Who wins from the EU’s new investment deal with China?

Europe has sacrificed precious geopolitical capital to reach a framework agreement. Will it be worth it?

January 12, 2021
Has Chinese President Xi Jinping come out on top? Photo: Li Xueren/Xinhua News Agency/PA Images
Has Chinese President Xi Jinping come out on top? Photo: Li Xueren/Xinhua News Agency/PA Images

In the closing hours of the German presidency of the EU, Angela Merkel signed off on a trade text that EU negotiators had laboured on for more than seven years: the approval in principle with the People’s Republic of China on a Comprehensive Agreement on Investment (CAI).

The talks had begun shortly after Xi Jinping’s 2012 accession to power, and concluded in a world radically transformed since then with China’s global ambition increasingly naked, a US dramatically diminished by the Trump presidency, a European Union distracted and depressed by Brexit and a world economy that has shrunk by an estimated 5 per cent in just one year, due to the global pandemic that originated in Wuhan.

Given this dismal list, and the fact that the precise details of the agreement remain to be agreed, it was not a surprise that the first reactions to the announcement were highly political. The incoming Biden administration had suggested strongly that it would prefer the EU to wait until the new US administration and the EU could talk about a shared China strategy; Beijing, in response to concerns that a new era in US politics might facilitate an arrangement that it desperately wanted to avoid—EU and US coordination on China policy—tossed in some last-minute concessions and pressed for a speedy conclusion.   

If there was any doubt that China saw the agreement as a political victory, it was dispelled when the Chinese foreign minister, Wang Yi, pausing in Cyprus on 5th January en route to Africa, delivered himself of a stern instruction to the EU: that the bloc should not be swayed by “other nations” in its relations with Beijing. China-EU relations should not be affected by external interference, but continue to advance towards win-win cooperation,” he said. “China-EU consensus outweighs differences. The two sides are partners, not systemic rivals.” 

This is difficult to square with the fact the phrase “systemic rivals” features in a key 2019 policy document in which the European Commission laid out its new strategy for China, responding to mounting anxieties over Xi’s deepening authoritarianism, China’s lack of meaningful economic reform and its increasingly aggressive bid for state-backed technological dominance.

The pandemic had added a number of further concerns to the list, including supply chain dependency and the aggression of China’s diplomats in pursuit of praise from their leader for their “wolf warrior diplomacy.” An EU report on China’s active information warfare complained of “conspiracy narratives and disinformation” and “covert Chinese operations on social media,” while trade and security chiefs warned member states to be wary of Beijing’s attempts to take advantage of the pandemic to acquire valuable European assets on the cheap.

All of these factors suggested that Europe’s deepening reservations about China’s behaviour would slow down negotiations on the CAI rather than speed them up. Now that it was signed, Wang was publicly yanking the EU’s chain, warning Berlin and Brussels against any cosying up to a newly friendly US administration.  

A few days after that, as the EU was still fending off the charge that by signing the deal it had effectively endorsed appalling human rights abuses in Xinjiang, Beijing rubbed salt in the wounds of a bloc that prides itself on upholding values by arresting more than 50 opposition activists in Hong Kong, apparently for the crime of plotting to win an election. EU leaders remained silent, leaving it to a spokesman to call for the release of detainees and to the foreign ministers of the UK, Australia, Canada and the US to protest this latest outrage. The question of how the EU was going to balance its values with its financial interests seemed to have been answered.

Has the EU at least won some major concessions, despite the appearance of humiliation? The EU Chamber of Commerce in China—which has been highly vocal over the years on the lack of a level playing field, the growing frustration of European companies in their dealings with China and the many restrictions on market access, forced technology transfer and other grievances—issued a statement of cautious welcome that essentially reminded its members that the devil will be in the detail. Since so much of the text remains to be negotiated, the chamber is keeping its powder dry for now.

Promises of a remedy for the chamber’s grievances, along with an end to compulsory joint ventures as the price of operating in China were welcomed, but, as with China’s pledge to “work towards the ratification of the outstanding ILO [International Labour Organisation] fundamental conventions,” a high degree of scepticism remains about whether China will honour its commitments, and what the EU could do if China failed.

The challenges of achieving fair trade and investment relations with China have changed radically since this long negotiation began: China has benefitted hugely from European foreign direct investment, attracted in the first phase of its growth to the prospects of cheap manufacture for export to third markets: foreign companies contributed more over the years to China’s exports than did China’s state-owned enterprises.

But the rate of FDI in China has declined recently, as European players have wearied of the well-rehearsed obstacles to market access and of poor investor protection. EU companies have become more interested in the potential of the Chinese internal market, where they faced great obstacles even as Chinese companies went on regular shopping sprees in Europe, hunting down companies with advanced technologies that could be plundered to upgrade Beijing’s own businesses. The net result has been rising concern in Europe about China’s capacity to create monopoly positions in third markets through leveraging state subsidies, leading to a growing presence of Chinese companies in high-value-added markets and increasingly in Europe’s areas of strength. Without a major rebalancing, this represents a real threat to Europe’s future.

It is too early to tell how far the CAI will address these problems: once the text is finalised it will have to undergo legal review and be approved by the EU Council and the parliament, a process that will take at least two years and could in theory take another decade.

Why did Merkel choose to push ahead? One answer is the importance of China to German car manufacturers: VW sells 40 per cent of its output to China and BMW and Daimler (which owns Mercedes) sell more than a third of their cars there, helping to account for the fact that one quarter of all cars sold in China are German. While Merkel has managed to maintain a robust line on human rights in China over the years, economic pressures in this pandemic year proved hard to ignore. But in rushing to sign, she has offended a number of European partners who felt their concerns were overlooked, and set up a confrontation with some determined members of the European Parliament, whose assent will be required for the agreement to come into force. Xi’s declaration of political victory may yet prove premature.