The EU-China Comprehensive Agreement on Investments (CAI): a piece of the puzzle.
On 30 December 2020, the EU and China announced that they had reached an Agreement in Principle on investments. The text is the result of lengthy negotiations, which started in January 2014. The EU-China CAI was met with fierce criticism from political commentators, who believe the treaty is a “strategic victory” for China and may potentially damage transatlantic relations. However, as usual with international affairs, matters are not always as simple as portrayed and deserve thorough consideration.
The Agreement
The EU-China CAI is an investment agreement which does not include trade issues and is mainly based on existing obligations under WTO law. As such, the Agreement in Principle revolves around three main issues: investments, sustainable development, and monitoring and enforcement mechanisms.
The main section of the CAI focuses on the access of EU operators to the Chinese market and the improvement of a level playing field. In this regard, both parties have agreed on new commitments such as ensuring the liberalisation of investments, disciplining the behaviour of State-owned enterprises and a ban of forced technology transfers, among others. It is noteworthy that the CAI does not include an investment protection chapter. The Agreement foresees a 2-year deadline to conclude this section.
As for sustainable development, the Agreement is based on two pillars: labour and environment. The EU and China have agreed to effectively implement the goals of the Paris agreement and have committed to effectively implement ILO Conventions already ratified and to ratify fundamental Conventions not yet ratified, especially on the abolition of forced labour. Negotiations on these provisions were extremely difficult, even becoming the main obstacle to reaching an agreement.
In its final sections, the draft treaty foresees the creation of an institutional framework to ensure effective monitoring of its implementation and a state-to-state dispute settlement. The pre-litigation phase will be set at the political level and will have a separate working group for the sustainable development provisions of the Agreement. The dispute settlement consists of a two-step mechanism: first, mediation and, in the absence of an agreed solution, recourse to an arbitration panel procedure.
Strengths and flaws of the CAI
The general objective of the CAI is to modernise and replace bilateral investment treaties (BITs) concluded by all Member States with China with a single uniform legal framework for EU-China investment relations. However, BITs would remain in force for the time being, at least until an investment protection section is concluded. The underlying reason is the need for predictable economic relations with China. This is crucial insofar as the interdependency of both economies is considerably deep.
The CAI also represents a landmark as it is the first time China is committing to labour and environmental standards in an economic agreement. Conversely, the Phase One Trade Agreement concluded between the US and China during the Trump administration does not include any section on sustainable development. On top of that, it is important to highlight that the Agreement embeds the current level of market access into China into international law. In this context, the CAI is expected to form the basis for a forum of discussion between the EU and China for key issues, such as a level playing field (ensuring a fair and open competition between companies from both sides), labour, and climate change.
Yet, the CAI is not flawless. The Agreement lacks any mention of human rights. In November and December 2020, right before the EU and China announced that they had agreed on the text, the European Parliament issued two Resolutions in which it stressed that “respect for human rights is a pre-requisite for engaging in trade and investment relations with the EU” and condemned “the government-led system of forced labour”, in particular the exploitation of Uyghur and other Muslim minority groups, in Xinjiang. In addition, 36 civil society organizations signed an open letter addressed to the EU. The appeal calls for the inclusion of a binding human rights clause in the CAI. Moreover, it urges the EU to condition its entry into the agreement upon China’s ratification of essential human rights instruments like the International Covenant on Civil and Political Rights and the ILO conventions.
Another source of criticism is the lack of effective commitments, as well as enforcement mechanisms, for the sustainable development chapter. On paper, the Agreement states that the Parties will “make sustained and continuous efforts” to ratify ILO conventions on forced labour. This is a common sentence in the “new generation” trade and investment treaties including sustainable development provisions, such as the EU-Korea or the EU-Vietnam Free Trade Agreements (FTA). In practice, these open-ended commitments do not impose any obligation of result, which makes it very difficult for the EU to prove a breach of the Agreement, so long as China shows minimum efforts towards the ratification of ILO conventions. These deficiencies in the wording of sustainable development commitments have been recently exposed by a ruling of the panel of experts on the EU-Korea FTA. As for the enforcement and dispute resolution mechanisms, they do not apply for the sustainable development chapter. The Agreement foresees a separate working group for monitoring the implementation of sustainable development commitments and a weak dispute settlement mechanism consisting of a panel of experts.
Prospects
Despite critics’ assertions, the CAI should not be simplified as a “business first” attitude towards China. Rather, the CAI seems to be “one building block” of an EU multi-layered strategy, which identifies China as a “negotiation partner, an economic competitor and a systemic rival”, simultaneously. Thus, this new EU approach towards China tries to balance two policy objectives. On the one hand, the EU is committed to maintaining its openness and fostering economic governance, despite the US-China trade conflict – the CAI is a good example. On the other, the Union is fully aware of Beijing’s human rights record and its abusive trade practices. In this context, it is currently developing tools such as the EU global human rights sanctions regime, the FDI screening system and the anti-coercion instrument.
In any case, the future of the CAI – and broader EU-China relations – does not look bright. The Agreement is still pending for ratification by the European Parliament (EP), which has echoed the growing concern over China’s human rights record. Furthermore, following the designation of several Chinese officials under the EU global human rights sanctions regime, Beijing retaliated by sanctioning EU lawmakers, diplomats and other institutions. In response to these hostilities, the EP overwhelmingly adopted a resolution demanding the lifting of sanctions against MEPs before proceeding with any discussions on the ratification. Besides, Chancellor Angela Merkel – the main promoter of the CAI during the German presidency of the Council – is leaving office in September and the German Green Party – a fierce critic of the Agreement – is high in the polls. As the political context that fostered the CAI vanishes, its ratification will remain frozen until EU-China relations steer into calmer waters.
by Ignacio Escondrillas Sánchez
