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The European Parliament on 20 May adopted a resolution stating
that the ratification process of the EU-China Comprehensive
Agreement on Investment (CAI), agreed in principle in December
2020, would be "frozen" by the Parliament while Chinese sanctions
remain in place. China imposed sanctions against five members of
the European Parliament (MEPs) and four entities and members of the
Dutch, German, and Lithuanian parliaments measures in response to a
22 March Council of the European Union decision to impose
restrictive measures, including travel bans and asset freezes, on
four Chinese officials.
EU investment in China
China was the EU's second-largest trade partner in terms of the
total value of trade in 2020, with the EU running a trade deficit
of USD186 billion. However, foreign direct investment (FDI) flows
have been substantially lower than the sheer size of the two sides'
populations, and potential markets would imply. Despite EU
companies historically being more active in China than vice versa,
the EU's FDI outflows to China represented less than 2.5% of
extra-EU FDI in 2017. EU FDI into China has been limited by factors
such as a lack of market access, complex and costly regulations,
and weak intellectual property protection. The largest share of EU
direct investment into China has been in the manufacturing sector,
particularly in the production of transport equipment and
machinery. The service sector, on the other hand, only accounted
for an average of around 10% of the total.
China's motivations for the CAI
The CAI likely serves both economic benefits to China and also
supports its domestic and external political goals: the CAI is
likely to encourage European companies to increase investments in
China in emerging sectors such as renewable energy, cloud
computing, and financial services. Furthermore, successful
implementation of multilateral trading agreements will be viewed
favorably ahead of upcoming important political events, including
the Communist Party of China's (CPC) centenary celebrations in July
2021 and an upcoming leadership transition at the late-2022
National People's Congress. Externally, the accelerated negotiation
process leading to its signing, within a crucial time window before
the end of Germany's presidency of the Council of the EU and prior
to the inauguration of the President Joe Biden administration in
the United States, indicate geopolitical targets of strengthening
China-EU relations to undermine the prospect of US-EU alliances
against Chinese interests.
EU's motivations for the CAI
Key provisions of the CAI are intended to improve market access
and remove operational obstacles for EU firms operating in China in
sectors such as manufacturing and various services sectors. The
forced transfer of technology to a Chinese counterpart in a joint
venture (JV) has, for instance, been considered particularly
problematic by EU businesses. Externally, the CAI's signing ahead
of US President Biden's inauguration in January 2021 advanced the
EU's long-standing trade policy objective of removing market
barriers and increasing legal protection for EU companies in China.
Additionally, the EU almost certainly wanted to signal to the US
its willingness to broker deals with China rather than remaining on
the receiving end of any US-China strategic competition. EU
governments and firms were most likely dissatisfied with the
US-China Phase One trade deal of January 2020, which left European
companies in China at a presumed relative disadvantage.
EU sanctions and Chinese retaliation creates substantial
roadblocks, but both sides remain hopeful
Despite strong interest in the CAI's passage back in early 2021,
the level of response from China indicates that, at least in the
short term, the Chinese leadership would place emphasis on the
projection of political strength domestically, even if these are at
the expense of some economic interests. The decision by China to
sanction elected MEPs and EU bodies, such as the EU Council's
Political and Security Committee, indicates a desire to demonstrate
that it will escalate beyond what the EU was likely expecting as a
tit-for-tat response, and have likely anticipated that it would
undermine the CAI's ratification in the European Parliament.
Consequently, the likelihood of China reversing its sanctions to
facilitate ratification of the CAI within its original schedule
will remain low, especially if the EU continues to challenge
Beijing on politically sensitive areas.
On the opposite side in the EU, Chinese sanctions against MEPs,
including two from the largest political group - the center-right
European People's Party (EPP) and one from the second largest - and
the center-left Progressive Alliance of Socialists and Democrats
(S&D), have become a key roadblock to any prospect of the CAI
moving through the European Parliament. The European Parliament's
resolution from 20 May was widely supported by EU parliamentarians,
being approved by 599 to 30 votes with 58 abstentions. On the EU
side, the CAI requires ratification by both the European Parliament
and the Council of the EU.
Despite political hurdles, both sides have maintained the
possibility of restarting ratification in the future. The Chinese
response to the European Parliament's resolution which halts the
ratification process has so far been relatively measured, with
state media outlet Xinhua highlighting that the Chinese
legal review and the translation process for the CAI are still
proceeding normally. Furthermore, China has indicated its intention
to preserve stability in the EU-China relationship, limiting risks
of retribution over current political disputes. On an inspection
tour of the Business & Innovation Centre for China-Europe
Cooperation in Chengdu, Sichuan province, on 21 April, Chinese
premier Li Keqiang highlighted the continued planned opening of
markets and "fair competition" for European and other foreign
businesses. This is a positive indication for European businesses
seeking to take advantage of the anticipated liberalization of
Chinese markets included in the CAI. However, companies will
continue to be exposed to politicized regulatory barriers, legal
and reputational risks, and nationalistic-driven boycotts as China
is unlikely to compromise on issues of EU concern, such as human
rights issues, industrial policy, or national security.
Posted 07 June 2021 by David Li, Principal Asia Analyst, Economics & Country Risk, IHS Markit and
Petya Barzilska, Sr. Research Analyst II, Europe & CIS Country Risk, IHS Markit
