China-EU trade deal strengthens Beijing's hand in power game with the US

The landmark investment treaty China and the European Union struck on Wednesday was nearly seven years in the making, giving the distinct impression of long, drawn-out negotiations.

Indeed, for much of the previous six years, Beijing had dragged its feet and instead focused on satisfying Washington's demands, leaving Brussels increasingly weary and frustrated.

But dynamics have changed since the beginning of last year, when Beijing finally began substantive discussions in earnest, and from July it accelerated the pace of talks. Over the past five months, Chinese negotiators reportedly underwent a role reversal, aggressively pursuing their European counterparts for breakthroughs so both sides could clinch the deal by a year-end deadline mutually agreed in 2019.

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The fact that Beijing was able to make enough concessions and wrap up the talks in a mere 10 months, after years of procrastination, says a lot about China's reimagined diplomatic priorities for a post-Covid-19 world.

European Commission President Ursula von der Leyen, European Council President Charles Michel, German Chancellor Angela Merkel, French President Emmanuel Macron and Chinese President Xi Jinping approve an investment pact between China and the European Union on December 30. Photo: AFP alt=European Commission President Ursula von der Leyen, European Council President Charles Michel, German Chancellor Angela Merkel, French President Emmanuel Macron and Chinese President Xi Jinping approve an investment pact between China and the European Union on December 30. Photo: AFP

President Xi Jinping certainly had Washington in mind on Wednesday when he said that in the new year, China and Europe - as two major global forces, markets, and civilisations - should demonstrate a sense of responsibility and take active steps to contribute to world peace and progress. Xi confirmed the deal over video links with EU leaders including German Chancellor Angela Merkel, French President Emmanuel Macron, President of the European Council Charles Michel and President of the European Commission Ursula von der Leyen.

The fact that both sides appeared eager to hit the deadline before US President-elect Joe Biden assumes office later this month reflects their strategic thinking over future ties with the United States.

Concluding the talks now is a clear diplomatic win for China, at a time when its standing in the West has been battered over its initial mishandling of the coronavirus pandemic, its "wolf warrior" diplomacy, and its policies in Hong Kong and Xinjiang.

More importantly, closer ties with the EU will help Beijing prevent Washington from forming a united front with European nations and other partners to challenge China's trade practices.

In fact, that is how many Chinese analysts have spun the deal in the country's official media, after Beijing made important concessions on market access, fair competition, and sustainable development.

Late last month, when reports emerged about an imminent China-EU agreement, Jake Sullivan - Biden's choice as national security adviser - signalled that the incoming administration was not happy about the deal and would prefer the EU to wait.

He tweeted that the Biden administration "would welcome early consultations with our European partners on our common concerns about China's economic practices".

Xi and Merkel in 2017. Chinese officials have recognised the chancellor's role in shepherding the deal to a successful conclusion. Photo: AFP alt=Xi and Merkel in 2017. Chinese officials have recognised the chancellor's role in shepherding the deal to a successful conclusion. Photo: AFP

But his intervention was too little, too late. In fact, one might argue that it achieved the opposite effect, and spurred China and the EU to conclude the deal on schedule.

Moreover, the EU's decision to brush aside Washington's concerns sends an interesting signal that it is now more willing to stand up for its own interests and cope with China on its own terms, after four years of the unpredictable and impulsive presidency of Donald Trump.

For the Chinese side, it had long set its mind on concluding the deal by the year-end deadline, particularly after Xi took personal charge of the project last year.

The Chinese officials also particularly recognised Merkel's important role in shepherding the deal to a successful conclusion while Germany holds the rotating six-month presidency of the European Council. The deal has long remained as a top priority for the chancellor, and will be seen as part of her legacy following her expected retirement later this year.

Both Beijing and Brussels will face difficulties in selling the deal at home, but the latter will probably have a harder time given strong political opposition in the European Parliament, the approval of which is required.

But as the European officials have said, the deal is the best the EU can get, and it is also "the most ambitious agreement" China has ever concluded with a third country.

According to the terms of the deal, China will allow European businesses to operate in the new sectors of electric cars, telecoms and auxiliary air transport services, as well as private health.

As more than half of the EU's investment in China is in the manufacturing sector, China has agreed to remove joint-venture requirements and ban the forced transfer of technology from foreign companies.

On top of this, it has for the first time agreed to remove preferential treatment for state-owned enterprises and to boost transparency regarding subsidies and regulatory barriers - one of the major complaints of foreign investors. Beijing had previously resisted demands from foreign countries, including the US, for it to reduce or remove implicit and explicit subsidies for state-owned enterprises.

The agreement also includes China's commitment to make "continued and sustained efforts" on forced labour and improve labour rights.

For Beijing, selling the deal at home should be much easier, as it can dress up the concessions as measures it already planned to take to boost reforms and opening up - which is also true.

To counter the hostile international environment, China's new strategic thinking is to open up even wider to foreign investors and businessmen, giving them a fairer deal to set up manufacturing facilities in the country as well as a larger stake in its booming domestic market with a middle class of 400 million people.

This will make the prospect of losing the Chinese market altogether very difficult for overseas investors, and set up a path for Beijing to form free-trade agreements to strengthen economic and trade ties with its key partners.

The China-EU deal comes after Beijing joined the Regional Comprehensive Economic Partnership in November, along with 14 other Asia-Pacific countries, forming the world's largest trading bloc - one that excludes the US.

Meanwhile, Xi has also indicated that China "will favourably consider joining" the renegotiated version of the Trans-Pacific Partnership, which was originally led by the US and aimed at excluding China.

After Trump pulled out of the TPP in 2017, the remaining 11 countries signed the renegotiated version, called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a year later.

In addition, Beijing is also expected to renew its efforts to form a separate trilateral free-trade pact with Japan and South Korea, two of its major trade partners in Asia.

Given this momentum, China now has better odds of pulling off those agreements and further cementing its standing as the dominant economic power in the region. All this would give Beijing more leverage to counteract the incoming Biden administration's influence.

Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper

This article originally appeared on the South China Morning Post (SCMP).

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