The EU-China Comprehensive Agreement on Investment: a tale of sound and fury

On December 30, the European Commission announced that the European Union and China had reached an agreement in principle on investment, nearly seven years after negotiations began. This was met with shock, if not fury— and that was even before the agreement was published. Those hoping for reinvigorated transatlantic relations between the EU and the USA following Joe Biden’s inauguration were disappointed. Biden’s National Security Advisor pleaded that ‘[t]he Biden-Harris administration would welcome early consultations with our European partners on our common concerns about China’s economic practices’. Then there were those fearing that an investment agreement with China would legitimise its human rights record, including its systematic repression of Uighurs and its crackdown on Hong Kong democracy. Members of the European Parliament promptly criticised the deal and hinted that further concessions from China will be needed if it is to be trusted.

Following the publication of the text of the EU-China Comprehensive Agreement on Investment (CAI) on January 22, however, such reactions can be seen in a different light. Firstly, in economic terms, the CAI does not seem to facilitate a substantially closer investment partnership between the EU and China, as it mainly consolidates the parties’ existing commitments under the World Trade Organisation (WTO). Even so, it seeks to address EU Member States’ sustainability concerns by adding pressure on China to comply with International Labour Organisation (ILO) Conventions. While the CAI heralds the EU’s emerging so-called strategic autonomy, generally perceived as a claim to greater independence from strategic and policy choices made by the USA, this does not amount to a fundamental shift in the EU’s policy on China. The CAI will operate in parallel to robust foreign investment screening, to address security concerns, and a new framework for sanctions in response to human rights violations.

Secondly, China’s commitment to continue negotiations on a fully-fledged investment protection regime, including reformed investor-state dispute settlement (ISDS), showcases its increasing desire to shape multilateralism, rather than merely be shaped by it. The degree to which the EU will be able to enforce this commitment in a manner which complies with its own values may be the benchmark against which the impact of the CAI will be assessed in the future.

A brief overview of the CAI

A brief overview of the substantive terms of the CAI seems necessary. The CAI largely builds on existing obligations under WTO law, namely on the prohibition of quantitative restrictions, monopolies and quotas, whereas it also seeks to ban forced technology transfer. Article 4 Section II requires that EU investors be granted equal market access to Chinese investors. A most favoured nation treatment clause provides that EU investors will not be treated by China less favourably than other foreign investors, and vice versa (Article 5 Section II). The EU has also secured institutional concessions, requiring that parties ‘shall ensure that any regulatory body […] acts impartially […] in a consistent and non-discriminatory manner’ (Article 3ter Section II). Such terms are not dissimilar to the Phase One Trade Agreement already concluded between the USA and China in 2020.

Complementing the EU’s White Paper on Foreign Subsidies, the CAI also includes stronger transparency safeguards regarding the provision of subsidies (Article 8 Section III). Moreover, in Section IV, there is a set of articles reasserting the parties’ existing ILO obligations and adding pressure on China to adopt ILO Conventions on forced labour it has so far refused to ratify. Due to the perceived ‘soft’ nature of such sustainability commitments, their effectiveness has been questioned. Nonetheless, the enforcement mechanisms established by the CAI do have the capacity to ensure that investment sustainability clauses do not remain purely aspirational. Firstly, it is envisaged that an independent Panel of Experts can be called upon to examine particular matters. Secondly, state-to-state arbitration, similar to what has been agreed under the EU-UK Trade and Cooperation Agreement, is also available.

Both mechanisms may ‘harden’ the ‘soft’ sustainability commitments undertaken by China, and political scrutiny could focus on the effectiveness of the EU’s enforcement actions. The CAI also increases the importance of the EU’s recently-appointed Chief Trade Enforcement Officer, who would be tasked with ensuring that non-enforcement on behalf of China, particularly when undermining the EU’s commitment to sustainability and human rights, does not go unchecked. To this end, it seems notable that the CAI creates a permanent forum to streamline discussions on the level playing field, human rights violations and measures to counter the climate emergency. Not to be disregarded, it also entrenches the current level of market access into China in international law.

The CAI and EU strategic autonomy

In spite of some novelties, then, particularly on the enforcement of sustainability commitments, the CAI does not seem to be ushering the sweeping investment liberalisation which could explain the furious responses it provoked. Nevertheless, the mere fact that the EU pushed for an investment agreement with China notwithstanding American objections seems to constitute the most overt manifestation of the EU’s strategic autonomy. This is not only owed to shifting political dynamics, but also represents an institutional response in light of the twin disruption caused by the pandemic and the previous US administration. Given these challenges, the CAI would appear to be the confirmation of a paradigm shift in EU trade and investment policy, towards ‘a more assertive approach to the defence of European interest and promoting its values’.

However, the CAI does not seem to validate fears that the EU, in pursuit of its strategic autonomy, has sided with China at the expense of its own values. In 2019, the Commission famously characterised China as ‘a cooperation partner […], an economic competitor […], and a systemic rival’. In this sense, the CAI is merely ‘one building block’ of the EU’s overall multifaceted policy vis-à-vis China. Noting that the CAI does not, on its own, sufficiently address Member States’ security or human rights concerns is not in fact a criticism of the EU’s ability to engage with China in a values-conscious manner. Rather, it reveals the EU’s realisation of the limitations of using its trade and investment agenda in lieu of a substantial foreign and defence policy.

Therefore, the EU, taking into account security concerns, has introduced a Foreign Direct Investment (FDI) screening mechanism, which aims at protecting critical assets and infrastructure from being acquired by foreign state-controlled companies. As already mentioned, the Commission is also pushing for greater scrutiny over foreign subsidies within its single market. Moreover, the EU recently adopted a European Magnitsky Law establishing a global human rights sanctions regime which allows it to target human rights abusers including China. It not only represents a tangible mechanism for the enforcement of human rights, but also, by virtue of its American inspiration, illustrates the potential of the transatlantic partnership in spite of the CAI.

Moreover, beyond its function as a tool of EU external economic policy, the CAI also has an important EU internal dimension. It is seen by the Commission as the first step towards ‘modernis[ing] and replac[ing]’ the existing Bilateral Investment Treaties between some Member States and China. Arguably, objecting to the CAI in principle implicitly expresses a preference in favour of a fragmented landscape within the EU. Working towards a single rulebook for all Member States when it comes to investment relations with China would inhibit the latter’s ‘divide and rule’ approach, to which the EU remains vulnerable.

The CAI, investment arbitration and shaping multilateralism

The CAI also demonstrates that China increasingly seeks to engage with, and thus shape, multilateralism, as opposed to merely be shaped by it. In Article 3 Section VI the parties commit to continuing ‘on the basis of the progress already made’ negotiations on an investment protection regime, including investment dispute settlement; they ‘shall work towards […] state of the art’ investment dispute settlement provisions. This seems to refer to a reformed, rather than traditional, ISDS mechanism, which includes an Appellate Tribunal, like the one established by the EU-Canada Comprehensive Economic and Trade Agreement (CETA). In doing so, the parties will be ‘taking into account’ the talks under the United Nations Commission on International Trade Law (UNCITRAL), where the EU, among others, is pushing for the creation of a Multilateral Investment Court. EU and China ‘shall endeavour’ to reach such an agreement ‘within 2 years of the signature of [the CAI]’.

Negotiations under the UNCITRAL on the structural reform of ISDS are continuing despite the pandemic. With the CAI, China has committed to an important role in shaping the next phase of international investment law, wanting to avoid having to join a multilateral system whose rules it did not influence, like it did with the WTO in 2001. Although the EU deserves credit for its drive to reach a sustainable multilateral solution in the long-term, this is indeed not sufficient. Its success will ultimately be determined by the substantive reforms which may be agreed; for instance, on the extent to which human rights considerations will be integrated within investment arbitration.

Given a deadline in two years from the agreement’s signing, pressure would seem to be mounting on those resisting efforts to reform ISDS. So far, this includes President Biden as well as some Member States and parts of civil society within the EU. Should the CAI commitments for negotiations materialise into a fully-fledged investment protection regime, the global debate around ISDS reform will be revitalised. Those altogether resisting to participate in it may find their stance to be untenable.

Tomorrow, and tomorrow, and tomorrow

The immediate and passionate criticism with which the mere announcement of the CAI was met was partly justified due to its timing, as it was feared to have undermined any post-Trump transatlantic enthusiasm. To paraphrase William Shakespeare’s Macbeth upon learning that Lady Macbeth has died just as he was due to go to battle— They should have signed hereafter; There would have been a time for such a word.

Still, the CAI’s substantive provisions do not, on their own, seem sufficient to foster a radically closer economic relationship between the EU and China. Concerns regarding the EU undermining its internal security or commitments to human rights appear to underestimate the broader network of EU policies which have only recently been developed: these seek to scrutinise FDI and foreign subsidies in the single market, and aspire to a more effective enforcement of human rights around the world. Within the CAI, commitments on sustainable investment are coupled with expert-driven oversight and state-to-state arbitration, although this will depend on the EU’s enforcement practices should the agreement be ratified.

These substantive, values-based concerns regarding the CAI, however, are to be distinguished from the more purely geopolitical objections regarding the integrity of the transatlantic partnership. As for the latter, Macbeth would perhaps admit that this is a tale full of sound and fury, signifying nothing— nothing, that is, other than an aversion to EU strategic autonomy itself.