US economy

China sees EU investment deal as diplomatic coup after US battles


When EU and Chinese negotiators began discussions on an investment agreement seven years ago, Beijing hoped it would help counter the Trans-Pacific Partnership trade pact championed by Barack Obama, the former US president.

The TPP was a far more ambitious project than the China-EU Comprehensive Agreement on Investment and a potential geopolitical coup for Washington, as it excluded Beijing. But Donald Trump, Mr Obama’s successor, abandoned the TPP on his first full working day in office.

In the end, it was China’s president Xi Jinping who would steal a march on his US rival by signing both the CAI and the Regional Comprehensive Economic Partnership, a separate regional deal with many of America’s closest Asia-Pacific allies, in the waning days of Mr Trump’s administration.

Mr Xi and Ursula von der Leyen, European Commission president, signed off on the CAI on Wednesday, although it will take at least another year to formally conclude. Valdis Dombrovskis, EU trade commissioner, hailed the pact as “the most ambitious [trade deal] that China has ever agreed with a third country”.

Beijing views the agreement as a strategic breakthrough, especially after Joe Biden’s incoming administration registered concern over the pact in recent weeks.

Jake Sullivan, Mr Biden’s incoming national security adviser, wrote on Twitter last week that the new administration would “welcome early consultations with our European partners on our common concerns about China’s economic practices”. The language was diplomatic but a former Obama official said the message to the EU was to “slow things down”.

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Matt Pottinger, Mr Trump’s outgoing deputy national security adviser, also weighed in after the CAI was concluded. “Leaders in both US political parties and across the US government are perplexed and stunned that the EU is moving towards a new investment treaty right on the eve of a new US administration,” he told the Inter-Parliamentary Alliance on China, an international grouping of parliamentarians that seeks a tougher approach to Beijing.

A Biden transition official said after the agreement was signed: “The Biden-Harris administration looks forward to consulting with the EU on a co-ordinated approach to China’s unfair economic practices and other important challenges.”

“What the US wants is not necessarily in the EU’s interests,” said Cui Hongjian, a European specialist at the China Institute of International Studies, a state-affiliated think-tank in Beijing. “The EU should have learned that over the past four years,” he added, referring to Brussels’ many trade disputes with the Trump administration.

The EU argues that the CAI “will not affect our commitment to transatlantic co-operation, which will be essential for addressing a number of the challenges created by China”. In private, however, EU officials have expressed frustration with the Biden team’s last-minute sniping at the CAI, especially after German chancellor Angela Merkel last year publicly committed to concluding it by the end of 2020.

“It was as if no one paid attention to the German chancellor saying it must get done this year — it was communicated very clearly,” said one person close to the talks. “For the US side it’s a really bad start.

“They believe they can tell their allies what to do instead of being a little bit humble and trying to solve bilateral [US-EU] problems first.”

The EU also argues that the CAI represents a “major breakthrough” in long-frustrated efforts by western countries to get Beijing to sign up to International Labour Organization conventions banning the use of forced labour and the protection of workers’ rights of association.

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The former emerged as a critical area of divergence in the final weeks of negotiation, largely because of the controversy over the Chinese government’s incarceration of millions of Uighurs in the northwestern region of Xinjiang.

Franck Riester, France’s junior trade minister, said last week that Paris would block the deal if the CAI did not force Beijing to abolish forced labour. However, the Chinese government merely agreed to make “continued and sustained efforts” to ratify the relevant ILO conventions.

“On labour it’s impossible for China to agree,” said Shi Yinhong, an international relations professor at Renmin University in Beijing and an adviser to the State Council, China’s cabinet. “Can you imagine China with independent labour unions? Forced labour also relates to Xinjiang, so that’s another ‘no’ for China.”

Mr Pottinger condemned what he called the EU’s “haste to partner with Beijing despite its grotesque human rights abuses”.

“There is nowhere for bureaucrats in Brussels or Europe to hide,” he added. “We can no longer kid ourselves that Beijing is on the verge of honouring labour rights while it continues to build millions of square feet of factories for forced labour in Xinjiang.”

EU companies have invested more than €140bn in the world’s second-biggest economy. Most large European multinationals support the agreement, which they feel will help them catch up with “market access” concessions Mr Trump secured for US companies in the January “phase 1” trade deal with China.

But one senior European executive complains that the CAI, like Mr Trump’s agreement, does little to address “structural issues” in the Chinese economy that create informal barriers for foreign investment.

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“We need mechanisms for enforcement,” the executive said. “If my Chinese competitors are receiving central or local government subsidies, who exactly do I talk to and what do I do? On the other hand, in Europe, Chinese companies can freely litigate against us.”

Additional reporting by Xinning Liu in Beijing



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