Developing dimensions in EU-China trade relations

Published : 05 Oct 2021 08:12 PM | Updated : 06 Oct 2021 06:41 PM

Any revi­ew pert­aining to evolving trade relations between countries or bet­ween a region and another reg­ion or bet­ween a country and another region or subregion brings forth an analytical exercise that touches different dimensions- each with its own connotations and denotations. This paradigm exercise also has to evaluate such an effort against the format of international legal obligations, the scope and contents of any agreement, existing challenges that need to be overcome and also the opportunities that may arise from a broader and diversified network related to investment.

Over the last five years China has gradually emerged not only as a country with innovative skills but also as an economic power-house. The recent past has also seen special attention being focused on China due to its controversial trade relations with the USA and its efforts to enhance its presence in alternate regions- Southeast Asia, different countries in Africa and Latin America and also in the European Union. 

It may be recalled at this point that after seven years of discussion, the EU and China finally reached an ‘agreement in principle’ on 30 December 2020 on a platform that was dubbed as the ambitious Comprehensive Agreement on Investment (CAI). However, six months later, several dimensions have gradually appeared and in their own way generated controversy between the important actors within the framework.

However, since then, EU–China relations have plummeted due to sanctions and countersanctions over human rights issues. This has resulted in the European Commission and the European Parliament taking their own time in finalizing their decisions about when it can come into force. However, behind the curtains, technical preparation and translation of the CAI are still ongoing. This is so because of the economic and geopolitical importance of the EU–China trade and investment relationship.

Economists associated with the European Commission have consequently been stressing that the CAI rebalances market access and binds China’s autonomous liberalization of investment since it joined the World Trade Organization (WTO), thereby preventing backsliding. The Commission has also not only underlined that China agrees to new market access commitments in several service sectors but also that the CAI strengthens the level playing field (LPF) with new rules on state-owned enterprises (SOEs), subsidy transparency and forced technology transfers (FTTs), and also includes important commitments to sustainable development.

It needs to be noted here that the EU’s cumulative foreign direct investment (FDI) flow to China over the past two decades has been around Euro 148 billion, Comparatively, China’s FDI flow to the EU has been slightly less –around Euro 117 billion. This data indicates that considering the size of the Chinese market and the significance of the bilateral trade volume – China is the EU’s largest source of imports, third-largest trade partner, and third destination for EU exports after the US and UK.  It also needs to be noted that the stock of Chinese FDI in the EU has grown between 2008 and 2017, but the EU FDI in China has grown massively from Euro 54 billion to Euro 178 billion- an increase of 225 per cent. EU strategic economic analysts have however said that EU FDI flows to China could have been relatively higher but has not been so because of China’s restrictive FDI framework. Apparently, whereas the EU is open in principle to FDI, foreign investors in China face different restrictions, especially in service sectors.

It would be worthwhile to mention here that after the emergence of China’s One Belt One Road initiative, the EU’s 2019 EU-China Strategic Outlook, labeled China not only as a key partner for cooperation but also as a “systemic rival” and a “strategic competitor”. In this regard it highlighted how China’s protectionist measures benefit its industrial champions through measures that safeguard them from competition through selective market opening, licensing and other investment restrictions; heavy subsidies to both SOEs and private sector companies; closure of its procurement market; localization requirements; and the favoring of domestic operators.

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It was this unevenness, which eventually persuaded the European Commission to initiate negotiations pertaining to the CAI to help improve the situation of its companies that are trying to operate in China.

Nevertheless, the announcement of a prospective CAI was straight away criticised for three essential reasons. Firstly, the agreement provided little new market access in China, as it mainly codifies China’s recent unilateral investment liberalization efforts. Secondly, the CAI was critiqued because there was lack of adequate reference to alleged China’s human rights abuses, such as the forced labour conditions of the Muslim Uyghur minority in the western region of Xinjiang. 

Thirdly, the European Commission pushed the agreement through without consulting with the new Biden Administration first. This, according to some, was probably due to Germany’s desire to finish its EU Presidency with diplomatic success. This aspect, in particular, has been referred to by some as the EU missing the opportunity to form a united transatlantic front against China related to the question of imposition of the EU’s and China’s respective sanctions and counter sanctions over human rights issues in March 2021.

It needs to be understood here that there might be some tacit uncertainty regarding the future of the CAI but, after Brexit, it has assumed an important character within the matrix of the EU trade and  investment policy. It also needs to be realized that it, by connotation, is not a traditional, ‘new generation’ EU free trade agreement (FTA), as it does not liberalize trade in goods and services. Nor does it include disciplines on non-tariff barriers, public procurement (PP) or intellectual property rights (IPR). Economists also do not consider it as an investment agreement in the traditional sense- as it does not provide post-admission investment protection standards. This, in a manner of speaking, means that it has less than the required potential to contribute to the WTO reform process, and its role in the triangular EU–US–China trade and investment relationship.

There are however some other aspects that demand our attention. It needs to be noted that China has recently made selective reforms and sector specific market openings based on its Foreign Investment Laws (FILs). China’s last FIL, in force since 1 January 2020, has marked an improvement because it has shortened the ‘negative list’ of protected sectors in which foreign investment is restricted or prohibited. This means that, unless they fall within the sectors listed in the negative list, the latest FIL guarantees foreign investors and their investments in China with national treatment and equal protection in their establishment and operation in China. This dimension needs to be understood also in Bangladesh. The liberalized sectors include resource management, trading and financial services.

In this context, the European Commission has noted that the implementing rules for the FIL emphasise the equal treatment of domestic and foreign invested firms with regard to land supply, government procurement, licensing formalities and protecting intellectual property. This adds to the potential value of the CAI.

The CAI has some other premeditated factors that binds several of China’s unilateral liberalization commitments in the manufacturing sector- which makes up more than half of the EU’s investment in China. The CAI binds several of China’s unilateral liberalization commitments in the manufacturing sector, which makes up more than half of the EU’s investment in China- about 28 per cent in the automotive sector and nearly 22 per cent in the basic materials sector.

It is understood that China is planning to liberalize around 30 manufacturing sectors, most of them without any reservations. These sectors include furniture manufacturing, rubber and plastic products, electrical machinery and equipment, computer and communication equipment, food processing, apparel and textiles, chemicals, and so on. China plans to apply reservations to only around 10 strategic sectors. They are based on the foreign investment restrictions enshrined in China’s recent FIL. For example, prohibition will still remain for foreign firms to increase the production capacity of Chinese sectors characterized by overproduction (e.g. cement, steel, (non-ferrous) metals, aluminium, transport equipment). In other words, EU companies can still invest in these sectors by, for example, acquiring a Chinese enterprise but not increasing the overall production capacity. That is indeed interesting.

Several reservations will however continue to apply to the automotive sector, which represents almost 28 per cent of EU FDI in China. The CAI will only provide EU companies access to China’s electric vehicles sector. Establishing new production capacity in electric vehicles will be allowed but subject to limitations related to overcapacity and competition with existing investment projects undertaken independently. Such a liberalization approach was already foreseen in China’s 2020 FIL.

All the above elements have understandably raised questions in the minds of EU entrepreneurs. This has also drawn attention to the need to have in place necessary trade defence and enforcement tools when necessary.

The last element that has also drawn EU attention at all levels and its financial institutions concerns dispute resolution mechanism through mediation. The European Commission has been increasingly relying on this procedure in the context of its more ‘assertive’ trade policy that focuses on enforcing bi- and multilateral trade rules (e.g. evidenced recently under FTAs with Ukraine and the Southern African Customs Union). Corporate legal experts, in this regard have suggested that the EU and China should remain free to have recourse to the WTO DSM instead. In that case the WTO dispute settlement process will remain an important avenue for EU–China trade dispute resolution, considering that the latter is using this system increasingly since it joined the WTO, both as complainant and respondent. 

Muhammad Zamir, a former Ambassador, is an analyst specialized in foreign affairs, right to information and good governance

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