EU-China Investment Plan

For the EU, New Year’s Eve marked the end of Brexit, but also the conclusion in principle of the negotiations on the EU-China Comprehensive Agreement on Investments (CAI). Although the deal was overshadowed by the UK’s departure from the Union, the CAI was nevertheless praised by the European Commission President Ursula von der Leyen who argued that it will provide “unprecedented access” to the Chinese market for European investors. A member state expected to strongly benefit from this agreement is Germany, not only as China is its largest trading partner, but also due to its importance to German carmakers and other manufacturers with large operations in China. In that regard, it is unsurprising that the German Chancellor Angela Merkel played a crucial role during the German Presidency of the Council of the EU in reaching the deal after seven years of negotiations.

Yet, members of the European Parliament (EP) were not as enthusiastic about it, particularly Guy Verhofstadt, from Renew Europe, who even warned that the EP will never ratify the CAI “without commitments and proof that the human rights of Hong Kongers, Uyghurs & Tibetans improve.” Considering that the CAI cannot pass without the EP’s ratification, the CAI will therefore continue to be a matter of debate in the following year. In order to understand what the controversy is all about, the following will provide a brief outlook of the CAI and answer whether it is indeed hypocritical for the EU to sign such a deal with a country it labels as their “systemic rival”. Moreover, as China became a topic of interest in terms of if its increasing cooperation with Serbia, a country that continues to pursue its EU membership, this blog will also briefly touch upon whether the signing of the CAI takes away the right from the EU to criticise Serbia for its pro-China behaviour.

The essence of the deal is to balance the scale right. Up until this point, EU investors have not had an equal access to the Chinese market, as the Chinese investors have had to the market of the EU. For the EU, the fact that the market access to China has been limited and that there has not been a level-playing field that would provide some guarantees for fair competition in China was one of the key hurdles in development of their economic relationship. Yet, with this agreement, China agreed to make some concessions that are supposed to produce the following results:

1. Allowing greater market access and adding new sectors to investment

• China is making commitments to market openings in the area of the manufacturing, encompassing the production of electric cars, chemicals, telecoms equipment and health equipment, among others.
• China is also making commitments for EU investments in various services sectors, such as financial services, cloud services, private healthcare, environmental services, construction services, international maritime transport and air transport-related services.
• China is prevented from backsliding on market access conditions, while quantitative restrictions and forced joint venture requirements in many sectors will be eliminated.

2. Inserting guarantees with regards to the level-playing field

• In order to improve the level-playing field between public and private companies, China will ensure that its State-owned enterprises (SOE) will not discriminate against European companies when they buy goods or services from them or sell goods or services to them. On top of that, China committed to sharing information and consulting if the behaviour of SOEs affects EU investors.
• China also undertakes the obligation to, upon request, provide specific information which allows for the assessment of whether the behaviour of a specific enterprise complies with the agreed the CAI obligations.
• China agreed on obligations on transparency with regard to subsidies provided in the services sector. It also committed to sharing information and to consulting on specific subsidies that could have a negative effect on the investment interests of the EU.
• Another commitment includes a clear prohibition of investment requirements that compel forced transfer of technology, such as requirements to transfer technology to a joint venture partner, as well as prohibitions to interfere in contractual freedom in technology licencing. In other words, the CAI prevents the Chinese government from forcing EU businesses operating in China to share their tech and confidential business information in exchange for market access.
• The agreement also includes guarantees that will make it easier for EU companies to obtain authorisations and complete administrative procedures.

3. Adding commitments to sustainable development

• China is undertaking commitments in the areas of labour and environment such as not lowering its standards of protection in order to attract investment nor to use labour and environment standards for protectionist purposes.
• China has re-committed to effective implementation of the Paris Climate Agreement, which will allow for the two biggest trading blocks to work together on fighting the climate change.
• China has also agreed to make continued and sustained efforts to ratify the International Labour Organisation’s fundamental Conventions (Forced Labour Convention and Abolition of Forced Labour Convention). The key issue regarding this commitment from China is that a deadline has not been specified for the ratification, which is another reason why the EP is sceptical about the CAI.
• Although it is stipulated that the development of this partnership includes participation of civil society via a dedicated institutional set-up, it remains unclear how and to what extent would organisations from the civil sector be involved.

4. Establishing of a monitoring system and a dispute-settlement mechanism

• The pre-litigation phase will include establishing a monitoring mechanism on a political level. In that regard, implementation of the commitments in the Agreement will be monitored at the level of Executive Vice President on the side of the EU and Vice Premier on China’s side.
• In absence of a mutually agreed solution with regards the enforcement of the CAI, the State-to-State dispute resolution mechanism (arbitration panel procedure) will allow the EU to issue a complaint in case of breach of commitments. Although the two sides agreed on streamlined and clearly defined compliance and post-compliance stages of the proceedings (including retaliation), it is unclear whether and how will this work in practice, as trust still remains an issue.

Considering the above points, it becomes clear that many details need yet to be worked out. However, the spirit of the agreed deal is all about boosting the position of the EU’s investors in China. Although the EP is right to raise the concerns of human rights situation in China, it should be more careful in choosing a platform to do so. If it blocks the ratification of CAI, it would be the EU investors who will suffer, not China and its investors. In such scenario, the EU would lose the negotiated access to China’s market, whereas China would continue one-sidedly building up its presence in Europe.

The EP should consider that there are other democratic countries which highly appreciate human rights, such as Australia, New Zealand, Japan, and South Korea, but have nevertheless signed a Regional Comprehensive Economic Partnership with China (and other South-East Asian countries) just a month before the conclusion of the CAI was announced. Even though this free trade agreement is likely to deepen the deal between these democratic countries and China, it is highly unlikely that these countries will stop calling out China for its record on human rights. In addition, even the US, a traditional promoter of human rights and a strong opponent of China, signed a “Phase One” trade agreement in January 2020 aimed at deepening Sino-American economic ties. Therefore, the fact that the CAI was signed is unlikely to result in softening the EU’s position on China’s human rights record either. For this reason, the signing of CAI does not go against the EU’s value-based approach to international politics.

Finally, some may ask whether it is also hypocritical that the EU is building a closer economic relationship with China, while simultaneously looking suspiciously at Serbia who keeps growing closer to this Asian giant both economically and politically. In that regard, while both the EU and Serbia are seeking to maximise their benefits by working with China, the way they are going about it is radically different. The signing of the CAI will not prevent the EU from continuing to exercise vigilance through investment screening and protection of their critical infrastructure. Serbia, in contrast, welcomes China’s projects with open arms, mostly via untransparent government-to-government talks. From the perspective of politics, the EU keeps condemning China for its treatment of Uyghurs in Xinjiang and of the protestors and political figures in Hong Kong, while Serbia not only abstains from EU’s declarations on these matters, but also proactively sends messages of support to the Chinese Communist Party.

Therefore, it would be wrong to call the EU’s move to sign the CAI with China hypocritical, as the deal represents a product of EU’s approach that is completely different from what Serbia is doing with China. In short, the EU is simply rebalancing the asymmetric economic relationship with China in a manner that does not compromise its political views, while Serbia’s actions can be seen as opportunistic political behaviour devoid of any human rights discourse or action.