Borderlex | 14 Oct 2014
EU-China investment treaty talks may face bumpy road
The EU and China are discussing their planned bilateral investment treaty on the sidelines of the Asia Europe Meeting (ASEM) in Italy this week. Both want to conclude an agreement that mutually opens markets and better protects investors’ rights. But negotiations will likely be protracted and Beijing does not appear to prioritise this deal with Brussels, Jennifer Freedman found out.
EU and Chinese negotiators are holding a second round of talks this week aimed at securing an agreement to remove restrictions on trade and foreign direct investment, and open investments in both directions. While it’s still early days – discussions were launched only in January this year – the toughest obstacles are likely to be deciding how to resolve investor disputes and figuring out how to persuade Beijing to allow Europe more access to China’s high-tech industries.
The EU’s interest in clinching a bilateral investment treaty (BIT) with China is two-pronged. The bloc aims to help European investors who have been locked out or hindered from entering the Chinese market, and to provide a simpler, secure and predictable legal framework for investment. The EU is also seeking to attract more Chinese investment. China’s joint venture requirements, equity caps, administrative barriers, local content rules and regulatory requirements such as technology disclosures are particularly burdensome to investors. The European Commission has estimated that scrapping these curbs would boost the EU’s foreign direct investment (FDI) in China by 2 percent and add 2 billion euros to the bloc’s annual exports.
Bilateral trade between the two economies approached 480 billion euros last year, but only 2.1 percent of European FDI is in China. While China is the top supplier of EU imports, the Asian country’s investments in the bloc represent just 6 percent of its global investment and less than 3 percent of the 3 trillion euros invested in Europe from abroad every year. EU companies invested 15.5 billion euros in China in 2012, the latest year for which figures are available, with Chinese FDI into Europe amounting to 7.6 billion euros.
Market access for investors
The BIT aims to address this imbalance and help the EU remain relevant in the fact of Beijing’s preference for dealing directly with European capitals, particularly Berlin. The EU also is seeking to crack open the Chinese market for services, which account for just a fifth of the bloc’s total exports to China. Europe’s services industry provides 75 percent of EU gross domestic product and jobs, and is of strategic importance.
“The negotiations are going to be extremely difficult,” said David Fouquet, a senior associate at the European Institute for Asian Studies in Brussels. “Just working through the technicalities of trying to even understand each other will be difficult. That includes investor-state relations, dispute settlement, and just a lot of issues. The Chinese aren’t going to give up anything unless they get something in return.”
While the same is true of the Europeans, Fouquet says Beijing seems to be dragging its heels on the BIT. “It’s a two-way street, but I never got any sense of urgency from the Chinese. From the EU, there was a sort of bureaucratic sense of urgency, from Karel De Gucht, who signed up for so many negotiations and FTAs, and then he had to deliver.”
The EU is bound to press Beijing to open up certain sectors where European businesses are restricted – such as transport, healthcare, distribution, business services and healthcare – and China will probably do so progressively, said Sylvain Plasschaert, professor emeritus from the University of Antwerp and the Catholic University of Leuven. Although China is considered more open to investment than some other EU partners, it is selective in this openness, and still tightly controlled.
“They have an industrial policy where they want to have sectors that that want to prioritize. They aren’t interested in textiles and shoes, but in things like biotechnology, nanotechnology,” Plasschaert told Borderlex.
China can benefit from European expertise in these areas, he said. “They have a lot to learn, but they learn quickly. When they want to make progress in these fields, they need help, and they will probably buy into European firms and make more joint ventures.” Still, he doesn’t believe a BIT will result in a flood of Chinese investment in Europe, as many Chinese are cautious about investing in the EU after many past ventures failed.
Investor-state dispute settlement (ISDS) is also certain to come up during the negotiations. The mechanism allows foreign companies to sue a host government if its domestic laws or actions — such as expropriations — harm their investments. ISDS is “always a major aspect of BITs, and one that creates problems”, Plasschaert said. “There will be a lot of opposition in the EU and it’s not clear how China would react.”
The success of the negotiations is also seen as a test for both partners’ approach towards negotiating further agreements. Earlier this year, Chinese President Xi Jinping urged China and the EU to “actively explore the possibility of a free trade area and the goal of bringing [annual] bilateral trade to $1 trillion by 2020. The EU said in a vague statement that it would be willing to “envisage” such a step at some point in the future, though the idea of an FTA with China has gained traction among some European leaders including British Prime Minister David Cameron and German economics chief Sigmar Gabriel.
“A single, standalone bilateral investment treaty between the EU and China that replaces the existing 26 EU members’ agreements is crucial,” says Pablo Zalba Bidegain, a member of the European Parliament’s economic and monetary affairs committee. “The BIT represents an opportunity to recalibrate the level playing field within the existing set of investment rules.”
The EU’s ability to negotiate on behalf of its member states on investment matters – as it has for decades on trade issues – is a relatively new competence which it is eager to exercise. The BIT with China, which probably won’t be wrapped up for at least two or three years, would be the first bloc-wide investment-only deal negotiated by the EU since it gained the power to do so in 2009 under the Lisbon Treaty.