EKIP– Expert Club for Economics and Politics A Different Opinion
After 18 years of difficult negotiations, in early September, Canada and China concluded the dialogue on the general investment treaty FIPPA (Foreign Investment Protection and Promotion Agreement).
While the public has largely touted the economic benefits of the agreement, there is currently a heated debate in Ottawa about whether the treaty is a good idea. The dispute foreshadows a similar discussion in the United States, as a number of business groups and some politicians urge Washington to follow its northern neighbor's example.
The Canada-China deal will be a prime example of the inevitable future debate that awaits U.S. policymakers. Chinese investment has already been the subject of much controversy in the United States, largely due to concerns raised by U.S. officials about Chinese ownership of a significant number of U.S. assets. Beijing has been using sovereign wealth funds and Chinese state-owned enterprises to buy up economic assets across North America. While some U.S. policymakers see this foreign investment as something that is “good for the United States,” most see something far more sinister—a trend that is accelerating rapidly and causing great concern among ultra-patriotic Americans.
One thing that is still missing from the debate is an effort to address the fundamental question that underlies such investment agreements - is this the right step to facilitate and liberalize external money flows? And more specifically, is this removing barriers to foreign investors, or is this the beginning of a host of bureaucratic and economic messes?
Undoubtedly, investment is the main driver of economic growth. The source is in most cases irrelevant, but there are always legitimate concerns about its "foreign" nature. Concerns about the possible loss of jobs due to the relocation of production abroad (outsourcing) are understandable for those affected, but putting up barriers to prevent such market actions is extremely ineffective and cannot be sustained in the long term. Those who are traditionally against foreign investment in general (for ideological and/or xenophobic reasons) will certainly oppose investment treaties. However, the main debate is directed in another direction - do those who recognize that foreign investment is beneficial believe that such agreements are a good policy tool? Scientific research on this issue has conflicting conclusions, ranging from a large positive impact on foreign investment to a strictly negative impact.
If the goal is to encourage foreign investment by increasing its volume, governments could provide subsidies to foreign entrepreneurs. This, of course, is a highly inefficient model that violates elementary principles of free trade and the basic mechanisms of functioning market economies.
The main indicator by which any investment is evaluated is its net present value (NPV). The progressive increase in this value increases the attractiveness of the project. The calculations are made using two factors: net cash flow (the difference between expected revenues and expenses in each future period) and the opportunity cost of capital. Providing incentives and preferences for some investors means that certain projects will have a higher NPV, will be more attractive and may lead to investments.
The focus should be on improving the delivery of administrative services, reducing regulatory burdens, enhancing the privacy of private property, removing barriers to market entry and exit, and reducing unreasonably high tax burdens. The goal should not be for governments to encourage foreign investment through international treaties. Instead, they should remove bureaucratic obstacles that help investors choose where to invest their money.
The economic relationship between the United States and China has been particularly contentious in recent years. This is certainly not the first time that these key issues have been raised loudly in the United States. The truth is that a potential investment agreement between the United States and China could actually undermine open foreign investment policies in both countries and in the world at large. The efforts of those supporting liberalized relations should be focused on a serious public discussion about whether international agreements are the best solution to the problems facing global trade.
