Despite Beijing’s Charm Offensive, the EU-China Investment Agreement Is Not Coming Back

The EU-China Comprehensive Agreement on Investment (CAI) has been frozen for just under two years. In May 2021, the European Parliament (EP) voted to suspend ratification after Beijing sanctioned 10 individuals and four entities within the European Union in retaliation for EU sanctions of the same month targeting Chinese individuals and entities involved in the persecution and mass detention of Uyghurs in Xinjiang. Yet Beijing continues to push the deal, which would have replaced the individual bilateral investment treaties (BITs) that most EU member states hold with China and included promises from both sides in terms of market access, level playing field provisions, and environmental and labor standards.

China’s new EU ambassador, Fu Cong, has expressed a desire to “resuscitate” the CAI, marketing it as a cure-all for the complaints he acknowledged some European businesses have about access and operating conditions in the Chinese market. Earlier this month, Fu suggested that all parties consider simultaneously removing sanctions and noted that Beijing stands ready to explore other proposals that would permit movement toward ratification. Some European parties may be receptive to a revival, at least according to the Chinese state media, which reported that EU Council president Charles Michel praised the deal during his December trip to Beijing, and that Sweden has promised to explore dialogue with the EP to move the deal forward during its EU Council presidency through the end of June.

Efforts by Beijing to revive the CAI are unlikely to be successful. For one, European opinions towards China have shifted markedly since former German chancellor Angela Merkel facilitated its in-principle agreement in December 2020—shaped prominently, for example, by Beijing’s behavior in the Russia-Ukraine war. But such efforts are doubtful to find purchase even in Germany, which is still China’s largest European trading partner and arguably the “birthplace” of the CAI due to Merkel’s eleventh-hour push to reach an agreement in the final days of Berlin’s EU Council presidency. The change reflects substantive concerns about the deal as well as a growing view within the German policy community that economic agreements with a changing China cannot be walled off from other parts of the relationship.

While German chancellor Olaf Scholz expressed interest in reviving the stalled deal upon entering office in December 2021, reactions to the CAI within Germany were very much a mixed bag. While praising the deal as an important symbolic, if marginal, step toward improving investment planning and security, behind the scenes, German industry found China’s economic promises underwhelming. Civil society groups such as NGOs and political foundations worried the deal formalized existing restrictions on their access and operations in China. Importantly, two of the three parties now serving alongside Scholz’s Social Democratic Party (SPD) in the ruling Traffic Light Coalition —the Greens and Free Democratic Party (FDP)—opposed the CAI. This was partially because of timing: the announcement came as a new U.S. administration eager to work with Europe on China-related trade and investment issues was entering office, and arguably delivered Beijing a diplomatic win amid concerning foreign and domestic policy developments—including crackdowns on democratic freedoms in Hong Kong, amped-up wolf warrior diplomacy as Covid-19 was spreading across the European continent, and rising attention to Chinese internment practices targeted at the Uyghur population in Xinjiang.

Beyond this, however, both the Greens and FDP concluded the CAI represented a missed opportunity to press for greater alignment with European values in China’s market orientation and human rights practices. In an April 2021 interview, then-chancellor candidate and now foreign minister Annalena Baerbock argued that in the CAI, the European side had “not sufficiently addressed the issue of forced labor in relation to the oppressed Uyghur minority,” sentiment echoed by Greens colleagues (author's translation). This was also a focal point of a coordinated FDP response to the CAI, which in June 2021 resulted in a set of 12 demands written by Sandra Weeser, member of the Economic Affairs and Energy Committee in charge of trade policy, and Gyde Jensen, an FDP colleague who was serving as chairwoman of the Committee on Human Rights and Humanitarian Aid. The FDP’s demands critiqued other parts of the deal too—including restrictions of European law firms and NGOs in China—and made it clear the FDP saw the CAI as far from ratification-ready.

Lifting sanctions on European entities will not ameliorate these substantive concerns. Instead, they reflect a growing sense in German political circles that while China is simultaneously a partner, competitor, and systemic rival, systemic rivalry must condition other parts of the bilateral relationship. The Greens and FDP were opposed to the CAI since it would have deepened economic ties without securing sufficient improvements in China’s human rights practices: the two issues were inseparable from the perspective of many who opined on the CAI in these parties. The Christian Democratic Union (CDU) felt differently at the time: deputy chairwoman of the CDU/Christian Social Union (CSU) parliamentary group Katja Leikert cited “worrying” developments in the human rights situation in China but argued it would be “naïve” to expect an investment agreement to “bring about a system change in China” and Chinese commitments of any variety on this front “must be seen as the positive intermediate steps that they are” (author’s translation).

But the idea that systemic rivalry should condition Germany’s relations with China is growing across the political spectrum. Norbert Röttgen, a CDU politician who had led the push against Huawei in Germany’s 5G infrastructure in 2019, expressed alarm from his vantage point as chair of the Committee on Foreign Affairs in the Bundestag. Röttgen held that allowing the CAI to proceed as-is, with China merely committing to “efforts” to ratify the International Labor Organization conventions on forced labor, would be akin to concluding an agreement in which “forced labor is implicitly accepted” (author’s translation). Now in opposition, the CDU is departing from the Merkelian practice of walling business considerations off from other parts of bilateral relations with China. CDU leadership strongly opposed the Cosco-Hamburg port deal based on security concerns, and party chief Friedrich Merz argued that Olaf Scholz’s state visit was simply inappropriate against the backdrop of the solidification of Xi Jinping’s authoritarian rule and rising Chinese aggression vis-à-vis Taiwan.

While there may resistance within the chancellery, many in the SPD are also aiming to distance the party from Merkel’s business-first approach to China. Germany’s muted reaction to Beijing’s draconian crackdown in Hong Kong was an important turning point for this group. In the wake of this, Nils Schmid, the SPD’s spokesperson on the Committee on Foreign Affairs who played a role in the debate over Huawei and 5G, argued it was time to retire the idea that “as we deepen our economic ties with China, it will become more liberal.” The SPD parliamentary group released a position paper on China in June 2020 calling for a toughened stance: while endorsing the European Union’s three-part approach to China as a partner, competitor, and systemic rival, the paper argued (according to one of the authors) that systemic rivalry should condition both partnership and competition, instead of Germany approaching China as “a partner on Monday, competitor on Tuesday, and rival on Wednesday.”

For Europe’s largest economy to make a push for progress on the CAI—or support efforts to lay the groundwork for deeper economic engagement with China in the future—Beijing will need to do more than lift sanctions or talk a good game about improving its human rights practices. Indeed, in meetings with sanctioned EU organizations and individuals in fall 2022, Beijing reportedly communicated that outstanding restrictions would not be strictly enforced, in a bid to push the investment deal forward. Reflective of the wide range of concerns with China and the CAI, however, this did little to move the needle. In April 2022, Beijing announced it would ratify ILO conventions on forced labor, arguably following through on its promises in the CAI to make “efforts” toward ratification. However, many policymakers within Europe did not see this move as a gamechanger, due to ongoing concern about China’s human rights practices. Nearly a year on, these practices are more widely scrutinized in Europe than ever, as EU statements at last week’s 38th EU-China Human Rights Dialogue and strong opposition to the proposed trip of the Xinjiang governor to Brussels and London make clear. This reflects the emergence of a broader paradigm in Europe in which differences in values have come into focus and will shape how Brussels, Berlin, and other European capitals engage with Beijing. In this environment, and as early opposition to the CAI within Berlin makes clear, emphasizing the benefits derived from economic ties without substantive action on issues such as human rights and de-escalation in Ukraine is no longer a winning formula for China.

Lily McElwee is a fellow with the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.

This commentary is based on research completed while the author was a DZ Bank Fellow in Transatlantic Business and Finance with the American Council on Germany. A forthcoming brief will delve further into German debate on the CAI.

Lily McElwee
Deputy Director and Fellow, Freeman Chair in China Studies