Op-Ed Contributors

US treaty could threaten growth

By Kevin P. Gallagher (China Daily)
Updated: 2010-07-07 07:54

From a microeconomic perspective, China has supported research and development and post-secondary education, and coupled that support with aggressive industrial policy to develop strategic industries such as electronics, automobiles, and now wind power.

As Zhao Zhongxiu and his colleagues from the University of International Business and Economics in Beijing show in a recent article in the peer-reviewed journal, China and the World Economy, part of the industrial strategy has been to learn from foreign firms by screening which types of firms they want to enter certain markets and regions, requiring joint ventures with foreign firms so that Chinese firms can acquire the technological capabilities to be world class exporters, and so forth.

Foreign firms have never been overly enthusiastic about such policies, but certainly saw the benefits of access to China's booming economy as outweighing the costs of working together.

These policies would have to change if the BIT with the US conforms to the many BITs the US currently has in place. US BITs have shunned the use of capital controls and performance requirements on foreign investment. Moreover, contemporary BITs have "investor-state" dispute resolution systems whereby a foreign investor can directly remove a dispute out of Chinese governance structures to a private tribunal at the World Bank and seek financial compensation directly from Chinese government coffers.

Corporate-led disputes stand in stark contrast to disputes at the World Trade Organization (that largely permits the elements of China's industrial policies toward FDI) where governments engage in the dispute process and therefore provide a diplomatic screen over more egregious cases by taking into account public welfare and broader geo-political concerns.

China has about 120 BITs and the US has close to 40. Thus far, none of China's BITs strip China's ability to deploy capital controls for speculative capital or to use performance requirements on foreign direct investment. Indeed, China's recent BIT with Germany defers to China's capital control regime as the standard and leaves out measures on performance requirements altogether.

According to a recent study I did for the United Nations, the Chinese model is more consistent with the BITs of other major capital exporting nations. China should bargain hard to ensure that a BIT with the US looks more like Chinese BITs when it comes to capital controls and performance requirements - so as to maintain the ability to preserve macroeconomic stability and generate economic growth for years to come.

The author is an associate professor of international relations at Boston University, US, and is currently a visiting scholar at the School of Public Policy and Management at Tsinghua University, Beijing.

(China Daily 07/07/2010 page9)