Expert Speak Atlantic Files
Published on May 18, 2021
Political and economic meaning of the EU-China Comprehensive Agreement on Investment (CAI)

After seven years, the EU and China concluded negotiations in principle on the Comprehensive Agreement on Investment (CAI) in late December 2020. The aim of the deal is to create a more level playing field for investors in both markets and, therefore, increase foreign direct investment (FDI) as well as trade flows. In some areas, the CAI provisions seem to offer new opportunities for European companies, but this might prove to be illusive. While its economic importance is dubious, the deal has political significance for both the EU and China and their relations with the United States (US). A detailed analysis of the CAI’s potential effects can be found in the study prepared by the Polish Institute of International Affairs (PISM) in cooperation with the Polish Economic Institute (PIE) and commissioned by the Greens/EFA Group in the European Parliament.

From the political point of view, the finalisation of the talks on CAI at that time seems to have been a lapse for the EU. The Union did not sufficiently factor in China’s activities in recent years, including violations of human rights in Xinjiang, undermining Hong Kong’s autonomy by implementation of the National Security Law, actions in the South China Sea without respecting international law, or the disinformation during the COVID-19 pandemic. The nod to finish the CAI negotiations in the context of these developments has undermined the EU’s credibility on the international stage as a promotor of human rights and its vision of a world order based on international law. It also showed a lack of cohesion in the EU’s policy and flexibility in relations with China when it comes to potential economic gains. Moreover, finishing the talks on the eve of the start of the Biden administration, which signalled its intention to strengthen US alliances, was ill-timed. In this situation, a lack of at least a consultation with the US, which shares many similar objections regarding China’s foreign and economic policy, hurt transatlantic relations and mutual trust. The end to the negotiations supported China in its competition with the US and showed that it can drive a wedge between America and its allies (another example is the Regional Comprehensive Economic Partnership (RCEP) signed last November). Thus, the CAI can be perceived as a diplomatic success for China.

When it comes to the potential economic impact of the CAI for the EU, the picture is also not so favourable. Many market-access commitments enclosed in the CAI are recycled and exist already, such as those in financial services, and in several sectors investment caps remain, for example, in telecommunications. In some areas, such as media or agriculture, access to the Chinese market is still restricted. Moreover, there has been much hype concerning the sustainability provisions, especially with regard to labour rights and environmental issues. China accepted including these in the agreement, but its commitments are weak and non-binding. For instance, it only promised to make efforts to ratify the International Labour Organisation conventions on labour rights, without a schedule or timeframe for doing it (e.g., as a prerequisite for the ratification of CAI). What is also important is that China’s domestic regulations, concerning, for example, internal security (such as in cyberspace) are not affected by the CAI. Therefore, practically all FDI can be blocked on the basis of a wide interpretation of security interests, which can be used as a political tool.

However, there are several provisions that, if genuinely implemented, could be beneficial for European companies, namely a prohibition on forced technology transfer, more transparency regarding subsidies (though only in services and not manufacturing, which is crucial from the EU’s perspective), and the broader definition of state-owned enterprise to embrace provincial entities. There could also be wider access to the Chinese market for EU businesses in such sectors as electric cars (but only for the biggest entities that can afford to invest more than €1 billion), digital consulting and cloud services, or health, as eight cities and Hainan Island are poised to be opened to foreign-owned clinics. On the other hand, CAI sustains wide access to the EU market for Chinese companies (though such instruments as the screening mechanism are still in place) and in some sectors, such as renewable energy, there are further concessions. Overall, the CAI can be perceived as a good result for China and not much of a success in terms of creating a level playing field between the sides.

Taking all this into account, the crucial issue concerning CAI is its limited effectiveness and enforceability. First, there is lack of an investment protection section. Without it, existing bilateral investment treaties between China and particular EU Member States will be used, which means a diversified level of protection. Both sides decided to continue talks for two more years to finalise the investment protection chapter, but there are no significant incentives to complete it (e.g., by making the CAI’s implementation dependent on that issue). Second, the dispute settlement system on a state-to-state level is incoherent, as provisions on sustainable development have a separate mechanism and can result only in recommendations. Thus, it does not guarantee comprehensive implementation of the agreement. Third, high-level consultations embraced in the CAI may prove beneficial but only if there is enough goodwill on China’s side.

Whether China can be trusted to really adjust to the legal framework of the CAI is problematic. This is connected with its record on adhering to international law, as well as the mixed effects of structural reforms (where the state plays a central role in the economy), or compliance with WTO dispute rulings, and violations of economic agreements, such as the free trade deal with Australia. Therefore, the timing and content of the CAI can be perceived as sub-optimal. In fact, increasing the Chinese Communist Party’s grip on the economy, which was visible in the case of the blocking of AntGroup’s IPO last year, might even increase the unpredictability of doing business in China.

The CAI is now under legal review before it can be signed. However, the prospective ratification process will face serious hurdles in the EU, especially in the European Parliament where some members were sanctioned by China in March as a counter to EU sanctions. As European Commission Vice President, Valdis Dombrovskis, pointed out in the beginning of May, the climate for CAI ratification is currently not favourable and thus, work on it has been put on hold. Overall, the EU should rethink the adoption of the CAI. Nevertheless, the Union should strengthen autonomous measures, which would also concern other countries besides China, such as an enhanced investment screening mechanism, human rights legislation, or the anti-coercion instrument and tools regarding foreign subsidies, currently in consultations. Moreover, the EU can gain more leverage on China by forging a common stance with the US and other like-minded partners.

Read the author's full report on the CAI here.
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