in Chinese companies within their jurisdictions.) 

Theoretically, regional governments do fall under the coverage of a BIT. A state is 

generally held to be liable for the actions of lesser entities such as “provincial or 

regional authorities, the security services and police, courts of law and other judicial 

or quasi-judicial institutions, private companies working on behalf of the State, publicsector utilities, corporations over which the State exercises de facto control and 

individuals working for or on behalf of the State”43. This is the case even if the state in 

 40Source can be accessed at http://finance.jrj.com.cn/2008/12/0104392922830.shtml. 

41 Ibid. In the Singapore case, the US did allow some exemptions—for example that if the restrictions imposed 

lasted less than a year and caused no realised loss for an investor, Singapore would not have to provide 

compensation. 

42 2009/10 European Chamber of Commerce in China Position Paper, p.11 

43 Watson, Farley & Williams, Introduction to investment treaties, 

Transparency and uniformity

of regulations
Briefing paper: Evaluating a potential US-China BIT 39 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

practise has little control over these entities. Past experience shows that investors have 

brought cases under investment treaties based on actions at the sub-national level. A 

Congressional Research Service report has noted that under NAFTA, “investor-state 

provisions gave rise to numerous ‘indirect expropriation’ claims against sub-national 

(state) governments in the United States, Mexico and Canada over environmental and 

other regulations”44. 

Nevertheless, if an investor wished to bring a case to international tribunal under a 

Sino-US BIT, proving discrimination might be difficult. The government’s position 

may, at face value, be consistent with non-discriminatory treatment, making it hard to 

prove a breach45. In addition, discriminatory policies may sometimes not be explicitly 

spelt out, either at the local or at the national level, but may still exist as an 

understanding. The lack of transparency about inner government policy and workings 

would be a further impediment to proving a case. It is unlikely the government would 

willingly surrender documentary evidence during an investigation into whether 

discriminatory treatment was policy, especially if it was incriminatory. Indeed, many 

relevant documents would doubtless be considered state secrets. Contradictions 

between policies and statements issued by various public officials at different levels of 

authority (which occur frequently) would create further challenges in determining 

whether or not a policy was officially “sanctioned”. 

In principle, a BIT could improve the lack of transparency by including clauses to 

address this issue. Although these are not standard in Chinese BITs, they have 

appeared in ones signed by the United States. Nevertheless, the fact that China has 

repeatedly committed to improving transparency in past agreements and yet has still 

fallen short of successfully implementing these conditions suggests that hopes on this 

front should be contained. 

There is a perception among many foreign investors that China is tightening access to 

its markets as far as investments are concerned. This is particularly true for mergers 

and acquisitions (M&A). New regulations were issued in 2006 that allowed a further 

government-approval step for M&A deals that affect “national economic security” or 

that involve famous Chinese brands46. The implementation of the anti-monopoly law 

(AML) in 2008 further toughened the situation. The vague definitions in these 

regulations give broad scope for rejecting deals. Many observers think that these 

measures may sometimes be used to shield monopolistic or incumbent Chinese 

enterprises against competition from foreign-invested enterprises. Many observers 

also viewed the rejection of Coca Cola’s bid for Huiyuan, a Chinese juice producer, in 

2009 over monopoly concerns as highlighting the government’s wish to preserve 

“national champions”. According to this argument, Huiyuan was simply too big for 

officials to allow it to be taken over by a foreign company47. 

Meanwhile, the government continues to adjust the foreign investment catalogue in 

accordance with its policy goal of encouraging foreign investment in sectors that help 

 44 CRS report for Congress on the proposed US-Panama Free-Trade Agreement, updated July 3rd 2007, p.17. The 

report adds that none of the claims against the US prevailed in these cases, however. 

45 Interview with Erin Ennis 

46 Kenneth Davies, OECD Observer, 

http://www.oecdobserver.org/news/fullstory.php/aid/2138/China_s_investment_watch.html 

47 See, for example, lawyer Dan Harris of Harris & Moure, http://www.amchamchina.org/article/4455 

Market access 
40 Briefing paper: Evaluating a potential US-China BIT

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China’s move up the economic value chain and away from polluting or low-valueadded industries. In the long run, this may close off more sectors to foreign 

investment. 

Against this background, some advocates of a BIT view it as a “new WTO” 

agreement—that is, a way of encouraging China to open its market and allow foreign 

direct investment (FDI) into new sectors. Traditional US BITs include a preestablishment protection element, which in China’s case would prevent it from 

discriminating between Chinese and US investors in reviewing and authorising 

investments, granting business licences and other steps necessary to set up an 

investment. Clearly, the scope of businesses that local companies are permitted to 

undertake is much wider than that open to foreign companies, so this would mark a 

major reform. Among the sectors that could benefit are automotives, petrochemicals, 

information, telecommunications and technology (IT&T), and certain renewable 

energy industries; in all these sectors, foreign investment is restricted to joint ventures 

in which the level of foreign shares is capped. Financial services would also face less 

discriminatory treatment at the establishment phase (for example, discriminatory 

capital requirements now deter foreign banks from expanding branch networks). 

Although this would clearly be extremely beneficial if it could be achieved, the 

outlook for improving market access through a BIT is difficult at best. Traditionally, 

China’s BITs deal only with the post-establishment phase of an investment. 

Negotiators for other OECD nations that have recently signed bilateral economic 

treaties with China report that their opposite numbers have been extremely unwilling 

to countenance any liberalisation of restrictions on foreign investments48. Indeed, most 

Chinese officials suggest that there is still lingering resentment over the concessions 

offered under the WTO accession. In practical terms, the fact that state-owned 

enterprises (SOEs) dominate many of the industries that remain closed or restricted 

would further impede liberalisation; moreover, the leaders of the SOEs have a 

powerful lobby in government, and often their political rank is equivalent to 

ministerial status. Potential critics of a BIT would probably argue that adjusting the 

present investment-approval regime to adapt it to the US model BIT would not only 

affect areas the Chinese government sees as important for security reasons but would 

also affect the government’s ability to control sectors that are important for economic 

planning—such as housing49 . It would require a very senior advocate of further 

opening within the government, possibly a vice-premier or higher, to campaign 

actively in favour of change in order to press it forward. At present, it is hard to 

discern such a figure. 

If China were to be persuaded to back a pre-establishment clause in a BIT, it would 

probably have to be offered some form of concessions on the approval process for 

Chinese companies entering the US market. There is a perception within China that 

the US may use spurious (in Chinese eyes) claims about strategic threats to block 

Chinese investments, notably through the CFIUS review process. Strong political 

pressures to block attempted Chinese investments in US companies have certainly 

 48 Confidential interviews conducted by the Economist Intelligence Unit. 

49accessed at http://finance.jrj.com.cn/2008/12/0104392922830.shtml. Tian 

Feng notes that measures to control economically important sectors do not necessarily need to discriminate 

between local and foreign companies, but notes that liberalisation of investment restrictions would likely be a “oneway street”. 

Chinese interests
Briefing paper: Evaluating a potential US-China BIT 41 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

been felt in high-profile cases, such as the bid by China National Offshore Oil Corp 

(CNOOC) for Unocal and Huawei’s attempt to purchase an interest in 3Com. 

Concessions on the CFIUS approval process might win Chinese flexibility for making 

greater concessions, especially as Chinese companies look to expand within the US. 

(The winding down of the US government’s stakes in major corporations in the 

financial and other sectors will probably prompt intense interest among Chinese 

companies keen to expand abroad.) However, the reality is that the Foreign Investment 

and National Security Act recently strengthened CFIUS processes; hence, it is unlikely 

that they would be up for negotiation. 

Chinese companies are in any case expanding their presence in the US and would 

probably see value in other aspects of a BIT, such as those requiring nationaltreatment and most-favoured-nation status. One particular area that might interest 

them would be that allowing special consideration of investors engaged in activities 

associated with investments when it comes to visas and working permits; the difficulty 

in obtaining visas to visit and work in the US is a source of much irritation for 

Chinese businessmen. Nevertheless, the advantages these areas offer to Chinese firms 

would be unlikely to persuade China to move away from its traditional postestablishment model of protection for investments. Moreover, some Chinese 

academics argue that “a BIT’s role in encouraging Chinese enterprises to ‘go out’ 

would be limited”, owing to the significant gap between Chinese firms’ technical and 

management capacities, relative to those in the US, which manifest as low rates of 

return on investments in the US 50 . Low returns are especially damaging for 

prospective Chinese investments in the US, as the expected trend of renminbi 

appreciation against the US dollar in the next few years will further reduce the 

prospective profit in renminbi terms. 

One more crucial point for the Chinese is the protection of the value of its investments 

in US securities. Acquisitions of US-issued debt represent the most important path at 

present for Chinese investment capital to enter the US51, and US-government debt is 

the most important element within those acquisitions. According to figures from the 

US Treasury, mainland Chinese investors were the largest holders of US Treasury 

securities in October 2009, with holdings worth US$798.9bn52. Although it is difficult 

to differentiate between private and public holders, it is likely that a very large chunk 

of this total reflects the country’s foreign-exchange reserves, which were valued at 

US$2.3trn at end-September 200953. Indeed, it is possible that China’s actual holdings 

of US debt may be even higher, if they are held indirectly via financial institutions in 

third-party countries. Preserving the value of China’s investments in these instruments 

has become an important policy prerogative for the Chinese government54. 

Theoretically, a BIT could also serve to boost inward US investment in China. A 

Chinese researcher, Tian Feng, has pointed out that US direct investment in China is 

relatively low, both as a proportion of total outbound US direct investment and as a 

 50 Ibid. 

51 accessed at http://finance.jrj.com.cn/2008/12/0104392922830.shtml 

52 http://www.treas.gov/tic/mfh.txt 

53 IMF, via Haver Analytics. 

54 See, for example, comments made by China’s premier, Wen Jiabao, quoted in the New York Times, 

http://www.nytimes.com/2009/03/14/business/worldbusiness/14china.html 
42 Briefing paper: Evaluating a potential US-China BIT

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proportion of China’s received inward direct investment. Nevertheless, she cautions 

that the role of BITs in stimulating inward investment is far from clear and that 

additional uncertainty is raised by the question of the potential US “pre-establishment” 

BIT model, which is less researched than the more commonly used “postestablishment” model. In addition, US investment in China has only recently picked 

up, despite the reforms associated with, for example, China’s 2001 entry into the 

WTO. Indeed, entry into the WTO saw much-more-important and wide-ranging 

reforms than BITs tend to bring about. As a result, it is not clear how much benefit a 

BIT would have in stimulating US investment in China55. 

As US Treasury officials have noted, the most significant impact of a BIT would be 

that it would “send a powerful signal that our two countries (the US and China) are 

committed to open investment and to treating each others’ investors in an open and 

transparent manner” 56 . Indeed, economic officials from other nations that have 

negotiated BITs have also highlighted the reassurance they can provide—for example, 

against the risk of expropriation—as one of their strongest advantages for businesses. 

Depending on the quality and details of the Sino-US BIT, it could also have a much 

more tangible and valuable effect. Advocates of an agreement look to the model of 

China’s WTO entry, which was a catalyst for the country’s legal development, vastly 

improving the regulatory environment for foreign businesses. If the more optimistic 

hopes were realised regarding a BIT’s potential market-access concessions, this would 

open up opportunities for US businesses that could be worth several billion US dollars 

or more, depending on the extent of the concessions. But even if a BIT served merely 

to push China to make its regulatory environment more transparent, and to implement 

its laws more effectively and in a fair and equal manner, foreign companies would 

welcome it. By contrast, although improvements in the regulatory environment will 

not depend on cases being brought under a BIT, it is likely that the continued failure of 

companies (or governments) to bring cases against China under a future BIT or 

existing economic treaties would diminish the impact of any deal agreed. 

Some would argue that the mere process of highlighting problems through negotiating 

a BIT will have an effect in forcing the Chinese authorities to focus attention upon the 

flaws within their regulatory regime for business. For the BIT to have a positive effect, 

China does not need to travel the full distance towards global best standards. 

Realistically, this may still be beyond its capacity, given its developing-country status 

and political system. But continued progress in this direction would be a beneficial 

result in and of itself, especially given present fears that China’s leaders may be 

backsliding away from commitments to economic openness. 

Meanwhile, on the Chinese side, the BIT negotiations allow a way for the Chinese 

government to engage in discussions over the challenges their countries’ enterprises 

face investing in the US. Given the potential impact that Chinese investments could 

have in terms of job creation and the development of a more balanced economic 

relationship between the two countries, this would be a welcome development. 

Nevertheless, given that Chinese companies in the US already enjoy relatively strong 

regulatory protection (notably in terms of fair and equal treatment), the effect of a 

 55accessed at http://finance.jrj.com.cn/2008/12/0104392922830.shtml 

56 http://www.ustreas.gov/press/releases/reports/sedusfactsheet.pdf, p.2 

Impact 
Briefing paper: Evaluating a potential US-China BIT 43 

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successfully concluded BIT for them would probably be less significant than for US 

companies in China. 

A final impact worth noting is the broader international significance that a US-China 

BIT would have. As a major treaty between the world’s largest economy and the thirdlargest one, it would probably serve as a model for future BITs, particularly when both 

countries negotiate bilateral deals with other economic partners. Meanwhile, since 

many countries have BITs with China and the US that contain most-favoured-nation 

clauses, the benefits of a Sino-US BIT could percolate down to companies from these 

other locations. As this increases competition, such regulatory changes should boost 

productivity and encourage job-creating investment within both China and the US. 

Conclusion 

A Sino-US BIT would provide significant legal support for US companies in a number 

of fields. It would strengthen their claims to non-discriminatory treatment and bolster 

their right to produce without performance requirements or restrictions on their ability 

to transfer funds into and out of their investments. At a time when China appears to be 

retreating in some aspects of its welcoming attitude towards foreign direct investment 

(FDI), the extra security a BIT could offer to investors would be welcome. 

Nevertheless, for an investor to prove a case in international arbitration against China 

under the terms of the BIT would be difficult, given the existing complexities and grey 

areas within the Chinese legal and political system. Another problem would be the fact 

that any foreign investor challenging the Chinese government would also expect to 

face retribution that might shut them out of the rapidly growing local market. (This 

may also be a factor explaining why no cases have yet been brought against China 

under a BIT, despite the many such treaties that it has signed.) 

If China could be persuaded to adopt a pre-establishment BIT model as part of 

negotiations with the United States, this would represent a major breakthrough, and 

would offer US companies substantially greater access to the Chinese market in terms 

of investment opportunities. However, the US would face difficulty in offering 

reciprocal moves to liberalise access to its own market in terms of investment, 

especially given the recent strengthening of the CFIUS review process. As a result, it 

is hard to envisage the Chinese moving towards a pre-establishment model. 

V. Implications for the US economy 

Overview 

Successful conclusion of a BIT between the US and China—in addition to being an 

economic achievement—would represent an important political accomplishment, 

particularly in light of the rifts created by two failed high-profile attempts in the past 

several years by China to invest in the US. Severe opposition by US lawmakers, on 

national-security grounds, caused the failures of an US$18.5bn bid by China National 
44 Briefing paper: Evaluating a potential US-China BIT

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Offshore Oil Corp (CNOOC) to buy Unocal in 2005 and a US$2.2bn offer by Huawei 

Technologies, in partnership with Bain Capital Partners (a US-based private-equity 

firm) to acquire 3Com. Indeed, the issue of the fairness of US authorities’ regulatory 

oversight of potential Chinese investments is an area of great concern for China in the 

BIT negotiations. 

The value of inflows of foreign direct investment (FDI) from the US to China has 

ebbed and flowed over the past decade, but generally declined since reaching a peak 

of US$5.4bn in 2002. Likewise, the number of US investments in China has declined 

every year since 2003. A small uptick in 2008—to US$2.9bn, from US$2.6bn in 

2007—is likely to be followed by a steep decline in 2009, as a result of the global 

economic crisis that took hold in late 2008. 

Source: Ministry of Commerce (MOFCOM), China. 

Note: Dollar figures on left scale represent non-financial, utilised FDI. 

The value of China’s inflows of foreign direct investment (FDI) to the United States 

has also fluctuated in recent years. In general, though, the scale of FDI flows from 

China to the US is significantly smaller than flows from the US to China (likewise, 

aggregate FDI inflows from the world to the US reached US$316bn in 2008, whereas 

inflows to China were US$108bn). The high in recent years of US$368m China-to-US 

FDI, reached in 2008, is surely to be followed by a decade low in 2009. Indeed, the 

first half of 2009 saw a bilateral outflow of FDI of US$407m, as Chinese companies 

concentrated on domestic business in the face of economic downturn. 
Briefing paper: Evaluating a potential US-China BIT 45 

Country and Economic Research www.eiu.com © The Economist Intelligence Unit Limited 2010 

Source: US Bureau of Economic Analysis. 

Note: Figures are not seasonally adjusted; negative figures indicate outflows of FDI. Data for 2009 is 

estimated. Data for FDI inflows from China for years prior to 2002 are not available. 

In contrast to FDI flows, trade flows between the US and China steadily increased in 

1999–2008, from both an export and import perspective. According to data from the 

International Monetary Fund, China edged out Canada in 2007 and 2008 as the 

country from which the US imports the most. Though data reported by the two 

countries (compare the graphs) shows some variation in data, the general pattern is 

that China exports much more to the US than it imports from it—and vice versa for 

US trade with China. And although both countries reported a pullback in trade flows 

during the first quarter of 2009 (with imports more affected than exports), recently 

released US import estimates for July 2009 show the fastest monthly increase since 

the Commerce Department began publishing the data in 1992. That increase is one 

indication that the US is emerging from recession. 
46 Briefing paper: Evaluating a potential US-China BIT

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Source: IMF Direction of Trade Statistics database. Data for 2009 are estimated. 

Source: IMF Direction of Trade Statistics database. Data for 2009 are estimated. 

Extent of reciprocal market access 

Under the model US BIT text, the partner county receives “treatment no less 

favourable” than domestic investors from establishment through to sale or disposition 

of the investment. By several accounts, though, China is unlikely to sign the model 

agreement, thus leaving open the door to negotiation in terms of how much the treaty 

would diverge from US BITs with other countries in terms of market access. Both the 

US and China are moving somewhat slowly and cautiously in proceedings, as this BIT 

will surely be the most difficult one either country has worked out. 

Specific market-access concerns from the US side include regulatory barriers and 

delays, lack of transparency, discriminatory treatment of US businesses at the 

provincial and local levels, local-content requirements and capital controls. By some 

accounts, the US will also pursue pre-establishment guarantees—that is, guarantees 

against discrimination before an investment is established. China is likely to fight for 

guarantees only after establishment. In addition, the issue of the treatment of China’s 

state-owned enterprises by the Chinese government will probably continue to be on 

the negotiating table going forward. 

Economic sectors most likely to be affected 

It is difficult to predict which business sectors a US-China BIT would most affect, in 

large part because of the way the US model BIT approaches market access. Barring 

dramatic changes to the 2004 model text, the revision of which is now underway, it is 

likely that the new model text will afford investors in future US BIT partner countries 

similar national treatment as the current text—that is, treatment no less favourable 

than it accords investors from the US (as contained in Article 3 of the 2004 model 

BIT). That said, US BITs contain exceptions to national treatment for certain sensitive 

sectors. These are spelled out in an annex to each BIT in what is sometimes referred to 
Briefing paper: Evaluating a potential US-China BIT 47 

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as a “negative list”, where the US and the partner country list, separately, which of 

their sectors are subject to exceptions from national treatment. Use of such exceptions 

may be a sticking point in the US-China BIT negotiations. 

When the US uses a negative list, the partner country is allowed to invest freely in all 

sectors of the US economy except the ones on the list, which may not be completely 

off limits to the partner country’s investors but are accorded something less than 

standard national treatment. China’s BITs, however, have traditionally addressed the 

issue of national treatment from a more vague perspective, simply stating that foreign 

investors are subject to domestic Chinese laws and leaving investors to navigate a 

sometimes tricky path in determining what those laws are. 

Negative lists enumerated by the US in BITs over the past decade have typically 

included air transport, banking, cable television, energy/power production, insurance, 

ownership of real property, radio/satellite communications and telephone/telegraph 

services. Though this list of sector exceptions is not standard across US BITs, it is 

difficult to imagine that any of those enumerated here would not be excluded in a BIT 

with China. 

Certain types of natural resources may also be included in the US’s negative list in a 

US-China BIT. Recent CFIUS reviews have not been supportive of such investments 

by China. As at mid-December 2009, for example, CFIUS is expected to recommend 

that President Obama reject the proposed purchase by a Chinese company of a 51% 

stake in Firstgold, a gold-mining company with properties in Nevada. The publiclystated rationale for the expected decision centres on the fact that Firstgold’s properties 

lie some 50 miles from a naval air station and that the transaction might result in 

sensitive military technology being passed on to foreign governments. Opponents of 

the recommendation counter that China’s growing ownership of the world’s supply of 

precious metals is a factor in the decision.57

Despite the probable limitations on some sectors, a fairly broad swath of the US 

business community voiced its support for the US-China BIT directly to President 

Bush at the start of treaty negotiations in 2008. The industry associations supporting 

the BIT include those representing apparel and footwear, electronics, equipment 

manufacturers, insurance, financial services, information technology, retail and 

textiles.58

According to one person interviewed for this analysis, a US-China BIT may contain 

provisions that would improve prospects for Chinese investment in the United States 

at a state and local level. That same person expressed hope that a US-China BIT 

would lead to better investment conditions for his industry, insurance. 

Macroeconomic impacts 

 

57 List of typical US negative-list elements taken from analysis of individual BITs, available at 

http://tcc.export.gov/Trade_Agreements/Bilateral_Investment_Treaties/index.asp. 

58 Information in this paragraph from a public letter to President Bush in July 2008; original text in 

accompanying PDF. 
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Although a US-China BIT would not create a completely transparent Chinese 

investment environment, it would serve as a solid improvement in terms of protection 

for US investors in China, particularly in terms of strengthening rule of law and 

market-directed reforms. These outcomes, along with likely increased inflows of US 

foreign direct investment (FDI) into China and greater assurances from the US side 

that future Chinese investments will be evaluated in a non-discriminatory manner, 

would be among the most important effects of a successful US-China BIT. 

VI. Interviews 

To complete this study, the Economist Intelligence Unit conducted interviews with the 

following officials and organisations: 

1. American Insurance Industry Association 

2. A former official of the George W. Bush Administration who represented the US 

in Strategic Economic Dialogue discussions 

3. Erin Ennis, US China Business Council (USCBC), Washington, DC 

4. American Chamber of Commerce in Beijing 

5. Robert Stumberg, Professor of Law and Director, Harrison Institute of Public 

Law, Georgetown University 

6. Thea Lee, Policy Director, AFL-CIO 

Summary transcripts of interviewees or organisations who agreed to have their 

remarks on record are presented in the following pages. 

1. American Insurance Association representative 

What are the insurance industry’s major concerns vis-à-vis the US-China BIT 

negotiations? 

The most significant problem facing the US insurance industry in China is high 

regulatory barriers. At present, foreign companies represent less than 2% of the 

property-and-casualty insurance market in China, a percentage that would be 

significantly higher if they were not being held back by Chinese regulation. The 

principal concern is that companies may not expand geographically unless they 

complete extensive application procedures on a province-by-province basis. Insurance 

companies are also shut out of certain product lines, namely third-party automobile 

liability insurance. 

Commitments concerning the insurance industry that China made as part of its WTO 

accession in 2001—in particular its agreement to grant licences to more foreign 

companies—represented a new plateau in terms of its overall regulatory environment; 

in practice WTO accession has not done much to improve the business environment 

for insurance companies. The China Insurance Regulatory Commission continues to 

be a major hindrance to doing business. The insurance industry views the BIT as an 
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opportunity to push China to a higher plateau in terms of openness and less-restrictive 

regulation (that is, creating a better business environment for insurance companies). 

Is there enough demand for insurance in China to absorb a significantly larger 

US insurance presence? 

Without a doubt, yes. The rapid increase in car ownership, in particular, presents a 

prime opportunity for insurance companies. An expanded insurance market presence 

would also have a positive impact in terms of protecting people from natural disasters. 

During the Sichuan earthquake in 2008, for example, buildings that one US insurance 

company had advised on sustained only very minor damage, while structures around 

them crumbled. 

Insurance is on the “negative list” (meaning that investment in the sector is restricted) 

in the text of many US BITs. 

What is the likelihood that insurance will be on the negative list in the potential 

US-China BIT, and what does that mean for the US insurance industry in China? 

Though the interviewee did not want to predict whether insurance would be on a 

potential list of industries subject to limitations under the BIT, he believes it would be 

“amazing” if China agreed to the model BIT text. 

What would be the impact of an expanded US insurance-industry presence in 

China on other industries? 

From the perspective of the financial industry, at least, a rising tide would lift all 

boats—that is, growth of one subsector of the industry would benefit other subsectors. 

What larger impacts (macroeconomic or otherwise) would an active US-China 

BIT have? 

Regardless of the outcome of the US-China BIT negotiations, it is certain that serious 

negotiations on investment and trade are a good thing for both parties, as it encourages 

mutual openness to foreign investment (particularly on China’s part). A BIT “with 

teeth” would be an even greater achievement. Furthermore, the BIT negotiations will 

set the stage for future open discussion of trade and investment issues. 

2. A former official of the George W. Bush Administration who 

represented the US in Strategic Economic Dialogue discussions with China 

What are the issues of greatest concern for the US and China within the BIT 

negotiations? 

It is important to keep in mind that past attempts at US-China BIT negotiations 

foundered due to China’s refusal to agree to stipulations providing for expropriation 

protection, fair and equitable treatment, and the ability of an investor to initiate thirdparty arbitration. In recent BITs, however—with Germany, Finland and other 

countries—China has agreed to provide such protections. 

The real issue in regard to the US-China negotiations with the US is whether China 

will want to grandfather non-conforming measures from the past or whether it will 
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move closer to the US approach to BITs, which, according to the interviewee, supports 

transparency and predictability for investors. 

What are the prospects for reciprocal market access within the framework of a 

US-China BIT (that is, use of a “negative list” by the US compared with a 

possible “positive list” by China)? 

Past BITs to which China has been party have simply stated that investment by the 

partner country is open to all sectors according to domestic laws, a situation that 

leaves foreign investors to figure out what those laws are. The US approach, however, 

has been to use a “negative list” (within an annex to a BIT) to identify which sectors 

are subject to restrictions by each party to the treaty. Though the interviewee did not 

know how the issue would play out in the context of the current negotiations, he did 

indicate that China’s vague approach would not be acceptable to the US. 

The issue of how the US financial-services industry would be affected by a USChina BIT has been a topic of discussion during our work on this analysis. Could 

you speak to the potential impacts of a BIT on financial-services firms? 

The question of how financial services will be affected is wrapped up in the general 

issue of national treatment—that is, whether China will agree to offer investors 

establishment and post-establishment protection (as the US accords to partner 

countries in all of its BITs), or whether it will attempt to impose exceptions. China’s 

position on this issue remains to be seen. In either case, national treatment of 

investment will be cross cutting—it will apply to all investors, financial services or 

otherwise, unless the sector is specifically addressed in an annex [or, presumably, in 

some equivalent of an annex if the model US BIT text is not the base from which the 

US-China BIT is developed]. In terms of whether a US-China BIT would improve 

market access for financial-services companies based in the US, the interviewee’s 

reaction was only if China agrees to provide adequate establishment and postestablishment protection. 

Do you think the BIT will contain specific provisions for the financial-services 

sector? 

Yes, but the BIT is all encompassing—that is, financial services should not be more or 

less affected than other sectors. The bottom line is that if China is willing to open a 

sector, it is willing to open a sector—and a BIT will not strongly affect that. 

Has the US-China BIT negotiation process changed since President Obama took 

office? 

Not as far as the interviewee knows—both sides are proceeding with due caution, as 

they were at the start of negotiations under the Bush administration. 

3. Erin Ennis with the US China Business Council (USCBC), Washington, 

DC 

What is the status of the US China BIT discussions? 

The Obama administration is currently conducting an overall review of the BIT 

programme, so things are a bit in flux at the moment (Interview conducted in August 

2009). 
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A high-standard BIT would provide added certainty for investors in the market place. 

If rights were denied, then they [US companies] would have legal recourse. 

Six key elements of a high-quality BIT would include: 

Non-discrimination requirement. National treatment and most-favoured-nation 

(MFN) status. 

International law protection. Fair treatment compared to local investors. 

Prompt compensation for either direct or indirect expropriation. Indirect might be 

related to clean energy—for example, if China were to expropriate clean technology to 

resolve a climate “emergency” in the same way that Thailand, for example, forced 

medical companies to hand over drugs. 

Capital flows allowed in and out freely. 

Removal of performance requirements. Examples would be the use of local vendors 

or the export of a certain proportion of product. 

Allowance of arbitration if investors wish to challenge the government. 

A BIT could help “establish a record as to how to attack laws or unofficial practices 

that are creating an unlevel playing field. It would provide new avenues and new 

authority for companies to address these issues.” 

The Chinese government has recently been adopting policies that are seen as 

more demanding of foreign investors, for example, by passing the anti-monopoly 

law and requiring more technology transfers for tax incentives. How would a BIT 

affect these? 

Tax status is obviously a big area for technology requirements, but this is not 

necessarily discriminating (for example, if both domestic and foreign companies are 

held to the same standards). [And a BIT would not necessarily affect this.] 

The anti-monopoly law has a provision for compulsory licensing. There is some 

concern that this may be used if prices are not low enough—for example, in a field 

like telecommunications where the Chinese government feels a foreign company is 

abusing its “monopoly” position. 

A “BIT’s value is that it doesn’t try to lay down every situation, but provides some 

broad principles.” 

How much extra protection would a BIT provide over the existing provisions 

within WTO-related protocols for issues like technology transfer, export/localsourcing requirements and transparency? 

The US model BIT prohibits the imposition of performance requirements—such as 

technology transfer, local-content or export requirements—as a condition for an 

investment. On transparency, the US model requires that laws, regulations, procedures 

and administrative rulings related to any matter covered by the BIT be “promptly 

published or otherwise made publicly available.” 

So the BIT would definitely provide additional protection for investors, yet 

enforcement is key. Under a BIT, investor-state dispute settlement is not the only 

recourse; government to government would still be an option. And as with any issue, 

companies would likely seek alternative means to resolve problems before bringing a 
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case under the BIT, but they would have the additional option of bringing a case to an 

independent arbitration panel. 

What will be the problem with enforcing equitable treatment for US companies in 

China? 

“There’s no doubt it’s going to be difficult to find it [proof of discriminatory 

treatment]” 

For example whether domestic software is being favoured over foreign software in 

purchases by SOEs. Officials can publicly deny they have a policy of discrimination, 

but still send a message that means that this happens in practice. 

What do the Chinese want out of the BIT? 

Chinese firms have a lot of investments in the US and a sense they’re being 

discriminated against, for example, in US reviews of foreign acquisitions of domestic 

companies with security ramifications, such as 3Com. 

The majority of CFIUS reviews go forward under the radar. It may not be very 

transparent, but they are relatively fair. 

The reality is that the CFIUS review process is not going to be put on the table for 

negotiation since it has only recently been reviewed and adjusted. 

There are many Chinese investments at the state and local level, such as greenfield 

investments in Texas and Georgia. These might benefit from the provisions of a BIT. 

What implications would a BIT have for SEC approval of investments? 

I think, in general, the SEC doesn’t need to approve Chinese investments, but the US 

does reserve the right to restrict investment in some aspects of financial services. 

There are certain sectors that require regulatory approval for foreign investment over 

specific levels —say, for instance, banking or broadcast licences. Those areas would 

be specifically spelled out in the annex to a BIT, since the US uses a negative-list 

approach. 

So, for instance, in the US-Jordan BIT, the US lists these sectors as the ones in which 

it reserves the right to restrict foreign investment: atomic energy; customhouse 

brokers; licences for broadcast, common carrier or aeronautical radio stations; 

COMSAT; subsidies or grants, including government-supported loans, guarantees and 

insurance; state and local measures exempt from Article 1102 of the North American 

Free-Trade Agreement (NAFTA) pursuant to Article 1108 thereof; landing of 

submarine cables; fisheries; air and maritime transport, and related activities; banking, 

insurance, securities and other financial services; and minerals leases on government 

land. 

Would a BIT still be valuable if it diverged from the US-model BIT? 

If the ultimate BIT looked like the US model BIT, regulatory processes would be 

greatly simplified. 

Every Chinese BIT to date has used a positive list and not a negative list, but a 

negative list (advocated by the US) opens up the potential for new investment fields as 

they emerge, so it is more liberalising. A more open investment list would provide 

competition that would help Chinese companies become stronger. 
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4. Robert Stumberg, Professor of Law and Director, Harrison Institute of Public 

Law, Georgetown University, Washington, DC 

Are the US-China BIT negotiations materially different from US BIT 

negotiations with other countries? 

In general, no. But a potential BIT with China is more concerning than other BITs—

not because China is expected to act deviously, but because China is such a big 

economy. 

Could you discuss how the Harrison Institute is involved in the BIT negotiations? 

Clients of the institute are, for the most part, state and local governments that are 

supportive of international trade but are worried that US trade negotiations are not 

supporting them. They are on the “defensive” side of investment-treaty negotiations. 

In practice, they are concerned that foreign investors will win BIT-related legal cases 

that would fail in US courts. 

Do you support the US-China BIT? 

Based on the 2004 model BIT, no. The legal risks for US-based companies are 

significant and should be thought through more thoroughly. A major mistake would be 

unintentionally giving China rights that domestic investors do not have, or freeing 

Chinese companies from obligations to which domestic companies are bound. 

In the financial-services sector, for example, how would a Chinese sovereign wealth 

fund be regulated in the US in terms of minimum-equity requirements? In addition, it 

is possible that a Chinese SWF that invests in the US under the auspices of a USChina BIT could avoid future domestic regulatory changes in the financial sector, as it 

could argue under pre-existing law (that is, the BIT regulations) that it is not subject to 

new laws. 

Risks to the US in terms of third-party involvement are also significant. For example, 

under the current US model BIT, a country that sets up a subsidiary in China would be 

given the same rights as a Chinese company when investing in the US. If that third 

country is one with which the US has shaky investment relations, this presents a 

troublesome scenario. 

What are the prospects for reciprocal market access within the framework of a 

US-China BIT (that is, use of a “negative list” by the US compared with a 

possible “positive list” by China)? 

A positive list is much easier to control than a negative list; for that reason, the 

interviewee prefers a positive list to negative one. 

What alterations to the model BIT would you advocate? 

Several main points come to mind in terms of investor rights. First is the issue of 

access to investor-state arbitration and the idea that, in this regard, one size does not 

fit all. The US model BIT, unlike the BITs of most countries, enables partner countries 

to pursue international legal routes before exhausting domestic (that is, US) legal 

options. The US should consider whether it is appropriate to give the same arbitration 

rights to all countries with which it negotiates BITs, and whether the implications of 

those arbitration rights will be the same for all investors within a market. In the 

context of China, the sheer size of the market means that Chinese-owned companies 
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could acquire a significant stake in major US companies. Is it wise to provide investor 

arbitration to those companies? It is also possible that state-owned enterprises in 

China could behave very differently from other companies in regards to handling of 

investment disputes with the US. 

Second is the issue of BITs outsourcing constitutional law. The model BIT links 

minimum standard of treatment, which includes “fair and equitable treatment”, to the 

customary international law treatment of aliens. While this customary international 

law is in theory based on the general practice of states, in practice, an expanding and 

evolving approach to minimum standard of treatment has been taken in tribunals (one 

that is based on the decisions of other tribunals rather than the practice of states). In 

the long term, the asymmetry between foreign and domestic legal rights would put 

pressure on the US legal system to reform. 

Third is the issue of preserving US policy space. As the number of BITs increases, and 

thus more investors are given arbitration rights, the risk that arbitrators will interpret 

the ambiguity of investor protections in ways that are unfavourable to the United 

States increases. 

5. Thea Lee, Policy Director, AFL-CIO 

Do you support the US-China BIT? 

There are some concerns, some of which apply to all large developing economies 

(China, India and Russia have all initiated BIT negotiations with the US) and some of 

which are specific to China. In the case of China, the magnitude of the US trade 

deficit with China is a major concern. As it stands, many multinational companies 

have shifted portions of their operations to China; for US-based MNCs, this shift has 

had a detrimental impact on US jobs. It is possible that a US-China BIT will result in 

further negative impacts on US jobs (an even greater concern if worker rights are not 

better accounted for in the model BIT) and worsening of the trade deficit. 

I understand you were part of the subcommittee of the Advisory Committee on 

International Economic Policy that submitted a report on the model US BIT to 

the State Department and the Office of the United States Trade Representative 

several months ago. Would you summarise some of the main points you made in 

that report? 

There was a clear divide between environment supporters and labour supporters 

among the group that produced the report. Thea Lee’s main concern about that model 

BIT, apart from issues surrounding worker rights, is that the investor-state disputesettlement mechanism now in the model US BIT gives too much power to foreign 

investors. The mechanism provides extraordinary rights to foreign investors but does 

not require commensurate responsibilities. 

Could you speak to the labour issues surrounding a US-China BIT in particular? 

How do those issues differ from labour issues related to other US BIT 

negotiations? 

As a formidable industrial power, China is a case of its own. Beyond sheer economic 

size, it is clear that China is in violation of worker rights and freedom of association 

among workers. For example, aside from the Chinese Communist Party-backed All-
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China Federation of Trade Unions, unions are not allowed in China. And China does 

not enforce even existing legislation on minimum wage, health and safety, child labour 

and forced labour. These issues require serious attention if the US is to continue BIT 

negotiations with China. 

Do you have expectations for the macroeconomic impacts of a potential US-China 

BIT? Increased foreign direct investment, trade flows, etc.? 

While it is tough to estimate potential economic impacts, to the extent a BIT opens 

avenues for US multinational companies to relocate to or open branches or factories in 

China, there will be a clear negative impact on US jobs [given, presuming, lower 

operating and labour costs in China]. It is more difficult to assess the potential 

behaviour of Chinese firms if they were given greater capacity to invest in the US—

would they hire local workers and source inputs locally, for example? In either case, 

US-China BIT negotiators should be concerned about the potential for accelerating the 

already very large US trade deficit with China. 
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Appendix I: US BITs and date of entry into force

(1) Grenada March 3rd 1989 

(2) Cameroon April 6th 1989 

(3) Bangladesh July 25th 1989 

(4) Congo July 28th 1989 

(5) Turkey May 18th 1990 

(6) Senegal October 25th 1990 

(7) Morocco May 29th 1991 

(8) Panama May 30th 1991 

(9) Egypt June 27th 1992 

(10) Czech Republic December 19th 1992 

(11) Slovakia December 19th 1992 

(12) Tunisia February 7th 1993 

(13) Sri Lanka May 1st 1993 

(14) Kazakhstan January 12th 1994 

(15) Kyrgyz Republic January 12th 1994 

(16) Romania January 15th 1994 

(17) Bulgaria June 2nd 1994 

(18) Poland August 6th 1994 

(19) Congo Brazzaville August 13th 1994 

(20) Argentina October 20th 1994 

(21) Moldova November 25th 1994 

(22) Armenia March 29th 1996 

(23) Ukraine November 16th 1996 

(24) Latvia November 26th 1996 

(25) Trinidad and Tobago December 26th 1996 

(26) Mongolia January 1st 1997 

(27) Estonia February 16th 1997 

(28) Jamaica March 7th 1997 

(29) Ecuador May 11th 1997 

(30) Georgia August 17th 1997 

(31) Albania January 4th 1998 

(32) Bahrain May 31st 2001 

(33) Bolivia June 6th 2001 

(34) Croatia June 20th 2001 

(35) Honduras July 11th 2001 

(36) Azerbaijan August 2nd 2001 

(37) Lithuania November 11th 2001 

(38) Jordan June 13th 2003 

(39) Mozambique March 3rd 2005 

(40) Uruguay November 1st 2006 
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Appendix II China BITs and date of entry 

into force 

(1) France May 30th 1984 

(2) Norway November 21st 1994 

(3) Singapore November 21st 1985 

(4) Thailand March 12th 1985 

(5) Kuwait November 23rd 1985 

(6) Austria September 12th 1985 

(7) Denmark April 29th 1985 

(8) Italy January 28th 1985 

(9) Sri Lanka March 13th 1986 

(10) Switzerland November 12th 1986 

(11) United Kingdom May 15th 1986 

(12) Japan August 27th 1988 

(13) New Zealand November 22nd 1988 

(14) Malaysia November 21st 1988 

(15) Poland June 7th 1988 

(16) Australia July 10th 1988 

(17) Ghana October 12th 1989 

(18) Bulgaria June 27th 1989 

(19) Pakistan February 12th 1989 

(20) Russia July 21st 1990 

(21) Turkey November 13th 1990 

(22) Mongolia August 25th 1991 

(23) Papua New Guinea April 12th 1991 

(24) Hungary May 25th 1991 

(25) Armenia July 4th 1992 

(26) Kazakhstan August 10th 1992 

(27) Kyrgyz Republic May 14th 1992 

(28) Moldova November 6th 1992 

(29) Turkmenistan November 21st 1992 

(30) Ukraine October 31st 1992 

(31) Uzbekistan March 13th 1992 

(32) South Korea September 30th 1992 

(33) Argentina November 5th 1992 

(34) Bolivia May 8th 1992 

(35) Philippines July 20th 1992 

(36) Vietnam December 2nd 1992 

(37) Greece June 25th 1992 

(38) Albania February 13th 1993 

(39) Belarus January 11th 1993 

(40) Croatia June 7th 1993 

(41) Georgia June 3rd 1993 

(42) Tajikistan March 9th 1993 
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(43) Uruguay December 2nd 1993 

(44) Laos January 31st 1993 

(45) United Arab Emirates July 1st 1993 

(46) Estonia September 2nd 1993 

(47) Lithuania November 8th 1993 

(48) Slovenia September 13th 1993 

(49) Egypt April 21st 1994 

(50) Azerbaijan March 8th 1994 

(51) Romania July 12th 1994 

(52) Chile March 23rd 1994 

(53) Ecuador March 21st 1994 

(54) Jamaica October 26th 1994 

(55) Peru June 9th 1994 

(56) Indonesia November 18th 1994 

(57) Iceland March 31st 1994 

(58) Morocco March 27th 1995 

(59) Serbia and Montenegro December 18th 1995 

(60) Cuba April 24th 1995 

(61) Israel April 10th 1995 

(62) Oman March 18th 1995 

(63) Algeria October 17th 1996 

(64) Mauritius May 4th 1996 

(65) Zambia June 21st 1996 

(66) Zimbabwe May 21st 1996 

(67) Bangladesh September 12th 1996 

(68) Cambodia July 19th 1996 

(69) Lebanon June 13th 1996 

(70) Saudi Arabia February 29th 1996 

(71) Syrian Arab Republic December 9th 1996 

(72) Cameroon May 10th 1997 

(73) Congo, December 18th 1997 

(74) Gabon May 9th 1997 

(75) South Africa December 30th 1997 

(76) Sudan May 30th 1997 

(77) Macedonia, June 9th 1997 

(78) Yemen February 16th 1998 

(79) Cape Verde April 21st 1998 

(80) Ethiopia May 11th 1998 

(81) Barbados July 20th 1998 

(82) Belize January 16th 1999 

(83) Bahrain June 17th 1999 

(84) Qatar April 9th 1999 

(85) Botswana June 12th 2000 

(86) Congo March 20th 2000 

(87) Brunei November 17th 2000 
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(88) Iran July 22nd 2000 

(89) Kenya July 16th 2001 

(90) Mozambique July 10th 2001 

(91) Nigeria August 28th 2001 

(92) Sierra Leone May 16th 2001 

(93) Myanmar December 12th 2001 

(94) Jordan November 15th 2001 

(95) Cyprus January 17th 2001 

(96) Netherlands November 26th 2001 

(97) Côte d’Ivoire September 23rd 2002 

(98) Bosnia and Herzegovina June 26th 2002 

(99) Trinidad and Tobago July 22nd 2002 

(100) Djibouti August 18th 2003 

(101) Guyana March 27th 2003 

(102) Germany December 1st 2003 

(103) Benin February 18th 2004 

(104) Tunisia June 21st 2004 

(105) Uganda May 27th 2004 

(106) Finland November 15th 2004 

(107) Latvia April 15th 2004 

(108) Sweden September 27th 2004 

(109) Equatorial Guinea October 20th 2005 

(110) Guinea November 18th 2005 

(111) Madagascar November 21st 2005 

(112) North Korea March 22nd 2005 

(113) Belgium/Luxembourg June 6th 2005 

(114) Czech Republic December 8th 2005 

(115) Portugal December 9th 2005 

(116) Slovakia December 7th 2005 

(117) Spain November 14th 2005 

(118) Namibia November 17th 2005 

(119) Vanuatu April 7th 2006 

(120) India November 21st 2006