EU-China Investment Agreement: The European single market provides market access to some 450 million citizens and, with its economic output, is one of the major players on world markets. However, digitization and the competition with China are shaking up established structures.

Therefore, the European Union currently has to prove that it is maneuverable on the global stage, especially in regard to two cornerstones of its single market: fair competition and free market access. In our next two blogposts we look into two major projects that show that the Union is willing to do just that. Part I sheds some light on the recently concluded EU-China Comprehensive Agreement on Investment (CAI).

Progress on difficult terrain: The investment agreement with China

Germany’s Presidency of the Council of the European Union ended on an unexpected note: on Dec. 30, 2020, the EU and China announced their “agreement in principle” on the EU-China Comprehensive Agreement on Investment (CAI), which the two sides were negotiating for seven years. Legal fine-tuning of the text will now take place in the following months. It is expected to be presented to the European Council and Parliament at the end of the year.

The CAI was associated with great expectations on the part of the EU 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 member states.

To be blunt, these expectations were not all met. However, they were also very lofty, considering that the negotiating partner was China. After all, since joining the WTO in 2001, China has repeatedly shown that it primarily follows its own developing path, not necessarily matching the expectations of Western economic partners. Against this background, preliminary assessments of the CAI oscillate between “decisive progress” and “minor improvement”.

A more “level playing field”

A “decisive progress” has been made regarding the investment environment, especially concessions on market access. On the one hand because China was hesitant to negotiate on this until the breakthrough in 2018.

On the other hand, because from the EU’s point of view, significant concessions and binding commitments have indeed been achieved. Two of these, which have been longstanding issues between the EU and China, are particularly noteworthy:

1) Joint ventures: In various areas where market access concessions are made (e.g., automotiveelectric cars, telecommunications equipment, financial services, cloud services), China may no longer impose joint ventures. However, they are not completely abolished with CAI. More details will be provided in the yet to be published annex on this.

2) Technology transfer: Measures and requirements that lead to the transfer of technology, production processes and proprietary know-how are explicitly prohibited.

Both points will contribute to European companies encountering fairer competitive conditions in China in the future – provided that the implementation from paper to practice works smoothly. However, in view of China’s handling of its WTO obligations, a question mark may be appropriate here.

More transparency, no investment protection and dispute settlement (so far)

The transparency clause should not bring any decisive progress, but at least a certain improvement: This 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 and domestic state-owned enterprises. However, in the medium term, the clause could at least lead to more caution in the business behavior of state-owned enterprises.

The CAI falls very clearly short of the above-mentioned expectations in investment protection and dispute settlement: These issues have been postponed. However, both sides intend to reach agreement within 2 years of the conclusion of the CAI. This also means that the 25 individual agreements with China, which the CAI was supposed to replace, will remain in force.

Thus, companies from different EU states will continue to encounter partly different investment conditions in China, depending on the form or existence of a national agreement. Conversely, Chinese investors in the EU remain confronted with the existing patchwork.

CAI is also a political signal

Beyond its influence on mutual competitive conditions, the CAI also has a significant political signaling effect: while Beijing blatantly celebrates the agreement as a propaganda success and a clear message to the U.S., the situation for the EU is ambivalent. On the one hand, it has shown itself to be a sovereign global actor that independently “gets things done” and has wrested significant concessions from the global economic power China in some areas.

On the other hand, the unexpected agreement came at a time that is at least worthy of discussion for two reasons: first, the inauguration of the new U.S. president was imminent, and he has already signaled that he wants to close ranks with like-minded countries vis-à-vis China – in contrast to his predecessor.

The fact that the EU is approaching China in this situation has therefore been subject to criticism; secondly, the latest developments in Xinjiang and Hong Kong bring the EU into a conflict of values, especially because the EU was unable to make a big splash with the CAI on the issue of forced labor.

The ratification of the CAI could also stand or fall with this issue: In the sustainability chapter, China has at least promised to make efforts to ratify ILO Conventions No. 29 and No. 105 on forced labor. If there is no clearly perceptible movement here in the course of the year, the European Parliament could find it difficult to approve the agreement. This risk at least sets certain incentives for China to actually take the environmental, labor and social issues in the CAI seriously.