China-EU investment deal suspension seen as more politically symbolic than economic, but risks to trade exist

Investment deals involving European countries that have separate bilateral investment agreements with China will be unaffected by the European Parliament’s decision this week to suspend the Comprehensive Agreement on Investment (CAI), with the move being more politically symbolic than it is economic, according to lawyers and diplomacy experts.

China sees the CAI as diplomatically significant, as it was a deal successfully struck with a Western power without first being vetted or blocked by the United States. But as an economic instrument, it poses no threat to the deals that European countries can make with China, because most of them already have separate bilateral investment treaties with China, international trade lawyers say.

However, there could be trade ramifications if China were to block European exports – as has been seen during the China-Australia conflict in the past year – if the icing of the CAI ignites a new diplomatic stand-off between the European Union and China, according to Bryan Mercurio, an international trade lawyer and a law professor at the Chinese University of Hong Kong.

“For China, that it successfully concluded a deal with a Western power thereby demonstrates it has the ability to compromise and is not an unreasonable negotiating partner,” he said. “That the CAI may never come into force doesn’t change that.

“But there may be economic fallouts due to the worsening relations between the EU and China. China has a long history of using trade measures to strike at countries with which it has broader policy disputes – Norway, Canada, United States and now Australia – and it would not be surprising if some European exports start experiencing delays at the border.”

A majority of the European Parliament voted on Thursday to stall the CAI’s ratification – required to make the pact legal. The move was aimed at hitting back at China on human rights and political issues, namely the reciprocal sanctions on EU and Chinese officials earlier this year.

Mercurio said some analysts and lawyers took the view that, after those two sets of sanctions were undertaken, Beijing had hoped the diplomatic “game” would stop there and that both countries would “get down to business” to ratify the CAI.

But the issue blew up, particularly after the European Parliament used strong language such as “crimes against humanity” in relation to Xinjiang, drawing the ire of Beijing.

“Those are not the words of a body [European parliament] that seeks to de-escalate the situation. I would expect China will react, with words and action,” Mercurio said.

Joerg Wuttke, president of the EU Chamber of Commerce in China, said the matter had reached an “escalatory stage”, and that the European Parliament merely “put a label on what was already clear since China imposed supersized sanctions on European parliamentarians”. The EU sanctioned four Chinese officials and one entity, while China sanctioned 10 EU individuals and four entities, including MEPs of multiple European political parties.

China, in turn, has held fast with its sanctions. A spokesperson for the Chinese Mission to the EU said on Friday that “China’s decision to take countermeasures is a legitimate response to the EU’s unilateral sanctions and confrontation”, but the unidentified individual maintained that the CAI was a beneficial agreement to both sides.

There were also concerns that freezing the CAI could be destructive to mutual investments and businesses on both sides, as the CAI provides rules on further market access to investments between the EU as a bloc and China. However, almost all EU countries already have bilateral investment treaties with China that have long liberalised and protected a large volume of bilateral investments between those countries and China, according to international trade lawyer and professor at City University of Hong Kong Julien Chaisse.

There are 26 such treaties between China and EU counties, and Ireland is the only country without one, Chaisse added.

“These treaties have done the job for the past 20 years … Also, there is a number of World Trade Organization rules that remain relevant for both EU-China,” Chaisse said. “All in all, companies are not left without protection – far from this. If the EU or China really wanted to harm each other, they would terminate all or some of these old [bilateral investment treaties].”

While there are some additional benefits to having the broader CAI, such as regulations for the environment and the use of labour, Chaisse said that the CAI has a limited impact on both China and the EU.

Henry Gao, a trade lawyer at Singapore Management University, echoed those sentiments, saying the CAI terms were not “unprecedented”. And Mercurio said the CAI was “a bad idea from the start”, as the EU has had a legacy of struggling to ratify deals.

“The lack of CAI provisions has not and will not deter European business from entering or maintaining operations in China,” he said.

Chaisse said the CAI setback could also be temporary, as history has shown that many difficult trade and investment pacts end up being signed despite earlier disagreements.

“I would not exaggerate the impact of this suspension,” Chaisse said. “It can be a reflexive pause that allows both China and the EU to make a reassessment of their respective interests.”

But the political implications of suspending the CAI’s ratification should not be discounted, said Zeng Jinghan, a professor of China and international studies at Lancaster University in England.

“Some time ago, the [Chinese] media regarded the negotiation of the trade agreement as a big diplomatic victory,” Zeng said. “Now that the CAI is frozen, China-EU cooperation on climate, anti-epidemic, multilateralism, digital economy and technology may all be affected.”

To restore the relationship, retaliatory measures must stop, Zeng said.

China, in particular, should focus on multilateralism and climate change, as well as people-to-people and cultural exchanges and non-governmental diplomacy, he added.

He also said Beijing should not pay heed to the anti-China voices in the European Parliament, as they were usually hyped up to win votes.

Additional reporting by Wendy Wu and Rachel Zhang