CORRECTED VERSION OF BEIJING 3855 -- Bilateral Investment

C O N F I D E N T I A L SECTION 01 OF 07 BEIJING 003856

SIPDIS

STATE FOR EAP/CM -- PARK AND FLATT
STATE FOR EEB/OIA -- SCHOLZ, TRACTON, AND HICKS
STATE FOR E - YON
STATE FOR L - CAPLAN
STATE PASS USTR FOR STRATFORD, WINTER, BAHAR
NSC FOR DNSA PRICE, SMART, AND LOI
TREASURY FOR TAIYA SMITH, RESNICK, AND SAMPLINER
COMMERCE FOR BRZYTWA AND ARONOFF

E.O. 12958: DECL: 09/28/2018
TAGS: EAID ECON EFIN CH

SUBJECT: CORRECTED VERSION OF BEIJING 3855 -- Bilateral Investment
Treaty Negotiations: Deliberate Pace in First Round Due to MOFCOM
Staff Changes -- ELIMINATES GARBLED TEXT

BEIJING 00003856 001.2 OF 007


Classified By: Acting Economic Minister-Counselor Robert Forden for
Reasons 1.4 (b) and (d)


1. (C) SUMMARY: The United States and China held the first round of
bilateral investment treaty (BIT) negotiations in Beijing, September
2-5, 2008. China concurred with the U.S. view that an agreement
would be significant given the two countries' importance to the
global economy as major investment destinations. At China's request,
the U.S. delegation explained provisions in the U.S. proposed text
and responded to detailed questions and comments from the Chinese
side. Discussions were productive and business-like, but moved more
slowly than expected. Chinese delegation members raised numerous
questions and comments, but did not commit to formal positions. The
United States and China subsequently agreed to a second round of
negotiations the week of October 13, with the intention of completing
the article-by-article review to facilitate preparation of a
bracketed text.


2. (C) Comment: The methodical pace was likely due to: (i) the
assignment of a new Chinese lead negotiator, new Ministry of Commerce
(MOFCOM) Treaty and Law Department Director General (DG) Li Ling, who
had not participated in previous exploratory discussions; (ii) the
large number of new Chinese participants; and (iii) former lead
negotiator Guo Jingyi's detention for alleged corruption in the
approval of foreign investment, which clearly had shocked some of his
former staff members and may have led China's negotiators to proceed
with special caution. Working in our favor, the number and quality
of questions and the size of the Chinese delegation suggests China's
sincere desire to understand the U.S. text, suggesting it may be
prepared to use the U.S. text as the basis for line-by-line
negotiations. End Summary and Comment.

--------------
OPENING REMARKS
--------------


3. (C) Director General Li opened by welcoming the U.S. delegation to
Beijing and commenting that the large number of Chinese ministries
represented demonstrated the PRC's commitment to the BIT
negotiations. There were as many as 30 Chinese officials present at
times, representing a wide range of ministries, as outlined at the
end of this cable. DG Li recalled past efforts to negotiate a United
States-China BIT, noting she had participated in the failed BIT talks
of the 1980s. According to Li, during the BIT exploratory talks held
between January 2007 and June 2008, significant differences in
approach were identified in the areas of national treatment, free
transfers, performance requirements, expropriation, minimum standard
of treatment, transparency, environment and labor, financial
services, tax, and investor-State dispute settlement. A BIT would
facilitate bilateral investment in each country, but we need to
recognize the gap in the level of economic development between the
two countries. Li recalled that the United States and China failed
to reach agreement in the 1980s because the USG insisted on a "high
standard" BIT and ultimately judged that no agreement was better than
a bad agreement. Li noted that China has entered into more than a
hundred BITs, which have played important roles even where they have
not provided such high standards. Li emphasized that the BIT would
need to reflect China's current level of development and that the BIT
negotiations would be a "protracted, uphill battle" for both sides.


4. (C) The U.S. delegation responded that, while BIT talks in the
1980s were not fruitful, significant developments in each economy
should assist our joint efforts to find common ground. Any agreement
would need to be perceived as high-standard by each side given its
respective interests. The U.S. delegation agreed generally with Li's
list of BIT issues where differences exist but stressed that the
extent of differences between the two sides varies significantly from
issue to issue. Some of the issues represent very significant
differences in approach (e.g., national treatment). On a number of
other issues, however, the differences are less substantial, and, in
some areas, the two sides have discussed potential means to narrow
differences. The U.S. delegation also noted that, in many instances,
the purpose of added detail in the U.S. text is to clarify the

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meaning of provisions or to respect the interests of government
regulators in sensitive sectors; thus while our texts differ, our
interests are likely to converge.


5. (C) U.S. delegation co-lead Wes SCHOLZ added that international
investors and foreign governments were paying attention to the
evolution of the U.S. China investment relationship. Developments in
the U.S. and China suggest a convergence of interest that has
substantially increased the likelihood of finding common ground in
BIT negotiations. Nevertheless, there are significant challenges
that will require working-level and political-level engagement to
succeed. SCHOLZ noted the two countries' leaders have expressed the
hope that we make significant progress before SED V in December.
This goal takes on particular importance for the United States given
our political calendar and our desire to ensure that, if negotiations
need to continue under a new Administration, there is a compelling
case to continue without significant delay. U.S. delegation co-lead
Daniel Bahar explained that the U.S.-tabled text reflect U.S. views
on all key issues. He recalled earlier agreement with the Chinese
delegation that the two sides should work toward a bracketed text
illustrating all areas of commonality and difference. The
development of negotiating positions and the consolidated bracketed
text should benefit from the progress made in the detailed 17-months
of BIT exploratory discussions between the two sides.

--------------
REVIEW OF U.S. TEXT
--------------

PREAMBLE
--------------


6. (C) The U.S. delegation provided an overview of the preamble of
its proposed text, which sets out the objectives of the Parties in
entering into the treaty. The Chinese delegation took issue with
language about the Parties recognizing that agreement will stimulate
the flow of "private capital," asserting that this language does not
account for state-owned capital, which is important to China. The
Chinese delegation also questioned the appropriateness of language
expressing the desire to achieve the objectives of the treaty in a
manner consistent with protecting the "environment," and "promotion
of internationally recognized labor rights." Members of the Chinese
delegation suggested that these issues are best addressed in other
fora.


7. (C) The U.S. delegation noted that, notwithstanding the reference
to "private capital" in the preamble, the U.S. proposed text also
applies to and protects state-owned capital. The references to labor
and environment are intended to emphasize the compatibility of these
interests with the protection of investment, and relate to specific
articles in the draft BIT text (Arts. 12-13),which address these
issues in only limited ways. None of these provisions seeks to use
the BIT as a means to address how each Party regulates these issues
more broadly, but the proposed references are important to
stakeholders on the U.S. side.

DEFINITIONS (ARTICLE 1)
--------------


8. (C) The Chinese delegation raised questions or comments on all of
the significant definitions and showed particular sensitivity towards
references to state enterprises. (Note: China encourages its largest
firms, including state-owned enterprises, to invest abroad because it
believes they have the best capacity to evaluate and manage overseas
investment projects. End Note.). They also questioned the necessity
of some definitions that they perceive as "obvious" (e.g.,
"non-disputing Party," "TRIPS Agreement, "UNCITRAL," and "WTO
Agreement"),as well as the appropriateness of the definition of
"state enterprises," while noting that some other terms should be
defined, such as "returns." (Note: Many Chinese BITs use the term
"returns" in the transfers article and define the term; however, U.S.
BITs do not use the term "returns" except as part of a separate term,
"returns in kind.")

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9. (C) On the definition of "enterprise," the Chinese suggested that
it refer to any entity constituted under the laws of each Party.
They then asked how various types of arrangements such as "joint
ventures" and "trusts" are defined under U.S. law. The U.S.
delegation responded that these matters are governed primarily by
state law, and that the definition is intended to be flexible enough
to take account of forms of enterprises that evolve over time or are
expressed differently in different legal systems. China also
expressed concern over the inclusion of a "branch" within the broader
definition of the term "enterprise," noting that a branch may not
bring a claim in Chinese domestic courts. (Note: Chna restricts
foreign investment in some setors to the establishment of branches,
particularly legal and financial services. End Note.)


10. (C) Regarding the definition of "investment," China asked why the
U.S. model does not include a reference to investments "made in
accordance with a Party's law." (Note: In the exploratory talks,
China asserted that this language might provide a means of qualifying
the BIT's substantive obligations such as MFN.) The U.S. delegation
explained its view that such language is not necessary and could
create unnecessary ambiguity. China raised several other questions
(e.g., overlap between "concession contracts" and "licenses [and]
authorizations conferred pursuant to domestic law," and the need for
including an "enterprise" as an example of the form that an
investment may take). The U.S. side stressed, in response, the broad
definition of investment, which is intended to cover all forms of
investment.


11. (C) China also raised questions about the terms "investment
agreement" and "investment authorization," and how these definitions
relate to authorizations or approvals under Chinese law that may not
fit into either definition. In response to questions from the
Chinese side, the U.S. delegation explained that the United States
does not have an "investment authority" (i.e., a single, broad based
screening mechanism for all inbound foreign investment); with respect
to China, the U.S. side said that it would need to consider further
whether China has such an authority as defined in the BIT.


12. (C) In the definition of "investor of a Party," China asked why a
Party should be included in this definition. China also raised
questions about the language stating that, in the case of a dual
national, the individual is deemed to have the nationality of the
person's "dominant and effective nationality." When an MFA
representative asked about the applicable criteria and asked whether
a separate convention on diplomatic relations between the two
countries would prevail, the USG explained that this definition
requires a fact-intensive inquiry based on a principle of customary
international law. On the definition of "national," China asked how
the USG distinguishes between "citizens" and "nationals" under its
law. The U.S. delegation committed to provide a detailed response at
a later time.

SCOPE AND COVERAGE (ARTICLE 2)
--------------


13. (C) China expressed concern that the Articles on Performance
Requirements, Investment and Environment, and Investment and Labor
apply to "all" investments in the territory of a Party (as opposed to
just investments/investors of the other Party),noting concern that
the obligation might confer benefits on third countries. The U.S.
delegation explained that the BIT does not confer dispute settlement
or other legal rights on investors of third-countries. Rather, the
three obligations apply to all investments - including investments of
third-country and domestic investors - in order to give full effect
to the obligations as between the Parties. Citing performance
requirements as an example, the U.S. delegation explained that
investors of either Party could be placed at a competitive
disadvantage or otherwise harmed if the treaty obligation did not
apply with respect to all investments.


14. (C) China questioned whether a Scope and Coverage article (not
present in China's BITs) is self-evident and thus unnecessary. The

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U.S. delegation explained that this provision is in fact necessary.
For example, the language providing that the treaty's scope is
limited to measures by a Party "relating to" investors and
investments indicates that a legally significant relationship must
exist between the government action and the investor or investment in
question. China also asked for an example of a U.S. entity that
exercises "delegated government authority." The U.S. delegation
cited the Pennsylvania Avenue Development Corporation and the
Tennessee Valley Authority.


15. (C) In the provision stating that the BIT does not apply to any
"act or fact" that preceded the BIT's entry into force, China
suggested that this term should be defined and questioned how it
differs from the separate definition of "measure." In response, the
U.S. delegation stressed that this language is intended to track the
comparable provision in the Vienna Convention on the Law of Treaties.
China also asked for clarification of the term "political
subdivisions." The U.S. delegation replied that this term
encompasses all levels of government below the central / national
level.

MOST-FAVORED-NATION TREATMENT (ARTICLE 4)
--------------


16. (C) Li said that China shares the same general view as the USG on
the Most-Favored-Nation (MFN) treatment provision. However, she
raised concern about extending the obligation to the
"pre-establishment" phase of investment" and about the reference to
"covered investments" (a definition that China had asserted was
unnecessary during the discussion of Article 1). Li said that
footnote 9 (which clarifies that a Party is required to provide the
"better of" national treatment and most-favored-treatment) is
acceptable, citing such a provision in China's BITs; she said
footnote 8 (clarifying that the MFN provision does not encompass BIT
dispute resolution mechanisms) is a new concept that China will need
to consider further. Li suggested that China could agree to MFN at
the pre-establishment phase if the United States would not demand
pre-establishment coverage for the national treatment obligation.
The U.S. delegation welcomed China's general agreement on the
principles of the MFN obligation, but pushed back strongly on Li's
attempt to link MFN pre-establishment to national treatment
pre-establishment coverage. Given China's generally broad approach
to MFN in other contexts, such as the Finland-China BIT, the recent
New Zealand-China free trade agreement investment chapter, and the
GATS, the U.S. side argued that the MFN issue should be much simpler
to resolve.

MINIMUM STANDARD OF TREATMENT (ARTICLE 5)
--------------


17. (C) In introducing its proposed minimum standard of treatment
provision, the U.S. delegation explained that this provision was one
of those provisions substantially revised in the 2004 U.S. model BIT.
The U.S. experience with other investment agreements caused us to
re-think our approach on the minimum standard of treatment provision
in order to provide significantly greater specificity than the broad
language found in earlier agreements (e.g., replacing short-hand
references to "fair and equitable treatment" with more specific rules
tied to the customary international law minimum standard of treatment
of aliens).


18. (C) The Chinese delegation pointed out that its existing BITs
generally contain a much shorter, simpler iteration of this provision
and asked questions about the content of the U.S. obligation. In
response to China's questions, the U.S. delegation explained that
customary international law results from the general and consistent
practice of states over time, that it is a widely-accepted concept as
reflected in the Statute of the International Court of Justice, and
that a representative from MFA had referred to the same concept at
several points earlier in the discussion. When asked about examples
of principles covered by this obligation, the U.S. delegation cited
two examples listed in Article 5 (i.e., the obligation not to deny
justice and the obligation to provide full protection and security).

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The MFA representative asserted that the first sentence of the U.S.
Annex A is a correct definition of customary international law, while
the second (which refers to Article 5 covering all customary
international law principles that protect the economic rights and
interest of aliens) is not. The U.S. delegation also clarified the
reference to the "principle of due process embodied in the principal
legal systems of the world." The U.S. sought China's agreement on
the desirability, in principle, of constraining subjective
decision-making on the part of arbitrators when considering this
provision. China said it would need to consider these issues further
and noted that significant differences of approach remain.


19. (C) The Chinese noted that paragraphs 4 and 5 of Article 5,
relating to armed conflict and civil strife, address different issues
than the rest of Article 5, and seem to cover more particular
circumstances than the expropriation article. They therefore
suggested that they could include these paragraphs if they were
included as a separate article. The U.S. delegation responded that
because there would be no legal difference between the meaning of
these paragraphs if included in Article 5 or a separate article, we
could consider their request.

EXPROPRIATION AND COMPENSATION (ARTICLE 6)
--------------


20. (C) The U.S. delegation provided an overview of the article on
Expropriation and Compensation, which provides that a Party may
expropriate property only in accordance with certain conditions,
including the payment of prompt, adequate, and effective
compensation; for a public purpose; and in accordance with due
process of law. The Chinese delegation sought clarification of the
meaning of the concept "public purpose" and how this term differs
from the concept of "public interest"; how compensation at "fair
market value" is determined"; and the meaning of "due process" in
context of expropriation. The Chinese delegation explained that
there are significant differences between the standard set out in
Article 5 and the standard for compensation in the event of an
expropriation pursuant to China's constitution (Articles 10, 13).
They did not identify any substantive (as opposed to drafting)
differences, however. They noted that under China's constitution and
its Property Law (Article 42),the government will compensate
investors for expropriated property in accordance with "law," which
refers to Chinese laws and regulations. The U.S. delegation
responded that our federal and state constitutions deal with
compensation for expropriation in a similar way, but we have never
viewed the BIT language to conflict with our domestic law.

--------------
NEXT STEPS
--------------


21. (SBU) The U.S. delegation proposed that the next round of
negotiations focus on completing the article-by-article review of the
U.S. proposed text, in the hope that achieving this objective would
give the Chinese delegation the information it needs to undertake
internal consultations and provide its official positions on each
issue. The U.S. delegation noted that both sides have a mandate to
make significant progress before the next SED meeting in early
December. Li commented that the three and a half days of discussions
were fruitful and constructive. The initial talks had assisted the
Chinese side in gaining a better understanding of the U.S. proposed
provisions, which will be useful in understanding areas of
commonality and difference as the negotiations proceed. In
subsequent discussions, the two sides agreed to hold the second round
of negotiations the week of October 13 in Beijing for four or five
days.


22. (U) The U.S. delegation has cleared this cable.


23. (U) Chinese Delegation List:

--MOFCOM--


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LI Ling, Treaty and Law, DG, Chief negotiator
WEN Xiantao, Treaty and Law, Director
CHEN Ran, Treaty and Law official
XUE Xiaohong, Treaty and Law official
WANG Hongbo, American Department, Business Counselor
WANG Youli, American Department, Second Secretary
SUN Peng, FDI Department, DDG
JI Xiaofeng, FDI Department, Director

--MFA--

SUN Jin, Treaty and Law, Director
LI Tingting, Second Secretary

--NDRC--

YUAN Feng, Outward and Inward Investment officer

--MIIT--

WANG Jianzhong, Programming Department, Deputy Director
JIA Hongwei, Industrial Policy Department, Deputy Director rank
ZHANG Xiaoyan, International Cooperation Department, Deputy Director

--MOF--

ZHANG Chenglong, Taxation Department Director
LIN Xuebing, Taxation Department, Deputy Director
FANG Xia, Tarrif Department, Director
WANG Shaoshuang, Treasury Department
Director
ZHOU Yong, Treasury Department, Deputy Director

--OTHER MINISTRY REPRESENTATIVES--

ZHANG Lu, MOHRSS, Int'l Coopertation Department, Dep. Director
QUAN Bei, PBOC, Int'l Coopertation Dept., Deputy Director
ZHU Hong, PBOC, Treaty and Law Dept., Director
WANG Lixiao, SASAC, Policy and Law Bureau, Director
ZHOU Huaishi, SAT, Int'l Taxation Dept., Deputy Director
ZHANG Jianhui, SCLAO, Industry Transport and Commerce, Deputy Director
BAI Ruiming, CBRC, Supervision Department III, Director
XIANG Chunsheng, CSRC, International Department, Deputy Director
LIU Zhifu, CIRC, International Department, Deputy Director
CAI Qiusheng, SAFE, Capital Department, Director


24. (U) U.S. Delegation List

--STATE--

Wesley S. SCHOLZ, Office Director, Office of Investment Affairs
Michael Tracton, Bilateral Investment Treaty Coordinator, Office of
Investment Affairs
Lee Caplan, Attorney-Adviser, Office of the Legal Adviser
Pamela Peng Park, China Desk Officer, Office of Chinese and Mongolian
Affairs

--USTR--

Daniel Bahar, Director for Investment Affairs, Office of Services and
Investment
Audrey Winter, Deputy Assistant USTR for China Affairs, Office of
China Affairs
David Katz, Senior Director for China Affairs, Office of China Affairs

--COMMERCE--

Edward Brzytwa, International Trade Specialist, International Trade
Administration
Arthur Aronoff, Senior Counsel, Office of the Chief Counsel for
International Commerce

--TREASURY--

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Bonnie Resnick, International Economist, Office of International
Investment
Gary Sampliner, Senior Counsel, Office of the General Counsel

--U.S. EMBASSY--

Robert Luke, Minister-Counselor for Economic Affairs
Matthew Dolbow, First Secretary for Economic Affairs

PICCUTA