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In December 2020, the EU and China concluded in principle the negotiations for a Comprehensive Agreement on Investment (CAI).
Why did the EU negotiate an investment agreement with China?
The trade and investment links between the EU and China are very important. The EU and China are strategic markets for each other, trading on average over €1.5 billion a day. China’s large and fast-growing domestic market of 1.4 billion consumers and its weight as the world’s third-largest economy represent significant business opportunities for European companies.
When European companies have the chance to compete and thrive on such markets, they generate direct benefits to the European economy in terms of higher productivity, brought about by a larger scale of operations, exports, innovation and global competitiveness.
However, China's market has been traditionally far less open to foreign investment than the EU’s, and EU companies operating in China do not benefit from the same levels of transparency and fair competition as those enjoyed by Chinese companies in the EU market.
The CAI aims to address this lack of balance. The agreement contains commitments on market access and disciplines that will help to level the playing field for EU investors in China, including clear rules on state-owned enterprises, transparency obligations for subsidies, and rules prohibiting forced technology transfers. The CAI also contains ambitious provisions on sustainable development, including commitments by China to implement effectively the Paris Agreement on climate change, and specific commitments on ratifying ILO fundamental Conventions on the abolition of forced labour.
What's in the agreement?
China has agreed to grant European investors a greater level of market access, including some significant new market openings.
The agreement contains disciplines on state-owned enterprises, transparency of subsidies and rules prohibiting forced technology transfer to ensure that EU companies can compete on a more level playing field in China.
For the first time, China has agreed to provisions on sustainable development, including commitments to implement effectively the Paris Agreement on climate change, and specific commitments on ratifying ILO fundamental Conventions on the abolition of forced labour.
Market opening and level playing field for European investments
China has made significant commitments to guarantee EU companies access to the Chinese market. The CAI binds the autonomous openings made by China in the last 20 years, and brings additional market openings in a number of services and non-services sectors.
With respect to non-services, China has made significant commitments in manufacturing, which makes up more than half of total EU investment in China – including 28% for the automotive sector and 22% for basic materials.
In the services sector, China also makes commitments on access for European investors in telecommunications (cloud services), financial services, private healthcare, environmental services and air transport-related services (computer reservation systems).
These commitments mean that European business will gain certainty and predictability for their operations in the covered sectors, as China will no longer be able to prohibit access or discriminate against them.
The CAI also lays down clear rules on state-owned enterprises, transparency obligations for subsidies, and rules prohibiting forced technology transfers and other distortive practices. These rules aim to improve the competition conditions for European investors in China.
The agreement also includes transparency rules and other guarantees that will make it easier for European companies to obtain licenses and authorisation and to complete administrative procedures. It also secures European companies’ access to China's standards-setting bodies.
Sustainable development at the core of the investment relationship
Beyond the economic dimension, the CAI also contains significant commitments on sustainable development. For the first time, China has agreed to such provisions with a trading partner. These commitments span the areas of labour, environment and climate, and include among others the obligation not to lower environmental and labour standards to attract investment and to promote responsible business conduct by its companies.
On environment and climate, China has also agreed to effectively implement the United Nations Framework Convention on Climate Change and the Paris Agreement on climate change. It has also agreed to support green growth and a cooperation agenda with the EU.
On labour, China has made commitments to implement effectively the International Labour Organisation Conventions (ILO) that it has ratified, and to make continued and sustained efforts to ratify the ILO fundamental Conventions on the abolition of forced labour. The two sides have also agreed to promote investment policies that further the objectives of the Decent Work Agenda.
Sustainable development matters will be subject to a specifically tailored enforcement mechanism involving an independent panel of experts and a high degree of transparency; including the participation of civil society, like in the EU’s other trade agreements.
Continuation of negotiations on investment protection on a separate track
The Agreement also includes a commitment by both sides to try to complete negotiations on investment protection within two years of the signature of the CAI.
The two sides have undertaken to work towards state-of-the-art standards of protection and a dispute settlement mechanism that takes into account work undertaken on structural reform of investment dispute settlement in the context of the United Nations Commission for International Trade Law (UNCITRAL). The EU's objective remains to replace the existing Member States' Bilateral Investment Treaties with China with a single modernised agreement at EU level.
How will the agreement be implemented and enforced?
The implementation of the commitments in the agreement will be monitored at the level of Executive Vice-President on the part of the EU and Vice-Premier on China's part.
In addition to regular contacts at that level, the agreement provides for the possibility to hold such meetings at short notice and on an ad hoc basis in case of serious issues regarding the implementation of commitments.
The agreement also provides for a robust State-to-State dispute resolution mechanism, as in the EU’s existing trade agreements. The agreement also establishes a specific working group to monitor the implementation of sustainable development-related matters, including labour standards and climate action.
What are the next steps?
Both sides are now working towards finalising the text of the agreement, which will need to be legally reviewed and translated before it can be submitted for approval by the EU Council and for ratification.