The EU-China Comprehensive Agreement on Investment

Table of Contents

1. Frontmatter

2. Introduction: The EU-China Comprehensive Agreement on Investment and a Thorny Path Towards Investment Liberalisation

   Alexandr Svetlicinii, I-Ju Chen

   Abstract

   The negotiations on the EU-China Comprehensive Agreement on Investment (CAI) were launched by the parties in 2014 and concluded in principle on 30 December 2020, after thirty-five rounds of negotiations. Despite the current stalemate in in the conclusion and ratification of the CAI, its importance cannot be underestimated, as it is the first bilateral investment treaty between the two major economic powerhouses and international norm entrepreneurs. The scholarly assessment of the CAI is organized along the following three themes, which correspond to the respective parts of this volume: (1) strategic objectives and negotiating positions of the parties; (2) substantive provisions of the CAI on investment liberalisation; (3) dispute resolution methods available to the parties under the CAI. Drawing upon the insights on investment liberalisation elaborated in the individual chapters, this book contributes to the understanding of the CAI as an example of international rule-making aimed at addressing investment-related issues in bilateral economic relations and setting the precedent for multilateral instruments.

3. Geopolitical Origins and Negotiations of the EU-China Comprehensive Agreement on Investment

   1. Frontmatter

   2. The Political Economy of the EU-China Comprehensive Agreement on Investment: Balancing the European Union’s Economic Interests

      Duncan Freeman

      Abstract

      The EU’s pursuit of the CAI with China was based on economic interest. Since the initiation of formal relations between the EEC and China in 1975, economic interest has been the core of EU policy, and as EU policy documents make clear, the penetration of the market in China by European companies has been a central goal of the EU. In its initial period the EU-China relationship was dominated by trade, both in terms of policy and real economic exchanges. In the 2010s investment moved to the top of the EU agenda, and the EU became the demandeur for the CAI. In the EU’s view, the relationship with China, including FDI, was unbalanced in favour of the latter. The relationship required rebalancing through what the EU called reciprocity and a level playing field. The CAI was a tool through which the imbalance between the open EU investment regime and the restrictive Chinese regime could be altered in favour of the interests of EU companies. However, this view of the lack of reciprocity in the EU-China relationship does not explain the EU’s pursuit of the CAI, which must be understood in a wider context of political economy. The centring of FDI in EU policy occurred following the crisis of 2008 in which China became the driver of global economic growth while the EU economy stagnated. While on the surface investment between the EU and China was small, EU investment in China became increasingly important to European economies and companies. Rather than being driven by the exclusion of EU FDI in China, the EU pursuit of the CAI was driven by increasing dependence of EU economies and companies on investment in China. However, the penetration of the market in China was not equally distributed among EU member states, with some benefitting much more than others.

   3. The Political Economy of China and the EU-China Comprehensive Agreement on Investment

      Sohyun Zoe Lee

      Abstract

      This chapter examines China’s political economy rationale for the EU-China Comprehensive Agreement on Investment (CAI). Since reform and opening up, Beijing has frequently utilized economic policies not only to promote domestic reforms, but also to achieve security goals and to elevate China’s status in the global political economy. Given China’s emphasis on economic statecraft, to what extent is the EU-China CAI consistent with China’s conventional economic diplomacy? What were the key drivers that motivated China to negotiate the CAI? Examining the development of CAI demonstrates that the agreement has been driven in large part by Beijing’s conventional political and economic objectives. At the domestic level, the high liberalization standards and comprehensive scope of provisions adopted in the CAI have been utilized to lock in domestic reforms and strengthening the Chinese government’s legitimacy. At the international level, the CAI demonstrates China’s ambitions to raise its status and to take a greater role in shaping global rules of investment, driven by intense global power dynamics.

   4. The European Union and China: In Search of Positioning and Exercising Normative Power in the Comprehensive Agreement on Investment

      I-Ju Chen

      Abstract

      The EU and China, two of the most externally integrated global economies, have much in common in the context of international economic governance. However, these two partners have developed different models according to their interpretations and prioritisations of international principles and values. The EU focuses more on its own internal problems, and China expands its reach around the world after its accession to the WTO (the World Trade Organisation) in 2001. Both the EU and China have emerged as ambitious leaders or even normative powers in international economic governance. The EU-China strategic partnership has reached a new equilibrium based on which they manage their contending normative self-understanding. Their four-decade-long bilateral and by now strategic partnership has progressed to a level of complexity whereby their impacts on each other are mutual and inevitable. The principal conclusion of the CAI has advanced in bringing these two major economic powers together. This chapter identifies opportunities that the EU and China have in the negotiation of the CAI despite challenges from current global, regional, and bilateral political issues. Nevertheless, considering EU and China’s individual limits as normative powers and the necessity to cooperate in re-constructing the economy after the pandemic, this “frenemy” situation could last for years with the concluded and eventually enforced CAI serving as a legal foundation and guidance for EU-China policy implementation.

4. EU-China Comprehensive Agreement on Investment: Substantive Issues

   1. Frontmatter

   2. Pre-Entry National Treatment in EU-China Comprehensive Agreement on Investment: An Open Sesame to the Chinese Market?

      Xueji Su

      Abstract

      Since its inception, the EU-China Comprehensive Agreement on Investment (CAI) has prioritised the goal of market liberalisation. To this purpose, the EU has proposed that the CAI should include, among other market liberalisation disciplines, a pre-establishment national treatment requirement with a narrow list of exemptions. However, China’s 2019 legislative overhaul in the sphere of foreign investment regulation, which introduced pre-establishment national treatment for foreign investment and repealed its long-standing case-by-case clearance procedure, casts doubt on the value of the EU’s proposal. At the same time, despite the new regulations, market access difficulties for foreign investors have not been eliminated entirely, and new issues have emerged from China’s reforms and increasingly politicised investment settings. This chapter examines the effects and limitations of the pre-establishment national treatment discipline alongside the negative list approach in the CAI, in light of persistent and emerging concerns with market access in China.

   3. The Disciplines of State-Owned Enterprises in the China-EU Comprehensive Agreement on Investment: Assessment, Implications and Directions

      Wei Yin

      Abstract

      Considerable attention has been paid to the activities of state-owned enterprises (SOEs), due to their state ownership and active role in the international market. Tailored SOE disciplines incorporated in recent negotiated or signed trade and investment agreements aim to direct the transnational conduct of SOEs and achieve a level playing field. This chapter analyses the SOE disciplines contained in the text of key provisions of the China-EU Comprehensive Agreement on Investment (CAI), assesses the implication of these SOE specific rules and discusses whether the CAI will shape SOE-specific rules globally. In disciplining SOEs, CAI provides a definition of covered entities, delivers on requirements of acting in accordance with commercial consideration, avoiding discriminatory treatment and ensuring transparency. This chapter recognises the merits and remaining issues of these SOE-specific rules in CAI as a potential model in regulating SOEs in other regional and multilateral negotiations.

   4. The EU-China Comprehensive Agreement on Investment: Disciplining Competition Law Enforcement in China?

      Alexandr Svetlicinii

      Abstract

      From the EU perspective, the conclusion of the EU-China Comprehensive Agreement on Investment (CAI) was motivated, among other things, by a wish to ensure a level-playing field for European companies doing business in China. Among the commonly named market access obstacles for EU investors in China were preferential regulatory treatment enjoyed by Chinese state-owned enterprises (SOEs), including being shielded from competition law and occasional instances of discriminatory enforcement of competition rules against foreign companies. The negotiation of the CAI was an opportunity for the EU to address these concerns through legally binding commitments that would be subject to dispute resolution. This chapter analyses the competition-related provisions of the CAI through the lenses of international investment law and competition law. It reviews the current status quo of China’s competition law enforcement in the light of the binding commitments included in the CAI. This forward-looking assessment attempts to forecast the likely effects of the CAI on the procedural and institutional framework of antitrust enforcement in China, including its treatment of domestic SOEs and foreign companies.

   5. Intellectual Property Dimension of the EU-China Comprehensive Agreement on Investment: The EU Approach Against Non-Market-Mediated International Technology Transfer

      Danny Friedmann

      Abstract

      To compete economically and geopolitically, a country needs to have access to cutting-edge technology, which is often proprietary, protected by intellectual property rights (IPRs) including patents or trade secrets. Before countries can innovate indigenously, they need to catch up. One can distinguish between market-mediated and non-market-mediated methods of international technology transfer. This chapter explores the EU approach to China’s non-market-mediated international technology transfer.

      Two USTR 301 Reports and an EU request for consultation with China at the WTO, provided incentives for China to include prohibitions of technology transfer in both the Foreign Investment Law and Administrative License Law. Nevertheless, after the promulgation of these laws, prohibitions against forced technology transfer were included in first the US-China Economic and Trade Agreement (“Phase One”), and then in the EU-China Comprehensive Agreement on Investment (CAI). At different moments in its history, China has relied on non-market-mediated technology transfer. As a truly developing country that was opening up in 1978, this was justified and effective. Anno 2022, just one year short of the World Bank prediction that China will become a high-income country, non-market-mediated international technology transfer might be counterproductive to China’s ability to indigenously innovate.

   6. Regulating Subsidies in the EU-China Comprehensive Agreement on Investment: Implications for Global Subsidies Reform

      Ben Czapnik

      Abstract

      The use of subsidies is a major irritant in multilateral trade relations and a source of tension between China and its main trade partners. Even though subsidies can be a useful tool in response to major policy concerns, such as the Covid-19 pandemic or climate change, their use can also lead to trade conflicts when they distort trade or negatively affect foreign producers. The EU is at the forefront of efforts to reform global subsidies rules at the WTO, including in ways that directly target Chinese practices, but there are few signs of progress in the multilateral context. This chapter assesses the extent to which the EU-China Comprehensive Agreement on Investment (EU-CAI) contributes to the EU’s objectives on subsidies reform. In addition to summarising the EU-CAI agreement’s substantive content on subsidies, it inquires whether the agreement effectively addresses the EU’s concerns. These concerns relate to the extensive use of subsidies in trade-distorting ways, the lack of transparency about subsidies and the burden on governments seeking to challenge subsidies through WTO litigation or through the imposition of countervailing measures. The EU-CAI negotiations make a marginal contribution to the EU’s pursuit of its objectives for global subsidies regulation, but this low-ambition outcome is not surprising in the context of a bilateral agreement focused on investment. While there currently appears to be no realistic pathway for the entry into force of the EU-CAI, the agreement may nonetheless provide some hints about the future direction of global subsidies reform, including at the multilateral level.

   7. Disputing Personal Data in the EU-China Comprehensive Agreement on Investment

      Mark McLaughlin

      Abstract

      This chapter analyses the emerging data realms in China and the European Union against the backdrop of the Comprehensive Agreement on Investment (CAI). It examines the link between data protection and investment flows and undertakes a comparative analysis of the PIPL and GDPR. Moreover, this chapter will also analyse the Digital Silk Road in promoting China’s model of data sovereignty. While early trade and investment agreements did not consider data relevant for the regulation of cross-border commerce, modern treaties are increasingly cognisant of rules for data protection. As such, the data-related provisions of the CAI will be placed in the context of other international investment treaties that seek to address the regulation of data flows.

5. EU-China Comprehensive Agreement on Investment: Procedural Issues

   1. Frontmatter

   2. The Future of Investor-State Dispute Settlement in the EU-China Comprehensive Agreement on Investment

      Ming Du

      Abstract

      This chapter intends to explore the future of the ISDS provisions in the CAI. Contrary to the dominant view that it is unlikely for China to be a supporter of the EU’s ISDS reform proposal, this chapter argue that such a conclusion may be premature. After a careful analysis of China’s submission to the UNITRAL Working Group III, the key feature of EU’s ICS, and a systemic evaluation of pertinent factors that are most relevant to China’s approach to ISDS reform, it is submitted that the divergence between the approaches to ISDS reform of the EU and China may not be unbridgeable. It is possible for China to agree to a two-tier ICS in the CAI, as the EU has concluded with other countries. Similarly, there are no strong reasons for China to oppose the EU’s MIC proposal, in particular after the EU indicated that the MIC proposal could take an open architecture.

   3. A New Dish of “CAI” for State-to-State Dispute Settlement in the EU-China Comprehensive Agreement on Investment

      Anran Zhang

      Abstract

      A new treaty dish of Cai (literally “cuisine”) concerning investment access and protection was prepared by the European Union (EU) and China at the end of 2020. The EU-China Comprehensive Agreement on Investment (CAI) contain a settlement section for resolving disputes arising between the EU and China, which also includes a chapter on the State-to-State Dispute Settlement (SSDS). SSDS in CAI establishes a comprehensive and step-by-step arbitration mechanism for resolving disputes between the Parties compared with other investment treaties signed between China and EU member states. This chapter is an exhaustive study on the SSDS in the CAI. It argues that SSDS designed with political expectations shows joint effort from both the EU and China towards a reformative mechanism to resolve disputes arising from the investment treaty.

   4. Never Fear to Negotiate: Options for Non-Adversarial Dispute Resolution in the EU-China Comprehensive Agreement on Investment

      Sara Migliorini, Naina Gupta

      Abstract

      The current tumultuous time in foreign relations has furthered the need for a reflection on the role of non-adversarial dispute resolution mechanisms in recent treaties, especially those that bind major economic powers such as the EU-China Comprehensive Agreement on Investment (CAI). This chapter analyses Arts. 3, 4 and 5 of Section V of CAI, which puts in place the system of non-adversarial dispute resolution. It finds that they are in line with the consistent efforts of the EU and China to incorporate processes of mediation and conciliation to resolve legal differences. After finding that non-adversarial dispute resolution mechanisms offer traditional advantages, that their weaknesses have been overcome in recent developments and that favourable jurisprudence has also emerged, the chapter concludes there are genuine prospects for the growth of non-adversarial dispute resolution in the China-EU context. This is enhanced by institutional moves encouraging mediations and consultations, other instances of the use of such processes in international disputes, and the traditional Chinese cultural preference for non-adversarial conflict handling.