Opinion

The EU-China investment deal may be anachronic in a bifurcating world

Ultimately, only time will tell if this landmark trade agreement will be productive and counter the potential bifurcation of international value chains.

By: Date: April 6, 2021 Topic: Global Economics & Governance

This opinion piece was originally published in China US Focus.

After more than seven years and 35 rounds of negotiations, the European Union finally reached a deal with China on the Comprehensive Agreement on Investment (CAI) in December 2020.

CAI is intended to replace 25 bilateral investment agreements between EU individual member states and China by offering greater market access within specific sectors. Ultimately, the goal is to reduce uncertainty for European investors in China. CAI also introduces instruments to call for more transparency regarding subsidies and the general behaviour of Chinese state-owned enterprises (SOEs).

A major shift brought forth by CAI has been the opening of some segments of the Chinese market to European foreign direct investment. Previously, while Europe had been wide open to Chinese investment, Chinese markets had steep barriers to entry for all foreign nations. While steep barriers remain, as clearly shown in the sectoral commitments from both sides published last week, a few segments of the Chinese market are now more open to European investors. This is the case for electric vehicles and some health services but, overall, the playing field remains tilted in China’s favour.

The small, but still relevant gains on market access are not accompanied by a clear improvement on investor protection. In fact, CAI only introduces state-to-state dispute settlement, giving two more years for both parties to reach an agreement on other forms of investment protection. This means that the existing infrastructure for handling financial disputes cannot be eliminated yet, namely the existing individual investment agreements between 26 EU member states and China. Finally, while CAI includes some provisions on environment and labour rights protection, the conditions fall short of what has previously been agreed to in other investment or trade deals agreed by the EU. This makes the ratification of this deal uncertain.

The EU seems to have realised its lack of political weight compared to its economic weight in a world of increasing great power competition. By introducing the concept of strategic autonomy, lawmakers in Europe want to demonstrate that the EU can decide its place in the world without depending on its long-term ally the US. This need for sufficiency without US ties is clearly related to the EU’s deteriorating relations with the US, which began after former President Trump came to power. In fact, , the EU only began negotiations with China in November 2013 after the US’ own negotiations for a bilateral investment agreement with China. The election of Trump brought them to an abrupt end. The EU persisted, though the pace of negotiations slowed while European countries sought clarity on the Trump administration’s next steps towards the EU. When it became increasingly clear to Europeans that they would be left disappointed by Trump and his administration’s decisions and in a climate of increasing strategic competition between the US and China, Europe was put in a position it had not been since the Second World War, that of striving for strategic autonomy, in an effort to avoid being squeezed in the new era of Great Power Competition.

This strategy made sense in a world dominated by a hostile and isolationist U.S. President like Trump, but it makes even more sense today in the light of Biden’s quest to re-engage with the US’ traditional allies, while maintaining what he himself has defined as “extreme competition” with China.

The Biden administration recently announced an executive order to build a China-free tech supply chain. While the US pushes for bifurcation of supply chains, the EU is simultaneously aiming to increase its investment in a number of sectors in China. They are increasing investment in electric vehicles in particular, which will likely be covered by Biden’s executive order. In other words, the market access obtained by the EU after years of negotiations could actually trap European companies in a market which is bifurcating from Europe’s main trading partner. This is the case of electric vehicles as China, under CAI, is demanding investments of above USD $1 billion from Europe if they want to have ownership control.

Conversely, if we focus on China’s investment in Europe, a different set of problems arise. Chinese companies are indeed very keen on investing in Europe, especially in high tech sectors. A large share of Chinese acquisitions in Europe since 2018 occurred in the industrial and, to a lesser extent, the semiconductor space. Some of the deals have been stopped for national security issues and this trend is bound to increase in the foreseeable future. If anything, the EU-China investment deal might make it harder to stop certain deals, but not impossible, as public opinion in Europe becomes increasingly hostile to China’s acquisitions.

All in all, the irony of the situation is that this investment deal could have been very useful for European companies in the good old days of productive engagement as a way to improve market access to the fastest growing economy in the world. Today, in the era of US-China strategic competition, with a US administration that calls on its allies for support to contain China, European countries will find it much harder to profit from this deal. The EU is used to lengthy negotiations and this time around, has concluded a deal which could soon become anachronic in the era of economic bifurcation. Ultimately, only time will tell if this landmark trade agreement will be productive and counter the potential bifurcation of international value chains. Meanwhile, the risk of these deals is tilted towards those European companies which are particularly exposed to China as it will induce them to put more eggs in China’s basket at the risk of getting stuck in China’s value chain.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Opinion

Europe doesn’t need a ‘Mega-Fab’

Europe should defend its existing dominance in equipment manufacturing for semiconductors and invest in chip design instead of luring high-end fabrication to its shores.

By: Niclas Poitiers Topic: Global Economics & Governance Date: September 22, 2021
Read article More on this topic More by this author
 

Blog Post

Opening up digital platforms and reducing anticompetitive risks

The current convergence in measures to open up digital platforms leaves a door open to some form of international coordination.

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: September 22, 2021
Read article More on this topic
 

External Publication

Investing in China: myths and realities

Concerns are real, but the country fares as well as peers at similar levels of development. Analysis published in fDi Intelligence.

By: Uri Dadush and Pauline Weil Topic: Global Economics & Governance Date: September 20, 2021
Read article More on this topic More by this author
 

Opinion

Making supply chains more resilient

After the current global semiconductor shortage, business leaders and policymakers must think now about how to minimise the effects of future exogenous shocks on production networks and the global economy.

By: Dalia Marin Topic: Global Economics & Governance Date: September 14, 2021
Read article More on this topic
 

External Publication

EU-India trade relations: assessment and perspectives

In-depth analysis prepared for the European Parliament's Committee on International Trade (INTA).

By: Suman Bery, Sonali Chowdhry, Alicia García-Herrero and Niclas Poitiers Topic: Global Economics & Governance Date: September 10, 2021
Read article Download PDF More on this topic
 

Policy Contribution

A green fiscal pact: climate investment in times of budget consolidation

Increasing green public investment while consolidating deficits will be a central challenge of this decade. A green fiscal pact would address this tension, but difficult trade-offs remain.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 9, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A Late Bloomer: where is China’s climate plan?

The world awaits China's concrete plan on carbon reduction, but the country is following its own pace.

By: The Sound of Economics Topic: Global Economics & Governance Date: September 8, 2021
Read article More on this topic More by this author
 

External Publication

What is behind China's Dual Circulation Strategy?

China's dual circulation strategy should not be dismissed as a buzzword: its implementation will entail major consequences.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: September 7, 2021
Read about event More on this topic
 

Past Event

Past Event

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 3, 2021
Read about event More on this topic
 

Past Event

Past Event

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1 Date: September 2, 2021
Read article More by this author
 

Podcast

Podcast

Environmental, societal and governance criteria: hit or miss?

Is sustainable investing contributing to society’s climate and social goals, or preventing systemic change?

By: The Sound of Economics Topic: Energy & Climate, Finance & Financial Regulation Date: August 26, 2021
Read article More on this topic
 

Blog Post

How much investment do we need to reach net zero?

The size and scope of investments needed to reach net zero will have significant macroeconomic implications.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate Date: August 25, 2021
Load more posts