Briefing No 3 01/2021 – EU-China investment agreement: is it worth the effort?

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The EU-China Agreement

What is the common thread linking three seemingly different documents such as the Sino-British agreement on Hong Kong (1984), China’s accession to the WTO (2001) and the Comprehensive Agreement on Investment (CAI) reached in principle by Beijing and Brussels on 30 December? They share the same strategic structure. In all three cases, starting from a fundamental difference in the parties’ objectives, an understanding is reached that guarantees the dominance of the most aggressive player. Chinese strategies and negotiating tactics have made the difference in each case: while Peking exploits external calendars and circumstances to its own advantage by pursuing geopolitical objectives, its counterparts ‘limit’ their ambitions to cooperation and end up following the others’ agendas.

Without going into the technicalities of the CAI, it is worth recalling its genesis and some figures: 7 years and 35 rounds of negotiations, 25 bilateral investment agreements between the EU and China to be replaced, a significant imbalance in Foreign Direct Investment (FDI) – of the €140 billion of China-EU FDI over the last 20 years, 120 billion are Chinese in the single market. These are all-sufficient assumptions to justify Brussels’ commitment, yet the mountain seems to have given birth to a mouse and done so prematurely.

It is essentially because, despite the ambitions, the element that most qualifies the agreement is the persistence of a basic asymmetry whereby the EU cooperates while China defaults. This situation is all the more paradoxical when one considers that the CAI was born precisely out of the European intention to correct the profound imbalance between the parties, setting itself three main objectives: improving the access of European companies to the Chinese market, operating under conditions of reciprocity and guaranteeing a level playing field.

To better understand the CAI, the issue of respect for the rules is central. While the figures confirm that the competitive EU market is already largely open to Chinese investments with few restrictions, the opposite is not true. And, despite some concessions obtained from Brussels in terms of market access in the automotive (electric cars), energy, telecommunications and private health sectors, it seems difficult for the hoped-for rebalancing to materialise. This is not only due to the de facto weak enforcement provisions, but above all because China still does not want to renounce the philosophy that has inspired its actions in recent years: always and only play by its own rules. Far from being accidental, the approval, a few days before the agreement, of a law that allows foreign investments to be subject to national security reasons is part of this framework. A game in which the EU, if alone, will always be at a disadvantage.

But the asymmetry in China’s favour is not only in the economics of the agreement but also in its political and geopolitical aspects. Beijing, thanks to an agreement with the EU, a champion of human rights, is seeking rehabilitation in the international community’s eyes, after the recent controversial events in Taiwan, Hong Kong and Xinjiang. Moreover, the commitments made by the Dragon to ratify the two World Labour Organisation conventions on forced labour – which the European Commission has welcomed – do not include any specific deadline for this to happen with certainty. The game was played personally by President Xi Jinping, demonstrating the strategic significance attached to closing the deal precisely with such timing. Even if the CAI never comes into force (the European Parliament will have to make a decision and battles are expected), it is still a victory for the Celestial Empire.

For the EU, the agreement’s benefits do not seem to justify its price from a geopolitical point of view. Symbolically, the CAI can be seen as an application of European strategic autonomy just a few months after the signing of the RCEP. Realistically, however, also in the light of the attitude of the new American Administration, it risks compromising the chances of a renewed Brussels-Washington cooperation (or, at least, to slow it down and make it more difficult), marking a point in favour of the Peking strategy of impeding an Atlantic axis in an anti-Chinese key.

Finally, there is also asymmetry in intra-European dynamics. The CAI is more of a German-driven agreement than a European one. It is no coincidence that about half of European FDI in China comes from Germany and concerns the automotive sector. It is not surprising, then, that the Chancellor has accelerated to meet the deadline that the parties had set themselves before the pandemic and thus add another significant success to Germany’s six-month EU presidency. The impression of a “very German” agreement is also reinforced by the contrast with the agreement on Brexit, signed only a week earlier and representative of a cohesive Union inspired by the collective interest.

What does this mean for Italy’s national interest?

Rome is an important trading partner for Beijing and the only G7 country to have signed the Silk Road agreement. Yet, it has played a marginal role in this. Nevertheless, the CAI may offer some valuable opportunities for our country as well. Not only those related to the automotive sector, which should allow the newly-established Stellantis to access the Chinese market for electric cars but also those in the energy sector – Eni and Enel are interested in the opportunities linked to the electricity exchange, distribution and renewables – and in telecommunications, especially in cloud computing. Net of the objective limits in terms of economic/technological transfers, financial and/or national security, workers’ rights and protection of individual investors – here the resolution of disputes remains at the political level, State-State – the agreement opens up interesting economic scenarios for Italy.

From the political point of view, some read the absence of Italian protagonism in the negotiations as a positive development, especially concerning the relationship with the new Administration. In reality, the game is open and cannot be the game of an individual. It is a game that our country has an interest in playing as a team, taking advantage of those ties with Washington that are still strong and carving out a primary role in the EU. It must be played on both sides of the Atlantic with realism, pragmatism and the necessary mutual trust. The focus of Rome and Brussels must be the strengthening of the axis with Washington, renewing a partnership based on shared values that will make it possible to achieve an approach to China (and technology) that is no longer competitive but common. If this is the case, then the great loser of our times, that multilateralism stigmatised and opposed by all, could come in handy. The CAI is, paradoxically, the demonstration that a united transatlantic front would have much more leverage towards Beijing and could catalyse an even broader coalition based on values to promote the Rule of Law and obtain real commitments on market access, subsidies to state-owned enterprises, respect for intellectual property also in the manufacturing sector. It is perhaps the only way we have today, as Italy and as an EU country, to guarantee our interests vis-à-vis Beijing and to counterbalance China on the world stage.

Cecilia Piccioni, diplomat, is a member of the Scientific Committee of Eurispes’ Observatory on International Issues.

Michele Bellini is Executive Officer at Sciences Po’s Paris School of International Affairs.

This content is also available in: Italian

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