Context

In a recent development, the European Union (EU) and China agreed in principle to the EU-China Comprehensive Investment Agreement (CAI) that was tentatively approved.

Background

• The Comprehensive Agreement on Investment has been seven years in the making.
• Since the launch of the project in 2013, the CAI was intended to increase investment between the EU and Chinaby establishing a legal framework and common rules on issues ranging from state-owned enterprises to subsidy transparency. 
• The deal is important politically as it shows the EU's commitment to its own economic sovereignty without constraints from the U.S.
• Also, 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 2020.
• The timing of this deal is significant since for the EU, it comes on the heels of a deal with Brexit.

Analysis

What is ‘in’ the deal?

• The deal removes barriers to foreign investments in China for certain EU industries, such as new energy vehicles, cloud computing services, financial services and health.
• It will also be the first agreement to deliver on obligations for the behavior of state-owned enterprises and comprehensive transparency rules for subsidies.
• For China the deal includes investment possibilities in renewable energies on a reciprocal basis.

AI core focus

• Access to the markets: Provide for new opportunities and improved conditions for access to the EU and Chinese markets for Chinese and EU investors (more specifically, broadening the EU investors’ access to the Chinese market by eliminating quantitative restrictions, equity caps, orjoint venture requirements).
• Addressing challenges: Address key challenges of the regulatory environment, including those related to transparency, predictability, and legal certainty of the investment environment.
• Guarantees protection: Establish guarantees regarding the treatment of EU investors in China and of Chinese investors in the EU, including protection against unfair and inequitable treatment, unlawful discrimination, and unhindered transfer of capital and payments linked to an investment.
• Non-discrimination: Ensure a level playing field by pursuing, inter alia, non-discrimination as a general principle subject to a limited number of clearly defined situations.
• Sustainable development: Support to sustainable development initiatives by encouraging responsible investment and promoting core environmental and labour standards.
• Dispute settlement mechanism: Allow for the effective enforcement of commitments through investment dispute settlement mechanisms available to the contracting Parties and to investors.

The need of the deal

• Increased cooperation: The necessity of this agreement is due to the increased cooperation between China and the EU.
• Bilateral trade: It is also due to the high volumes of bilateral trade and investments (especially from the EU to China), that makes the urgency of shared principles and rules more and more appreciable.
  • Trade: According to Eurostat data, in 2019 the EU had-
    • exported goods worth approximately €198 billion (US$242 billion) to China
    • imported goods worth €362 billion (US$442 billion) from China, with a bilateral trade worth some US$650 billion
  • Investment: With reference to investments in 2019, Chinese foreign direct investment in the EU continued to decline, mirroring the decline in Chinese outbound investments globally.
  • However, China continued to be the second largest FDI recipient.

Europe and China- major partners for a generation China and the European Union (EU) jointly account for nearly 35% of global GDP in PPP terms. Europe championed China’s case for World Trade Organization (WTO) membership and China supported the ‘European Project’. Between 1995 and 2012, Germany, Europe’s economic powerhouse, enhanced its industrial value by 37%, the largest chunk of which came from supply chains not in the United States but in China. In March 2019, the EU Commission published “A Strategic Outlook”, describing China as, simultaneously, a cooperative partner, an economic competitor and a systemic rival promoting alternative models of governance.

How is the deal different?

• The EU said this investment deal with China aimed to be ambitious and cover a wide range of issues.
• The European side said the US-China phase one trade deal  signed in January failed to deal with structural issues in the Chinese economy and European firms were left feeling frozen out by the deal.
• The CAI is unlike the US-China phase one agreement, that not only demands greater market access for US companies but also holds Beijing to buying American goods.
• Nor is it similar to the  Regional Comprehensive Economic Partnership (RCEP)trade deal signed between China and 14 other countries – the world’s largest free-trade agreement.
  • RCEP streamlines rules and standards of trade to encourage the flow of goods and services, but not specifically investment.
• EU insists it wants to start talks about a bilateral free-trade agreement after the investment deal is done. But even if the China and the EU can sign a deal, the CAI will face a number of challenges from the EU parliament.

Why the deal is ‘disappointing’?

• A puppet show: The EU bureaucracy is playing by China’s rules, dancing to China’s tune. The use of the word ‘values’ in the announcement devalues the term.
• Ignored China’s global threats: It glides over:
  • Chinese Communist Party’s (CCP) human rights abuses in China
  • consistent breach of rule of law in international dealings
  • bullying allies such as Australiaand Norway
  • territorial aggression on democracies such as Indiaand around the South China Sea
• Trust issues: The deal is very controversial as it happens against strong objections in the United States and in public opinion in Europe, as there are many problem areas: effective verification mechanisms are lacking and many investment areas are still closed or semi-closed.
• Win-win situation ‘only’ for China: It ignores the fact that while the deal will help drive China’s Belt and Road Initiative into the EU on the physical side, it will equally enable Huawei to drive 5G telecommunications there and hand over the most precious commodity of the 21st century, citizen data, to the CCP.

China has already protected itself by rushing a National Security Law on December 19, right before getting CAI approved, to fend off foreign investment whenever it harms China's national security

• Ignored intelligence law: Worse, this deal has not even mentioned, leave alone questioned, China’s National Intelligence Law that effectively turns every Chinese entity into an intelligence gatherer.
• Threat to national security: A China is not a US or an India. Every deal with this nation has to be seen through the prism of national security.
• Suppression: China will not change; instead, it will use the rules of law around which the rest of the democratic world functions to supress and smother its European partners.

What about EU-US relations?

• Biden had sent signals that essentially told the EU not to rush and sign the CAI now.
• Moreover, the EU made it clear that it wanted to collaborate with the new Biden presidency after four years of difficult co-existence with the Trump presidency.
• It is not clear why the EU, despite all of this, went ahead and signed.
• The EU signed it in the last days of the Trump presidency, so it appears a toxic European response to the four years of often strained relations with the US.
• With China’s proactive approach towards the EU, Biden may find it a difficult task to reset the US-EU relations.

Assessing the implications for India

• Trade competition: After the EU-China deal, India would have to compete more with China in order to drive home its point.
• Resettling relations with EU: This deal would also lead India to think about resetting its relations with the EU. Although India and EU are stakeholders in each others’ economy, the former would still need to pursue EU in a more proactive manner.
• Addressing future challenges: India also needs to watch for another angle that may emerge in future with China increasing its stakes in the EU.
• Cooperation in Indo-Pacific region: Of late a number of the EU countries such as France, Germany and the Netherlands are showing keen interest in the geopolitics of the Indo-Pacific Region. These countries have shown inclination to be a stakeholder in the security and economy of the Indo-Pacific Region. India needs to consider this inclination and work accordingly.

EU-India The European Union is India’s largest trade partner with two-way trade amounting to $115.6 billion (€101.3 billion) in 2018-19. In recent times India has been hinting towards entering into a preferential trade agreement with the EU if not a free trade agreement.

Way forward

The deal is not the ‘solution’ to commercial and economic problems, but it could be a step forward or become a tripwire for bigger problems around China and the world. In any case, it proves that China is not a secondary regional issue, but a massive global question that calls everybody to rethink many problems.

Now, the ball lies in three courts — the European Parliament, the Council of the EU Council, and the Biden administration. The economic fate of the EU in the 21^st century will only be determined by how these three poles uphold the liberal values they had authored in the middle of the 20^th century.