Can We Make Progress on Trade & Investment with China in 2016?

By Claire Reade –

Secretaries Lew, Kerry pose with Chinese counterparts State Councilor Yang Jiechi and Vice Premier Wang Yang at the Strategic & Economic Dialogue in Beijing during July 2014. Source: U.S. Department of State's flickr photostream, U.S. Government Work.

Secretaries Lew, Kerry pose with Chinese counterparts State Councilor Yang Jiechi and Vice Premier Wang Yang at the Strategic & Economic Dialogue in Beijing during July 2014. Source: U.S. Department of State’s flickr photostream, U.S. Government Work.

We face a daunting challenge these days, trying to determine where change in China is possible. We cannot tell for sure why the Third Plenum economic reforms have not moved more effectively to make the market play a decisive role, why state-owned enterprise reform is lagging, or whether the nationalism we are seeing in so many arenas will translate into harmful economic policies.

But the Strategic and Economic Dialogue is coming up this spring, the Joint Commission on Commerce and Trade typically begins working group activity around now, and China is chairing the G20 this year. In addition to the macroeconomic and finance issues ranging from currency rates to capital controls, many trade and investment issues demand attention. How can we effectively assess which trade or investment areas might offer an opportunity for progress, given all the complex circumstances in China? And what can we realistically do on these fronts in 2016?

This depends in part on what U.S. stakeholders and policymakers have identified as priorities, but it also could help to understand where Chinese stakeholders want change. Two recent articles in Caixin, a respected and generally progressive Chinese business and finance magazine rumored to have connections to top Chinese economic officials, and a commentary in Chinese discussing the accomplishments of Du Runsheng, the vaunted Chinese agriculture reformer from Mao’s era who died at 102 last October, may provide us additional perspective. Together, they indicate three potential areas where the United States and China might agree regarding the benefits to China’s economy and to a predictable and fairer trade and investment environment if China took concerted action: spurring healthy innovation; creating competitive and efficient markets; and improving governance and transparency in China. Let’s look at each of these in terms of concrete actions that might be taken in 2016.

Innovation: At the 2010 Strategic and Economic Dialogue, China and the United States agreed that their policies would conform to these key innovation principles: “non-discrimination; support for market competition and open international trade and investment; strong enforcement of intellectual property rights; and, consistent with WTO rules, leaving the terms and conditions of technology transfer, production processes and other proprietary information to agreement between individual enterprises.” To put it mildly, these are still live issues in China. And the consequences are not trivial. As Caixin noted, for 2015, the World Economic Forum cited a lack of Chinese innovative capabilities as a significant problem for China’s future economic growth, while a survey of Chinese companies reflected the same concern. China itself has flagged “innovation” as a key area for this year’s G20.

Healthy innovation requires a “hands off” environment, where individuals can make independent decisions on collaboration without government intervention or pressures created by some broader national industrial policy goal. Du Runsheng recognized the motivating power of letting people make their own decisions, successfully advocating reforms that ended forced mass agricultural cooperatives and allowed households to farm on their own. He noted that “without independent thinking, one billion brains are equivalent to just one brain. Mistakes made [by one person] are duplicated by everybody.”

Yet China has many policies that counter this reality, including subsidies, localization requirements, tax laws, regulations preventing foreigners from competing effectively in entire sectors (e.g., telecommunications, financial services, insurance, construction), and competition laws that may undermine intellectual property rights. The United States needs to call out these policies as destructive for both U.S. stakeholders and China’s own innovation ambitions.

Another front for enhancing innovation involves improving protections against intellectual property (IP) theft. One young Chinese entrepreneur noted in a recent newspaper interview that the geeky protagonist in HBO’s Silicon Valley was far too concerned about the ethics of stealing others’ intellectual property and that in China today that theft would be par for the course. In 2015, China committed to work on revising its trade secrets law. Instituting a strong set of protections with serious penalties accompanied by real judicial powers to enforce them in 2016 would enhance the opportunities for innovation, as would the consistent imposition of significant deterrent penalties for this and other kinds of IP theft.

Finally, work on allowing efficient and reliable data flows would enhance innovation across the economy. Impeding these flows in the twenty-first century is as problematic as blocking roads, ports, airspace, telephone, telegraph, and the postal service 100 years ago.

Competition and efficiency: We need a multifaceted effort to get this right. First, the bilateral investment treaty has President Xi Jinping’s attention, a circumstance we should not ignore. To be able to conclude a high-quality agreement, though, hard work needs to continue to achieve open and fair competition in Chinese markets. Caixin pointed out the need to “overhaul” sectors like health care and financial services, which include banking, securities, insurance, asset management, and data-related services. Numerous other sectors, including value-added telecommunications and Internet mediated services also need attention. And Caixin makes a key point on the need to reform state-owned enterprises, as well as eliminate local governments’ harmful interactions with local companies to allow a level playing field. A bilateral investment treaty (BIT) can and should do all these things, as well as protect and encourage innovation.

Governance and transparency: Improving the institutional legal framework for the economy would help both innovation and efficient fair competition. Actions would involve both eliminating regulations and creating safeguards surrounding their creation. We need our stakeholders to help the U.S. government identify regulations that create local barriers or create risks of corrupt or biased decisions, so we can press China to eliminate them. On the transparency front, Du Runsheng emphasized that his successful agricultural reform programs emanated from listening to the farmers. In a similar vein, Caixin bluntly declared a few weeks ago that, “the authorities…need to carry out changes that guarantee the public a say in public affairs.”

In concrete terms, the United States should work on China to make systemic changes that are then embedded in authoritative Chinese legal measures, including, for example, comment periods of 60 days for complex draft rules, rather than just 30 (or fewer); letting the public see the comments others have submitted; requiring agencies to include reasons for their decisions in writing and permitting appeals of those decisions; and publishing all court and other analogous rulings. Finally, the United States could make a real difference if its interagency — with the help of outside experts if possible — implemented the Xi visit commitment on judicial reforms by working together to identify short- and longer-term changes that would significantly improve the conduct and outcomes of commercial cases in China and pressing for these changes.

Even if we can see more clearly the areas where there may be genuine agreement that work needs to be done, we have to look at one more question. What are the prospects this year for achieving any or all of these goals? Frankly, far from clear. China’s corruption crackdown, combined with ever-widening mandates for nationalistic orthodoxy in academia, online, and in cultural spheres, raises the question whether there is any safe space for innovation in China. Even supposedly noncontroversial commercial innovation seems vulnerable in this constrained environment. Improving competition conditions will also not be easy. China faces major vested interests with no desire to lose their prerogatives, so China’s top leaders will have to engage significantly—on the BIT, for example—to make a difference. Finally, improving rule of law and transparency will require China’s leaders both to understand the systemic value of this seemingly dry legal concern and to see this as an initiative that will improve fairness and predictability, not as inconvenient or worse, threatening.

Ms. Claire Reade is a senior associate with the Freeman Chair in China Studies at CSIS and senior counsel at Arnold & Porter in Washington, D.C. This piece appeared as a CSIS Commentary here.


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