Filling the investment gap for US-China climate change cooperation

This article is a winner of the 2016 China Focus Essay Contest. The other winning piece, which discusses North Korean nonproliferation, can be found here. The 2017 essay contest will open in March. Congratulations Angela!

Recent years have seen a period of increasing tensions between the US and China. Security conflicts like the South China Sea and trade issues like the Transpacific Partnership have only intensified and remain largely unresolved. The highly anticipated Xi-Obama summit in September 2015, the first state visit by the Chinese president, was a symbolic gesture at best, with election-related anti-China sentiments looming in the backdrop.

In the sea of diplomatic frictions that have dampened US-China relations, climate and environmental policy has emerged as a focal point of cooperation. Despite domestic controversy surrounding climate change, particularly in the US, climate policy now symbolizes one of the few areas of progress on the US-China front.

The Paris Accord in December 2015 symbolizes this cooperation. The first-ever international agreement to lower greenhouse gases was signed by 195 nations, chief among them the US and China. Desperate for some common ground, the US and China used it as an icon of bilateral success.

However, colossal promises like keeping global warming below 2°C come with colossal gaps to fill. For China this means, by one calculation, a shortage of $6.7 trillion to meet their Paris goals by 2030. For the US, it means overcoming an indeterminate stay on the Clean Power Plan and backlash from the most powerful industries in the US economy. In other words, both countries urgently need ways to finance that handshake in Paris. Interestingly enough, the opportunity has been there for over a decade.

The biggest missed opportunity in US-China relations has been the lack of a bilateral investment treaty (BIT). A BIT between the US and China has been in progress for eight years but has failed to come to fruition.

There is opportunity in the climate space for investment that is unmatched in magnitude or absent in any other area of the relationship. With a bilateral investment treaty, there is a great potential for bolstering the clean energy market in both the US and China by lowering risks and driving investment. There is opportunity to make good on the Paris promise and for the two largest economies in the world to set a model for international climate policy.

There are also grave consequences for failing to cooperate on climate policy, finance, and cross-border investment. It could mean failing to deliver on Paris. It could cause irreversible damage in developing countries where the effects of climate change are immediate. It could squander the time-sensitive need for clean energy deployment and investment. It could leave markets in the US and China dichotomized rather than complementary or even competitive.

The case for a BIT is compelling. International cooperation on climate change hinges on a strong and aligned climate finance strategy from the US and China. Soon to become a net global investor, meaning outbound investment will soon exceed inbound, China is expanding its reach. Chinese firms and state-owned enterprises (SOEs) are looking all over the world to broaden their portfolios. And as its economy experiences a profound change to an era of slow growth, China will look beyond raw materials and natural resources. It will focus on establishing new technologies and acquiring market access.

Clean energy is that nexus.

A high-standard BIT that gives equal treatment to investors on both sides would encourage the US and China to collaborate on climate policy. The ability to transfer funds across borders, using a market rate of exchange, fair employment, and streamlining resolutions for legal disputes would incentivize both countries to invest in new technology and provide a defined platform for how to govern and deploy them. It would address one of the key challenges to clean energy: a lack of R&D. Conventional instruments of finance like banks have been unwilling to pour money into clean energy due to low margins of success and no real way to gauge returns. Governments, which can catalyze innovation efforts, are constrained by politics and funding. It is therefore imperative to enable the private sector to perform the heavy lifting in clean energy investment. A BIT could incentivize private capital from China to elevate the renewable energy breakthroughs that have been made in the US.

It's no secret, however, that America doesn't look too kindly on Chinese investments, especially in a sensitive industry like energy. Fears of national security breaches, threats to the national economy and job market, and anxieties over stolen technology are among the reasons Chinese firms are given the cold shoulder. The Committee on Foreign Investment in the US (CFIUS), which is charged for protecting against investments that threaten national security,  is particularly known in the context of scrutinizing Chinese investments. As investments from China to the US have accelerated dramatically in the last decade, suspicion and resistance toward Chinese deals has also intensified. Many blame trade with China as the cause of job shortages and economic ills at the turn of the century. The impacts of the recession and anti-China rhetoric from political leaders who exploit these fears have cast an even darker shadow on the state of these affairs. Because clean energy is still a relatively new field of foreign investment, a handful of transactions have seen some success. But the same suspicions that China may be stealing the technology and research that have made the US a leading producer apply to clean energy and clean tech.

China hasn't helped itself, either. The state under Mr. Xi is increasingly protectionist. Leading American businesses like Apple, Qualcomm, and Microsoft have been subjected to anti-monopoly investigations and put on blacklists. Chinese police have raided Uber offices. The government has advocated indigenous innovation,  limited foreign publications, and constrained foreign NGOs.

These actions affirm China's new role on the global stage. Blocked by CFIUS or constrained by international institutions like the WTO or IMF, China still has options. The China-led Asian Infrastructure Investment Bank and the One Belt One Road initiative are examples of this. The AIIB has drawn in non-regional trade giants like the EU, and the Belt and Road program seeks to link 60 countries. While they are certainly not global structures, they still serve as a staggering reminder of China's growing influence, its regional pull, and its attractive capital.

And for all the criticism against it “ of China going rogue  or contributing to East-West divisiveness “ the ambitious new programs have the potential to aid developing countries and China's economic ills. Leveraging its regional trade partners, China's could achieve decoupling: meeting its climate targets while maintaining growth. However, if the US allows China to control the climate change dialogue, a Chinese green revolution  could have insidious effects. China has an oversupply of coal and industrial materials. Under political pressure to shift toward cleaner fuels, it's likely that China will move its supply to developing economies that need it. In essence, without the US absorbing Chinese investments or helping it define investment guidelines, China could go green at home but exacerbate climate conditions via brown investments elsewhere.

A US-China BIT would provide the framework to prohibit poor energy investments. More importantly, it has the potential to drive incredible progress on climate change. It could be the policy lever for better bilateral climate cooperation and help smooth over the many other issues that currently mar the relationship.

First, it would make business transactions easier. It would encourage rather than avert Chinese FDI in US energy. Chinese firms are looking for a less cumbersome process than the current one, which often involves intense scrutiny by CFIUS. American firms want smoother operations in China where they face constraints, like limited access to online publishing.

Second, it could provide a platform for much-needed clean energy R&D. Energy innovation relies on intensified R&D. It would serve the world best if China and the US led by example to make their R&D complementary so that firms could explore a broader spectrum of energy possibilities. By allowing easier cross-border investment, more capital toward R&D can flow from private corporations rather than government funding.

Lastly, it could help the US and China maintain better relations through steadier bilateral trade. There is a pervasive sentiment in the US, further promoted by Trump mania, that globalization and trade with China are to blame for the US's economic and security problems. But the best way to protect against Chinese aggression is to engage China, not to block it off. The more money China invests in the US, the more committed it is to sound relations. In the other direction, US investment can offer the US a foothold in the region, where China has become increasingly assertive.

On the climate front, the US needs to welcome China, and other nations, to take leadership in financing the programs needed to uphold climate change negotiations. If bilateral cooperation in climate finance is effective, the US and China could provide a model for the rest of the world to follow.

There are some early signs of success. On the private partnership level, there is the Bill Gates-led Breakthrough Energy Coalition,  the international multibillionaire's club of clean energy enthusiasts. It includes the likes of Salesforce's Marc Benioff and Richard Branson as well as Zhang Xin and Pan Shiyi of SOHO China and Jack Ma of Alibaba. All of two dozen wealthy sponsors have committed to investing large sums into new clean tech companies. This coalition demonstrates how easily new ventures could be funded through investments. A BIT would open the gates to more sources of income covering a much larger landscape of energy needs. Aside from technology, investments could also boost public-private partnerships to bolster R&D, where IP rights are shared by both countries' participants.

Given the tremendous milestone marked by the Paris accord, it would be disastrous for the US and China to squander such a prime opportunity for collaborating on climate change. The goal of slowing global warming requires robust international financing with carefully curated guidelines. And with new conflicts crowding the US-China narrative each day, a BIT should be on the front lines of policy consideration.

During the historic Xi-Obama summit last fall, President Xi remarked, The sun and the moon shine in different ways,  referring to China and the US. For all their differences, the US and China exist under the same skies. Amid a number of bilateral tensions, they have found a pillar for cooperation. It is now their imperative to find the money for it.

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Angela Luh

is a co-winner of the 2016 China Focus Essay Contest. She holds a BA in international politics and economics from UC San Diego.

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