EU-China investment deal clouds ties with US

CAI: Enter the Dragon!

Business

January 28, 2021

/ By / Brussels

EU-China investment deal clouds ties with US

China clearly has more to gain than EU from this deal

A new agreement between the European Union and China over bilateral investments is being welcomed by both as a milestone in business ties. But the EU needs to look before it leaps again into the waiting arms of China.

On December 30 last year, after seven years of protracted and sometimes difficult negotiations, the European Union and China agreed in principle on a landmark investment treaty that Brussels insists will resolve longstanding problems faced by European companies in the country. The Comprehensive Investment Treaty (CAI) tackles a number of long-term EU grievances which include concerns that the EU’s companies are forced to share valuable technological knowhow in exchange for being allowed to compete on the Chinese market, along with fears that the country’s state-owned enterprises are unfairly favoured and that the Chinese system of state subsidies is opaque.

The deal will “significantly improve the level playing field for EU investors”, including by “prohibiting forced technology transfers and other distortive practices”, the EU said in a statement. “China has committed to an unprecedented level of market access for EU investors, giving European businesses certainty and predictability for their operations,” the EU asserted, adding that “EU companies will henceforth benefit from fairer treatment when competing in the Chinese market.” It also said the treaty which came after “intensive negotiations,” is of “major economic significance,” for EU as it “will help rebalance the trade and investment relationship between the EU and China.”

According to EU, the CAI lays clear rules against the forced transfer of technology and the provisions consist of the prohibition of several types of investment requirements that compel 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 licensing. Moreover, the EU has said that the CAI seeks to “make investment fairer” through a clause that seeks to “discipline the behaviour of SOEs (China’s state-owned enterprises) by requiring them to act in accordance with commercial considerations and not to discriminate in their purchases and sales of goods or services”.

Other parts of the deal concern specific sector-by-sector market access rights, removing barriers such as requirements for companies to have partnerships with local firms in joint ventures, and eliminating caps on levels of investment. Areas where EU companies will win enhanced access rights include the automotive sector, telecoms equipment, cloud-computing, private healthcare and ancillary services for air transport. The deal will also put the EU on the same footing as the US when it comes to operating in the Chinese financial services market. China and Europe trade on average over EUR 1 billion a day and the treaty is aimed at doubling the bilateral trade.

Bridging difference with business

The agreement is a significant “business coup” for Germany, which saw its six-month term as EU president expire on December 31, 2020.  With this agreement, Germany has ensured a considerable gain for its auto and other industries. Germany sees China as key to post-pandemic economic recovery.

That may be so indeed, but it is unlikely to prove to be a win-win as most Europeans presume. Indeed, in the short run, the agreement may help Germany’s economy to an extent by boosting exports and helping it overcome the dramatic hit on its economy since the beginning of the Covid-19 pandemic in late 2019. However, in the long run the agreement poses a real danger to Germany’s own economic health and EU’s unity. In many ways, the agreement may be even a bigger win for Beijing, which is facing harsh global criticism over handling of the COVID and its human rights record, and is seeking new foreign investment in the country as many international companies have been moving their operations out of the country in response to the US-China trade war and other concerns.

In a strategic sense, the investment agreement allows China to enter and build Great Wall of China “inside” the EU and in business sense, China has EU in its grip, with its missions, mottos, acronyms and initiatives. The accord could take effect in early 2022, according to EU officials. For long, China has been practicing “pick and choose” policy in its relations with the EU, focusing on its strategic interests, and has often ignored EU’s basic principles and values. Over the years, it has vastly increased its efforts to strengthen bilateral relations with member countries of the EU and has put a special emphasis on Europe’s periphery.

In the sectors covered under the treaty, European businesses will gain certainty and predictability for their operations as China will no longer be able to prohibit access or introduce new discriminatory practices. These sectors include manufacturing, the automotive industry, financial services, health, R&D of biological resources, telecommunications, computer services, international maritime transport, air-transport related services, business services, environmental services, and construction services.

With this agreement, EU naturally now becomes a strong advocate for the CAI underscoring its benefits and breakthroughs. EU claims to have extracted enough commitment on Chinese economic structural reform, market access, and worker rights? However, given China’s past record and practices, it does not look very promising. It would therefore not be easy for EU to publicly promote and defend the CAI which runs counter to those of U.S. led collective effort to rein in Chinese unfair and state-led practices.

EU’s demand for opening of the China’s procurement market has fallen on deaf ears. China has balked at EU demands for a binding investor court system to settle disputes. Finally, the EU negotiators appear to have settled for looser arbitration which may do little to encourage companies to sue the Chinese government. The two sides are aiming to conclude negotiations on investment protection within two years of the signing the CAI.

Blow to transatlantic ties

For China, the deal is a diplomatic coup which strengthens its ties with Brussels at a pivotal moment. The accord bolsters China’s claim to be a mainstream geopolitical force and may limit risks resulting from a tougher EU stance on Chinese investments in Europe in future. It will also strengthen Beijing’s long-standing call for the start of talks on a free-trade pact with the EU, which insisted on an investment treaty first. China is the bloc’s second-biggest trading partner behind the United States, and the EU is China’s biggest trading partner.

Despite concerns over rushing into the CAI, due to arguments that EU risks losing leverage and could encourage Chinese assertiveness, EU agreed to the deal, asserting the code phrase “open strategic autonomy”. The last-minute concession by China is not without reasons. China knew that the talk with EU had the best prospect of success only under the Covid-19 ridden German Presidency and it was “now or never” given that there was not going to be significant change on China policy under Biden administration.

The EU could have waited for Joe Biden’s arrival in the White House to gauge the new administration’s China policy. The unwelcome housewarming gift for Biden’s administration will therefore be seen soaked with mistrust and confronting partnership. The EU, therefore, seems to have committed the same mistake of partial and uncoordinated deal making, something that the EU leaders had accused Biden’s predecessor Donald Trump. Although some European parliamentarians are preparing to do battle to defeat the treaty when it comes to ratification on labour standards and human rights, it is likely to pass in the European Parliament given the considerable influence Germany and France exert on the European Parliament’s political groups and the view that the Parliament is just a “Talking Shop”.

EU’s Chinese gamble – Is it worth playing?

The deal has strategic implications for the US-EU relations and has potential to cause friction at a time when Biden would normally be busy undoing the damage that former President Trump had done to US-EU ties. During Trump’s administration, the US-EU cooperation was confined to security issues, but with Biden in the White House, EU could have expected a revival of broader and deeper transatlantic cooperation to address the global challenges. In its rush to conclude the deal with China, the EU may have missed the opportunity to rebuild the transatlantic partnership with the Biden administration. It is true that while CAI will not necessarily derail, US-EU broader cooperation, it could complicate matters.

The Biden administration is likely to implement a tough-on-China policy and it wants to build an alliance of democracies, in which the EU would be pivotal, to put pressure on Beijing over both its human rights record and aggressive trade practices. In this sense, Biden’s China priorities could come in conflict with the EU-China investment treaty. Just a few weeks ago, EU had publicly urged the US to join in an alliance to assert the interests of the democratic world against “authoritarian powers” and to meet the “strategic challenge” of China. What is interesting and confusing is that just a day before the investment accord, the EU had expressed concerns about “the restrictions on freedom of expression, on access to information, and intimidation and surveillance of journalists, as well as detentions, trials and sentencing of human rights defenders, lawyers, and intellectuals in China.” Yet, barely 24 hours later, the EU negotiators went ahead and signed the agreement.

China seems to have staged a major political coup in the EU, and EU being a major player in the multilateral economic organisations like the World Trade Organisation, it would not be easy for the Biden administration to turn to these multilateral bodies to confront Chinese economic policies.

Deteriorating trade relations between Trump administration and China may have been a catalyst for EU to ink the deal but in a strategic sense the EU seems to have taken a big risk by going ahead to sign the treaty at a time when it is keen to revive the transatlantic relationship. It seems to have conveniently forgotten that without the support of US it cannot address the challenges China presents to global norms and institutions.

The EU and U.S. have traditionally been partners of preference mutually, as exemplified by NATO. Thus, signing this deal with China at a time when Washington is spearheading international efforts to shed light on China’s belligerence and abusive trade practices on several fronts, it is certain that in shadow boxing with Washington, Beijing will use the deal as Europe’s endorsement of its trade and investment regime contrary to U.S. assertions about the disruptive and unfair nature of the Chinese system. The investment deal with China not only robs EU of its strategic leverage, but also makes a mockery of Europe’s commitment to values and principles and above all contradicts its policy of working closely with the United States. In many respects, the comprehensive agreement on investment would cloud American efforts to make common cause with Europe in areas of shared interest. Is EU’s Chinese gamble worth playing?

Monitoring core labour standards

China has committed to implement the International Labour Organisation’s (ILO) Conventions it has ratified, and “to work towards the ratification of the ILO fundamental Conventions, including on forced labour.” As part of its obligations under the CAI, Beijing is expected to ratify respective international treaties, which explicitly prohibit the practice of forced labour, and that China will effectively implement the ILO Conventions it has already ratified. Of the 190 ILO Conventions, China has ratified 26, though it has legally denounced five of those and abrogated another one, meaning that only 20 are in force.

But the investment deal is silent on which specific commitments and actions China will take and what will happen if China fails to adhere to such standards. Moreover, EU does not have any existing mechanism in Brussels or in Beijing to monitor implementation of these standards and ILO being a toothless body, it is doubtful if EU can exert any pressure on China to live up to its commitments. China is a founding member of the ILO and is Titular Member in the ILO Governing Body.  China has poor history of observing international labour standards and as such whether ratification of Convention No. 122, on Employment Policy and No. 29, on Forced Labour, would spell an end to the labour camps is very doubtful.

Interestingly, however, with this deal the EU has been able to pick holes in China’s weakness on its trade practices, and on current state of labour standards in the country which may help other countries to become more assertive in their dealings with China by establishing a new reference point in terms of commitments from Beijing and by getting China to commit to high standards of conduct.

Concern for India 

The EU-China investment treaty is a major economic significance post-pandemic world order and India should analyse, in economic and strategic terms, how the EU-China deal affects European investment in India, and its relations with the EU.

After this accord, EU has now focused its attention on India and the EU-India Summit in May under the Portuguese Presidency will be important to watch. “We also want to develop our presence in the Indo-Pacific region. We look at the agreement on investment with China. We think this needs to be developed in this (EU) presidency. This should set new paces for our relationship, and be used to inspire our relationship with India,” the Portuguese Prime Minister Antonio Costa said very recently.

The EU may attempt to use the CAI as a model for its deal with India or at least throw the CAI gambit at India, highlighting the large gap between EU-India and EU-China ties. The EU is cert to ask India to open its markets fully to benefit from EU’s markets. But that is a slippery downhill road for a developing nation, home to world’s largest population of the poor and which cannot afford to adopt an approach of reciprocity with the world’s richest region.

(The author is the secretary general of Brussels based Europe India Chamber of Commerce. The views expressed are personal.)

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