The European Union’s Comprehensive Agreement on Investment (CAI) with China—announced on December 30, 2020, at the end of Germany’s six-month rotating presidency of the Council of the European Union—was the result of long discussions among EU officials and member states. After nearly seven years and thirty-five rounds of EU-China talks, the European Commission decided it had achieved as much as it could. Negotiations had gone at a snail’s pace until recently, but commitments finally came from Beijing in the last weeks of December on two major areas: first, international labor standards, and second, sustainable development and climate change. At last, China—with the personal involvement of President Xi Jinping, who last year declared relations with Europe a top foreign policy priority—was ready to sign and make some concessions. And, above all, this round of negotiations was the last chance for German Chancellor Angela Merkel—who has visited China twelve times since taking office in 2005—to strike a deal with the country before she retires after Germany’s general elections in September.

The timing of the CAI announcement—three weeks before the inauguration of President Joe Biden, who had committed to a new approach of bringing together the United States’ democratic allies for engaging with China—raised eyebrows in Washington, especially as national security adviser–designate Jake Sullivan had tweeted on December 21 that the new administration would “welcome early consultations with our European partners on our common concerns about China’s economic practices.” Although it was not able to interact officially with the EU or European governments before taking office, the Biden team clearly seemed keen to engage with them on unfair Chinese practices such as state subsidies, forced technology transfers, and market access discrepancies.

Philippe Le Corre
Philippe Le Corre was a nonresident senior fellow in the Europe Program at the Carnegie Endowment for International Peace.
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Why did the EU, which claims to have similar concerns and had criticized the former U.S. president Donald Trump administration’s unilateral approach in dealing with these issues, prefer to go it alone? Merkel, it appears, wanted to push for an economic agreement while maintaining the pressure on China in other aspects of the relationship. However, this does not mean that the CAI is a done deal, nor that other parts of the EU-China relationship—including human rights, labor rights, and Hong Kong, where thousands of EU citizens reside—will not be addressed in the months to come. This article analyzes the debate around the CAI in the context of other dimensions of the evolving EU-China relationship and focuses on the EU’s balancing attempt, also called “tightrope diplomacy.”

Why the EU-China Comprehensive Agreement on Investment?

After years of complaints and dissatisfaction on their part, the CAI will open the door for European companies to several sectors of China’s economy. The European Commission has negotiated “increased legal certainty, improved market access and fairer rules of engagement,” including crucially the elimination of joint-venture requirements in sectors such as manufacturing (including automotive, chemicals, and health); financial services and insurance; private hospitals; biological resources; air transport; real estate and environmental services; and even cloud services, which will “be open to EU investors subject to a 50 percent equity cap.” One year after the Trump administration signed its Phase One trade deal with China, which opened some sectors to U.S. business, the EU felt compelled to make sure its companies would not be left behind.

Under strong pressure from France, the European Commission also made sure that sustainable development was included in the final document. Climate change is an area where Brussels hopes to engage Beijing in a significant way. While Xi may have pledged last year that China—the world’s largest emitter of greenhouse gases—would be a carbon-neutral economy by 2060, similar Chinese commitments following the 2015 Paris Climate Agreement were not met. For example, coal production in China was much higher in 2018–2019 than before the agreement.

Generally, the CAI is a work in progress by EU standards. A lot remains to be discussed with regard to China’s promises on sustainable development, labor, and market access issues. For its part, Beijing can see the CAI as a symbolic and fairly quick win, having been able to sign an agreement with a major Western entity just before the new U.S. administration took office. During the presidential campaign, Biden and his team had explicitly called for democracies to jointly address the China issue, hence slight perplexity in Washington with regard to the EU’s move.

Since 2016, European companies had been complaining that the investment relationship with China was becoming uneven. Although EU foreign direct investment (FDI) in China remained slightly above Chinese FDI in the EU (€140 billion versus €120 billion over in the past twenty years), European companies often found they could not compete on a level playing field against Chinese national champions—especially state-owned enterprises—in the Chinese market. In 2016, the level of Chinese FDI in the EU reached a record €37.2 billion, including both mergers and acquisitions and greenfield investments. According to the AEI Investment Tracker, the total value of China’s overseas investment and construction combined since 2005 exceeds $2 trillion. While China was becoming the world’s second-largest investor in 2016, FDI in China was stagnating due to rising restrictions in the domestic market and stronger local competition encouraged by the state. For many years, the European Union Chamber of Commerce in China had stressed disproportionately restrictive rules in market access. The CAI addresses many of these issues. Brussels insiders point out that China has rarely engaged so explicitly in collaboration with a group of states. According to Wang Huiyao, the president of Center for China and Globalization and adviser to China’s State Council, “The completion of these negotiations is a historic breakthrough for both China and Europe, and a new milestone in China’s globalisation.”

What is less clear is how the EU will ensure China implements its side of the deal, especially with regard to International Labor Organization (ILO) standards, with which Beijing promised to comply without setting a clear date for ratification of the relevant conventions. It appears highly unlikely that China will have signed ILO conventions before ratification of the CAI. Unlike Vietnam when it negotiated its trade deal with the EU in 2019, China did not agree to ratify the ILO’s Right to Organise and Collective Bargaining Convention. The CAI also covers China’s obligations in the treatment of state-owned enterprises, transparency of subsidies, and rules against the forced transfer of technologies.

China did commit to a greater level of market access for EU investors and published a so-called negative list of industries in which foreign investment is allowed if the investor meets certain conditions—in all service and non-service sectors. In the annexes of the deal, published by the European Commission, the EU similarly addresses sectors where foreign entities cannot invest. But Beijing also enacted on December 1, 2020, regulations for the review of foreign investment with new hurdles for companies (including mandatory pre-investment reviews and expansion of regulatory scope). In addition, China’s Ministry of Commerce released an order on January 9, 2021, to ward off “unjustified extra-territorial application of foreign legislation,” aimed at international sanctions possibly targeting Chinese firms in the future.

EU leaders, including Merkel and French President Emmanuel Macron, have insisted that investment is only one of the many aspects of the relationship with China. Addressing the World Economic Forum in January, Merkel appeared “satisfied” with the EU-China agreement. Like the German chancellor, Macron has rejected a suggestion that the West should rally against China, reportedly saying, “a situation to join all together against China, this is a scenario of the highest possible conflictuality. This one, for me, is counterproductive.”

Since the conclusion of the CAI negotiations, Germany and France have reached out to some Asian governments, repeating the EU line that China was not only a negotiating partner but also an economic competitor and a systemic rival. This triad was detailed in the 2019 EU-China Strategic Outlook, a landmark attempt to define the union’s China policy. European Commission Director-General for Trade Sabine Weyand insisted on January 5, 2021, that the EU would, in parallel to the CAI, work to address the systemic challenges raised by China. But on January 6, less than a week after the deal was agreed, fifty-three pro-democracy officials and activists were arrested in Hong Kong on charges pursuant to the controversial National Security Law, thus in complete violation of the “one country, two systems” principle that is meant to rule the special administrative region until 2049. On February 28, forty-seven more pro-democracy figures were charged for “conspiracy to commit subversion” by participating in an informal democratic primary election. The EU has issued diplomatic condemnation but not yet imposed any sanctions against responsible Hong Kong officials.

The CAI as Part of the EU’s Evolving China Strategy

Representatives of Germany’s car industry, which alongside the chemical industry will benefit greatly from the new market openings in China, said the completion of the CAI was “excellent news.” Others who will benefit include subcontractors of the industry, many of them based in Eastern or Central Europe. The president of the European Union Chamber of Commerce in China, Joerg Wuttke—a leading China expert within Germany’s business community—noted that the EU and China may not have a common border but they “have huge global supply chains and economic interests.” China is not the Soviet Union, he added. Germany has taken advantage of its deep economic interactions with China better than any other European country over the past thirty years. Unlike the vast majority of other EU members, it now has an almost balanced trade relationship with China (worth around €200 billion) while others see their trade deficits deepening.

Not everyone in Germany agrees with the view of the CAI’s champions, though. It addresses the problems of old industries like automaking but not the larger threat posed by China’s determination that its high-tech industries should have access to all major global markets while severely restricting others’ access to its market. For example, European telecommunication manufacturers have seen their global market share in China shrink dramatically over the past three decades, while Huawei and ZTE have prospered in Europe and still stand a good chance to capture some of the 5G market in Germany and several other countries.

In Berlin, Merkel’s political opponents have expressed strong doubts about her approach. A few days after the CAI was sealed, Nils Schmid, a parliamentarian and foreign policy spokesman for the Social Democratic Party, said that Germany needed “a real foreign policy for China” and to “decouple [its] foreign policy from the commercial interests of big business.” The Greens party has become one of the most critical voices in Berlin, as well as in the European Parliament where its member Reinhard Bütikofer chairs the delegation for relations with China. He has deplored what he called the CAI’s “exceedingly weak language that doesn’t really promise anything.” Bütikofer also predicted the parliament might block the deal if China does not commit to implementing labor rights.

France has had less of a hefty national debate on the matter, but French parliamentary members have been hugely skeptical. European Parliament Member Marie-Pierre Vedrenne, a member of France’s Democratic Movement, which is part of Macron’s ruling coalition, stated, “The document is hard to read at the moment. At this stage I am not able to tell you if European companies will benefit from the deal or not.” One of her European Parliament colleagues, Raphaël Glucksmann (a member of the Socialists & Democrats group in the EU Parliament), said that the CAI is “especially weak on human rights and forced labor issues.” But French companies with business interests in China have remained silent.

Although all member states were regularly informed by the European Commission during the negotiating process, some felt there should have been more debates and expressed their disappointment with the ways the CAI was handled by the German presidency of the Council of the European Union. Italy’s Undersecretary of State for Foreign Affairs and International Cooperation Ivan Scalfarotto said, “We are giving a positive signal to China at a time of significant human-rights concerns,” alluding to the situation in Hong Kong and the persecution and possibly forced labor of Uighurs in Xinjiang. Poland’s Foreign Minister Zbigniew Rau tweeted about the need for “more consultations and transparency bringing our transatlantic allies on board.” He added, “A good, balanced deal is better than a premature one.” Opponents and defenders of the deal are gearing up for the ratification debate in the European Parliament, which should take place in the coming months.

The Other Parts of the EU’s China Toolbox

China’s government repeatedly pointed out that 2020 marked forty-five years of diplomatic relations with the EU. For Beijing, it was important to achieve some success by the end of a year during which European criticism of China seemed to have escalated, whether on the origins of COVID-19, human rights violations against the Uighur and Kazakh minorities in Xinjiang, and the repeated arrests of democrat activists in Hong Kong. On March 22, the EU decided for the first time since 1989 to impose some sanctions on four Chinese officials involved in running internment camps for Uighurs in Xinjiang region, leading to an angry counterattack by Beijing against European politicians (including European Parliament members), diplomats, and analysts. 

In a survey conducted by a network of European think tanks, ten of the thirteen European countries involved—including France, Germany, and the United Kingdom—had a deteriorating image of China last year. No doubt the attempt by Beijing to capitalize on the deteriorating public health situation in Europe in the first months of the coronavirus pandemic through so-called mask diplomacy and other actions did not do its reputation good.

In particular, China’s image has been fading in Central and Eastern Europe where countries have been disappointed with the lack of opportunities from engaging with China and the very limited Chinese investments. Those that are EU members have benefited from proper coordination with and assistance from Brussels during the pandemic. By contrast, Chinese assistance efforts were not acknowledged, except in Hungary, which in February became the first EU member to acquire the China-made Sinopharm vaccine. On February 10, the invited leaders of three Central European countries and the three Baltic states did not participate in the virtual summit of the 17+1 group, a format set up by China to interact directly with the region. Some countries might gradually step aside from the group.

The gap between European democracies and an increasingly authoritarian Chinese regime has widened, and trade and investments seem to be the prime areas of cooperation at the moment. Besides the CAI, the only recent achievement was the signature last year of the EU-China Agreement on Geographical Indications, initially aimed at 200 European and Chinese brands.

There is limited rapprochement at the political level, with NGOs and some politicians in Europe increasingly denouncing human rights abuses in China. There is a willingness—clearly expressed by a majority of members of the European Parliament—to put pressure on China with regard to issues in Hong Kong and Xinjiang. In February, EU foreign ministers decided to move ahead with new measures to respond to its tightening control over Hong Kong. This includes outreach to civil society groups there and coordination with like-minded international partners.

EU officials in certain circles sometimes claim they may never reach the standards demanded by human rights advocates. Meanwhile, some business federations either worry about Chinese acquisitions of European technology or see diminishing chances to remain a player in the Chinese consumer market. The CAI was put forward as part of the EU’s toolbox in order to address economic risks tied to China’s state capitalism. This includes the EU investment screening mechanism that has been operational since last October, the white paper on foreign subsidies in the single market published last July, and a set of mitigating measures on 5G announced last January. A white paper on international procurement is also under way.

Such actions are responses to challenges coming primarily but not exclusively from China. They appear as defensive measures, but they should not prevent the EU from standing for its free-market values and innovation principles, as pointed out by Brussels and major member states. In addition, policymakers in various European capitals are keen to strike a balance between interests and values.

In European minds, the CAI should not be seen as an impediment to a strong, regular, transatlantic discussion on China. The EU-U.S. dialogue that was initiated by the Trump administration last year will thus be continued with the Biden administration. The EU was keen to preempt U.S. criticism of the CAI by releasing, right after last November’s U.S. presidential election, an EU-U.S. transatlantic agenda for global change. This may not have mentioned China by name, but it did refer to values, historical links, and shared objectives of the EU and the United States. Furthermore, on March 12, U.S. National Security Advisor Jake Sullivan insisted the United States was engaged in “deep consultations” with Europe on shared concerns over China.

Future Prospects for the EU-U.S.-China Triangle

Among the many EU statements that refer to the bloc’s relationship with China, the 2020 Strategic Agenda for Cooperation that was published in 2013 remains, despite its somewhat naive language on human rights, perhaps the most comprehensive action plan for cooperation between the two countries. It has nevertheless been overshadowed by the 2019 Strategic Outlook, with the triad roles of China as negotiating partner, economic competitor, and systemic rival reflecting the need for the EU to reassess the relationship. With a growingly assertive Chinese regime and a damaging global crisis, the past twelve months have made the partnership even more challenging. Much may also change when Merkel leaves office in Germany later this year. Mirroring her country’s division between pro-business and pro-values groups, her government has tried to strike the right balance between partnership and rivalry with China. For that matter, no serious counterproposal to Merkel’s approach to China has been put forward by other European leaders.

Unlike the United States, the EU does not have the hard power necessary to compete with a China that is expanding its strategic influence in the Pacific and other regions. Its soft power is relevant, but insufficient. What the EU can push for is the defense of its liberal democratic values and the rule of law, in addition to its 450-million-people-strong consumer market. Perhaps this is what the EU most failed to leverage when signing the CAI, which could have been part of a multilateral deal with China. Even if the agreement is not ratified eventually by the European Parliament, Beijing will have benefited from a symbolic moment.

Following four devastating years for the transatlantic relationship, which helped China to consolidate its power and influence in many parts of the world, European and U.S. leaders are back on track for more cooperation. They alluded to China’s rise at a EU Foreign Affairs Council meeting on February 22, which U.S. Secretary of State Antony Blinken also participated in. The great majority of member states seem willing to engage with the United States on China-related issues, especially in relation to technology, connectivity, human rights, multilateral reform, and freedom of navigation in the South and East China sea.

Lastly, European politicians may soon have to deal with large public debates on China’s rise. It will start with CAI, no doubt, and should continue across electoral campaigns from Germany this year to France’s presidential and legislative elections in 2022. Merkel and Macron, the latter of whom will probably run for reelection next year, have defended continuing dialogue with China as opposed to a Trump-style decoupling. Nevertheless, they will face an increasingly China-sceptic opinion among the public as well as among NGOs, journalists, academics, and politicians who have accumulated grievances over China’s behavior. Leaders, especially in Berlin, may learn the hard way that the EU under Germany’s European Council presidency last year prioritized its interests over its values.

Unlike the United States, European leaders do not seem to believe in so-called fungibility with China. Their argument is that economics should be treated separately from broader diplomatic efforts. There appears to be a different approach from Biden’s administration, which is gradually revealing its global China policy. The new approach includes directly addressing U.S. concerns on values and interests to Chinese leaders—when Blinken and Sullivan met Chinese Politburo member Yang Jiechi and Foreign Minister Wang Yi recently in Anchorage, Alaska, they discussed a mix of territorial disputes, human rights in Hong Kong and Xinjiang, as well as economic issues, driving angry responses from their Chinese counterparts who urged the United States to, in Yang’s own words, “stop advancing its own democracy in the rest of the world.”

For the time being, the EU has embarked on a different route, illustrating the current gap between the two sides of the Atlantic. Still, the deteriorating state of relations between China and Western democracies means that European leaders are venturing into unchartered territory.