China, EU nail down market-opening investment pact

8 min read

The European Union and China’s agreement today (December 30) on a new investment pact is either a sign that Brussels is willing to sacrifice its values on the altar of trade or a clever bit of realpolitik to assert independence from the US just ahead of the shift from Donald Trump to Joe Biden.

Negotiators from the European Commission and Beijing finally concurred on the terms of the Comprehensive Agreement on Investment (CAI) after six years of negotiations and despite stiff opposition from a significant number of senior European parliamentarians. The pact is expected to face an arduous ratification process in 2021. 

On the surface, the CAI should allow European firms much greater access to and a more level playing field in China’s vast markets, which have remained relatively closed to outsiders despite Beijing’s promises of opening since the 1990s. 

Reality will be in the detail, which is still unclear since the terms of the pact were negotiated in secret and members of the European Parliament, where anti-Beijing sentiment is more endemic than within the EU’s executive, were reportedly only allowed to read a truncated copy of the pact this week.

Only parts of the agreement had been leaked to the press when Asia Times went to press. EU sources say that the current terms offered by Beijing were unthinkable just months ago, with one diplomat commenting to Asia Times that they are “probably the best the EU can expect.”

According to reports, the deal will more fully open up China’s manufacturing, construction, advertising, air transport, maritime services, and telecom sectors to European firms. 

There are also suggestions that Beijing will allow greater access to China’s electric vehicle and private hospital sectors, two markets where European firms have something of an advantage over Chinese firms. 

European companies will reportedly no longer need to partner with Chinese entities for market access, one of the chief complaints of foreign investors. 

Meanwhile, Beijing has pledged more “restraints on its state-owned enterprises, greater transparency on subsidies and rules against forced technology transfer,” according to a Financial Times report.

What these all mean in practice, given that the Chinese government is accustomed to making grand promises on international trade it often fails to keep, is another matter. Moreover, allowances for greater access doesn’t mean European firms will find it easy to invest in China’s markets.  

Chinese firms already have an unmovable dominance in many of the opened sectors, namely construction, manufacturing and telecoms, meaning European firms will find a consolidated market that is extremely difficult to penetrate.  

More, there appears to have been little movement on a settlement system for commercial disputes, necessary for larger European firms to invest in confidence.

Committees and arbitration panels will be created to ensure that the terms of the pact are honored, and possible sanctions could be imposed for failure to comply.

However, it remains to be seen how much authority these bodies will have to enforce compliance from Beijing, with the EU already hesitant about engaging in any punitive actions against China over trade. 

Whilst the negotiations have generally been seen as one-sided, with the Europeans asking for the same reciprocal rights that they afford Chinese firms, it appears unlikely that European states will markedly alter their new investment screening protocols, intended to protect their strategic and largest businesses from foreign (namely Chinese) takeovers. 

It is believed that the EU balked at allowing China full access to European energy markets, agreeing only to its investment in renewable energy sectors where it is already dominant in some European states such as Italy. 

Bilateral EU-China trade was valued at US$650 billion last year, but Chinese investment in EU states has steadily declined since a peak in 2016, at around US$45 billion. In 2018, China invested about half this amount. Yet China remains the second-largest recipient of European investment.

By no account is this a perfect deal for the EU, although no deal involving trade or investment is ever wholly ideal, as Brussels and London found out in yet another 11th-hour pact that was secured last week over Brexit. 

The European Commission had vowed not to put “speed over substance,” as a spokesperson said last week, but Beijing has clearly prioritized haste in agreeing to the pact.

Beijing’s apparent desperation to secure the terms of the deal before the end of 2020 and before Biden takes office in mid-January may, on the one hand, have enticed the EU into thinking that Chinese officials have given away much more than they wanted.

In this view, the time was ripe to wrap up the terms of the deal, which Beijing may not have been willing to make if they had been delayed until next year. 

On the other, Beijing might have promised more concessions than it will actually be able to honor in practice, especially if parts of the Communist Party’s bureaucracy are unwilling to engage with such pledges, especially on issues related to ending the special provisions afforded to state-run firms. 

Moreover, the Chinese government was hardly negotiating from a position of weakness this year, with its economy back up-and-running amid the pandemic whilst Europe’s is unlikely to begin recovery until at least late next year.  

A Financial Times editorial commented this week: “An investment agreement should make life easier for European businesses in China, but it will require much more than this to create a level playing field. Brussels should not be rushed into a deal. It could hold out for more.”

Polish, French and Dutch senior officials had last week voiced some opposition to rushing to conclude the terms of the deal by the close of 2020, although their objections apparently petered out. 

Germany, whose economy is far more dependent on Chinese trade and investment than most other EU member states, made it known that it wanted to finalize the terms of the CAI before the end of its six-month EU presidency, which ends on December 31. 

This has led to accusations that Berlin had put maximum pressure on the European Commission to finalize the terms of the deal for its own domestic benefit, not those of other EU states.

There is even reportedly ire about the direct role German Chancellor Angela Merkel played in the negotiations when responsibility falls on the European Commission. 

Leading China scholars in Europe say Brussels could have gained better terms if it had delayed negotiations until next year when they reckon there would have been a good chance of the EU engaging in a new joint-effort with the incoming Biden administration to press for more concessions from Beijing. 

This was clearly the hope of Biden’s camp. But Brussels no doubt was peeved that the incoming US president’s team refused to cut off the “phase one” trade talks between the US and China, arranged earlier this year to postpone Trump’s “trade war”, which gives the US far better market access to China than the EU currently enjoys. 

For Brussels, the investment pact will put the EU on a more level playing field with the US regarding economic relations with China, a prerequisite if they are to jointly work to tackle other international issues and problems associated with China. 

It also sends a strong signal that Europeans are no longer willing to play second-fiddle to the Americans.

In many ways, the investment pact’s agreement is far more symbolic for both sides than the likely content that will be agreed. For the Europeans, it demonstrates their importance in global trade and diplomacy. 

For the Chinese, the CAI will not only sow divisions between the US and EU before Biden even takes office, but it will cap off a year in which Beijing has economically recovered relatively well from the pandemic and has secured other landmark trade deals, not least the Regional Comprehensive Economic Partnership between Asian states. 

But the symbolism of agreeing to the terms of the deal will likely fall away by next year when it comes to the arduous task of actually getting the deal across the line through ratification. 

The text has yet to be fully agreed upon by both sides and problems could arise over the semantics when it is translated, some observers suggest.

The CAI must go before the European Council and Parliament next year for ratification, and opposition to Beijing is more strongly felt in those two institutions than the EU’s executive.

Indeed, there is no certainty that the investment pact will be accepted by the European Parliament. If it is, most analysts don’t expect it to be fully ratified by the EU until near the end of 2021. 

Given recent comments from senior European parliamentarians, the main sticking point will be China’s record of forced labor in Xinjiang, as well as its failure to ratify many of the International Labour Organization’s (ILO) rules on worker rights, which it has promised to do for some time. 

“Trade policy does not take place in a vacuum — how the question of forced labor is addressed in the CAI will determine the agreement’s fate,” Bernd Lange, chairman of the European Parliament’s trade committee, wrote in a tweet last week. 

Reuters reported on December 28 that Beijing will “pledge to subscribe to the International Labour Organization’s rules on forced labor,” although the exact wording of China’s commitment will be key.

Many in the EU are skeptical of Beijing merely making promises and will demand to see evidence of change before ratifying an agreed deal. 

The forced labor issue matters for two reasons. Firstly, it will be used by many European officials and parliamentarians as a way of signaling their belief that the EU should uphold international standards on human rights, a grand claim often made by Brussels but which has clearly gone missing in the CAI negotiations. 

Indeed, there was a strong reaction on social media after European Commission President Ursula von der Leyen stated upon agreement of the CAI’s terms that it shows the EU is “open for business but we are attached to reciprocity, level playing field & values.”

Second, critics will use China’s failure despite repeated promises to ratify international labor codes as a way of showing that the pledges it made in the CAI cannot be trusted, that it might swear to create a level playing field but won’t in practice.

Many questions will be asked in the ratification process that some suggest could undo the deal.   

Why did the European Commission, reportedly pressured and hurried by German leaders, put trade above a values-led policy? Has the gulf between the European Commission and Parliament, not just in sentiment but also in information sharing, now grown dangerously wide?

What is the EU’s true relationship with the US, one of trust or a competitive alliance? 

Six torturous years of negotiations between the European Commission and China may have finally ended. Next up are fraught negotiations between the EU’s various institutions and stakeholders over whether the agreed terms are good for the EU or only its most powerful members. 

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Source: Asia Times – China, EU nail down market-opening investment pact

Tony Simon

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