Europe's Choice and China's Rise: How the New CAI will Define the Future of the Global Economy

On December 30, 2020 the European Union and the People’s Republic of China came to a

political agreement on a bilateral investment treaty, titled the EU-China Comprehensive

Agreement on Investment (CAI). While the legal framework is still being worked out, if this

agreement comes into fruition it will be the largest and most comprehensive bilateral

investment treaty ever signed. In its earliest drafts, this agreement is already aiming to provide European investors a degree of entry that has never before been seen, allowing them to invest in key sectors without partnering with local Chinese firms, guaranteeing stronger protections for intellectual property rights, and increasing transparency on Chinas state-owned enterprise (SOEs) sector.

On the other hand, China gains access to Europe’s market and technical know-how as it seeks to acquire leadership in technologies of the future, outlined in its Made in China 2025 policy. Narrowed down, this new relationship will define a new global economy, where China’s rise to dominance will continue thundering forward as it increasingly dominates strategic sectors from artificial intelligence to electric vehicles, and to a degree, the CAI is Europe’s acknowledgement of this, as it seeks to bind China into established norms of global trade utilizing its extensive regulatory powers.

Geo-Political Consequences and Challenges

Yet, significant challenges remain before the two parties can flesh out a fully-fledged

agreement, as a top EU official has acknowledged, “legal frameworks still have to be revised

and updated”. For many Europe and China watchers the question remains on how the EU will enforce this agreement and whether it lies in Chinas interests to fully abide by it. Furthermore, beyond just legal challenges, the Europeans must contend with geopolitical concerns from traditional allies.

Nowhere are these concerns more present than across the Atlantic, with Biden’s National

Security Advisor, Jake Sullivan, issuing disapproval via twitter calling for: “consultations with our European partners on our common concerns about China’s economic practices”. For many in Washington D.C, the perception of China as a rising threat to U.S technological primacy has urged policy makers towards an increasingly hawkish stance towards China. This newly minted investment agreement further amplifies American reservations, fearing that this agreement could enhance China’s advancement towards technological supremacy. Many in Washington view this agreement as simply Europe seeking to extract further concessions and leverage vis-à-vis the United States on key trading issues, so as to force the U.S back into global trading norms (hopefully bringing the WTO back up and running) and push it away from a strain of isolationism that has become re-emergent under Trump.

The agreement though challenges American efforts to bifurcate U.S economic linkages, as two of the three centers of the global economy, China and Europe seek to further integrate and expand their economic linkages. So far, most efforts by the Americans to “collectively impose costs”, as stated by Jake Sullivan, have fallen flat.

How Europe fits into Chinas future

Beginning in 2015, when the Communist Party announced its Made in China 2025 plans, the

Chinese state has sought to pursue self-sufficient dominance in key sectors of the future. The

Chinese government has actively encouraged the private and SOE sectors to upgrade their

productive capacities by acquiring new technologies abroad, or by pooling large amounts of

credit into so-called “sunrise” industries of the future, like electric vehicles, semiconductors,

robotics, artificial intelligence, and supercomputing.

Increasingly, Chinese firms have targeted leading European firms for acquisition as they seek to capture vital technical know-how, as seen for example in the 2016 acquisition of KUKA, a

leading German robotics firm, by China’s Midea Group. Giving the Europeans access to the

Chinese market will feed their export dependence (for example one fifth of DAX revenues are derived from China), in the search for further penetration of China’s large and growing market (posting 2% growth in output during 2020). European firms have increasingly been forced to leverage vital technical information in exchange for entry into Chinas large market. While this agreement seeks to ameliorate some of these concerns it is not sufficient in itself to bring European firms on equal footing with Chinese ones.

Prior history has shown that formal laws often do not translate into practice, China’s large

informal system of network-based ties between Communist party insiders and firms, leaving

western notions of state-market interactions redundant. Unlike in the EU where laws are

specific and codified, the Chinese legal system is often interpretive and less binding, especially in areas where the Communist Party has the incentive for it to be so. In many ways, network-based systems create an arena of protection that cannot truly be regulated, still leaving European firms at a disadvantage.

By opening the domestic market for European investment, the Chinese have acknowledged that they cannot go at it alone. Europe will provide the needed investment into vital sectors which China seeks to dominate bringing necessary technical know-how. Most importantly, this agreement is an acceptance of the fact that Europe no longer sees China as merely a place for low value-added production, but a partner for intra-industry trade and investment, a market that can absorb Europe’s high value-added exports. To an extent, this agreement recognizes China as a member of the global north, and as such, a force that cannot be stopped.

What is in Store?

The question then remains for how long Europe and China will be seen as partners? China’s

need for technical know-how will last only for so long. What will happen once China achieves

parity with Europe in key sectors which the Europeans currently lead in? That is the paradox of Europe’s relationship with China. The potential remains that as Europe seeks evermore to open the domestic Chinese market, they are imposing long term costs by sacrificing long run technological advantages for short-run market entry and profits, as China has already begun to supersede the Europeans in key technologies of the future like 5G technology and electric vehicles (commanding the largest EV market in the world). The question then remains, whether China will seek a symbiotic relationship or an extractive one.

The EU-China Comprehensive Agreement on Investment is groundbreaking, simply put, it

symbolizes a shifting focus away from a transatlantic based system of commerce to one that is increasingly Eurasian. Likewise, this new political agreement symbolizes the first attempt in

nearly a century to fully harmonize Chinas system of commerce with that of an outside power, and so, it poses the first major test on China’s willingness to play by established norms or to re-write them all together.

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