The rise and stall of the EU-China CAI: still in the cards?

With the German Presidency of the European Council scheduled to end in January 2021, this investment deal provided ‘the icing on the cake’ according to Politico EU. 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 research into China-EU FDI (available upon request) shows, Germany is also by far the most attractive country for Chinese FDI, with 174 Chinese acquisitions over the last ten years. Therefore, much 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 outcome. 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 was sworn into power. The deal could weaken EU-US ties and Western cooperation on China. The deal, independently agreed with China, tells of the EU’s search for strategic autonomy.

There are also questions on the ratification of labor rights standards since no deadline on this matter was mentioned in the agreement. Additionally, despite improvements in market access and references to environmental standards, the deal falls short from an investor protection standpoint. The two sides estimate that an additional investment protection agreement will be concluded within two years. The deal still has to be ratified by the European Parliament.

“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 was meant to 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 at the time outlined four advantages of CAI for the EU, saying it would:

• 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 would have forbidden requirements for technology transfer to a joint venture partner and China would have to remove joint venture requirements in, among others, the automotive and health sector. Moreover, European companies should 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 labor 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.

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, considered 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 the CAI, Chinese firms would 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 Chinese FDI flows into Europe were already large, there must be other benefits for Beijing as well. Theresa Fallon argued 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.

While some may have held out hope that the initial setbacks in ratifying the CAI would prove temporary, the years since 2020 have seen a broader accumulation of challenges in the EU-China relationship. The current EU Commission has adopted a “de-risking” approach to reduce strategic dependencies on China. While many of the fields covered by the CAI are not necessarily concerned by the de-risking policies, this does tell of the overall strains that are increasingly present.

Very telling was the fact that, during a March 2023 visit to China, Commission President Ursula von der Leyen said the CAI had not even been discussed during meetings with Xi Jinping. While she did not say it directly, her comments during 2023 have been widely interpreted to mean the CAI will not be revived. Indeed, discussion in Brussels and in EU capitals appears to have moved on, and trade and investment with China are now discussed much more in terms of overcapacity, export dumping and a general atmosphere of threat to European key industries presented by increasingly export-oriented consumer technology companies in China. In a keynote speech on China the same month, von der Leyen stated that the pact will have to be “reassessed”.

Now, with relations in a more challenging place, simply going back to the status quo ante – meaning the revoking of sanctions on EU Parliament members – would no longer be enough to bring CAI ratification back on the table. EU-China relations have taken on new considerations in the intervening years, and this broader political context will have to be considered while debating any future revival of the CAI.

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.