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Thursday, March 25, 2021
EU-China Comprehensive Agreement on Investment: Gloomy Prospects
ANBOUND

After China and the European Union sanction each other regarding Xinjiang-related human rights issues, EU-China relations have deteriorated to the lowest point. There is no doubt that this will have a major impact on the cooperation between the two, and the EU–China Comprehensive Agreement on Investment (CAI) may suffer greatly because of this.

The CAI is the result of collaborative hard work by both China and the EU. From its first round of negotiation that was conducted on January 21, 2014, to the last which was held in 2020, a total of 35 rounds of negotiations were held over these 7 years. On December 30, 2020, Chinese President Xi Jinping and EU leaders jointly announced that the negotiations regarding the CAI have been completed as scheduled. It was intended for the agreement to act as a benchmark for international high-level economics and trade rules with the focus on institutional openness. After the CAI, which is a comprehensive, balanced and high-level agreement is signed, it will take effect after both parties complete the respective internal approval procedures.

However, the deterioration of EU-China relations has greatly increased the risks faced by the CAI. If the European Parliament opposes the adoption of the agreement or causes the agreement to be entirely abandoned, this would mean that the huge efforts made by both sides would be completely nullified. This also indicates that the previous announcements of completion of the negotiations by leaders of both China and the EU, which in itself is a form of endorsement and confirmation, would be meaningless. In the current complex geopolitical and geo-economic situation, this would prove to be a costly failure for both parties.

The ANBOUND research team has continuously tracked the negotiation process of the CAI via the geopolitical research platform ANBOUND 100+. During the previous year as well as at the beginning of this year, we have analyzed the complexity and difficulty of completing the negotiation. On January 3rd of this year, we stated that we cannot be prematurely optimistic about the final conclusion of the CAI. An important reason being that there have always been distinct voices within the EU regarding the CAI, which can be roughly divided into two factions. The first comprises mostly of business and economic circles in Europe. Some politicians, as well as economic and trade officials, based on consideration of political, economic and diplomatic interests, weigh EU-China relations and devise policy choices on the judgments of such rationality. Such people would include German Chancellor Angela Merkel and French President Emmanuel Macron, who have been pushing for the conclusion of the CAI. The second group would be the opposing voice in Europe. They include certain factions of Europe's largest political party, the European People's Party (EPP), the Progressive Alliance of Socialists and Democrats (S&D), Renew Europe and the Green Party who are strongly against the agreement.

Under the backdrop of the Biden administration's systematic promotion of human rights as well as value diplomacy, the differences in European politics surrounding the CAI are increasing. It has been pointed out that before the mutual sanctions between the EU and China, some representative center-right members had supported the CAI on economic grounds. In an interview that was held on the 18th of March this year, Deutsche Welle posed a hypothetical question to Reinhard Bütikofer, Chair of the European Parliament Delegation for Relations with China, that question being that if a vote were to be taken at that moment, would the CAI be passed? Bütikofer replied that the number of negative votes would be between 300 and 400, which means that either a weak majority or a weak veto against it. However, after the mutual sanctions, the situation has since reversed. In European politics, generally speaking, as long as the elected officials of its party are sanctioned by a third country, the party cannot pursue any agreement with the country concerned. It is understood that the EPP will oppose the CAI alongside the S&D, Renew Europe and the Green Party. This means that 499 of the 705 seats in the parliament will oppose the adoption of the CAI.

Another important tool for analyzing the fate of the CAI is to see how China and the EU will judge the Chinese market. It is a relatively common view in China that its huge market space is attractive and for a long time, China has been Europe's largest trading partner. According to the latest data from Eurostat, the bilateral trade volume between China and Europe reached EUR 586 billion in 2020. Among them, EU exports to China amounted to EUR 202.5 billion, a year-on-year increase of 2.2%. China's Ministry of Foreign Affairs spokesperson Hua Chunying stated on the 24th of March that the CAI is "not a gift from one party to the other, but is rather something that is mutually beneficial". She has also stated that the EU cannot simply speak of cooperation and making real gains, while imposing sanctions and harming China's rights and interests. There are also Chinese scholars who believe that the longer the CAI is delayed, the less benefits it would provide which would also similarly affect Europe.

A basic premise of these views is that Europe values China's market space. However, according to ANBOUND's information tracking, Europe is not as reliant on the Chinese market as was imagined. Some European think tanks believe that the purpose of the CAI is limited to foreign direct investments and does not contain any trade terms. Although some aspects of the agreement involve more than market access and includes sustainability, climate change, international conventions and labor, these provisions are still very general and contain limited implementation possibilities. Within this narrow range, from the perspective of the EU, the main goal is actually to improve market access for European companies operating or intending to operate in China, and to ensure that they have a fair and mutually beneficial competitive environment in their operations. A representative view is that the CAI cannot achieve such a goal. Others believe that in terms of equality, the Chinese market is still much more closed off to EU companies than the EU market is to Chinese companies.

With the recent changes in EU-China relations, such views may affect the voting choices of an increasing number of members of the European Parliament. Under the current situation, the probability of the European Parliament's approval of the CAI appears to be rather slim.

Final analysis conclusion:

The deterioration of EU-China relations has widened the divergence of two opposing views within Europe. In addition, Europe's attitude towards the "Chinese market" is not an idealistic one. As a whole, the prospects for the European Parliament to pass the CAI in the future are not exactly optimistic.

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