Independent or short-sighted? The CAI and its geopolitical implications

By Robin Vandendriessche

On the 30th of December 2020, just three weeks before President Biden’s inauguration and on the second last day of Germany’s presidency of the Council, the EU and China concluded in principle the negotiations on the Comprehensive Agreement on Investment (CAI). Negotiations have lasted for nearly seven years but gained considerable momentum in the last weeks of 2020. The CAI, according to the European Commission, will be the most ambitious agreement that China has ever concluded with a third country, allowing EU investors to better access the fast-growing 1.4 billion consumer market.

Many critics do not seem to share that optimistic assessment. Over the past years, China has intensified the oppression of the Uyghur minority in the Xinjiang region,  has cracked down on Hong Kong’s democracy, and has increasingly threatened Taiwan. The fact that the EU rewards China with this deal now does not send a strong signal to Beijing. Furthermore, it is not clear how much the EU would gain from this deal. Clauses in the deal that will discipline the behavior of China’s state-owned enterprises are not likely to have a significant impact as China failed to fulfill similar commitments in the past. The same applies to China’s commitment to “work towards” enforcing international conventions on labor standards. Free trade unions are not likely to be created any time soon. 

Not many Europeans seem to believe that the CAI will succeed in leveling the playing field in China’s economy or eliminate its lack of reciprocity in market access. Especially the smaller member states, which have far lower rates of investment in China, were prepared to wait for a more balanced agreement. It was no coincidence that only French President Macron and German Chancellor Merkel participated in the final talks between China and the EU institutions. Germany accounts for nearly half of all European investment in China, while France has the second biggest European business presence there.

European diplomats often criticized the Trump administration for adopting a unilateral approach towards China without consulting its European partners. Now, the Europeans did the same by signing a political agreement on the CAI just three weeks before the Biden administration took office. From a Chinese point of view, this was a logical move as the new U.S. administration sought a unified approach towards China. Beijing knew all too well that concluding the CAI could drive a wedge between the United States and the EU at a time when President Biden proclaimed to rebuild alliances. Even though the EU, and especially its larger member states, must have known that this move would not go down well with the new U.S. administration, it saw the Chinese desire to conclude the CAI before the Biden administration took office as a unique window of opportunity

The conclusion of the deal shows that the EU takes “strategic autonomy” over a value-led European common foreign and security policy. Although this move will satisfy the proponents of European strategic autonomy it will not help to work together with the U.S. on common interests such as halting China’s abuse of human rights or its lack of reciprocity. The EU has repeated the mistake of the Trump administration when it went solo in its trade war against China. By not waiting a few more years, the EU failed to take advantage of favorable dynamics, such as a more willing U.S. administration, that would significantly strengthen the EU position vis-à-vis China.

The politics of the CAI have become even more complicated since the EU, joined by the U.K. the U.S., and Canada, in March 2021 slapped sanctions on Chinese officials involved in the crackdown on the Uyghur minority in Xinjiang. This coordinated move together with the U.S. could not be more different than the one to conclude the CAI in December 2020. As a response China sanctioned five members of the European Parliament, thereby infuriating the institution that has to ratify the CAI, putting the fate of the deal in serious doubt. 

The CAI does not seem as ambitious as the European Commission proclaims. Its swift conclusion was made possible by the economic interests of its French and German supporters and Chinese geopolitical preferences. Instead of waiting like several other member states would have preferred, the deal was concluded and the opportunity to present a united front against China with a more willing U.S. administration was lost. Recent sanctions and Chinese counter-sanctions have put the future of the deal in serious doubt but at the same time delivered an opportunity for the EU to correct its mistake and start working together with its allies on a more coordinated China-strategy.

Geopolitics’ turn again: Covid-19 edition

By Mary Karnachoritou

Henry Kissinger the well awarded American diplomat spoke of the “Post corona-virus world order” However prejudicial Covid-19 has been, not all countries came through as losers. In fact, the pandemic constituted a unique chance for international players and coalitions to re-negotiate their status. Crises- from the Greek word “Krisis” meaning “the decisive moment”- like this have the potential to change geopolitical trends and priorities exposing the international system to rearrangement. In this article I aim to explore the impact that the pandemic had in the geopolitical puzzle and especially in the European Union. What are Brussels’ next steps in these shifting times? Are we heading towards a reversed status quo in international relations with the East dominating the West?

China appears to be the big winner of this pandemic. Although China was the first country affected by the virus when it emerged, China was also the first to overcome it by applying strict lockdown measures. In this way, China had the chance to manage the crisis and even work as a role model and assistant to other nations. The choice of the Chinese government was not a coincidence as it adopted the well tested “superpower” attitude that superpowers have used in previous crises. To be more specific, China was also favored because of its widely developed and cheap technological production chains which experienced extreme demand during this period. The world and especially emerging economies are highly dependent on Chinese value chains for their economy to function and to prosper. This realization is indicative of China’s growing power over the last decades. Europe’s own characterization of China as “cooperation partner” and “systemic rival” proves its importance in the international system. Moreover, the pandemic placed China in a disadvantageous position of global criticism, hate speech and prejudice. Nevertheless, Xi Jinping used the international stance in his favor by changing China’s usual diplomatic behavior abroad into a more aggressive one that now was legitimately based. In other words, the pandemic could be considered as the start of the Sino-American rivalry in practice as China reveals its true capabilities in this international chess game.

The United States of America on the other hand faced for the first time a palpable shock of their rules-based system. As the adviser of Joseph Borell, Nathalie Tocci highlighted, the coronavirus crisis has been a “Suez moment for the US” meaning that this pandemic encroached the deep foundations of US dominance in the modern world. The biggest geopolitical loss it had to suffer is the shift to the East. Trump’s administration and its ineffective response towards coronavirus has made the country fold back on the interior matters while foreign policy remained antagonistic, or even in the margins of enigmatic. The US democratic model seemed incompetent to confront the spread of the virus something that did not prove difficult for more authoritarian governance models. Although this phenomenally effective response may stem from the transparency deficiency that exists in those countries providing distorted reality facts.The current  Biden administration is expected to turn towards the Atlantic alliance and to fortify its allies in the West implying the EU.

 The European Union, on its part, has proven to be on the losing side of this health crisis. In particular, European states once again showed their incapacity to work together and create a united front against the invisible enemy that this time knew no borders or North-South, East-West axes. National interests provoked an unprecedented isolation since the Single European Act, instead of a Union solidarity. The goals that have been set by the new Geopolitical Commission under Ursula Von der Leyen were one by one fading in front of the current health situation. Even Union’s core values such as democracy, freedom and rule of law were severely restricted causing social turbulences and introduced some degree of contestation in the European Strategic Compass. Health does not fall within EU’s competences, but as previous crises have indicated, further integration in the affected spheres becomes unavoidable. The introduction of the Recovery Fund is the collective response that Europeans choose to support. Furthermore, the enhancement of the Banking Union is attached to the general European efforts for a strategic autonomy in the financial and technological area. Although strategic autonomy does not apply in the foreign policy, it constitutes a step forward for more coherent and concrete European policies. With the covid-19 crisis the EU entered an era of redefinition and as happens in these periods of time, re-evaluation of pre established authorities takes place. In European Union’s case it seems that the pandemic highlighted the role of the European Parliament which is expected to strengthen in power in the following years if the context of a more integrationist agenda, prevails.All in all, it is an indisputable fact that the times we are facing are highly transitional in terms of high politics. New game rules have been introduced this time stemming from the East. While emerging eastern states seem to shape the world of alliances coloring it with more authoritarian traits, the west is moving towards strengthening its preexisting structures. NATO and more specifically EU-US relations are drawn closer so as a counterbalance to what it appears to be a Sino-Russian “confluence” of interests and values. Although Europe’s perception of China is that of the “Icy Friend”, the continent’s future points toward the Western alliances. The EU’s ambition to play an active role in the Sino-American antagonism, underlines the need for a strong democratic institutional set up, and what is better than the European Parliament whose role has been signified steadily over the past years. States ‘geopolitics remain at a crossover and only the unfreezing of  time  of the Covid-19 era will point to the next direction.

The EU-China Comprehensive Agreement on Investments: What’s in it for China?

By Veronica Burgstaller

On 30 December 2020, the Comprehensive Agreement on Investments (CAI) was concluded in principle between the EU and China, marking the most ambitious agreement China has ever concluded with a third country and replacing the bilateral treaties it had previously with 26 EU member states (except Ireland). The agreement, after 7 years of negotiations, is a milestone in the bilateral relationship between the EU and China but clearly is unbalanced in the sense that it brings more benefits for the EU than for China. In essence, the CAI is an investment market access agreement that will expand market access and ensure competitiveness. It will provide a level-playing field for EU entities in China in addition to easing such restrictions as the condition of joint ventures activities with Chinese partners or the compulsory transfer of sensitive technology. On the other hand, the EU’s investment environment has long been relatively open. Although under CAI China will gain access to additional markets, that will help promote technological development, the main reasons for Beijing to push forward with the agreement are generally understood as being of geopolitical nature. For instance, the agreement will serve to legitimize the Chinese Communist Party (CCP) and  pre-empt policy coordination between the EU and the U.S

Though these points are not wrong, the CAI should be seen as a brick-stone of a broader and long-term Chinese policy strategy to achieve middle income status by 2035 and resolve the country’s internal domestic problems. Since its accession to WTO in 2001, China’s high growth has been driven predominantly by high levels of investment, mainly through domestic financing. Due to high export rates, followed by high domestic savings levels, China faced a problem of twin surpluses on both capital and current account. With an underdeveloped financial market, it cannot channel domestic savings into areas of investment. Also, its large foreign exchange reserves have led to protectionism and trade frictions with the EU and US. In order to overcome ‘a middle-income trap’, China has to implement reforms in the demand and supply side of the economy, meaning it has to encourage consumption, while at the same time increasing outward investment. The Belt-and-Road Initiative (BRI) for example enables China to redirect investment into infrastructure development projects. But inward investment is equally important because China can benefit from the expertise and know-how of foreign firms. Innovation would increase labor productivity and ultimately China wants to encourage the creation of its own original domestic products that are consumed by its citizens. 

In addition, high-level agreements may enable China to lock in domestic economic reforms. A recent study showed that trade agreements with strong political and economic partners put more pressure on domestic firms to comply with international standards and provide incentives for regulatory reform. The EU is currently the biggest global investor. Although the CAI may not be a trade agreement it is binding and ratcheting and also goes beyond investment-related provisions like clauses on sustainability and labor protection. 

Finally, the COVID-19 crisis, since the beginning of last year, had some unexpected and profound effects on global trade and investment flows. In the first quarter of 2020, China’s economy contracted with a growth rate of -6,8% and fixed-asset investment sank by 16%. Although most major firms in China returned to 90% of their working capacity within a period of two months, small firms are still lagging behind and consumption remains low. Inward foreign direct investment from the US and the EU continues to decline. More than ever, it is crucial for China to provide a more liberal and transparent investment environment. In line with such developments, China has issued a revision of its negative lists for foreign investors on June 23, 2020, that reduced the number of sectors in which domestic firms have preferential treatment from 151 in 2018 to now 123. Equally, the Foreign Investment Law promulgated in March 2019 had come into effect on January 1, 2020, unifying investment regulations and indicating further opening up of market access. The EU should understand that China’s foreign policy is mainly motivated by domestic concerns. From the 5th to 11th March, during the holding of the 4th session of the 13th National People’s Congress, Premier Li Keqiang outlined the 14th Five Year Plan that emphasises high-quality development with a focus on innovation, high-tech technology and the promotion of foreign trade and investments. Market liberalisation in China may have taken place incrementally, first in special economic zones that function as testing grounds, as seen in the case of  negative lists for foreign investors before being finally adopted nation-wide. In short, China has to balance policies that maintain the legitimacy of the party and has to retain its centralised grip, while also acting to liberalise its trade and investment environment. The CAI is an opportunity for China to achieve the objectives it set itself to become an innovative, middle-income country.