A missed opportunity to ease tensions with China

By David Gordon
July 11, 2014

Chinese Premier Li speaks to U.S. Treasury Secretary Lew next to U.S. Secretary of State Kerry during a meeting at the Zhongnanhai leadership compound in Beijing

Secretary of State John Kerry and Treasury Secretary Jacob Lew traveled to Beijing this week for the annual Strategic and Economic Dialogue, at a time when U.S.-China tensions are running higher than at any point in the past decade. Though each country’s bureaucrats were able to put on a good face and paper over significant disagreements, they were unable to make progress on any major security or economic issue.

Unfortunately, the U.S. administration passed up a chance to advance and elevate the U.S.-China Bilateral Investment Treaty, an agreement that sets the rules of the road for cross-border investment. Doing so could have yielded major economic benefits and had positive spillover effects on the strategic issues vexing both countries. But now, with little for the two sides to hang their hats on, the relationship is ripe for more tension.

A year ago, when President Barack Obama met with new Chinese President Xi Jinping at the Sunnylands Ranch in California, the two laid out an ambitious agenda, agreeing to discuss contentious cyber issues, the need to increase pressure on North Korea, and more broadly chart a positive course for the world’s most important bilateral relationship.

Since the earlier summit, however, a number of issues have set back relations. Increased Japan-China acrimony in the East China Sea, an aggressive Chinese move to set up oil rigs in disputed waters off Vietnam, and the Edward Snowden espionage revelations have set teeth on edge in Washington and Beijing.

On the economic side, U.S. indictments of Chinese military hackers, a series of ongoing trade disputes, the recent weakening of China’s currency and continued restrictions on foreign investors have each threatened to undermine the countries’ $500-billion-a-year commercial relationship. While the United States continues to describe relations with China as a delicate balance between cooperation and competition, China looks at the United States through a darker lens, convinced that America is determined to “contain” its rise.

U.S. Secretary of State Kerry shakes hand with Chinese State Councillor Yang at the Great Hall of the People in BeijingAt this year’s dialogue, the Obama administration passed up a big opportunity to make progress on the BIT. At the opening ceremony, Xi publicly expressed interest in “speeding up” talks on the treaty, but from the final communique it is clear that the U.S. side did not take up his offer.

So, why is the treaty important? Each country would have to treat most foreign business ventures as if they came from home. China could no longer subject U.S. companies to technology-transfer mandates that force them to hand over trade secrets as a price of doing business in the country. Chinese state-owned enterprises would be restricted in their ability to use the government to boost their competitiveness. U.S. firms would be allowed to invest more in sectors like insurance, telecom and banking, which were previously highly restricted to foreigners. They could for the first time seek legal recourse through independent international arbitration. The Chinese economy would benefit from the BIT — both by making U.S. investors more confident in their Chinese exposure, and by allowing more Chinese investment in the United States.

Treaty talks remain in the early stages because the Obama administration, it appears, does not want to seem too eager to either engage China or reward the Chinese for bad behavior. But slow-rolling the BIT will reinforce the view of many in China that the only real U.S. economic priority in Asia is the Trans-Pacific Partnership, a deal that China has not been asked to join and which it sees as part of a U.S. containment strategy.

At the S&ED, the administration should have pushed to conclude the BIT before President Obama leaves the White House. Such a commitment would have sent a strong signal that Obama remains serious about his statement at Sunnylands that — despite the tension surrounding regional maritime claims, currency manipulation and corporate espionage — the U.S. has a real stake in China’s success.

Progress on the BIT will not make regional tensions disappear. Security issues will remain strained as the United States continues to stand strong on maritime issues, a matter of critical importance to America’s treaty-bound allies Japan, South Korea, the Philippines and Australia. By demonstrating resolve in the face of Chinese maritime aggression, U.S. security commitments decrease the odds of conflict. This stance, though, will inevitably strain U.S.-China relations.

Still, the BIT could take at least some of the bite out of a growing list of security challenges. It would be the first major agreement between the United States and China on any issue since the negotiations for China to gain World Trade Organization membership ended in 2001. During the Cold War, the United States and Soviet Union came to major agreements on a variety of strategic and economic issues, providing an important safety valve for the relationship. Passage of the BIT would help our two nations create a habit of dealing with difficult issues in a workmanlike way. A major economic breakthrough is more likely to soften Beijing’s territorial assertiveness than holding back on an agreement that would benefit both countries.

 

PHOTOS: Chinese Premier Li Keqiang (R) speaks to U.S. Treasury Secretary Jack Lew next to U.S. Secretary of State John Kerry (C) during a meeting at the Zhongnanhai leadership compound in Beijing July 10, 2014. REUTERS/Ng Han Guan/Pool

U.S. Secretary of State John Kerry (L) shakes hand with Chinese State Councillor Yang Jiechi as they arrive for the China-U.S. Eco Partnerships signing ceremony at the Great Hall of the People in Beijing July 10, 2014. REUTERS/Andy Wong/Pool

15 comments

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Actually, Obama is right: It does make sense to punish China’s belligerence by slowing trade talks. That hits China where it hurts most: In the pocketbook. It also slows their strategy for world economic domination.

The author argues that China’s aggressiveness can be contained solely by the USA military, but that would be very expensive for the USA. Moreover, it would allow China to believe that cost of their hostility is limited.

Moreover, China wants a bigger military anyway, whereas the USA wants to limit defense spending. So if the USA relied solely on its military, China would have a natural advantage.

Also, the BIT may seem promising for the USA, but in practice, China has never allowed any trade deal that was mutually advantageous. The have always ensured the foreign firms pay a heavy price for access to the huge Chinese market. Moreover, it is very difficult for US private enterprise to compete with China’s huge state-owned firms.

The author, David Gordon, used to work at the U.S. State Department, but who is he working for now? Chinese clients? It certainly seems so.

Posted by DifferentOne | Report as abusive

Nothing different from decades of Cold War crappola from the DifferentOne.

Psychologizing foreign policy sells newspapers and the occasional chickenhawk hardcover. Nothing useful ever achieved even in the short-attention-span minds of Americans.

The only thing outstanding in the comment is a complete ignorance not only of military capability; but, any understanding of the wasted cost of maintaining our imperial presence around the world.

Mail me a penny postcard when Reuters notes that the cost of maintenance of each soldier we stick in a foreign base is double that of anyone we support inside our boundaries for actual “defense”. There’s only 150+ such bases.

Posted by Eideard | Report as abusive

@Eideard

Perhaps I did not word my comment clearly enough. Allow me to try again:

Actually, Obama is right: It does make sense to punish China’s military belligerence by slowing trade talks. That hits China where it hurts most: In the pocketbook. It also slows their strategy for world economic domination.

The author argues that China’s aggressiveness can be contained solely by the USA military, but operating a vast military force around the world is very expensive for the USA. Most Americans want to limit defense spending right now, whereas China wants a bigger military. So if the USA relied solely on its military, China would have a natural advantage. The Chinese government might consider a military contest to be a welcome boost to national pride, with no economic downside, whereas the USA would be under constant pressure to cut back. The USA is a democracy after all, and taxpayers do complain.

Also, the BIT may seem promising for the USA, but in practice, China has never allowed any trade deal that was mutually advantageous. They have always ensured that foreign firms pay a heavy price for access to the huge Chinese market. In practice, American firms will never be allowed to operate freely in China. And, China will always have an overwhelming advantage in sectors where the Chinese firms are behemoths supported by the government.

The author, David Gordon, used to work at the U.S. State Department, but who is he working for these days? Chinese clients? It certainly seems so.

Posted by DifferentOne | Report as abusive

I agree with DifferentOne.

Posted by Wardness | Report as abusive

Kerry, as Obama can only aggravate situation.
They have no shame no decency

Posted by nvgg | Report as abusive

Honesty, real commitment to peaceful co-existence without resorting to dirty tricks is the best policy.

Posted by WJL | Report as abusive

we are talking about a country which exploits its own, runs them over with tanks and has killed countless very nice priests and religious. Human rights violations built this monster and it is growing and expanding..south of San Diego, Africa and we are letting them build casinos and buy into US companies!!! being nice to terrible people just makes them believe you are weak or as the Chinese press described Americans:fat, stupid and lazy. There is a famous painting of monguls with hidden knives etc. at a talk with the nice Chinese ruler..guess what happened?

Posted by mkhunt | Report as abusive

Twice a week, I have a one hour conversation with a 35-year-old businesswoman in China as part of her English class to improve here pronunciation and vocabulary. We often comment how similar we are despite politicians best efforts to try to convince us how different we are.

Her point of view is that disputes over the East China Sea and archipelagos are thousands of years old between two parties and she asks why the US must always be the policeman of the world. As for demonizing China, the US itself has some things in our history and now that we can not be proud about.

Posted by areyousaying | Report as abusive

With America’s stated goal of debasing the dollar beneath any reasonable floor to reflate the US economy, the Chinese would be foolish (which they are not) to throw the doors wide open to cross-border investment. If they did, we could simply buy their entire commercial sector just by running the printing presses full tilt. The real building block of commerce and credit is trust, and we seem to have either forgotten, or no longer care about that. I think that it may prove harder to conquer the world with paper in the future than it has been in the past.

Posted by StevePhillips | Report as abusive

BIT is no reward (& the TPP is more like a punishment), it’s just I cannot see in my view how China would be advanced by BIT to the same capacity that the US would. It most certainly seems the advantage in BIT is to the US side – however as with many bilateral relationships with the US, it’s the US side that tends to be the laggard on investment despite the bigger liquidity pool available for investment being on it’s side.

US politicians want / need / use adversaries for politik points it’s clear they are not interested in losing an adversary to gain a friend.

Posted by StigTW | Report as abusive

A BIT would be in China’s long term interest, just as the U.S.-Mexico BIT has greatly benefited Mexico over time. But it is hard to imagine the current Chinese leadership providing the necessary groundwork any time soon. They are hardly ready to stop forcing American companies to transfer technology and production to China, to protect intellectual property of foreign firms, and to desist in cyber attempts to advance the latter objective. The most recent five year plan – with its endless list of “strategic sectors” which are off limits to foreign ownership in many cases – is hardly compatible with a BIT. But then the U.S. has also cordoned off some areas from Chinese investment.
And as long as the State Owned Enterprises dominate the Chinese economy, the chance for “neutral” rules and protocol to guide investment via a BIT is very likely not practical in the near future.

Posted by Cassiopian | Report as abusive

“A missed opportunity” with communist China was when the US corporate bosses started shipping US jobs to China in droves to pocket quick super-profits from cheapo labor. But, as they started learning the hard way now, there’s no free lunch in China…
Greed is shortsighted by definition.

Posted by UauS | Report as abusive

The US corporations destroyed the middle class here to gain a middle class there that is ten times larger. Unfortunately the Chinese are not foolish enough to let them into those markets. The Chinese win, we lose. We’ll have to start working on the Indians now I guess. But I’m betting we won’t win there either. The USCA is starting to see that is no longer “Our way or no way” in the world anymore. We no longer have the influence to control all markets.

Posted by tmc | Report as abusive

The West has made a huge mistake in helping the CCP remain in power by strengthening its economy and thereby its legitimacy. Generations to come, all over the world, will suffer the consequences of the naive failure to realise that an autocratic state, who has always played only by its own rules, will continue to do so on the international stage too, to the severe detriment of its increasingly anxious and pressured neighbours and to the rest of the world. In a few words: The Chinese government can not be trusted to pursue anything else but its own narrow objectives. We will all suffer the indirect consequences, – and even the direct ones as a major war is likely to break out at some point – and I blame our own politicians and business leaders for this.

Posted by Zenmon | Report as abusive

A U.S. – China BIT is simply unrealistic now and in the near future. The Chinese Government is mercantilist and their economic landscape is dominated by State Owned Enterprises and State owned banks that cater to them. And there is no clear demarcation between public and private enterprises in China (boardrooms are not “neutral” bodies), or between the CCP and the large SOE’s, as the Chinese Communist Party’s influence is intrusive everywhere, especially in personnel matters, where CEO’s are changed randomly to suit the Party’s interests.
The Chinese rule of law in commercial matters is negligible, communication and information is heavily censored by the CCP, transparency is minimal, and the military has large stakes in many commercial enterprises. Establishing a non-politicized, rule governed BIT regime in such an environment is impossible. Forced transfer of technology by Western firms, the theft of intellectual property, cyber theft of corporate secrets is built into the cake here – that is the nature of Chinese autocracy. A BIT, similar to the U.S. – Mexico BIT, cannot operate in such a degraded, lawless political environment.

Posted by Cassiopian | Report as abusive