EU-China comprehensive agreement on investment: A scoping study
photo: Heinrich Böll Foundation

Heinrich Böll Foundation | 16 December 2020

EU-China comprehensive agreement on investment: A scoping study

 Executive Summary

Currently, the European Union (EU) and China are in talks aiming to conclude a new EU-China Comprehensive Agreement on Investment (CAI). The new agreement is intended to replace 26 existing bilateral investment treaties (BITs) between the EU member states and China and create new treaty obligations for Ireland, harmonise EU investment policy vis-à-vis China, and significantly widen the scope of investment protection. The CAI will differ significantly from existing agreements with China, covering a broader range of areas than current member state BITs and containing more detailed provisions throughout. A leaked draft of the negotiating text of the CAI indicates that the agreement would liberalise market access – an area not covered by existing treaties. Unlike existing member state investment treaties with China, it would also contain detailed chapters aimed at disciplin- ing the state parties on issues of domestic regulation of an investor’s entry into and opera- tion within the host state, financial services, and subsidies. It may also contain provisions on sustainable development and make use of the EU’s new Investment Court System (ICS), though there is still strong disagreement between the parties regarding these chapters.

China’s economic power, systemic importance, and political specificity make it different from other EU trade and investment partners, and require a more cautious approach than the CAI currently offers. It is a country whose unique system does not allow for a neat distinction between private business and the state, and which obliges private companies to cooperate with the state. It is a country with an ambitious industrial policy that aims at occupying a dominant position in the technology sector, and that has been willing to allow the forced transfer of intellectual property as a means of attaining it. And it is a country whose actions – with respect to the Uyghur minority population, the protests in Hong Kong, and mass surveillance practices – have raised serious human rights concerns, both with regard to the actions of the Chinese government as well as the actions of EU companies operating in China.

Thus far, most discussion of the agreement in the EU has focused on the «offensive» oppor- tunities that the CAI represents for European investors, in particular in terms of the poten- tial gains regarding market access and eliminating performance requirements. Much less attention has been paid to «defensive» aspects of the CAI and the potential risks of the agreement for the EU and for EU businesses operating overseas, as well as the potential risks for the populations of both the EU and China.

This scoping study sets out some of the most important concerns regarding the EU’s defen- sive interests with respect to the CAI, given the information currently available. It aims to draw attention to some of the issues that civil society groups should watch carefully upon the completion and release of the draft agreement, and to highlight the missed opportuni- ties by EU negotiators in terms of strengthening the environmental, labour, and human rights credentials of EU investment policy. The issue areas that it highlights are divided into four substantive sections.

The first section of the study examines the CAI’s failure to address the problem of investor claims regarding regulatory changes, noting the CAI’s reproduction of the problems with ambiguous standards such as «fair and equitable treatment» that have led to the loss of regulatory space and the privileging of investor interests over public policy in countries around the world. It goes on to demonstrate that attempts to limit these claims by provid- ing greater specificity in definitions and through exceptions provisions are insufficient, and that more significant reforms are needed.

The second section discusses the watering down of the investment and sustainable develop- ment chapter in the CAI, in comparison with similar chapters included in recent EU trade and investment agreements. It also emphasises the lack of investor obligations in the CAI – two significant missed opportunities for ensuring that the EU’s external investment policy upholds high standards of protection in the areas of human rights, the environment, and anti-corruption.

The third substantive section explores the potential impacts of the agreement’s broad market access protections, questioning whether the EU has ensured sufficient policy space with respect to regulating critical infrastructure, and asking whether the provisions pur- porting to protect the EU’s right to screen investments prior to entry might be challenged if applied stringently to Chinese investments.

Finally, the fourth substantive section focuses on the potential human rights impacts of the agreement, exploring issues such as the potential complicity of EU investors in China, and the deficiencies of the Sustainability Impact Assessment that the EU conducted prior to negotiating the current agreement.

Given China’s unique position, the study concludes that the EU must ensure that particular- ly strong protections for EU regulatory policy space are included in any future investment deal. The CAI should be redrafted to include stronger exceptions provisions, wholesale carve-outs for key areas of EU regulatory policy, and more clearly defined protections for investors. The EU should also consider more far-reaching reforms such as setting out obligations on investors, eliminating ambiguous and overly broad protections such as the «fair and equitable treatment» standard altogether, and curtailing or eliminating the possibility of recourse to investor-state dispute settlement (ISDS),[3] in line with the prac- tices of several other contemporary investment treaties. The EU should also consider whether it is wise to conclude such an agreement without a commitment on the part of China to protect human rights – including in Hong Kong and within Uyghur and other ethnic and religious minority communities – and should ensure the CAI includes binding and enforceable commitments with respect to upholding international human rights, labour rights, and environmental protections.

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