Index > Briefing
Sunday, May 23, 2021
Impacts and Prospects of the Freeze on EU-China Investment Deal

On May 20, the European Parliament voted 599 to 30 with 58 abstentions in favor of a resolution suspending ratification of the EU-China Comprehensive Agreement on Investment (CAI) until Beijing lifts sanctions on EU politicians. This means that the CAI, which took 35 rounds of painstaking negotiations over 7 years, has been officially blocked from the ratification process by the European Parliament.

It is not surprising that CAI faces such a situation. Since March this year, researchers at ANBOUND, which have long been conducting tracking researches on China-Europe relations, issued a series of warnings about the prospects of the CAI. In our judgment, the risks to the EU-China Investment Deal have increased as China and the EU have imposed sanctions on each other over the "human rights issues" in Xinjiang, and the prospects are not encouraging. The current situation, unfortunately, confirms our earlier fears. Rising political opposition in Europe is the main reason why the ratification of the investment deal has been suspended. After China's counter-sanctions measures were unveiled in March, it was estimated that 499 of the 705 votes in the European Parliament from the European People's Party (EPP), Progressive Alliance of Socialists and Democrats (S&D), Renew Europe (Renew), and Greens–European Free Alliance (Greens–EFA) would oppose the CAI. On May 20, however, the vote was even worse, with 599 votes in favor of a freeze on the CAI. Obviously, in the past two months, the opposition to CAI in the European Parliament, and the "hostility" towards China in the European political community has also been on the rise.

The U.S. has also played a role in the freeze on the EU-China investment deal. Under the Biden administration, the U.S. began to repair its relationship with Europe and rebuild its transatlantic alliance with Europe. The U.S. has been strategically restraining China in recent years and does not wish to see Europe establish a stable relationship with China contrary to the U.S. strategic framework. Thus, preventing the ratification of the CAI has become an important geopolitical goal of the U.S. As a matter of fact, the "human rights issue" in Xinjiang has been facilitated by the U.S.. Before Joe Biden took office, his team said that Europe "should align with the U.S." in response to the investment agreement signed between China and the EU late last year, according to information tracked by ANBOUND. In this regard, the failure of the CAI is a major success for the U.S. geopolitical strategy.

For China, the real questions are twofold: What will be the impacts of the European Parliament's freeze on the CAI? What will be the prospects of the CAI?

First, it must be objectively acknowledged that the negative impact of the freeze on the CAI is enormous and that China's efforts to expand its geopolitical and geo-economic space in Europe have been hampered, even the mainstream media in the U.S. sees such situation as a setback for both China and the EU. For Europe, the CAI will provide greater protection for its investment and intellectual property rights in China and facilitate its access to the Chinese market. For China, the CAI will enhance its international standing as a fair and respectful trading partner. Researchers at ANBOUND believe that the negative impact on China will be greater, and that the CAI is not only an economic agreement in the sense of trade and investment, but also a major opportunity for China to expand its geopolitical and geo-economic space.

In early 2018, after then-U.S. Secretary of Defense Jim Mattis released the National Defense Strategy Report, Chan Kung, founder of ANBOUND, put forward the strategic concept of "1+3" for the future world structure. The core of this strategic concept is that, in the face of the compression of economic space caused by anti-globalization and the U.S. strategic adjustment to China, China can seek to establish an "economic alliance" with Germany and Japan based on the value of economic globalization to deal with the U.S., which is promoting unilateralism and the "America First" strategy under the Trump administration. At a time when geopolitical frictions were not intense, the "1+3" concept had a strong rationale and a window of opportunity to advance. Unfortunately, the window of opportunity for the "1+3" has gradually disappeared due to the rapid deterioration of the geopolitical situation, China's insufficient attention to the "strategic competition and cooperation period" and the lack of timely adjustment of its strategy.

If the CAI is concluded, it would facilitate China and the EU to expand mutual economic space and multilateral cooperation (the EU has 27 member states) under the backdrop of anti-globalization and geopoliticization. Unfortunately, all this has become empty talk with the freeze on CAI ratification. The Chinese delegation to the EU said the CAI is "mutually beneficial", not a "favor" from one side to the other, and that China's counter-sanctions were a legitimate response to the EU's sanctions. Even if the words of the delegation are not wrong, yet from a geopolitical point of view, the European Parliament's freeze on CAI ratification is still undeniably a huge loss for China.

The world now follows the established trajectory and pattern where the U.S. will continue to rebuild its transatlantic alliance against China, and China will expand its space for survival and development in a world of increasing "hostility" and antagonism. International trade, foreign investment, technology flows, knowledge sharing and educational exchanges in the era of globalization will be affected to varying degrees. If the differences between China and Europe increase in the future, the relationship between Europe and China will be more distant, the differences in the U.S.-EU Atlantic alliance will be reduced, and the geopolitical strategy of "constraining" China promoted by the U.S. will be more complete. Foreign companies, especially European ones, will re-evaluate the investment environment in China and adjust their investment strategies when the CAI ratification has been in a deadlock for a long time.

Second, we believe that there is no such possibility in the short term for the reverse of the situation. Although the relevant resolution of the European Parliament is not legally binding and uses the term "freeze" instead of "deny", which theoretically leaves open the possibility of resuming negotiations, the official stance of the European Parliament has already reflected the current political attitude in Europe towards China. In our opinion, the current situation makes it almost impossible for the CAI ratification to be resumed in the short term. First, China is unlikely to lift its counter-sanctions against 10 EU politicians, think tanks, and diplomatic agencies unless Europe first lifts its human rights sanctions against China. This involves a number of principles and bottom-line issues in China's politics and diplomacy. Second, China's policy authorities may see little chance of the European Parliament ratifying the CAI in the current geopolitical environment, even if China makes some concessions. Therefore, the above impasse is not expected to ease in the near future.

Will the impasse between China and Europe persist? In our opinion, this is uncertain and it should not be persisted. In today's world, geopolitics has become the dominant force in the world and capital markets. The main contradiction China faces is the U.S.-China relationship contradiction, and the main geopolitical pressure in the future also comes from the U.S. The core of the U.S. strategy towards China is to contain it, but this is at odds with Europe's strategic objectives. For Europe, which intends to get rid of its reliance on the U.S. to some extent and seek "strategic autonomy", the purpose of promoting the CAI is not just for economic purposes, but more for "rebalancing". The "rebalancing" is mainly reflected in two aspects. First, the rebalancing between the EU and China. Given the changes in the Chinese economy, the EU needs a new model to balance this. The second is to form a balance given the current economic relations between China and the United States. The EU believes that the conclusion of the first phase of the economic and trade deal between China and the U.S. has created new imbalances for China's other trading partners and therefore needs to be rebalanced.

International relations have always been complex and cannot be entirely grounded in economics, nor in values and ideologies. The future relationship between China and Europe should focus on the global geopolitical landscape. In terms of strategy, China must make a key distinction between the U.S. and Europe, and its strategy towards the U.S. may not necessarily apply to Europe. The EU is not a country, but a group of 27 economically, culturally, and politically diverse countries. Since Brexit took effect, the EU has been made up mostly of non-Anglo-Saxon countries.

As we have pointed out in the past, the Biden administration will not bring about a reverse in the U.S.-EU relations, and the EU will make greater independence a long-term policy objective. In this context, China needs to reposition its relationship with Europe. Despite the ups and downs of China-EU relations, it still needs to reposition its relationship with Europe through cooperation based on open communication, so as to find a foothold for the era of "Globalization 2.0". To do so, of course, requires political acumen.

After the "1+3" window of opportunity has passed, how should China respond to the challenges ahead? As an influential country, China needs not only to maintain its strategic determination, but also to establish a clear strategy of its own. According to Chan Kung, China's future policy should maintain its strategic determination. He suggested that China should build its image and status as a "haven". When the world is in a period of structural adjustment, both China and foreign countries long for a "safe haven", and that is the reason why the status of a "haven" is important. If China can fulfill such demand with sufficient capacity, then the country will naturally have its place in the world.

Final Analysis Conclusion:

The freezing of the EU-China Comprehensive Agreement on Investment by the European Parliament is a major event in China-EU relations, and its negative impact on China cannot be ignored. In view of the changes in global geopolitical landscape, China should strive to build a resilient relationship with the EU, expand its international space with the goal of building a "haven" in this turbulent world, so as to enhance China's own attractiveness.

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