Oracle Bones: Assessing Progress Made on Trade and Investment Issues through the Xi Visit

Not one, but two fact sheets were issued at the end of President Xi Jinping’s visit to Washington, documenting areas of agreement between the United States and China. Media covered the two presidents’ press conference, as well as highlights from the first fact sheet, which addressed matters ranging from climate change to cybersecurity. However, the second document, entitled “Fact Sheet: U.S.-China Economic Relations,” also bears a close look.

This fact sheet covers macroeconomic and macro-finance matters, as well as priority trade and investment issues where (more or less) progress was made. Given that the Joint Commission on Commerce and Trade (JCCT), led by China’s vice premier and two U.S. cabinet members, is coming up before the end of this year—and the fact sheet notes the need to use the JCCT to make progress on key issues facing the business community—it is worth probing what was accomplished on trade and investment and what remains to be done. In the bigger picture, with the Trans-Pacific Partnership (TPP) deal now completed, China soon will also face pressure to measure its ability to open its economy against the ambitious and comprehensive metrics set by TPP.

So how far did Xi and Obama advance toward removing key obstacles to market-based trade and investment? And what are the implications for future trade relations? It appears the two countries tackled a number of very difficult areas, and inched ahead in several of them, as opposed to announcing a breakthrough on trade like the November 2014 deal on the trillion-dollar International Technology Agreement. But negotiating with the Chinese for years can feel as if sandpaper is the only tool at hand to try to break through a massive wall. Persistence is critical in these cases, since it can eventually bring the message home on the importance of reform and then actually lead to a significant change. China’s leaders’ current need for economic growth drives them willy nilly to listen to the United States and others on trade and investment issues these days, so China will continue to do so, regardless of whether the Obama administration is in its waning months.

Below, I note six issues from the latest fact sheet that signal some Chinese willingness to be responsive. I believe the bilateral investment treaty (BIT) has the best prospect, if still far from a sure thing, of becoming the next vehicle for breakthrough change in China over the next 18 months.

1. BIT: moderate progress. The BIT language echoes past fact sheets, indicating that China and the United States seem to be staying “on track,” in terms of both sides’ commitment to continue serious negotiation. This means that China probably shrank its proposed list of the industries it wants to exempt from BIT rules (its negative list) to some reasonable extent. The Xi visit fact sheet does elaborate more than in the past on the high standards required to reach final agreement, including references to the BIT needing to “effectively facilitate” both market access and more broadly “market operation.” This may be a message to China that it cannot just formally “open” sectors but prevent real access by stymieing market forces. The negotiations are not over yet, it is clear.

2. National security and technology regulations: modest progress. China often prefers vague terms in legal documents to maximize the government’s ability to shift conditions on the ground as they desire. Of course, this can create damaging uncertainty for participants in China’s market. The fact sheet reduces a few of the many anxieties plaguing U.S. business regarding China’s national security review. It clarifies that existing investments will not have to go through a new review under the latest law, and once a new transaction is approved, it normally will not be reopened. The fact sheet also limits the capacity of outsiders to a transaction to distort an investment review outcome in favor of a Chinese competitor. However, much work lies ahead. Unlike other global economic powers, China’s legal definition of national security is so broad that China could literally block every transaction involving a foreigner.

3. Technology: On the technology front, the fact sheet takes a positive step with its list of principles for avoiding discrimination against U.S. technology products in the guise of protecting national security. That said, the language includes no hard commitments to follow those principles.

4. Eliminating forced intellectual property/technology transfers: modest progress. When China joined the World Trade Organization, it committed not to require companies to transfer their technologies. The fact sheet notes the application of this commitment in a particular context: China (and the United States) will not advance these kinds of policies as a condition of doing business. It does not hurt to clarify the need for Chinese officials to avoid this behavior in specific areas where temptation is especially high.

5. Agricultural biotechnology approval process: The fact sheet reflects small steps forward in a tough area. It lists the principles underlying a good approval process and commits China to improve regulations and consult with all stakeholders, whether foreign or domestic. Key challenges from here include ensuring that China’s consultations are meaningful, that the improved regulations actually reflect the fact sheet principles, and that they are completed in a reasonable timeframe.

6. Rule of law: big step on process; substance still a question. China’s new focus on rule of law does not translate into any optimism on human rights or the strengthening of democratic institutions, as China’s crackdown on civil society activists and Internet censorship demonstrates. However, in the economic sphere, a focus on rule of law may offer some opportunity to move China toward a credible market regulatory structure that can boost global growth. The fact sheet notes a significant and positive change in China’s position on these economic discussions. For the first time, China will bring its political leading group and its judiciary to the table with U.S. counterparts, who include the key economic policymakers in our executive branch. This means that serious discussions can begin. The question will now become what outcomes can be achieved.

Looking at the oracle bones provided by the economic factsheet, the Xi visit seems to have galvanized progress forward on foundational principles and achieved a few small, hard won, specific changes. Next stop—JCCT.

Claire Reade is a senior associate with the Freeman Chair in China Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Claire Reade
Senior Associate (Non-resident), Trustee Chair in Chinese Business and Economics