China is shedding its past image as a closed country. On March 15, a new foreign investment law was passed, enabling international companies to make inroads into the world’s second-largest market. China ensures that it will be taking measures to protect overseas companies that are operating within its borders. Considering the long trade dispute between China and the United States (U.S.), the law is expected to bring a shift in diplomatic relations between the two countries. However, there are contradicting views on China’s attitude; therefore, a closer look at the law is needed to determine its intentions.
The National People’s Congress (NPC), the annual conference of China’s legislature, was held in Beijing from March 5 to March 15 this year. As the supreme administrative authority of the country, the NPC generates policy initiatives for the national economy and social development. This year’s meeting gained worldwide attention as China has been suffering from an economic downturn and a trade war. With this background, the NPC passed a law to more strongly safeguard intellectual property without forcing foreign companies to hand over technology to their Chinese partners. Considering that technology transfer is at the center of the political conflict between China and the U.S., this action suggests that China is willing to resolve this issue.
An End to the Trade War?
China’s progress towards thetechnology industry has been slowbefore because it achieved economic development based on low wages in the past. Therefore, China has continued to make rapid strides in technology. During this process, China has attacked the intellectual property of other nations, and this eventually provoked a trade war between China and the U.S. Even before taking the helm of his country, President Donald Trump complained about China’s trading practices in 2016. Spearheaded by President Trump, the U.S. added various tariffs and applied Section 301of the Trade Act to prevent unfair trade practices and the theft of intellectual property. This enables the President to impose fines or penalties on a trading partner when it is deemed to be harming the interests of the U.S.
The U.S. has continuously claimed that Chinese laws undermine the intellectual property rights of other countries by forcing foreign firms to engage in joint ventures with Chinese companies, which allows the Chinese companies to use or even steal the other company’s technology. Thus, it could be said that the current trade war is largely focused on intellectual property, especially related to technology. However, the two countries have moved to reach an agreement to end the trade war. On December 14, 2018, China’s State Council Tariff Tax Committee decided to suspend the imposition of tariffs on certain U.S. products for three months from January 2019.
▲ Professor Lee Jaehyoung. Provided by Professor Lee
The U.S. and China seem close to a deal; however, the trade war is not over. According to Professor Lee Jaehyoung (Graduate School of Law), the biggest obstacle to solving the conflict is that the U.S. has no faith in China fulfilling its promises. “Whether the local governments will comply with the central government’s decision is also unclear,” explains Professor Lee. The new foreign investment law may ease the tensions, but the Chinese government appears to have rushed through the investment law amid trade war negotiations. If there is a pushback against a draft bill, passing the bill can take years for the NPC, but it took only three months this time. Therefore, it is too early to arrive at a hasty conclusion.
Much Room for Interpretation
There has been criticism that the law does not fully address the concerns foreign firms have about operating in China. In other words, there is a view that China passed the law in order to appease President Trump. The abrupt change in attitude and rapid approval of the new law indicates that the Chinese government has taken swift action to end its trade war with the U.S. Because the law will be applied starting from 2020, it is currently unclear whether China will observe the law. This vague situation leaves much room for interpretation, meaning foreign firms are hesitant to take action.
There is a so-called “negative list” of 48 sectors that will not be open to foreign investment at all or not without certain conditions or special permission. For example, foreign companies are not allowed to invest in fishing, gene research, religious education, news media, or television broadcasting. Similarly, only limited investment is allowed in oil and gas exploitation, nuclear power, airlines, airport operation, and public health. Foreign companies will receive the same treatment as their Chinese counterparts for sectors outside of this list.
Meanwhile, if China does not keep its promise, South Korea is expected to experience a negative impact. Professor Lee states that, with China raising doubts about the new foreign investment law, the U.S. is unlikely to ease its trade sanctions against China or its allies, including Korea. However, he also believes that the local technology industry in Korea can benefit from China’s delay in technological progress. Overall, embodying more specific information about the law is needed to clarify the complicated relationship between China and the U.S. Considering the current unclear situation, it is evident that the international business community will continue to express concerns about the law.
China’s new foreign investment law is expected to bring a positive change to the hostile relationship between China and the U.S. Its allowance of foreign investment will eventually be a win-win situation for both countries in that it will result in the overall growth of the economy in both countries. However, as the law is yet to be implemented, it is not the time to stay optimistic about the future of trade war. China seems to have lost the direction for establishing a healthy environment in which both local and foreign companies can grow. It is unclear whether China will adhere to its legislation and thus there is still much to be addressed regarding the trade war.