July 12, 2013 10:39AM

Do We Need an Investment Treaty with China?

From the Washington Post today:

China and the United States have agreed to restart negotiations over a possible investment treaty that could substantially open the Chinese economy to more American companies.

I’m all for countries opening their economies to foreign investment. One hot issue right now is a proposed takeover of a Virginia pork producer by a Chinese company. Some members of Congress are wary and have raised a number of concerns, such as food safety. In my view, these concerns have no merit. Aside from the standard review of whether a particular foreign investment raises national security concerns, I don’t think we should restrict foreign investment.

But I’m not convinced that investment treaties as currently formulated are necessary for a liberalized foreign investment policy. In fact, through the controversy they cause, they may even undermine it.

I wrote specifically about the possibility of a U.S.-China investment treaty here. Then just recently I wrote more generally on whether investment treaties are about liberalization or litigation. In a nutshell, the way these treaties work is that they give foreign investors an opportunity to sue host country governments before an international tribunal when they feel they have been treated badly. (There are several legal obligations, but one example of the standard that applies is whether the foreign investors have received “fair and equitable” treatment. This is pretty broad and vague, and people can’t seem to agree on what it means.)

My concern is that these treaties mostly result in lots of litigation by companies that have already invested abroad, rather than focusing on removing actual barriers to foreign investment. If we could draft a treaty under which both sides (or all sides, if it was done multilaterally) promised to allow foreign investment and not discriminate against foreign investors once they have invested, that might work. But the current system isn’t well calibrated for that task. Instead, it puts administrative and constitutional law principles into international law, and leads to high‐​profile litigation on issues unrelated to discrimination against foreign investment. In regard to Chinese investment, it raises the following prospect: A Chinese state‐​owned company invests in the United States, gets badly treated by some domestic regulator (not hard to imagine), then sues the U.S. government in an international tribunal for billions of dollars. Somehow I don’t think that will play very well politically.

So by all means, I think we should liberalize investment with China (allow their investment in here, and talk to them about letting our investment in over there). I’m just not sure that investment treaties in their current form are a very good approach to this issue.