EU-China Investment Deal in Doubt, Businesses Caught in Geopolitical Crossfire

Fewer than three months after it was agreed upon, progress on the EU-China Comprehensive Agreement on Investments (“CAI”) has come to a halt as a result of tit-for-tat sanctions due to alleged human rights and forced labor issues in Xinjiang.

On March 23, the European Union Parliament, whose approval is mandatorily required for passing the CAI, cancelled its review meeting on the agreement. The Parliament’s second largest group, the center-left Progressive Alliance of Socialists and Democrats, made clear that the lifting of Chinese sanctions was a condition to the resumption of CAI talks.  

EU and China impose tit-for-tat sanctions 

On March 22, the EU sanctioned four Chinese individuals, including a top security director, for alleged human rights abuses in Xinjiang. While symbolic in nature, this is the first time in three decades that the EU has imposed sanctions against China. Similar steps were followed by US, UK, and Canada the same day.  

In retaliation, China sanctioned 10 EU citizens and four entities, for “gross interference” in its internal affairs and “maliciously spreading lies and false information”. According to the country’s foreign ministry, all relevant personnel and their family members will be prohibited from entering China, including Hong Kong and Macao, and companies and institutions affiliated will be restricted from engaging with China.  

Economic fallout for EU, China businesses will hurt more

The delay and uncertainty lingering around the EU-China CAI may pose an economic loss of business opportunities to both the EU and China. The deal had marked China’s success in securing closer trade and investment ties with the EU against the backdrop of escalated US-China rivalry, while for European companies, the CAI meant better access to the giant Chinese market, especially in the automotive sector and financial services. This was also a way for some European companies to mitigate the impact of the COVID-19 pandemic and reducing return on investments in other markets.  

Sanctions ploy escalate long-brewing tensions, companies caught in crossfire

The tit-for-tat sanctions and the halting of CAI talks may indicate that the EU is moving closer to a hardline US stance. Meanwhile, Russia and China, both accused of human rights violations, have condemned the US and EU for interfering in their internal affairs. Moscow and Beijing have jointly called for a UN Security Council summit to diffuse heightened “global political turbulence”.  

Following the escalated tensions from each side, leading Western apparel brands, including H&M, Nike, Adidas, and Burberry, are facing backlash and boycotts in China for the corporate statements they made last year about concerns over allegations around forced labor in Xinjiang. They either stated that the company did not source products from Xinjiang or the company would stop sourcing from the region. These statements resurfaced on Chinese social media and caused fury among Chinese consumers in the wake of a new round of Western sanctions, earlier this week, on Xinjiang officials.

H&M, the world’s second largest fashion brand, is particularly under turmoil due to the boycotts. In addition to criticism it received on social media, the company’s online stores have been removed by the leading Chinese e-commerce platforms, including Taobao, JD.com, and Pinduoduo and a number of major tech applications – map applications, ride-hailing, and food delivery – have ceased business relations with the company.  In China, where the population relies heavily on online services, losing access to these platforms means H&M is essentially getting cut off from its Chinese consumer base. Moreover, some H&M physical stores have also been impacted as the result of continuous uproar among local consumers, some of which are reportedly closing business. 

How to read the situation 

At this time, it is advisable that foreign companies wait and watch to see how developments unfold. The most practical position to take would be to refrain from adopting a direct stance amid geopolitical tensions as the winds of change here can be swift but consequences with regards to business decisions taken will be long-term.  

China, meanwhile, has stood firm on its ground, stating that ideological differences will not influence its focus on negotiating stronger trade and business relationships. 

Interestingly, the Chinese Foreign Minister Wang Yi is currently on a tour of the Middle East to strengthen economic and commercial partnerships with prominent resource-rich countries.  For China watchers, the timing of the tour will likely mean that Beijing is seeking international allies or even diplomatic neutrality among regional stakeholders. 

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