A coalition of 30 U.S. business groups this week strongly urged the Bush administration to make sure that any Bilateral Investment Treaty (BIT) it negotiates with China is comprehensive in scope and meets or surpasses the investor protections incorporated in the model BIT the U.S. typically uses with developing countries.

In a July 21 letter to President Bush, the trade associations, which include the U.S. Chamber of Commerce, the National Association of Manufacturers and the U.S.-China Business Council, press for the negotiation of a "high-standard" BIT that "follows the U.S. Model BIT, as updated most recently with the U.S.-Rwanda agreement, and seek the strongest possible provisions" in three key areas.

The U.S. and China announced they would launch BIT talks at the June 17-18 meeting of the Strategic Economy Dialogue (SED).

First, any treaty should ensure "core investment protections," the letter said. These include guarantees of "fair and equitable treatment, full protection and security, compensation for expropriation, free transfer of capital, and disciplines on performance requirements," according to the letter.

Second, U.S. firms investing in China should be afforded "national treatment and most-favored nation treatment" both prior to investment in China, or "pre-establishment," and after the investment is made, or "post-establishment." Moreover, this treatment should be based on a "negative list approach" whereby only specific industries or parts of industries that are designated during negotiations can be excluded from this coverage by the treaty. This negative-list based protection at all phases of investment is "of particular importance in China," the letter states, because "its investment restrictions at the national, provincial and local levels are oftentimes opaque."

Third, individual investors should be able to take investment disputes to an international arbitrator under so-called "investor-state" arbitration, for breaches of the BIT and of "existing and future investment agreements with U.S. investors," the letter says.

The letter also notes that "it is also vital that these negotiations ensure competitive practices and treatment across all sectors, particularly given that China still has a significant state-owned sector."

The "key demands" spelled out in the letter, said one informed source, are that U.S. negotiators insist on a negative-list agreement with pre-establishment protections that cover all sectors.

"China's BITs to date have not dealt with this issue," he said. This is particularly necessary to avoid the completion of a BIT that fails to protect all investments in China but that would still allow the Chinese to point to a victory. "What is the benefit and why allow China to claim a victory that they've addressed business concerns when they have not addressed nonconforming measures?" he said.

Additionally, U.S. business groups are worried that even a treaty based on the U.S. model BIT would not be able to address key problems posed by China's state-owned enterprises (SOEs), given that "there is a nexus between government and party and SOEs" that can give SOEs critical competitive advantages.

Specifically, this source noted two examples that might not be covered under the model BIT. First, SOEs have a carve-out in Article VII of China's Anti Monopoly Law that exempts them from certain provisions. Under the terms of the model BIT, a U.S. firm would need to wait and see whether some aspect of the new law, which enters into effect Aug. 1, had impacted its China-based operations in a way that violates the BIT.

Second, this source pointed to China's policies protecting "domestic innovation" in virtually every sector and argued that it was "unclear how the model BIT would address these."

These include regulations and standards, which are often most evident in sectors such as express delivery and medical device sectors but exist across the board in China, "where the government has a substantial role," this source noted.

The letter also asks U.S. negotiators to "continue to press vigorously for resolution of other priority issues on which work is ongoing" between the U.S. and China during the BIT talks. This request seeks to address the concern of some financial services firms that ongoing bilateral discussions, at the Strategic Economic Dialogue (SED) and elsewhere, to liberalize access to Chinese financial services markets via the lifting of equity caps and other measures, not take a back seat to the BIT talks, according to an industry source.

While driving home the point that any BIT must be "high-standard," the letter praises the Bush administration for recognizing that foreign investment "is a critically important driver of economic growth and productivity for the United States."

For U.S. firms, the BIT will aide exports to China because it "would improve U.S. access to China's market and reduce measures that either discriminate against U.S. investors or deny them market access."

The deal would also enhance U.S. competitiveness by counteracting investment treaties China has negotiated with other countries in Europe, Asia, and Latin America.

Finally, a BIT would help ensure continued foreign investment by China in the United States, according to the letter, which helps create jobs, generates taxes and financing, and raises the U.S. standard of living.

The groups signing the letter are the American Apparel and Footwear Association, American Chamber of Commerce -- China, American Chamber of Commerce in Shanghai, American Council of Life Insurers, American Electronics Association, American Exploration and Production Council, American Insurance Association, Association of Equipment Manufacturers, Automotive Trade Policy Council, Bankers Association for Finance and Trade, Business Roundtable, Coalition for Employment through Exports, Coalition of Service Industries, Computing Technology Industry Association, Emergency Committee for American Trade, Financial Services Forum, the Financial Services Roundtable, Grocery Manufacturers Association, Information Technology Industry Council, Motion Picture Association of America, National Association of Manufacturers, National Foreign Trade Council, Retail Industry Leaders Association, Securities Industry and Financial Markets Association, Sporting Goods Manufacturers Association, Travel Goods Association, United States Council For International Business, U.S. Association of Importers of Textiles and Apparel, U.S. Chamber of Commerce, and US-China Business Council. -- Dan Neumann