China Economics Europe & Eurasia Politics & Government

China-EU Investment Deal: A Return to Bipolarity?

Many observers warn that the CAI may be China’s way of undermining US-EU relations and preventing the Biden administration from crafting a transatlantic China strategy.

After 35 rounds of talks that first started in January 2014, the leaders of the European Union and China have concluded in principle the negotiations for an investment deal that has been seven years in the making. The European Commission announced the Comprehensive Agreement on Investment (CAI) on December 30th, which will replace the 25 bilateral investment treaties that China signed with individual EU countries before 2009. However, the trade agreement goes beyond the existing treaties and aims to reinvigorate China-EU cooperation by broadening access to markets and creating a uniform legal framework for Chinese and European investors. Both sides are currently working to finalize the text of the deal before it is submitted for approval by the EU Council and the European Parliament.

The CAI establishes a foreign direct investment (FDI) management system like those in EU agreements with other major economies that support equal conditions for domestic and foreign investors. The deal covers numerous vital issues like the transfer of technology, transparency of subsidies, state-owned enterprises, and equal access to standard-setting bodies for investors. However, whether the CAI will reach its goal of achieving a genuine level playing field for European workers and businesses is highly debatable.

At first glance, the deal may seem extremely one-sided, as China appears to be making a number of concessions that will benefit European firms while the EU makes few beyond the status quo. However, the European market has been fully open to foreign investment for years, while the same cannot be said for China. Critics have warned that there exists a veneer of equality in the deal that hides an asymmetric investment environment that benefits China. Some have condemned it as a win for China on the geopolitical level, and a loss for advocates of human rights and labor rights in the country.

Additionally, many observers warn that the CAI may be China’s way of undermining US-EU relations and preventing the Biden administration from crafting a transatlantic China strategy. Key political players in the US, including Biden’s national security advisor Jake Sullivan, have expressed concern about the trade agreement. However, many in the EU may also view it as a display of the EU’s independence from the US on its China policy. Ultimately, it will be up to the discretion of EU member states and the European Parliament to debate whether the deal will be beneficial for their union.

The CAI is indicative of the deepening of bilateral economic relations between China and the EU over the last 20 years. China currently ranks as the EU’s second-largest trading partner behind the US, with two-way goods commerce valued at over €1 billion a day on average. According to European Commission data, the cumulative FDI flows from China into the EU over the past two decades have amounted to almost €120 billion, and the cumulative FDI flows from the EU to China were even higher, at more than €140 billion.

All of this is reminiscent of what Yan Xuetong, a distinguished Professor and Dean of the Institute of International Relations at Tsinghua University, wrote in a Foreign Affairs piece in 2019. Yan envisaged the return of bipolarity “with China playing the role of the junior superpower.” However, he predicted US-Chinese bipolarity to be more focused on consumer markets and technological advantages rather than being ideologically-driven. Instead of well-defined military-economic blocs characteristic of the Cold War, “most states will adopt a two-track foreign policy, siding with the United States on some issues and China on others.”

Beijing’s strategy to enhance economic power over the past decade has been to finance infrastructure in developing countries with the goal of creating foreign governments that are dependent on Chinese aid and thus compliant. These efforts are embodied in the Belt and Road Initiative (BRI), China’s ambitious worldwide infrastructure and connectivity program. What makes Chinese aid both attractive and potentially dangerous to foreign governments is that it differs from the prevailing standards of official development assistance defined by the Organisation for Economic Co-operation and Development (OECD). Xi has often touted this dimension to Chinese aid, including at the 2018 Forum on China-Africa Cooperation in Beijing when he emphasized that aid to Africa will come with “no attachment of political strings”.

China is not a member of OECD and thus does not adhere to its definition or practice on foreign aid. The lack of requirements for market reforms or reducing corruption makes the Chinese approach attractive to governments that are unable or unwilling to fulfill political conditions or wish to retain greater autonomy over their economies. They should be wary, however, of China’s proclaimed commitment to national sovereignty in international law. Foreign governments may soon discover that what China demands in return is allegiance on several contentious issues, such as the nonrecognition of Taiwan as part of Beijing’s “One-China” policy.

China’s entrepreneurialism in the economic realm has allowed Beijing to provoke the US without triggering a concerted response. Writing about the BRI, analyst Nadège Rolland argued that it is “intended to enable China to better use its growing economic clout to achieve its ultimate political aims without provoking a countervailing response or a military conflict.” While Beijing has no intention to establish a far-flung global military presence like that of the US, its strategy has been to intensify its economic, and thereby political, influence over dependent states through economic projects and agreements.

Prior to the finalization of the investment deal, some European politicians expressed concerns about Beijing’s human rights record, specifically its crackdown in Hong Kong and its use of forced labor in Xinjiang. The European Parliament’s demands for the deal to include a clause binding China to international agreements on modern slavery were ignored by the Chinese government. Instead, Beijing makes a non-binding commitment “to make continued and sustained efforts” to ratify international conventions on banning forced labor. Reinhard Bütikofer, chair of the European Parliament’s China delegation, said, “We demanded practical steps and guarantees and the deal is just full of hot air.”

China has promised to ban forced labor under the investment deal, but many are already speculating whether this is simply an empty promise. If so, does this mean that the EU is prepared to abandon its proclaimed commitment to human rights and put its economic interests first? Members of the European Parliament along with dozens of civil rights groups have sent an appeal to the European Commission, which said the CAI “sends a signal that the European Union will push for closer cooperation” with Beijing “regardless of the scale and severity of human rights abuses carried out by the Chinese Communist Party.”

The post-Cold War interregnum of US hegemony is over, and perhaps the CAI is a testament to the emergence of a new world order defined by an uneasy peace between two superpowers. In light of the CAI and other trade deals like the Regional Comprehensive Economic Partnership, will China’s innovative use of economic power actualize Yan’s prediction? The world awaits to see whether the European Parliament will ratify the CAI and its implications for both US-EU and US-China relations. Despite the outcome, the principle of the deal’s agreement in itself suggests the inklings of a bipolar world order as China continues to rise on the world stage.

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By Shuyi Li

Shuyi Li is a third year Political Science and Economics major at the University of California, Los Angeles. Growing up in three different countries fueled her passion for international relations, especially US-China relations.

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