Korea-China BIT Talks Stall Over Pre-Establishment

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 004611 SIPDIS STATE FOR EAP/CM -- PARK AND FLATT STATE FOR EAP/K AND EAP/J STATE FOR EEB/OIA -- SCHOLZ, TRACTON, AND HICKS STATE FOR EEB/TPP/MTA STATE FOR E - YON STATE FOR L - CAPLAN STATE PASS USTR FOR STRATFORD, WINTER, BAHAR, ROHDE NSC FOR SMART AND LOI TREASURY FOR RESNICK AND SAMPLINER COMMERCE FOR BRZYTWA AND ARONOFF PARIS PASS OECD E.O. 12958: DECL: 12/18/2018 TAGS: ECON EFIN EINV EAID ETRD WTRO PREL CH SUBJECT: Korea-China BIT Talks Stall Over Pre-Establishment Classified By: Economic Minister-Counselor Robert Luke for Reasons 1.4 (b) and (d). ¶1. (C) Summary: In a December 18 meeting, Korean Embassy officials told Econoff that China and Korea continued to discuss in two forums the prospects for strong bilateral and trilateral (with Japan) investment agreements after signing a more limited "Investment Protection and Promotion Agreement" in September 2007. Talks in both forums have stalled as China resists granting pre-establishment national treatment (PE-NT) rights to foreign investors, a position China also has staked out in ongoing U.S.-China bilateral investment treaty (BIT) talks. On Doha, they said that China did not push strongly for an agreement because it is more focused on its role as a "leader of developing countries." They advised that the main outcomes of the December 13 China-Japan-Korea summit was the $50 billion currency swap agreement, a commitment to implement the G20 consensus, including refraining from protectionist measures, and establishing the meeting as a standalone, annual event. The officials also assessed that President-elect Obama's victory had increased U.S. soft power in Asia, perhaps at the expense of China. End Summary. China-Korea BIT Talks Stalled -------------- ¶2. (C) Korean Embassy in China Economic Section Chief xxx and First Secretary SEO Min-jeong told Econoff in a December 18 meeting that Korea continues to discuss the prospects for a stronger investment agreement with China as a part of its bilateral Free Trade Agreement (FTA) negotiations and in trilateral investment treaty talks between China, Japan, and Korea. In both cases, talks are stuck at the joint feasibility study stage as China resists making any concessions on PE-NT, which would grant foreign investors the right to make investments on the same terms as domestic investors, thus allowing them greater market access. ¶3. (C) The trilateral group has held five rounds of negotiations, they said. In both sets of talks, the lead Chinese negotiator is Deputy Director General Sun Feng, who is from the Ministry of Commerce's (MOFCOM's) Foreign Investment Administration (FIA),rather than from MOFCOM's Treaty and Law bureau, which has the lead in China's BIT negotiations with the United States. They assessed that FIA, which also leads MOFCOM's participation in China's approval process for foreign investment projects is "inwardly focused" on the impact of investment on China's domestic markets. The FIA is relatively conservative because it has no responsibility for outbound investment, they said. Details on 2007 China-Korea Investment Agreement -------------- --- ¶4. (C) The Korean Embassy officials noted that while Korea's 2007 investment agreement with China does not include PE-NT, it does have performance requirements and transparency provisions. The 2007 agreement also contains a blanket exception for existing non-conforming measures (NCM's),but restricts China from adopting new measures that discriminate against foreign investors in areas other than PE-NT. The Korean officials said that the issue had come up when China passed a bankruptcy law that Korea felt disadvantaged its investors, suggesting they had discussed the concerns with China. China-New Zealand BIT Employs a Partial Negative List -------------- - ¶5. (C) The officials added that China employed a negative list of NCM's in its BIT with New Zealand, but only covering it obligations to foreign investors in the manufacturing sector, not services. China's Desire to Lead Developing Countries Hurt Doha -------------- - BEIJING 00004611 002 OF 002 ¶6. (C) The Korean officials asked if the United States had engaged China substantively on Doha during the fifth round of the U.S.-China Strategic Economic Dialogue, which ended December 5. They said that China is aiming to solidify a leadership role among developing countries. The belief among many developing countries that Doha will not achieve its ostensible goal of promoting "development" for their benefit was one reason China allowed the talks to fail in JJuly, even though it was in China's economic interest as a major exporter to achieve a deal. Trilateral Summit Outcomes -------------- ¶7. (C) On the December 13 summit between China, Japan, and Korea, the Korean Embassy officials said that the main outcomes were the $50 billion currency swap program, a commitment to work together to combat the financial crisis, including implementing the G20 agreement, and establishing the meeting as a standalone, annual event, whereas all previous trilateral meetings had taken place alongside other multinational events. Obama Victory Enhances U.S. "Soft Power" -------------- ¶8. (C) The two officials were enthralled about President-elect Obama's victory in the U.S. presidential election. They said that Obama's Kenyan father and upbringing in Indonesia made him an inspiring figure to people in Africa and Asia and "increased American soft power." One of the officials mentioned that several years ago, her colleagues all wanted to go to China because China was viewed as the most important emerging power, but following Obama's victory, she wants to go to Washington. Comment -- Korean Interest in Discussing China Economic Policy -------------- - ¶9. (C) In this and other meetings, the Korean Embassy in Beijing welcomed the opportunity to share ideas on economic engagement with China. Apart from the points above, the Korean officials also asked questions on China's anti-monopoly law, transparency, innovation, and protection of China's state-owned firms. Our take from this meeting was that Korea would be open to regularly sharing ideas on China economic and trade policy. RANDT