Barack Obama makes his first trip to China in the middle of a global financial crisis and just weeks before world leaders meet to try to strike a global climate change deal. Leadership from the US and China is imperative to solving these crises. But rather than tackle them, the two countries are mired in a good old-fashioned trade war and plan to use Obama's historic visit to negotiate an investment deal that could set the stage for more trade disputes in the decades to come.
In September the US slapped heavy tariffs on Chinese tires. The Chinese quickly struck back by launching investigations into imports of US cars and chickens. In October, the US launched an investigation into steel pipe imports from China, which led to a 99% punitive tariff in November. China is now considering its own investigation into the US bailouts of the car industry, claiming the carmakers might have been unfairly subsidised.
Worse still, one area in which the two superpowers are co-operating will open the door to even more disputes. Among the topics on the table for Obama in China is a proposed bilateral investment treaty (BIT) that will, among other things, make it harder to transfer clean technology and easier for the two countries to spat over trade.
Under a BIT, US and Chinese companies would be granted substantially greater rights than they enjoy under the WTO. BITs allow foreign firms to sue state and local governments for measures deemed discriminatory impediments to their profitable operations. By elevating the rights of corporations over governments in international disputes, BITs could undermine new regulations each country might implement.
BITs make it much harder for governments to deploy prudential measures to prevent and mitigate financial crises, for example. Under its agreement with the US, China would essentially be forced to de-regulate its financial system – not prudent given that it was China's banking system that held its own during the crisis.
Rather than petitioning the Chinese government conducting an investigation of the US bailout and deciding whether to file a case, the Chinese firm Geely (which may buy Volvo from the the US carmaker Ford) could hypothetically sue the US government for damages.
It's not too hard to imagine. Look no further than Argentina to see these kinds of lawsuits in action. Argentina has over 40 claims against its actions to pull itself out of the financial crisis that hit there in 2000-2001. Some private firms have been awarded over $100m.
What's more, new regulations to stop climate change could be interpreted by private tribunals as diminishing the value of a firm's investment. That's enough grounds to sue a domestic government for damages. This happened in Mexico in the case of toxic waste regulations and was tried in the US against clean water regulations.
It is ironic that the US is negotiating an investment deal now, given that it just received a report from a state department advisory committee recommending that the US break from the past and redraft its investment treaties to ensure that companies, workers and the environment are on a more level playing field.
When the world is working hard to create new global regimes to prevent financial crises and stop global warming, it's hardly the time to lock in old-fashioned rules that stand in the way of progress. Now, more than ever, the world needs US and Chinese leadership.
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