Business groups’ complaints show how Trump’s China deal falls short on foreign investment



Adam Behsudi | Politico

U.S. companies have expressed fresh misgivings about China’s foreign investment law, providing additional evidence that President Donald Trump’s grinding trade fight with Beijing and goal of signing a preliminary trade deal this month have done little to reform China’s practices.

“The reality remains that the Draft Implementing Regulations do not address clear differences between the treatment of China’s state-owned enterprises and the private sector,” the U.S. Chamber of Commerce, the American Chamber of Commerce in China and the U.S. Information Technology Office wrote in joint comments obtained by POLITICO.

Those comments, submitted to the Chinese government last month, come as the two countries attempt to complete a “phase one” deal, as they announced in October. Several analysts have already said the concessions outlined last month don’t go far enough. Others note they appear to be an effort by Trump to appease a rural base that has been battered by Chinese retaliation in the nearly two-year trade fight by getting China to agree to increase farm imports.

Even in China’s attempt to address some of the systemic issues that sparked the trade war, Beijing’s regulations for putting the new law into force show that China is unlikely or unwilling to relent on aspects of its state-run economy that prompted Trump to slap tariffs on more than $350 billion worth of Chinese imports.

This week, Chinese President Xi Jinping plans to tout his country as a hub for foreign investment during its annual international import expo in Shanghai. Experts who follow China say true openness doesn’t seem to be forthcoming.

“If you thought the foreign investment law was going to allow multinational companies to compete with state-owned enterprises, you’re a fool,” said Derek Scissors, a senior fellow at the American Enterprise Institute who is critical of China’s policies. “What the Chinese are saying is, ‘We will treat you better subject to the condition that with any sector the state thinks is important we will take your technology and give you nothing.'”

As part of the so-called phase one deal, Beijing is likely to announce long-anticipated openings in its financial services sector. It is also expected to put into place previously agreed-to intellectual property protections dealing with copyrights and trademarks.

In exchange for Chinese concessions, Trump delayed an October tariff escalation. If a deal is reached, China is expecting the president to hold off on another round of tariffs in mid-December that go after big-ticket items like laptops, smartphones and other consumer goods.

A senior White House official said there are still questions over how to enforce China’s commitments on intellectual property and forced technology transfer. Those are similar issues that brought the talks to a grinding halt last May.

What the deal is not expected to fully address are Chinese industrial policies that rampantly subsidize state-owned and domestic industries.

It’s also unclear if China is willing to fully address U.S. concerns over policies that force American companies to hand over technology as a condition of doing business in China’s lucrative market. A second phase of negotiations is expected to tackle those larger questions, although Chinese officials have already tamped down expectations of so-called structural reforms.

“They said we should not have high expectations on the structural issues,” said a U.S. business source who was recently briefed by Chinese officials in Beijing.

Beijing’s new foreign investment law, which is expected take effect Jan. 1, provides another clear sign that any major changes in China will be hard fought.

The implementation of the investment law “raises significant questions about whether the U.S. negotiating team is working to solve old challenges that are no longer relevant in China’s 21st century political economy,” said a person close to the trade talks.

The approval of the new law was fast tracked in March by the National People’s Congress, China’s rubber-stamp legislature. The legislation aims to prohibit forced technology transfer and illegal government meddling into foreign business practices.

But the law still creates numerous loopholes that allow the worst of China’s state-run economic policies to go unchecked, U.S. business groups said in recent comments.

China’s implementing regulations continue to distinguish between foreign and domestic companies, which “enables the establishment of de facto requirements and limitations for foreign investors,” the business groups note. The regulations to implement the law also do not mention whether state-owned companies will be treated differently.

The law also creates an opaque national security review system and a vague definition for allowing a breach of the law for reason under “national or public interests.”

The law also does not address its relation to China’s emerging “corporate social credit” system. The system, which is expected to be operational in 2020, will monitor and control the activities of foreign companies in China for regulatory compliance and also to guide the behavior of firms in the Chinese market. The process will take place through voluntary reporting as well as data monitoring and video surveillance.

“The use of big data and algorithms to govern the corporate SCS [social credit system] — design of which remains highly opaque — is of great concern to our members,” the groups said in their comments.

The mounting issues identified in the comments all add to the disappointment that U.S. businesses now face with a deal that won’t do much to address those problems.

“The bottom line is China’s approach to helping the Trump administration is solving challenges of the 1990s in 2019,” said the person close to the talks. “None of it amounts to very much.”

Ben White contributed to this report.

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