In a bind: ratify EU-China Investment Agreement?

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At the very end of 2020, the EU managed to complete the 7-year negotiations with China on an investment agreement (Comprehensive Agreement on Investments = CAI). It could be considered the European alternative to the phase 1 trade deal with China by the Trump administration, which thrashed multilateralism with its America-first ideology and focused solely on American self-interest.

Afraid of lagging behind the US, the EU -under Merkel’s presidency- went all out to finalize its own deal with China before the end of the year. According to the EU, Xi Jinping has made many unprecedented concessions, which provide better access to the Chinese market, a level playing field and ample protection for European companies. What the Chinese themselves received in exchange for all those concessions remained unclear in all press releases and on TV.

Obviously China has always had much more access to the European market than European companies have had to the Chinese. It could be expected that Beijing would have to make more concessions than the EU when drawing up an investment agreement: it took the PRC no less than 7 years to do so. And precisely in the year that Xi Jinping covered up the gravity of the Corona outbreak in Wuhan, incorporated Hong Kong in violation of existing international treaties, arrested peaceful protesters in Hong Kong and sentenced them to years in prison, expelled foreign journalists from the PRC, threw into the dungeons Chinese journalists exposing the truth about Corona, interned a million Uyghurs in ‘re-education camps’, bullied critical Western government officials and continuously intimidated Taiwan, the EU thought it opportune to quickly finalize the deal.

PR-stunt

The agreement is of course a huge PR stunt for the all-powerful President Xi Jinping. We have to guess at the exact motives of Merkel and Macron to push through this deal: do they think that with the CAI they have more ammunition in hand to tackle China if it does not adhere to the trade stipulations, keeps on violating human rights or descends into protectionism? Is the agreement a signal to Biden that the EU is making its own strategic considerations without blindly following America’s will? Or is the EU firmly convinced that the agreement will offer European companies much more economic opportunities and protection in China?

We haven’t seen the details of the deal so we don’t know who will benefit the most from it. The large European companies such as VW, Siemens, NXP etc who have already established a sizeable representation in China or also the European small and medium-sized enterprises? The agreement is said to allow EU companies to invest in new sectors, removing the long-standing Chinese requirement to establish joint ventures. Furthermore, foreign companies will no longer be forced to transfer technology, although exceptions still do apply in some sectors. Lastly, the CCP has pledged to be more transparent about the granting of corporate subsidies and to prohibit state-owned companies from keeping foreign investors out by default.

What are Xi’s promises worth? We will have to wait and see, but his behavior in recent years gives little reason for optimism. China does not adhere to all the conditions of the phase 1 trade agreement with the US, which does not bode well for the CAI. Nevertheless, the EU ambassadors approved the draft agreement on December 28. The deal must now be approved by all EU governments as well as the European parliament, a process that will likely take at least 6 months. The agreement may not come into effect until 2022.

Timing

The timing of the agreement is nevertheless striking. While in America a new President comes to power who has expressed a desire to restore relations with the EU and to build a diplomatic front against China, the EU apparently considered it wise and necessary to quickly close the deal with China in order to achieve at least some sort of equal footing with the US (with its Phase 1 trade agreement) in the relationship with the PRC.

Over the past year, European parliamentary dissatisfaction with the EU’s appeasement policy towards China has grown strongly. The EU has not gone beyond a few shallow statements from Brussels expressing “serious concern” about developments in Hong Kong, Xinjiang, Tibet and the South China Sea, despite the fact that sanctions instruments are now at its disposal. The European government leaders have decided not to use that weapon for the time being.

The governments of the various member states that are ravaged economically and financially by Corona are most likely very concerned of losing market share in China. There was / is also the overdependence on Chinese medical aid in the fight against Covid: those who were too critical of Beijing could no longer count on relief supplies. The economic interdependence was and still is so comprehensive that in the current crisis European companies will need the Chinese market to recover, such is probably the general feeling and conclusion in quite a few European government circles.

Dutch parliament

The question is to what extent national and European parliamentarians will go along with this pragmatic ‘business first’ attitude of their governments and the European Commission. Below I focus on the Netherlands to give an indication of the recent state of mind in a national parliament.

The many questions from CDA (Christian party) MP Van Helvert about the China policy of the Rutte cabinet caught the eye over the past year. After all, the CDA is part of the Rutte’s coalition government. The MP bombarded Minister of Foreign Affairs Blok and other ministers with questions about Huawei, the persecution of Christians and Uyghurs, the Taiwan issue, Chinese espionage, academic cooperation with China, etc. etc. Just before Christmas, Van Helvert fired off his last salvo towards Blok:

“Are you aware of the report that Huawei was testing Uyghur face recognition software? How do you assess this report? To what extent do you consider it desirable that Chinese companies that facilitate the oppression of Uyghurs in China are active in the Dutch and European countries? And can you demonstrate that these companies do not also engage in such practices within the European Union? Is it possible, following the American example, to create a black list in the European Union of foreign companies that actively operate contrary to European values and interests, causing European companies to require an export license to do business with them?

Are you willing to argue for this? Has the time not come, also in light of the recent revelations about the massive forced labor in China’s Xinjang region, that you and your European colleagues are going to take a much harder stance against China? How long will these massive human rights violations be condoned?”

To what extent this critical attitude has been appreciated by his own party, is questionable, though. Van Helvert has been ranked very low on the CDA candidate list for the upcoming Dutch elections …

Suspension of extradition agreement

Coalition partners VVD and D66 as well as opposition parties have frequently made themselves heard too. They for example sharply condemned the Chinese actions in Hong Kong this summer. Consequently in October, Blok committed himself to suspend the Dutch extradition treaty with Hong Kong, which other Western and European countries had already decided at an earlier stage, as a symbolic protest against the annexation of Hong Kong by Xi Jinping. However, the formal announcement of the Ministry of Foreign Affairs or the Ministry of Justice & Security about this suspension has still not been issued: perhaps typical of the lack of a sense of urgency inside the Dutch government in the implementation of its China policy?

But the pressure from the House has at least forced the reticent Blok to take a more proactive stance in the EU: Chinese abuses were finally discussed and mentioned more openly in Brussels. In recent months, the minister has apparently been more committed to persuading his European colleagues to include human rights in the European policy approach towards China. The Dutch opposition parties SP & PvD even launched a motion at the beginning of December for the immediate halt of the CAI negotiations, but that attempt failed to gather sufficient support in Parliament.

Blok and Kaag

It will be interesting to see how Blok and Minister for Foreign Trade Kaag will defend the CAI in Parliament. After all, on November 27th, Kaag wrote in a letter to the House about the CAI negotiations: “Other important outstanding points concern agreements on dispute settlement as well as on the environment and labor standards, where the parties are still far apart. The Netherlands and a large number of member states indicated that firm agreements about this are essential in order to reach a final agreement. Most member states, including the Netherlands, stated that the content of the agreement is more important than the speed at which it is concluded (‘substance over speed’) and that the EU does not rush to reach an agreement. “

Blok and Kaag will undoubtedly fall back on the EU argument that China is both an economic partner and a system rival, which must be cooperated with where / when possible, and which must be protected against where necessary. The CAI promotes free trade, they will repeat. And their line of defense is likely to be that the CAI does offer the EU at least a starting point “to punish” China if it does not stick to the agreements. Will the Dutch MPs and the European Parliament swallow that argument?

Success story

As I said, I don’t know the details of the CAI, but it is somewhat surprising that China made all those concessions in the very last moment, after resolutely blocking them for nearly seven years. Merkel says the CAI is a success story, as Xi even has pledged to “make continuous and sustained efforts” to ratify international treaties banning forced labor. Sounds anything but a hard Chinese guarantee, with a clear roadmap and verifiable timetable, but more like a statement of intent, of which many have been issued by the Great Helmsman Xi in recent years. Refer as well https://www.mijngroeve.nl/history/merkel-china-the-moment-of-truth/

Furthermore, Xi’s China rarely feels compelled to comply with international court decisions, given f.e. Beijing’s refusal to accept the 2016 ruling in the socalled ‘South China Sea Arbitration’, a case brought by the Philippines against the PRC under the UN Convention on the Law of the Sea (UNCLOS), which clearly rejected the legality of China’s claims of sovereignty in the South China Sea area … I am curious what the dispute procedures will be in case of any disagreement about the implementation of the various clauses of the CAI …

Chinese self-sufficiency

It is also important to note that the CAI has been achieved against the background of an officially formulated Chinese policy aimed at increasing China’s self-sufficiency and drastically reducing China’s dependence on Western technology and know-how. After all, Xi wants to make China a dominant superpower that can rely on itself. To achieve this he mainly invests in his state-owned companies. How those goals will align with Xi ‘s pledges through the CAI to provide the EU with greater access to the Chinese market and reduce state subsidies will become a major challenge.

At the same time, the EU fears’ of the unstoppable advance of China seem to be growing. Brussels has recently introduced far-reaching foreign direct investment control- and screening mechanisms to prevent Chinese companies from simply buying up European companies with special know-how or sensitive technologies. Brussels is encouraging the EU member states to adopt a coordinated foreign investment screening policy …

The Hague

The Dutch government is also said to be busily working on (‘country neutral’) legislation that should be ready before mid-2021 to better protect Dutch companies against Chinese takeovers. In other words, there is a strong tendency to give China less access to the European market, for fear of creating too great a dependency on a country ruled by a communist regime that does not shy away from intimidation and playing hard ball.

The fear of Chinese espionage and the value of sensitive know-how has finally also trickled down to the Rutte cabinet. Very recently, Kaag sent a confidential letter to the House about the additional strategic framework for export control of semiconductor technology. This is an extra regulatory framework in addition to the existing export control rules. As mentioned early on in mijngroeve.nl, see eg https://www.mijngroeve.nl/history/taiwan-and-holland-sandwiched-in-the-geopolitical-technology-war/ , the tiny Netherlands has a unique leverage over the Chinese giant in the capacity of ASML, the world leader in EUV semiconductor equipment from Veldhoven, without whose help China would find it difficult to upgrade its own semiconductor foundry industry. The extent of that leverage has finally been fully understood by the Dutch government, albeit under heavy American pressure: the chances that ASML will receive an export license to ship the EUV machines ordered by China seem as good as gone …

Will the CAI prove to be dead at birth or – ironically- the formal start of the further decoupling of the European and Chinese economies, just like in a way Trump’s phase 1 trade agreement signified the formal technological decoupling between the US and the PRC? Should it be ratified or not?

The European values

The MPs in the individual member states and the European parliament ‘d better study the agreement in detail to understand what commitments China has actually made. The question is also whether parliamentarians think that the CAI is sending the right signal to China as well as to the European population and voters at this particular moment in time. After all, in 2020 the EU repeatedly stressed in various publications and statements to stand up for democracy and human rights, to defend European values and principles in the face of the US’s lack of leadership in that respect. The aggressive, combative and intimidating China under Xi has meanwhile not made itself very popular among many MPs across Europe, the general state of mind is probably not all that different from the one in Dutch parliament. See also https://www.mijngroeve.nl/history/holland-china-policy-growing-parliamentary-discontent/ & https://www.mijngroeve.nl/history/holland-china-predictions-about-the-new-relationship/

The CAI, whether ratified or not, won’t become an easy success story. Tensions between the EU and China will not ease in 2021, all the more so as Europe will be keen to strengthen transatlantic ties with the Biden government, which will be anything but friendly to China. The fact that both Merkel and Trump will disappear from the scene makes an improvement in German-American relations finally possible.

Nato

Merkel’s departure may also herald a European change of course with regard to China, as it was mainly the Chancellor who hammered on the ‘strategic partnership’ with the PRC and who acted extremely cautiously and diplomatically in the relationship with Beijing. NATO increasingly sees China as a geopolitical threat, despite assurances from people like Merkel and Blok that China does not pose a military threat to Europe. Nevertheless, Nato views China more as a rival than a partner. Vice versa the same applies. Since Germany, like the Netherlands, is not in favour of a large European defense force and still regards NATO the fundament of European security, the question pops up how the EU would like to deal with an eventual scenario in which China is no longer predominantly an economic partner but mostly a system rival.

The issue of Taiwan in particular will be high on the international agenda in 2021, the Hague and Brussels will be forced to reconsider whether, like the US, they want to express more explicit support for the democratic island https://www.mijngroeve.nl/history/taiwan-taking-center-stage-in-2021/ In America, with the full consent of Congress, Trump has turned the Taiwan Assurances Act into law: it states that the US Congress believes that Taiwan is an essential part of the US ‘Free and Open Indo-Pacific Strategy’ and that the government as such, should support Taiwan’s continued pursuit of greater international representation.

Taiwan

As regards Taiwan’s exclusion from international organizations as a result of Beijing’s fierce opposition, the US Congress believes that such a situation is detrimental to global health, civil aviation safety and efforts to combat transnational crime, and also negatively affects democracy in Taiwan. The law emphasizes that it is US policy to advocate for the meaningful participation of Taiwan in the UN, WHO, international civil aviation organizations, Interpol and other international bodies, when appropriate.

Until now, Blok and his European companions have not dared to speak out on the issue of Taiwan, for fear of Chinese trade repercussions. But if the EU wants to strengthen ties with America, Europe’s China & Taiwan policies will be questioned. It is doubtful whether this will remain without consequences for the CAI. President Xi is after all extremely allergic to countries that dare to use the T-word (Taiwan, Tibet, Tiananmen 1989)….