Why the EU-China economic agreement seems to be going nowhere —

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Europe is getting tired of trying to pry open the doors of China’s market.

At a summit yesterday (Oct. 1), with one minute left to midnight, European Union leaders released a statement calling for a fairer and more reciprocal economic relationship with the world’s second largest economy. They also made clear that it’s crunch time for negotiations over an investment agreement eight years in the making that will address some of the EU’s concerns around market access for its companies in China and transparency surrounding Chinese state-owned enterprises, among other things. But experts warn the deal is looking less and less likely to succeed.

EU-China relations and the CAI

The 27-country bloc is China’s largest trade partner, while the Chinese market is the second largest destination for EU goods and services after the US. And yet the economic relationship between Brussels and Beijing is not well regulated. That’s partly because it has grown quickly, outpacing their ability to legislate around it. But it’s also because the most ambitious such effort—the Comprehensive Agreement on Investment (CAI)—has so far failed to produce results.

In 2012 when Brussels and Beijing began negotiating the terms of the CAI, China’s goal was full access to the EU’s common market. Meanwhile, the EU believed its companies in China faced unfair competition from state-owned enterprises and discriminatory business practices. The bloc wanted fewer subsidies for Chinese companies operating in Europe and a “level playing field” for EU companies in China.

Nearly a decade has passed and while some progress has been made, many tensions remain. Now, EU officials are making it clear that the prospects of reaching a deal by the end of this year—a self-imposed deadline that Agatha Kratz, associate director at the research consultancy Rhodium Group, described as “futile”—are slim. European Commission president Ursula Von der Leyen recently said after a high-level dialog with Chinese president Xi Jinping, “China has to convince us that it is worth having an investment agreement.” And the EU is preparing to put in place mechanisms to screen and restrict foreign investment in Europe that would function independently of the CAI.

Is China’s market open to EU companies?

Last week China announced an ambitious goal of reaching net zero carbon emissions by 2060—a meaningful and important step in tackling global greenhouse gas emissions. The EU’s reaction was lukewarm; it wanted Beijing to commit to net zero emissions of all greenhouse gases, not just carbon dioxide, as well as other measures like a moratorium on building coal-fired power plants. At the EU summit yesterday, officials called on China to “assume greater responsibility in dealing with global challenges” like climate change but qualified the carbon-neutrality pledge as “an important step in the right direction.”

This is a common pattern in EU-China relations: Brussels insists reforms are too slow and not ambitious enough while Beijing argues the EU isn’t giving them credit for what’s already been done. Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis, describes the negotiations as “a dialog between deaf people.”

Another example is the all-important issue of market access. China says it has taken historical steps to open up its market to foreign investors but critics say it allows its own heavily-subsidized actors to saturate markets before doing so. For example, at the beginning of this year, China opened up its financial services industry, notably by lifting equity caps for foreign investment. In its 2020 position paper the European Chamber of Commerce in China said “the fact that the reform took place so late in the game made it more akin to letting foreign investors onto a railway platform only after the train had long since departed.” (The Chamber’s president Joerg Wuttke recently said he didn’t think the CAI could be concluded this year.)

Meanwhile in its recent quarterly assessment the US-based nonprofit Asia Society concluded that, in most industries, China is deferring long-term reforms of the kind the EU is asking for in the CAI in favor of short-term government intervention. “Today’s economic expediency,” it warns, “will make the net cost of righting China’s policy foundations much greater tomorrow.”

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