Europe risks shooting itself in foot with ‘premature’ Chinese trade agreement

Europe risks shooting itself in foot with ‘premature’ Chinese trade agreement

The investment pact risks splitting EU members and alienating the US president – all for a deal with few benefits

Ursula von der Leyen boasted of bending China to Europe’s will at a Warwick conference earlier this month as the European Commission president spoke in grandiloquent terms of the region’s investment pact with Xi Jinping’s authoritarian regime.

Commitments from China to stamp out forced labour amid international outcry over the persecuted Uighurs put to work in Xinjiang province were emblematic of the “role I see for Europe on the global stage”. “China agreed to do this because of us,” the German stressed. This was “a forceful cooperation, a forceful progress”.

But von der Leyen’s rhetoric is at odds with growing criticism of Europe’s Comprehensive Agreement on Investment (CAI), which was struck on Dec 30 when all eyes in Britain were focused on the UK’s last-gasp trade deal with the EU.

Political opponents and experts warn that a naive EU has been outmanoeuvred and “used” by the Chinese to score a geopolitical win, which has opened up divides within Europe and set relations with a new US president off to a difficult start.

German MEP Reinhard Butikofer, chair of the European Parliament’s delegation on China, puts it even more bluntly, accusing the EU of “helping Xi Jinping to show Joe Biden the middle finger”. Delhi is also outraged by Europe’s overtures to Beijing after the recent death of Indian troops in border skirmishes with Chinese forces.

After von der Leyen’s recent threat and abrupt about-turn on imposing a hard vaccine border with Northern Ireland, these are not good times for European diplomacy.

Limited scope
The economic impact of the deal is minimal, too. Trade experts point out that while the CAI may be “comprehensive” in the title, it is anything but, despite seven years and 35 rounds of talks. Von der Leyen’s optimistic spin about opening up the Chinese market overlooks the reality of an initial deal which largely brings together a plethora of existing bilateral investment agreements between China and individual European states.

Lauge Poulsen, associate professor of international political economy at UCL, says: “Critics and proponents should be under no illusion: the agreement is limited in nature and will only be relevant for a small minority of European firms operating – or seeking to operate in – China.”

Many of the “breakthroughs” hailed by Europe under the CAI, such as allowing up to 50pc foreign ownership in cloud services, or allowing car manufacturers to invest without a local joint venture partner, were already under way, Poulsen adds. Industry groups are lukewarm at best about the benefits.

Just as significant is what the deal does not include, including European access to the Chinese procurement market, a robust dispute resolution mechanism, or any firm measures to prevent the use of subsidies which has caused so much consternation at the World Trade Organisation.

On the issue of forced labour, China is committed to “continued and sustained efforts” to meet international standards – the same standards it promised to “work towards” when the country joined the WTO 20 years ago.

For politicians like Butikofer, that is rubbing the EU’s nose in it. “The European Parliament adopted a very clearly and strongly worded resolution before Christmas, demanding that CAI should deliver guarantees against forced labour. That hasn’t happened.”

The deal is by no means certain to be ratified either. The fact that 600 MEPs voted for that resolution “is a major stumbling block to say the least”, the MEP adds: “Then there are the geopolitical implications of doing the deal at this moment, in this way. Helping Xi Jinping to show Joe Biden the middle finger has also been the reason for a lot of scorn and criticism. The way in which this has been handled, has been a mistake indeed.”

Splits within Europe
The pressure has come mainly from Germany, disconcerting other European capitals who wanted to hold fire until Biden took office to present a united front against China with the new president.

According to Deutsche Bank, German carmakers built more cars in China than in Germany in 2019, at more than 5m. China became Germany’s largest trading partner in 2016 and accounts for around a quarter of the EU’s inbound investment into China.

After a year in which China’s rapid recovery from Covid-19 has seen it – albeit temporarily – overtake the US as the EU’s largest trading partner, Chancellor Angela Merkel’s determination to complete the deal before the end of Germany’s EU presidency and her own spell in office aligned with Xi’s eagerness for a diplomatic coup.

Although the EU still sees China as a “systemic rival”, the realpolitik behind the deal has been enhanced by the UK’s harder line on China in a break from the courtship of the David Cameron era, underlined by the banishing of telecoms firm Huawei from 5G networks and ministerial condemnation of the democratic crackdown in Hong Kong. “That felt like a tipping point for me,” says Sam Lowe, research fellow at the Centre for European Reform.

Theresa Fallon, director of the Brussels-based Centre for Russia Europe Asia Studies (Creas), adds: “Now the UK has Brexited, we see the growth of German power. This was largely led by Germany. You had a German rotating president in Merkel, a German president of the European Commission and a German director general for trade in Sabine Weyland. All the stars were aligned to get this pushed over the line.”

Berlin’s eagerness came despite concerns elsewhere (including a pointed tweet in English from Poland’s foreign minister that a “good, balanced deal is better than a premature one”) and discontent over China among the EU’s newer members in central and eastern Europe.

There, promises of a Chinese investment boom have failed to emerge in the context of falling foreign direct investment from China in the EU since 2016. According to the Mercator Institute for Chinese Studies, FDI from China dropped by a third to €12bn in 2019, taking it back to 2013 levels.

Splits within Europe may be less costly though than the early blow to relations with Biden, who has been looking to build an international coalition against China in a marked contrast from Donald Trump’s all-guns-blazing approach on tariffs.

Walter Lohman, director of the Asian Studies Centre at the Heritage Foundation’s US think tank, called the CAI “very surprising and not a little cynical” after Europe “complained for four years about US unilateralism”.

He adds: “They got used by the Chinese. The Chinese were trying to throw up an obstacle to US-Europe cooperation even before it started. And Brussels went for it. EU officials would have you believe that the Chinese made all the concessions. The biggest gain for the Chinese was actually the agreement itself. It was strategic versus the US. Beijing succeeded with Brussels, and will succeed with Washington, if we allow the CAI to block future cooperation between us.”

Despite Europe’s aspirations to chart a solo course on the world stage they were exposed as ingénues again this month in Russia, which expelled three EU diplomats during a recent visit by Josep Borrell, the EU’s foreign affairs chief. Borrell humiliatingly found out about the move on social media. “In Moscow, they were just kind of pawed around like a cat with a ball of yarn,” adds Fallon.

The ham-fisted handling of the CAI has dealt another blow to those ambitions, according to Butikofer’s cutting verdict: “Merkel and Macron favoured demonstrating to Washington that they want to pursue what they call ‘strategic autonomy’. But you can quite easily shoot yourself in the foot autonomously – and I think that’s what we did.”

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