EU & China’s Investment Alignment

Comprehensive Agreement on Investment (CAI) is a multibillion-Euro investment deal signed by the EU & China. It is one of the most wide-ranging global economic deals agreed by the EU and the most ambitious agreement that China has ever concluded with a third country.

What does CAI offer to EU? Over the last two decades, foreign direct investment from the EU to China has crossed €140 billion, a significant amount by any standards. While EU firms have invested across several sectors, their primary focus has been auto manufacturing and chemicals.

Source: European Commission Fact Sheet Dec 2020

However, European multinationals fully appreciate that the ‘Chinese Opportunity’ is much bigger than these two sectors especially as China continues to invest in self-sufficiency across a large swathe of critical sectors especially telecoms, technology, and energy. With China the only economy in the world posting positive GDP growth despite the head winds of a global pandemic and shrinking economies, the EU’s appetite for investment opportunities in China is growing.

For the EU, this agreement further improves market access conditions for European companies looking to invest in China. It opens up new sectors and regions for investment and delivers a clearer, more transparent set of regulations that introduce a level of predictability for potential investors. It establishes a formal and binding framework for discussion and resolution of any disputes or problems EU investors might face in China and puts in place a mechanism for state-to-state dispute resolution for EU multinationals operating China.

Professor Steve Tsang Director of SOAS China Institute London UK commenting on the CAI agreement says, “The main economic benefit for the EU lies in the expanded scope for EU companies to invest in China, the strongest growing major economy.”

EU investors can now make long-term plans with huge level of confidence in commitments underwritten by key decision makers within the Chinese government. EU-based companies can now explore opportunities across financial services, private health care, real estate, hi-tech cloud services, environmental services, air, and maritime travel services in a market of 1.4 billion people and the fastest growing economy in the world.

What does CAI offer to China? China is actively developing global trade alliances as part of a strategy for opening up its economy and contributing to the development of a more cooperative and connected world. It has liberalized some sectors for foreign investment and ownership which has helped improve its World Bank ‘Ease of Doing Business’ ranking to 31 which places it a notch above France.

The CAI is therefore a far-reaching accomplishment for China. It follows the successful precedent set by the signing of the Regional Comprehensive Economic Partnership (RCEP). Reducing bureaucratic red tape and enabling Chinese firms to operate freely in countries across the EU as well as in China, the CAI will serve as a road map for Chinese business operations working towards global market access standards.

The ambitious provisions of this multibillion-Euro deal are a first for any international Chinese trade deal. It offers Chinese businesses an opportunity to develop strategic joint ventures with EU firms in sectors ranging from large-scale manufacturing to fast-growing renewable energy. Although it excludes public services and critical EU infrastructure.

The agreement cements a values-based investment relationship underpinned by sustainable development principles to provide a level playing field for businesses from both countries, including further ratification of ILO conventions by China.

Market Reaction: The market reaction to this deal has been overwhelmingly positive with the Euro peaking against the US dollar and China’s CSI300 index of listed shares rising to 5,211, its highest point since 2015, in the wake of the agreement.

What Next? CAI will now be ratified by the European Parliament under the next Presidency of French President, Emmanuel Macron. Professor Tsang sounds a cautions note “it is certainly useful to the EU to enhance its scope for investments in China, the Pandemic is likely to limit new investments being made in the immediate term”. 

Although the Biden administration may wish to influence the ratification process, the general consensus across the EU parliament seems to be towards getting it done. Indeed, the terms agreed under CAI reflect ‘Phase One’ of the trade agreement between the Trump administration and China signed in January 2020. 

The EU is progressing further to cement its relationship with China. They have proposed that the negotiations for the Strategic Agenda for Cooperation 2025 should now resume immediately. In my opinion, this will be an excellent next step since both parties have worked hard over the last seven years to finalize the CAI. They would be well served to leverage the momentum built up and to capitalize on the significant understanding they have gained of each other’s positions.

The CAI has enabled EU & China to further strengthen their relationship based on investment in each other’s economy and mutual respect for a rule-based world order. This potentially sets a strong precedent for both partners to see convergence of their policy positions on global economic and diplomatic issues.

Aftab Siddiqui is an independent analyst based in London.

A version of this article was published on CGTN site.