After seven long years of negotiations, China and the European Union announced on December 30 that they have reached a Comprehensive Agreement on Investment (CAI). It is a hugely consequential event for the world economy and international politics.
The agreement is destined to rebalance the trade and investment relationship between two of the top three economic power centres in the world order, binding them to values-based investment principles that are rooted in sustainable development principles.
The agreement envisages that China will open up to provide an unprecedented market access for EU investors, giving them certainty and predictability for their operations and a level playing field with transparency and accountability, apart from committing on environment and climate and on labour standards. The agreement also provides for a robust enforcement and monitoring mechanism.
The European Commission’s press release outlining the key elements of the agreement is here. The Chinese commentaries describe the agreement as “an extraordinary boost for pragmatic cooperation” between the EU and its largest trading partner China based on win-win approach, to mutual benefit, being “the basic logic in the era of globalisation”. (here and here)
President Xi Jinping stressed at the video conference that the “balanced, high-level, and mutually beneficial” pact demonstrates China’s determination and confidence to open up on a high level, and Beijing will provide broader market access, a better business environment, stronger institutional guarantees and brighter prospects for bilateral cooperation.
Xi vowed that China and the EU, “two of the world’s major powers, civilisations and markets,” are set to enhance mutual trust and join hands together to kick off a new start in 2021 and signal to the world community that notwithstanding differences on some issues, “both sides have the political willingness to enhance dialogue, deepen cooperation and share the benefits based on mutual respect.”
According to Eurostat data, in 2019 the EU had exported goods worth approximately US$242 billion to China and imported goods worth US$442 billion from China. China is the second largest FDI recipient after the US counting – according to Rhodium Group. The CAI’s main objective would be an enhanced protection of EU investments in China and vice versa, improved legal certainty regarding the treatment of EU investors in China and Chinese investors in Europe, reduction of barriers to investing in China and vice versa, and as a result, increasing bilateral investment flows and improved access mutually to the Chinese and EU markets. Indeed, the CAI signifies a turning point in the China-EU relationship.
Some analysts estimate that the EU has snubbed the US by concluding the CAI unilaterally. But the high probability is that the EU expects the Biden administration to find an alignment with the CAI and follow its footfalls to use trade and investment relationship with China as a key stimulus for post-pandemic economic recovery.
If that happens, the CAI may represent not only a strong foundation towards sustainable cooperation between China and the EU but provide a reference point for China-US bilateral negotiations about issues such as the Phase Two trade deal. Of course, this would mean that the relations among China, EU and the US will be based on similar principles and will increasingly tend to achieve similar goals, thus curtailing both current and potential conflicts in the future.
In a statement in Paris on Wednesday, President Emmanuel Macron said, “The dialog between Europe and China has strengthened and become more balanced these past few years. It continues.” Macron offered to visit China in the coming months along with German Chancellor Angela Merkel to discuss areas of cooperation. To be sure, the CAI bears the imprimatur of German Chancellor Angela Merkel who was determined to finalise the pact during Berlin’s presidency of the EU.
Suffice to say, the Franco-German axis is at work and the momentum will continue during the French presidency of the EU next year. Significantly, Germany is proceeding with Huawei’s access in its 5G sector, while the Chinese company has chosen Brumath Business Park in the Grand-Est region of France, close to the French-German border, to build its new European production facility to manufacture technological solutions for mobile networks for Huawei customers in Europe, with an annual production value in the order of 1 billion euros. Huawei already has 23 R&D centres in Europe and partnerships with over 100 universities, and a highly performant supply chain including 3100 companies.
Clearly, Indian policymakers ought to take note that there is a powerful sign in all of this to the US that real, tangible power in the world order has shifted. The next two decades are going to be critical “because China will use them to become the first global power,” as EU foreign policy chief Josep Borrell wrote recently. Borrell, interestingly, has implied the decline of US power as well as the inevitability of China’s rise as the number one world power.
In geopolitical terms, the CAI flags that Europe intends to be strategically independent. It shatters India’s foreign policy assumptions that Europe is preparing to join the US-led “Indo-Pacific” strategy to contain China. The heart of the matter is that Europe is backing out of the US project for a binary world.
Biden has to take note that his predecessor’s raucous “Indo-Pacific strategy” is a road to nowhere without the European allies. Europe is in quest of permanent institutionalised peace in the continent. In a forceful essay last week, former German foreign minister and a highly respected European thinker Joschka Fischer wrote,
“Europeans must make clear to the Biden administration from the start what Europe can and cannot do. America is a global power… Europe, by contrast, consists of many small- and medium-size countries, each of which has only limited ability to project power and influence… Past experience with military missions outside of Europe has shown that the perspective of a global power differs fundamentally from that of a small- or medium-sized power. European voters recognise this, and it will have a strong bearing on whether they accept such missions in the future.
“In the context of the transatlantic relationship, Europe’s role is to defend NATO territory and its precarious periphery. In Eastern Europe, this concerns primarily the Baltic states.., the war in eastern Ukraine, and other “frozen conflicts” in Europe’s neighbourhood. Resolving these – or at least achieving some sort of stabilisation – will require a much more forceful European diplomatic response… As for world politics, Europe must leave this domain to the global superpowers – a title it cannot claim for itself. This is particularly true when it comes to China… NATO should not be made into a security organisation for East Asia, as that would simply overstretch it.”
The bottom line is that while Biden’s administration is expected to work alongside allies such as the EU to manage relations with China, the EU and China have rushed to get a deal done. Of course, this is not a deal against America, but the fact remains that the China-EU alignment makes nonsense of the single most potent weapon in the US armoury against China, namely, the ever-looming threat of sanctions. The implications are profound for both the Asia-Pacific as well as the Western Hemisphere.
For, it can only mean the end of US hegemony in the Asia-Pacific and in the Western Hemisphere. Where does that leave Quad? Alas, India was punching far above its weight and the outcome is predictable. Fortunately, India is not in the dire straits as Australia finds itself. Beijing still remains open on rebooting cooperation with India. But India needs to jettison its delusional thinking and assess realistically the emergent directions of the reshaping of world order.
China is entering 2021 with wind at its back. China’s economic strength will only increase as global trade keeps recovering. In the OECD’s estimation, China will account for around one-third of the world’s economic recovery in the new year.