28/01/2021
On 30 December 2020, the Comprehensive Agreement on Investment (CAI) between the European Union and China was announced, just hours before the end of the negotiations’ time limit laid down at their previous meeting in September. The text of the CAI was long-awaited and released on 22 January 2021 for information purposes. However, it may still undergo further modifications. The Agreement is said to guarantee an ‘unprecedented level of market access to EU companies in China’. Currently still to be signed, the deal will need to be vetted by experts and lawyers and to be ratified by the European Parliament before being effectively signed by the two parts.
Negotiations on the Comprehensive Agreement of Investment have not been easy and took almost seven years, as a first discussion on the matter started at the 16th EU-China Summit held in Beijing in November 2013. Ultimately it took the EU and China 35 rounds of talks to agree on a final settlement. Chinese President Xi Jinping, who personally took part in the last video-conference to discuss the final terms of the deal in December 2021, referred to it as ‘great news for the depressed world economy’, while the European Commission praised it as ‘the most ambitious agreement that China has ever concluded with a third country’. According to Jörg Wuttke, President of the EU Chamber of Commerce in China, the PRC has committed more to the CAI than to the US-China Phase One trade deal and RCEP. This is because the CAI implies the implementation of WTO rules, introducing the “binding and ratcheting” clause which makes it difficult for China to undo its concessions, forcing the PRC to extend later concessions also to other partners (the Most Favoured Nation rule).
Objectives and Breakthroughs
The new Agreement is commercially of vital interest for the EU. In the first 9 months of 2020, the trade volume between the EU and China reached EUR 425.5 billion, marking an increase of 2,9% compared to the same time period in 2019 (EUR 413.4 billion). According to Eurostat, this growth during the pandemic outbreak is mainly attributable to the increase in imports from China of some specific goods such as textile face masks, surgical masks, as well as disposable and single use surgical drapes. Moreover, in 2020 China became the EU’s largest trading partner, replacing the United States. The deal, therefore, aims at strengthening and extending the existing economic cooperation through the pursuit of a long-awaited reciprocity regime between the two economic partners. At present, the CAI only covers the segment of market access and the level playing field, with investment protection and investment dispute settlement still to be further discussed in the next two years. The political reason behind such omission is that investment protection is the competence of both the EU and its Member States and, as such, also needs to be approved by the European Parliament and the national parliaments. The new agreement does not supersede or terminate the 26 Bilateral Investment Treaties (BITs) in force between China and the EU member states (except Ireland, which never signed a BIT with the PRC), on the contrary, ‘shall be an integral part’ of the overall economic bilateral relations.
According to the European Commission’s statement, the Comprehensive Agreement on Investment will loosen many restrictions imposed on EU companies active in China, including quantitative restrictions (prohibitions, global quotas, non-automatic licensing, quantitative restrictions made effective through state-trading operations), joint venture requirements, equity caps and forced technology transfer. The increased reciprocity will boost the flow of EU FDI to China, allowing the growth of European industry and enhance its global competitiveness. The industrial sectors benefiting from this new opening up are to be found in China’s key industrial sectors, such as manufacturing, automotive (both traditional and new energy vehicles) and private health. In the tertiary sector, China has expressed a binding commitment to ease EU market access in financial and international market services, matching the measures contained in the US-China ‘Phase One’ trade deal. In addition, the CAI will also facilitate EU access in R&D, telecommunications, air and maritime transport services, as well as in environmental and computer services. On the EU side, the European market was already fairly open to Chinese investment in the services sector, while Brussels has committed itself under the WTO’s General Agreement on Trade in Services (GATS). Nevertheless, the EU’s most sensitive areas of interest, such as energy, agriculture, fisheries, audio-visual and public services, have been preserved in the CAI, not allowing for Chinese investments in these key sectors. Also, the EU FDI screening mechanism and the 5G toolbox will remain in force.
The CAI aims at enhancing the level playing field for EU firms through four main commitments made by the PRC. Firstly, Chinese State-Owned Enterprises (SOEs) will take into account only commercial considerations in their decision-making process and will not discriminate against purchases and sales of goods and services. If required, SOEs will have to provide specific information in order to allow further assessment of their behaviour and improve transparency on subsidies in the services sector. Secondly, China will ban forced transfer of technology to joint venture partners as a requirement for EU investments in China, as well as interference in the contractual freedom of technology licensing. Thirdly, Beijing will grant the EU equal access to standard-setting bodies, while perfecting and updating transparency rules for regulatory and administrative measures. Finally, China has committed itself to respect the principles of the International Labour Organization (ILO) and to ratify its convention on labour conditions (no deadlines released yet), other than the promise to contribute to the implementation of the Paris Climate Agreement. Commenting on the CAI, the China’s Ministry of Commerce (MOFCOM) has highlighted the necessity to meet the aspiration of the people to live a better life as China’s fundamental development purpose, reiterating the government’s commitment to environmental protection and labour issues in economic and trade matters.
Challenges and Remaining Room for Improvement
Despite the increased openness of the Chinese market and an enhanced level playing field, the detractors of the deal argue that Beijing’s treatment reserved to EU FDI is still not as open as the single market is towards Chinese investments and full reciprocity is yet to be achieved. Moreover, some important investment tools have not been addressed during the negotiations. The draft does not mention any investor protection mechanism to whom individual investors can resort to litigate disputes, nor any monitoring mechanism for industrial and manufacturing subsidies, making it quite difficult to avoid discrimination or ensure transparency on the matter. Also, according to the CAI, China is currently not required to publish an annual report of the subsidies allocated to its service sector and reasonable doubt remains on whether China’s commitment can be enforced. What is included in the agreement is, however, a monitoring mechanism during the pre-litigation phase (the Investment Committee) and a state-to-state (EU-China) dispute settlement mechanism. On top of this, only a few days before the finalization of the CAI, the PRC published its reviewed system for foreign investments, with the aim to set up new protections and enhance national security. The implementation of such rules will take effect within thirty days and implies that EU investments will be vetted case by case and could even be rejected if considered to seriously affect national interests. The Chinese FDI review system could thus limit the scope of the CAI.
Mounting EU Criticism
In the EU, controversies about the Agreement have risen both among the EU Member States, as well as in the European Parliament (EP), which will have to ratify the deal during the French rotating EU Presidency in 2022, once signed by China and the EU. Within the EP, some parties believe that the agreement was rushed and that the current formulation does not suffice, being driven mainly by economic interests and therefore representing a precarious trade-off between the need for more reciprocity and the EU’s core values. Ratifying the CAI would, indeed, lead to a loss of EU normative power and, consequently, to a loss of leverage on issues such as human rights and green development in China. It would set a precedent and would make it harder in the future to press China on these matters.
It should not be surprising that the current debate about the CAI hinges on matters other than pure business and trade. Indeed, within the European Union, political and human rights aspects are often intertwined with external trade policy and law. Over the years, the EU has developed a variety of tools to promote human rights in its external trade agreements, such as including related clauses in bilateral trade agreements and a set of human rights criteria in its Generalised System of Preferences (GSP). The Lisbon Treaty formalised not only the reinforcement of the EU’s external commercial competence, but also institutionalised a normative approach in its external action, aiming at furthering European values and universal principles (TEU Art. 21). Hence, there is a close nexus between trade and human rights and a clear EU priority to urge its external partners to promote the respect of human rights, labour standards, the environment and good governance through trade.
The Chinese commitment to the ratification of the ILO’s conventions has been described as too weak and vague, with the urge to call for independent labour unions in China as proof of their commitment. Reinhard Buetikofer, chair of the European Parliament’s delegation for relations with China has argued that the EP should insist not only on the ILO conventions’ ratification, but also on the Human Rights Sanctions Mechanism (European Magnitsky Act) and on banning imports of products of forced labour. He also reported that, in order to finalize the CAI with China, a beneficial side deal on equal access to Public Procurement has been blocked by the German Presidency at the Council level. Bernd Lange, chair of the European Parliament’s Committee on International Trade (INTA), has denounced the latest developments in Hong Kong, stating that such behaviour is not in line with China’s and the EU’s claimed ‘shared and advance common values’ and how ‘no one should make the mistake of assuming built-in majorities for any deal’. On his part, Emmanuel Maurel of the European Parliament’s Left Group, has rhetorically asked whether the signing of the CAI can be considered to contribute to the EU’s much-praised ‘strategic autonomy’, addressing what he believes to be an extremely advantageous deal for China. The European People’s Party (EPP), European Conservatives and Reformist (ECR) and Renew Europe have added their voices to those who are skeptical about the CAI, with Anna Fotyga of the ECR calling on the EU to launch an impact assessment on the agreement’s effects on human rights. It is fair to say that, at present, there seems to be a united front in the European Parliament on the CAI’s ratification, since the political groups have expressed their opposition to its current formulation. Finally, the European trade unions have made common cause with the EP, warning of the danger of social dumping, which would sharply lower labour prices. In view of these strong voices rising from the European Parliament and civil society, the ratification process is expected to be paved with a number of challenges and potential roadblocks. The question is how these can be overcome.
Among the EU Member States, the general perception is that the Comprehensive Agreement on Investment will benefit merely a small number of them, if not just Germany and France, both of which attended the EU-China Virtual Leaders’ Meeting end of December 2020 and who backed the deal. The two countries have indeed strong economic ties with the PRC and will surely profit from the agreed better terms to penetrate the Chinese market. France, for instance, sees among others, great new opportunities for its retirement home industry in China, while Germany aims at securing its interests in Beijing’s electric vehicles and battery sector. It is unlikely, though, that smaller European countries, which were not as much involved in the negotiations, will equally gain as much benefit from it. For this reason, many EU countries, among which Spain, Italy and Poland, have been blaming France and Germany of pressuring to close the deal in such a rush. The timing of the agreement in fact also plays an important factor. Firstly, the CAI was confirmed just before the end of the German EU Presidency and the beginning of the Portuguese one, in presence of Angela Merkel, who will leave office as Germany’s chancellor in September 2021. In addition, the ratification and review phases are expected to take place under the French EU Presidency in 2022.
China’s Three Wins
Returning to the draft’s text, concrete economic benefits on the Chinese side seem somehow limited. The EU market has always remained fairly open to Chinese investments and firms. The real gains for China are more of a symbolical and political nature. First of all, the CAI protects EU investment in China, necessary to fuel the Chinese SOEs’ competitiveness and boost Chinese innovation, which makes them essential to the national economy, as reported by Liu He, China’s Deputy Prime Minister in charge of economic policy. Secondly, the deal can be perceived in China as a legitimization of the regime by the EU in the face of the international community, especially in times of growing China’s scepticism worldwide. Finally, and perhaps more importantly, agreeing on the CAI before the inauguration of the Biden administration, has represented a clear diplomatic move to send the US proof of China’s pertaining partnerships in the West and to prevent the formation of an EU-US united front against China under the new US administration.
Nothing served, however, Biden top aide’s suggestion to the EU to not conclude the deal before having discussed the terms of a possible cooperation on China’s front. The EU leaders have opted to embrace the concept of ‘strategic autonomy’. Brussels is working on a proposal for an entirely new set of cooperative transatlantic regulations in sectors where dialogue was unthinkable under the Trump administration (climate change, high-technology’s standard setting, etc.). At the same time, the EU interests can not be subordinated to the US election cycle. It remains to be seen whether the EU’s choice of a unilateral approach to China, rather than consultation with partners and allies, will prove more beneficial than Trump’s previous attempt.
What is next?
For now, a swift and smooth ratification of the CAI by the EP seems highly unlikely. Some important developments since December 30 are underway. Portugal has taken over the European Council’s Presidency for the first half of 2021 and many of the EU Member States have become more cautious towards China. Looking forward, Angela Merkel, who worked hard to see the investment deal concluded, will end her mandate as German chancellor in September 2021 and her successor could be taking a more firm approach towards China. In addition, Biden’s inauguration could lead to a new assessment of relations with the US by both Brussels and Beijing, potentially affecting the CAI itself as a consequence.
In sum, some analysts hope that the EU will take more substantial action on China in 2021, emphasizing the idea of the PRC as a ‘systemic rival’. In contrast, European diplomats urge “to get real”, to acknowledge China’s fast recovery and its economic boom after the Covid-19 pandemic and, for this reason, to recognise its importance not only as an economic competitor but also as a cooperation and negotiating partner. Gunnar Wiegand, Managing Director for Asia and the Pacific at the European External Action Service (EEAS), has expressed the need for the EU to confront China on issues such as climate change and human rights, but also the urgent necessity to be ready to cooperate and negotiate with China at a moment in which its economy is of great concern for the EU (for instance in view of the Euro area’s GDP dropping by -7.8% in 2020). While waiting for the ratification of the CAI, the EU should not only reinforce its defensive toolbox to gain more leverage on China, but also strengthen its cooperation and explore common interests with the US to cope with China, as unity may give extra strength in these unpredictable times of global distress and political repositioning.
Author: Benedetta Gatti, Junior Researcher, EIAS
Photo Credit: VoxEU