The EU is right to go ahead with the China investment agreement

After seven years of negotiations and 34 tough rounds, the EU and China finally achieved a welcome breakthrough on their Comprehensive Agreement on Investment (CAI) on December 30, 2020. With an independent foreign economic policy aimed at opening markets instead of sealing them off, the EU can give meaning to its new slogan "Open Strategic Autonomy."

The agreement is a success for the EU. After all, it was the EU that took the initiative for the negotiations. While Europe is fundamentally open to Chinese investors, this has not previously applied to European companies in China. As a result, the EU had little to offer in terms of improved market access. The result: years of stalemate in the negotiations.

With Joe Biden's election victory, the process suddenly became unlocked, because, now, China must expect increased transatlantic cooperation to its detriment.. It has therefore made decisive concessions that made the conclusion of an agreement possible. In the future, China will, for example, refrain from locking out and discriminating against European investors, especially in important service industries such as finance. It accepts new rules for state-owned enterprises and subsidies. It pledged its own efforts on labor standards and sustainability, as the EU has agreed with other contracting parties. The price for the EU is that it refrains from further tightening the conditions for foreign investors. And it runs the risk of letting China drive a wedge between the EU and the US. Both points can be dealt with.

Developing a common transatlantic position on China would take time

After all, whether the agreement weakens the transatlantic partnership is not at all a foregone conclusion. To improve relations with Washington, Brussels, instead of playing hardball with China, should address existing bilateral issues of contention: Aircraft subsidies, EU agricultural protectionism, U.S. tariffs on steel and aluminum, regulation and taxation of digital corporations, to name a few.

What is clear is that developing a common transatlantic position on China would take time. And time is not playing for Europe. The size of the EU's internal market has shrunk by a seventh with the UK's exit, while China's relative economic weight, and thus its bargaining power, is steadily increasing. Moreover, a transatlantic shoulder-to-shoulder deal would likely force the EU to make additional concessions to China or the United States to make a trilateral deal possible.

Moreover, the cornerstones of Biden's China policy are not even visible yet. In early 2020, the U.S. committed China to additional imports of American aircraft and agricultural products with the so-called Phase 1 agreement - to the detriment of the EU. And it won concessions, for example in finance, that the EU obtains only with its present agreement. Biden wants to renegotiate its own agreement. It is doubtful that he will take EU interests into account. During his vice presidency from 2009 to 2016, the U.S. relied on a "pivot to Asia" to contain China, and not on closer cooperation with Europe.

Successful joint action by the EU with the U.S. requires the existence of common interests. It is true that both want better protection of intellectual property and stricter rules on subsidies and state-owned enterprises. But the interests are not identical. The EU has its comparative advantage in industry, the U.S. in services. Both have current account deficits vis-à-vis China; that of the U.S. was 2% of GDP in recent years, but that of the eurozone was only 0.5%. Germany has even had a current account surplus for years. In 2019, it exported goods worth 96 billion euros to China, which is pretty much the same as the U.S. export value, even though the U.S. economy is five and a half times larger. In terms of income on investments, Germany received circa 15 billion euros in 2019; the U.S. only a few hundred million more. So, the fact is: European and especially German companies have been much more successful in China than American companies for years.

Unrealistic to expect more Chinese concessions

In addition to the lack of transatlantic coordination, there is criticism that Chinese concessions to the EU do not go far enough. In fact, companies from the EU are not treated completely equally to domestic ones in China. On the abolition of forced labor, the agreement contains only soft clauses. But anything else would have been illusory, given the EU's bad cards described above. An escalation would have been expensive for the EU, with highly doubtful prospects of success. After all, China does not allow itself to be talked into politically sensitive points of contention in domestic policy. After the experience with Trump's trade war, this should be beyond dispute.

The criticism that the agreement does not provide for the opening of the state procurement market in China is particularly unrealistic. Of course, it is regrettable that China has still not joined the relevant WTO agreement, despite all its assurances. But it is not the task of bilateral policy to exert pressure here; certainly not in the context of a closely mandated investment agreement. Nor is the fact that the treaty provides for a state-state dispute settlement procedure rather than the EU's new investor-state procedure a disadvantage in dealing with a state-capitalist system; on the contrary.

Implementation will be key now

The EU has only had jurisdiction over foreign direct investment for a little over 10 years. Once the new agreement will be complemented with investment protection provisions, it will replace the 25 existing bilateral agreements that EU member states have with China. That alone is an important gain for the EU in the current geostrategic situation. But it is regrettable that the entire negotiation process has been highly opaque. The annexes to the agreement which contain details on market access concessions are not yet known. It is therefore too early to make a final assessment. What is clear, however, is that a well-negotiated agreement can only be a successful one if its provisions are actually implemented. Only if this can be plausibly assumed will the EU Parliament approve the agreement. The EU must be vigilant in the implementation of agreements. To this end, it has recently appointed a Chief Trade Enforcement Officer. He will have a lot to do. And as far as the enforcement of human rights standards is concerned, the EU has only just created sanctions options, which should now also be used - gladly together with the USA.

Slightly updated version of an article that has been published on January 8th, 2021 in Frankfurter Allgemeine Zeitung.

Coverfoto: © Lukasz Kobus, European Union

The Kiel Focus series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.