Can a China-US investment treaty bring security to the Asia-Pacific?

Can a China-US investment treaty bring security to the Asia-Pacific?

While discussions surrounding a Bilateral Investment Treaty (BIT) have focused on the potential for increased trade and investment, a BIT could also help alleviate security concerns and create lasting peace in the Asia-Pacific region.

With Xi Jinping’s visit to the US over, the two leaders have pledged to continue working towards achieving a comprehensive BIT (for a quick summary of key outcomes during Xi Jinping’s visit, have a look at GRI’s latest infograph at the bottom of this article). Negotiations originally began in 2008, but were put on hold following Obama’s election.

Now that a firm commitment has been made by both parties, the prospects for reaching such a treaty are increasingly bright.

The main aim of a Sino-US BIT is to help encourage bilateral investment by guaranteeing companies non-discriminatory market access and protection from arbitrary treatment. In that respect, a BIT makes strong economic sense in the current climate by providing a level playing field for both US and Chinese companies to invest in one another’s markets.

Several roadblocks must first be addressed by both sides: US legislators are concerned about the favourable terms given to Chinese SOEs & domestic firms and the application of China’s anti-monopoly law; the Chinese are concerned about the Committee on Foreign Investment in the United States (CFIUS), which has the power to block foreign investment should it be deemed a threat to national security.

However, there is a strong impetus for both countries to overcome these issues.

The US and China have already made narrowing down the list of sectors which will be restricted to foreign investment a key priority. The time is therefore ripe for producing results – political momentum on both sides of the Pacific is strong.

The biggest benefits of a far-reaching and comprehensive BIT would exceed simple investment and trade. Rather, the treaty will provide the opportunity to significantly increase cooperation between both countries and in doing so will greatly reduce tensions in the entire Asia-Pacific region.

Since Kant’s principle of perpetual peace, the notion that trade decreases the chance of interstate conflict has become widely accepted. The logic is simple: by increasing bilateral investment, the cost of conflict becomes too high for both countries to consider it a viable option. The European Community (EC) was built on this foundation by making the cost of another war between France and Germany too high to fathom.

Potential challenges

The process of negotiating towards a BIT is as important as the end result. BITs are difficult to achieve because they require negotiating through political and economic security challenges which are sensitive topics in both countries. However, the fact that both sides are willing to sit down and talk about these traditionally taboo areas is a success in itself and will help both sides become increasingly open in their dealings and achieve trust between one another.

With the US and China as the two biggest ‘strategic competitors’ in the region, the potential to calm tensions in the region is high. Concerns over the risk of cyber-attacks spilling into kinetic war would be largely mitigated. Unexpected encounters at sea between each other’s navies would be less likely to result in conflict, while tensions between US regional allies and China could be allayed. Most importantly, societal relations would be greatly improved. With over 50% of Americans seeing China as a threat, a BIT would help promote China as an economic opportunity.

While many believe the recent success of the TPP will be Obama’s greatest foreign policy achievement, that treaty does little for the Sino-US relationship. A comprehensive BIT between the US and China would be a significant achievement in Obama’s “pivot to Asia.”

A BIT will, first and foremost, promote bilateral investment. However, the intangible benefits it has the potential to produce should remind both leaders that there is more at stake should they fail to agree to a comprehensive BIT.

Categories: Economics, International

About Author

Nicolas Jenny

Nicolas Jenny specialises in European and Asian political risk analysis. He has lived extensively throughout the region and speaks English, French and Mandarin. He holds a double master's from Sciences Po Paris and Fudan University and a BSc in politics from the University of Bristol.