The facts: The pace of EU-China negotiations on the Comprehensive Agreement on Investment (CAI) intensified significantly as 2020 drew to a close. Before the end of the year the deal was struck - despite the reservations of some member states and calls from the incoming Biden-Harris administration in the United States for “early consultation” with Europe on “common concerns about China’s economic practices”.
The EU says that the CAI brings it improved access in sectors like automotive, financial services, real estate, rental and leasing, and addresses issues such as labor rights, forced technology transfers and unfair competition, especially from Chinese SOEs. The EU Commission also points to unprecedented Chinese commitments on climate and human rights. Experts in China have described the end of the seven-year long negotiations as a step toward multilateralism. The EU has been praised in China for skillfully balancing its relationships with both the United States and China and for exercising its principle of “strategic autonomy”.
What to watch: The political endorsement of the deal by EU leaders is currently being converted into a detailed agreement which will then require approval by the European Parliament. This may prove challenging with some MEPs concerned about the timing and human rights, especially in the light of recent arrests in Hong Kong and a mounting international debate about China’s systematic use of Uighur forced labor.
MERICS analysis: The agreement is a political and symbolic win for China. It projects an image of strong EU-China cooperation at exactly the time when the election of Joe Biden in the United States raises the prospects of a renewed transatlantic approach to China. For Europe, it will bring selective improvements regarding market access, non-discrimination and operating conditions in China, even if many of the market openings China has offered are mostly a repackaging of existing commitments. Some crucial and structural issues, however, are not addressed – like domestic procurement rules that discriminate against foreign investors or restrictions on cross border data flows. With regards to human rights and labor issues, China has so far only committed to “working towards” ratifying the missing International Labor Organization (ILO) conventions in the CAI. This might well take decades – if it happens at all.
The promises of the CAI also need to be seen in the context of larger ongoing developments in China’s legislation. For instance, both the Foreign Investment Law and the draft Data Security Law allow “corresponding measures” for discriminatory action against Chinese companies by other states, and new security review measures for foreign investment were introduced in December. Additionally, the Ministry of Commerce’s (MOFCOM) recent order on “Countering unjustified extra-territorial application of foreign legislation and other measures” penalizes Chinese and international companies present in China that comply with international sanctions. This could cover EU firms that restrict sales to Huawei in order to comply with US sanctions.
“Foreign companies should be prepared for continued, or even greater, geopolitical uncertainties affecting their presence in China, irrespective of what Beijing is promising in the CAI.” MERICS analyst Katja Drinhausen.
More on the topic: Read MERICS Executive Director Mikko Huotari’s op-ed in Handelsblatt here (in German) and an interview with Huotari and MERICS Chief Economist Max J. Zenglein here.
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