The CAI: A New Era for the EU and China

By John Lavelle

Although overshadowed by events in America, the European Union began 2021 with a bang.  After seven years of intense negotiation and arbitration, the European Union and China have agreed, in principle, to a Comprehensive Agreement on Investment (CAI).  This agreement is the most encompassing accord that China has made with any third nation or party, including the United States.  Even though the finer details are still up for debate and the treaty is not yet ratified, the CAI marks a new age in EU-China relations. There are many questions and concerns about the winners and losers of the deal: Why has this agreement occurred now, and will the prerequisites of the deal actually be upheld?  How will this deal change the partner countries themselves and their relationship with each other?  How does this deal affect America under the new Biden administration?  Most importantly, is it a good deal for the international community? 

The key terms invoked during the negotiations and embedded within the agreement were ‘market access’ and ‘investment protection’.  These terms drove the direction of the talks as well as the manner in which the core areas would be implemented. The preeminent areas for this deal are the health, automotive, and financial services sectors: both parties gained advantageous rights and privileges in their respective regions.  Private European hospitals will be able to open and operate in cities such as Shanghai and Beijing, without the joint venture requirements of old.  In the automotive sector, China has removed their infamous joint venture requirements and increased access for new energy vehicles from Europe. Financial fields such as banking and trading in securities will no longer require joint ventures or caps on foreign equities.  The agreement also plans to make investment more equitable for both nations.  China has agreed to increase transparencies in subsidies, force their state-owned enterprises to adhere to commercial consideration guidelines and stop forced technology transfers. The EU also states that, most importantly, China has agreed to increase labor and environmental standards by implementing the conditions of Paris Agreement and International Labour Organization

Conversely, what exactly does China receive by agreeing to this deal that has provided Europe with plenty?  Primarily, China and its companies will gain even more access and investment opportunities to the European manufacturing and energy sectors, but importantly not to nuclear energy. Chinese 5G, mainly from Huawei, will still be allowed in Europe, but will continue to be screened before implementation across the continent.  The alliance will also increase the European Union’s reliance on the Chinese markets and economy. Reports that have been released since the onset of the agreement find these to be the only major gains China receives on paper. 

Considering the formerly listed Chinese preventions, this deal seems like a diplomatic victory for the EU. However, I would agree with many prominent analysts, that this is a decisive Chinese victory, with the EU and USA being the primary losers. 

  This Chinese diplomatic victory is due, primarily, to the timing and the lack of enforcement of the agreement.  Last year should have been a bad year for Chinese diplomacy to say the least. Aside from their actions in Hong Kong and Xinjiang as well as the mishandling of the COVID-19 outbreak, they also killed Indian troops, sanctioned Australia after a trade deal, and continually threatened Taiwan and its sovereignty.  However, regardless of China’s involvement in all these incidents, the EU still made a deal with the People’s Republic.   The timing issue is due to the inauguration of President Biden. Biden has been vocal about improving relations with the EU while also establishing better communication and cooperation with the Middle East and China. However, EU relations with America at this point have splintered and are off to a rocky start.  Biden wants more allied input in America’s dealings with China, mainly from the EU.  The newly elected President of the USA even pleaded with the EU nations to postpone the deal until he was in office, but to no avail. The EU saw this deal as a chance to gain strategic independence, and took advantage of the opportunity. Despite Biden’s plea and his campaign to improve relations with allies, the EU turned its back on the USA and forged ahead with the China deal, dismissing America’s desire for a bilateral arrangement with the People’s Republic.       

The other issue is the enforcement of the agreement.  How will the EU enforce Chinese efforts to “work towards” the improvement of labor rights and environmental concerns?  The vague concessions China has given are weak and prospectively unenforceable.  Retrospectively, the more concrete of China’s concessions in the CAI, such as foreign investment caps and forced joint ventures were concessions China originally ‘made’ 20 years ago, in order to join the World Trade Organization in 2001. This time around, these compromises were offered as new and progressive, when they are in fact unoriginal, passé and, most importantly, unenforced.  If China would not change for the WTO, why would they for the EU?  China is notorious for its agreement to treaties and almost immediate violation of those agreements, as seen in their violation of the trade treaty with Australia and the continued encroachment upon Hong Kong sovereignty.  The EU cannot enforce this treaty and China has neither the desire nor the need to uphold its end of the bargain.   

How will this deal affect the nations of the EU? On its surface, not so much.  All the European nations have trade deals and agreements set up with China, with the exception of Ireland.  However, those deals are varied in terms of access and bilateral investment. The deal puts all the EU nations on the same level in their relations and dealings with China. This deal does benefit some EU nations more than others, mainly Germany and France (to a lesser extent).  It links China to the auto industries of Germany and France, the largest in Europe, both of which have been struggling in recent years.  This fact did not go unnoticed in Europe and caused much resentment and anger.  During the talks with China and Xi Jinping, Merkel and Macron were the only two EU leaders at the conclusion of the negotiations. Even worse for optics, this deal was completed just before Germany’s six-month presidency over the EU ended.  Many EU countries, notably Italy, Spain, and Belgium, have voiced their concerns over this deal, which might be a glimpse of the manner in which the post-Brexit EU will function.  Will the EU be dominated by Germany and France while the smaller nations are neglected and go unheard?   Specific to the deal, these nations have also criticized the agreement for ignoring the labor and human rights violations committed in China and for causing a significant fracture in transatlantic relations.  Not only has this deal worsened transatlantic relations, but it has also split the EU. The CAI has made the Post-Brexit Era of the European Union uncertain and vexed, all in the attempt for ‘strategic independence’.    

The Comprehensive Agreement on Investment was indeed an historic agreement for both the European Union and China, but the ‘historic’ aspect arises from the EU’s short-sightedness and poor timing, leading to an unequivocal diplomatic victory for China.  After years of public violations and abuses by the government, the People’s Republic of China negotiated a deal that will greatly enhance their own coffers while conceding comparatively little to its trade partners.  This deal is a disaster for Europe as a whole, and for America as well, causing concern for US-EU relations under the Biden administration. Within the EU, the deal emphasizes the questions and uncertainties of how the post-Brexit Union will function.  Internal tensions have risen within the union, due to the poor optics and the exclusion and neglect of smaller nations during the negotiations.  By bringing China and the EU closer together, the CAI has split the European Union away from America and caused an internal rift that may ultimately fracture the Union itself.   

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist. 

6 Comments Add yours

  1. Jenna says:

    Really interesting read. So much to think about here that I wasn’t tuned in to!!


  2. Meaghan says:

    Very interesting


  3. Fran says:

    Great article! I’m looking forward to seeing what happens. Hopefully, you can do a follow up piece.


  4. Fatima Freitas says:

    Riveting article. Compelling point of view!


  5. William Lavellr says:

    John great article and insight on what this may mean to the EU now that the UK is no longer part of it.


  6. Michelle says:

    Very thought provoking article- I appreciate the author’s candor. This has certainly convinced me to delve more into detail about the CAI. Exceedingly well written . I look forward to following this author.


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