Investment Agreement Between the EU and China - What does German Industry Gain?

Just as surprisingly as the agreement between the EU and China on the CAI, the process of ratification has stalled just four months later. The European Commission now clearly refers to the difficult conditions. Continued rapid progress is considered unlikely in Brussels.

Hopes for early entry into force dampened

While the technical steps of legal review and translation of the text into all official languages of the European Union will continue, the political steps - approval by the European Council and ratification by the European Parliament - are likely to become much more difficult. The most difficult step will probably be the ratification of the agreement.

Above all, the Chinese concession, to push ahead independently with the adoption of the ILO conventions on forced labour has met with great criticism and is perceived as very weak. In addition, there are the current events on Xinjiang issues and the related sanctions by the EU and countersanctions by China. Among others, several members of the European Parliament, the Subcommittee on Human Rights in the European Parliament and the Political and Security Committee of the Council of EU Foreign Ministers are affected by China’s countersanctions.

Against this background, too, the voices in the parliamentary groups of the European Parliament are increasingly speaking out openly against ratification. The signing of the agreement, which was actually planned for the first half of 2022 under a French Council presidency, can now almost no longer be expected.

But what about the negotiated contents of the agreement? Were the goals set on the European side achieved? What does the agreement mean for European companies invested in China and those seeking access to the Chinese market? And how should the EU continue to negotiate?

What’s in the agreement for German Industry?

Important goals were achieved and enshrined in the agreement. These include the ban on forced technology transfer, transparency requirements for subsidies in the services sector and the requirement that state-owned enterprises must behave in line with the market. The agreement can thus help improve the framework conditions for economic relations and solve existing challenges. German industry welcomes this.

Another positive aspect is China’s commitment to grant European companies comprehensive access to Chinese standardization bodies. A comprehensive sustainability chapter was also anchored in the investment agreement. In this chapter, China states that it is working on adopting the ILO Convention against Forced Labour.

What the agreement can’t do

The CAI does not resolve structural imbalances in market access. The Chinese system of negative lists remains in place, as do numerous possibilities for intervention and blocking by the Chinese authorities. Conversely, the EU is assuring China of the openness of its own market for an indefinite period, which must be seen as a major negotiating success for Beijing. German industry is therefore calling on the European Commission to maintain pressure on China to make further concessions in the direction of reciprocity and a level playing field. The list of continuing restrictions is still long.

What does it mean for European trade associations in China?

Annex II of the EU-China Investment Agreement (CAI) contains Article 9 on non-profit organizations, which is currently causing uncertainty. It is feared that the CAI will give the Chinese leadership the right to appoint the heads of branches of European NGOs in China.

The annex lists policy areas that remain within the autonomy of the contracting parties despite the investment agreement and are therefore not regulated in the investment agreement. Article 9 states that despite the CAI, China still reserves the right to decide on investments by foreign investors in non-profit organizations. At the same time, China retains the right to make a legal regulation that forces the management staff of such non-profit organizations to be staffed with Chinese citizens.  

Through Article 9, China insists on being able to continue to restrict the scope of action of foreign NGOs at will. In this way, China is sending a further political signal that it wants to bring foreign NGOs more and more under Chinese control. This would also affect representatives of the open Western model of society, such as business associations and political foundations. This is not in the interest of German industry. The federal government and the EU must take action here and prevent this potential restriction. The relevant section should be deleted from the agreement.

CAI as an important part of an overall European strategy

When weighing up the expectations of the agreement, the picture for German and European industry is mixed. In the areas of market access and level playing field, the commitments made by the Chinese side largely codify a status quo already achieved over the last few years. The CAI would improve the situation for European companies in China in some areas, but not fundamentally change it.

At least as important as the individual building blocks of the agreement is the role it plays as a constructive part of an overall European strategy. The CAI must be seen as one building block in a series of policy measures that must benefit both the expansion of the EU’s relations with China and the creation of a level playing field in business competition. The BDI had already called for such a strategic approach in its policy paper on China in 2019.

One example of further components of an overall strategy is the expansion of unilateral instruments to protect competition in the EU. These include, above all, the revision and finalization of the proposal for an International Procurement Instrument (IPI), European coordination with regard to investment screening, and an improved set of rules to combat unjustified state subsidies in the area of competition and in the awarding of public contracts (“Foreign Subsidies Instrument”), for which the EU Commission recently presented a legislative proposal.

In order to continue to obtain substantial concessions on market access and economic reforms in the future, the EU should maintain positive pressure on China. Overall, the CAI shows that the bilateral negotiation track is only part of the solution in the systemic competition with China. Unilateral measures and also international coordination with partners such as the U.S. and Japan are equally necessary.