On April 20, the Office of the U.S. Trade Representative and the U.S. Department of State jointly announced the completion of a new Model BIT that will form the basis for negotiations with foreign trade partners like China, India, and Vietnam. This “high-standard” text promotes a broad range of objectives. According to the joint press release, the model BIT will “ensur[e] that U.S. companies benefit from a level playing field in foreign markets, provid[e] effective mechanisms for enforcing the international obligations of our economic partners, and creat[e] stronger labor and environmental protections.”

A BIT is an international agreement by which both countries commit to reciprocal, enforceable rules concerning the treatment of investors from the other country. These agreements typically protect foreign investors from expropriation and discriminatory treatment by the host country. BITs usually stipulate to dispute resolution by arbitration. Besides protecting investors, the U.S. model text seeks to advance other interests, including access of U.S. goods and services into foreign markets, and promotion of market-based economic reforms and the rule of law in counterpart nations. The United States has over 40 BITs in force with trade partners.

In 2009, the Obama administration began a review of the existing 2004 model text to address additional concerns in the areas of labor, the environment, and foreign state-owned enterprises. Articles 12 and 13 of the new model text require foreign counterparts not to lower their labor and environmental standards to attract foreign investments. This negative obligation applies generally, thereby preventing not only U.S. investors, but all foreign investors, from obtaining labor and environmental concessions in the foreign host nation.

Despite the apparent reach of these provisions, the labor and environmental requirements are not ironclad. First, according to Articles 1 and 2(1)(c), these provisions apply only to the customs territory of the United States. In other words, some U.S. territories (such as Guam and U.S. Virgin Islands), would remain free to derogate from their own standards unless there are federal requirements. Second, critics have noticed that the provisions on labor and the environment are not subject to compulsory arbitration per Article 24(1). Thus there is no formal mechanism to directly enforce these provisions.

With respect to countries that foster state enterprises, notably China, Article 2(2) of the model text covers state enterprises that act in the place of the host government. In theory, this provision closes a potential loophole whereby a foreign country could deputize state enterprises to take harmful actions against U.S. investors. Some critics have noted, however, that the model text’s definition of state enterprises is narrowly focused on express delegations of governmental authority. China, for instance, exercises control over strategic enterprises by appointing loyal persons to their boards of directors.

The completion of the model BIT coincides with increased attention in China to outbound investments. China’s current national economic policy, the Twelfth Five-Year Plan for the period of 2011 to 2015, calls for Chinese companies to invest abroad. According to official sources, as of March 2012, China’s cumulative outbound investments in non-financial sectors were $338.5 billion in total. In the first quarter of 2012 alone, Chinese outbound investments amounted to $16.55 billion, an increase of 94.5 percent as compared with the same period last year. Much of this outbound investment has been directed at mergers and acquisitions abroad.

The new model BIT could facilitate negotiations with China. The conclusion of a BIT may promote greater access for U.S. companies to the Chinese market. Underscoring the importance of the model BIT, the joint press release stated, “International investment is a significant driver of America’s economic growth, job creation, and exports.”