China & EU: A Comprehensive Agreement on Investment

After seven years of discussion, European Union and China finally started the negotiations for an investment deal (Comprehensive Agreement on Investment) that will open up the market access for Europe in China, its largest trading partner after US.
At the negotiation table there are a lot of topics such as COVID-19 handling, climate, forced labor, technology, eco and trade issues, and EU business in China.
EU has been traditionally more opened to chinese investment than the reverse, with the well-known chinese protectionism policies, using the “infant industry argument”, which means that new industries inside the domestic market need to be protected and supported to allow them to flourish or, otherwise, the foreign competition and goods would overflow and saturate the domestic market and the high tariff rates that the imported goods suffer.
However, China, even being a centrally planned economy market adopting strong protectionism policies, it’s a country that greatly benefits from the globalization finding less barriers to invest overseas than the foreign bodies that want to invest in China, and its strong SOE’s (state-owned enterprises) can easily outbid any competitors and have easier access to funds than the privately held companies.

At the moment, foreign direct investment finds its barriers to access the local market through pre-establishment and post-establishment restrictions.
Regarding the pre-establishment restrictions, the foreign direct investment is, according with the Catalogue for the Guidance of Foreign Investment Industries, either allowed and encouraged or restricted and prohibited, and other hand after establishing often it’s not subjected to equal treatment.
For this, “China is making commitments to ensure fair treatment for EU companies so they can compete on a better level playing field in China, including in terms of disciplines for state owned enterprises, transparency of subsidies and rules against the forced transfer of technologies.”

What will be the impact of the CAI? First of all, this agreement will allow the access of EU to the world’s second biggest economy in favorable conditions that Beijing will exhort beyond the commitments that already exist under the World Trade Organization, eliminating equity caps, restrictions and joint venture requirements in keys areas such telecommunications, aviation and biotechnology, which will ultimately also allow European companies to access subsidies, to be protected by local laws and rule making, and speeding up their growth.
EU expects transparency, predictability and legal certainty of the investment environment and for this the agreement shall ensure that European companies in China have proper access to information affecting their businesses and the opportunity to comment on relevant laws and regulations.

For China, the agreement does not mean a significant greater access to the European market or protection that it already has but a geopolitical conquest, a diplomatic coup and a blow for the US, being China’s most significant agreement since the signature of Accession Protocol for WTO in 2001.
This agreement will consolidate China’s position in a strategic continent and eliminates the US attempt of segregating it from global trade, serving as an incubator to a future free-trade agreement similar to the one that EU has signed with Vietnam last year.
It will also be expectable that in a near future EU also makes the same demands it made with Vietnam regarding labour rights which will also be a chance for China to upgrade some institutions.
Nonetheless, this agreement shows that despite the deep ties with the US, the European Union wants to show itself as an independent player that it’s not willing to take sides in the US-China trade war, conserving the power to decide and to benefit from both belligerent parties at economic war, playing “both horses” strategy.

As for the US, on the eve of a new administration, still unclear on its position and approach of China, the news were received with perplexity and will not be improbable that Washington will try to adopt a strategy to regain its sphere of influence in Europe and shift the balance of the geopolitical conquest that Beijing is achivieng in Europe.

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