New E.U.-China Investment Deal Drives Wedge Between U.S. and Allies

A newly signed investment deal between China and the European Union has drawn heavy condemnation from critics, and threatens to complicate efforts by the incoming Biden administration to establish a common position on China between the U.S. and its allies. Quickly signed in the final days of 2020, the Comprehensive Agreement on Investment (CAI) grants each side’s companies greater market access to the other’s territories, and would loosen a requirement that European businesses operate through joint ventures with Chinese partners and technology sharing requirements. The New York Times’ Jack Ewing and Steven Lee Myers reported on the details of the agreement:

The agreement would also open up China to European banks and contains provisions intended to curtail secret government subsidies. Foreign companies often complain that the Chinese government secretly subsidizes domestic firms to give them a competitive advantage.

The agreement will “significantly improve the competitive environment for European companies in China,” Hildegard Müller, the president of the German Association of the Auto Industry, said in a statement before the announcement. “It will provide new impetus for a global, rules-based framework for trade and investment.”

[…] European officials said a breakthrough came in mid-December when China, in a significant concession, agreed to make a stronger commitment to observe international standards on forced labor. China also agreed to step up its efforts to fight climate change. [Source]

But the investment agreement has been met with fierce criticism from human rights advocates and politicians in the United States. Amid widespread evidence that China is using forced labor in Xinjiang, including new revelations at the end of December 2020 that Xinjiang authorities have constructed massive factories alongside detention camps, human rights advocates say that China’s commitment in the CAI —promising that China will make “continued and sustained efforts” to ratify two conventions on forced labor—is far too weak for the E.U. to expect any improvement.

As Tom Mitchell and Katrina Manson reported for the Financial Times, even Chinese experts expressed little faith that the CAI would compel China to change its labor policies:

“On labour it’s impossible for China to agree,” said Shi Yinhong, an international relations professor at Renmin University in Beijing and an adviser to the State Council, China’s cabinet. “Can you imagine China with independent labour unions? Forced labour also relates to Xinjiang, so that’s another ‘no’ for China.” [Source]

In an opinion piece for the FT, Gideon Rachman pointed to Beijing’s extensive history of failing to live up to written commitments as reason for the E.U. to seriously doubt Beijing’s sincerity regarding its supposed concession on forced labor:

These EU arguments sound tough-minded. But, in fact, they are naive. It is naive to believe that China will respect the agreement it has signed. It is naive to ignore the geopolitical implications of doing a deal with China right now. And it is naive to think that the darkening political climate in Beijing will never affect life in Brussels or Berlin.

The EU says that this deal will “discipline the behaviour” of China’s state-owned enterprises, which will now be required “to act in accordance with commercial considerations”. But China made very similar commitments when it joined the World Trade Organization in 2001. Pledges to rein in state subsidies made 20 years ago are now being offered up again as fresh concessions. Beijing’s promise to “work towards” enforcing international conventions on labour standards are also laughably weak. […]

Over the past year, China has repeatedly demonstrated its willingness to ignore treaty commitments. Its new national security law violates an agreement with Britain that guaranteed the autonomy of Hong Kong. China has also imposed tariffs on Australian goods in violation of the China-Australia free trade agreement. [Source]

Writing in a newsletter for the German Marshall Fund’s Asia Program, Noah Barkin wrote that the deal revealed an enduring willingness in European capitals to trust Beijing’s word, and at the same time, a loss of faith in Washington as a reliable ally:

Second, the deal shows that European capitals still see value in Chinese promises, despite evidence in recent years—Hong Kong, the South China Sea, Xi in Davos—that they are often tactical and empty. This belief is what allows the EU to hail China’s language on SOEs, subsidies and forced labor (“continued and sustained efforts”!) as victories. In Washington, the days of trusting Beijing to stick to the rules, and deliver on its promises, are long gone. Third, after four years of Trump, the deal is a clear signal that the EU is embracing “strategic autonomy.” Europe won’t hesitate to chart its own path—even if it ruffles American feathers. As a former senior Obama official and current Biden adviser told me presciently back in 2019: “Our allies have been traumatized by Trump and we will be hearing about him for a long time. They won’t be saying: ‘Glad to have you back, now let’s get down to business.’”

[…] My expectation is that 2021 will be a lost year for EU-U.S. cooperation on China, as Europe finalizes its investment deal with Beijing and the Biden administration is consumed by daunting domestic challenges. Some EU officials are saying that one of the reasons for going ahead with the CAI despite the looming transition in Washington was that European capitals expect the Biden team to take the better part of a year to formulate its own China strategy. There was not much appetite for sitting tight while that process unfolded. Another reason not to expect much in 2021 is Germany. With a federal election looming in September and six state elections spread out over the course of the year, Berlin will be more inward-looking than ever. This is not a recipe for big leaps forward in the West’s strategy towards China. [Source]

But trust in Beijing among the E.U.’s member states varies. Analysts have pointed to Germany, and in particular, Chancellor Angela Merkel, as a driving force behind the CAI. The Financial Times’ Erika Solomon and Guy Chazan reported on Merkel’s resistance to any notion of an E.U.-China “decoupling”, but also noted an emerging faction of more hawkish politicians waiting in the wings:

In such circumstances, Trump-style “decoupling” of economic links was never going to be an option for Germany. Ms Merkel has strongly resisted any tendency to see China as an adversary, in a replay of the old cold war between the west and the USSR. “If we have this continental drifting apart of our nations, populations, and public opinion and so forth, that is a concern,” says Jörg Wuttke, a German businessman and head of the EU Chamber of Commerce in China. “[This] is not the Soviet Union, where you basically had a common border but no other interest. We have no border with China, but we have huge global supply chains and economic interests.”

[…] The exchange shed light on how German rhetoric on China could change after the Bundestag election in September, when Ms Merkel bows out after 16 years as chancellor and a new governing coalition is formed.

“Regardless of who replaces Merkel, the next German government is likely to include the Greens, who are the most hawkish party in Germany on China and very focused on human rights issues,” says Mr Barkin. “If they’re in government, that is going to change the way the government sounds on China.” [Source]

The agreement is also poised to drive a wedge between the E.U. and the United States. The Trump administration seemed to have been caught by surprise, with outgoing deputy national security adviser issuing an irate statement.

The incoming Biden administration has said publicly that it is interested in establishing a united position on China with its allies, and incoming national security advisor Jake Sullivan had issued a statement earlier in December “welcoming early consultations with our European partners.” But European leaders hastily proceeded with a signing ceremony with Xi Jinping over video conference the following week. The Guardian’s Patrick Wintour reported on reactions to the signing in Washington:

Tom Wright, a senior fellow at Brookings thinktank in Washington, said: “It’s just mind-boggling that the EU would even consider rushing to agree an investment pact with Beijing weeks before Biden takes office after claiming for several years that they wanted transatlantic cooperation on China.” [Source]

For the CAI to enter into effect, it still must be ratified by members of the European Parliament, which is not expected to happen for some time. And that process may in itself be challenging, as its members have been outspoken in their concern about the human rights situation in Xinjiang. Given the challenges to ratification that remain, Julia Friedlander, writing for The National Interest has argued that the “furor” over the CAI may be overblown:

The EU and its member states will almost certainly need to act against pure commercial interest in the coming years to hold China accountable for human rights violations, military provocations, and industrial espionage. As a clear sign of this trajectory, Brussels is sharpening its regulatory toolbox through the passage of the EU Magnitsky sanctions authority, increasing scrutiny of incoming investments, and in competition policy, which will set standards for European market participants. So, in this context, let’s suppose that having a failed agreement on the books is also a negotiating tactic. Berlin has a record of setting a benchmark and then pointing to agreement not upheld when responding to an inconvenient truth, particularly an economic one. This allows for a less politicized response to Chinese infractions, provides insurance against asymmetric retaliation, and eschews the endless cycle of counteraccusations over who was the first offender. European governments can turn to their industry and say: look, we tried. [Source]


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