China, U.S. plan new open investment treaty

The U.S. and Chinese governments have nearly completed negotiations on a Chinese Bilateral Investment Treaty, which will make it easier for American companies to invest in China, and vice versa.

Such a treaty would serve the interests of the Chinese government and American corporations, but not necessarily the interests of American citizens and workers.

us-chinaAt the same time, the U.S. government is confronting China militarily in the South China Sea.  And President Obama is trying to sell the Trans Pacific Partnership Agreement on the basis that it will enable the United States and not China to write the rules of international trade.

But this new treaty, based on what has been reported about it, will make the U.S. and Chinese economies even more interlocked than before.

The problem from my standpoint as an American citizen is the difference between the status of Chinese corporations and U.S.-based corporations in their home countries.  Chinese corporations serve the goals of Chinese government policy.  U.S.-based corporations serve the interests of their executives and stockholders, and them alone.

A U.S. investment in China could take the form of buying shares in Chinese companies, or it could take the form building factories or even retail stores in China.  The same would be true of Chinese investments in the United States.

Currently Chinese investment in the United States is greater than U.S. investment in China.  That is a natural result of the Chinese trade surplus.   Dollars that Chinese earn through exports have to go somewhere.  Some of them are used to buy Treasury bonds to help finance the federal government.   Others go to buy American assets.

china.usa20090601074304453I expect the main result of the treaty will be increased mutual investment by Chinese and Americans in each others’ companies.   Chinese investors have been buying up American businesses—including IBM computers, General Electric appliances and Smithfield hams — partly to get the advantage of the American brand name.

Possibly the treaty could result in a net creation of new jobs based on Chinese building factories in the United States, as German and Japanese companies have done.

One advantage of building factories in a foreign country is that it provides insurance if the country sets up tariff barriers to imports.  The danger is that it leaves the owner open to takeovers by the foreign government.  Historically this has not been a danger for foreign investors in the United States except in the case of German assets during the two world wars.

A takeover need not be an outright expropriation.  It could take the form of demands that foreign investors be allowed to buy a minority or majority interest in the company.  This had happened frequently to American companies abroad.

This hasn’t happened much in the United States that I know of.  Washington frequently freezes foreigners’ bank accounts as a part of economic sanctions against foreign countries, but it hasn’t nationalized foreign-owned factories, mines or oil wells.

There is no logical reason why a U.S. investment treaty with China couldn’t be of mutual benefit to the people of both countries.  I am sure former GE workers in Louisville would rather be working for a Chinese company and see the appliance division close.

Based on historical experience with treaties from NAFTA on, I think the beneficiaries will be the Chinese government and U.S.-based corporations whose executives have no loyalty to any particular country.

My guess is that President Obama will submit this treaty for ratification during the lame duck session of Congress and will get more support from Republicans than from Democrats.


The Job-Killing U.S. Trade Deal You’ve Never Heard Of: the China Bilateral Investment Treaty by David Dayen for the American Prosect.  (Hat tip to Avedon Carol).

Are China and the U.S. Close to Signing an Investment Treaty? by Shannon Tiezzi for The Diplomat.

The Biggest American Companies Now Owned by the Chinese by Stephen Gandel for Fortune.

Our Incoherent China Policy by Clyde Prestowitz for the American Prospect.

The New China Syndrome by Barry C. Lynn in Harper’s magazine.

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