Leaders of China, Germany, France and the European Union held a meeting via video link on Dec.30, 2020, to jointly announce that China and the EU had completed Bilateral Investment Treaty negotiations as scheduled.
This marks the third major economic diplomatic achievement that China has made in less than a month after the signing of the Regional Comprehensive Economic Partnership Agreement (RCEP) on Dec. 15, following eight years of negotiations, and the announcement that China would favorably consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
The China-EU treaty, known as BIT, carries special significance as the first investment treaty between China and a developed economy. Some international critics interpret the signing as a Chinese tactic to draw the EU to its side amid the China-U.S. tensions by driving a wedge into transatlantic relations. Some others view it as a tradeoff on the part of the EU to get economic benefits from China. Both views are myopic and untenable.
First and foremost, the BIT was driven by China’s economic transition from high-speed development to a new phase of high-quality development, not by any attempt to undermine the U.S.-EU alliance. The catchword in Chinese economic reform in 2020 was the new development paradigm that established domestic circulation as the mainstay, with domestic and international circulations reinforcing each other.
I believe that domestic circulation is focused on innovation-driven demand to spur further opening at home, thus creating the underlying conditions to better align with the opening up of higher quality to ensure that domestic and international circulations advance in tandem.
The three announcements made by China are also aligned with a new round of reforms at home. Efforts to advance cross-regional opening up are a case in point. On Nov. 14, President Xi Jinping presided over a roundtable on comprehensively promoting development of the Yangtze River Economic Belt. In January 2016, Chongqing municipality hosted a roundtable on promoting the development of the Yangtze River Economic Belt, and in April 2018 a roundtable on deepening the development of the Yangtze River Economic Belt was held.
The overall theme, which can be seen in Chinese statements from 2016 to 2020, illustrates the country’s commitment to fostering a large, integrated domestic market as part of the wider economic integration process. When it comes to opening-up, according to a report by the Financial Times in December, China’s ambassador to the EU said the top leadership of both China and the EU attach extraordinary importance to the BIT, signaling China’s determination to translate external pressure into a driving force to power its transition to high-quality growth.
As a matter of fact, China had engaged actively with the U.S., dating to the Obama administration, for a potential bilateral investment treaty, but it ran into various barriers. In this vein, the treaty with the EU is by no means a move of expediency but rather a strategic choice made by China. A parallel could be drawn between the BIT, the RCEP and arguably the CPTPP, and China’s entry into the World Trade Organization 20 years ago, as they mark China’s efforts to launch a new round of reforms that carry a weight equivalent to the WTO accession.
Second, no international economic treaty can be concluded with one-sided aspirations. The EU is keenly aware of the necessity to set up institutional arrangements with China in a bid to harness external pressure to foster internal growth and gain strategic advantage in the post-pandemic era. Economists forecast that even with mass vaccination against the coronavirus, the G7 advanced economies will find it difficult to recover to their pre-2019 levels by 2022, heralding a period of stagnation for the next three to five years.
To put that into perspective, the advanced economies already have a range-bound interest rate around zero, which means financial leveraging will not do the trick as usual, so there is limited headroom for lifting investment through low interest rates. Job losses, too, will continue to be a drag on consumption.
Meanwhile, massive stimulus and relief packages in the wake of the outbreak have created sovereign debt crises in the EU, compounded by elevated unemployment that may burden a whole generation and pose a considerable risk of a “lost decade” across the EU. Top on the EU agenda is how to steer the EU economy out of the stagnation of the post-pandemic era, which was created by prolonged subdued consumption, low investment and high unemployment. Last but not least, Brexit takes some wind of the sails of EU integration.
What stands in stark contrast is the positive forecast for China’s recovery, which is on track to reach 8 percent growth in 2021, according to the World Bank and the IMF. Such a prognosis will definitely inform the strategic calculations of other counties and regions, including the EU, which may consider it necessary to leverage China as an external force to shore up its own growth.
Also, the EU hopes that the BIT will help nudge the U.S. to return to multilateralism and the system of free trade.
In sum, the BIT is an integral part of China’s overall effort to implement its new development philosophy, with high quality development at its core. It is strategically planning to power a new round of reform and opening-up through both internal and external dynamism.
For the EU, the BIT is a well-thought-out strategic choice based on the world’s post-pandemic economic landscape. In a nutshell, the BIT represents the convergence of strategic interests on both sides.