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Europe Suspends CAI Ratification and Echoes Washington's China Concerns

Jun 10, 2021

It became apparent during the U.S. presidential primaries and the subsequent campaign that President Biden would favor a multilateral response to Beijing. Coordinated multilateral and economic measures would replace bilateral negotiations and punitive measures. Since the beginning of his presidency, Biden focused on strengthening alliances and re-staffing the State Department with those who firmly believe in the version of U.S. diplomacy that existed before Trump. Such a vision requires a compliant Europe that agrees with and relies on the United States for instruction when dealing with adversarial superpowers like China. 

Yet, the European Union continues to hesitate when considering its trade and investment relationships with Chinese companies. This hesitancy recently manifested itself when the European Parliament failed to ratify the EU-China Comprehensive Agreement on Investment (CAI) over human rights concerns in Xinjiang and Hong Kong. Despite pushback from the EU, French President Macron and German Chancellor Merkel expressed support for the deal, highlighting Europe's divided foreign policy apparatus. 

When determining immediate and future concerns, the G7 economies labeled China, Russia, and the coronavirus pandemic as its most significant threats in a recent 12,400-word communique. The report criticized Russia for undermining democracy in Ukraine and scolded Beijing for human rights abuses and economic coercion. The communique's calls for 'collective efforts' strikingly resembled President Biden's foreign policy directives, as it presented the West as a broader alliance that exceeded just the core G7 members. 

British Foreign Secretary Dominic Raab argued that China needs to understand "these basic international rules [that] have got to be adhered to." The paper also supported Taiwan's participation in World Health Organization forums and the World Health Assembly. The group also expressed concern for Russia's involvement in neighboring Ukraine. 

Although Chinese exports to the U.S. continue to grow, and Germany has not severed trade ties with China, the U.S., its G7 allies, and smaller European countries have all harshened their diplomatic rhetoric toward Beijing and Moscow. After seven years of negotiations that finished last December, the European Commission suspended the CAI over human rights concerns that the United States emphasized. The CAI hoped to guarantee a framework for trade and investment in respective markets to secure a fair degree of reciprocity. European firms would gain greater access to Chinese markets while simultaneously removing barriers for Chinese investment in Europe. 

The European Commission said that ratification of the agreement was suspended after China imposed sanctions on members of the European Parliament, three members of national parliaments, two EU committees, and several academics who specialize on issues involving China. These measures were "not conducive to the ratification of the agreement," according to Valdis Dombrovskis, Executive Vice President of the European Commission. Given the current diplomatic environment, it is unlikely that the ratification will happen soon. 

However, it is essential to note that Chinese sanctions occurred after the EU issued sanctions against four Chinese officials and the Xinjiang Public Security Bureau for alleged involvement in operating education camps in Xinjiang Province. 

Ratification of the CAI would significantly benefit German carmakers who hope to expand production and sales of electric vehicles in China. German Chancellor Angela Merkel recently argued that the EU should not abandon the trade deal. Merkel called for greater reciprocity of markets despite political obstacles. The deal was previously considered flawed by European analysts who argued that it was pro-Chinese and only offered European firms limited access to China's massive market. 

The German Greens and Social Democrats also appear skeptical, hinting that ratification might be delayed for at least two years. If the Greens and Social Democrats gain more control in Berlin after Merkel's departure, support for the CAI in Germany could decline. 

The Details of the CAI 

The CAI is a bilateral investment treaty that guarantees particular protections for businesses investing in another country. Under the CAI, China and the EU pledged to reduce industrial subsidies, limit state intervention in enterprises, and address forced technology transfers. After giving Chinese companies greater access to European markets, EU manufacturers in electric vehicles, telecoms, and private hospitals would gain vital access to Chinese demands to boost national exports. 

Although the CAI has many critics who label it as a pro-Chinese agreement, it is more important to European exporters than China. Beijing has done much to amend foreign investment laws and increase investment access in China through regional incentives in the finance, AI, healthcare, procurement, and e-commerce industries. The Regional Comprehensive Economic Partnership (RCEP) Free Trade Agreement also increased market access to all 10 ASEAN nations and Australia, Japan, New Zealand, and South Korea. 

The suspension of the CAI appears to signal that most of the EU have officially joined Washington's collective effort to counter China's global influence through political and business measures as outlined in the Strategic Competition Act. 

Despite the abrupt suspension, Chinese Premier Li Keqiang recently called for the ratification of the CAI as early as possible and emphasized the importance of his European allies in Italy during a phone conversation with Italian Prime Minister Mario Draghi. Italy has called for China-EU cooperation to drive the global economic recovery. Draghi also emphasized collaboration in energy, aviation, trade, and investment, while also calling for the ratification of the CAI. 

Li Keqiang’s conversation with his Italian counterpart highlights the greatest obstacle in China-EU relations – the fact that the EU failed to construct a cohesive and clear consensus on China policy. Beijing’s allies in the EU will continue to advocate for greater cooperation, while hawks in Brussels dismantle the investment and trade framework that stakeholders crafted for nearly a decade. The need for Europe to communicate a China policy independent of Washington’s whims has never been greater. 

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