The EU’s Investment Agreement with China Is a Diplomatic Opportunity

It is shortsighted for the United States to express alarm over the recent Comprehensive Agreement on Investment (CAI) between Brussels and Beijing. The agreement looks much like what the Trump administration should have tried to get, and there might even be a degree of envy in Washington. Beijing is eager to prevent a common transatlantic approach to China, even if it involves making some concessions (at least temporarily). The United States should not assume the European Union will automatically side with it, but a number of factors provide the incoming Biden administration a good opportunity to rebuild transatlantic cooperation and develop a common approach toward China.

First, an approach to Europe on China should be part of a larger U.S. reconsideration of its China policy, including on decoupling and technology transfer. The Europeans do not see China as a military threat (in contrast to Russia), but they increasingly see it as a threat to their economies and a rules-based international order. The CAI has its opponents and can be seen as a short-term deal with the devil—one European diplomat said it is possible to have political differences with China and still do business with them. The CAI, should the Chinese live up to it, would be a good guide for how China’s place in the international economy could be reformed. But while it is hard to get an agreement with China, it is even harder to get China to live up to its commitments. 

While the CAI could help guide U.S. policy, there is a caveat: doing business with China requires carefully identifying how to define concrete objectives, how to verify progress, and how to identify business or technology transfers that otherwise make economic sense but would harm economic or national security. Europe and the United States both face this problem. As a senior European official once put it, China is trying to hollow out key German industries, and the CAI commitments are unlikely to stop this. 

Immediate decoupling does not make sense, as there is some trade with China where the economic benefit outweighs the security risk, but identifying these areas is not a simple process. A policy that is more focused and granular in defining technology leadership would better safeguard U.S. technological strength by protecting domestic companies’ revenues. It would be best to do this in partnership with Europe. Many Europeans rightly fear that China’s industrial policies intend to displace key EU industries, and these concerns could be a foundation for a stronger EU-U.S. partnership. This strategy is a short-term approach, as China has had its own decoupling policy in place for years (perhaps better described as displacing Western companies), but we should not let China set the pace in ways that serve its own interests more than our own.

Second, the European Union has set itself up as the arbiter and defender of fundamental right. That makes Beijing an awkward bedfellow. Discussions with European executives and officials show increasing discomfort over China’s predatory trade behavior, its flouting of international law, and its actions in Hong Kong and Xinjiang. With President Trump soon to leave office, it will be easier for the United States to build on shared preferences for democratic governance, fundamental rights, and rules-based markets, all areas where China is at odds with Europe. China’s internal political dynamics will unavoidably lead to greater Orwellian repression, and that will shape European public opinion in ways unfavorable to China and put increasing strain on CAI.

This is a glaring incongruity in European thinking, but the United States cannot set itself up as a moral arbiter after a year of social unrest and a very messy election. Over time, the strengths of the Biden administration may reverse this, but it will take months to rebuild relations with Brussels and Berlin. There was a degree of schadenfreude for Europe in signing the CAI. Developing a common view of China can be a first step in rebuilding ties.

The agreement itself is vulnerable. Beijing might be encouraged to live up to it as much as possible to prevent stronger transatlantic cooperation, but some parts of the deal run counter to long-standing Chinese economic policy and practices. Beijing will not end subsidies to state-owned enterprises, and while they may no longer require forced technology transfer, they will still work to acquire European technology illicitly. China has used these policies for 40 years and will change them as little as possible.

A renewed partnership with Europe cannot be based on a “tech alliance.” There is significant distrust in Europe when it comes to technology and the United States; there are difficult issues (over competitiveness, privacy, and content control) that will take time to work out. A renewed partnership should be built on shared political values that can ultimately guide a common approach to technology and China. This is an old diplomatic precept—to build on strengths and existing agreement. This does not mean that a “tech alliance” is impossible nor that we should not begin working on a tech agenda with the European Union. It just means a tech alliance should not be the starting point for a discussion of China.

The new administration can rebuild the relationship in ways that promote growth on both sides of the Atlantic while countering the risks posed by authoritarian regimes. The economic effects of technological change put immense strain on the transatlantic relationship, and greater transatlantic cooperation will require agreement between Europe and the United States on difficult technology issues. There are significant obstacles that must be overcome, and common approaches to privacy, competitiveness, and innovation will need to be developed. However, we should not underestimate the strength provided by shared principles among transatlantic market democracies to provide the foundation for a renewed partnership to defend, once again, fundamental rights and the rule of law. These democratic values are the basis for renewed cooperation in the transatlantic community.

The United States needs to make some strategic decisions, and there are questions that will take time to answer. Is global bifurcation in technology and trade impossible to avoid? Can China be made to extend the commitments in the CAI to other countries, and then live up to them (along with its previous World Trade Organization commitments, which it has largely ignored)? The answers are not at all clear, but there is a common element: we are more likely to achieve our objectives, whether it is a stable bifurcation or dragging China back to the international community, if we do it with Europe. Without this partnership, any goal will be much harder to achieve.

James Andrew Lewis is a senior vice president and director of the Strategic Technologies Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2021 by the Center for Strategic and International Studies. All rights reserved.