The EU-China Business Association and the Flanders-China Chamber of Commerce organized a webinar entitled: “EU-China Investment Agreement – What’s in it for European Businesses?” on February 18, 2021.

During the webinar, Mr Carlo Pettinato, Head of Investment Policy Unit DG Trade at the EU Commission, and Mr. Joerg Wuttke, President of the EU Chamber of Commerce in China, discussed the benefits that the Comprehensive Agreement on Investment will bring for European businesses. The agreement grants EU investors a greater level of access to China’s market in existing sectors, as well as offering some significant new market openings. It will also level the playing field for European businesses in China.

The discussion was accompanied by an enlightening Q&A session, with closing remarks from Mr. Jochum Haakma, Chairman of the EU-China Business Association. The session was moderated by Gwenn Sonck, Executive Director, EU-China Business Association. 

Ms Gwenn Sonck welcomed the participants to the webinar on behalf of the EU-China Business Association. The webinar had the largest number of subscriptions at 400. She also welcomed the speakers and the Chairman of the EU-China Business Association Mr Jochum Haakma. 

The Comprehensive Agreement on Investment (CAI) is the most ambitious agreement China has ever concluded with a third country. At the end of last year, the European Union and China concluded the negotiations and reached an agreement in principle on the CAI. The agreement grants EU investors a great level of access to China’s markets and will level the playing field for European businesses in China. In 2020, global foreign direct investment collapsed by 42% due to the pandemic. China however inverted the trend and became the world’s top destination for FDI, overtaking the U.S. Foreign investments in China increased by 4% to USD163 billion. In 2020 China also became the EU’s biggest trading partner overtaking the U.S. According to the IMF, China’s growth will be 8.2% this year, which is the highest in 10 years. 

During these difficult times, the EU-China Business Association acts as an important bridge to promote the economic and trade relations between the EU and China. The EUCBA has 20 member associations all over Europe, representing more than 25,000 European and Chinese companies. 

Mr Carlo Pettinato, Head of the Investment Policy Unit of the Directorate General of Trade of the European Commission, focussed on the content of the agreement. The conclusion in principle of the negotiations was announced at the end of December after seven years of negotiations. In the last year and a half, there was a big acceleration in the pace of negotiations after the 2019 summit, where the two sides decided to try to conclude the agreement by the end of 2020. The conclusion in principle is not the end of the story. The agreement is not signed yet and has not yet come into force. Before we sign it, we need to conclude the legal review by us and with the Chinese side, the translation, and the cleaning up of the text, and the schedule to present it to the European Council and the Parliament. The signing and entering into force are expected to take place next year. 

The rough text of the agreement – not yet legally reviewed – was published on the EU DG Trade website and the list of market access commitments will soon be published as well in the next few weeks. What was the main objective of this agreement for us and have we achieved those objectives? There are two main objectives: improve the level of entry to the Chinese market for European investors and the conditions under which European companies in China operate. The three pillars of the agreement are:

• The market access conditions
• The level playing field: the fair competition conditions in the Chinese market
• Sustainable development: the values, responsible business conduct, ILO convention ratification etc. 

Our objectives have been achieved as best as possible. European companies operating or planning to operate in China had signaled throughout the years that there were and still are problems in China. They include very limited market opening and heavy restrictions and even prohibitions to enter certain industries or equity caps in joint ventures. The second category of obstacles were the indirect hurdles or discrimination in the application of certain conditions, unclear licensing procedures and other non-transparent administrative approvals to operate. The third was the lack of a competitive field. The state-owned enterprises enjoy different conditions than other operators and there is widespread use of subsidies in the Chinese economy. 

Why is this agreement important? We are already very interdependent. The agreement rebalances quite a bit the starting point. We have a European market which is very open to foreign investment while the Chinese market was not as free and open to foreign investment so there was a complete lack of comparable conditions of opening. The agreement addresses the question of regulatory environment, market access, transparency, predictability and legal certainty of investment conditions, apart from fair treatment and protection from discrimination. We should not ignore the political value for us of the sustainable development aspects. The agreement encourages responsible investment and promotes protection of environmental standards. China commits to fully implement the Paris Agreement on Climate Change and Environment, and as regards the protection of human rights and forced labor, China has committed to ratify the conventions of the International Labor Organization, including on forced labor. 

Talking about China, everybody is asking: what about implementation? The CAI provides for a robust state-to-state dispute settlement mechanism, including a special enforcement mechanism for disputes arising out of the sustainable development chapter. There is something more, which is not in any other agreement: regular political oversight including a rapid alert mechanism in case of substantial problems. This is very important and will be done at the level of Vice President of the EU Commission and from the Chinese side at the level of Vice Premier. This is not something that will happen in the course of a summit or once in a while, there is regular political oversight. 

The CAI will improve market access of European investors. It includes new market opportunities in crucial sectors, such as cloud services, financial services and health. Providing new openings is something that rarely happens in services and investment agreements, which is different from trade agreements. The binding of existing levels of opening is a guarantee that there will not be backtracking. There is of lot of binding of existing market opening of course, but also new market openings on the Chinese side. 

On financial services, China had already started the process of gradually liberalizing and will now bind it, including those further openings that had been granted to the U.S. under the so-called phase-1 deal. The sector is now largely open on an “erga omnes” basis, on an MFN basis, and binding this opening with the EU ensures that China will not be able to backtrack from these commitments in the future. Backtracking of certain openings has sometimes happened in China. Joint venture requirements and foreign equity caps have been removed from banking, trade in securities, and insurance – including re-insurance – as well as asset management. 

On health services, the joint venture requirements for private hospitals have been lifted in big cities – including Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen – above 10 million inhabitants and also some cities above 5 million inhabitants as well as Hainan island. On telecom and cloud services, China has agreed to lift the investment ban for cloud services, which will now be open for EU investors, although subject to a 50% equity cap. China commits to market access for computer services, bringing the level of commitment closer to the EU level, although some equity caps in online services remain. China will also include a technology neutrality clause which will ensure that equity caps imposed on value-added telecom services will not be applied to other services, such as financial services, logistics, medical services etc., if these are offered online. On biotech, China had previously never committed on research and development in biological resources. Now they will bind the existing measures. They are gradually opening the sector. China does not lift the restrictions, but the agreement binds any lifting of the restrictions in future. In the business services sector, joint venture requirements are removed in real estate services, rental and leasing services, repair and maintenance for transport, and advertising, market research, management consulting and translation services. 

Mr. Pettinato concluded with a few remarks on the level playing field pillar of the agreement. The CAI is the most ambitious that China has ever concluded, not only on the market access side, but also on issues that are key to level the playing field for investors. We have included rules against the forced transfer of technology, which is in the books in China but is not always what is happening on the ground. Now we have a means to monitor and enforce it. There will be a requirement that state-owned enterprises should act according to commercial considerations and should not discriminate against EU investors. Disciplining the behavior of SOEs is a huge issue. The third element of the level playing field are the transparency obligations for subsidies. There will be an obligation to publish subsidies and a consultation mechanism to share information on adverse effects. There is no prohibition of subsidies, but more transparency to understand the subsidies and in case of adverse effects there is a mechanism for consultations that allows us to use the dispute settlement mechanism. In order to bring enforcement you need evidence, which is difficult to get, also from our companies operating in China. 

Mr. Joerg Wuttke, Chairman of the European Union Chamber of Commerce in China, said that the organization has 1,700 members in nine cities in China and its foremost obligation is advocacy. The Chamber is not a trade promoter, substituting the national chambers, but is gathering information on where reform steps are lacking and coming up with suggestions. In last year’s position paper we came up with 430 pages of analysis in 35 working groups covering 900 cases. It is a big challenge to pinpoint the areas where China has to improve. Monitoring the gap between promise and delivery of the CAI will become a big chunk of our work. The Chamber is grateful to the European Commission to have finalized the CAI after seven years of negotiations. There has been a lot of talk about why not waiting to conclude the CAI, but there has to be an end to negotiations at one stage because there is a limit of what you can gain. In 2019 the EU Commission made it very clear that the deadline would be at the end of 2020. Be careful of not over-negotiating with China, they are not giving anything away free of charge. If you don’t conclude the deal, you may actually be worse off. 

Do not think that because it is China, they are not going to honor their commitments. According to the U.S. Embassy and AmCham, China basically met its commitments in the phase-1 deal on finance, insurance and other items. There are two camps in China. One really wants the domestic reforms to go on and they sometimes need an outside push. Don’t be too pessimistic about the pledges they made. In December, the U.S. was asking to wait to conclude the deal for the Biden administration to take office, and then get something better. If you offer me a deal, give me the parameters and tell me what is in there for me. Tell me how long I have to wait and what the deal is going to be like. Finally, how are we going to sit down and talk with the Chinese? The idea to wait for the U.S. to come up with common ground was ridiculous. The U.S. are our natural ally, and AmCham and the European Chamber’s papers are very identical, but we are not going to wait for the U.S. because we have our own agenda. 

The details of the CAI are very important to us because China is the market of the future. Over the next 10 years, 35% of global growth is in China, more than all the OECD countries put together. We cannot just let China do its own stuff, we have to engage. Now we have certainty in a couple of areas. In the case of the SOEs, we have something to legitimately track. The deal gives us a bit of certainty and leverage in case we are not happy with progress. 

The big unknown is whether the agreement will be ratified by the European Parliament. It partly depends on how we explain it to the parliamentarians. What is in there for us?  Does it creates jobs in Europe? I believe yes, better access translates into more activities in Europe for the Chinese market. The major stumbling block is human rights. Over the past years, China has put on a very ugly face. There is the national security law in Hong Kong, Xinjiang, the Taiwan issue, and the problems in the South China Sea. China is not really popular right now. According to Pew Research, China has moved from 50% to 60% positive in 2010 to 70% to 80% negative in Europe. It is difficult for our decision makers to stay positive on China. Over the last six weeks, Mr. Wuttke says he has been urging Chinese decision makers to understand what it takes to our decision makers to make the CAI happen and not to make it worse. With all the limitations, the CAI is still worth ratifying.

Q&A:

Mr. Jochum Haakma, Chairman, EU-China Business Association: Did any consultations take place with the U.S. or any other non-EU countries during the negotiations? Mr Pettinato: If you mean by consultation that we align our strategy and objectives, the answer is no. But we talk all the time to each other about what we are doing. We have been talking to many partners, including Japan, Australia and Korea. In joint committees one part of the agenda is an update on negotiations. Even before Trump we were already talking with the U.S. when they were negotiating an investment agreement. We have a lot of concerns that we share with the U.S. about certain Chinese practices that we eventually want to bring to the WTO. 

Is the CAI different from other investment agreements because it regulates both better market access and investment protection? The investment protection agreement has not been agreed upon yet, does this has to be completed in two years? Will they both be signed at the same time? Mr Pettinato: The big imbalance in the relationship as far as investment conditions are concerned was not on protection but on market access conditions and a level playing field, because 26 of the 27 EU member states are already protected by bilateral investment protection agreements. It was not the most urgent gap to fill. However, we should have a good investment protection agreement with China, replacing the old bilateral agreements. There are some differences with China on investment protection, in particular on dispute settlement. So we had to take a decision: continue to talk on the difficult issue of dispute settlement and put the whole agreement on hold, or do like we did with Japan, where we still had a disagreement on investment protection, but had an agreement on the rest and concluded the FTA. The agreement with China on investment protection will be on a separate track and will most probably not be signed at the same time as the CAI. We hope to sign the CAI next year, while investment protection will probably take a bit longer. 

Which conditions must be met before negotiations on the FTA with China can start? Mr. Pettinato: Let’s first conclude and implement the investment agreement, let’s bring some of the rules to the WTO, and see how China reacts to reforms of the WTO, before speaking about the FTA.

Do you expect resistance from EU member states in the approval phase and how to react? Mr Pettinato: I would be surprised if there are real problems. There already is political posturing, but that is part of the game. We have consulted the member states throughout the negotiations up to the highest level. The Commission would not have taken a step if we didn’t have the reassurance that the member states are supporting us. I don’t think the problem will be on the Council’s side, the problems are likely to be in the Parliament. It will be a challenge to get the Parliament to approve the agreement because of the human rights issue. It will not be enough for the Commission to go to the Parliament and say it is good for Europe to have this agreement done. It is up to the businesses to say that this is beneficial to our companies in China but also for their activities in Europe. What China does this year will be observed very closely as part of the ratification. 

Could you elaborate a bit more on the dispute settlement mechanism? Mr Pettinato: The dispute settlement in the CAI is the state-to-state dispute settlement. The authorities from the EU side engage with the authorities of the Chinese side, it is not the investors that take action against a government. This is not in the CAI because it is part of the investment protection element on which we disagree with China, because we want the investor court system and China is not there yet. 

Could you explain the most-favored nation element of the CAI, because the concessions China has agreed to will also be available to the U.S. and other WTO members? Mr Pettinato: Unlike trade, investment agreements are usually not applied on a preferential basis. You don’t open a sector only to one or another state, except in case of individual licenses. Everything agreed on investment in services, is automatically applied on an MFN basis to the whole WTO membership, because in the WTO there is a general agreement on the trade in services. The non-services sectors are not covered under WTO rules, so China has the obligation to apply the concessions to the EU, not to other WTO members. However, very often you apply them to all foreigners, although you are not obliged to. China could in theory backtrack against everybody, but not against European companies. 

To what extent will SMEs benefit from the agreement compared to large companies? Mr Pettinato: The big players have other means to pursue their interests. If anybody gains from clearer rules, transparency, better procedures and ways to have their interests defended, it are the small players. We hope that more small players will feel more confident to enter the Chinese market. Mr Wuttke: SMEs are already quite active here and have been quite successful. 

China is trying to make Hainan into a free trade zone. Will there be less restrictions on capital flows? Mr Wuttke: Hainan is labeled as a free trade port. Our shipping companies tell us that there is virtually northing in it, but luxury item producers are saying that sales are going through the roof. China accounts for 50% of the global market of luxury goods. Hainan is also a medical hot spot. The CAI opens the door to private hospitals. Hainan will turn into a major hospital setting. China is aging very fast. Hainan has features of opening up, but is not an area where we will see easing of capital flows. China is very stringent in limiting the flow of capital. 

Mr. Jochum Haakma, Chairman of the EU-China Business Association concluded the webinar by thanking Mr Carlo Pettinato and Mr Joerg Wuttke for providing their insights. For the investment world, the CAI will be a major step, because we now have a different framework when everything will be ratified. We hope the Year of the Ox will be a bullish year but the CAI will not be signed yet as President Macron would like it to be signed in 2022, when France assumes the EU presidency. In March, the EU-China Business Association will organize a similar webinar on investments in Europe, where there will also be more scrutiny of foreign investments, including those from China. Mr Haakma concluded with a question: Is the real challenge facing the European Union in the coming years not China but restoring our unity, values and security before we can achieve and maintain strategic autonomy?

If you are interested to learn more, contact the EU-China Business Association: info@eucba.org and follow us on linked: https://www.linkedin.com/company/eu-china-business-association-eucba/