As 2020 drew to a close, leaders from the EU and China confirmed that after nearly seven years of negotiations, they had clinched an agreement-in-principle on investment. In addition to its significance for international investment governance and geopolitics, this new Comprehensive Agreement on Investment (CAI) has also been watched closely by the trade community, who have looked for signals of what it could mean for bilateral trade ties.

In the early years of the CAI’s negotiations, some top trade officials suggested that the outcome, if an ambitious deal was reached, could potentially set the stage for the negotiation of an EU-China free trade agreement (FTA). The two economic powers are among the four largest traders in the world and trade heavily with each other, with European Commission statistics placing bilateral trade at EUR 1 billion daily.

Given their close economic ties, the EU and China have long sought to deepen their cooperation, especially in recent years, including through the establishment of high-level forums on trade and economic issues. However, they have also engaged in fraught disagreements and debates on myriad subjects, including renewable energy trade, rare earths extraction, Beijing’s push to be treated as a market economy in trade remedy investigations, and China’s dominance on the global steel market. The European Court of Auditors has said that it would like to better understand current Chinese investments in the EU and see EU member States work more cohesively on the issue, as part of a deeper examination of Beijing’s state-driven investment strategy.

In recent years, some of these tensions have abated. Examples include the establishment of the Global Forum on Steel Excess Capacity at the 2016 Group of 20 (G20) Summit in Hangzhou, China, and the removal of the EU’s anti-dumping and countervailing duty measures on imported Chinese solar panels in 2018. Also in 2018, the sides established a bilateral working group at the level of vice ministers on World Trade Organization (WTO) reform, even as the EU is also part of a separate trilateral discussion with the US and Japan that has proposed the negotiation of several WTO provisions related to industrial subsidies, including in relation to state enterprises, – measures seen as targeting China. Other topics raised in that trilateral forum include the need to address concerns over forced technology transfer at the WTO.

Some of these issues were raised by EU leaders at the summit where the CAI announcement was made, according to a press statement from the European Commission. “Looking beyond the CAI negotiations, the EU reiterated its expectation that China will engage in negotiations on industrial subsidies in the WTO,” the statement says.

“The EU leaders also emphasized the need to improve market access for EU traders in sectors such as agri-food and digital, and to address overcapacity in traditional sectors such as steel and aluminum as well as in high tech,” the EU document notes.

Tensions over steel have lately been on the rise, due partly to the impact of the COVID-19 pandemic, as well as Beijing’s decision to disengage from the Global Forum on Excess Steel Capacity in 2019. “Market imbalances are now growing, with steel production continuing to expand rapidly, notably in China, despite the severe demand downturn,” said a joint ministerial statement by the EU and 28 other countries in October 2020.

Investment deal text: GATS+ commitments, language on forced tech transfers

Among the developments listed in the CAI agreement-in-principle is language that would aim to prevent forced technology transfers, which was the subject of a WTO dispute between the two sides that was launched over two years ago.

Many EU businesses have long complained that establishing joint ventures or otherwise establishing themselves to do business in China meant agreeing to onerous contractual terms, often involving the transfer of intellectual property, that domestic companies do not face. The EU consultations request that launched the dispute says that “[t]he Chinese measures at issue appear to: (i) discriminate against foreign holders of intellectual property rights, and (ii) restrict the foreign right holders’ ability to protect certain intellectual property rights in China, contrary to China’s WTO obligations.”

The EU-China dispute has not advanced past the consultations phase, which is the first stage of any WTO case, and Beijing’s national investment legislation from 2019 includes an explicit prohibition of mandatory technology transfers.

The CAI agreement-in-principle also describes a “positive list” approach for market access, meaning that only those sectors included in the CAI schedules are subject to new commitments. On most-favored nation and national treatment, the CAI will use a negative list approach on a set of annexes, meaning that all sectors are covered unless specifically excluded. Further details on what those annexes cover are not currently named in the text.

The text published by the EU notes that China has agreed to go beyond what it has currently agreed to under the WTO’s General Agreement on Trade in Services (GATS) in several areas. These so-called GATS+ commitments would apply to sectors ranging from financial services to environmental services, among others. The document also flags “comprehensive commitments in the manufacturing sector” by China, while noting that commitments are less extensive in some other sectors, namely agriculture, fishing, mining, and energy.

The agreement-in-principle also describes a slate of sustainability provisions, including “commitments to effectively implement the Multilateral Environmental Agreements – including the UN Framework Convention on Climate Change and the Paris Agreement” and “commitments not to lower the standards of labor and environmental protection to protect investment.” Also listed are several commitments related to the implementation and/or ratification, as relevant, of the International Labour Organization’s (ILO) Conventions, among other provisions.

The weeks since the CAI announcement have seen intensified debate over the accord’s merits and limitations, including whether the accord is sufficiently ambitious on areas such as labor rights and human rights. The final text is not yet complete, and the timeframe for concluding technical discussions and a subsequent “legal scrub” had not been announced at press time, though the EU has said that related talks on investment protection and investor-state dispute settlement should conclude within two years after the CAI’s signature.

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By Sofía Baliño, Communications and Editorial Manager, Economic Law and Policy, IISD