Will the New Chinese Investment Law Defuse Trade Tensions?
Chinese Vice Premier Liu He (3rd from left) meets with US President Donald Trump. (Photo: AFP/Getty Images)
By Tai Wei Lim

Will the New Chinese Investment Law Defuse Trade Tensions?

Mar. 26, 2019  |     |  0 comments

2018 turned out to be a milestone in China’s economic ties with the developed West, particularly the United States of America. President Donald J. Trump was welcomed by the Chinese society and government when he was elected in 2016. As Trump was a practical-minded New York real estate mogul and businessman who claimed to be good at the art of the deal, the Chinese government under the Xi Jinping administration were ready to embrace the US in economic and business cooperation.

However, in 2018, with allegations of industrial theft, espionage, unfair business practices and lack of market access, the Trump administration began far and broad moves against the Chinese authorities in the economic and tech spheres. The moves were so extensive that it caught everyone by surprise, including the Chinese. Dealing with the trade tensions (some go as far as to call it a “trade war”) began to consume much of the Chinese authorities’ time and resources and it was given priority over other issues. Some attributed these measures to the work of Peter Navarro, a White House adviser in trade, economic and business affairs, who famously wrote the book Death by China. It was likely he was just one member of a larger group of hawks and conservatives who wanted to go hardline on China’s trade/investments/business practices.

The hardliners demanded free and fair trade as well as investment opportunities with the Chinese. The Trump administrative ratcheted up its trade tariffs against Chinese made products and threatened to impose the full set of tariffs against all Chinese made products coming into America. The US also persuaded its five eyes intelligence allies and its alliance network throughout the developed world not to adopt Huawei 5G technologies citing security concerns. Correspondingly, leading five eyes countries and major EU countries began to restrict Huawei 5G technologies from entering their core networks. Meanwhile, its politicians including US Vice President Mike Pence spoke openly about negative Chinese business/trade/investment practices in the now-famous Hudson Institute speech.

The Trump administration also ordered American chipmakers to stop supplying ZTE (Zhongxing, a Chinese electronics and 5G tech company) with high tech chips before rescuing it via a last minute plea from the Xi Administration. Perhaps, the most high profile incident in the trade tensions was the US prosecutors/investigators’ request to the Canadian authorities to hand over Huawei’s Chief Finance Officer Meng Wanzhou to the US authorities for violating United Nations sanctions against the Islamic Republic of Iran for nuclear weapons development. It quickly led to a deterioration of relations between Canada and China as the latter accused the Canadian/US authorities of politically motivated moves. Beijing quickly detained Canadians on their side for legal violations and even sentenced a drug trafficker to death after a retrial.

The trade tensions with the West was taken one notch downwards after Washington DC and Beijing engaged in trade talks which apparently appeared to go well at the point of this writing (an extension for more time was agreed on both sides). One of the positive attributes of the talk was perhaps the new investment law arising out of Beijing.

The new investment law promulgated by Beijing has been welcomed quite universally as a step in the right direction by foreign investors keen on engaging the Chinese market and industries. At lightning speed (within three months), the Chinese quickly put in place new laws that can help them resolve trade tensions with the Americans on market access to the Chinese business sectors. The new investment law replaces previous three archaic laws that had been put in place during the heady economic reform era from the 1980s and 1990s onwards. The new law to replace the three archaic laws was passed in March 2019.

It will help to defuse tensions and is welcomed by the West and also the East Asian region for world economic stability.

Several new features of the new investment law stand out. First, multinational companies are now free to engage in equitable competition with domestic Chinese companies with the exception of a list of sensitive sectors that remain restricted for foreign investors. The Chinese authorities promised that this list will be further whittled down. Second, there will be strong restrictions on state agencies’ reach into the private sector. Third, a complaints mechanism and institution will be set up to manage and handle the complaints of foreign investors in China. These measures will help level the playing field for the foreign investors in China. The European Union and the United States have long complained about obstacles in their ability to compete and operate freely in the Chinese market.

It appears these complaints are reaching fruition, especially after the Trump’s administration slapped trade tariffs on Chinese goods with potential threats to escalate them to all goods originating from China to the US. The trade tensions have also spilled into the tech sector with the West monitoring possible and potential unfair competition from Chinese players from their perspectives. Speculations, rumors, projections and worries (perhaps unsubstantiated) about a “decoupling” effect between US and Chinese economies has begun to take root in the narrative sphere.

In any initiatives and laws, there are always room for improvements. To understand the European and American complaints better, it is useful to analyze the complaints that the West has about the new investment law. First, some commentators and observers claim that while the new investment law curtails the government’s ability to intrude into the private sector, it does not stop other associated entities from doing so, e.g. state owned enterprises representing local government interests to pressure foreign private sector investors/companies into implementing an item to the former’s benefit. Some European countries for example prefer to have restrictions across the board instead of focusing only on limitations on the government’s ability to intrude.

Second, the American observers/media are concerned about theft of intellectual property rights (IPR) and industrial espionage which they feel are not sufficiently covered by the new investment law and want the Chinese authorities to go further in this sector. One of the sources of tension between the Americans and the Chinese had been what the American businesses and authorities perceived as a lack of enforcement against IPR theft on China’s part and they were hoping to see more of this addressed in regulations. For them, the new investment law did not address this issue specifically. Thus, commentators and observers claim therefore that this law does not go any way in helping assuage the US-China trade tensions.

Third, some Western analysts and commentators feel that the new investment law wordings are vague and not clear enough. They are afraid this opens up avenues whereby local entities can then skirt the law to the detriment of foreign investors. On top of that, the new investment law also provides retaliatory measures which China can use against countries it perceives are practising unfair investment barriers for Chinese companies. It then creates a political/geopolitical element in the investment law and some uncertainty with regard to its implementation/interpretation/promulgation. Some Western critics therefore are of the opinion that the investment law is rushed and is approved by a rubber stamp parliament without duly consulting with Chinese stakeholders and/or foreign companies and trade associations operating within China. Thus, in their perception, it may not take into account the interests of foreign investors.

Despite these complaints, almost all stakeholders universally agree that the new investment law is a step in the right direction. It will help to defuse tensions and is welcomed by the West and also the East Asian region for world economic stability. China and the US are the two major engines of growth in the world economy today. The trade tensions has hurt sectors on both the Chinese and US sides and also introduced uncertainties to the world and East Asian economies. Thus, many countries hope for a stabilization factor, a reprieve of sorts, to tune down the temperature and work towards stabilizing the world economy for the sake of all. The new investment law is a step in the right direction in this aspect. It will take hard efforts and wisdom on all sides for US and China to reach a new equilibrium as they readjust their relationship to reflect national priorities/interests and changing geopolitical realities in the world.

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