On 30 December 2020, the EU and China agreed in principle on a Comprehensive Agreement on Investment ("CAI"). The text of the agreement is not yet available,1 but the European Commission called it "the most ambitious agreement that China has ever concluded with a third country." The EU expects this to create a better balance in the EU-China trade relationship considering China has committed to a greater level of market access (including the elimination of quantitative restrictions and joint venture-related requirements requirements) and fair treatment for EU investors than ever before and that China is bound by unprecedented investment discipline commitments, including in relation to state owned enterprises ("SOEs"), subsidy transparency, and compulsory technology transfers. In addition, the CAI covers sustainable development provisions. Work continues on finalizing the text of the CAI, before it can be signed and ratified, and on connected bilateral negotiations on investment protection.

Background

Almost seven years after the launch of bilateral EU-China CAI negotiations in 2014,2 the EU confirmed the agreement in principle on 30 December 2020.3

After the CAI text has been finalized, it will need to undergo legal review and translation prior to bilateral signature and then approval by the EU Council and the European Parliament to go into effect on the EU side. While approval of Member State legislatures will not be required for the CAI to enter into force, these EU procedures are likely to take some time in view of the highly political nature of the agreement, and their precise timing is unclear at this stage.

The EU and China have made a commitment to try to complete connected agreement negotiations on investment protection and investment dispute settlement within two years of future CAI signature. Ultimately, the EU’s aim is for these investment-related agreements to update and replace existing Bilateral Investment Treaties concluded between China and individual EU Member States, and to serve as a springboard to strengthen related multilateral rules, including on industrial subsidies.4 The EU has also stated that its work on expected autonomous EU measures relating to subsidies and due diligence would continue. There are no current plans to negotiate a comprehensive EU-China Free Trade Agreement.

Key features in the EU-China CAI

New market access and liberalisation for EU investors (and others)

According to the EU, the CAI would be the most ambitious agreement that China has ever concluded with a third country; this is in large part due to certain market access and non-discrimination commitments by China (e.g., elimination of any quantitative restrictions, foreign equity caps or joint venture requirements) for a variety of industry sectors.5 Due to the Most Favoured Nation ("MFN") principle established under WTO rules, third countries should also benefit from the EU’s and China’s commitments under the CAI.

China’s precise commitments are specified by industry sector, and as such should improve predictability and facilitate EU investment in, among others, the manufacturing and automotive sectors, financial services, private health services in certain Chinese cities, R&D (biological resources), telecommunication/cloud services, computer services, international maritime transport services, certain air transport-related services, certain business services, environmental services, and construction services. Certain sectors considered sensitive by the parties, such as audio-visual, air transport and public services, would be excluded from the CAI scope.

The EU has already committed to a number of concessions to China in the context of its multilateral services obligations under the General Agreement on Trade in Services ("GATS"), and beyond this, the EU has now agreed to some additional market access, particularly in the manufacturing sector.

The CAI would also include provisions allowing work mobility of managers and specialists of investing Chinese and EU companies, without the need for labour market tests or quotas.

Rules to create a level playing field for foreign investments

Pursuant to the promised investment discipline commitments by China and general transparency requirements for domestic regulation, the EU’s aim with the CAI would be to level the playing field for EU investors by ensuring robust rules in the following areas:

  • SOE disciplines: SOEs would be required to follow commercial considerations and non-discrimination rules in purchase and sale of goods or services. Under special transparency rules, requested information must be provided for assessment of whether particular SOEs are complying with their obligations, and any unresolved issues can be submitted for special dispute resolution.
  • Transparency in subsidies: The CAI would impose unique transparency obligations for subsidies in relation to services with a specific consultation procedure in relation to subsidies considered to have a negative impact on a party’s investment-related interests.
  • Forced technology transfers: There would be specific rules against compulsory transfer of technology, including bans on various investment conditions compelling technology transfer (e.g., to joint venture partners) and government interference in technology licensing. The rules would also include disciplines to protect confidential information collected by administrative bodies from disclosure.
  • Standard-setting and authorisations: To ensure the ability to provide input when various product standards are developed, EU and Chinese companies would have equal access to standard-setting bodies. Also, for related authorisations, there would be rules to improve transparency and predictability.

These level playing field provisions would benefit Chinese and EU investors alike by creating a stable and predictable business environment suitable to attract foreign direct investment ("FDI") in both China and in the EU.

Sustainable development

The CAI would reflect the current EU approach to sustainable development by establishing certain commitments relating to labour, environmental protection, climate change, and corporate social responsibility. The relevant provisions would be subject to tailored implementation mechanisms involving a dedicated institutional set-up to ensure inclusion of civil society, and potential government consultations through a special working group to address potential issues or differences in interpretation. While some in the European Parliament have made strong statements that the rules do not go far enough, the European Commission has countered that they are an important lever for further change.

Implementation of the CAI commitments and dispute settlement

Once adopted, implementation of the CAI commitments would be monitored through an Investment Committee, and various transparency and consultation mechanisms would apply to facilitate both ongoing and ad hoc bilateral dialogues. Any bilateral disputes under the agreement would be subject to a State-to-State dispute resolution mechanism.