Cooperation on investment: a new instrument for geopolitical competitiveness

Cooperation on investment: a new instrument for geopolitical competitiveness

 

18 March 2021

Marcell Horváth

On 30 December 2020, the European Union and China reached an understanding on an investment pact, which could enable the creation of China’s most significant investment promotion agreement ever concluded with a third party. Hammered out in the exceptional geopolitical moment of the change in US presidency, the significance of that deal lies in the fact that it can guide the EU’s efforts, both geopolitically and economically, towards achieving strategic autonomy and the possibility of competitive cooperation in Eurasia. The question is whether the EU is ready to take advantage of this rare opportunity and to enter the 21st-century competition.

On 30 December 2020, Chinese President Xi Jinping and leaders of the European Union reached an understanding on the key elements of the Comprehensive Agreement on Investment (CAI) after seven years of negotiations involving a total of 35 high-level rounds. However, the swift conclusion of the negotiations came as a major surprise amid the past years’ trade-war tensions and growing conflicts of interest regarding economic strategy.

Following ratification, the pact, which is intended by Brussels to take effect in 2022, could impact a huge proportion of global business transactions, with China being one of the EU’s largest investors and trading partners. According to the Commission’s calculation, Chinese foreign direct investment (FDI) has increased exponentially over the past 20 years, with Chinese investment worth a total of EUR 120 billion flowing into the EU market. IMF data for the end of 2019 show that 19% of China’s FDI went to EU Member States. This makes the EU China’s second largest investment target after the USA, on a similar scale. By contrast, EU investments in China have been more moderate. The partnership is also strong in the field of trade. The EU is China’s largest trading partner and since last year the opposite is also true: In 2020, EU–China trade outperformed the EU’s trade relations with the USA.

What does the Agreement on Investment mean? The starting point is sustainable development. The pact foresees an investor relationship that is based on values and takes into account the principles of sustainable development, while respecting the principle of transparency. Against this background, China has undertaken to comply with international environmental agreements in the relevant areas, with the summary objective of effectively implementing the Paris Agreement in Eurasia.

In addition to focusing on long-term sustainability, the main advantage of the agreement for the EU is that it provides access to the Chinese market of almost 1.4 billion consumers, and it does so with a more level playing field than before. Thus, on the one hand, the pact prohibits the forced transfer of technologies and, for the first time in history, it also regulates Chinese state-owned enterprises and sets transparent rules for their subsidies. On the other hand, in many industries, China is to lift the restrictions requiring the joint venture form that have been the norm to date and will introduce a regulated, transparent dispute settlement mechanism. In that context, China has undertaken to open up its manufacturing industry, which receives roughly one-half of the EU’s foreign direct investment. Similarly, China has committed to lifting the restrictions requiring the joint venture form in the financial sector in the fields of banking, securities trading, insurance and asset management. In addition, the way has also been cleared for EU investors in the Chinese sectors of logistics, business services and private healthcare services.

China’s generous gesture, one that it has never previously made to any of its partners, helped achieve the EU’s main objective of balancing out the asymmetry between the two parties and improving the terms of competition within the Chinese market. The agreement can be an important step forward for both global competition and the future of the EU’s industrial sectors, provided that EU leaders seize the historic moment.

For China, the significance of the pact lies in the fact that it can be used to attract additional European know-how, technology and capital to the country thanks to the removal of restrictions and to the improvement of the business environment, allowing European investments in China to flourish, which in turn facilitates economic and technological development in China. The pact offers advantages for Chinese investments targeting Europe mainly in the renewables market, and it is therefore expected to benefit Chinese investors in the fields of solar panels, wind power stations and electricity generation. Furthermore, the agreement may also enable production to be relocated to Europe in the form of joint-venture or greenfield investments, which carries the potential of significantly boosting the number of investments in Hungary. Nevertheless, the EU has taken care to ensure that “sensitive” areas such as public services, agriculture, fisheries and critical infrastructure remain unaffected, so the agreement will be without prejudice to either the rules on capital investment due diligence or 5G regulations.

For China, as the latest chapter of “reform and opening up”, the agreement can further strengthen connectivity in the Eurasian region as part of the Belt and Road project, considered to be of key importance, and can further increase the economic benefits by bringing about a sustainability (green) turnaround across Eurasia.

Despite the expected benefits, however, diplomacy will need to exert meaningful efforts on both the Chinese and European sides to ensure that cooperation is maintained. The Agreement on Investment was clearly concluded at an exceptional geopolitical moment aptly recognised by the parties. The “transitional” period brought about by the change in US presidency amid a great deal of confusion for the USA created an opportunity for China to counter the USA’s intention to isolate it internationally, which is expected to intensify under Biden’s presidency. It was also a good time for the EU to demonstrate its autonomous geopolitical significance.

In the autumn of 2020, China conducted its international relations very sensibly and with excellent diplomatic skills, and significantly promoted cooperation in Eurasia. Last November, it also sealed the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free trade agreement, with 15 states in the Asia-Pacific region. One month later, it reached an understanding with the EU on the most significant investment agreement ever concluded. In doing so, Beijing took strategic steps to prepare for the next phase of the US trade war and thus increase its resilience in the geopolitical sphere and thwart the US attempts to isolate it.

On the EU side, the agreement was primarily urged by Chancellor Angela Merkel, in her last year of office, supported by President Emmanuel Macron. As a legacy of Merkel’s 15-year governance, and that of the German EU Presidency, the Chancellor wanted to show that the EU can act as an independent player in the multipolar world order without needing the “consent” of the USA in the negotiations with China. Rethinking its role in the US–China race, the EU can be more competitive by pursuing a middle-way strategy, as compared to integration.

However, the long-standing tensions between the parties obviously remain relevant despite conclusion of the agreement. Much will depend on effective compliance with the agreement and the dispute resolution mechanism. Retaining ownership of companies in strategic sectors and strengthening the European technology sector are expected to remain a priority in Europe. Further difficulties may arise from the fact that the USA has since indicated its firm intention to join the leaders of EU Member States at the negotiating table to discuss matters concerning China going forward.

Overall, apart from securing the obvious economic benefits, with this agreement the European Union wanted to contribute to a rule-based trading system, to the integration of the Eurasian market and to the facilitation of trade flows. In turn, in the spirit of multilateral cooperation in Eurasia, Beijing will have the means to prevent the EU and the USA from jointly coordinating their policies on China and, therefore, from developing a united front against the Asian country. From a geopolitical perspective, the investment agreement and thus the opening up of the Chinese market to the EU can also be seen as a step towards cooperation in Eurasia, strengthening the region’s global competitiveness. In the long run, the recent deal could even pave the way for free trade negotiations between the parties. While the EU and China reached their understanding with great strategic sensitivity ahead of the inauguration of US President Joe Biden, clarifying the aspirations of the EU for “strategic autonomy” and those of China for cooperation in Eurasia, the question remains whether the EU will embark on the long silk road, which has stood the test of time.