The European Union – China Agreement
On December 30, 2020, the European Union and China completed political negotiations for a Comprehensive Agreement on Investment (CAI). The pact was signed at the end of a videoconference involving Chinese President Xi Jinping and top European representatives: Ursula von der Leyen, President of the European Commission; Charles Michel, President of the European Council; and German Chancellor Angela Merkel, the rotating President of the EU Council. President Emmanuel Macron of France was also connected.[1]
In general terms, the agreement reflects the intention of the EU and China to deepen economic relations, granting each party more secure opportunities to invest in the other party’s economy. European industry will gain more secure access to China’s huge domestic market; this comes at a time when China is entering a decade of restructuring toward a green and digital economy, and Europe is striving to stay at the forefront of technology in those areas. It will become possible for EU member states to invest in electric vehicle manufacturing, telecommunications, healthcare, financial services, environmental services, international shipping and airline-related sectors.
Brussels points out that China has never gone this far in opening up its markets. In the sectors covered by the agreement, the activity of European companies becomes more secure, since the Chinese giant will no longer be able to prohibit access to the market, nor will it be able to introduce new discriminatory practices. For the first time, the Middle Kingdom has agreed to ambitious provisions on sustainable development, has made commitments on forced labor and has acknowledged the ratification of the fundamental conventions of the International Labor Organization (ILO).
The President of the European Commission commented that the agreement will certainly rebalance economic relations with China. The Chinese President noted that this agreement between China and the EU (two of the world’s major powers, civilizations and markets) will give a strong impetus to the global recovery following the Covid-19 pandemic, help build an open economy between Beijing and Brussels, facilitate investment, and strengthen confidence in economic globalization and free trade. In addition, Xi Jinping asked the two sides to seek synergies in development strategies, taking advantage of the prospects related to the Belt and Road Initiative to connect Europe to Asia, and to cooperate in the digital sector.
China today is the EU’s second largest trading partner after the U.S., with bilateral trade in goods worth more than one billion euros per day. Beijing is committed to ensuring fair treatment for European companies, so that they can compete fairly in its huge market. The CAI will help create a level playing field for European investors by establishing clear rules on Chinese state-owned enterprises, ensuring transparency of subsidies and prohibiting forced technology transfers and other anti-competitive practices.
Once ratified by both parties, the CAI will bind them in an investment relationship based on the principles of sustainable development. In particular, China pledges not to lower standards of protection in the labor and environmental sectors in order to attract investment, to fulfill its international obligations, and to promote responsible behavior among its enterprises.
China has also agreed to effectively implement the Paris Agreement on Climate Change, as well as the ILO’s core provisions on forced labor. The mechanism for dispute settlement between the parties, which was included in the agreement, meets the most demanding requirements that the EU is accustomed to specifying in all its trade agreements.
The agreement reached stipulates that, within two years of its signing, both parties undertake to complete negotiations on the protection of investments and the settlement of disputes in this area.
The choice of the moment
As if time was running out, after more than seven years of negotiations between China and the EU, the CAI came into being in the last days of 2020. The end of that year had been set as the target date at the EU-China summit in April 2019. Undoubtedly, both parties felt the urgency of setting the basis for making their economies more interdependent, as well as acknowledging the convenience of anticipating any possible effect resulting from the installation of the new U.S. administration. The latter, in turn, had publicly expressed the desire to be consulted by Brussels during the negotiations, before the agreement was reached.
The role of Germany
In fact, it was Germany – close to handing over the rotating presidency of the European Union, due to take place on 31 December – that secured the investment treaty between China and the EU at the last moment. Merkel made the signing of the text a central issue for the German presidency of the Union and can take credit for an important victory. For once, she was the one who pressed her European partners to secure the agreement on time. The chancellor knew that she had a unique opportunity: the German presidency, on the one hand, provided her with the necessary leadership and authority; the ongoing power transition in Washington, on the other hand, gave her leeway that would likely shrink once Joe Biden took office on January 20, 2021. Moreover, in Germany, with the Covid-19 pandemic, there was a realization of the need to strengthen European sovereignty in the context of the confrontation between Washington and Beijing.
Germany is also the European country that benefits most economically from the conclusion of the agreement. It is to date, by far, the largest trading partner of the People’s Republic of China in Europe. In 2019, the value of trade between the two countries reached 206 billion euros: German companies exported 96 billion euros worth of goods to China, and China in turn sold 110 billion euros worth to Germany. These transactions, which account for around a third of the total volume of trade between China and the European Union, took place in sectors that are vital to German manufacturing: machinery, automobiles, electrical engineering and chemicals. The companies involved have become heavily dependent on the Chinese market.
It must also be said that Germany, while hoping to continue to benefit from the Chinese market, now refuses to do so without due care. After the euphoria at the beginning of the 2010-20 decade, when Chinese demand was key to Germany’s spectacular economic recovery after the 2009 crisis, followed by strong growth, a growing distrust of Beijing took over in Berlin. Since the middle of the decade, German economic and political circles have realized that, contrary to their expectations, the expansion of trade, direct investment in China and the associated transfer of technology had not led to a greater openness of the Chinese economy nor to fairer behavior toward their companies.
A necessary agreement
It would seem, therefore, that the content of the agreement corresponds to what the EU wanted and sought for in its relations with China. The agreement seems to have passed with flying colors the conditions required in the study that the European Parliament had commissioned last spring.
In that document, the starting point was the observation of the evolving nature of China-EU economic relations, which, however, cannot be understood in isolation. The Chinese economic model has recently changed. Since President Xi Jinping came to power, China seems to have changed course from the reform path traced by Deng Xiaoping and has aimed at a stronger role for the state in the production of goods and services and in economic planning. With Donald Trump in the White House, the confrontation escalated. The trade war with China, led by the United States and begun in early 2018, is the paradigm of the new economic model that characterizes relations between the two giants.
This is the context, according to the cited document. China is too big a partner for the EU and, as its importance is likely to grow, the EU is called upon to define a flexible approach, establishing the conditions for a fruitful coexistence and, at the same time, strengthening the tools to defend its interests and values.
The study then goes on to consider areas where joint engagement with China comes more naturally, such as climate change and the multilateral trading system. So it makes sense to maintain a constructive dialogue on these issues and to work together on reforming the World Trade Organization (WTO). Secondly, there are important lines of demarcation that the EU cannot cross in its economic relations with China. The type of business ownership is not the only issue. Beijing could favor certain private enterprises because it considers them strategic. Such a disparity in the economic model creates significant obstacles to a trade and investment relationship that aims at being free and unrestricted.
The authors of the study argue that, although the EU cannot hope to change the Chinese economic model, it does have the opportunity to dialogue with that government – especially those favoring reform – regarding some essential economic changes. The concept of “competitive neutrality” could be an interesting area of dialogue insofar as it would help China calculate the size of government support for state-owned enterprises – and other strategic enterprises – in order to gradually reduce it and move toward a market economy.
The study concludes that while continued dialogue and negotiations are obviously welcome and it is still reasonable to hope that China will continue with economic reform, the EU should not be naive. To date, we must recognize that China’s economic system is driven by a very intrusive state, which creates multiple tensions and complications with the EU regarding trade and investment relations. Beyond bilateral relations, such an intrusive state is also creating strong competition for European companies, in both its domestic and also foreign markets, given the size of Chinese companies worldwide.
These were the terms, therefore, in which were expressed the minimum concessions that the EU negotiators would have to obtain in order for an agreement to be reached.
Undoubtedly, the EU has obtained a positive and necessary agreement. Consider that the starting point was 25 bilateral investment treaties (BITs) between China and each of the EU countries, except Ireland (Belgium and Luxembourg have a joint agreement). These bilateral agreements suffer from three main drawbacks. First, they only address investment protection, not market access. Second, none of the BITs cover sustainability issues, norms regarding state-owned enterprises, or transparency rules regarding subsidies, which are just as high on the EU agenda for China. Third, the coverage of the BITs is quite variable and riddled with exceptions. For example, the French BIT includes cultural issues, while the Finnish BIT focuses on the prohibition of unreasonable or discriminatory local content measures for investment.
These are major drawbacks, and certainly the new CAI has provided for decisive improvements on all these issues, from liberalization and market access to the role of state-owned enterprises and subsidies, not forgetting sustainability issues. At present, the EU also includes provisions on the environment and labor in its agreements. On the issue of climate change, China’s recent targets to reduce greenhouse gas emissions by 55 percent by 2030 and achieve carbon neutrality by 2060 represent a substantial change in the rules of the game.
Will China change its policies with this agreement?
Gaining better access to a still protectionist Chinese market while ensuring a more level playing field: these were the goals the Europeans set themselves in the negotiations. They seem to have achieved them, but to what extent have China and the EU resolved their differences over the protection of workers’ rights?
In fact, the political backdrop of the talks, which began in 2013, has changed in the past two years, with troubling reports about the treatment of Uighur Muslims and the situation in Hong Kong. China does not admit that the use of Uighur workers is considered equivalent to forced labor. At the same time, it has shown itself willing to sign up to the conventions recommended by the ILO. Franck Riester, France’s Minister for Foreign Trade and Economic Attractiveness, wrote with some optimism on Twitter: “China’s commitment to ratify ILO’s core conventions on combating forced labor was necessary. We got it.”
In fact, China’s commitment is less than firm, limiting itself to “continued and sustained efforts to ratify” those conventions. “China does not remain at all obliged by such a commitment, which contains nothing concrete,” notes Janka Oertel, of the European Council for International Relations. The negotiators expressed their perspective: “We do not have to rely on this investment agreement to change China.” Indeed, this is only one piece of the puzzle. The other pieces are, according to European sources, the “other instruments” available to act against forced labor, such as the EU’s most recent human rights sanctions regime. Chinese concessions “are not enough, but they allow a step forward.”
Raphaël Glucksmann, MEP for the Group of the Progressive Alliance of Socialists and Democrats, asked: “But are the Commission and the Member States content with words, with promises that do not commit the Chinese leaders in any way? Will we be able to ensure the implementation of this commitment? Will it be possible to go and verify, on the spot, that the camps have been closed, that there is no forced labor? It would not be the first time that a dictator signs an international treaty without respecting it.”[4]
Members of the European Parliament, now called upon to ratify the agreement, have in the recent past supported resolutions condemning the use of forced labor in China.
According to economist Dani Rodrik, the fundamental question is this: Can democracies stay true to their values when they link to China through trade and investment?[5] Two elements must be considered. First: splitting China’s economy from those of the West today would lead to catastrophe. Second: Western countries can do little to reshape China’s repressive regime with respect to human and labor rights.
However, it must be ensured that Western businesses and consumers are not direct accomplices to human rights abuses in China. Democratic countries must be protected from those Chinese practices that could undermine international agreements made on labor, the environment, technology and national security. The goal should be to defend and protect the values of the West, not to export them.
One inevitably wonders what the Chinese government thinks it stands to gain from this agreement. One possible answer is that China is buying an insurance policy against future restrictions in Europe. The agreement contains an arbitration clause that allows the parties to bring infringement charges against each other. Although the European Commission sees this as a mechanism that should prevent the Chinese from backtracking on their commitments, the Chinese government could also use it to counter specific entry barriers against Chinese companies.
Rodrik’s conclusion is that we should not ask whether the CAI allows Europe to export its systems and values, but whether it allows Europe to remain true to itself.
The reaction of the USA
It is unclear whether Joe Biden’s team’s concerns about the deal have abated, but Germany was eager to get the agreement signed before its six-month presidency of the EU ended.
Tom Wright, senior research fellow at the Brookings Institution in Washington, tweeted, “It’s just mind-boggling that the EU would even consider rushing to agree an investment pact with Beijing weeks before Biden takes office after claiming for several years that they wanted transatlantic cooperation on China.” But no matter how much the Biden administration publicly wanted to be consulted before Brussels finalizes the deal, the EU evidently feels it must emphasize its independence regarding policy strategies toward China.
The CAI between the EU and China has provoked the ire of incoming National Security Advisor, Jake Sullivan. Among the objections he raised, the request for clearer clauses to prohibit the use of forced labor in China, especially against the Muslim Uighur minority, stands out. On the other hand, Zbigniew Rau, the Polish Minister of Foreign Affairs, insisted in vain to the EU that things should not be rushed and declared that there should be greater cooperation with Washington. And more than one analyst shared this opinion. Perhaps excessive haste and poor advice played its part. Evaluating the reaction of the EU’s main trading partner would have been a good reason to slow down. It may well be that the EU wishes to remain economically sovereign, but this should not mean that politically important economic agreements are made at the wrong time.[6]
It should also be recalled that Brussels had not been consulted by the Trump administration on U.S. policy in Asia since 2017. And that not even the previous Obama administration, had bothered to inform the European Union at the time when it was about to create the Transpacific Partnership with several leading Asian states, an agreement that Trump would later cancel on his first day in office.[7]
Final Considerations
It is worth remembering where China and the EU came from before they reached an agreement at the end of 2020. China on November 15 had created the world’s largest free trade zone.[8] The signing in Hanoi of the agreement that gives life to the Regional Comprehensive Economic Partnership (RCEP), together with Japan, South Korea, Australia, New Zealand and the 10 nations of ASEAN,[9] had created a common market for their products. These economies generate 30% of the world’s economic output and constitute a market of around two billion people. No area of the world can boast such development potential. In short, China had just been assured that it would continue to prosper, strengthen, assert itself and win.
For its part, the EU had lost strength after a forced amputation. Last December 24, four years after the 2016 referendum, it was obliged to accept that the challenge pronounced by Theresa May – Brexit means Brexit – had materialized. Almost as it expired, the worst of evils, namely, a United Kingdom exit from the EU without any agreement, was averted. On the basis of their agreement, both the UK and the EU achieved, with enormous effort, the narrow goal of limiting the disastrous consequences of Brexit.
Yet Europe, from the writer’s point of view, in essence gained more than meets the eye: it succeeded in obtaining an agreement that will guide its long-term relations with the UK. The EU needed to agree on a fruitful coexistence with such a significant former partner. The importance of the Brexit negotiations was dictated by the commercial costs, of course, but also by the political, social and strategic ones. Had the British walked out without a deal, Europe would have been left without the foundation on which to build a future relationship with the UK. A solid relationship on which to rely for mutual prosperity is important for both the EU and UK. They certainly need to cooperate on climate change, digital transformation and other common challenges.
Reason prevailed. The EU was aware that it was starting, in those negotiations, from a limited position of strength: it knew that Brexit would change little in its internal functioning and that on the UK instead fell the enormous task of rebuilding its institutions and charting a new political course out of the EU. It sought and achieved a balance between not rewarding such a significant defection and not getting hurt.
Adapting to a transforming global dynamic, the EU has been preparing to claim its future role. In this polarized world, China is becoming more confident, more assertive. The United States has been increasingly inward-looking, fixated on domestic issues. It remains to be seen how the Biden administration will operate.
So, there has never been a more important time for Europe to pool its resources and influence in order to speak with one voice. In this context, it seems clear that whatever direction the relationship between the U.S. and China takes in the future, the EU needed to agree on a fruitful coexistence with the Eastern giant.
It is no coincidence that the EU’s agendas with respect to the UK and China have had many points in common: it was decisive to establish regulatory alignment (i.e. a level playing field), agree on state aid arrangements and a mechanism for the resolution of disputes arising from trade. Isn’t this precisely an economic ethics agenda? We believe it is, because it was a matter of agreeing on behaviors considered mandatory.
The data is overwhelming. China is and will continue to be an important focus of investment for EU countries. The flow of direct foreign investment from the European Union into China in the last twenty years has exceeded 140 billion euros; in the opposite direction, from China to the EU, the figure is almost 120 billion euros.
The European Union is China’s most important trading partner. China in turn is the EU’s second largest trading partner after the USA. Today China is the second largest market after the USA, but EU exports to China have been overtaken by China’s exports to the EU. The EU’s trade deficit with the People’s Republic of China has reached 220 billion dollars. It is lower than the equivalent trade deficit of the United States, but still very significant.
At the beginning of its economic revolution, China was at a very low level of development. Even today China’s per capita income is only a quarter of that of the EU. This fact immediately raises a question: if the Chinese presence today is so decisive in the world, how decisive will it be, from all points of view, when its economic development is fully mature?
From the time it joined the WTO in December 2001, China enjoyed a reduction in tariffs because it was accorded the most-favored-nation status. In addition, uncertainty over trade policy has been greatly reduced. The WTO offers its members tools to protect themselves from unfair competition. In 2018, about half of the trade defense instruments used by the EU were applied to China.
To what has been said so far must be added the consideration of what the Belt and Road Initiative will mean. It is of vital importance for China, but also for Europe, since the project involves 13 EU countries and several neighboring economies. Jeffrey Sachs recently wrote that the EU, China and President Biden’s administration must join forces to shape a green and digital global recovery.[10] Now that major carbon-emitting countries are pursuing neutrality, and Biden has decided to bring the U.S. back into the Paris Agreement and commit it to decarbonization by 2050, the elements are in place for a truly green recovery on a broad basis.
In addition, the European Commission was congratulated on its new investment agreement with China. European diplomacy also played an important role in China’s recent commitment to achieve carbon neutrality by 2060 – a decision that was quickly followed by Japan’s pledge to decarbonize by 2050. Now another major success has been achieved: the new EU-China investment agreement will benefit Europe, the People’s Republic of China, the world and the United States.
With all the authority he has acquired through his intellectual standing and his role in United Nations initiatives, Sachs reminded us that the ancient Greek philosophers believed that politics and ethics should go hand in hand. Aristotle devoted two of his works, the Nicomachean Ethics and the Politics, to these complementary issues: the former is a guide to human happiness, and the latter is a guide to understanding how politics can promote happiness in the Greek city-state (the polis). Moreover, in our day, Pope Francis has published two major encyclicals – Laudato Si’ (2015) and Fratelli Tutti (2020) – to show how ethics can help guide the world toward environmental sustainability and global peace. The latest encyclical shows in depth how we can go beyond families, communities and countries to build dialogue and trust across the world.
DOI: La Civiltà Cattolica, En. Ed. Vol. 5, no. 3 art. 14, 1020: 10.32009/22072446.0321.14
[1]. Cf. “L’UE et la Chine parviennent à un accord de principe sur les investissements”, Brussels, December 30, 2020, in https://ec.europa.eu/luxenbourg/news/lue-et-la-chine-parviennent-a-un-accord-de-principe-sur-les-investissements
[2]. Cf. “China, Eu complete investment agreement negotiations”, in Xinhuanet (www.xinhuanet.com/english/2020-12/31/c_139630807.htm), January 12, 2021.
[3]. Cf. A. García-Herrero – G. Wolff – J. Xu – N. Poitiers, “EU-China trade and investment relations in challenging times”, Study requested by the European Parliament’s Committee on International Trade, May 25, 2020; cf. www.europarl.europa.eu/RegData/etudes/STUD/2020/603492/EXPO_STU(2020)603492_EN.pdf
[4]. Cf. P. Wintour, “China and Eu poised to sign long-delayed investment deal”, in The Guardian (www.theguardian.com/world/2020/dec/29/china-and-eu-poised-to-sign-long-delayed-investment-deal), December 29, 2020.
[5]. Cf. F. Lemaître, “L’Ue accepte un accord d’investissements avec la Chine malgré des engagements limités sur le travail forcé”, in Le Monde (www.lemonde.fr/international/article/2020/12/31/la-chine-et-l-union-europeenne-concluent-un-accord-de-principe-sur-les-investissements_6064888_3210.html), December 31, 2020.
[6]. Cf. A. García Herrero, “¿Cuándo y cómo debería la Unión Europea celebrar un acuerdo de inversión con China?”, in Bruegel, December 17, 2020.
[7]. Cf. D. Hutt, “Eu-China deal may give Biden’s team more options”, in AsiaTimes (asiatimes.com/2020/12/eu-china-deal-may-give-bidens-team-more-options), December 31, 2020.
[8]. Cf. F. de la Iglesia, “Nasce in Asia la più grande area al mondo di libero scambio commerciale”, in Civ. Catt. 2020 IV 570-582.
[9]. That is, the members of the Association of Southeast Asian Nations (ASEAN), which includes Brunei, Cambodia, the Philippines, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam.
[10]. Cf. J. D. Sachs, “Europe and China’s Year-End Breakthrough”, in Project Syndicate (www.project-syndicate.org/commentary/eu-china-investment-agreement-by-jeffrey-d-sachs-2020-12), December 31, 2020.