The Strategic and Economic Dialogue: Almost as Interesting as a Sharknado

The U.S.-China Strategic and Economic Dialogue (SED) has only generated fitful levels of interest in recent years. With this year’s SED coming on the heels of Sino-American rancor involving Edward Snowden, expectations for this week’s talks were tamped down as well.

With D.C. swamped with all the high-profile sharknado news, it would be easy to miss this week’s SED talks. In a semi-surprising development, the Washington Post‘s Howard Schneider reports that something significant happened:

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.

During high-level talks over the past two days, Chinese officials agreed to drop a longstanding demand that negotiations over a Bilateral Investment Treaty would have to exclude sensitive or developing sectors of the economy that it wanted to protect.

Although many American companies have businesses in China, investment there is governed by a strict set of rules that often limits foreign ownership — a policy, U.S. officials argue, that will crimp China’s growth in the long term and which limits the benefits American companies and workers can gain from China’s economic expansion.

American officials characterized the change in negotiating policy as a major concession and a sign that the new Chinese government wants to speed economic opening.

The Financial Times’ Geoff Dyer provides some interesting details:

The two governments began discussion of a bilateral investment treaty in 2008, but the talks did not progress. According to US officials, the discussions are now being revived after China made an important concession about the basis for the negotiations. Every sector will be up for discussion unless one of the governments declares it off-limits – a “negative list” approach, which Washington had long called for.…

China has also agreed this year to revise its offer for signing up to the World Trade Organisation’s agreement on government procurement rules.

Both stories stress that there’s no guarantee a bilateral investment treaty (BIT) will be negotiated — in theory, they’ve been negotiating this for five years. Still, what’s interesting is why China agreed to these concessions. There are three proffered reasons in the news roundups: 1) putting a halt to rising levels of U.S. investor protectionism in reaction to things like the proposed takeover of Smithfield Foods by Shuanghui International, 2) a desire by China to jump-start lagging U.S. foreign direct investment in the country since 2010, 3) a crowbar to allow China Inc. to buy up the world, or 4) a mechanism by China’s new leadership to jump-start domestic economic reforms.

I don’t think it’s (1). The truth is there really hasn’t been a lot of U.S. investor protectionism directed against China. Furthermore, no BIT in the world is going to crimp the CFIUS process if there really is a national security case.

It could be (2). According to the Commerce Department’s Bureau of Economic Analysis data, U.S. foreign direct investment in China has fallen from $58.9 billion in 2010 to $51.3 billion last year. That last figure is still way above pre-2008 levels, however, so I’m not sure it’s enough of a motivating factor.

I don’t think it’s (3), and I’ll outsource why to this Martin Wolf column.

I have no positive evidence for (4), except that it would be consistent with what President Xi Jinping and Premier Li Keqiang have been jaw-jawing about with respect to domestic economic reform. And using an international agreement to force domestic change in China is not an unprecedented maneuver.

Developing … in some very interesting ways.