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China and the EU: Keeping Up with the Investment Deal Discussions

By the end of 2020, European Union leaders and the People’s Republic of China’s Xi Jinping had announced the long-awaited conclusion of a Comprehensive Agreement on Investment (CAI). This month, however, the EU stated that it has suspended any efforts to ratify the agreement. Right now, the investment deal is on shaky ground; could this give rise to more complications?

Europe and China have an extensive and growing economic relationship, dating back to 1975. They have established several mechanisms for dialogue as well as a Comprehensive Strategic Partnership to deepen economic, cultural, and political exchanges. While China is the EU’s second biggest trading partner, the EU is the largest trader in China, making them both two of the largest traders in the world.

Since 2014, both have been negotiating the conditions for an investment deal, after the EU Commission published a preliminary Impact Assessment in 2013. Although there have been numerous benefits from their economic partnerships, there is a lack of reciprocity in access to markets and a lack of regulation in Foreign Direct Investment (FDI). For years, Brussels has complained about the one-sided investment relations, as the Chinese market has been “highly unfair towards foreign investors and companies, with denials or restrictions to access to a number of sectors, mainly due to national security concerns”. As a result, European FDI has fallen short in comparison to Chinese’s FDI to Europe.

The objective of the agreement is to liberalise investment in numerous industries whilst establishing an impartial and non-discriminatory regulatory framework to ensure fair market access and competition between Chinese and European companies. The deal comprises several elements. Quantitative restrictions, equity caps or joint venture requirements on several sectors, such as the automotive industry, will be eliminated. An enforcement mechanism as well as a dispute resolution mechanism will be created to protect firms in the foreign country from infringements and discriminatory behaviour. Moreover, both players will be bounded to the principles of sustainable development, the protection of labour rights, and the Paris Agreement. The treaty also addresses key issues regarding State Owned Enterprises, forced transfer of technology, transparency, and the liberalisation of financial services. The investment agreement between these two giants is considered one the most ambitious and influential international investment deals globally, as it will cover the activity of 2 billion people. Beyond this, signing the CAI could lay the foundations for a future Free Trade Agreement (FTA) with China, and strengthen their economic ties.

Yet, for the last seven years, both parties have been discussing the investment deal. Even though Sino-European relations have been prosperous, they have encountered several disagreements on the road. While the EU mentored Beijing during its socialisation process into the global market back in the early 2000s, both international actors still differ in political, social and economic perceptions and objectives. As Oded Eran, a researcher for the Institute for National Security Studies, argues, both have “a clear, partially shared interest in advancing their economies while exploiting their relative advantages in a fashion that is mutually acceptable, maintaining strategic industries, and protecting them.”

Last December, negotiators from both sides reached terms on a CAI. In March this year, however, the relationship took a downturn when the EU, followed by the US, the UK and Canada, sanctioned Chinese officials over suspected human rights abuses in Xinjiang. Since 2017, human rights experts have accused the PRC of committing crimes against humanity for holding against their will and abusing the minority Uyghur Muslims in internment camps. Xi's administration quickly retaliated and sanctioned back ten European individuals and four entities for spreading false accusations. In light of this dispute, the EU Trade Commissioner Valdis Dombrovskis announced that the European Commission has provisionally put any efforts to approve the deal on hold while China’s measures remain in place. Western democracies are not only concerned with abuses in Xinjiang but also with the crackdowns in Hong Kong and the PRC's treatment of activists and journalists.

Throughout the partnership, there have been several points of contention regarding human rights abuse, control over Hong Kong and Taiwan, China’s ‘developing nation’ status, foreign interference, the South China Sea, climate change negotiations, Intellectual Property Rights (IPR) and data protection. These enduring indifferences have stunted the progress of the CAI, but the most pressing issue today is the agreement's geopolitical context and regrettable timing.

Firstly, the EU has struggled to form a coherent foreign policy approach to the PRC, resulting from the fragmentation of interests and opinions within the Union. The 27 member states diverge in geographical location, economic background, political orientation, legal procedures and cultural and traditional outlooks and customs. Any negotiation under a CAI must be treated as a consensus by all member states, but not all of them see economic ties with the Asian giant optimistically, particularly smaller economies.

Secondly, the dynamics of the relationship have changed since the first talk on the deal. China’s outstanding economic growth has given it a bigger voice in international affairs but also the capability to influence and shape the direction of the global economy in its favour.

Consequently, the EU’s ability to influence Chinese foreign and domestic policy has declined.

Thirdly, the United States is a major influencer in EU-Sino developments. Although uncertainty about China has existed since the 2000s, negative perceptions have become more popular since Trump became President. His administration deemed Chinese determination as a threat to the international liberal order and global stability, sparking a trade war. It is unfortunate then that Europe has been caught in the middle of rising trade and tech tensions. On one hand, European leaders argue that the Union can no longer completely rely on its alliance with the US, whilst on the other hand, the Brussels is experiencing rising tensions with Beijing.

Although the COVID-19 outbreak has exacerbated global negative views of China, the pandemic has also demonstrated how crucial the stability of the Chinese economy is for the world's economy. Once the global factory of the world, it has been focusing on higher value added fields and higher labour costs. Today, the PRC is a key player in supply chains and an important competitor in high technology goods. Thus, concluding the investment deal would have a massive impact on the international economic recovery, as it “would convey investment demand and confidence throughout the global supply chain, bringing a large number of global investment opportunities to other firms, and thereby helping both to maintain the stability of the global supply chain and to further ease the recovery of the global economy”.

The CAI undoubtedly offers significant economic benefits and cooperation opportunities to both actors but also a mechanism for development in the world economy. Nonetheless, the past few years have demonstrated how volatile and unpredictable superpower dynamics can be. Given that an investment deal is an important undertaking for the EU’s economic policy, the latter needs to find a balance between its economic interest in the region and its norm-setter role in international relations. Its strategic vision of China as a ‘partner, competitor and systemic rival’ might not be the most tangible approach vis-à-vis the current situation. For Beijing, on the other hand, putting aside its pride might be less costly than damaging its ties with Europe amid prospects of closer EU-US cooperation. Even if negotiations were to resume in the next few months, the probability that the Union forms a comprehensive strategy towards China are low, particularly if it continues to infringe on human rights. All things considered, the bigger challenge is not establishing the CAI but how to manage Sino-European engagement whilst balancing the Transatlantic relations with the US. The future of the CAI will remain uncertain as tensions rise between the EU, China and the US.

Written by Sophie Hassam

Sophie Hassam is a columnist at DecipherGrey.


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