EU-China (1)

Uri Dadush: Non-Resident Fellow at Bruegel (uri.dadush@bruegel.org)
André Sapir: Senior Fellow at Bruegel (andre.sapir@bruegel.org)
Grateful to Bruegel colleagues, Petros Mavroidis, and Mia Hoffmann for assistance.

The European Union (EU) is notably open to foreign direct investment (FDI).
Compared to the EU, China's markets present significant restrictions, particularly in services sectors.
The EU aims to enhance conditions for its companies in China, resulting in a Comprehensive Agreement on Investment (CAI) finalized in December 2020 after eight years of negotiations.
The CAI seeks to improve market access for foreign investors through enforceable state-to-state dispute resolution, although it currently lacks provisions on investor protection (e.g., against expropriation).
Investor protection is maintained through existing bilateral investment treaties (BITs) between EU members and China.
Criticism of the CAI arises primarily because it offers limited new market access in China, viewed as a diplomatic compromise affecting EU relations with the United States.
Assessment indicates that despite modest new access, the CAI formalizes prior unilateral liberalization efforts by China, enhancing enforceability of EU firms' rights and including new rules on critical issues like subsidies, state-owned enterprises (SOEs), technology transfer, and transparency.
Potential for multilateral reform with implications for the World Trade Organization (WTO) exists fostering China's integration into the global trading and investment system.
Ratification by the European Parliament is challenged by ongoing Chinese sanctions against its critics.

The EU's policy towards FDI is treaty-based promoting openness, though variations exist among member states.
China's FDI regulations remain restrictive, especially in the services sector despite recent liberalization efforts.

Foreign Investment Law (FIL) (January 2020):
- Encourages foreign investment in certain industries while restricting it in others (e.g., joint ventures required in specific sectors).
- Recent revisions to the FIL establish non-discrimination in governmental procurement and outlaw forced technology transfer.
- International agreements supersede Chinese FDI regulations in cases of more favorable terms.

The CAI binds China's liberalization efforts into an international treaty, focusing on market access for EU firms despite existing restrictions in many sectors.
Ratification of CAI provisions on investment protection is scheduled for negotiation within two years of signing.

CAI enhances market access for EU firms in both goods and services sectors:
- Manufacturing Sector: CAI establishes access in 30 sectors; 20 sectors have no limitations on market access.
- Services Sector: Significant improvements in sectors previously closed, with new openings and the removal of joint venture requirements.
The removal of joint venture obligations will reduce risks of forced technology transfers.

CAI incorporates new rules enhancing fair competition between EU and Chinese firms, addressing issues surrounding the operations of SOEs and subsidies.
Improved transparency regarding subsidies and operations of SOEs may positively impact EU's competitive stance in China.

The CAI introduces novel disciplines that could become a benchmark for future bilateral agreements, enhancing investment predictability.
Positively impacts WTO negotiations by potentially integrating new standards pertaining to technology transfer, subsidies, and SOEs into broader rules.

CAI signals China's commitment to competition and liberalization while aiming for clearer regulations on technology transfers and SOE operations.
Economic benefits to EU might instigate further alignment of trade with the United States regarding investment practices.

EU maintains capabilities to regulate inward investments while asserting its interests in human rights, labor rights, and environmental standards through sustainability clauses in CAI.
Enhances EU's negotiating capacity and positions it against potential isolation from Chinese markets.

While the CAI is not without limitations, it acts as an important step in enhancing EU firms' investment landscape in China.
Provisions consolidate recent liberalizations into a binding framework, securing EU firms' interests in the Chinese market.
Continuing negotiations post-ratification for more comprehensive investment protection rights are critical for underpinning a stable economic relationship between the EU and China, fostering an open, predictable trading environment.