Stalled Chinese investment deal set to return to EU agenda next month

A stalled investment deal with China is likely to be back on the European Union's agenda next month, amid a bout of soul-searching over what direction the bloc's relations with Beijing should take.

Major trading nations will insist on discussing the Comprehensive Agreement on Investment (CAI) at summits of EU foreign ministers and leaders in May, according to an EU official who spoke on condition of anonymity.

This will be part of a broader conversation on China, as the EU's 27 member states look to flesh out a model for "de-risking" bilateral ties with the world's second largest economy. Some officials do not view the CAI in conflict with these aims, since the deal was designed to protect European investments in China.

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At summits in Stockholm and Brussels, top leaders and diplomats is likely to discuss whether there is any way of unlocking the pact - even if the prospect looks remote at present.

The CAI was agreed at a political level in the last days of 2020, but ran aground after a row over sanctions months later. The EU sanctioned Chinese officials and entities over alleged human rights abuses in Xinjiang in March 2021, and Beijing immediately retaliated with sweeping measures against EU lawmakers, academics and diplomats.

Chinese envoys have floated the idea of simultaneously dropping sanctions in recent months with a view to reviving the pact, but Brussels has not yet been moved by the suggestion. Instead, officials point to the human rights situation in China that does not appear to be improving.

The European Parliament - which holds ratifying power over the deal - maintains that it will not approve the CAI while its members remain under Beijing's sanctions.

Moreover, the mood towards China in the chamber has worsened since Russia's invasion of Ukraine in February 2022. Members have criticised Beijing for failing to condemn the war and chastised EU officials for continuing to engage with the Chinese Communist Party.

This stance is expected to be renewed during a debate on EU-China ties in the parliament on Tuesday, where lawmakers are expected to set out their continued opposition to the investment deal.

"Nobody should expect that the parliament will do China the favour of signing on to a deal which is out of step with the development of economic relations between the EU and China," said Reinhard Buetikofer, head of the European Parliament's China delegation.

"CAI as it stands represents old thinking. We need a new approach."

Diplomats in Brussels were doubtful that the deal could be salvaged, given the general lack of high-level political backing. Three Western European envoys said their countries were unlikely to support reopening the deal.

The blowback from French President Emmanuel Macron's recent trip to China and the French public's general antitrade sentiment is likely to mean France would not sponsor efforts to resuscitate the CAI, one diplomat said.

Senior EU leaders - and even business associations - have also said the deal would need to be reassessed in light of the major changes the bilateral relationship has experienced in recent years.

"Much has changed in China and the rest of the world since then. Before resuming the ratification process, a reassessment of the agreement would first be necessary," said Tanja Gonner, managing director of the Federation of German Industries in a statement this month.

Gonner's statement was all the more notable given that Germany is by far China's biggest trading partner in the EU, with German firms also holding sizeable investments in the country.

In the first two months of the year, it accounted for 27 per cent of all trade between the EU and China, according to Post calculations based on Chinese customs data.

The Netherlands, France, and Italy followed in terms of trade values with China, but none of them came close to Germany's total.

European Commission President Ursula von der Leyen, who was among the signatories of the deal in December 2020, said last month in Brussels that "we have to recognise that the world and China have changed in the last three years, and we need to reassess CAI in light of our wider China strategy".

Following meetings with Chinese President Xi Jinping in Beijing last week, von der Leyen reiterated that "we have seen during that time further deterioration in market access for EU companies in China".

In her Brussels speech, von der Leyen laid out a vision for "de-risking" the EU-China economic relationship: restricting EU companies' investments in Chinese tech sectors like artificial intellgince, quantum computing and semiconductors; and reducing reliance on Chinese exports of critical raw materials like rare earths and lithium.

When the EU's 27 leaders last discussed China at their European Council summit in October, they broadly agreed with the agenda von der Leyen subsequently laid out, though her remarks were seen as being more "forceful and unconciliatory" than the leaders' discussion, an EU official said.

Even so, von der Leyen and others have emphasised that there is no desire for decoupling from China.

"It is neither viable nor in Europe's interest to decouple from China. Our relations are not black or white, and our response cannot be either. This is why we need to focus on de-risking - not decoupling," she said in her Brussels speech.

A second senior EU official said that while some leaders chose to couch their approach to China in softer language, the 27 were roughly on the same page.

"I think the baseline is the same, the way you express it is sometimes a bit different," the official said, referring to the seemingly contrasting positions adopted by von der Leyen and Macron in Beijing.

"The way you do it is different, from France to Germany, from commission to council - of course we are different. But I see no one questioning the overall approach," the official said.

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

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