On Dec. 30. the EU and China agreed in principle on a deal that will govern their bilateral investment going forward.
The Comprehensive Agreement on Investment (CAI) was first proposed in 2012, as Europe increasingly saw its economic future in Asia (pdf), and sought out deeper ties with Beijing. Their relations have taken a hit since then, poisoned by the US-China trade war and a crackdown on civil liberties in Hong Kong and Xinjiang. Many—this writer included—thought the CAI would fall victim to these tensions.
But that didn’t happen. Chinese president Xi Jinping got involved to move the talks forward and German chancellor Angela Merkel committed to reaching a deal by the end of 2020.
From a European perspective, the central question right now is whether the deal is a good one. There are clues to be found in some of the declared concessions. The EU has kept a tight lid on the text of the agreement, but it released several documents (pdf) outlining its key points. We’ve pulled out a few in particular that may not live up to their promise:
(China’s “negative list” gathers all the industries in which foreign and sometimes domestic private investment is limited or banned. Private investment in any industry not on that list is, in theory, allowed.)
As some critics have pointed out, some of these concessions look like pre-existing wins dressed up as new ones. But is that the full story?
Covid-19 has damaged China’s relations with Western countries. Signing an agreement with Europe, just weeks before US president-elect Joe Biden’s inauguration, was a symbolic win too good to pass up. There was a window, says Agatha Kratz, associate director at the research consortium Rhodium Group, during which “China was going to be willing to make concessions.” And the EU seized it.
Still, says Kratz, “it may be the best you can get, but it doesn’t mean it’s a good [deal].”
On its face, the agreement appears to be “shockingly one-sided,” as Yale law professor Taisu Zhang recently tweeted. China appears to be making many market-related concessions that will benefit European firms, while the EU concedes little beyond what it committed to in the 1995 General Agreement on Trade in Services—although it grants Chinese firms access to its renewable-energy market, with a 5% cap for every EU country and mechanisms in place to ensure reciprocity.
But Europe has been on the backfoot in its economic relationship with China for some time. Its market has been fully open to foreign investment for years, while China’s was not. At its peak in 2016, Chinese FDI in the EU totaled €37.3 billion. European companies in China, meanwhile, have long faced market access barriers; they were made to partner with Chinese firms, were locked out of many industries, and faced unfair competition from state-owned enterprises. Even if, on paper, an industry was open to them, business owners said in practice, it was a different story (pdf).
The CAI, Europe argues, is about rebalancing the scales. In one document, the EU writes that “China has not made such far-reaching market access commitments with any other partner,” and says the “level of ambition” of the concessions “match the EU’s openness.”
Andy Mok, a senior research fellow at the Center for China and Globalization, says the deal was worth it for China in exchange for the chance to pre-empt Biden’s goal of crafting a joint response to China with European and other allies early, and on his terms. For Europeans, who have made bold pronouncements of strategic autonomy, it’s a chance to show Washington that they won’t be pressured into backing out of a deal that is similar to the one the Trump administration signed with China just over a year ago.
Nick Marro, lead global trade analyst for The Economist Intelligence Unit, believes that many of the concessions highlighted by the Commission as unprecedented are a “a repackaging of existing wins.” China has committed to significant market reforms since 2017 and, while some of the issues contained in the CAI are new and noteworthy, analysts say most double down on existing commitments.
Meanwhile, activists complain that Europe may have compromised on its red lines, including how to prevent subsidies going to state-owned enterprises who compete with European firms. They also worry the EU may be less willing to confront China (pdf) on labor and human rights down the line because it wants the CAI to succeed.
In an email to Quartz, the European Commission disputed that the concessions obtained from China were nothing new, writing that its “description of the CAI is accurate.”
“It’s not incorrect to say that some of it is a repackaging,” concedes Mok. Still, after almost a decade of negotiations, he believes Europeans knew this was the best deal they could hope to get. While Europe faces down the barrel of a long-term financial slump caused by Covid-19, China is projected to grow 7.9% in 2021, and was the only major economy to grow at all in 2020.
Hong-Kong based investor David Baverez, who is French, has followed the deal closely, and believes it is significant for Europe, even if some concessions aren’t ground-breaking. Baverez likens deals in China to letters of intent in which parties commit to work together. In many ways that matters more than the content, he says, which may not be implemented anyways because “the environment in China changes all the time.” In this way, the agreement is a gesture of political goodwill that is likely to benefit companies in both countries.
There are important new elements in the CAI, including promises of progress on climate change and an unprecedented commitment by China to involve civil society in the implementation of the sustainable development pledges. The CAI also contains language on forced labor, a particularly sensitive issue in China. The key here will be implementation; the wording is vague, alluding only to “effective implementation” of the International Labour Organization conventions that China has already ratified, and a “commitment to work towards ratification” of other outstanding ones.
If China lags on any of these, the CAI makes provisions for “an enforcement mechanism” based on “state-to-state dispute settlement,” as well as a way for officials on both sides to monitor progress and urgently flag issues without resorting to litigation through the CAI or at the World Trade Organization.
That’s ambitious. As the Economist Intelligence Unit recently pointed out, in the parallel scenario of the Phase 1 US-China trade deal, signed in Jan. 2020, few US companies “expressed confidence in using that deal’s dispute-resolution system amid fears of retaliation and threats to company privacy.”
The job of debating whether or not this deal is worth signing will be up to EU governments and the European Parliament, which is expected to vote on it in the next eight to 12 months. But after six years of negotiations, many MEPs say they were caught off-guard that a deal was seemingly reached within a week, one day before New Year’s Eve, without the text of the agreement being made public (the Commission has also pushed back on these claims, saying it kept the Parliament involved and updated throughout).
Reinhard Bütikofer, a member of the parliament’s committee on foreign affairs and chair of the delegation for relations with China, believes the fate of the CAI will rest on whether the EU and other democracies are willing to compartmentalize relations with China. That is, can the bloc deepen trade relations one day, and still be willing to challenge China’s human rights violations the next?