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Why XpressWest dropped its China high-speed rail deal?

A bullet train passes over Yongdinghe Bridge in Beijing. Photo: Xinhua

China's ambition of exporting its high-speed rail technology has met another setback in the US.

On June 9, XpressWest, a private US company, unilaterally terminated the contract with China Railway International (CRI) to build a high-speed rail line from Los Angeles to Las Vegas due to concerns over "difficulties associated with timely performance" and the Chinese partner's challenges in gaining necessary government approvals to proceed with the project.

China's official Xinhua News Agency reprimanded XpressWest's decision as "precipitate" and "irresponsible" and voiced support to CRI's efforts to defend its interests in the US by legal means in a strongly worded commentary.

The US company's move casts a shadow on the agreement reached by the two countries at last week's Strategic and Economic Dialogue to exchange their negative list offers of industries that remain off-limits to investment for further negotiations for the Bilateral Investment Treaty (BIT).

The termination of the contract indicates that the two powers are still divided on some substantial points in the BIT negotiations, which will, to a large extent, lift the restrictions for market access and will result in the establishment of more transparent market rules. In addition, a BIT deal will allow Chinese companies to have the same treatment as their US counterparts when investing in sectors that are not detrimental to the national interest of America.

On the sidelines of the strategic and economic talks, Deputy China International Trade Representative Zhang Xiangchen said that the negotiators from the two sides were keeping a close contact and expressed China's appeal for equal treatment in the process of security scrutiny.

Inconsistent statements

In a statement, XpressWest CEO Tony Marnell conveyed his helplessness, saying that the decision was primarily driven by a US federal government directive that high-speed trains operated in the US must be produced locally, while calling for a more flexible and realistic approach to support high-speed rail construction.

Teng Jianqun, director of the American studies department at China Institute of International Studies, speculated that the abortion of the deal could be traced down to the objection from the US federal government.

"The US federal government requirement that the high-speed trains should be produced by local makers is a clear indication of protectionism," said Teng, citing a provision of the contract between XpressWest and CRI specifying that either the announcement of a decision or the cancellation of a decision must be made public after being approved by both parties.

However, on XpressWest's Chinese and English websites, there are subtle differences in the interpretation of the Surface Transportation Assistance Act (STAA), a law which was enacted in 1983 and sets a series of non-tariff barriers to transportation construction projects in the US subsidized by federal funds.

On its Chinese website, XpressWest speaks of its realization that its decision to purchase foreign-made high-speed trains is technically antagonistic to some STAA provisions. But on its English website, the US firm gives a different explanation, saying that its purchase of high-speed trains from foreign producers is outside the jurisdiction of the STAA.

According to the STAA, all of the steel or iron, components and materials needed for the transportation projects subsidized by the federal funds must be produced or bought within America, with exemption granted to projects whose use of home-made materials leads to a 25 percent increase in total costs and projects whose products can be assembled domestically and whose proportion of home-made components surpasses 60 percent.

Last fall, China Railway Rolling Stock Corporation (CRRC) started the construction of a factory in Springfield, Massachusetts to assemble subway trains for Boston, after it won a major transit contract in the US, a move seen as an effort to meet the requirements of the exemption clause. The Chinese rail manufacturing company is also planning to establish a $40 million manufacturing facility in Chicago to produce trains for the city's subway system.

"The high-speed rail cooperation between China and the US may be subject to a very complex process, as the related laws and regulations adopted by the US federal government and local governments remain different," said Xu Hongcai, director of the economic research department of the China Center for International Economic Exchanges.

Xu suggested that Chinese enterprises should fully take into account the local investment policies, politics and laws before making overseas investment.

Political and economic factors

The strong skepticism Marnell expressed in the statement toward the courage and vision of the policymakers in Washington to support high-speed rail projects in the US seems to hint at political infighting, in which the Republicans object the development of high-speed rail while the Democrats do not.

When XpressWest was applying for the federal funds in 2013 for a high-speed rail project, then House Budget Committee Chairman Paul Ryan and Senator Jeff Sessions, both Republicans, wrote a joint letter to the US Department of Transportation in an attempt to stop the US federal government from financing the project, voicing their concerns over the aftermath of "subsidizing another costly, wasteful and risky high-speed rail project", especially when the nation was facing a debt crisis threatening the well-being of the current and future generations of Americans.

Importantly, developing the high-speed rail is one of the commitments Barack Obama made in his presidential campaign in 2008 and is one of the initiatives he actively pursued during his first tenure. The Democratic Party has long had a policy of growing the economy by increasing fiscal expenditure, which has consistently been opposed by the Republicans, who deem that the federal government should keep down spending and be less interventionist.

In 2011, Florida Governor Rick Scott rejected the US federal government's offer of $2.4 billion to build a high-speed rail line linking Tampa with Orlando, saying that the project would be "far too costly" to taxpayers and that the "risk far outweighs the benefits".

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