US-China Meetings Yield Tentative Progress on Investment Treaty Plans

17 July 2014

Top government officials from the US and China met in Beijing late last week for a series of high-level discussions, addressing topics such as currency reform, a planned investment treaty, and a prolonged row over a tech trade deal. While officials reported constructive talks in these and other areas, analysts note that more work will be needed to translate this progress into concrete results.

The US-China Strategic & Economic Dialogue has become a regular feature on the international calendar, serving as an opportunity for the two sides to advance dialogue and potentially find solutions in what has traditionally been a complicated relationship, one of both cooperation and competition.

China became the world’s largest trader earlier this year, surpassing the US, a long-time holder of that title. The rise of the Asian nation on the world economic stage has not been without controversy, however, and the two sides have sparred repeatedly over topics ranging from renewable energy support policies to the use of trade remedies.

The efforts of the US to close a trade deal with 11 other Pacific Rim countries in the near-term – an initiative known as the Trans-Pacific Partnership – has prompted many analysts to suggest that the pact is meant to counter the growing influence of China. To date, Beijing is not a member of the group negotiating the trade deal, and has not formally requested entry, though it has asked for information regarding TPP developments.

“Let me emphasise to you today the United States does not seek to contain China,” US Secretary of State John Kerry said last week. “We welcome the emergence of a peaceful, stable, prosperous China that contributes to the stability and the development of the region, and that chooses to play a responsible role in world affairs.”

ITA progress?

Trade watchers had been particularly looking to last week’s meetings for signs of a resolution to the months-long stand-off over the expansion of the WTO’s Information Technology Agreement (ITA).

Various ITA participants have been negotiating in recent years to expand the pact’s product coverage. The existing version of the ITA – a tariff-cutting mechanism for selected information and communication technology products – dates back to the mid-1990s, and many of the goods subject to its requirements have since become obsolete.

Meanwhile, several new products and technologies have entered the marketplace that are not included in the trade deal.

Negotiators had been hoping to unveil an agreed-upon list of new products in time for last December’s WTO Ministerial Conference in the Indonesian island province of Bali. The talks, however, came abruptly to a halt in November, following a disagreement between China and several fellow participants over the former’s wish to exclude a series of products from the final list and subject some others to long tariff phase-outs. (See Bridges Weekly, 21 November 2013)

A meeting of trade ministers from the Asia-Pacific Economic Cooperation (APEC) countries in May, while citing progress, failed to lead to a resolution. (See Bridges Weekly, 22 May 2014)

While no formal resolution was reached, the two sides had “constructive discussions” on the ITA expansion efforts, said US Trade Representative Michael Froman in a statement following the meetings.

“We look forward to intensifying our work with China in the coming weeks with the goal of defining a list that is consistent with achieving an ambitious plurilateral agreement,” the US trade chief added, noting that reaching an agreement would also be a win for Beijing in its role as APEC host this year.

Investment treaty timetable

A potential timetable for the negotiation of a bilateral investment treaty (BIT) between the two sides was another key focus of the meeting. The renewal of these plans was a key outcome of last year’s bilateral talks, though the process had originally begun under previous US President George W. Bush. (See Bridges Weekly, 18 July 2013)

The recent move to ease investment restrictions in the Shanghai Free Trade Zone – a Chinese pilot project that aims to serve as a testing ground for reforms – has been raised as a potential model for how Beijing may approach its BIT negotiations with Washington. (See Bridges Weekly, 10 July 2014)

According to Froman, the US has received assurances from its Asian trading partner about a “timetable for moving forward” on the “negative list” component of the pact. Under a negative list approach, all sectors are open to investment except for those specifically deemed closed.

Chinese Vice Premier Wang Yang confirmed additional details in his statement to reporters last week, noting that the two sides are aiming to reach a deal this year on the BIT text’s core issues and main articles, and would launch negative list negotiations in early 2015.

Currency

Another outcome of last week’s meetings was a non-binding commitment by China to speed up the liberalisation of its exchange rate regime. The strict control of its currency, known as the renminbi or yuan, has been a long-standing source of contention with its trading partners, particularly the US.

Critics of the existing policy say that China’s currency is undervalued, thus giving its exports an unfair advantage over its competitors. Beijing, for its part, has noted that the currency has already appreciated significantly over the past several years, and that further liberalisation will take time.

“Consistent with your reform agenda, China committed to reducing intervention as conditions permit, and China is making preparations to adopt greater transparency, including on foreign exchange, which will accelerate the move to a more market-based exchange rate,” US Treasury Secretary Jack Lew told reporters following the discussions.

Chinese Central Bank Governer Zhou Xiaochuan stressed the point in a briefing on the event margins, telling reporters that the “direction of our foreign-exchange reforms is clear,” while noting that interventions into the exchange rate will only be decreased “when conditions are ready.”

“We hope that the exchange rate could be kept basically stable on a reasonable and balanced level through reforms,” he said, in comments reported by the Financial Times. “At the same time, we will allow market supply and demand to play a bigger role in determining the exchange rate.”

Climate

Climate change has been another key issue for the two sides, particularly over the division of responsibility in this area, given that both are major emitters of carbon.

A year ago, Chinese President Xi Jinping met with US President Barack Obama in California to discuss this and other topics, after which the two sides announced an agreement to work toward phasing down the production and use of hydrofluorocarbons, a major greenhouse gas. The move was seen at the time as a potential turning point for US-China climate discussions. (See Bridges Weekly, 13 June 2013)

During Secretary of State Kerry’s last visit to Beijing, the two countries then announced five initiatives under their Climate Change Working Group, including reducing emissions from heavy-duty and other vehicles; improving smart grids' carbon capture, utilisation, and storage; collecting and managing greenhouse gas emissions data; and increasing energy efficiency in buildings and industry. These were to be implemented from October 2013 onward, at the earliest. (See Bridges Weekly, 18 July 2013)

This time around, the working group announced programmes across all five initiatives, along with an agreement to adopt stronger fuel efficiency standards for heavy- and light-duty vehicles and greenhouse gas emissions standards. The group also announced a new initiative on climate change and forests, as well as four projects on carbon capture, utilisation, and storage.

“As the world’s two biggest energy consumers and carbon emitters, China and America have a special role to play in reducing emissions and in developing a clean energy future,” Kerry told reporters last week.

The US’ top diplomat highlighted that coming together on climate is invaluable for advancing a solution on the global level, particularly in light of the negotiations for a new international pact to replace the Kyoto Protocol. The planned deal is being discussed under the auspices of the UN Framework Convention on Climate Change (UNFCCC), and officials hope to complete it in time for a meeting in Paris late next year.

ICTSD reporting; “China vows to speed up renminbi liberalisation,” FINANCIAL TIMES, 10 July 2014; “U.S., China ink coal, clean energy deals but climate differences remain,” REUTERS, 9 July 2014.

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