Negative list in need of some positive tweaks

Zhang Chengliang / China Daily

China should make its framework compatible with other countries to promote trade agreements

The term negative list has become a catchphrase since the Chinese government decided to adopt one list in its negotiations on a bilateral investment treaty with the United States last July. On Sept 30, China announced its first negative list in governing foreign investment, applying it to the Shanghai (China) Free Trade Zone.

While negative lists are new in the world's second-largest economy, the US has used them widely in investment treaties with other countries since the 1980s. In 1982, the US designed a template for bilateral investment treaties, which was updated and revised in 1994, 2004 and again this year. In all of them, the negative list played an important role.

Essentially, it's a blacklist that names areas and circumstances in which foreign investors are barred or limited. Anything that is not included on the list is fully open for foreign investors, who can obtain pre-entry national treatment.

For decades China has used a positive list in its regulation of foreign investment. Its Catalogue of Industries for Guiding Foreign Investment divides all industries into three categories: sectors where foreign investors are encouraged, where they are allowed and limited and where they are banned. In operating the positive list, China grants post-entry national treatment to foreign investors, meaning they can gain national treatment only after they are approved to operate in China.

But with the US accelerating its pace of reshaping global trade and investment rules by pressing ahead with the Trans-Pacific Partnership, the Transatlantic Trade and Investment Partnership and the Trade in Services Agreement, China, with its paucity of foreign investment regulations and underdeveloped service industries, risks being marginalized in this globalization. It thus needs to change its old pattern of foreign investment regulation and actively participate in the new wave of globalization.

China's first negative list was a step toward that goal. The country is still in the testing phase of the negative-list approach, and there is lot of room for improvement.

First, authorities need to revise laws related to the economy, especially the service industry, so they meet the needs of the negative list. Although the US has no specific laws about the negative list, restrictions on foreign investments are stipulated in industrial laws and regulations, which provide the legal foundation for compiling the negative list.

However, in China the negative list introduced in the Shanghai free trade zone lacks the support of domestic laws and regulations. It even contradicts some existing laws. That was why the top legislature decided to stop applying some existing foreign investment regulations in the zone.

To solve the problem and pave the way for a nationwide negative list, China should now begin reviewing its economic laws. Some that are against the spirit of the negative list should be abolished or amended, and industrial laws for which there has long been a need should be drafted. Legislation should also be improved on national security checks of foreign investment. By doing these, the negative list can be built on a sound legal framework.

Second, there needs to be more detail and transparency with the list. Many items on the Shanghai list are too vague to be implemented. For example, the list restricts foreign investors from secondary real estate market and property brokerages. But it does not spell out what these restrictions are. If that is left unclear, restrictions could pertain to stakeholding, the scope of business and several other things. Such lack of detail greatly restricts the list's practical use and makes things extremely difficult for those charged with enforcing the law. By comparison, the US negative list details all elements of each item and specifies the law the listing is based on. In China there is an obvious need for each item on the list to be interpreted clearly, which would help improve foreign investors' confidence in the Chinese system.

Third, the number of special regulations on the list should be reduced. The Shanghai negative list has been criticized since its birth because it appeared to be hastily designed. It simply reproduced the Catalogue of Industries for Guiding Foreign Investment in the format of a negative list. The Shanghai list has 190 special regulations that outline the sectors that are restricted for foreign investment. They account for 17.8 percent of all industries. Among these measures, 38 ban foreign investment and 74 limit foreign investment. The list is too long, and certainly so when compared with its US counterparts. For example, the three US negative lists in the US-South Korean free trade agreement have fewer than 40 special regulations.

Shanghai will update its negative list this year, and it is expected to shrink. Sectors that have little significance to the national economy and people's livelihoods should not be on the list. For example, leasing and commercial services can be removed. If policymakers believe regulations are needed, they can use industrial laws to regulate both foreign and domestic companies. In addition, some industries that have already opened to overseas investors under bilateral or multilateral free trade agreements can be removed.

Fourth, industrial categorization should be revised to be in line with international practice. The Shanghai negative list is based on China's industrial categorization, which was updated in 2011. It has 18 sectors. But most of the negative lists compiled by other countries such as the US follow the World Trade Organization's classification, which divides the service industry into 12 sectors and 155 sub-sectors. The difference in classification will cause China fundamental problems during its negotiations with other countries on investment treaties and free trade deals. China should seriously think of unifying its sector classifications with the WTO method so that its negative list can be internationally applicable. This will help with its negotiations and facilitate the country's integration with the globalization that is now happening.

Finally, China must make optimum use of escape clauses to protect its industries when drafting the negative list. The combination of pre-entry national treatment and the negative list creates a big challenge to China and poses a threat to its domestic industries and economic security. Escape clauses can help in this regard. In investment treaties and free trade pacts the US has signed with other countries, it has introduced escape clauses that cover matters such as national security, government procurement, financial services and taxation. Items listed in escape clauses are subject to special treatment and are generally not fully open for foreign investors.

In addition, the negative list has special items that are subject to possible further revisions. These revisions could mean stricter restrictions or new restrictions being placed to check foreign investors. This mechanism allows the country that designs the negative list to protect itself. As China negotiates with other countries on investment treaties and free trade deals, it should take advantage of this mechanism. For example, it should put core industries such as the financial sector into this category. Moreover, China must consider adding a clause giving it the right to check industries that have not emerged or new forms of existing industries.

The negative list offers a chance for China to embrace the reshaping of the global trade and investment system. It must improve the list and open its industries wider to global investors to gain a bigger say in the new system and promote its sustainable development. At the same time, it must strike a balance between economic security and openness.