What is in the EU-China investment treaty?
By: Praneet Sisodiya
Tags: Trade, European Union, Geopolitics, China, Economy

Source- Financial Times

Introduction

In November 2013, expectations were high that an investment treaty between China and the EU could be reached within 30 months when Jose Manuel Barroso, former president of the European Commission, and Herman Van Rompuy, former European Council president, visited Beijing. However, it took seven years and 35 rounds of negotiations after that to finalize a deal. The EU concluded its Comprehensive Agreement on Investment (CAI) with China on 31st December 2020. The European Union and China investment deal will ameliorate the level playing field for European investors, while Chinese companies will benefit from new openings in Europe. EU has sealed its top priority in its trade relations with China. Brussels insists that the investment pact, which comes into force in early 2022, will settle enduring hurdles faced by European companies.

Implications for the European Union

The European Union (EU) and Chinese trade are about $1 billion a day, with China being the EU’s largest import source. The EU is China’s second-largest trading partner after the US. The investment deal takes care of several of the EU’s grievances. EU’s companies are being forced to divulge important technological knowledge in exchange for being allowed to compete in the Chinese market. China has been unequitable in favoring state-owned companies, and the process of state subsidies is veiled to outside countries. European investors have found it arduous to make foreign direct investments (FDI) in certain Chinese industries. Over the period of the last 20 years, Chinese FDI into the EU has reached €120 billion while FDI from the EU to China reached a cumulative €140 billion. Considering the humongous markets’ size, the level of bilateral FDI remains small. The deal is likely to improve these numbers. Disputes under the agreement will be solved in a state-to-state dispute settlement mechanism, which will be accompanied by a monitoring mechanism for pre-litigation phase issue solving at the political level.

The deal will allow EU investors, companies to be more competitive without resorting to sharing technology transfers and following other distortive practices. With China accounting for 30 percent of the current global growth, the EU companies believe that expanded access into that market will ensure a better economic performance for the EU. Some other additives for the EU include better access to markets, expunging barriers such as necessities for companies to enter into partnerships with local firms and quashing caps on the level of investment, Intellectual Property (IP) protection, and access to legal remedies in China. The bloc’s companies will get augmented access to manufacturing, the automotive industry, financial services, health, R&D of biological resources, telecommunications, computer services, international maritime transport, air-transport related services, business services, environmental services, and construction services. In the sectors pertinent to the agreement, European businesses will enjoy more legal certainty, predictability. Equal access to standard-setting bodies will be granted for EU companies, and they will provide robust transparency on rules for regulatory purposes. However, access to China’s energy sector has been left untouched in the agreement. The deal also puts the EU on the same pedestal as the US when it comes to working in the Chinese financial services market.

Valdis Dombrovskis, the EU’s trade commissioner, admonished that the deal is not an elixir for all the issues that ail the trade between the two. The trade deal is far narrower than the comprehensive free trade agreements that the EU has signed with Japan, Canada, and the UK. Some issues that were not ironed out were overcapacity in steel production, unequal access to public procurement contracts, and trade in counterfeit goods. EU was also looking to settle broader impediments like China’s use of industrial subsidies through reform of the World Trade Organization. EU insists that the deal can help other countries in being more assertive in trade with Beijing as the deal establishes a new reference point in how to seek assurances from China.

Implications for China

For China, the deal is good diplomacy as the new US administration under President Biden has made it crystal clear that it would bring together all democracies to put pressure on Beijing over its human rights record and discriminatory trade practices. With China being cornered alone in the world due to it being the origin of Covid-19, the deal provides a little respite for President Xi Jinping. The deal increases existing rights for Chinese companies in the EU market at a time when the EU is looking to broaden its legal arsenal against unfair foreign competition. It also offers China new entry into the manufacturing sector and the rapidly growing renewable energy sector in Europe.

Criticism of the Deal

The agreement is likely to be contentious with proponents of human rights, given allegations of abuses in China. It could also create friction with the US administration of Joe Biden, who has made limpid that he wants the EU to bring joint pressure on Beijing over its aggressive trade practices. Over the past year, China has crushed the freedom of Hong Kong, intensified oppression in Xinjiang, killed Indian troops, threatened Taiwan, and sanctioned Australia. EU claims that its ubiquitous and inseparable human rights are the cornerstone of its relations with other countries. But the deal raises pressing concerns about China’s human rights record in dealing with Uighur Muslims in the western region of Xinjiang. It is reckoned that more than a million Uighur Muslims are imprisoned in camps in Xinjiang, while those outside are subjected to forced labor, intense surveillance, religious restrictions, forced sterilizations, and demographic changes in the region. But the Chinese deny this by saying that the camps are mere vocational training centers. The bloc has said it has got unprecedented commitments from Beijing, including that China shall make incessant and persistent efforts to ratify two International Labour Organization conventions against forced labor, but human rights advocates contend that this is not sufficient. What makes matters worst is that the French junior minister for trade said that the EU would not wait for Beijing to adopt a ban on forced labor before ratifying its investment agreement with China. Beijing’s commitments will be ratified, but not at the time of signing the deal. These friction points will continue to linger till the deal is signed by the European Parliament.

Source- tradingeconomics.com

Implications for India

The EU is India’s largest trading partner, and in recent times India has been showing a proclivity of entering into a preferential trade agreement with the EU if not a free trade agreement. The signing of the deal would mean India will have to compete more with China and think about reassessing its relations with the EU. India will need to woo the EU more proactively and make its economy more prepossessing for the Europeans. Until New Delhi agrees to sign a comprehensive trade agreement with the EU, Europe’s primary focal point will be on the RCEP- integrated China, while India will languish behind. The deal will also make China more audacious in the Indian Ocean region with repeated forays of its navy, where India is the current net security provider, thus impinging on India’s regional geopolitical clout.

Conclusion

The EU-China investment deal underscores the prioritization of the EU’s short-term economic opportunities over any long-term strategy against a rising global power that is adamant on challenging the tenets of the global structure, which the EU is keen to preserve. So, human rights and liberal values are being ignored, and they are not being allowed to cloud the economic relations with China. The EU has demonstrated that it is miles away from emerging as a serious geopolitical player on the world stage. With Brussels’ innate lack of ability to think strategically, it should instead increase engagement with India.

Beijing has emerged as the bigger winner as the deal is the most consequential agreement, geo-economically, geopolitically since the signing of its World Trade Organization Accession Protocol in 2001. The deal has given China a morale booster in challenging times for the CCP and reinforces their belief that democracies have no stomach for a long-term fight. The moment of economic weakness is too good an opportunity to leave. The deal also puts China in an invulnerable position and helps muffle the impact of America’s endeavor to exclude it from global trade and investment. In purely economic terms, European Union has emerged as the winner from the deal. Still, geopolitically, China has taken the pole position, which will reinvigorate its belief to continue with hegemonic tendencies in the Indo-Pacific region and globally.