Author: Jan Veselý
Student of China Studies major, School of International Relations, Renmin University, Beijing

This article is dedicated to the exploration of the potential of the Comprehensive Agreement on Investment (CAI) concurrently negotiated between China and the EU. The trading and investment partnership between the EU and People’s Republic of China is one of the largest in the world with an enormous effect on the world’s investment flow. The scope of the agreement is comprehensive. It goes beyond traditional investment treaties and shall include market access clauses and other specific obligations.

Various countries compete for the widely recognized spill-over benefits resulting from the incoming foreign direct investment (FDI). Policies to attract and retain foreign investment have been massively adopted by various governments, who often invest substantial resources in the policies. Not so extensively explored are surprisingly the political risk and its influence on the investment decision-making. This is often subject to the efforts of states negotiating bilateral and multilateral treaties to improve market access and investment environment to reap the benefits of increased mutual investment activity.

Under the circumstances of a complicated US-China trade relationship and some US trade sanctions against the EU, the China-EU agreement under negotiation embodies a potential to offset some of the negative effects caused by the ongoing tensions. China has a motivation to become less dependent on the US trade and both sides expressed early in 2018 that the Investment agreement is a top priority for them. In December 2019 Chinese foreign minister Wang Yi (王毅) even said that: “China is prioritizing diplomatic relations with Europe”.

After years of tedious negotiations of CAI, progress has been achieved during latest rounds of talks with all interested stakeholders paying close attention. Both the EU and China made a commitment to conclude negotiations this year (2020) which might bring extensive opportunities to business on both western and eastern ends of the Eurasian continent.

The negotiators agreed on a comprehensive scope of the agreement incorporating enhanced market access opportunities, provision of non-discriminatory guarantees, protection for investors and their respective investment. Furthermore, the agreement should include not only paragraphs on environment regulation, transparency, licensing and authorisation procedures but also rules on environmental and labour-related dimensions.

The scope of CAI includes some very difficult and challenging areas for reaching a mutual understanding. A success is nevertheless a possibility and it might change the status quo of existing investment environment and have far-reaching effects on both sides of the Eurasian continental area. The potential benefits and added value for investors and the two economies as a whole could be gigantic.

Even the least ambitious investment treaty reiterating the already existing provisions under the WTO could replace complicated regulatory network of 26 bilateral investment treaties between EU member states and China and reduce the administrative and legal burden put on Chinese companies operating on the European market.
The overall potential is, however, much larger. Alongside with other EU institutions, the European Commission put forward a very ambitious and comprehensive proposal with the following key objectives to be reached under the new treaty:

  • The CAI aims to further open China’s market beyond commitments made under the World Trade Organisation (WTO).
  • Achieve non-discriminatory treatment of European companies on the Chinese market compared to local or third-country companies.
  • Ensure clear, objective and transparent treatment under the law in the process of licencing or authorisation.
    Guarantee transparency in subsidies.
  • Objective to work towards a sustainable development policy incorporating proposition of environmental and labour clauses.
  • Investment protection mechanism ensuring a high level of protection for European companies, while preserving the right to regulate in the public interest.
  • State-to-state dispute settlement and framework to monitor treaty implementation.

China and the EU are trading over a billion euro every day with the potential to promote mutual trade and investment cooperation even further. From the exchanges of first offers in 2018, we know that both sides exchanged offers on market access and also committed themselves to narrow the level playing field on both sides mainly by adoption of non-discriminatory measures.

These measures on their own could spur investment activity in both directions. China wants to demonstrate its intentions and has made commitments already in 2018 to improve market access, investment environment and to strengthen protection of intellectual property. A new Foreign Investment Law came into force introducing a very new concept for China. Negative investment list introduced on the 1st January was brought into effect meaning that investors in all other sectors except sectors included on the list will be assured of national treatment (investors shall be treated no less favourably than investors from the host state). Additionally, according to the law investment will not require pre-approval from the government.

Though the empirical evidence according CSSI that investment treaties induce increased investment has been inconclusive so far, the common rational is that an investment treaty brings far-reaching benefits to the host country by increased investment activity. The foreign investment contributes to economic growth and its spill-over effects very often positively impact also other areas of economy. The positive impact could be observed in job creation, technology and know-how transfers, and higher productivity of labour and overall increase in economic activity.

Though it is a complex agreement that requires compromises and willingness from both the EU and China, its incremental potential is to unleash an immense increase in two-way investment towards a mutual benefit. It is not easy to predict the future and if the Comprehensive Agreement will be concluded but we know for sure that even its least ambitious version hides notable potential for improvement of the investment environment and would send a sign of mutual trust, understanding and willingness to develop a shared future.

References:
https://trade.ec.europa.eu/doclib/press/index.cfm?id=2115
https://trade.ec.europa.eu/doclib/press/index.cfm?id=1435
http://mg2.mofcom.gov.cn/article/policy/China/201909/20190902898870.shtml
https://www.oecd.org/daf/inv/investment-policy/BFO-2016-Ch8-Investment-Treaties.pdf
https://www.europarl.europa.eu/legislative-train/theme-a-balanced-and-progressive-trade-policy-to-harness-globalisation/file-eu-china-investment-agreement
https://ec.europa.eu/trade/policy/accessing-markets/investment
http://foreignpolicy.com/2020/01/23/europe-new-front-trump-trade-war-davos-wef
http://documents.worldbank.org/curated/en/528401576141837231/pdf/Political-Risk-and-Policy-Responses-Summary-of-Research-Findings-and-Policy-Implications.pdf
https://www.reuters.com/article/us-china-eu/eu-china-investment-agreement-negotiations-enter-critical-stage-eu-ambassador-idUSKBN1ZG0J9
http://eeas.europa.eu/archives/docs/china/docs/eu-china_2020_strategic_agenda_en.pdf
https://ec.europa.eu/commission/sites/beta-political/files/communication-eu-china-a-strategic-outlook.pdf