European Parliament votes to freeze ratification of Comprehensive Agreement on Investment

The European Parliament voted to freeze ratification of the China-EU Comprehensive Agreement on Investment (CAI) until China lifts the sanctions on some EU lawmakers and entities which were imposed as retaliation for the EU putting sanctions on Chinese individuals and entities it accused of involvement in human rights violations in Xinjiang.

The resolution was passed in the Parliament with 599 in favor, 30 against and 58 abstentions. It said that any consideration by the Parliament of the CAI and any discussion on its mandatory ratification by the members of the European Parliament have justifiably been frozen because of the sanctions China imposed on 10 EU individuals, including five MEPs, and four entities on March 22. Foreign Ministry Spokesman Zhao Lijian said that China decided to sanction relevant entities and individuals on the EU side who maliciously spread Xinjiang-related lies and disinformation and severely harmed China’s sovereignty and interests. “This is a necessary, legitimate and just reaction to the EU’s moves of imposing sanctions and seeking confrontation,” he said at a daily briefing in Beijing. Zhao added that “sanctions and confrontation cannot solve the problems. Dialogue and cooperation is the right way forward.” He called the agreement “a balanced and win-win deal that benefits both sides, rather than a gift or favor bestowed by one side to the other”, adding that an early ratification of the agreement is in the interests of both China and the EU, and the two sides should make positive efforts for this to happen.

China and the EU concluded in principle negotiations on the agreement on December 30, 2020 after 35 rounds of talks spanning eight years. Both Chinese and EU leaders have applauded the agreement, to be approved by the European Parliament and the 27 member states. According to the European Commission, the EU has invested €140 billion in China over the past 20 years. European Commission Executive Vice President Valdis Dombrovskis said in March that the agreement will “help to level the playing field and provide more market openings for EU companies and investors”. Shada Islam, Director of the New Horizon Project, a Brussels-based global strategy and advisory company, said that the current tension is not conducive to a rational discussion of the pros and cons of the agreement.

The China Daily called the vote “nothing but a desperate attempt to use the agreement as a tool to browbeat China”, adding that although it “does not necessarily mean the CAI is dead, it does push the consensus on the agreement reached after years of negotiations into a dead end”. The China Daily called the EU allegations about Xinjiang “baseless and politically motivated, and a blatant interference in China’s internal affairs”. The newspaper added that fabricating lies about Xinjiang or leveling groundless charges against China threaten the healthy development of Sino-EU relations. The China Daily also points out that the CAI is not a gift from the EU to China and that the EU could need it more than China, as “the EU is mired in a double dip recession and desperately needs an economic booster like the CAI while, on the other hand, China was the only major economy to achieve positive growth last year and its GDP grew 18.3% in the first quarter of this year.” The China Daily concludes that “by holding the CAI hostage to subjugate China, the EU, in effect, is hurting itself,” adding that “China will never compromise on its core interests no matter how much it cherishes the agreement or respects the commitments the two sides have made”.

China remains open to further talks with the EU on the ratification of the CAI, but it would be naive for EU politicians to assume the Chinese side is desperate for the ratification of the agreement, still according to the China Daily. “The EU’s move to leverage the CAI to coerce China into compromising its core interests lays bare the bloc’s hypocrisy and will only serve the interests of those China hawks in Washington,” the newspaper concludes.

Meanwhile, two-way investments between China and the U.S. have been declining sharply, according to the Rhodium Group and the National Committee on U.S.-China Relations. FDI between the U.S. and China fell to USD15.9 billion in 2020, the lowest level since 2009. Chinese FDI in the U.S. reached USD7.2 billion in 2020, a slight increase from USD6.3 billion in 2019. U.S. FDI in China dropped to USD8.7 billion in 2020, roughly a one-third reduction from 2019 and the lowest level since 2004. At the height of economic relations between the U.S. and China, two-way investment reached close to USD70 billion in 2016 and more than USD60 billion in 2017. Anna Ashton, Senior Director of Government Affairs at the U.S.-China Business Council, who presented an overview of more than 150 China-related proposals currently being worked on by Congress, expressed a desire for clear policy. “There are political factors here in the United States that are creating a climate that is anything but inviting to Chinese FDI,” she said.

Meanwhile, the U.S. has extended a ban on U.S. investments in Chinese companies deemed to have links to the country's military. The Treasury had previously set a May 27 deadline for issuing a clarification on the ban, which originated from an executive order by President Trump in November 2020, seeking to ban U.S. investment in firms the U.S. claims are owned or controlled by the Chinese military. In a worst-case scenario, the investment ban could be expanded to cover more Chinese businesses.

This overview is based on reporting by the China Daily, Shanghai Daily and Global Times.