Europe’s disappointing investment deal with China

After more than seven years of negotiations, the European Union and China appear to have reached a deal for their Comprehensive Agreement on Investment to go forward right before the deadline pressed by President Xi Jinping at the EU-China summit back in September.

The deal is important politically as it shows the EU’s commitment to its own economic sovereignty without constraints from the U.S. and it follows the example set by the 10-members of the Association of Southeast Asian Nations, Australia, Japan and South Korea in signing the Regional Comprehensive Economic Partnership back in November. Suddenly, it looks as if U.S. President-elect Joe Biden has been left alone in his pursuit to contain China even before he is sworn in on Jan. 20.

Still, RCEP and now the CAI have their limitations. When it comes to CAI, much of what has been written relates to the lack of enforcement for China regarding international conventions on labour — including forced labour — but much less attention has been paid to the economic consequences of this deal. Alas, the reason for that might be because the deal amounts to so little.

To start, the purpose of CAI is limited to foreign direct investment and contains no trade clauses. While some aspects of the deal are about more than market access, including sustainability, climate change, international conventions and labour, those provisions remain general and contains limited enforcement possibilities.

Within that narrower scope the main objective, from the European perspective, really is to improve market access for European companies operating — or intending to operate — in China and to ensure a level playing field when they do, as well as reciprocity. Based on that yardstick, the question is whether CAI fulfils such expectations? The answer is a resounding no.

If we start with the hardest, reciprocity, China’s market remains much more closed to EU companies than the EU market is for Chinese companies. On a level playing field, an attempt has been made to address the issue of subsidies harming European companies operating in China, but it is really just that: an attempt.

There are a number of reasons for that. First of all, only subsidies in the service sector are covered, while most of the EU investment in China is in manufacturing, where subsidies cannot be scrutinised. Secondly, even within the service sector, the enforcement mechanism is poor as the state-to-state dispute settlement included in the treaty does not apply to subsidies.

Finally, on market access, only a few concessions have been made bilaterally and all of them are limited. The three main sectors where concessions have been made are electric vehicles, telecommunications and private hospitals.

For the former, it only applies to new investments in electric vehicles, and only if there is no excess capacity in a particular province. As for telecommunications, EU investment remains capped at below 50%. For private hospitals, control has been granted in some provinces but limited to the existence of enough demand.

Given all of the above, the question is why rush a deal that is so inherently complex? Probably because to many it seems as if the EU has nothing to lose, as its concessions to China appear minimal and because the COVID pandemic is leaving a huge scar on Europe’s economies. Only time will tell whether this is in reality a free lunch for Europe, no matter how small the meal.

But even if the EU is getting a free lunch, that does not mean it will not get indigestion, and two scenarios come to mind where that might occur. The first is the reaction of the U.S., which remains Europe’s largest investor and trading partner. Secondly, the EU’s ability to protect its own market from unfair competition.

More specifically, the EU is in consultations to pass legislation on foreign subsidies harming the single market with an implicit focus on China. On paper, CAI allows both China and the EU to take additional regulatory measures if needed but the reasons stated in CAI do not mention subsidies.

China has already protected itself by rushing a National Security Law on Dec. 19, right before getting CAI approved, to fend off foreign investment whenever it harms China’s national security. The question is whether the EU will now dare continue with its efforts to protect its market from unfair competition by legislating against foreign subsidies.