European Parliament Votes to Freeze the EU-China Comprehensive Agreement on Investment

While the CAI has been suspended, it may still be ratified if geopolitical tensions get resolved. The ratification vote was originally scheduled for later in the year, around fall. Moreover, even without the agreement, China surpassed the US to become the EU’s largest trade partner in 2020. So, while the CAI may boost trade and investment, it is not a precondition to do so.

What has happened?

The European Parliament has voted to suspend ratification of an investment deal with China, as relations between the two sides deteriorate.

On May 20, 2021, the European Parliament passed a resolution to freeze ratification of the EU-China Comprehensive Agreement on Investment (CAI) in response to Chinese sanctions on European human rights advocates. The vote passed with 599 votes in favor, 30 votes against, and 58 abstentions.

If passed, the agreement would make it easier for European and Chinese companies to conduct business with one another.

Worsening relations between the EU and China, however, have called the future of the CAI – which has been over seven years in the making – into question.

What is the EU-China Comprehensive Agreement on Investment?

The CAI was set to facilitate trade and investment between European and Chinese companies within each other’s jurisdictions.

For European businesses, the agreement would go farther than most of China’s deals with other countries to open up the country’s markets to foreign investment.

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Most notably, it was to relax restrictions in some areas that require European businesses to form joint ventures with Chinese partners and to share technology.

Under the CAI, European businesses would gain greater access to China’s auto, healthcare, cloud computing industries, finance, and air and maritime transport industries, among others. Additionally, under the CAI, China would commit to more stringent labor and sustainability standards.

The CAI also included level-playing field commitments to prevent backsliding on agreements, as well as a dispute resolution mechanism similar to the one included in the US-China Phase One Trade Deal.

China, for its part, wants to secure its economic presence in the EU in the context of ongoing US-China trade tariffs and disputes, and a need to solidify alternative markets.

Detailed analysis of the CAI’s content can be found here.

What led to the freezing of the deal?

On December 30, 2020, EU and Chinese leaders agreed on the content of the CAI, after first beginning negotiations in 2014. The agreement came together with late momentum after talks hit a snag in June 2020.

The agreement, however, required ratification from the European Parliament before taking effect. Some members of the European Parliament opposed a deal with China amid alleged human rights allegations in the country and growing political disputes with the EU and its allies.

Additionally, US President Joe Biden’s administration – which had not yet entered office when EU and Chinese leaders agreed to the CAI – signaled its unease with the deal, calling for consultations on it before proceeding further.

In March 2021, the EU joined the US, UK, and Canada in placing sanctions on Chinese officials involved in alleged human rights violations in the region of Xinjiang.

In response, the Chinese government responded by placing sanctions on a number of think tanks, scholars, and European Parliament politicians. This included every member of the European Parliament’s Subcommittee on Human Rights, its Political and Security Committee, five other members of parliament, and 27 EU ambassadors.

Following these sanctions, the European Parliament passed the resolution freezing the ratification of the agreement on May 20. Additionally, the resolution called for greater unity between EU member states on tackling other China-related issues, such as cybersecurity threats.

What are the implications for trade and investment?

The European Parliament’s resolution to freeze ratification of the CAI does not mean the agreement is dead.

The resolution signalled the European Parliament’s intent, but was not a vote on the CAI’s ratification, which was expected to be held in the autumn of 2021. Should China remove sanctions on the EU officials before then, it is possible that the European Parliament will vote to ratify the CAI.

Further, Germany has been a leading proponent of the deal on the EU side as Chancellor Angela Merkel seeks to support the country’s auto industry and other export-driven industries. Given Germany’s influence in the EU, continued advocacy from Merkel means that eventual ratification of the CAI cannot be ruled out.

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In April, after China had already placed sanctions on the EU officials, Merkel still pushed for the deal, calling it a “cornerstone” of economic relations. Later, in May, Merkel said, “Despite all the difficulties that will surely arise with the ratification, it is a very important undertaking.”

Nevertheless, regardless of whether or not the CAI is adopted, skeptics argue that the agreement is not as impactful as its advocates suggest.

Some of the commitments included by the CAI already exist elsewhere. For example, China’s Foreign Investment Law already explicitly bans forced technology transfers. Similarly, China’s labor and sustainability commitments in the CAI are non-binding. Here, the concern for foreign businesses is not the lack of a written commitment, but their inadequate implementation.

Further, many individual EU member states already have bilateral agreements with China that cover similar areas. Of the 27 EU member states, Ireland is the only one that lacks a bilateral investment agreement with China.

Even without the CAI, last year, China surpassed the US to become the EU’s largest trade partner, with the two sides registering US$709 billion in trade in 2020. While the CAI may boost trade and investment, it is not a precondition to do so.

Political disputes pose risks to European businesses operating in China, but economic ties will likely continue to deepen regardless of the CAI’s fate.

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