China-U.S. Trade Law

Chinese leaders have participated in high-level strategic talks with both the United States and Europe in recent months, during which China reiterated its interest in a bilateral investment treaty (BIT) with each of them. EU officials went to Beijing in December 2010 for the Third China-EU High-Level Economic and Trade Dialogue, and President Hu Jintao met with President Obama in Washington D.C. in January 2011.

There are similarities in China’s economic relationships with these two trading partners—the United States and Europe both seem to be increasingly dependent on China for the health of their financial markets and economic growth. However, differences in the relationships suggest that China may be closer to reaching a BIT with the EU than with the United States.

The United States may appear, on the surface, to be more dependent on China for financial support than Europe. China holds over $900 billion of U.S. sovereign debt. Notwithstanding the United States’ financial troubles, China continues to hold vast sums of U.S. treasuries, which has played a critical role in financing the U.S. wars in Iraq and Afghanistan, as well as the expanding costs of U.S. “homeland security” and domestic social programs. The United States has told China that it will focus “on reducing its medium-term federal deficit and ensuring long-term fiscal sustainability,” and has asked China to stimulate a domestic demand that would absorb more U.S. exports, but even if the two countries did as suggested, China still would remain the largest financial backer of U.S. debt.

Recently, as Portugal, Italy, Ireland, Greece and Spain all have threatened the stability of the euro, China has taken on a larger role as a banker for Europe. China reportedly bought €6 billion of Spanish bonds, committed to buy another €5-6 billion of Portuguese bonds, and pledged to back Europe in its efforts to bail out Greece. China’s euro commitments are still far from the level of its holdings in dollars, but the precarious state of the euro, and therefore the European Union, means that E.U. leaders may have a more compelling need for cooperation with China than the United States.

President Obama has been promoting China as a market for U.S. exports and as a solution (rather than the problem) for reducing the trade deficit, stimulating economic growth, and promoting job expansion. In his 2011 State of the Union address, he said, “To help businesses sell more products abroad, we set a goal of doubling our exports by 2014 — because the more we export, the more jobs we create here at home. Already, our exports are up. Recently, we signed agreements with India and China that will support more than 250,000 jobs here in the United States.” 

E.U. leaders similarly have been looking at China to stimulate exports, economic growth and jobs. China has been the second-largest foreign market for European goods, and exports grew last year by more than thirty percent. The promise of new jobs is especially important for Europe. There have been strikes and threats of strikes in Greece, Portugal, Italy and the U.K., and fears that public sector jobs will be cut substantially as the European governments try to reign in public spending and get their financial houses in order. 

Europe and the United States both have significant trade imbalances with China but, according to the European Commission’s Vice President, Joaquin Almunia, the E.U. is focused less on revaluation of the yuan and more on increasing E.U. companies’ investments in China. In addition, Europe appears to be increasingly more willing to relax export controls on high-tech goods, which might help reverse some of the trade balance and, perhaps more importantly, would gain the appreciation of Chinese officials who have complained about such restrictions among their Western trading partners.

As Europe’s interdependence with China is accelerated by the debt crisis, so also, it would seem, Europe will leap ahead of the United States in signing a BIT with China. When the two delegations discussed trade and investment issues in Beijing last December, China emerged with a commitment from the European delegation that the Europeans would “speed up a feasibility study for a bilateral investment treaty.” During President Hu’s visit to Washington, negotiations for a U.S.-China BIT were mentioned, but members of the U.S. Congress subsequently have complained about the Obama administration’s inaction on a BIT, and even FTAs with Colombia and Panama, pending for years, have remained tied up by labor rights interest groups. Negotiations and ratification of a U.S.-China BIT, although an eventual likelihood, certainly will not be easier than finalization of the agreements in Central and South America.

As the United States seems slowed by trade politics in pursuing the investment treaty that might help open the Chinese market for American companies and attract more Chinese investment into the United States, China should have an easier time accepting the terms of a BIT with Europe than with the United States. E.U. BITs typically have not provided guarantees for market access during the pre-investment phase, but rather only after the investment has been established. By contrast, U.S. BITs require that the host government provide foreign investors national treatment, for example—meaning the same rights as domestic investors—at the pre-investment stage, which remains one of the hurdles to agreement on a U.S.-China BIT.

It is not unusual for European negotiators to wait for the results of American negotiations and then seek comparable terms. The course of Chinese accession to the WTO was marked by such a strategy. However, in those negotiations, China was primarily obliged to accept tough terms. The BIT negotiations define more equal ground for the negotiating parties. Europe may not wait for the United States to extract better terms because it may not want to wait, and it may not think the United States is in a position to fare better in negotiations. Moreover, because the Europeans typically are not as demanding as the United States in BIT negotiations, China likely will find completion of a deal with Europe more attractive, and will be able to get it done more quickly.