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International relations

China and EU reach investment deal, but risk friction with US

Broad agreement addresses long-standing concerns, Biden camp warns against haste

Chinese President Xi Jinping, top left, and European leaders attend a videoconference Dec. 30 on the investment deal.   © Reuters

BRUSSELS/BEIJING -- China and the European Union struck a sweeping agreement Wednesday on an investment pact that will deepen ties between the world's second- and third-largest economies, despite a warning from the incoming U.S. administration over rushing into a deal.

The two sides wrapped up talks on the broad outlines of the Comprehensive Agreement on Investment in a video meeting attended by Chinese President Xi Jinping, European Council President Charles Michel, European Commission President Ursula von der Leyen, German Chancellor Angela Merkel and French President Emmanuel Macron.

The investment deal, which Brussels and Beijing began negotiating in 2014, is expected to give a boost to European companies seeking to enter the Chinese market and revive European economies hit hard by the coronavirus pandemic. For China, the agreement -- coming close on the heels of the recently signed Regional Comprehensive Economic Partnership -- further enhances its international influence.

"This agreement will rebalance our economic relationship with China," von der Leyen said.

Xi said the treaty will "greatly boost world economic recovery in the post-pandemic era" and "enhance the international community's confidence in economic globalization and free trade," according to the official Xinhua News Agency.

The two sides clinched the deal before U.S. President-elect Joe Biden takes office next month, and questions remain as to how the incoming administration will respond. Biden's team had warned Brussels this month against an overly hasty deal, citing "common concerns about China's economic practices."

Some analysts warned that the China-EU agreement risks splintering a united front against some of Beijing's more problematic economic measures.

"This need for the EU to publicly promote and defend the CAI would likely run counter to those of a U.S.-led collective effort to rein in Chinese unfair and state-led practices," Wendy Cutler and James Green said in a report for the Asia Society published Wednesday.

Cutler served three decades in the Office of the U.S. Trade Representative, including serving as acting deputy U.S. trade representative. Green served as minister counselor for trade affairs at the U.S. Embassy in Beijing as well as in the USTR.

"Beijing will use these encounters to convey European endorsement of China’s trade and investment regime -- contrary to U.S. assertions about the disruptive and unfair nature of the Chinese system -- and mute critics of recent Chinese strong-arm trade tactics towards Australia," they said.

"Clearly, one of Beijing’s key objectives in making last-minute concessions to Europe is to drive a wedge between the U.S. and EU approaches towards China on the eve of a new administration in Washington."

The deal will lower barriers faced by European companies seeking to enter the Chinese market, according to a document released by the EU.

Beijing will phase out joint venture requirements in the automotive sector and ensure market access for "new-energy" vehicles such as electrics. Joint venture requirements will be lifted for private hospitals, letting EU businesses open facilities in major cities, and European investors will be allowed to own stakes of up to 50% in companies offering cloud services.

The deal includes measures to improve transparency surrounding Chinese government subsidies to state-owned enterprises, and to ban forced technology transfers. It also establishes a mechanism for dispute settlement if one side fails to abide by the agreement.

The two sides clashed until the last minute on protections for workers in China, but Beijing ultimately agreed to work toward ratifying International Labor Organization rules on forced labor.

"For the first time, China has ... agreed to ambitious provisions on sustainable development, including commitments on forced labor," the EU said in a news release, praising this concession by Beijing.

In contrast to free trade agreements, deals like this focus narrowly on conditions for promoting investment without touching on tariffs. The Chinese side had hoped for a trade pact, but Brussels stuck to investment, arguing that a full-fledged trade agreement would take too much time.

The deal, like RCEP, furthers Beijing's efforts to take a leading role in international trade and investment. With the power competition between the U.S. and China expected to drag on for some time, Beijing is rushing to strike major deals that shut out Washington while expanding its own sphere of influence. The concessions made in this agreement suggest that such geopolitical considerations were at play.

The conclusion of the investment pact is expected to bring substantial economic benefits as well. China's direct investment in the 27 EU member countries doubled in three years to $280 billion in 2019, according to the International Monetary Fund.

The boost is driven largely by Xi's Belt and Road infrastructure-building initiative. Chinese investment into key EU members like Germany and France have increased as well.

Direct investment would play a greater role in lifting China's economy once the new deal lowers hurdles for European players to take a stake in Chinese companies or build Chinese factories. Attracting European investment will be key for China's "dual circulation" strategy, through which it aims to bolster industries at home with the help of foreign input.

The EU has suffered an economic blow from the coronavirus pandemic, and many members including Germany strongly supported the deal with China. But the agreement still needs to be ratified by the European Parliament, which could pose a challenge given the body's concerns over China's treatment of its Uighur Muslim minority and crackdown in Hong Kong.

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