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EU-China investment deal done and dusted

Jo Harper
December 29, 2020

The EU-China investment deal is a major step towards negotiations on a free-trade agreement. But it also leaves the incoming Biden administration with a headache over US-China relations in the post-Trump era.

A woman walks past the flags of the EU and China in Beijing
The EU-China investment deal has been many years in the makingImage: Jason Lee/REUTERS

After almost seven years of negotiations, the European Union and China on Tuesday finally agreed an investment deal, although its official signing is expected on December 30. According to an internal European Commission paper which DW gained access to, the deal, known as the Comprehensive Agreement on Investments (CAI), removes barriers to foreign investments in China for certain EU industries, such as new energy vehicles, cloud computing services, financial services and health, the Commission said.

"The CAI will also be the first agreement to deliver on obligations for the behavior of state-owned enterprises and comprehensive transparency rules for subsidies," a European Commission statement read. China also agreed to "make continued and sustained efforts" to pursue the ratification of ILO fundamental Conventions on forced labor, it read.

The EU had been asking for a level playing field in real estate, manufacturing, construction, and financial services and forced technology transfers from European firms with facilities in China. EU companies working in China face one of the most restrictive foreign direct investment (FDI) regimes in the world, according to the Organization for Economic Cooperation and Development.

For China the deal includes investment possibilities in renewable energies on a reciprocal basis. Jürgen Matthes from the German Economic Institute in Cologne downplays the significance of this. "The starting position is unequal. China's market is much more closed, but everyone can already invest freely in Europe. It was therefore clear from the start that China would make more concessions than the EU, that cannot be celebrated as a particular success now," the economist told DW.

A brief history of the Silk Road

The Commission statement went on to say that the necessary substantive commitments from China had been achieved on the three key pillars of the negotiations: market access, level playing field and sustainable development. "The negotiated result is the most ambitious outcome that China has ever agreed with a third country," it read.

Beijing had long resisted lifting restrictions on EU investments in China, but as the inauguration of Joe Biden as president of the United States draws nearer, the Chinese leadership appears to have been more flexible in its stance. A deal with the EU on market access is seen by many as a public relations victory for the president, Xi Jinping. Furthermore, as Matthes suggests, in some areas, European companies still have to enter into a joint venture with a Chinese partner when they have branches in China and thus also share their trade secrets.

The ambassadors of EU countries on December 28 approved the draft CAI. The deal needs to be ratified by EU governments and the European Parliament.

According to Eurostat data, in 2019 the EU exported goods worth approximately €198 billion ($242 billion) to China and imported goods worth €362 billion, with a bilateral trade worth $650 billion.

China continued to be the second largest FDI recipient after the US in 2019, including — according to the Rhodium Group — $1.6 billion of freshly announced FDI projects by EU companies in China in the last quarter of this year.

Xi Jinping speaks before an EU flag
A deal with the EU on market access is seen as a PR victory for Chinese President Xi JinpingImage: picture-alliance/Xinhua/Wang Ye

Doubts abound

Jake Sullivan, who is to be Biden's national security adviser, wrote on Twitter last week that the Biden administration would "welcome early consultations with our European partners on our common concerns about China's economic practices."

EU officials argue the deal puts the bloc on par with the US, which has secured the same benefits in its so-called Phase 1 trade pact with China.

Of the EU members, only Poland raised serious objections to the deal with China, suggesting that earlier consultations with the Biden administration were needed.

Some European parliamentarians are still preparing to fight over labor standards and human rights. "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," warned Bernd Lange, chairman of the European Parliament's trade committee on Twitter. 

"So far, China has mainly made promises in many areas, but has hardly improved access for European companies and the protection of intellectual property in practice — it remains to be seen whether the agreement will offer more than lip service this time," Matthes says.

Large international corporations in particular benefit from this, Matthes says. "The small and medium-sized European companies with a focus on the EU market will not benefit from it, but will increasingly have to deal with Chinese state-owned corporations, with which they cannot compete on the same terms," he adds.

Furthermore, if China does not deliver what it promises in practice, then the EU must also have options to deviate from the agreement and to close its market more strongly, Matthes believes.

Matthes also argues in favor of a joint approach with the US. "Especially when it comes to the issue of Chinese state capitalism and the distortion of competition, the chance together with the US is greater to achieve something really tangible," he said. "With this agreement, the EU threatens to shoot its powder too early," he concluded.

China's Gateway to Europe - The New Silk Road