The New EU-China Agreement: What ‘shared future’?

Written by Ana Sofia Cabral, EST Ambassador to Bologna, Italy 

In June 2020, the People’s Republic of China’s (PRC) State Council put forward a White Paper – “Fighting Covid-19: China in Action” – on the country’s Covid-19 efforts to contain the pandemic. Most of the paper’s contents relate to the PRC domestic progress at responding to the virus domestically (State Council Information Office of the People’s Republic of China, 2020). Besides the health-related content, however, there is one segment that relates to another battle – the one of rescuing or safeguarding its international image as a ‘responsible country’ (Phillips, 2017). Criticisms have been varied, some voicing discontent with alleged ‘nontransparent conduct’ from Beijing at the first stage of the spread of the virus (Spross, 2020). The willingness of the PRC to not let the international animosities the pandemic crisis raised damage its image as an important bilateral and multilateral player in the international order, seems to be reiterated by its strategic partnerships accomplished during the last year.

EU-China’s search for a liberal partnership

The European Community and the PRC formally established diplomatic relations in 1975 and three years later, the counterparts signed their first trade agreement. Since then, the bilateral cooperation between the trading partners has been growing at noticeable speed (Men, 2008). Today, the EU is PRC’s biggest trading partner and the PRC is EU’s second-largest trading partner (second only to the US) (EU Commission, 2020). However, the EU-China cooperation has been described as “mixed”, as it consists of both cooperative and competitive elements and effective multilateralism may be harder to practice when an international power openly opposes values and principles that so tightly guide EU policy. Therefore, some sort of accommodation is implicitly binding for a comprehensive agreement to be accomplished (Geeraerts, 2019).

In March 2019, the EU issued the “EU-China Strategic Outlook” where it labelled China as a ‘strategic competitor’, but also as a ‘cooperation partner’. The document highlighted how both actors looked forward to a comprehensive partnership.  While the EU reiterated it acknowledges both challenges and opportunities in doing so and given the PRC has sustainably grown as an emerging power, it cannot rebalance the relationship with China without full unity of the EU’s member states (European Commission, 2019). The two partners negotiated a new investment agreement over the past months that seems to underline how the EU has stood firm with last year’s assertions – the need to negotiate a deal that ensures fair competition and that respects labor rights as set by the Charter of Fundamental Rights. In fact, the EU’s openness to foreign investment from China had traditionally been on a nonreciprocal basis – European companies usually don’t face the same openness to their establishment in China than Chinese ones find in Europe (Casarini, 2016). The EU and the PRC have therefore negotiated a new agreement that will allegedly better balance their trade pattern.

The CAI and its political ramifications

The Comprehensive Agreement on Investment (CAI) is the new investment deal between the EU and the PRC. This deal has been reached ‘in principle’ by the EU Council in December 2020 and has been submitted for formal ratification by the European Parliament.

The CAI agreement incorporates a number of provisions that prove its comprehensiveness. It includes objectives in market access and investment protection, level playing field, and sustainable development. The PRC has committed to allow greater market access to EU investors, which is a relevant milestone given the current and concerning asymmetry between the treatment each side’s firms get. Some of the provisions regarding the market confined quantitative restrictions and further liberalized market access to be granted to some crucial sectors for the EU such as manufacturing, health, research and development (R&D), new energy vehicles, business and financial services and environment.

Efforts to improve the level playing field of Chinese enterprises vis-à-vis European enterprises have long been sought by the EU, which (as aforementioned) has voiced its concern for the internal market’s competitiveness would not the PRC make changes in their SOEs commercial conduct. Therefore, improvements in technology transfers and transparency of subsidies by Chinese enterprises also account as a relevant achievement of the CAI agreement.

Another particularly relevant accomplishment of this agreement comes in the section related to sustainable development. Among environmental protection efforts – such as the effective implementation of the Paris Agreement and UN Framework Convention on Climate Change – there is a pledge for the PRC to increase efforts to move toward the ratification of theInternational Labour Organization (ILO) convention on forced labour (European Commission, 2021). However, the main shortcoming of this point comes from its vagueness by not setting a specific deadline for such ratification, which raises doubts on the effective willingness for the PRC to ratify this convention, not to mention whenwill that happen¹. This comes just a month after the EU Parliament has formally condemned the disregard for human rights by the PRC, as exercised through the exploitation of the Uyghur minority in the Xinjian autonomous region of the PRC (European Parliament, 2020).

The CAI shall not be considered in isolation though. This agreement is happening at an historical juncture when the Chinese economy is transitioning from a model export-oriented growth to a new model that is based on domestic consumption and outward investment – without which it could face the famous ‘middle-income trap’ –   that could further subjugate its regional and international power status. The ‘middle-income trap’ is a concept of economic development that refers the situation in which a developing country reaches a point where its growth rate slows down and is not fast enough to cross the middle-income range to the upper-income level of its citizens. This may happen because, for instance, the innovative capacity and technological development can’t overcome the one of foreign competition, leaving the country’s potential restricted to its export-led low-skill production sectors (Agénor, Canuto, 2012).

Another relevant ongoing Chinese ‘going out’ project is its Belt and Road Initiative (BRI), which was first presented in 2013 and now integrates the transport connectivity and economic boost of trade and investment between a wide range of countries across continents, including Europe. This initiative of the PRC entails huge investment from its government but as well great cost reductions and shipping time efficiencies for its trade system, further increasing Chinese products competitiveness in the European market (Casarini, 2016).

Given that this initiative has preceded the CAI in Europe, perhaps it alerted the Union on the risk that a scramble for outside investment coming from the PRC could complicate how Brussels conceives a common position of the EU member states towards the PRC. Perhaps the BRI did raise important questions among EU tables on what the Union could gain from further outside Chinese investment and functioned as a vaccine to the Union to understand the nature of reciprocity and transparency deals coming from the PRC, as well as what is the common ground member states can agree on when taking a collective approach to deals with the PRC.

One’s exclusion or other’s exclusivity?

The implications of a healthy relationship with the PRC come not only from the great opportunity external money provides for crisis recovery on Europe, but also from its diplomatic and political dimension. One of the current challenges for both is to cohabit in a global governance system that is evolving from a US-centred international order into a more diffuse one that gravitates with the EU, the US and the PRC trading poles (Geeraerts, 2019). The US faces a particularly uncomfortable position for the next few years. Former US President Donald Trump envisioned a mercantilist relation with Asia and reached an unfortunate trade-war with the PRC in 2018. Although many American and European businesses do recognize a track record of unfair trade practices when dealing with the PRC, they have criticized the US response imposing higher tariffs on Chinese imports. Fast forward 4 years of Trump’s mandate, the new US administration faces a scenario in which China has changed the status quo in its favour, demonstrating a flexibility to converge to some EU standards (Yahuda, 2019). 

What is more, just 2 months prior the negotiation with European counterparts, the PRC was signing a very relevant deal with the members of ASEAN and five other regional partners – the Regional Comprehensive Economic Partnership – which is of great economic significance given members of the RCEP account for nearly 30% of the world output. This deal has hence enhanced further the strategic importance of the Indo-Pacific region, and notably heightened the PRC’s engagement with its neighbours (Borell, 2020). The accomplishment of two major trade and investment cooperation deals represent a significant geopolitical win for the PRC, by reinforcing economic interdependence in the world system that does not include the US.

Where to next?

The new globalization era of the XXI century has required the PRC to upgrade its economy’s openness and standards to meet the new trends and reciprocity in international trade and investment, a refreshed version of the ‘socialism with Chinese characteristics’ (Heng, 2018).

In what comes to future dealings with the PRC, the EU shall continue the efforts to reach a comprehensive approach as a whole Union that assures the complying with EU rules and values. A step towards that direction seems to happen with the CAI commitment of the PRC to ratify ILO conventions on forced labour. Furthermore, cooperation with the PRC is still fundamental to address key global issues such as climate change with the Paris Agreement and economic recovery through the financial stimulus Chinese investment represents for the continent.

In what comes to global diplomacy, the EU is not following a confrontational stance towards the PRC, contrary to the US. Rather, the EU works toward greater economic cooperation, but in a strategic manner and holding firmly to the social values that hold the Union together. Nonetheless, the EU would not want to alienate the US at the time it started a Presidency with which the prospects for fostering cooperation seem more positive than with the former administration.

Ana Sofia Cabral, Ambassador to Bologna (Italy)

¹ Author’s own considerations of the document “EU – China Comprehensive Agreement on Investment (CAI): list of sections”, source: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2237

References

Borell, J. (2020), The Regional Comprehensive Economic Partnership – what does it mean for the EU?, source: https://eeas.europa.eu/headquarters/headquarters-homepage/88997/regional-comprehensive-economic-partnership-%E2%80%93-what-does-it-mean-eu_en

Heng, Q. (2018), Navigating China’s Economic Development in the New Era: From High-Speed to High-Quality Growth, in “China Quarterly of International Strategic Studies”, vol. 4, no.2, pp. 177-192.

Casarini, N. (2016), When all roads lead to Beijing. Assessing China’s New Silk Road and its Implications for Europe, in “The International Spectator”, vol. 51, no. 4, pp.1-14.

Agénor, P., and O. Canuto (2012), Middle-Income Growth Traps, Policy Research Working Paper 6210, The World Bank. Source: https://openknowledge.worldbank.org/bitstream/handle/10986/12004/wps6210.pdf?sequence=1&isAllowed=y

Geeraerts, G. (2019), The EU-China partnership: balancing between divergence and convergence, in “Asia Europe Journal”, vol. 14, no.3, pp. 281-294.

Phillips, T. (2017), The Guardian, “Chinese premier warns world entering period of political and economic upheaval”, source: https://www.theguardian.com/world/2017/mar/05/chinese-pm-warns-world-entering-period-of-political-and-economic-upheaval

Spross, H. (2020), DW, “China: An unpopular winner in the year of the coronavirus”, source: https://www.dw.com/en/china-an-unpopular-winner-in-the-year-of-the-coronavirus/a-55413717

Yahuda, M. (2019), The International Politics of the Asia-Pacific, Routledge.

Men, J. (2008), EU-China Relations: Problems and Promises, in “The Jean Monnet/Robert Schuman Paper Series”

European Commission (2020), source:https://ec.europa.eu/trade/policy/countries-and-regions/countries/china/

European Commission (2021), source: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2237

European Parliament (2020), source: https://www.europarl.europa.eu/doceo/document/B-9-2020-0431_EN.pdf

European Commission(2019), Joint Communication to the European Parliament, the European Council, and the Council – “EU-China – A strategic outlook”.

State Council Information Office of the People’s Republic of China (2020), “White Paper on Fighting Covid-19: China in Action”, source http://hr.china-embassy.org/eng/gdxw/t1786877.htm