MARCH 18, 2016
In behind-the-scenes negotiations with China, the Obama administration is pushing a trade compact that could export jobs overseas and erode worker protections. Why?
The 2016 election has highlighted growing public opposition in both parties to the status-quo globalization agenda, which both sides blame for outsourcing jobs and privileging corporate profits over ordinary workers. This populist voter backlash puts trade agreements like the Trans-Pacific Partnership (TPP) on life support, and is forcing candidates to better explain how they would boost jobs and wages.
But what if those voters learned that the Obama administration is in the midst of negotiating yet another corporate-friendly trade deal, one that would facilitate more offshoring, and that could also give China, of all countries, effective veto power over domestic policy?
That’s precisely what’s happening in behind-the-scenes negotiations over a little-publicized agreement on the table between the U.S. and China, the world’s two largest economies. Just as the White House is trying to sell TPP as a bulwark against China, the administration is simultaneously seeking an investment treaty with the Chinese that undercuts that argument.
“It really calls into question the contention of the Obama administration that they have a coherent strategy to integrate trade and international relations and national security,” says Barry Lynn, a senior fellow at New America. “It shows they have no idea what they’re doing.”
The deal is called the China Bilateral Investment Treaty, or BIT. This is a standalone compact which would normally be negotiated as the investment chapter in a broader free trade agreement. Investment treaties provide a framework for foreign investors to pursue direct corporate ownership stakes in a partner country, offering them a series of guarantees of non-discriminatory treatment, limits on the expropriation of capital, and access to extra-judicial tribunals to enforce the agreement. The latter are set up through a system known as the investor-state dispute settlement (ISDS) process, which has expanded in scope in recent years as a key protection for foreign investors. In fact, ISDS has proven hugely controversial in the TPP debate, with critics charging it would allow corporations to overturn national laws that constrain their profits.
The U.S. has implemented 41 BITs over the years, as well as investment chapters in a dozen free-trade agreements. But the U.S. already attracts more foreign direct investment than any country in the world, with $168 billion flowing in just in 2012. That includes investments from countries that until now have lacked the protections of a BIT, like China. “It’s pitched as a way to promote investment,” said Celeste Drake, trade and globalization policy specialist at the AFL-CIO. “We’re one of the top countries for foreign investment anyway. We don’t need to give away rights for foreign investors.”
Few investors have the capital to undertake and manage businesses overseas. Invariably, large multinational corporations, or investment vehicles like hedge funds and private equity firms, engage in foreign direct investment. And a BIT offers them the ability to lock in profits while neutralizing the risks that go along with investing abroad.
For example, U.S. companies operating in China encounter local corruption, preferential treatment for their domestic producers, intellectual property theft, and ever-changing regulatory demands. The BIT sweeps away such hurdles, and allows foreign investors to use ISDS to recoup lost profits if foreign governments use those maneuvers to hamper their business. It effectively removes American companies’ one big motivation for keeping manufacturing stateside—our relatively stable judicial and regulatory systems and rule of law. If companies can get all that guaranteed in China, there’s nothing keeping their factories here. The BIT, then, is a recipe for more outsourcing.
China currently protects many of its industries by excluding foreign investment in certain sectors. The key to the BIT is what’s known in trade deal parlance as the “negative list”—a list of which sectors would stay excluded. U.S. corporations want to whittle down that list and pry open more sectors where they can invest in China, and subsequently move production overseas.
On the flip side, there’s already substantial Chinese investment in the U.S.—more than U.S. investment in China, in fact—but we don’t have good information on its impact. Many Chinese companies are state-owned or state-influenced, subsidized from home, and freed from having to run an immediate profit. Michael Wessel, a commissioner on the U.S.-China Economic and Security Review Commission, warns that Chinese-subsidized firms could squeeze domestic competitors by undercutting them on price. Despite this uncertainty, Wessel contends that not single case study on Chinese-invested firms has been undertaken by an independent expert. “We have no idea what Chinese companies are doing in the U.S.,” he says. “Not all investment has [the] same impact. Our negotiators are flying blind.”
When you contemplate Chinese state-owned enterprises enjoying the same treatment on their investments as domestic producers, and having the ability to use ISDS to maintain those privileges, things get even more alarming. “ISDS puts corporations and sovereign governments on the same plane,” says the AFL-CIO's Drake. “This would be China acting through a corporation to challenge a U.S. law.” Under ISDS, Chinese companies could sue federal, state, or local governments over any laws that force them to alter their production facilities. They could potentially sue the Committee on Foreign Investment in the United States (CFIUS), which approves all foreign investment transactions, even though this panel’s reviews are normally not subject to judicial oversight.
The U.S. could try to restrict state-owned enterprises, but without broadly-written language, Chinese companies would be likely to circumvent such constraints. “We’ve talked to U.S. negotiators, they don’t seem disturbed by it,” Drake adds. “I’m disturbed that they’re not disturbed.”
While most of these agreements look similar to the “model BIT,” a template treaty available at the State Department website, the administration has been strangely silent when it comes to its China trade negotiations. Administration officials haven’t publicly announced any negotiation sessions, nor have they briefed cleared trade advisers, who are supposed to be able to look at trade deals as they happen. “This is more secretive than the TPP,” says Wessel, who is also a cleared adviser.
We do know that both sides are eager to finish the BIT, after 24 rounds of talks. Politico Pro reported this week that the White House expects a new “negative list” offer from China before President Xi Jinping arrives for a summit later this month. The Obama administration called completing the BIT before the president leaves office a “top economic priority” following an Obama-Xi meeting in September. Xi has also expressed interest in accelerating the talks, especially in light of China’s weakening economy and its need for foreign investment.
Wrapping up the BIT negotiations, however, would trigger a political explosion.
Wrapping up the BIT negotiations, however, would trigger a political explosion. Given that the leading Republican candidate assails trade deals with China in every public address, tossing another U.S./China treaty into the mix would fan an already volatile political fire. Like other treaties, the BIT would require a two-thirds vote for Senate ratification. That would be a difficult lift in a year with a record Chinese trade deficit and high anxiety over the downsides of globalization.
The BIT’s presence also undermines the geopolitical case for TPP, since one of the main arguments for that treaty is that it’s needed to “contain” China. “If you’re saying TPP is for strategic reasons and doing this at the same time and not telling us anything about it, what are we to expect?” asks Lynn of New America. “We have to assume it’s a giveaway, and we have to assume your claims about TPP are bogus.”
China has ignored many of the commitments imposed on it following its entry into the World Trade Organization, and critics fear the Chinese would not live up to their obligations on the BIT either. And even amid the secrecy surrounding the deal, many question the value of letting China invest more in the United States, or letting U.S. corporations escape domestic laws and regulations, effectively turning capitalism into a heads-I-win, tails-you-lose game. Investment rules acceptable to corporate executives aren’t necessarily good for workers. And pushing another deal that accelerates the hollowing out of the nation’s industrial base, in an election year, borders on political insanity.
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