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

On December 30, 2020, the EU and China concluded "in principle" the EU-China Comprehensive Agreement on Investment (CAI). Negotiations had started in 2013 and took 35 rounds of talks, even though Chinese Premier Li Keqiang and former European Council President Herman Van Rompuy had hoped the deal could be reached by 2016.

The deal was concluded in a video conference between Chinese President Xi Jinping, European Commission President Ursula von der Leyen, European Council President Charles Michel, German Chancellor Angela Merkel, and French President Emmanuel Macron. Described by the European Commission as an unprecedented deal with major economic significance, it was intended to rebalance the trade and investment relationship between the EU and China.

The deal received significant criticism — not least because its conclusion was announced on the eve of a new administration entering office in the US, and because of shortcomings on forced labour issues. The CAI suffered a heavy setback when China placed sanctions on several members of the European Parliament, ostensibly in retaliation for EP sanctions on Chinese officials involved in Xinjiang human rights violations. The CAI has been essentially frozen since. Is there any chance of revival, and what were the original strengths and shortcomings of the agreement?

Rush to Conclusion

With the German Presidency of the European Council scheduled to end in January 2021, the investment deal provided what Politico EU described as "the icing on the cake." Chancellor Merkel was known to prioritise good strategic relations between the two geopolitical blocs — and the German automotive industry, as the main EU investor in China's manufacturing sector, stood to benefit greatly. As Datenna's research into China-EU FDI shows, Germany is also by far the most attractive country for Chinese FDI, with 174 Chinese acquisitions over the last ten years — making the investment relationship with China a matter of significant national interest.

According to The Diplomat, there were three main concerns about the agreement. Some member states questioned why the deal needed to be struck just before the Biden administration took office — arguing it could weaken EU-US ties and Western cooperation on China. Questions also arose over the ratification of labour rights standards, with no deadline specified in the agreement. And despite improvements in market access and environmental references, the deal fell short from an investor protection standpoint, with both sides estimating that a supplementary investment protection agreement would be concluded within two years.

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."— European Commission President Ursula von der Leyen

The CAI was designed to ensure EU investors achieve better access to the Chinese consumer market and compete on a more level playing field. The European Commission outlined four key advantages for the EU: guaranteeing an unprecedented level of access for EU investors in China; allowing EU companies to buy or establish new companies in key sectors; helping level the playing field for EU companies operating in China; and committing China to rules on state-owned enterprises and transparency in subsidies.

Concretely, the CAI would have forbidden requirements for technology transfer to a joint venture partner, and China would have removed joint venture requirements in the automotive and health sectors. European companies would have gained better market access in sectors including R&D, telecommunications, computer services, air transport, and financial services. Commitments were also made on implementing the Paris Climate Agreement and respecting ILO labour conventions.

What's in It for China?

Senior fellow Sourabh Gupta at the Institute for China-America Studies described the agreement as a milestone for China:

"For China, this is the most significant economic agreement— geo-economically, geopolitically, and from a broad economic perspective — since the signing of its WTO Accession Protocol in 2001. It will be remembered 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 gaining improved access to some manufacturing and energy sectors (excluding nuclear). According to analyst Theresa Fallon in The Diplomat, three additional gains for Beijing were significant: the CAI would preserve and encourage EU investment in China, enhancing its economic and technological development; it would provide international legitimation of the Chinese system; and by showing flexibility before Biden's inauguration, Beijing pre-empted a coordinated EU-US stance toward China.

A Deadly Blow? Troubles in EU-China Relations

While some held out hope that initial setbacks in ratifying the CAI would prove temporary, the years since 2020 have seen a broader accumulation of challenges in EU-China relations. The current EU Commission has adopted a "de-risking" approach to reduce strategic dependencies on China. During a March 2023 visit to China, Commission President von der Leyen stated the CAI had not even been discussed in meetings with Xi Jinping. Her comments in 2023 were widely interpreted to mean the CAI would not be revived — with von der Leyen stating that the pact would have to be "reassessed."

Discussion in Brussels has moved on, with trade and investment with China now framed much more in terms of overcapacity, export dumping, and the broader threat to European key industries posed by increasingly export-oriented Chinese consumer technology companies. Simply revoking sanctions on EU Parliament members would no longer be sufficient to bring CAI ratification back to the table — the broader political context has fundamentally shifted.

The Implications for Investment Screening

Even at the time of its conclusion, the CAI left loose ends on investment protection. The agreement referenced working "towards modernised protection standards and a dispute settlement" under the UNCITRAL framework — meaning that investment screening of Chinese investments and protection of European firms investing in China remain essential, as no legal protection mechanism was ever finalised. These considerations remain as relevant today as they were in 2021.