Investment protectionism of all types has gained traction as a result of the global financial crisis; despite this, however, the removal of trade barriers and advancement of economic liberalization are irreversible worldwide trends.

United we stand [By Jiao Haiyang/China.org.cn]

To this end, moves to begin substantive discussions regarding the China-U.S. Bilateral Investment Treaty (BIT) topped the agenda at the fifth round of the China-U.S. Strategic and Economic Dialogue (S&ED). The experience of other countries shows that BIT plays a positive role, both in attracting foreign investment for the host country and in protecting foreign investors.

Despite these benefits, Sino-U.S. discussions on BIT have stalled since they began in the 1980s, having been hit by deterioration in Sino-U.S. relations in the late 1980s.

The two countries resumed BIT discussions in June 2008; however, little progress has been made, to date. There is no doubt though that the increasing economic links between the two countries provide sufficient motivation on both sides to advance the BIT timetable.

Bilateral investment should be evenly matched; however there is currently an enormous gap between Chinese investment in the U.S. and American investment in China. U.S. direct investment in China is the largest of any country, while China's direct investment in the U.S. only ranks 25th out of all investing countries, accounting for less than 1 percent of America's total FDI. International investment has no universally accepted systemic rule, unlike the multilateral trading system; therefore, the Sino-U.S. BIT is basically an "equivalent compromise" which seeks to take into account both sides' interests.

In essence, restrictions on market access represent the major obstacle to bilateral trade between China and the U.S. and because of this investment access and fairness have become two of the most sensitive issues in BIT discussions between the two countries. In general, the U.S. has the superior investment environment, especially in terms of market openness, infrastructure, IPR protection and R&D. Chinese enterprises, however, face huge problems where market access is concerned, largely due to very strict American rules on national treatment and market access related to the aviation, communication, nuclear, financial and ocean carriage industries. China's national capital, especially its sovereign wealth fund, has come up against many formidable barriers.

Since the beginning of the international financial crisis, China's sovereign wealth fund has invested heavily abroad in order to mitigate the surge in foreign exchange reserve and minimize capital risk. These actions have put the U.S. on its guard against so-called "strategic investment" and "national capitalism." China has encountered further resistance to its attempts at investing in those non-commercial sectors which the U.S. feels are too closely linked to its own national interests. The telecommunication, energy and financial industries are all good examples of this.

U.S. direct investment in China has been on an upward curve since 1994, with multinational corporations being the principal source of U.S. direct investment in China. Such corporations invest across an extremely wide range of sectors and their yields are impressive. American multinationals are now manufacturing and distributing worldwide, thanks to China's huge market and plentiful resources. American investments in China include those in capital-intensive heavy industry, technology-intensive industry and the modern service industry. American investment in China yields a return which is as much as 8 percent higher than the average global rate of profit and these steady profits are ploughed into new investment.

American direct investment in China has, however, been adversely affected by the global financial crisis. The profit margins of FDIs have been squeezed by China's rising production costs and America's reindustrialization strategy. The Obama administration wants to restructure the global industry chain through promoting capital investment in the domestic market.

Against this backdrop, it would be mutually beneficial for China and the U.S. to establish BIT. In terms of the investment connections and economic scale of both countries, China and the U.S. have huge potential for bilateral investment and it would be hugely significant if the direct investment ceiling could be broken at this time. Both countries should begin by substantively addressing the issue of economic development and working to overcome political obstacles. "Equivalent compromise" should be made on both sides with regard to market access and national treatment toward foreign investment.

The author is the deputy director and associate research fellow of World Economy Study at the Economic Forecast Department of the State Information Center.

This article was first published in Chinese and translated by Li Huiru.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.