Progress on difficult terrain: The EU-China investment agreement
Cora Jungbluth is a senior expert for international Trade and Investment at Bertelsmann Stiftung.
Germany’s Presidency of the Council of the European Union ended on an unexpected note: on 30 December, 2020, the EU and China announced their agreement in principle on the EU-China Comprehensive Agreement on Investment (CAI), which the two sides negotiated for seven years. After legal fine-tuning of the text, it was expected that it would be presented to the European Council and Parliament by the end of 2021.
The CAI was accompanied by great expectations on the part of the EU, particularly with regard to the competitive conditions for European companies in China. The agreement was supposed to create a real “level playing field”, stop forced technology transfer, create more transparency with regard to Chinese state-owned enterprises, and replace the patchwork of 25 existing bilateral investment agreements between China and the individual EU member states.
To be blunt, not all these expectations were met. However, they were also lofty aims, considering the investment and business environment in China. Since joining the WTO in 2001, China has repeatedly shown that it primarily follows its own path, not necessarily matching the expectations of Western economic partners. Against this background, preliminary assessments of the CAI in Europe oscillate between decisive progress and minor improvement. This blogpost looks at the progress and shortcomings of the CAI from a European perspective. It argues that while some progress has been made, the CAI is not as ‘comprehensive’ as would appear from its title.
CAI provides a better “level playing field” for European companies
Decisive progress has been made on the environment for investment, especially the concessions on market access. China was initially hesitant to negotiate on this until the breakthrough in 2018, when China agreed to include market access in the negotiations. From the EU’s point of view, significant concessions and binding commitments have indeed been achieved. Two such concessions, which have been long standing issues between the EU and China, are particularly noteworthy:
1) Joint ventures: In various areas where market access concessions have been made (e.g., passenger cars, telecommunications equipment, financial services, and cloud services), China agreed not to impose new, and phase out existing, joint venture requirements. For example, from 2022 foreign investors in automobile manufacturing will no longer be limited to holding a certain shareholding percentage. However, joint venture requirements are not completely abolished with the CAI. Investment in the aviation sector or in market survey activities, for example, remain subject to joint ventures.
2) Technology transfer: Measures and requirements that lead to the transfer of technology, production processes and proprietary know-how are explicitly prohibited. This tackles the issue of forced technology transfer, e.g. through forced joint ventures as the sole form of market entry for foreign investors.
Both concessions will contribute to European companies encountering fairer competitive conditions in China in the future – provided that implementation works smoothly in practice.
More transparency, but no investment protection and investor-state dispute settlement
The transparency clause does not bring any decisive progress, but does bring a degree of improvement. The clause provides that the contracting parties have the right, under certain circumstances, to request information on the organizational structure and ownership of companies with regard to state ownership and influence.
Admittedly, this will not immediately change the unequal competitive conditions for foreign companies and domestic state-owned enterprises in China. However, in the medium term, the clause could at least make Chinese state-owned enterprises more constrained in their conduct of unfair business practices, especially combined with the requirement, also laid down in the CAI, to "act in accordance with commercial considerations”.
Furthermore, the CAI clearly falls short of expectations concerning investment protection and investor-state dispute settlement. These issues have been postponed as both sides intend to reach agreement within two years of the conclusion of the CAI. This also means that the 25 bilateral investment agreements between individual EU member states and China, which the CAI was supposed to replace, will remain in force.
Thus, companies from different EU member states will continue to encounter different investment conditions in China, depending on the existence and content of bilateral investment agreements with China. Chinese investors in the EU in turn will remain confronted with the existing patchwork of agreements.
CAI is also a political signal - but its ratification is at stake
Beyond its influence on mutual competitive conditions, the CAI also has a significant political signaling effect: While Beijing has celebrated the agreement as a great success not only for the EU and China, but also for the world, the EU has been ambivalent for several reasons.
On the one hand, the EU has shown itself to be a global actor that has concluded an important economic agreement with a global power like China. On the other hand, the agreement could be regarded by the other important global power, the United States, as a rather alienating signal, since a fresh start for the transatlantic alliance under a new President Joe Biden was already expected. Moreover, developments in Xinjiang and Hong Kong at the time of CAI’s conclusion were already cause for criticism of the EU’s timing and brought the EU into a conflict of values, especially on the issue of forced labor.
The ratification of the CAI could stand or fall on this issue: In the sustainability chapter, China has promised to make efforts to ratify ILO Conventions No. 29 and No. 105 on forced labor. If there is no perceptible movement on this in the course of the year, the European Parliament could find it difficult to approve the agreement.
Recent developments in EU-China relations have further reduced the chances of a smooth ratification process on the European side, at least for the time being: The EU has reacted to the situation of Muslim Uighurs in Xinjiang by sanctioning Chinese officials believed to be involved in forced labor. China has retaliated in kind and, among other things, imposed sanctions on members of the European Parliament – the body which is crucial for ratifying the CAI. A group of MEPs has already reacted to this and initiated a motion for a resolution, which includes freezing “any consideration of the EU-China Comprehensive Agreement on Investment (CAI), as well as any discussion on ratification by the European Parliament”, as long as China’s sanctions are in place.
Outlook: a rocky road ahead
The EU and China took seven years to conclude their bilateral investment agreement. Negotiations were not easy from the very start, as both parties came with very different expectations, including on market access. Given these circumstances, one can say that in the end they made some progress on difficult terrain. But the CAI does not live up to the letter “C” in its name, since ‘comprehensiveness’ is not a given. There are gaps and shortcomings that need to be addressed. However, among the current, yet unresolved, political tensions between the EU and China, the road towards achieving this might be even rockier than the negotiations themselves. It is far from clear whether the CAI will move through the ratification process in the EU any time soon – or even at all.
This post was first published on Bertelsmann Stiftung as part I of a two-part blogpost on the EU’s international competitiveness on www.ged-project.de. The text has been modified by the author to include recent developments.
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