Explainer | What is the China-EU CAI and how is an investment deal different from a trade deal?

The Comprehensive Agreement on Investment has been seven years in the making and still nothing has been signed
China signed two big trade deals this year – the phase one trade deal with the US and RCEP – but this investment treaty has a different purpose

China-EU investment deal

Keegan Elmerin Beijing

Published: 12:00pm, 24 Dec 2020

Why you can trust SCMP

Time has nearly run out for a landmark investment deal between China and the European Union, potentially tanking promises made by leaders on both sides to finish before the end of the year.

The Comprehensive Agreement on Investment (CAI) was meant to join the ranks of other major economic deals signed in 2020, such as the Regional Comprehensive Economic Partnership, a China-backed trade deal which includes 15 countries in the Pacific, and the China-US phase one trade agreement.

But doubt has been cast on the deal in the final hours caused by sticky negotiation issues – including human rights, market access and dispute settlements – as well as signals of disapproval from Washington. And even if the two sides pull through, the deal still faces hurdles such as the ratification process, a gauntlet run through the EU parliament.

What is the purpose of the deal, and what do the two sides want?

Since the launch of the project in 2013, the CAI was intended to increase investment between the EU and China by establishing a legal framework and common rules on issues ranging from state-owned enterprises to subsidy transparency. The deal aims to replace more than two dozen bilateral investment treaties between the EU’s 27 member states and China, according to official EU policy explanations.

For the EU, creating a “level playing field” with China has been the key phrase in its messaging. Brussels and European businesses planned for the deal to remove market access limitations, including China’s licensing requirements and limits to foreign ownership in certain sectors.

Investment deal not a panacea for troubled China-EU relations, observers say

China, for its part, has raised objections with Europe’s tightening of its foreign investment screening policies in recent years, increasing suspicion over Chinese buying firms in what Europe sees as strategic sectors.

During the most recent annual EU-China summit, held via video conference in June, China’s premier Li Keqiang told leaders in Brussels he hoped Europe would keep its investment markets open to China.

How is the CAI different from other big deals made this year?

The EU said this investment deal with China aimed to be ambitious and cover a wide range of issues.

The European side said the US-China phase one trade deal signed in January failed to deal with structural issues in the Chinese economy and European firms were left feeling frozen out by the deal.

The CAI is unlike the US-China phase one agreement, that not only demands greater market access for US companies but also holds Beijing to buying American goods, from agriculture to manufacturing, including some at the expense of purchases from Europe.

Nor is it similar to the Regional Comprehensive Economic Partnership (RCEP) trade deal signed between China and 14 other countries – the world’s largest free-trade agreement. RCEP streamlines rules and standards of trade to encourage the flow of goods and services, but not specifically investment.

EU insists it wants to start talks about a bilateral free-trade agreement after the investment deal is done. But even if the China and the EU can sign a deal, the CAI will face a number of challenges from the EU parliament.

What’s the problem with the CAI?

Firstly, both sides – particularly the Europeans – have been frustrated with the slow pace of the negotiations. CAI negotiations were slow in the early years. Then, in 2019, China’s premier Li Keqiang and then-EU commissioner Jean-Claude Juncker pledged to finish negotiations by the end of 2020.

But optimism has dimmed in recent months. An EU policy briefing in September had already cast doubt on whether the two sides could reach an agreement before the end of the year, saying China had been more focused on navigating its relationship with the US than with Europe.

Europe’s dissatisfaction with China’s human rights record, such as the mass detention programme in the western Muslim-majority province of Xinjiang, is one of several sticking points remaining for Europe.

This month, the European Parliament – which is ultimately responsible for Europe’s final ratification of the deal – passed a resolution suggesting the CAI must include adequate commitment to respecting international conventions against forced labour because of concerns about reports out of Xinjiang.

China has been accused of detaining Muslim Uygurs and other minorities and using forced labour. China denies the claims and says alleged detention camps are vocational training centres.

What’s going to happen before the year’s end?

While there have been some positive signs, developments in recent days do not bode well for the deal’s completion.

On Monday during face-to-face meetings in Beijing with ambassadors from the 27 EU nations, China’s foreign minister Wang Yi said he was hopeful the two sides could reach a consensus on the deal.

But EU member state Poland expressed doubt, saying Europe should seek a fair, mutually beneficial agreement with China.

“We need more consultations and transparency bringing our transatlantic allies on board. A good, balanced deal is better than a premature one,” said Poland’s minster of foreign affairs Zbigniew Rau in a tweet on Tuesday.

What effect will a Biden presidency have on China-EU investment talks?

On the same day, incoming US president Joe Biden’s national security adviser Jake Sullivan gestured to Europe that the EU should approach the deal with caution.

“The Biden-Harris administration would welcome early consultations with our European partners on our common concerns about China’s economic practices,” Sullivan posted on Twitter, with a link to a story about the CAI.