What Would a U.S.-China Bilateral Investment Treaty Mean?

Earlier this month, a senior U.S. Department of State official indicated that the United States and China, following years of consideration and five months of expedited negotiations, will soon have the draft text of a Bilateral Investment Treaty (BIT).  The agreement would further liberalize the trade relationship between the United States and China, as well as providing a framework for resolving future commercial disputes.

But some commentators have raised questions about the full legal implications of such an agreement.  In particular, the BIT could turn many American and Chinese regulatory decisions into arbitrable investment disputes.

A BIT typically permits aggrieved foreign investors to seek compensation for unfair or inequitable regulatory treatment in arbitration instead of host country domestic courts.  Such an agreement with China would mark the first time that the United States has signed a BIT with a substantial foreign investor and opened the possibility of litigating American regulatory decisions before international arbitrators.  With large scale regulatory reform on the horizon, particularly in the financial sector which has substantial Chinese investment, this possibility raises complex sovereignty questions.

In addition, arbitration of American regulatory disputes raises the tricky question of compliance with an adverse decision.  The United States has typically treated BIT’s as self-executing treaties, but Congress would have to approve the payment of adverse judgments.  Domestic political considerations would make such authorization unpalatable, and any failure to pay could jeopardize the overall BIT framework.

As of now, the parties have reached no agreement, and the U.S. Senate would have to ratify any BIT before it took effect.  But, as several commentators have noted, the issues surrounding a U.S.-China BIT merit careful scrutiny.

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