Mark Schaub London Office, King & Wood Mallesons

 30 December 2020 was a big news day for fans of international trade.

Living in London for the last year and being subjected to Brexit 24/7 made one feel as if the approval of the Brexit deal by the UK parliament was less news but rather the season finale of a reality TV show. However, as luck would have it 30 December had 2 not 1 big trade stories with China and the EU agreement major terms in principle of the EU-China Comprehensive Investment Agreement (“the EU-China Agreement”).

Like Brexit the EU-China Agreement still needs to go through an approval process. Although, ultimate approval seems likely it is less certain than the approval of the Brexit deal. Indeed, when one remembers that in 2016 the Wallonia region was able to hold up the EU’s free trade deal with an innocuous Canada – the risk of derailment cannot be fully excluded.

Is it a Big Deal? – Yes. China is the EU’s second-largest trading partner and the EU is China’s largest trading partner. Over Euro1 billion per day of trade flows between these two giants. In a world of increasing friction in cross border trade and investment the EU-China Agreement is a welcome signal that the large trading blocs (or at least two of them) see benefit in aligning and opening their markets as well as providing business with greater certainty and predictability. 2020 has not been great for predictability or certainty.

What Does it Cover? The main pillars of the EU-China Agreement are: (1) market access, (2) level playing field and (3) sustainable development.

A very brief overview is as follows:

Market Access – China will provide greater market access for European investors in China – this will be in some ways a concept similar to how Hong Kong SAR has been provided greater access under CETA. From China’s perspective the EU-China Agreement guarantees existing market access rights to EU markets in sectors like agriculture and fisheries (there they are again I never knew until recently the core importance of fishing to the world economy!). Chinese companies will also have greater access to sectors such as manufacturing, retail, wholesale and renewable energy. For EU business China has committed to an unprecedented increase in market access for EU investors by removing protectionist restrictions[1]

Which Sectors are the Winners?

Sectors that will benefit include:

Manufacturing – especially automotive, transport vehicles, medical devices and chemicals. However, China will still be able to block foreign investment in some sectors, especially those with significant overcapacity or particularly sensitive sectors[2] – but they do this also to domestic companies. The NDRC has clamped down on damaging overcapacity for decades. One example is that it will not be possible to establish or expand capacity in respect of traditional petrol-powered automobiles unless the existing factory’s productivity exceeds the industry average. Similar restrictions have applied to Chinese domestic enterprises for decades.

Services – in particular financial, international maritime, environmental, construction, computing, auxiliary air transport services, cloud services, and private health services. However, in some areas restrictions will remain and in others EU investment will be off-limits such as China’s internet services market (except for end user internet access services) and some fund management services.[3]

Level Playing Field

China will need to address forced technology transfers, non-transparent subsidies and modifications to how state-owned enterprises operate.  The forced technology issue had already been dealt with in the Foreign Investment Law earlier in the year. In respect of sustainable development, the main issue was that China will continue efforts to ratify international conventions on banning forced labour.[4] The EU has secured undertakings for EU businesses to operate on a level playing field in China – the general concept is that EU investments will be treated “no less favourably” than Chinese competitors. The agreement will largely secure the same benefits for the EU as the US obtained under President Trump’s Phase 1 trade deal with China.[5]  SOEs will not be permitted to discriminate in tenders. Also, subsidies to SOEs will need be more transparently disclosed. In addition, the EU and Chinese will improve mutual access to their respective standard setting organizations.

Sustainable Development

Both parties have committed not to lower the standards of labour and environmental protection in order to attract investment. The Parties also undertook to meet requirements under International Labour Organization conventions and the Paris Climate Agreement as well as promoting Corporate Social Responsibility.[6]

How to Enforce?

Although it is all well and good to have struck a bargain – the issue remains as to how it will be enforced in practice. In this regard the EU-China Agreement has “a transparent enforcement mechanism”, similar to other EU Free Trade Agreements.[7]  Such mechanism involves a two-step approach based on consultations and possibly mediation. If these soft approaches fail then there is recourse to an independent arbitration panel. In addition to actual disputes the EU-China Agreement will also establish  monitoring mechanisms both institutionally (at the level of Vice Premier for China and Executive Vice President for the EU) and also public oversight (by way of involving civil society).

Naturally, much will depend on the actual implementation on the ground.

Summary

As almost everyone on the planet looks forward to turning the page on 2020 the EU-China Agreement is a concrete signal that international co-operation may be making a welcome comeback.

For Europe, China is a crucial economic relationship today and is becoming even more important in the future. Neither Europe nor China can ignore the other as a market for trade and investment. In many ways the new agreement also “levels the playing field” for the EU vis a vis the USA in the wake of the USA’s economic and trade agreement with China. The drafts are similar in respect of IP protection and improving market access (i.e. financial services).

Naturally, for any relationship as complex as the EU’s with China there will be many questions that remain. One interesting issue is that many EU companies have established their Chinese operations via Hong Kong SAR or Singaporean holding entities. It is likely that such entities will not be entitled to reap the benefits of increased market access to EU companies.  This may also lead to some EU companies needing to restructure their China business.

[1] EU and China Comprehensive Agreement on Investment Fact Sheet

[2] Key elements of the EU-China Comprehensive Agreement on Investment, EU

[3] EU and China agree new investment treaty, Financial Times

[4] China promises to ban forced labour under EU investment deal, Politico

[5] China-EU investment deal: leaders conclude marathon negotiations via video link, SCMP

[6] EU and China Comprehensive Agreement on Investment Fact Sheet

[7] Whats and whys of the EU-China investment agreement, Reuters