E.U. Puts Investment Deal with China On Hold as Beijing Refuses to Back Down on Sanctions

Members of the European Parliament voted overwhelmingly in favor of suspending talks on a landmark investment agreement with China, effectively putting ratification of the agreement on indefinite hold. The Comprehensive Agreement on Investment (CAI) was hailed by Beijing as a major diplomatic victory when it was signed in December 2020, but the rapid deterioration in E.U.-China relations following a tit-for-tat sanctions battle in March quickly extinguished enthusiasm for its ratification. Politico Europe’s Stuart Lau reported on the vote to pause ratification talks on Thursday:

The motion was passed by 599 MEPs, with 30 votes against and 58 abstentions, dealing a blow to the fate of the pact, officially known as the Comprehensive Agreement on Investment (CAI).

According to the motion, the Parliament took the position that “any consideration of the EU-China Comprehensive Agreement on Investment, as well as any discussion on ratification by the European Parliament, have justifiably been frozen because the Chinese sanctions are in place.”

It also demands that “China lift the sanctions before dealing with CAI, without prejudice to the final outcome of the CAI ratification process,” and says MEPs expect the European Commission “to consult with Parliament before taking any steps towards the conclusion and signature of the CAI.”

Beijing previously said it expected MEPs to “reflect deeply” and to ratify the deal as soon as possible. There are no signs from Beijing yet that it’s planning to remove the sanctions, which it has called “necessary, legitimate and just.” [Source]

European officials had been debating putting the CAI on ice earlier this month. On May 4, the E.U. trade commissioner announced a pause in efforts to ratify the trade deal, but that announcement was later walked back by an E.U. spokesperson. But MPs from across Europe have loudly voiced their opposition to the agreement, citing China’s human rights offenses and aggressive counter sanctions against European officials, diplomats, and academics. Bloomberg reported that Beijing has stood firm on their sanctions, even as it has become evident that they have become a key sticking point in the E.U.-China relationship:

China is standing firm on retaliatory sanctions that led Europe to freeze a landmark investment deal, in the latest sign that Beijing is willing to sacrifice economic opportunities to protect its “core” interests.

[…] “China’s decision to take countermeasures is a legitimate response to the EU’s unilateral sanctions and confrontation,” a spokesperson for China’s mission to the EU said. “The China-EU investment agreement is a balanced agreement that benefits both sides. It is not a gift given by one side to the other.”

[…] Wang Yiwei, director of Renmin University’s Center for European Studies and a former Chinese diplomat in Brussels, dismissed the European freeze as an “emotional response” and predicted the bloc would eventually return to the table. The retaliation had successfully deterred Europe from making more moves against China regarding Hong Kong and Taiwan, he said.

“The Chinese retaliation came as a surprise to the Europeans as they didn’t expect the escalation,” Wang said. “The EU needs some time to cool down their emotions to realize how significant the CAI is to them, because what’s been agreed — after Xi’s personal involvement — is something they have been dreaming of.” [Source]

One country within the bloc that has continued to reliably support Beijing is Hungary, and in particular Viktor Orban’s Fidesz . It has continued to support the CAI, while vetoing other E.U. measures to criticize China such as a fairly milquetoast bloc statement criticizing Beijing for cracking down on democracy in Hong Kong. South China Morning Post’s Finbarr Bermingham reported on opposition to the CAI pause from Hungary’s ruling party, despite overwhelming support from most of the rest of the European Parliament:

The motion gained the support of all the major parties in the European Parliament, including the European People’s Party, Socialists and Democrats, European Conservatives and Reformists, Renew Group and the Green Party – a sign of how Beijing’s sanctions helped unite the political spectrum.

“The Chinese side wants the CAI deal badly, but they miscalculated and now continue to underestimate the determination of the European Parliament to defend European interests and values,” said German MEP Reinhard Buetikofer, who was one of those targeted by Beijing.

[…] The EU’s efforts to introduce new actions on Hong Kong over Beijing’s crackdown on the city, for instance, have been stymied by Hungary’s power of veto for the past two months. [Source]

Amid the politicking over the future of the CAI deal, academics have waded into the debate about the merits of the agreement itself. In December 2020, European proponents hailed the deal as a boon for E.U. businesses, giving them increased market access in China, as well as a human rights victory, as it contained language that for the first time strengthened China’s commitment to observing international standards on forced labor. But academics have criticized the limited enforceability of many of the deal’s clauses. For the Observer Research Foundation (ORF), a policy think tank based in Delhi, Damian Wnukowski analyzed the political and economic merits of the CAI:

However, there are several provisions that, if genuinely implemented, could be beneficial for European companies, namely a prohibition on forced , more regarding subsidies (though only in services and not manufacturing, which is crucial from the EU’s perspective), and the broader definition of state-owned enterprise to embrace provincial entities. There could also be wider access to the Chinese market for EU businesses in such sectors as electric cars (but only for the biggest entities that can afford to invest more than €1 billion), digital consulting and cloud services, or health, as eight cities and Hainan Island are poised to be opened to foreign-owned clinics. On the other hand, CAI sustains wide access to the EU market for Chinese companies (though such instruments as the screening mechanism are still in place) and in some sectors, such as renewable , there are further concessions. Overall, the CAI can be perceived as a good result for China and not much of a success in terms of creating a level playing field between the sides.

Taking all this into account, the crucial issue concerning CAI is its limited effectiveness and enforceability. First, there is lack of an investment protection section. Without it, existing bilateral investment treaties between China and particular EU Member States will be used, which means a diversified level of protection. Both sides decided to continue talks for two more years to finalise the investment protection chapter, but there are no significant incentives to complete it (e.g., by making the CAI’s implementation dependent on that issue). Second, the dispute settlement system on a state-to-state level is incoherent, as provisions on sustainable development have a separate mechanism and can result only in recommendations. Thus, it does not guarantee comprehensive implementation of the agreement. Third, high-level consultations embraced in the CAI may prove beneficial but only if there is enough goodwill on China’s side.

Whether China can be trusted to really adjust to the legal framework of the CAI is problematic. This is connected with its record on adhering to international law, as well as the mixed effects of structural reforms (where the state plays a central role in the economy), or compliance with WTO dispute rulings, and violations of economic agreements, such as the free trade deal with Australia. Therefore, the timing and content of the CAI can be perceived as sub-optimal. In fact, increasing the Chinese Communist Party’s grip on the economy, which was visible in the case of the blocking of AntGroup’s IPO last year, might even increase the unpredictability of doing business in China. [Source]

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