Prospects for U.S.-China Cooperation on Global Investment Policy

Part of Chapter 7 | International Investment Policy

By Scott Miller1
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Despite the important role that foreign direct investment (FDI) plays in the global economy, there remains no coherent multilateral regime for the governance of investment. Addressing this governance gap is unlikely to occur without the cooperation of the United States and China. While a more coherent international investment regime would benefit both countries, current trends in the bilateral relationship, and challenges to the authority of international investment agreements (IIA), suggest that the prospects for reaching any effective multilateral agreement are worsening with time. Policymakers in the United States and China should recognize these constraints and focus their energies in multilateral forums on reestablishing a consensus on FDI governance and the treatment of foreign investors. In the near term, the two countries should focus on domestic policy reform in order to enhance medium-term prospects for reaching agreement.

Trends in Foreign Direct Investment

It is difficult to overstate the role that FDI has played in shaping the modern structure of the global economy and global value chains. FDI flows have helped to drive growth, spread knowledge and new technologies, share management skills, boost employment, and raise productivity.2  Lowering barriers to cross-border investment and providing fair treatment for those investments have also been a major historical priority for the United States and the institutions of the global economic order, premised on the grounds of both economic efficiency and the idea that enhanced economic integration through investment would help promote peace. As of end-2016, the global stock of FDI was estimated at more than $26 trillion,3 which the World Bank classifies into four primary types: national resource seeking; market seeking; efficiency seeking; and strategic asset seeking.4 Each of these types presents different opportunities from the standpoint of economic policymakers. However, in general, a country’s openness to FDI correlates positively with economic growth.5

The 2008 global financial crisis led to a significant fall in annual flows of FDI worldwide, declining from nearly $2 trillion in 2007 to roughly $1.2 trillion in 2009. This fall was particularly steep in FDI flows to developed countries and the subsequent recovery has been slow and uneven.6 Even as global gross domestic product (GDP) has risen more than 18 percent above its pre-crisis peak,7 projections from the United Nations Conference on Trade and Development (UNCTAD) estimate that the global volume of FDI flows will reach almost $1.8 trillion in 2017, still below peak levels reached a decade earlier. Developed countries will receive roughly 60 percent of this investment while developing countries, after experiencing a decline of nearly 15 percent in annual flows during the previous year, are expected to see a return to growth.8

The International Investment Regime

Relative to other aspects of the global economic order (such as trade), governance of FDI is fragmented and underdeveloped. In the aftermath of World War II, negotiators of the Havana Charter made a first effort at developing a multilateral investment agreement in 1949. However, disagreements between developed, developing, and socialist countries on issues such as a minimum standard of treatment for foreign investors prevented even a draft agreement from emerging. As discussed in greater detail below, the disagreements that lead to the failure of this original attempt have proven persistent, preventing the successful negotiation of any binding multilateral agreement in the nearly seven decades since. The most recent of these efforts was the unsuccessful attempt to negotiate a Multilateral Agreement on Investment (MAI), which took place from 1995–1998 under the auspices of the Organization for Economic Cooperation and Development (OECD).

The regime that has emerged in place of any multilateral agreement is a patchwork of international investment agreements (IIAs) negotiated on a bilateral basis. The first formal bilateral investment treaty (BIT) was negotiated in 1959 between Germany and Pakistan, with the primary objective of mitigating political risk (e.g., expropriation, nationalization) for German investors. This pattern, whereby developed countries utilized BITs as a tool for enhancing the security of their investments and developing countries used them as a tool for enhancing their attractiveness to foreign capital, would characterize the vast majority of subsequent agreements. As of end-2016, there were more than 3000 IIAs in force worldwide, mostly negotiated in the interval between the end of the Cold War and the onset of the global financial crisis. These agreements vary in scope , coverage, and specificity, with later agreements typically featuring more precise language and larger carveouts. The only point of broad agreement is the International Centre for Settlement of Investment Disputes (ICSID) Convention, in which 136 signatories agreed to a common mechanism for dispute settlement.

Sources of Persistent Disagreement

For mainstream economists and economic policymakers, the logic of a simpler and more coherent multilateral regime for governing FDI is clear and compelling. A consistent set of international rules, balancing the rights of investors with the power of governments to regulate in the public interest, would improve the efficiency of global capital allocation. In turn, this would produce global growth that is more rapid, sustainable, balanced, and inclusive. A range of case studies, including that of the United States,9 and sophisticated econometric estimates have provided evidence in favor of this general argument, while also highlighting the importance of appropriate supporting policies to maximizing potential gains.10

Compared to the near-consensus on the need for such a multilateral framework, relatively few governments have held consistent positions on how to best regulate FDI in practice, or the utility of a binding multilateral agreement to govern it. During the Cold War, the most obvious divide was between a pro-market West, led by the United States, and the socialist economies of the Soviet bloc. Perspectives of nonaligned countries varied significantly, with governments adopting stances and development strategies that reflected a balance between domestic political economy pressures and their position within the larger Cold War framework. IIAs proliferated and grew more complex, reflecting both the gradual growth in the demands of host countries for more sharing of benefits and a range of legal innovations developed to help de-politicize disputes and enhance investment security.11 These included codes of conduct for investors and investor-state dispute settlement (ISDS) mechanisms, respectively.

The end of the Cold War, when the collapse of the Soviet Union suggested that a generalized version of the Western market economy might have entered permanent ascendance, also marked a high point in terms of both bilateral negotiations and support for a multilateral agreement. In a single 10-year period, from 1990 to 2000, the number of IIAs grew more than fivefold, from less than 400 to over 2000. On the multilateral front, the Asia-Pacific Economic Cooperation (APEC) economies released the APEC Non-Binding Investment Principles in 1994.12 Negotiations to establish a multilateral agreement on investment (MAI) were launched the following year and, for a time, appeared to making progress. Nonetheless, a deal ultimately proved elusive: the OECD-based talks collapsed in 1998 and, at the World Trade Organization ministerial in Cancun five years later, investment issues were removed from the multilateral agenda.13

The core issue that prevented (and continues to prevent) negotiation of a binding multilateral investment agreement is differences between nation-states over the role of government in the economy and the standard of treatment accorded to aliens. At its most basic, an investment agreement is a check on the power of government. As a contract that defines the rights of foreign investors, it defines and partially circumscribes the power of a state to act within its own borders. There has never been an international consensus (or even, in most states, a durable domestic consensus) over the extent of the state’s power to regulate and whether the treatment of aliens ought to conform to some international standard. This is why the collapse of the MAI negotiations in 1998 was caused not by disagreements over obscure legal arcana, but over core principles of investment protection: definitions of investment; degree of liberalization; rules governing indirect expropriation and fair compensation; cultural exceptions; and free movement of firm assets across borders.14

Recent Trends and Developments

Today, it is clear that momentum in favor of international investment liberalization peaked in the 1990s and early 2000s. This is evident even as the number of formal investment liberalizing measures enacted worldwide continues to outpace the number of new restrictions.15 One reason for this trend is the resurgent popularity of state capitalism, which is sharpening disagreements between market and nonmarket economies over the appropriate role of the state in the economy.16 Another is the continued diffusion of economic power, which has reduced the ability of the G7 economies to provide effective global economic management. Thus far, the far more heterogenous (and far less united) G20 has failed to establish itself as the premier forum for global economic governance. A third is the mounting backlash against many agreements already in place, which has even led some governments to abrogate their existing agreements (or simply allow them to expire).17

The ongoing debate in the developed world over ISDS usefully illustrates this third challenge. From 1959 to 2008, there were 326 publicly notified disputes under ISDS provisions, with developing countries featuring as respondents in a large majority of cases. In the subsequent decade alone, the number of known disputes has more than doubled,18 and many developed countries (including the United States) have been respondents in investment disputes.19 Considering completed cases, states have prevailed in formal disputes about twice as often as investors and investor awards amount to a small fraction of initial claims.20 Nonetheless, the newly realized possibility that government actions can be challenged by foreign investors has generated huge political backlash, even in countries with long histories of openness to foreign investors. For those contemplating future negotiations, multilateral or otherwise, this suggests the worrying degree to which any consensus over international investment rules has already unraveled.

Prospects for U.S.-China Cooperation

Given the potential economic benefits, finding ways to strengthen the global investment regime would seem to be a common objective for policymakers in the United States and China. Indeed, there are reasons to expect that investment policy could provide future opportunities for U.S.-China cooperation. The United States has the largest stock of direct investment abroad of any single nation, while China’s stock of outbound direct investment is rapidly increasing and could top $1 trillion by 2020.21 The extent and expansion of their respective global investment footprints suggests that the United States and China may share a common interest in promoting a harmonized global investment regime that safeguards the rights of foreign investors against various forms of expropriation.

At the same time, near-term trends in the bilateral relationship echo the global trends described earlier, suggesting that cooperation is likely to prove elusive. For example, the Organization for Economic Cooperation and Development (OECD) ranked China the among the most restrictive countries of the 62 covered in the 2016 edition of its FDI regulatory restrictiveness index.22 Notably, this reflects only the degree of de jure restrictiveness; it does not capture the full extent to which the role of the state in the Chinese economy has expanded under the Xi Jinping administration. In the United States, the Trump administration has not yet provided a clear statement of its international investment policy, but presidential tweets have indicated clear dissatisfaction with the status quo. On Capitol Hill, there is active debate over reforming the U.S. national security investment review system, motivated in part by concerns over Chinese industrial policy. Meanwhile, U.S.-China BIT negotiations, launched in 2008, are stalled. Without major reforms to China’s policies, it is unlikely that a completed treaty could attract the consent of two-thirds of the U.S. Senate.23

These factors, as well as longstanding structural differences in the U.S. and Chinese economies, suggest that disagreements are likely to prove insoluble over the near term. Rather than launching any major new multinational initiative, the United States and China should instead seek to manage bilateral disagreements while utilizing discussions in the Asia-Pacific Economic Cooperation (APEC) and the G20 to assemble building blocks for future cooperation. The example of the 1994 APEC Non-Binding Principles on Investment offers one model for pursuing this route, and the 2016 Hangzhou Principles released by the G20 represent at least an endorsement of some useful basic principles.24 However, the prospects for moving beyond rhetoric at the multilateral level are limited.

Prospects for bilateral cooperation will also depend heavily on the direction of policies in each country. If policymakers in China are serious about concluding an agreement with the United States, then they will need to recognize that the substantive differences between the United States and China are, for the most part, growing. Despite public commitments to “reform and opening up” by senior Chinese leaders, including President Xi Jinping’s speech at Davos in January 2017, the overall policy direction of the Xi administration has been sharply mercantilist. At the same time, liberalization efforts, such as the Shanghai Free Trade Zone, have offered procedural reforms at best, with any genuine liberalization offset by protectionist policies and practices elsewhere. All of this has increased tension in the bilateral relationship and worsened near-term prospects for cooperation.25

The United States faces a different set of challenges. There are legitimate security grounds for strengthening the capabilities of the Committee on Foreign Investment in the United States (CFIUS), the U.S. national security investment review body.26 There is also a sound strategic logic to preserving the narrow security focus of CFIUS while developing a separate process and mechanism for pursuing better treatment for U.S. investors in China and elsewhere through select application of reciprocity.27 However, reforms should not become an excuse for protectionism, should not target any single country, and should not undermine the basic open investment policy that the United States has followed since the Reagan administration. Managed well, this might lay a foundation for future cooperative initiatives. However, considering the current domestic political backlash against globalization, expectations should be attenuated.

In short, even as the economic logic of greater cooperation on promoting a rules-based multilateral investment regime remains obvious, there is little near-term likelihood of meaningful progress (even on a bilateral basis).

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[1] The author would like to thank David Parker and Daniel Remler for their research and drafting support.

[2] FDI Flows, United Nations Conference on Trade and Development,

[3] United Nations Conference on Trade and Development, Annex table 04: FDI outward stock, by region and economy, 1990–2016, in World Investment Report 2017: Investment and the Digital Economy, June 2017,

[4] Christine Zhenwei Qiang, Roberto Echandi, and Peter Kusek, Maximizing potential benefits of FDI for competitiveness and sustainable development: World Bank Group report on investment policy and promotion diagnostics and tools, World Bank Group, May 2017, 12–18,

[5] Joshua Aizenman, Yothin Jinjarak, and Donghyun Park “Capital Flows and Economic Growth in the Era of Financial Integration and Crisis, 1990-2010,” National Bureau of Economic Research (October 2011),

[6] “Global Investment Prospects and Trends,” in World Investment Report 2017: Investment and the Digital Economy, United Nations Conference on Trade and Development (June 2017),

[7] “World Economic Outlook, April 2017: Gaining Momentum?,” International Monetary Fund (April 2017),

[8] “Global Investment Prospects and Trends,” in World Investment Report 2017, 2.

[9] Michael V. Seitzinger, Foreign Investment in the United States: Major Federal Statutory Restrictions , Library of Congress, Congressional Research Service, June 17, 2013,

[10] Roberto Echandi, Jana Krajcovicova, and Christine Zhenwei Qiang, The Impact of Investment Policy in a Changing Global Economy: A Review of the Literature, World Bank Group, Trade and Competitiveness Global Practice Group, October 2015,

[11] Armand De Mestral and Céline Lévesque, Improving International Investment Agreements (Routledge Research in International Economic Law, Routledge, 2012),

[12] Asia-Pacific Economic Cooperation, APEC Non-Binding Investment Principles, November 1994,

[13] Edward M. Graham, “The MAI and the Politics of Failure: Who Killed the Dog?,” in Fighting the Wrong Enemy: Antiglobal Activists and Multinational Enterprises, Peterson Institute for International Economics (September 2000),

[14] “Recent Policy Developments and Key Issues,” in World Investment Report 2015: Reforming International Investment Governance, (June 2015),

[15] United Nations Conference on Trade and Development, “Recent Policy Developments and Key Issues,” in World Investment Report 2017: Investment and the Digital Economy, June 2017,

[16] One illustration of this is the fact that the percentage of companies in the Fortune Global 500 that are state-owned has more than doubled over the past decade, from 10 percent to roughly one quarter. See PricewaterhouseCoopers, State-Owned Enterprises: Catalysts for public value creation?, April 2015, 9,

[17] “Recent Policy Developments and Key Issues,” in World Investment Report 2017.

[18] Investment Dispute Settlement Navigator. United Nations Conference on Trade and Development, Investment Policy Hub,

[19] For example, see Daniel Hurst, “Australia wins international legal battle with Philip Morris over plain packaging,” Guardian, December 17, 2015,

[20] Scott Miller and Gregory N. Hicks, Investor-State Dispute Settlement: A Reality Check, Center for Strategic and International Studies, January 2015,

[21] Daniel H. Rosen and Thilo Hanemann, An American Open Door?: Maximizing the Benefits of Chinese Foreign Direct Investment , Rhodium Group, May 2011,

[22] Organization for Economic Cooperation and Development, “OECD FDI Regulatory Restrictiveness Index Chart,” 2016,

[23] Library of Congress, Congressional Research Service, “Negotiations for a Bilateral Investment Treaty (BIT),” in China-U.S. Trade Issues, April 24, 2017,

[24] G20 Research Group, G20 2016 China: Annex III: G20 Guiding Principles for Global Investment Policymaking, July 10, 2016,

[25] For example, see United States Chamber of Commerce, Made in China 2025: Global Ambitions Built on Local Protections, March 2017,

[26] Matthew P. Goodman and David A. Parker, Global Economics Monthly: The China Challenge and CFIUS Reform, Center for Strategic and International Studies, March 31, 2017,

[27] David Dollar, “What do China’s global investments mean for China, the U.S., and the world?,” Brookings Institution, May 18, 2016,