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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 299  March 8, 2021
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])
*The EU-China Comprehensive Agreement on Investment: Stuck half-way?*
* <#m_405041178295699484__edn1>
Axel Berger and Manjiao Chi** <#m_405041178295699484__edn2>

China and the EU agreed in principle on a Comprehensive Agreement on
Investment (CAI) on December 30, 2020, after 35 rounds of negotiations
since 2014. In the EU (and the US), critical voices pointed at the
uncertain enforceability of key provisions and the negative impact on
cooperation between the EU and such key partners as the US vis-à-vis China.
For China, the CAI is held as a diplomatic success. In fact, the recently
published draft text
suggests that the CAI is less comprehensive than the title indicates, and
that important elements remain unresolved.

As Europe is already open to Chinese investors, additional market opening
is expected from China. EU efforts mostly focused on issues of limited
market access, technology transfer and the regulatory environment. The CAI
addresses these issues in the sections on investment liberalization and
regulatory frameworks. China commits to opening its markets in some
sectors, including electric vehicles and financial and air-transport
services. However, one could ask whether China is not already unilaterally
opening up these sectors, and the CAI just locks-in those reforms.[1]
<#m_405041178295699484__edn3> Arguably, however, preventing the revocation
of economic reforms in China is an important achievement in and by itself.
Conversely, given Europe’s increasing scrutiny of Chinese investments,
securing a high level of market access in Europe was high on the China’s
agenda: while the EU does not make any substantial additional market access
commitments to China, it guarantees the existing level of access. Securing
market access and locking-in reforms may be important outcomes, but they
are unlikely to substantially increase two-way investment flows.

Potentially more important is the prohibition of forced technology transfer
and joint venture requirements, which appear more comprehensive than what
China agreed to in its WTO accession protocol or in the Phase One Deal with
the US. In addition to technology transfer requirements imposed by the
state, China and the EU also commit not to “directly or indirectly require,
force, pressure or otherwise interfere with the transfer or licensing of
technology between natural persons and enterprises”.[2]
<#m_405041178295699484__edn4> Furthermore, the CAI includes a number of
“level-playing-field” provisions that may improve the transparency of
subsidies, enhance procedural transparency, predictability and fairness of
regulatory and administrative procedures, and regulate the operations of
state-owned enterprises.

The section on sustainable development is an important outcome of the CAI
negotiations. While sustainable development sections are common in EU’s
trade agreements, the CAI is China’s first agreement with such a section.
As the CAI offers the EU much less leverage compared to a fully-fledged
free trade agreement (FTA), the inclusion of such a comprehensive chapter
section is a success. But the obligations under this section are mainly
based on the parties’ existing commitments under other international
environmental and labor treaties. Moreover, the wording of several key
provisions (providing that the parties “shall strive to ensure” or “shall
make continued and sustained efforts”) characterize such obligations as
“best-effort” in nature.[3] <#m_405041178295699484__edn5> However, the
section on sustainable development establishes a standalone mechanism to
resolve disputes, similar to that included in the EU-Republic of Korea FTA.
Under the latter mechanism, an independent panel has recently issued a
holding that Korea (i) has violated its commitment to comply with the
principle of freedom of association and (ii) should make “continued and
sustained efforts towards ratification” of the “key ILO conventions”.
Whether violations of the sustainable development section provisions under
the CAI can lead to the same outcome remains to be seen, in particular as
some of the key labor provisions are less binding in nature. In addition to
regular government-to-government consultations, the CAI also requires the
parties to hold dialogues with civil-society organizations, which could be
challenging as Chinese law
has strict limits on such organizations. This section may thus prove
crucial for the ratification in the EU. If ratified, its practical effects
would depend largely on good will, close cooperation and the usage of
dialogue mechanisms.

Lastly, the CAI does not include sections on investment protection and
investor-state dispute settlement (ISDS). The EU’s insistence to replace
ISDS with an Investment Court System
*,* as well as the ongoing multilateral discussions on a reform of ISDS,
could explain this omission. While the parties will continue negotiating
the sections on investment protection and ISDS and “endeavour” to conclude
them within two years
after the signature of the CAI, the 25 bilateral investment treaties (BITs)
with outdated ISDS rules between EU members and China remain in force and
could possibly lead to unwanted ISDS claims.

The CAI is stuck half-way in the development of China-EU bilateral
investment relations. While it addresses important issues of market access,
regulatory cooperation and sustainable development, it does not replace the
old BITs, nor contribute to the overall reform of the international
investment regime. Both parties should use the next two years to remedy
this omission.

* <#m_405041178295699484__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_405041178295699484__ednref2> Axel Berger ([log in to unmask]) is
a Senior Researcher at the German Development Institute / Deutsches
Institut für Entwicklungspolitik (DIE); Manjiao Chi ([log in to unmask])
is Professor and Founding Director, Center for International Economic Law
and Policy (CIELP), Law School, University International Business and
Economics (UIBE), China. The authors wish to thank Lauge Poulsen and
Claudia Schmucker for their input and Julien Chaisse, Wen-Hua Shan and an
anonymous peer reviewer for their helpful peer reviews.
[1] <#m_405041178295699484__ednref3> See Lauge Poulsen, “The EU-China
investment deal and transatlantic investment cooperation”, presented at the
Shapiro Geopolitics Workshop, Jan. 25-26, 2021
[2] <#m_405041178295699484__ednref4> See, e.g., CAI, Article 3(3). See
also Simon
Lester, “Forced technology transfer provisions in the CAI and the US-China
Phase One deal”, in *IELP Blog*, Jan. 24, 2021
[3] <#m_405041178295699484__ednref5> See, e.g., CAI, Article 5(2)-(3).
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Axel Berger and Manjiao Chi, ‘The EU-China
Comprehensive Agreement on Investment: Stuck half-way?,’ Columbia FDI
Perspectives No. 299, March 8, 2021”. Reprinted with permission from the
Columbia Center on Sustainable Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Riccardo Loschi, [log in to unmask]

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*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - CCSI has organized a Sustain What
   webcast for *March 12, 2021*. Andrew Revkin, longtime New York Times
   journalist and founding director of the Earth Institute Initiative on
   Communication and Sustainability, will host a discussion examining how the
   Biden Administration is likely to (and should) approach trade policy at
   this critical time, to ensure a robust and timely response to the pandemic,
   restore trust in the WTO, and help multilateralism live up to its promise,
   especially at times when international cooperation is needed most. No
   registration is required. Visit our website
   for more details and the link to join the event.
   - *CCSI is accepting applications until March 31, 2021* for its
   Executive Training on Sustainable Investments in Agriculture, which will
   take place online June 15-25, 2021. Please visit our website
   for more information, including on how to apply.

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
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