The Pitfalls of the China-EU Comprehensive Agreement on Investment

Two of Europe’s important partners, India and the U.S., share concerns about the new deal.

A screen displays live Chinese President Xi Jinping, top left, European Council President Charles Michel, top right, European Commission President Ursula von der Leyen, bottom right, French President Emmanuel Macron, bottom center, and German Chancellor Angela Merkel during an EU-China Leaders’ meeting video conference at the European Council headquarters in Brussels, Wednesday, Dec. 30, 2020.

On December 30, leaders from Brussels and Beijing reached terms on a new China-EU Comprehensive Agreement on Investment (CAI). After seven years of negotiations, the deal will reportedly grant the EU enhanced market access in China, in sectors such as health services, chemicals, electric vehicles, and telecoms. Advocates say it will enhance legal protections for EU investments in China, eliminate equity caps and quantitative restrictions, ease requirements for joint ventures, and increase transparency in the Chinese market.

That all sounds just fine. Why, then, has the CAI met significant disapproval in India and the United States, as well as within Europe itself? There are two broad lines of criticism.

First, some experts are skeptical the deal will accrue substantial economic benefits for most European capitals or stimulate many reforms inside China. Every EU member save for Ireland already had a bilateral investment treaty with China. Even if it’s reasonable to expect some economic benefits in some select sectors, Beijing is unlikely to allow EU companies to challenge the market positions of any of its top state-owned enterprises.

One U.S. expert described the deal, spearheaded by German Chancellor Angela Merkel, as “mainly designed to please a handful of German multinational companies.” And at a time many capitals in Europe are raising growing concerns about Chinese investments on national security grounds, the CAI does little to mitigate the risks of investments from China.

Diplomat Brief Weekly Newsletter N Get briefed on the story of the week, and developing stories to watch across the Asia-Pacific. Get the Newsletter

The CAI reportedly received a critical boost in December when China granted a “significant concession” in agreeing to better observe international labor standards and elevate its efforts to fight climate change. However, Beijing’s track record inspires little confidence in the efficacy of non-binding commitments on human rights, labor, or the environment. Time and again, and with relative impunity, China has skirted voluntary bilateral and multilateral commitments in these areas.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

Before signing the CAI, European Union officials might have consulted first with Italy, which signed a Belt and Road Initiative (BRI) Memorandum of Understanding with Beijing in 2019. As the first “G-7” country to endorse the BRI at a time the Chinese initiative was facing widespread international criticism, Italy gave an important reputational boost to President Xi Jinping’s signature initiative. Nearly two years later, few Chinese investments have materialized and “unprecedented” Chinese commitments on human rights and labor reforms remain hollow promises.

The more damning lines of criticism, however, relate to the CAI’s geopolitical context and regrettable timing. The U.S. and EU had just launched a new dialogue designed to coordinate approaches to China in October 2020. One week prior to the CAI, with the Biden administration preparing to take office in Washington, incoming national security advisor Jake Sullivan tweeted the administration “would welcome early consultations with our European partners on our common concerns about China’s economic practices.”

Beijing’s sudden flexibility and rush to complete the agreement before the end of the year was clearly aimed at pre-empting the prospect of closer U.S.-EU coordination. Brussels obliged, and while Beijing will honor some of the specific sector commitments, those gains will likely pale in comparison to the promises that go unfulfilled and the strategic advantage Europe has ceded.

European diplomats often criticized the Trump administration for adopting a unilateral approach to trade grievances with China. President Donald Trump should have consulted with U.S. partners and allies, they say, in pursuit of a more coordinated approach. With an incoming U.S. administration signaling its intent to do just that, Brussels has opted for its own form of unilateralism – except rather than attempting to impose costs on China, it is pursuing greater market access.

The timing of the CAI is particularly disappointing for India. Currently, thousands of Indian soldiers are engaged in a tense military standoff with the People’s Liberation Army at the Line of Actual Control in minus 30-degree Celsius temperatures in the Himalayas.

Having stood firm in 2020 against China’s assertiveness, including banning hundreds of Chinese apps on security considerations and declining to sign the RCEP trade agreement in part over concerns about Chinese trade practices, India hoped the international community would increase the pressure on Beijing. The EU has done the opposite, and there is a lesson for India in this. As India’s Samir Saran worries, Europe has “weakened its own hand, given short shrift to its own values, and undermined the position of its friends and allies,” as the EU moves “from ‘values’ to ‘valuations.’”

Indeed, this is a particularly inexpedient time for the EU to break ranks with other democracies and provide China a diplomatic victory. Beijing has faced growing international condemnation for its “wolf warrior” diplomacy, its lack of transparency regarding the COVID-19 pandemic, and its increasingly belligerent approach to a wide range of contentious domestic and foreign policy issues: from Hong Kong to Taiwan, and from the South China Sea to Xinjiang.

As China seeks to weather an international backlash, it’s betting on one simple fact: that foreign capitals can issue diplomatic protests ad infinitum but at the end of the day everybody wants to make money. The EU seems determined to prove Beijing right.

China prefers not to stand alone. That’s why it has invested so much energy into courting disunity among ASEAN member and within Europe itself. Now it is attempting to forestall greater coordination among the world’s top democracies – including the Quad, the EU, and likeminded partners like Canada, New Zealand, and the U.K. – on issues where they enjoy considerable strategic convergence, from investment and trade to human rights, cybersecurity, and freedom of navigation. Not only is it proving successful, Beijing is securing its prize at a significant discount, in return for vague or hollow commitments and marginal economic concessions.

As Theresa Fallon argues, “Even if the CAI is never signed…or if it is never implemented, China has already scored a win.” However, that win is incomplete: the CAI is not yet a done deal. The European Parliament and member states must still finalize and ratify the agreement before it takes effect and many European parliamentary leaders are already voicing opposition. There is still time to reconsider this ill-advised investment agreement.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

Dr. James Carafano is a vice president at The Heritage Foundation and directs the think tank’s research in matters of national security and foreign relations.

Dr. Arvind Gupta is the director of the Vivekenanda International Foundation (VIF) in New Delhi and former Indian Deputy National Security Advisor.

Jeff M. Smith is a research fellow in the Heritage Foundation’s Asian Studies Center.