Over the past five years, China has gradually established itself not only as a country of innovative skills, but also as an economic power. The recent past has also seen special attention to China due to its controversial trade relationship with the United States and its efforts to strengthen its presence in other regions – Southeast Asia, various countries in Africa. and Latin America and also in the European Union.

It should be understood that examining the evolution of trade relations between countries or between one region and another region or between a country and another region or sub-region produces an analytical exercise that touches on different dimensions, each with its own connotations and denotations. This paradigm exercise must also weigh such an effort against the format of international legal obligations, the scope and content of any agreement, the existing challenges that need to be overcome, and the opportunities that may arise from a wider and diverse network linked. to investment.

It should be remembered at this point that after seven years of discussions, the EU and China finally reached an “agreement in principle” in December 2020 on a platform dubbed the ambitious Comprehensive Agreement on Investment ( CAI). However, nine months later, several dimensions gradually emerged and in their own way sparked controversy between the major players in the framework.

It should be noted that EU-China relations appear to have been affected due to sanctions and counter-sanctions on human rights issues. This has led the European Commission and the European Parliament to take their time to finalize their decisions on the date of entry into force of the desired agreement. However, behind the scenes, the technical preparation and translation of the CAI is still ongoing.

This is so because of the economic and geopolitical importance of trade and investment relations between the EU and China. The economists associated with the European Commission have thus underlined that the CAI rebalances market access and initiates the autonomous liberalization of China’s investments since its accession to the World Trade Organization (WTO), thus avoiding a backward step. The Commission also underlined not only that China is accepting new market access commitments in several service sectors, but also that the CAI is strengthening the level playing field (LPF) with new rules on state-owned enterprises ( SOE), transparency of subsidies and forced technology transfers. (FTT), and also includes important commitments in favor of sustainable development.

It should be noted here that the cumulative flow of foreign direct investment (FDI) from the EU to China over the past two decades has been around € 148 billion. In comparison, FDI flows from China to the EU were slightly lower – around € 117 billion. These data indicate that given the size of the Chinese market and the importance of the volume of bilateral trade, China is the largest source of EU imports, the third largest trading partner and the third largest destination for exports from the EU. ‘EU after US and UK.

It should also be noted that the stock of Chinese FDI in the EU increased between 2008 and 2017, but EU FDI in China increased from 54 billion euros to 178 billion euros, i.e. an increase of 225%. EU strategic economic analysts, however, said that EU FDI flows to China could have been relatively higher, but were not due to China’s restrictive FDI framework. Apparently, while the EU is in principle open to FDI, foreign investors in China face different restrictions, especially in the service sectors.

It would be interesting to mention here that after the emergence of China’s One Belt One Road Initiative, the EU’s 2019 EU-China Strategic Outlook described China not only as a key partner for cooperation, but also as ” systemic rival ”and“ strategic competitor ”. In this regard, he highlighted how China’s protectionist measures benefit its industrial champions through measures that protect them from competition through the selective opening of markets, licensing and marketing. other investment restrictions; heavy subsidies to public and private sector enterprises; closure of its supply market; location requirements; and favoring national operators.

It is this inequality that ultimately convinced the European Commission to initiate negotiations on the CAI to help improve the situation of its companies trying to operate in China.

Nevertheless, the announcement of a CAI has been criticized for three reasons. First, the deal has provided little new market access to China, as it primarily codifies recent unilateral efforts to liberalize China’s investment. Second, the CAI has been criticized because there was no adequate reference to alleged human rights violations in China, such as the forced labor conditions of the Uyghur Muslim minority in the western Xinjiang region. Third, the European Commission pushed through the deal without first consulting the new Biden administration.

It should be understood here that there might be some tacit uncertainty about the future of the CAI, but after Brexit it has taken on an important character in the EU’s trade and investment policy matrix.

It should also be understood that this is not a traditional “new generation” EU Free Trade Agreement (FTA), as it does not liberalize trade in goods and services. It also does not include disciplines on non-tariff barriers, government procurement (PP) or intellectual property rights (IPR). Economists also don’t see it as an investment deal in the traditional sense, as it doesn’t provide for investment protection standards after admission. This, in a way, means that it has less than the potential required to contribute to the WTO reform process and its role in the EU-US-China triangular trade and investment relationship. The CAI also has other premeditated factors that tie several of China’s unilateral liberalization commitments in the manufacturing sector, which account for more than half of the EU’s investment in China – around 28 percent in the automotive sector and nearly 22 percent in the basic materials sector.

There are other aspects that require our attention. It should be noted that China has recently carried out selective reforms and sector-specific market openings on the basis of its Foreign Investment Laws (FILs). The latest Chinese IDF, in effect since January 1, 2020, marked an improvement as it shortened the “negative list” of protected sectors in which foreign investment is restricted or prohibited. This means that unless they fall under the sectors listed in the negative list, the latest IDF guarantees foreign investors and their investments in China national treatment and equal protection in their establishment and operations in China. This dimension must also be understood in Bangladesh. Liberalized sectors include resource management, trade and financial services.

In this context, the European Commission noted that the rules of application of the IDF emphasize the equal treatment of companies with national and foreign capital with regard to the supply of land, public contracts, licensing formalities and intellectual property protection. This adds to the potential value of CAI.

It is understood that China plans to liberalize around 30 manufacturing sectors, most of them without any reservations. These sectors include furniture manufacturing, rubber and plastic products, machinery and electrical equipment, computer and communication equipment, food processing, clothing and textiles, chemicals, etc. China plans to apply reservations to a dozen strategic sectors only. They are based on restrictions on foreign investment in China’s recent IDF. For example, the ban will remain for foreign companies to increase the production capacity of Chinese sectors characterized by overproduction (eg cement, steel, metals (non-ferrous), aluminum, transport equipment). In other words, EU companies can still invest in these sectors, for example by acquiring a Chinese company but without increasing the overall production capacity. It is indeed interesting.

Several caveats, however, will continue to apply to the automotive sector, which accounts for nearly 28 percent of EU FDI in China. CAI will only provide EU companies with access to China’s electric vehicle sector. The establishment of new electric vehicle production capacities will be allowed but subject to limitations linked to overcapacity and competition with existing investment projects undertaken independently. Such a liberalization approach was already foreseen in China’s IDF 2020.

All of the above naturally raised questions in the minds of EU entrepreneurs. It also drew attention to the need to put in place the necessary trade defense and enforcement tools, where appropriate. Some industry sectors in the EU and the US reiterate that the EU must prioritize transatlantic cooperation over WTO reform by proposing new rules that address concerns about China that ‘it shares with the United States and other similar countries. country of spirit. They therefore suggest that as long as China’s counter-sanctions against EU officials and entities are in place, the deal should not be signed and ratified.

The last element that has also caught the attention of the EU at all levels and its financial institutions concerns the dispute settlement mechanism through mediation. The European Commission is increasingly relying on this procedure in the context of its more ‘assertive’ trade policy which emphasizes the application of bilateral and multilateral trade rules (as recently evidenced by the FTAs ​​with Ukraine and the Southern African Customs Union). Corporate legal experts, in this regard, have suggested that the EU and China should remain free to resort to the WTO DSM instead. In this case, the WTO dispute settlement process will remain an important avenue for the settlement of EU-China trade disputes, given that the latter has increasingly used this system since its accession to the WTO, to the both as plaintiff and defendant.

Muhammad Zamir, former ambassador, is an analyst specializing in foreign affairs, the right to information and good governance.

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