Trans-Pacific View | Diplomacy | Economy

What Does the EU-China Investment Deal Mean for US-EU Relations?

Insights from Alexander Vuving.

Mercy A. Kuo
What Does the EU-China Investment Deal Mean for US-EU Relations?
Credit: Flickr/ Friends of Europe

Diplomat author Mercy Kuo regularly engages subject-matter experts, policy practitioners and strategic thinkers across the globe for their diverse insights into U.S. Asia policy.  This conversation with Dr. Alexander Vuving  –  professor at the College of Security Studies at the Daniel K. Inouye Asia Pacific Center for Security Studies and editor of “Hindsight, Insight and Foresight: Thinking about Security in the Indo-Pacific “(APCSS 2020)  is the 254th inThe Trans-Pacific View Insight Series.”

Explain the key outcomes of the EU-China investment deal.

On the penultimate day of 2020, to fulfill a pledge they made in 2019, the top leaders of China and the European Union struck the deal, which is officially called the “Comprehensive Agreement on Investment” (CAI). It was seven years in the making with 35 rounds of negotiations, and will replace the 25 bilateral investment treaties that individual EU members signed with China before 2009. These 25 pacts secured some market access and reduced some legal uncertainty for European investors in China, but they largely accommodated China’s restrictive and highly discriminatory investment regime. Now the CAI makes a step further to broaden the access and tighten the legal framework for European investors in the Chinese market, but it falls far short of achieving a “genuine level playing field” for European businesses and workers and ensuring reciprocity in market access, a major objective set out by the European Parliament in its 2018 resolution. The CAI goes beyond market access and investment protection to include provisions on environment and labor rights protection, but with regard to forced labor and labor rights, what it has secured is just China’s promises.

In a nutshell, the CAI makes the playing field less unlevel but, at the same time, it affirms an asymmetric investment environment that strongly favors China. Seen in a larger picture, the small gains achieved by the CAI are not worth the opportunity loss it causes. By striking the deal now and not waiting a few more years, EU leaders failed to take advantage of favorable dynamics that would significantly strengthen the EU position vis-à-vis China. The EU’s size as the world’s largest market and its high level of technological development could be leveraged to obtain more reciprocity with China. The Biden transition team has indicated that the new US administration will end unilateralism and seek a united front with the EU, Japan, and other allies in its trade fight with China. These opportunities got lost with the agreement on December 30, 2020.

What is the impact on EU China strategy?

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The impact of the CAI on the EU China strategy is large and negative. It robs the EU of a huge leverage in dealing with China. The mindset it embodies locks the EU in an asymmetric game, the end outcome of which is “China defects and the EU cooperates.” The fate of the CAI will resemble those of the Sino-British pact on Hong Kong’s “one country, two systems” and the WTO admission of China. All these three pacts share the same strategic structure. Because China’s objective in these games is geopolitical gain while that of its counterpart is China’s cooperation, the games’ outcomes conform to China’s objective. I call this situation the “peace-lover’s dilemma” because its strategic structure ensures the dominance of the more aggressive player.

Identify the deal’s winners and losers.

In purely economic terms, the primary winners are big European firms in various manufacturing and services sectors such as the car, chemical, telecom, and healthcare industries, banking, and transportation. Major German and French companies that already have an entrenched position in China appear to be the largest beneficiaries.

At the geopolitical level, the biggest winner is China. Although the CAI still needs to be signed by the EU members and ratified by the European Parliament, a process that can hardly be concluded before 2022, the 2020 pledge has rescued China from its retreat in the trade war with the United States. Some EU leaders may think that they have gained an advantage in dealing with the United States, but this elusive advantage is more than offset by the entrenchment of the EU’s weaker position vis-à-vis China.

The obvious losers of the deal include those who advocate for human rights and labor rights in China as well as those who advocate for repairing and strengthening the U.S.-EU transatlantic relationship. At the geopolitical level, the United States is the biggest loser.

Assess Germany’s leadership in delivering the deal and implications for Brussels’ leveraging ratification of the deal in EU member states.   

Although the European Parliament made high-level transparency of the negotiations one of the preconditions for its consent, many member states “do not exactly know what is inside the deal,” as a Polish expert observed. Germany has leveraged its EU rotating presidency in 2020 and its influence in the EU bureaucracy  ̶  the European Commission’s president and director-general for trade are both Germans  ̶  to cut a deal that is most beneficial to some big German businesses. With the support of French President Emmanuel Macron, German Chancellor Angela Merkel was able to bulldoze the deal against some resistance within the EU. With this deal, other EU members gained a small free lunch, although they lost the opportunity to have a bigger dinner. But as they all are very hungry now, they would opt for the free lunch rather than labor to get the dinner.

How might the EU-China deal affect the incoming U.S. administration’s plans to bolster transatlantic relations and security alliances in managing China’s expanding influence across Europe?

The CAI reflects an effort by Chancellor Merkel and some other European leaders to assert the EU as a major pole in a multipolar world. A key message of the deal is “the EU is very independent from the United States.” But this assertion is applied to a wrong place. The EU and the U.S. share some common strategic and political goals: to achieve reciprocity and a level economic playing field with China, to halt China’s abuse of human rights, to discourage China’s assertiveness abroad. By cutting a separate deal with China, the EU has repeated the mistake of the Trump administration when it went solo in its trade war against China. The CAI will damage both the EU’s comparative advantage vis-à-vis China and its transatlantic alliance with the U.S.