At the end of 2020, the EU Council and Commission concluded an agreement in principle on a Comprehensive Agreement on Investment (CAI) with the P. R. China. Fundamental to this agreement are the beliefs held by both parties in an open multilateral trading system, the reaffirmation of their respective commitments under the WTO agreement, and the creation of a climate that facilitates and develops trade and investment between the parties, establishing the necessary provisions for the liberalization of investment. Another fundamental assumption is based on the numbers – the EU is the main destination for Chinese exports; China is the third destination for EU exports (after the US and the UK). Between 2000 and 2020, EU companies invested around €148 billion in China and Chinese companies around €117 billion in the EU.
In terms of concrete elements, the most important is the strong desire of companies on both sides to access the other’s domestic market. On the European side, the growth of the Chinese economy – which will be the largest in the world by 2050 with a GDP of about €49 trillion – makes it essential to have access to the Chinese market as soon as possible, especially the urban Chinese market (875 million persons in 2020; about 1 billion in 2030). On the Chinese side, more and more companies want or need to internationalize and the most desirable market for this is the European market, given its size and per capita income.
On the other hand, it is important to level the terms in which the investment in the other party takes place, namely by removing strong restrictions or limitations – for example, China’s strong restrictions in the financial services and telecommunications sectors. On the other hand, this Comprehensive Agreement on Investment will prohibit forced technology transfers and restrict the terms under which Chinese state-owned enterprises (SOEs) can operate outside the normal rules of a competitive market.
The timing is right for this CAI. On the EU side, the huge exposure of large European companies in China – especially in the manufacturing sector – demands a relationship based on more equitable rules. On the other hand, the financial services, commercial services and healthcare sectors in China are of particular interest to European companies and more competition is actually needed in Chinese domestic market.
On China’s side, despite the perception by many that Chinese capital is inexhaustible, the truth is that it is barely enough to finance the New Silk Roads (BRI), and is not even supposed to fuel the new waves of internationalization of [medium sized] Chinese companies (rather, capital is likely to be raised via European IPOs). Accordingly, it is paramount for China to create conditions for a constant flow of FDI into the country.
On the other hand, the successive blacklisting of Chinese companies by US authorities will not diminish; on the contrary, the Biden Administration will not soften the previous policy in this domain, which will force many Chinese companies – mainly state-owned and technological, but not limited to these – to leave the North-American markets and look for new markets with a similar level of income, capital and technology.