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EU-China Comprehensive Agreement on Investment (CAI)

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last updated on 18 February 2021 | reading time approx. 4 minutes

  

After about seven years in the making, China and the European Commission announced on 30 December 2020 that they finished talks on a "Comprehensive Agreement on Investment" ("CAI"), which the European Commission in its press release called "the most ambitious agreement that China has ever concluded with a third country." The preliminary text of the CAI has been available since 22 January 2021.

 

  

  
 

 

The in terms of content rather important remaining annexes (except Annex I which is already available) are supposed to be published in February 2021. Based on the preliminary text and contrary to previous expectations, the CAI will not replace all 25 existing bilateral investment treaties (BITs) of the EU members states currently in place with China. However, the CAI is still a draft and needs to undergo legal review and translation as well as ratification by the European Parliament on the EU side to become effective, while approval of Member State legislatures will most likely not be required, depending on the final content of the CAI.

 

These procedures will take some time and their precise timing is unclear at this stage. They might presumably take at least until the second half of 2021 or even longer.

 

What contents are known

Core elements of the CAI on the Chinese side are rules against the forced transfer of technologies, obligations for the behavior of state-owned enterprises (SOEs), comprehensive transparency rules for subsidies and commitments related to sustainable development as well as further and new market access openings and commitments such as the elimination of quantitative restrictions, equity caps or joint venture requirements in a number of sectors.

  

Facilitated market access

China has undertaken to remove certain barriers to foreign direct investment in sectors such as manufacturing, financial services, R&D (biological resources), computer services, air transport-related services, construction services, healthcare (private hospitals) etc. In the automotive sector China has agreed to remove and phase out joint venture requirements and would commit market access for vehicles with alternative drive systems (electric, hydrogen etc.).

 

For telecommunication/cloud services China has agreed to lift the investment ban for cloud services. They would now be open to EU investors subject to a 50 percent equity cap.

 

In the sector international maritime transport China would allow investment in the relevant land-based auxiliary activities, enabling EU companies to invest without restriction in cargo-handling, container depots and stations, maritime agencies, etc. China would also eliminate joint venture requirements in real estate services, rental and leasing services, repair and maintenance for transport, advertising, market research, management consulting and translation services, etc.

  

With regards to environmental services China would remove joint venture requirements in environmental services such as sewage, noise abatement, solid waste disposal, cleaning of exhaust gases, nature and landscape protection, sanitations and others.

 

Rules to create a level playing field for foreign investment

  • SOEs: The CAI would discipline the behavior of SOEs by requiring them to act in accordance with commercial considerations and non-discrimination in their purchases and sales of goods or services. China would also, upon request, provide specific information to allow for the assessment of whether the behavior of a specific enterprise complies with the agreed obligations.
  • Transparency in subsidies: The CAI would impose transparency obligations on subsidies in the services sectors. Also, the CAI would oblige China to engage in consultations in order to provide additional information on subsidies that could have a negative effect on the investment interests of the EU.
  • Forced technology transfers: The CAI would lay very clear rules against compulsory transfer of technology, including the prohibition of several types of investment requirements that compel transfer of technology, such as requirements to transfer technology to a joint venture partner, as well as prohibitions to interfere in contractual freedom in technology licensing. These rules would also include disciplines on the protection of confidential business information collected by administrative bodies (for instance in the process of certification of a good or a service) from unauthorized disclosure.

   

Sustainable development

The CAI would contain certain commitments relating to labor, environmental protection, climate change, and corporate social responsibility. However, the relevant provisions are subject to a specifically tailored implementation mechanism to address differences with a high degree of transparency and participation of civil society. China would also commit to working towards the ratification of the outstanding ILO (International Labor Organization) fundamental Conventions and takes specific commitments in relation to the two ILO fundamental Conventions on forced labor that it has not ratified yet.

 

Implementation and dispute settlement

Any bilateral disputes under the CAI would be subject to a State-to-State dispute resolution, coupled with a monitoring mechanism at pre-litigation phase established at political level.

 

Criticism

In contrast to China, where the CAI was praised and perceived as a milestone, there was much criticism from the EU and the U.S. side. On the one hand, there was criticism that China´s commitments were too vague. In addition, there was abrasive criticism regarding the timing of the conclusion. In this context, it was also controversially discussed whether the EU should have coordinated more with the U.S. and waited for Joe Biden´s inauguration.

 

By all means, one has to bear in mind that the CAI is no free trade agreement. It is not designed to address highly sensitive political issues, but is rather a market access deal. Currently, there are in fact no plans to negotiate a comprehensive EU-China Free Trade Agreement in the foreseeable future. Compared to the existing BITs with EU member states, the CAI can be seen as an improvement, as it contains more detailed regulations and is in general more sophisticated.

  

However, from a mere legal perspective, compared to the current legal framework for foreign investment in China, an improvement is not always visible at first glance.

  

Comparison to current legal framework

If we look at the commitments in the automotive sector, joint venture requirements have already been removed in the Negative List 2020 and the Free Trade Zones (FTZ) Negative List 2020 for the production of special purpose motor vehicles and commercial vehicles. As the negative lists are usually renewed annually or semi-annually, until the CAI comes into effect, there could even be less restrictions (e.g. production of passenger cars in 2022) merely with the negative lists, which tend to be more and more favorable for foreign investment with each renewal.

 

According to the Negative List 2020 and the FTZ Negative List 2020 all restrictions on the shareholding ratio of foreign investors in the finance sector have been removed. Furthermore, the two concepts of national treatment for foreign investors in China and protection against forced technology transfer have both already been mentioned in the new Foreign Investment Law, effective since 1 January 2021.

 

Outlook

In the past few years, China has made selective reforms (e.g. removal of ownership limits in the financial sector) and sector-specific market openings, by shortening the restricted and prohibited sectors on the negative lists applicable to foreign and domestic investors in China. Nevertheless, on the downside China has also enacted a series of security-related laws (e.g the Cyber Security Law) and other regulations, as the very recent foreign investment review and merger control rules, that may hamper the operation and freedom of foreign investment, potentially offsetting past gradual steps towards liberalization.

 

At least for China, the CAI is seen as a major breakthrough. At a late-night press conference on 30 December 2020, a China Ministry of Commerce spokesman told reporters that China hopes for deals with other countries (e.g. Japan, South Korea, Singapore, New Zealand, Chile) to diversify its trading partners and to prepare for a new U.S. approach under Biden. The signing of the Regional Comprehensive Economic Partnership (RCEP) between China and 14 other countries — not including the United States — on 15 November 2020 can be seen as another strategic approach by China.

   

As the details of the CAI are not certain yet, it is difficult to predict at this stage what impact the CAI will have on future trade between the EU and China, and possibly also in relation to third countries. In any case, the two agreements concluded shortly after each other, CAI and RCEP, can be seen as a strong signal to the global free trade and as a counterbalance to the protectionism of some of the largest economies. Whether the CAI can be a basis for further discussions remains to be seen.

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