The unprecedented EU-China investment agreement (CAI)

On the 30th of December, the day before New Year’s Eve, the EU and China concluded “in principal” on the EU-China Comprehensive Agreement on Investment (CAI). The negotiations already started in 2013 and took 35 rounds of talks, even though Chinese Premier Li Keqiang and former president of the European Council Van Rompuy thought the deal could be reached by 2016.

The deal was concluded in a videoconference between Chinese President Xi Jinping, European Commission President von der Leyen, European Council President Charles Michel, German Chancellor Angela Merkel and French President Emmanuel Macron. It is an unprecedented deal with major economic significance that will rebalance the trade and investment relationship between the EU and China, according to the European Commission. The timing is quite unusual for such a high-level agreement. So, what happened? And what are the implications of the deal?

Why the hurry?

The German Presidency of the European Council would end by January 2021, and this investment deal provided ‘the icing on the cake’ according to Politico Europe. It is known that Merkel wants to strive for good strategic relations between the two geopolitical blocks. Especially the German industry will benefit greatly from the deal as about half of EU FDI in China is in the manufacturing sector, with the German automotive industry as the main investor. Nevertheless, as our China-EU FDI Radar shows, Germany is also by far the most interesting country for Chinese acquisitors, with 174 Chinese acquisitions over the last ten years. Therefore, a lot is at stake for Germany regarding the investment relationship between China and the EU.

The investment deal will contribute to the level-playing field and is of high importance for both European and Chinese businesses. However, not all European members were satisfied with the conference. According to The Diplomat, there are three main concerns about the agreement. Some member states wondered why the deal had to be struck just before the Biden administration would come into power. The deal could weaken EU-US ties and Western cooperation on China. Nevertheless, the deal shows that the EU is searching for strategic autonomy and independently agrees on this major agreement with China. Secondly, there are questions on the ratification of labour rights standards since no deadline on this matter is mentioned in the agreement. Lastly, despite improvement in market access and references to environmental standards, the deal falls short in an investor protection mechanism. The two sides estimate that an additional investment protection agreement will be concluded within two years. The deal as it now, still has to be ratified by the European Parliament.

What’s in it for the EU?

“Today‘s agreement is an important landmark in our relationship with China and for our values-based trade agenda. It will provide unprecedented access to the Chinese market for European investors, enabling our businesses to grow and create jobs. It will also commit China to ambitious principles on sustainability, transparency and non-discrimination. The agreement will rebalance our economic relationship with China”.

– President of the European Commission Ursula von der Leyen

The CAI will ensure that EU investors achieve better access to the Chinese consumer market and that they will compete on a more level playing field, which is important for global competitiveness. The European Commission has outlined four advantages of CAI for the EU, as it will:

• guarantee an unprecedented level of access for EU investors in China
• allow EU companies to buy or establish new companies in key sectors
• help level the playing field for EU companies in China
• commit China to rules on state owned enterprises and transparency in subsidies

For example, the CAI will forbid requirements for technology transfer to a joint venture partner and China will remove joint venture requirements in, among others, the automotive and health sector. Moreover, European companies will get better market access in sectors such as R&D, telecommunications, computer services, air transport and financial services.

Besides that, commitments have been made on effectively implementing and respecting sustainable development under the Paris Climate Agreement and respecting labour rights under the Conventions of the International Labour Organisation (ILO). For the EU, these were key elements to include in the deal with China as it will promote sustainable development.

What’s in it for China?

According to a press release of the Chinese Foreign Affairs Ministry, Chinese President Xi Jinping pointed out that under the current circumstances, China and the EU joined hands and achieved fruitful results in EU-China relations. China pushed for high-level opening up and this deal will provide broader market access, a better business environment, stronger institutional guarantees and brighter prospects for mutual investments.

Sourabh Gupta, a senior fellow at the Institute for China-America Studies in Washington, considers the agreement to be a milestone for China:

“For China, this is the most significant economic agreement, geo-economically, geopolitically as well as from a broad economic perspective, since the signing of its World Trade Organization Accession Protocol in 2001 (…) It will be remembered in the future as the most economically meaningful instrument signed by China during its second phase of reform and opening up.”

With this deal, Chinese firms continue to have access to key European strategic markets, while the deal improves access to some manufacturing sectors and to the energy sector, except for nuclear energy. EU sensitivities will be preserved under the CAI agreement and the EU foreign investment screening mechanism will continue to be enforced on Chinese investments.

However, as the Chinese FDI flow into Europe was already large, there must be other benefits for Beijing as well. Theresa Fallon argues in The Diplomat that there are three more gains for China. Firstly, the CAI will preserve and encourage EU investment in China, which will enhance China’s economic and technological development. Secondly, for Beijing, the CAI agreement shows international legitimation of the Chinese system. And lastly, Beijing showed itself flexible to make some concessions because of Joe Biden’s victory. With the CAI, Beijing pre-empts a mutual EU-US stance towards China after Biden coming into office.

The implications on investment screening

Clearly, the CAI benefits both China and the EU in terms of trade and investment possibilities. Now, the two sides will have to work to finalise the agreement. This means legal revision, translation and approval by the European Council and European Parliament, which might take more than a year.

However, as market access is tackled in this agreement, there are still loose ends on investment protection. The statement says that ‘the common objective is to work towards modernised protection standards and a dispute settlement’, referring to the context of the United Nations Commission on International Trade Law (UNCITRAL). This means that the investment screening of Chinese investments and protection of European firms that want to invest in China are still essential as no legal protection mechanism has been settled yet.