Draft deal will bring 7 years of negotiations to a successful close, but risks EU tensions with US

Jim Brunsden, Mehreen Khan and Michael Peel in Brussels

December 30, 2020

The EU and China are set to announce a long-awaited investment treaty, in a move that is aimed at opening up lucrative new corporate opportunities but risks antagonising president-elect Joe Biden’s incoming US administration.

The draft accord awaits confirmation by European Commission president Ursula von der Leyen and the Chinese leadership on Wednesday, European officials said — a moment that would finally bring seven years of often difficult negotiations to a successful close.

But the accord may create friction with the incoming Biden administration in the US, which has stressed the need for transatlantic co-operation to put pressure on Beijing. Rights activists will also scrutinise the deal closely over allegations that China uses Uighur Muslims detained in large numbers in Xinjiang province as forced labour. Beijing denies the claims.

A backlash began even before the deal was unveiled. Reinhard Bütikofer, chair of the European parliament’s delegation for relations with China, late on Tuesday branded it a “strategic mistake”. He tweeted that it was “ridiculous” for the EU side to try to sell as “a success” commitments that Beijing has made on labour rights in the draft deal.

The deal is expected to remove some barriers to EU companies’ possibilities for investing in China, such as specific joint-venture requirements and caps on foreign equity. Industries where the EU has secured improved access terms include automotive, healthcare, cloud computing and ancillary services for air transport, EU officials said.

The deal will also lock in existing market openness in the Chinese financial services sector.

Other parts of the agreement seek to ensure transparency of subsidies and to set clear rules against forced technology transfer. EU officials said that Brussels has also secured guarantees of non-discrimination compared to state-owned enterprises. All of these points have been core EU grievances in its trade relationship with China.

For Beijing, the draft deal will lock in existing market access rights while securing some openings in the areas of manufacturing and renewable energy.

Brussels views the draft deal as a vindication of the bloc’s strategy of seeking negotiated solutions with Beijing rather than the kind of outright confrontation on trade pursued by outgoing US president Donald Trump.

EU officials note the agreement secures some similar benefits to Mr Trump’s “Phase 1” deal with Beijing — an accord struck last January against the backdrop of an escalating trade war. They note that the US and EU will henceforth be able to co-operate on China issues from a position of equality.

But the Biden team has made clear that it wants a multilateral alliance with the EU and other partners to put pressure on Beijing on trade, ending the Trump era of going it alone.

The new US administration would “welcome early consultations with our European partners on our common concerns about China’s economic practices”, Jake Sullivan, who will serve as Mr Biden’s national security adviser, wrote on Twitter last week.

But Thomas Wright, a senior fellow at the Brookings Institution, said the EU’s choice of pressing ahead with the investment agreement made its separate offer of a renewed transatlantic partnership “sound insincere”.

“I’m sure Biden will work to revitalise transatlantic relations but this episode is unquestionably damaging and will have many justifiably asking if it’s worth Biden’s time placing a big bet on Europe,” he tweeted late on Tuesday.

Brussels officials caution that the draft deal is an exercise in trying to level the playing field with China on issues around investment and market access, but that it only covers a subset of trade irritants between the two sides.

The agreement is far narrower in scope than a free trade deal, and issues including public procurement, and Chinese overproduction of steel — both flashpoints — fall outside its scope. However, the deal does commit Beijing to upholding global sustainable development goals and the Paris climate agreement, and also not to undercut environmental standards to attract investment.

EU officials said the question of labour rights was the final sticking point to be overcome in the talks, with the EU securing commitments that China will work to ratify and implement International Labour Organization conventions.

The commitments include Beijing making “continued and sustained efforts” to ratify ILO conventions against the use of forced labour. France had led warnings from national governments that a deal was impossible unless such guarantees were secured. China had made important last-minute concessions, European officials said, in what many observers see as an effort by Beijing to get the agreement done before Mr Biden takes office on January 20.

The agreement, which will need to be approved by EU governments and the European parliament, includes dispute settlement procedures, with the possibility that the EU can withdraw market-access opportunities if China does not meet its obligations. Ratification processes will only begin after at least several months, once the text has been legally checked and translated.

The announcement comes only two days before an end of 2020 target date agreed on by Brussels and Beijing last year. The EU had repeatedly complained in recent months that talks were making too little progress, stressing that its faith in negotiated solutions with Beijing depended on a positive outcome.