OPINION-The EU-China CAI: It matters and it is here to stay

Macau Business | April 2021

At the end of 2020, the European Union (EU) and the People’s Republic of China concluded [an “agreement in principle” on] a Comprehensive Agreement on Investment (CAI). The aim of CAI is to create a more open, transparent and secure environment for greater future flows of investment; within an open multilateral trading system framework supported by both parties.

Jorge Costa Oliveira – Partner and CEO of JCO Consultancy http://www.linkedin.com/in/jorgecostaoliveira/

External trade and investment numbers are clear – the EU is the top destination for Chinese exports; China is the third destination for EU exports (after the USA and the UK). Between 2000 and 2020, EU companies invested around 174 Bn US$ in China and Chinese companies invested about 138 Bn US$ in the EU.

The most compelling reason for this Agreement lies in the strong desire of companies from both parties for market access. On the European side, the growth of the Chinese economy – which will be the largest in the world in 2050 with a GDP of c. 58 Tn US$ – makes it essential to have access to the Chinese market as soon as possible, in particular to the Urban China market (c. 875M persons in 2020; c. 1 Bn in 2030). Yet, Europeancompanies perceive major limitations to access the Chinese market on grounds of domestic development strategy and protectionism in some sectors. On the Chinese side, more and more companies want or need to internationalize themselves and the EU market is the most desirable market to this end, given its dimension and per capita income. Yet, there is growing scrutiny from EU national regulators, on grounds of national security and unfair competition.

On the other hand, CAI aims to level the playing fieldon the investment terms on the other party– e.g., binding China’s levels of openness, removing joint-venture requirements, lowering equity caps in some sectors, transparency in subsidies (namely as regards subsidies provided in the services sector) – and by removing strong restrictions or limitations – e.g., the strong restrictions in China on the financial services and telecommunications sectors.

Several relevant European companies already have a strong presence in China in the manufacturingsector. CAI brings commitments for access for EU companies in several services sectors in China, such as the financial services, international maritime services, environmental, construction and computer services, as well as in auxiliary air transport services, cloud services, and private health services.

The Chinese economy and consumers will benefit from fairer competitionin these sectors; sectors that have long been open in Europe to Chinese companies that have entered the EU market especially in the last two decades. China has already been opening gradually its financial markets to foreign investment; on other services sectors, CAI will contribute to opening up its markets further to foreign investment and letting the market play a decisive role in the allocation of resources. CAI also seeks to discipline the behavior of State-owned enterprises (SOEs) by requiring them to act in accordance with commercial considerations and not to discriminate in their purchases and sales of goods or services.

Furthermore, CAI aims to prohibit forced technology, with pledges of no interference in contractual freedom in technology licensing, protection of confidential business information and prohibition of investment requirements that compel transfer of technology.

Another relevant factor to put in the equation are the successive blacklists of Chinese companies formulated by the USA authorities that will not diminish; on the contrary, the Biden Administration will not soften the previous policy in this area, which will force many Chinese companies – mainly SOEs and technological ones, but not only – to leave the USA and look for new markets with similar level of income, capital and technology.

Despite the perception by many that Chinese capital is endless, the fact is that both for the BRI and for new waves of internationalization of Chinese [medium size] companies, capital available in China is insufficient. Therefore, it is paramount for China to create conditions for a constant flow of FDI into the country; as is essential to create the conditions for many of said medium size companies, having adopted international principles of corporate governance, to raise the funds required for their internationalization via IPOs in Europe.

The late March 2021 EU sanctions on Human Rights violations accusations and China counter-sanctions on the grounds of internal interference are inevitable. From a European point of view, the biggest hurdle to finalize CAI is having it approved by the European Parliament. Human Rights actions from the EU are inevitable and indeed necessary so that the European Commission and Council are not perceived as too aligned with China. In the end, European and Chinese business interests will likely prevail since CAI is crucial for EU and China’s interests.