Is the China-EU investment deal doomed?

Last week, the European Parliament voted by a landslide to freeze discussions with Beijing on the Comprehensive Agreement on Investment (CAI) and demanded that China lift the retaliatory sanctions it has imposed on European Union (EU) officials, diplomats, academics, and researchers. The EU's unexpectedly tough stance towards China has brought recently unstable China-Europe relations to a low point, and there is much attention on whether this is the end of the China-EU investment deal or whether there is hope for a revival.

The CAI is a result of seven years of marathon negotiations and final talks were wrapped up in December last year. It was once seen in China as a "diplomatic victory", preventing Europe from leaning towards the US. But with the change of leader in the White House and US President Joe Biden playing the human rights card with China, the EU took the lead in announcing sanctions on four Chinese officials and one organisation involved in alleged human rights abuses in Xinjiang - the first of such sanctions on China since 1989. In retaliation, China sanctioned ten individuals and four organisations from the EU. The CAI was set to be formally ratified next year, but this tussle has put it in sudden limbo.

Amid full-blown strategic confrontation between China and the US, the geopolitics in China-Europe relations has become increasingly important to China. It had hoped to use the investment deal to tie down economic relations with Europe to weaken the traditional trans-Pacific alliance between the US and Europe. Amid the China-US tech war, Europe is also an important source of advanced technology for China; currently, China relies on Europe for 40% of its high-tech products. The investment deal would help to boost China's technological competitiveness and autonomy.

Following the sanctions and counter-sanctions between China and Europe, Chinese officials have engaged in frequent dialogues with European leaders to try and stabilise China-Europe relations. Two days before the European Parliament froze the CAI, Chinese Premier Li Keqiang spoke on the phone with Italian Prime Minister Mario Draghi, saying that China values its relationship with the EU, and hopes both sides can resolve differences through dialogue based on mutual respect, to push for the ratification of the CAI.

While it cannot turn the tide, China's current tone towards Europe is not overly tough. Joining the Munich Security Conference via video link from Beijing on 25 May, Chinese State Councilor and Foreign Minister Wang Yi spoke for the first time after the CAI freeze, saying that China sees the EU as a partner and not an opponent, and it feels that cooperation is the general direction and theme of China-Europe relations. This signals that China has not given up on salvaging China-Europe relations following the setback.

Wang also emphasised that the CAI is not a boon for just one side. On the other hand, the Xinjiang issue concerns China's sovereignty and security, and for some people in Europe to link these issues of a different nature by politicising economic and trade issues "is not acceptable and will definitely not work". He also said that creating political opposition and economic decoupling between China and Europe is not in Europe's interests and cannot last.

At the meeting, Wang could not hide his disappointment with the EU. "It has never come to our mind that the EU will put sanctions on us," he said, stating that Beijing was "shocked" when the EU imposed sanctions against Chinese officials over Xinjiang.

Wang also criticised the US without mentioning names, saying that a certain superpower had prioritised itself and imposed unilateral sanctions over the past few years, seriously disturbing and damaging international order and global governance. He reminded Europe that China and Europe had then stood together to prevent the world from heading towards confrontation and division. Wang's remarks, highlighting China and Europe's shared interests during the Trump era, were made as protracted US-EU trade disputes are easing.

Currently, China is still showing goodwill to the EU and maintaining strategic patience to ensure that the door is open to implementing the investment deal. But the biggest obstacle is that the European Parliament would only restart the ratification process if Beijing lifts its sanctions. And since this involves China's sovereignty and security which cannot be compromised, both parties are left with little bargaining room.

Last Friday, Chinese foreign ministry spokesperson Zhao Lijian criticised the EU for its "gross interference in China's internal affairs" and stated that China's decision to sanction EU officials is "a necessary and legitimate reaction to the EU's moves of imposing sanctions and seeking confrontation". This again shows that China is unlikely to lift sanctions on the EU.

However, as the European Parliament's freezing of the investment deal has no legal effect, the EU and its 27 member countries have yet to support the decision. Despite the uncertainty, this does not mean that the investment deal is therefore doomed. While imposing sanctions on Chinese officials and freezing the investment deal are symbolic gestures on human rights issues that may help the EU take the moral high ground, the EU also knows that these actions would have no substantial effect on improving the situation in Xinjiang.

At the same time, if the investment deal falls through, the EU would lose the Chinese market, its economic benefits, and a chance for better protection of the EU's investments and intellectual property rights in China. This would also be a test of whether Europe is truly able to separate politics from the economy when dealing with China.

Also, the investment deal is deemed more beneficial to major EU countries such as Germany, France, and Italy. The uneven distribution of benefits will result in varying degrees of enthusiasm and other practical considerations. Some analysts predict that countries that bear a grudge against China such as the three Baltic states and the Czech Republic are more likely to keep the investment deal on hold because of the US factor.

With China's EU policy remaining unchanged, whether the ratification process of the investment deal can be restarted would depend on whether the interests and opinions within the EU can be effectively integrated. Freezing the deal does not mean that it would be abandoned. There will be light at the end of the tunnel if China and the EU could find a way to decouple mutual political sanctions from the investment deal.

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