EU-China-EU Comprehensive Agreement on Investment

by Dr. Sebastien Goulard

After seven years of negotiations, China and the European Union have approved a comprehensive agreement on investment (CAI).

On December 30, 2020, during a video conference which brought together Chinese President Xi Jinping as well as European Council President Charles Michel, European Commission President Ursula von der Leyen, German Chancellor Angela Merkel, and French President Emmanuel Macron, China and Europe reached an agreement in principle on investment. This agreement will still have to be signed and ratified by parties.

This landmark agreement highlights the rapprochement between China and the European Union and illustrates the importance of trade between the two regions.

This new agreement is not a free trade agreement, but it will still enable European and Chinese companies to increase their investments and therefore facilitate greater economic integration. Today, European FDI stock in China reach 150 billion euros, and China FDI stock in the European Union stands at 113 billion. Thanks to this agreement, these amounts could further increase.

European ambitions

The main objective of the EU vis-à-vis China is to create the conditions for an economic rebalancing between the two markets.

The European Union constitutes a vast market of 450 million inhabitants where foreign companies, including Chinese ones, can operate with very limited restrictions. On the contrary, the Chinese market is often perceived by European companies as a very closed market despite the efforts made by Beijing to accelerate reforms.

With this agreement, it will become easier for European companies to operate and invest in China.

It is therefore a win-win partnership, as it will create new opportunities for businesses, and allow consumers to enjoy a wider range of products and services.

A more open China

This agreement proves that China had embarked on an exemplary path to further opening its economy.

• A major decision regards subsidies. China will be more transparent about subsidies granted to state-owned enterprises, but would not renounce them entirely.
• Furthermore, technology transfers would not be compulsory between European and Chinese companies.
• On the other hand, European investors would have access to new economic sectors, and could develop their own businesses or acquire local companies with limited restrictions. The creation of a joint venture will not be a condition for the development of a European company in the Chinese market; further restrictions would be progressively lifted on European companies’ activities in China. In the tertiary sector, finance, some sectors of the aviation aviation, health services or even research and development will be gradually opened up to European companies.

By facilitating mutual investment, China and the European Union are building a strong business environment that will bring prosperity to both regions.

Sustainable and social development at the heart of the Sino-European agreement

The European Union and China share the same concerns regarding the fight against global warming and, as great powers, they are committed to developing innovative solutions for the environment, and thus to respect the commitments of the Paris climate agreement.

The CAI agreement closely addresses this question, and a working group will be set up to study the progress made by the European Union and China in the field of sustainable development, but also that of social responsibility. Thus, China has pledged to ratify the International Labor Organization fundamental conventions.

An agreement in the making

Certain points of this extremely ambitious agreement will have to be finalized within two years of the signing of the agreement. They relate in particular to the protection of investments and the dispute settlement mechanisms. The application of all the measures decided by this agreement will be monitored by a group of independent experts.

The agreement will also have to be approved by the European Parliament, and should enter into force by the end of 2022.

The Comprehensive Agreement on Investments and the BRI

The long-negotiated agreement between the EU and China could serve as a model for other investment agreement under the Belt and Road Initiative. The mechanisms developed to reduce the risk of disputes between economic partners could be replicated with all the BRI states to facilitate the development of new projects.

China’s move to a more transparent, open and socially responsible economy will have some positive impacts on BRI projects. These ones will become more opened to foreign and European investors.

Through the recent trade agreements concluded by China, we can note that Beijing is committed to an ever more open economy which will certainly help for  world economic recovery in the current difficult situation.