Removing restrictions, addressing concerns

Service sector can be well served by a high-quality bilateral investment treaty

As Chinese President Xi Jinping visits the US, the members of the American Chamber of Commerce in China will be hoping that the bilateral investment treaty will be high on the agenda.

This is because a high-quality treaty would unlock the potential of services - in the financial sector, healthcare, education, logistics - and bring immense benefits to Chinese people and the companies they work for.

We need look no further than manufacturing to see the potential.

For many years during the past 10 years, foreign-invested companies produced more than half of China's exports, bringing much-needed capital, designs and know-how to a sector that catapulted the country to middle-income status.

But now extra added-value is increasingly difficult to obtain. Since the start of the decade, manufacturing output growth has halved to below 7 percent and more than one in five AmCham China members involved in the resources and industrial sectors have moved or are planning to move capacity outside of China due to rising costs.

Some actions have been taken to boost the service sector.

At its third Plenary Session in 2013, the 18th Central Committee of the Communist Party of China discussed some major issues concerning comprehensively deepening reform, and decided that market should play a bigger role in the economy and set the stage for reform.

Since then free-trade zones have been introduced and the State Council published opinions promoting an increase in the quantity and quality of foreign investment in the service sector.

New regulations on bank-card clearing seem set to end the domestic monopoly in this area, and Beijing is working on a pilot program to develop several important service industries.

On the face of it, the service sector seems to be doing well.

In the first half of 2015, China's service sector grew 8.4 percent, outpacing overall economic growth.

However, it still accounts for just 49.5 percent of GDP, whereas, in the United States, for example, it accounts for 80 percent.

Services jobs - including those in the financial, insurance, education, engineering, legal, media and entertainment, telecommunications, retail, real estate, travel, healthcare, information and computer technology sectors - also account for more than 80 percent of US private-sector employment.

Indeed, governments around the world recognize the importance of integrating and supporting services in other sectors of the economy - especially for economies in transition or seeking to move up the value chain, as growth of the service sector helps drive an innovation-based economy given that many key service jobs have significant knowledge content.

In addition to being an important component of the US domestic economy, the export of US services is helping develop the sector around the world through the exchange of information and ideas, the application of technological advances in the workplace, and through training and development of skill sets.

Hence, one of the best ways that China can drive its own domestic service sector is to attract and encourage foreign services providers to invest in the market.

Investment challenges

US services companies have struggled with the challenges that impact their ability and willingness to invest in the market.

The Service Trade Restrictiveness Index, from the Organization for Economic Cooperation and Development, rates China as more restrictive than the global average in every single service sector.

The most restrictive are courier services, broadcasting and air transport.

In a survey we conducted last year, 72 percent of our service member companies expressed optimism about growth in the domestic market, but only 25 percent were optimistic about the regulatory environment.

Restrictions on US service companies could potentially put China and Chinese companies at a significant disadvantage in the global marketplace by isolating China technologically from the rest of the world, and the end result of that may be to limit the country's access to cutting-edge technology, innovation and ideas.

Yet with its 13th Five-Year Plan (2016-2020) and the evolution of the free-trade zones, China has a chance to provide a much-needed boost to the service sector and accelerate its contribution to economic development.

We also hope that a bilateral investment treaty between the US and China can be agreed quickly.

As most of the sectors closed to foreign investment are in services, it is here that the treaty can make the most difference.

From AmCham China's point of view, services have no place on the negative list of exceptions to the opening up that the treaty represents.

With a short negative list, this treaty promises to be the most significant development in China's economy since it joined the World Trade Organization.

But to achieve this, the treaty needs to go much further.

As well as removing restrictions on investment, it needs to address the concerns of many of our members.

These include transparency and due process in the way regulations are enforced, data localization, government support for State-owned enterprises and licensing regimes that cater to domestic companies.

We also note what appear to be overly broad definitions of national security in the recently passed National Security Law.

So during Xi's US visit, we hope that both sides will see the benefit of cooperation in getting a high-quality bilateral investment treaty signed as soon as possible.

As the example of the manufacturing sector shows, an open, dynamic and innovative service sector has the potential to transform China's economy.

What we're seeking is ambitious, but no less than what China needs to overcome its current problems.

The author is the Chairman of the American Chamber of Commerce China and has lived and worked in Beijing for 17 years.

(China Daily 09/23/2015 page23)