Disregarding the US, Angela Merkel leads the EU into an investment agreement with China

January 5, 2021 4:31 AM

In a sign of shifting political dynamics, a Brexited EU led by German Chancellor Angela Merkel concluded the Comprehensive Agreement on Investment (CAI) with China on December 30, 2020

Merkel’s task became easier with the exit of Britain, which had always assured that Washington’s views found resonance in the EU decisions.

By Yogesh Gupta

In a sign of shifting political dynamics, a Brexited EU led by German Chancellor Angela Merkel concluded the Comprehensive Agreement on Investment (CAI) with China on December 30, 2020, ignoring a request by President-elect Joe Biden’s team in the US for early consultations. Under discussion for seven years, negotiations for the CAI acquired a new momentum in recent weeks after an anxious Xi Jinping directed his negotiators to “make enough concessions” to snatch the deal before the German presidency of the EU concluded on December 31 and Biden’s takeover on January 20, 2021.

Xi was keen to forestall any joint efforts by the Biden administration (with its EU allies) to attempt a common strategy to challenge China’s (unfair) trade practices (the US and the EU getting about 45% of China’s exports). Xi had feared China’s diplomatic isolation due to its crackdown in Hong Kong, Tibet and Xinjiang. Merkel wanted this deal as it would help its carmakers and other manufacturers to operate in China without going through joint ventures with Chinese partners and sharing their sensitive technologies. She had also been upset with President Donald Trump for his recurrent jibes and reducing the presence of American troops in Germany, without consulting her.

Merkel personally ensured the approval of EU’s 26 Head of States with the dissenting Poland (having close relations with the US) being sidestepped. Merkel’s task became easier with the exit of Britain, which had always assured that Washington’s views found resonance in the EU decisions.

Under the CAI, European businesses would get better (not full) access than their American counterparts to China’s market in new energy vehicles (of importance to Germany), healthcare, telecom, finance and cloud services. The EU also obtained a few concessions from China on ending forced technology transfers and publishing a list of subsidies provided to designated sectors annually; for the first time, China has agreed to open up its services sector partially.

How much China would actually implement these decisions remains to be seen, in the absence of any specific monitoring or dispute settlement mechanism given Beijing’s known reticence in observing agreements of not its liking.

On forced labour, China agreed to seek ratification of four ILO conventions, but no date has been agreed for it nor any verification mechanism agreed; the EU has been satisfied with the lip service paid by the Chinese. There was no progress on improved labour rights, as China did not agree to allow independent trade unions or give them the right to collectively bargain with employers. In return, China will get relatively free access to the EU market (16% of the global economy in 2019).

The deal still needs to be approved by European Parliament where some members are hawkish on China; the European Commission led by (German) President Ursula von der Leyen is canvassing for supporting this “good and solid” deal saying it is the “most ambitious outcome that China has ever agreed with any country.”

Xi is projecting the CAI, soon after the conclusion of the Regional Comprehensive Economic Partnership (RCEP) with 14 Asia-Pacific countries a few weeks earlier, as a win for his diplomatic efforts. He will now be much more emboldened in resisting the US pressure for restructuring of China’s economic policies.

After Britain’s departure, the EU is being driven increasingly by the Franco-German partnership and has become more independent of the US in its economic and other policies. With the mutual trust broken under Trump, it will become much harder for the Biden administration to align EU’s policies more closely with theirs.

The deal illustrates the difficulties of dealing with an authoritarian China, which is both a strategic rival and lucrative market for most countries. It certainly gives a blow to the transatlantic solidarity, making it clear that when its interests so demand, the EU would not hesitate to pursue an independent policy towards China or other countries. For India and others, the lesson is that economic interests of other countries would often be an important determinant in shaping their attitude towards a resurgent China.

(The author is a former ambassador)

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