January 7, 2021 | Who benefits from the EU-China Investment Agreement (CAI)?
Who benefits from the E.U.-China Investment Agreement (C.A.I.)?
Happy Thursday, welcome new subscribers!
Here’s today’s focus:
EU-China Comprehensive Agreement on Investment (CAI)
The impact of China’s state-backed digital currency on fiat currencies and decentralized cryptocurrencies (DC/EP)
Biden’s plans to form a ‘grand alliance’ to counter China
Who benefits from the EU-China Investment Agreement (CAI)? Can we draw any firm or tentative conclusions?
On Monday I started writing on the EU-China investment agreement to gain a better understanding of its geopolitical significance, specifically its impact on US-EU relations and US-China relations. On Tuesday I addressed the rationale of those who oppose the agreement.
Before we begin drawing any conclusions, I should mention that none of my views are static and that I’m actively seeking critiques and evidence-based counter-arguments. I’m trying to understand reality better, not advocate a position.
Today we will focus on the expected benefits of the EU-China investment agreement, known formally as the Comprehensive Agreement on Investment (CAI). This is an expansive topic, which makes it difficult to cover every nuance in a single day’s worth of notes. However, I will do my best to narrow my scope and focus on the most relevant portions of CAI so that I can at least try to discover insights of some substance.
Keep in mind CAI hasn’t been formally ratified yet, so today’s analysis will center around the agreement in principle between the European Union (EU) and the People’s Republic of China (PRC).
The agreement sets to establish a renewed economic relationship between China and the European Union based on ‘reciprocity’ and a ‘level playing field’. Europe gains an unprecedented level of investment access to China’s markets, while China agrees to eliminate some of it’s ‘anti-competitive’ trade practices. For example, the CAI will require China’s state-owned enterprises to act in accordance with commercial considerations and “not to discriminate in their purchases and sales of goods or services." In other words, China’s state-owned enterprises cannot receive preferential treatment from the Chinese government.
It’s more difficult to outline what China gains directly from the deal because its internal decision-making rationale is a bit murkier than that of the European Union. The consensus view is that China benefits most simply by cementing the current EU-China status quo for the foreseeable future. China wants to maintain its free access to EU markets, and this deal solidifies that.
But hasn’t China always had access to European markets for decades? Why should it fear anything changing now?
We should consider the context of this agreement to understand China’s underlying intentions. Prior to 2017, China could feel relatively secure in its ability to maintain access to global markets, as hyper-globalization accelerated from the 1990s until recently. Things have changed post-2017, as the world appears to be entering a different environment, one where hyper-globalization is slowing or perhaps reversing entirely. So if hyper-globalization is slowing, maintaining access to existing markets will be a higher priority for countries/regional economies dependent on global trade like both China and the EU.
Although the agreement is yet to be formally ratified, it represents a major step toward supporting the long-term interests of EU-China economic relations. Such an investment agreement will likely serve as a stepping stone for future agreements not just between China and the EU but for many other countries as well.
As I mentioned on Tuesday, CAI is especially significant given the global backdrop of rising anti-China sentiment, economic nationalism, and intensifying right-wing populism. This agreement appears to signify a small victory in support of free and open global markets. However, I’m not certain we can mark this as a revival of the secular hyper-globalization trend I just mentioned.
There’s some truth to the idea that China had to make significant concessions to reach this agreement. For instance, China has long promised to increase domestic market access to foreign firms and capital, with limited results. China’s rhetorical commitments to ‘reform and opening up’ have often rung hollow in the eyes of western observers, but things feel different this time around. China has agreed to end its long-standing practice of forced technology transfer. This is significant because China officially denied the existence of such a practice for years. China has also committed to eliminating forced labor, which is a topic I intend to explore further in future notes.
Taking a step back, I’d also like to comment on EU-China and US-China relations in the broader context of global capitalism. It’s not possible to decouple from China without dismantling the underpinnings of modern liberal democracies: global capitalism. Western states are free to choose engagement or decoupling. However, it’s better to frame this as a choice between global integration and economic collapse.
In absolute terms, China likely benefits more from hyper-globalization than any western state. However, it’s unclear whether or not China can benefit from economic divorce from the west. Yet, China clearly seems to be far better prepared for a destructive ‘race to the bottom’ than most liberal democracies.
In closing, the EU-China CAI is evidence that the European Union recognizes the significance of global capitalism to the success and well being of its European project. The fact that China is willing to make many important concessions demonstrates China’s commitment to multilateralism within the existing global economic system. Keep in mind CAI still exists within the broader framework of the rules-based global order, and it’s likely only a matter of time before the United States also considers a similar agreement with China in the not-so-distant future. After all, ideological principles alone don’t pay the bills.
Thanks for reading!
Best,
Kevin
EU-China Investment Agreement
“The EU-China Comprehensive Agreement on Investment (CAI) is a test for the future trajectory of the EU-China relationship”
The negotiations for the Comprehensive Agreement on Investment (CAI) represent the EU’s most important attempt to rebalance the EU-China economic relationship. While the CAI is an advanced version of a bilateral investment treaty (BIT) it cannot solve issues that are not part of the agreement. Nevertheless, concluding – or not concluding – the agreement would have wider political repercussions. Given the geopolitical context and current tensions in EU-China relations, the agreement should be seen as a test for the future trajectory of the relationship.
Europe’s position in the US-China trade conflict: It’s the exports, stupid
The US-China trade conflict has bred the truism that Europe is in a tough spot: Washington and Beijing would each like Europe to support them and European nations are struggling – and will continue to struggle – to choose between US skepticism towards China, and China’s wish for the trade order to remain as it is. But experience suggests Europe’s politicians will be more tempted to side with the US than China – and that one of their most important reasons will be Europe’s greater dependence on the US as its biggest export market.
European Parliament members say Hong Kong arrests threaten passage of EU-China investment deal
The EU-China investment deal, tentatively reached just last week, faces a new hurdle as a growing number of European Parliament members expressed concern on Wednesday over the mass arrests of pro-democracy politicians in Hong Kong.
“The situation in Hong Kong is followed closely by parliamentarians,” said Bernd Lange, head of the EU parliament’s trade committee, which will be responsible for reviewing the deal later this year.
China Regulatory
Alibaba antitrust probe presents new challenges for China’s regulators 12 years after implementation of anti-monopoly law
With all eyes on the antitrust investigation into Chinese e-commerce giant Alibaba Group Holding, Beijing’s record to date in tackling alleged monopolistic behaviour by big business may not shed any light on how the case may end.
A review of more than 100 Chinese antitrust cases in the 12 years since China’s anti-monopoly law came into effect found that most targeted the pharmaceutical industry and municipal water utilities, according to research by the South China Morning Post.
Ex-Boss of China’s Biggest Policy Bank Sentenced to Life for Bribery
A former chairman of China’s biggest policy bank was sentenced Thursday to life in prison for taking bribes, marking the end of the trial of another financial big shot who fell to the country’s years-long anti-corruption campaign.
Hu Huaibang, a former boss of the China Development Bank (CDB), was convicted of taking 85.5 million yuan ($13.2 million) of bribes from 2009 to 2019 in exchange for using his power to facilitate financing, business operations and promotions for others, according to a court statement (link in Chinese).
China’s Digital Currency (DCEP)
International Trade Law Concerns With China’s Digital Currency: How Sovereign-issued Stablecoin Can Destabilize International Trade
A government-backed digital currency will grant China unprecedented trade leverage and, if China chooses, help the GOC conceal actionable subsidies and manipulate its currency exchange
In addition to allowing the GOC to exercise more control over its economy with the DCEP, the characteristics of digital currency will permit China to prolong the appearance of increasing marketization and liberalization of its economy. The DCEP will allow China to loosen regulations and argue that it is creating a fairer playing field for trade when, in fact, the DCEP grants China incredible authority to manipulate international trade. The WTO is unprepared to deal with the unique challenges posed by a central bank-issued digital currency, especially in China where domestic banks are mainly state-owned.
If a government-backed digital currency provides this much leverage in global trade to its issuer, does this mean other states will be incentivized to release their state-backed digital currency as well?
If the assertions in this report are true, China’s DCEP will not only impact the perceived standing of the US dollar and other fiat currencies but also other decentralized digital currencies like Bitcoin as well.
US-China Relations
Biden Plans to Build a Grand Alliance to Counter China. It Won’t Be Easy. (Wall Street Journal)
At the heart of Mr. Biden’s China policy is what he calls a Summit of Democracies that would seek to establish a clear alternative to Beijing’s autocratic rule, said Biden senior advisers interviewed during and after the presidential campaign. The U.S. will also try to organize smaller groups of democracies to tackle specific issues such as advanced telecommunications and artificial intelligence.
It’s not clear that the US and China are fundamentally misaligned on their desire to continue the existing rules-based world order. Although the US and China see the current world order from different perspectives, both sides benefit immensely from the current configuration.
The biggest questions seem to center around the geopolitical role of the United States in East Asia. In the context of this dynamic, the core conflict centers around the idea that China is an ascendant power and the United States is a declining power in East Asia.
Thanks for reading, and see you tomorrow!
Best,
Kevin
Photo by CHUTTERSNAP on Unsplash