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China—foreign investment law may appease US, improve business climate

China prevented President Trump’s planned tariff increase on 2 March (from 10% imposed in July 2018, to 25%) on US$200b of Chinese imports, with an extension to the ceasefire announced this week. Beijing is unlikely to acquiesce to demands for structural changes to China’s economic model that distort markets and competition, including the prevalence of subsidies and state-owned banks. However, China has offered to shrink their circa US$375b annual surplus on US trade and have fast-tracked plans to introduce a new foreign investment law that will, in theory, answer major grievances. The latter promises to better protect foreign intellectual property, ensure equal legal treatment of foreign and domestic firms, and ban forced technology transfers. This builds on changes announced last year to open finance and other industries, including by relaxing joint venture requirements.

The National People’s Congress looks set to pass the new foreign investment law on 5 March. Averting an escalation of trade tensions would be welcome—the Asian Development Bank estimates that if China and the US were to impose blanket tariffs of 25% on all goods imports from the other country, China and US GDP would fall by 1% and 0.2% respectively. However, the law could be insufficient to appease US concerns—the latest available draft exempts the financial sector, omits key deadlines, includes a national security clause that could be used to block investments, and allows expropriation for ‘social and public interests’. Implementation of the final legislation will be key—to the extent that enforcement is inconsistent and arbitrary, and informal mechanisms override the formal legislation, the benefits will be blunted. Still, amid China’s export growth slowdown which is frustrating efforts to deleverage the economy, authorities are incentivised to improve conditions for foreign firms, at least at the margins. This is welcome—at the end of 2017, Australia had A$77b (3.4% of Australia’s total foreign investment stock) invested in China.