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January 5, 2021

Asia

CHINA/EUROPE: Investment pact is economic win for EU, political win for Beijing

BY Carsten Nickel, Gabriel Wildau

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( 5 mins)
  • Following seven years of negotiation, Beijing and Brussels concluded negotiations on an EU-China Comprehensive Agreement on Investment (CAI) on 30 December.
  • Beijing’s willingness to accept a relatively one-sided deal reflects China’s concern to avoid international isolation and decoupling amid the ongoing transition in the US.
  • The politics around the deal show how interpretations of “strategic autonomy” differ between Paris and Berlin, but the EU’s shared goal is to strengthen multilateral institutions.

Key elements of the CAI

The information in this note about the CAI’s contents comes mainly from a summary document published by the European Commission, but caution is warranted. The impact of the deal, if approved, will depend largely on the specific language, which is not yet publicly available.

For European companies, the biggest market access gains are in financial services, autos, telecom equipment, health care, business services, and cloud computing. On finance and autos, the deal largely locks in concessions that Beijing previously offered, including the end of joint-venture requirements and equity caps across a range of specific business lines. China also committed to market access for European new energy vehicles.

The deal includes commitments by China that state-owned enterprises will “act in accordance with commercial considerations and not … discriminate in their purchases and sales of goods or services.” Beijing pledged to increase transparency on government subsidies, but this pledge covers only the services sector, not the industrial sector. The CAI also establishes rules to forbid various forms of forced technology transfer, reflecting longstanding concerns from the European business community.

On labor rights, China committed to “work towards ratification” of two International Labor Organization conventions on forced labor. This weak commitment has emerged as a source of opposition to the deal, given concerns about forced labor by ethnic Uighurs in Xinjiang. EU Trade Commissioner Valdis Dombrovskis also cited steel overcapacity, access to public procurement contracts for EU companies, and trade in counterfeit goods, as further outstanding issues.

Chinese companies would also enjoy some modest new market opening in the EU, including in manufacturing and renewable energy. The deal also aims to protect the rights that Chinese investors ostensibly already enjoy, in the context of increased scrutiny by European regulators of Chinese acquisitions in recent years.

Beijing perspective

From Beijing’s perspective, the deal’s main benefit is that it will encourage the continued inflow of foreign direct investment from Europe, at a time when Chinese leaders seek to resist pressure for decoupling of supply chainsbetween China and the West. Contrary to some commentary that Beijing has become inward-focused, Beijing still views foreign investment as a pillar of its development strategy and decoupling as a threat.

From the perspective of the Chinese public and nationalist elements of the leadership, the CAI will appear one-sided in Europe’s favor, since Beijing is offering most of the concessions. Similar concerns about the first iteration of the US-China trade deal contributed to the temporary collapse of negotiations in May 2019. Chinese leaders are unlikely to reject the CAI, but Beijing’s willingness to accept such a one-sided deal reflects Beijing’s response to the shifting international environment. As recently as five years ago, such a deal would probably not have been politically possible. Now, however, Beijing’s concern to avoid international isolation and decoupling overrides these concerns.

The deal also has implications for the US-China geopolitical rivalry. At the level of optics, at least, the deal looks like a win for China. It strengthens EU-China economic relations just as the incoming Biden administration is expected to seek stronger cooperation with Europe to confront China across a range of issues. If the deal wins final approval in Europe, China’s leadership will interpret this outcome as a sign that – despite Europe’s discomfort at China’s human rights record, its early handling of Covid-19, and its increasingly aggressive diplomacy – economic incentives will trump such concerns when push comes to shove.

While avoiding direct criticism of the deal, incoming US National Security Advisor Jake Sullivan hinted at displeasure, saying that the Biden administration “would welcome early consultations with our European partners on our common concerns about China’s economic practices.” Beyond optics, however, nothing in the deal precludes Brussels from cooperating with Washington on many issues that are unaddressed in the deal, including human rights.

EU perspective

The deal can be seen as an anchor providing the EU with a more structured relationship with China, to be flanked by other policies (common position on 5G, investment screening, defensive mechanism on subsidies, etc). It replaces 27 bilateral investment treaties, arguably making it harder for China to drive a wedge between EU countries.

The deal is a success for German Chancellor Angela Merkel and those who prefer to maintain ties with Beijing, instead of decoupling. Respective internal divisions are also reflected in the usual noise that tends to surround EU global dealmaking: parts of the commission and some member states complain about having been sidelined by the German council presidency.

While interpretations of “strategic autonomy” differ, especially between Paris and Berlin, the EU’s overall goal remains to strengthen multilateral institutions. By completing the deal with China, Brussels is gaining leverage before holding discussions with the US. The bloc has “tied its hands” before Joe Biden’s takeover, reducing Washington’s ability to force the EU to choose between China and US on a bilateral basis.

The deal still needs to be finalized, but the expectation is that only European Parliament approval will be required. As previously discussed, a key signpost going forward will be Germany’s post-Merkel positioning after the September elections. The Greens will likely be a central player and are more skeptical of China, while the social democrats (and to a lesser degree the center-right) face a balancing act between a new liberal-humanitarian China skepticism and a more traditional focus on employment, growth, and realism in global affairs.