EU-China Comprehensive Agreement on Investment, market access and decoupling

A recent report titled “Decoupling – Severed ties and patchwork globalisation” published by the European Chamber in China (EUCCC) in partnership with MERICS, rightly states that at the origin of decoupling, we have un-coupling, which is a policy of basically keeping the Chinese market out of the reach of foreign players. As an example, the report cites the high-speed rail industry:

"High-speed rail technology in China developed quickly due to extensive state support combined with mandates for foreign technology transfers as a condition for market access. Once China’s high-speed rail companies were confident enough, market access was tightened, though not through direct means such as a change to the legal regime governing foreign investment. Instead, the high-speed rail sector was subjected to one of a plethora of indirect barriers that have long-plagued China’s business environment. In this case, handpicked, state-owned national champions benefited from an unfair procurement system, which quickly gave them complete market share and the ensuing economies of scale that drove down their costs considerably.” (p.11)

In short, two of the main issues were SOEs and procurement. Will the Comprehensive Agreement on Investment (CAI) change that? No, and it is not really surprising. The agreement aims at increasing market access for investors, not facilitating market access for trade of goods/services in general (Article 1: “The Parties […] hereby lay down the necessary arrangements for the liberalisation of investment”). However, these matters are closely related, and are often discussed during the same meetings, for instance during the EU-China High-level Economic and Trade Dialogues held annually. Hence sometimes the confusion when it comes to assessing the results obtained by the CAI. What the agreement will not do (and was never intended to do) is solve the overall asymmetry of bilateral trade.

This “agreement in principle” (which has a long way to go before coming into force) is a interesting mix of promised measures that already exist (such as the Article 3.1(f) prohibiting forced technology transfer, which is already covered by the Article 22 of the 2019 Foreign Investment Law. See my comments at the time), commitment to do what was already promised elsewhere (for instance Article 4.1.2.6: “each Party shall […] effectively implement the UNFCCC and the Paris Agreement adopted thereunder, including its commitments with regard to its Nationally Determined Contributions”) and “new” commitments, for example in the financial sector (see details here).

What about public procurement and SOEs then? SOEs’ reform is a huge and complicated issue, that is not dealt with in line with other countries expectations. Despite promises made for the WTO accession in 2001, the willingness of the Chinese government to reform wavered over the years up to a point today where the biggest SOEs are seen as national champions to be protected/supported and the public sector in general as of utmost political importance, not to mention the increasing willingness of the Party State to control the private sector. One of the lessons of the Chinese experience has in fact been the difficulty of using the WTO as a vehicle to compel economic reform.

Government procurement seems to be way smaller an issue to tackle, but a brief look at the Chinese authorities’ actions of the past two decades illustrates how wrong that assumption is.

China said in 2001 that it would join the Agreement on Government Procurement (GPA) "as soon as possible" but it actually won't be joining anytime soon. China's offers (another revised offer, the 7th, was made at the end of October 2019) usually exclude so many parts of the public sector that one would be forgiven for wondering about the good faith of China’s proposals and its actual commitment to acceding to the GPA...

The EU tried to push the matter, for example in discussions in June 25, 2018 in Beijing during the 7th High-level Economic and Trade Dialogue. In the press release, it is stated : "China confirmed its commitment to acceding to the WTO Government Procurement Agreement (GPA). The EU sought assurances from China that it will negotiate its accession to the GPA on the basis of an ambitious and comprehensive offer". But no such assurances were given and a few days later no mention of it at all in the Joint statement of the 20th EU-China Summit.

Some lobbying groups such as Business Europe still mentions it prominently, like in their January 2020 report: “The call for Chinese accession should be treated as a key priority in any high-level contacts between the EU with China from now on. The offer must eliminate substantially all de jure and de facto barriers that currently lead to the preferential treatment of domestic suppliers over foreign suppliers.”

It is interesting to note here that foreign invested companies in China (very much at the core of the CAI) feel it is a big issue: “The European Chamber’s BCS 2020 registered that 44 per cent of companies reported missing business opportunities due to market access restrictions, such as barriers to government procurement processes”. In almost every edition of the annual European Chamber’s Position paper, its recommendations include: “Improve the China’s World Trade Organisation (WTO) Government Procurement Agreement (GPA) Offer”. In its latest edition, it even cautions that “the longer China fails to accede to the GPA and open up its procurement markets, the more likely it is to end up in the crosshairs of the EU’s proposed International Procurement Instrument”.

Was the timing for the EU-China Comprehensive Agreement on Investment right? Does it has enough substance to be meaningful other than from a political standpoint? Will it pass “the test of democratic ratification by the EU Parliament”? Will we see a notable increase of FDI flows between the two economies? One clue might lie in the very measured answer from the EU business community, no doubt in part result of a “promise fatigue” and perhaps of a feeling that “the EU-China CAI has been oversold and underpowered”. Meanwhile, the trade/tech war brewing between the US and China might make it look like an almost trivial matter, as “Digital decoupling between China and the United States could severely impact EU businesses in China and they should "prepare for the worst"”...