An EU-China deal for a bygone era

By Wendy Cutler*

After four years of Donald Trump’s “America First” agenda, the European Union could be forgiven for attempting to go it alone. But, if history is any guide, no single economy can compel China to change its most problematic behaviors.

Late last month, the European Union and China released new details about the Comprehensive Agreement on Investment they concluded in December. On paper, EU negotiators made some progress in important areas like market access, investment liberalization, and sustainable development. But can an incremental bilateral agreement like the CAI really govern economic relations with today’s China?

To be sure, the EU has secured market access in important sectors – including electric vehicles, cloud computing, financial services, and health care – largely through the relaxation of equity restrictions. But detailed annexes to the agreement have yet to be made public, and it remains to be seen how many of these commitments are entirely new.

It is possible that the deal largely codified steps China has already taken to boost market access, either through its own investment laws and regulations or on an ad hoc basis. Furthermore, while equity restrictions form a formidable barrier to market access, they are hardly the only ones. Foreign companies often face a series of other regulatory hurdles, which they can clear only by securing approvals from multiple Chinese government agencies – an often time-consuming and frustrating process.

According to the latest US-China Business Council survey conducted last spring, securing licensing and related approvals is the sixth-biggest challenge American firms face when operating in China.

In any case, the content of the CAI is only part of the story: China often disregards its bilateral commitments. Australia is a case in point. Despite a comprehensive bilateral free-trade agreement, China recently imposed restrictions on imports of Australian wine, barley, and coal, among other products, over what are essentially political grievances. (For example, China took issue with Australia’s decision to ban the Chinese giant Huawei from its 5G network and its calls for an independent inquiry into the origins of the COVID-19 pandemic.) Australia is not an isolated case. After South Korea’s 2016 decision to deploy an American missile-defense system within its borders, China imposed heavy economic sanctions, despite the bilateral free-trade agreement that had come into force the previous year.

If the Chinese authorities are not hesitant about abandoning their trade commitments, what is the point of securing them? The CAI’s attempt to address market distortions caused by the Chinese government’s hands-on approach to economic management is similarly dubious. With Chinese firms receiving large subsidies and other official financial assistance, it has become increasingly difficult for foreign companies to compete with Chinese firms, both in China and in third countries.

This trend is set to continue. Last July, Chinese President Xi Jinping pledged to “strengthen financial support for market players” and noted that state-owned enterprises (SOEs) “should play a leading role to drive upstream and downstream enterprises of all kinds.” To address these distortions, the CAI includes provisions for enhancing the transparency of services-related subsidies. But its mechanism for discussing other harmful subsidies – where some of the greatest problems lie – is unenforceable. Moreover, while the CAI’s rules on SOEs are stronger than those imposed by the World Trade Organization, they fall far short of those contained in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

More robust provisions in these areas are essential to make any trade and investment agreement with China meaningful. The CAI’s final crucial weakness relates to the labor provisions in the section on sustainable development. In particular, China offered only a vague and unenforceable pledge to “make continuous and sustained efforts” to pursue ratification of the two relevant International Labor Organization conventions addressing forced labor. Make no mistake: given China’s highly centralized government, its leaders could quickly ratify the ILO conventions. They simply don’t want to.

Chinese leaders have consistently resisted international obligations that permit intrusive inspections, including in response to increasingly dire reports of forced labor by Uighur Muslims in Xinjiang. With the forced-labor issue reportedly the last to be settled in the CAI negotiations, it seems clear that sealing the deal required the EU to yield on this vital human rights issue.

And for what? This modest and incremental agreement will deliver only limited economic gains to Europe. The CAI might have made sense in 2013 when negotiations began. But it is certainly not equipped to address the challenge China poses to the global economy today. On the contrary, it may strengthen China’s hand in rebuffing international calls for meaningful reform. After all, it was concluded just before US President Joe Biden’s inauguration, despite signals of concern from Biden’s team. In this sense, it could complicate the new US administration’s efforts to build a coalition of like-minded countries to address the challenges posed by China.

At best, the CAI is too little, too late. The same goes for the “phase one” trade deal by Donald Trump’s administration which came into effect one year ago. Rather than address the critical issues of government subsidies and the market-distorting role of SOEs, the Trump administration said they would be included in “phase two” negotiations, which never began.

In deciding whether to approve the CAI, the European Parliament and EU member states should think long and hard about China’s track record of disregarding its trade and investment commitments, cutting foreign entities’ market access in informal and opaque ways, and brazenly violating human rights. Such an honest assessment would produce a clear conclusion: bilateral deals are not enough.

After four years of Trump’s “America First” agenda, it is understandable that some in the EU want to demonstrate that the bloc has the “strategic autonomy” to act on its own. But, if history is any guide, no single economy can compel China to change its most problematic behaviors, from excessive subsidies and industrial overcapacity to human-rights violations. A collective approach, rooted in effective transatlantic cooperation, at least has a fighting chance.

*Wendy Cutler, a former acting deputy US trade representative, is Vice President of the Asia Society Policy Institute.

Copyright: Project Syndicate, 2021.
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