The European Union has moved ahead of the United States in negotiating a bilateral investment treaty with China, as predicted previously here on Baker Hostetler’s China U.S. Trade Law blog. Chinese Commerce Minister Chen Deming and EU Trade Commissioner Karel De Gucht made the announcement on Thursday, July 14, 2011 in Beijing following the 25th meeting of the joint economic and trade commission between China and the European Union.

Both China and the European Union expressed concerns that likely will be key topics of the negotiations. As reported by Xinhua, Europe’s primary concerns are compulsory certification regulations, export credits, and exports of raw materials. For China, primary concerns are high tech trade, registration of herbal medicine, and Europe’s policies applying anti-subsidy, or countervailing duties, to China. These issues are unlikely to stand in the way of a treaty agreement, however, because China has demonstrated a significantly increased commitment to its economic relationship with Europe and is eager to continue attracting foreign investment.

Even before this month’s news about raising the United States’ debt ceiling, China appears to have been shifting its trade and investment focus away from the United States and toward Europe. Economists tracking China’s purchases of U.S. Treasury debt have observed an unexplained gap between the decrease of those purchases and an increase in China’s foreign exchange reserves. The Chinese government remains guarded about its foreign exchange holdings, but some economists believe the gap can be explained by a redirection of foreign investment to Europe.

The announcement of bilateral investment treaty negotiations also comes on the heels of Premier Wen Jiabao’s five-day tour of Hungary, Germany and England, which began on June 24. Trade between the EU and China has risen rapidly this year—twenty-one percent higher than last year, when bilateral trade totaled $480 billion (by comparison U.S.-China trade in 2010 totaled $457 billion). And China is reported to be the fastest rising destination for European exports.

Twelve agreements were signed between China and Hungary during the visit, and China has shown interest in purchasing Hungarian state bonds, as well as investing in the government-owned airline and rail companies. The China Development Bank reportedly has made a one billion euro credit available for joint business ventures with Hungary.

China and Britain reached trade agreements worth $2.2 billion and set goals for doubling trade between the two countries to $100 billion by 2015. British natural gas company, the BG Group, signed a $1.5 billion financing deal with Bank of China.

China and Germany signed agreements worth more than $15 billion, including purchases of aircraft and collaborative automobile investments. China already has a trade deficit with Germany, and German exports of high-technology goods continue to increase.

China also has given Europe repeated assurances that it would invest in European sovereign debt, including purchases of Greek government bonds, in order to continue to support Europe and the euro. EU Trade Commissioner De Gucht has maintained that China cannot be the solution for Europe’s debt crisis, but admits that the Chinese investment “certainly helps.”

Meanwhile, China is urging the United States to act responsibly and protect the interests of debtholders in deciding whether to raise the U.S. debt ceiling. Chinese ratings agencies have downgraded U.S. sovereign debt, which might be dismissed were it not for the fact that the three largest U.S. credit rating agencies lean ever more in that direction with the August 2 deadline fast approaching with no agreement in the U.S. Congress to raise the debt ceiling.

Europe has the attention of the Chinese for the moment. The United States will have to get its economic house in order, before it can start courting China again for an investment treaty. It also would not hurt for the United States to approve Free Trade Agreements with Colombia, Panama and South Korea, which have been in limbo since they first appeared to be concluded during the George W. Bush administration in 2006 and 2007, to show that a politically sensitive agreement like a U.S.-China investment treaty ultimately can get done. Perhaps the EU-China negotiations will lead to additional Chinese reforms that will help pave the way for a future U.S.-China treaty, but for now it would seem the United States has a lot of catching up to do.