The Strategic Implications of the China-EU Investment Deal

 The EU-China Comprehensive Agreement on Investment is a win for China, and a blow to transatlantic relations. On December 16, 2019, answering a question at an event in Brussels, Chinese Foreign Minister Wang Yi stated that it was unlikely that China could sign an investment agreement with the European Union, because China was a “developing economy.” Fast forward to December 30, 2020. China’s President Xi Jinping held a long-awaited video conference with European Union leaders including Germany’s Chancellor Angela Merkel and French President Emmanuel Macron. After the video call, the European Union announced in a press statement, “The EU and China concluded in principle the negotiations for a Comprehensive Agreement on Investment (CAI).” What happened? Chinese foreign direct investment (FDI) into the EU has increased exponentially over the last few years, primarily directed to the strategic areas of infrastructure and high technology. According to European Commission data, cumulative flows of Chinese FDI into the EU amounted to almost 120 billion euros. However, EU investment into China was even higher, at more than 140 billion euros. About half of EU FDI in China is in the manufacturing sector, with the German automotive industry as the main investor. Germany also held the rotating presidency of the EU in the second half of 2020. Merkel had made it a priority to conclude the deal by the end of the German presidency. She was instrumental in persuading the other EU leaders to accept a deal that was so beneficial for German industry. German senior officials within the European Commission drove the negotiations to a successful conclusion. On the Chinese side, Xi unusually stepped in personally and made concessions to clinch the deal. For the EU, this was an opportunity to display its “strategic autonomy” in foreign relations before the new U.S. administration set in. For China, it was a way to drive a wedge between the EU and the United States.

What’s in the CAI for the EU?

All EU member states except Ireland have already concluded bilateral investment treaties with China. These agreements differ markedly from one another, but they all cover only the post-entry protection of investment, not market access. The EU-China “Comprehensive” Agreement on Investment was intended to cover market access as well as investment protection. At the end of the day, the agreed text of the agreement only concerns market access, with investment protection still left to negotiate for a future agreement. Negotiations for the CAI were not easy: they started in 2013 and took 35 rounds of talks.Enjoying this article? Click here to subscribe for full access. Just $5 a month.The European Commission presented the agreement as “the most ambitious agreement that China has ever concluded with a third country.” The agreement binds China’s liberalization of investments and prevents backsliding on conditions of market access for EU companies. 

In addition, it provides for the elimination of quantitative restrictions, equity caps, or joint venture requirements in a number of sectors. In the automotive sector, China agreed to remove joint venture requirements and to grant market access for new energy vehicles. In the health sector, China promised to eliminate joint venture requirements for private hospitals (of particular interest to France). The CAI will also facilitate EU market access in other sectors including R&D (biological resources), telecommunication/cloud services, computer services, international maritime transport, air transport, and other services. On financial services, market opening provisions match those of the U.S.-China “Phase One” trade deal. The CAI also seeks to improve the level playing field for EU companies. To ensure that Chinese state-owned enterprises act in accordance with commercial criteria, it establishes the obligation for an enterprise to provide certain information and provides for transparency on subsidies in the services sectors.