EU’s investment deal will give it limited inroads into China

Hello from Brussels. Trade people had a couple of quiet days this week round here while everyone was busy having views on vaccine safety and the risk preferences of EU medicine regulators. Obviously it couldn’t last, and yesterday the EU went back on the export ban warpath again.

But in the intervening period, at least people had time to find a quiet room, wrap wet towels around their heads and decipher the detailed “schedules” on market access for the controversial EU-China investment deal, which were published on Friday last week. We give our take, based on various conversations, below. Today’s Tall Tales focuses on some unfair bashing of the UK government over trade and human rights.

A few cars here, a bit of wind power there

Even by the standards of trade deals, the EU and China market access schedules of the Comprehensive Agreement on Investment (CAI), which detail sector by sector the permitted involvement in each other’s economies, make pretty dry and complex reading. Mainly they’re a reminder how much of China’s economy remains off limits to foreign companies. That’s excluding the myriad other murky ways — planning permission, licensing, regulatory harassment — that China deters foreign investors it doesn’t like.

We think a fair summary of the schedules — the main text was released in January — is as follows. They codify market access to foreigners that China had in theory already given in a few areas, such as private hospitals and cloud computing, but where bureaucracy and regulatory discretion have deterred actual investment. They have opened up a bit of new space in the car sector, though on China’s own terms. There’s a two-way deal in renewable energy which establishes the principle of reciprocity but may not affect investment a lot. And that’s pretty much it.

The Chinese automotive sector provisions (Annex III Sector 12 Sub-Sector W if you’re following along at home) underline a common theme: some market opening, yes, but tailored narrowly to China’s interventionist management of its domestic market. China already has plenty of conventional fuel car manufacturing and wants more electric (“new energy vehicle” or NEVs) production. So the deal allows no new foreign-owned enterprises building traditional cars and has prohibitively complex rules about capacity and local output for expanding existing production. (You’re welcome to buy one of China’s own basket-case car companies if you feel like it, though.)

On the other hand, China’s keen to attract leading-edge foreign NEV manufacturers, both to serve the expanding domestic market and bring new technology. The rules here are about managing overcapacity more than protecting local producers. Hence, foreigners can build new electric vehicle plants, again subject to capacity constraints and local production, but those constraints are relaxed if you invest more than $1bn (Annex X). Car parts production isn’t limited. China takes what China wants, including the intellectual property one way or another. (Accusations of IP theft are multiplying.)

The other part that caught our eye was in renewable energy power generation (Reservation 21 in the EU schedules). China can increase its position in each EU member state to certain rather low limits (1 per cent of generating capacity for solar, 1 per cent for onshore wind, 1.4 per cent for offshore wind, which can rise to a collective total of 5 per cent before the deal has to be renegotiated) as long as EU companies are allowed the same in China.

Brussels not unreasonably thinks reciprocity (though it avoids using the word here, maybe a bit too sensitive at home) is more likely to make the overall deal stick, giving Chinese companies have something to lose if it gets torn up. Sabine Weyand, head of the EU’s trade directorate, last month told a seminar: “We actually think you can extract more commitments from a partner if you are also willing to commit yourself,” contrasting it with the US-China “phase 1” deal in January last year. China’s “phase 1” commitments were neither reciprocated by Washington nor, in the event, mainly honoured by Beijing.

In practice, though, Chinese energy companies are already investing in some EU countries on a large scale (the percentage share limits are a floor, not a ceiling). And European companies will struggle to compete in China’s subsidy-distorted domestic power sector.

Overall, it’s a deal that at the margin probably helps big incumbent corporations a bit on both sides, including rumoured under-the-table deals for EU telecoms companies and Airbus. Noah Barkin, of the research firm the Rhodium Group, said: “This deal codifies previous liberalisation and chips away at asymmetries, but it’s not transformational. It will essentially benefit 15 to 20 EU multinationals, half of which are probably German.” (We’d add, not entirely flippantly, that Volkswagen, one of the deal’s beneficiaries, is a state-directed company: corporatist Germany and state-capitalist China have more in common than you might think.)

Alicia García-Herrero, chief Asia-Pacific economist at the investment bank Natixis and one of the most well-informed observers of CAI, concluded: “I can’t understand who would see this deal as such a big change . . . I don’t see why we would spend all this time and resources to create an agreement that has no content.”

The more you look at CAI, the less transformational it appears, both on commercial substance and the issues Trade Secrets has previously discussed of labour standards and human rights. (To be fair there are also the rules on subsidies and state-owned enterprises we’ve also mentioned before and will come back to.) Will it still get through the member states and the European Parliament? Maybe, but it’s hard to see anyone getting particularly enthusiastic about it.

Tall tales of trade

Not even Dominic Raab is wrong all the time. The UK foreign secretary made another of his trademark clumsy interventions this week, quixotically attempting to drive a wedge between the Irish and US governments over the Northern Ireland Brexit issue, and thought St Patrick’s day would be a fine moment to do it.

But he also attracted some unfair criticism for a video clip enterprisingly unearthed by the Huffington Post in which he said the UK ought to do trade deals with countries even if they had lower than ECHR (European Convention on Human Rights) standards of human rights protection. Human rights organisations piled in with condemnations, but Raab was surely right. The ECHR is a treaty attached to a court which applies very high human rights standards to its signatories.

As a former FT colleague points out, the ECHR (protocols 6 and 13) outlaws the death penalty, which would invalidate the deal the UK has just signed with Japan, let alone a future agreement with the US. In fact, since the UK declined to comply with some of the cases it lost at the European Court of Human Rights, you could argue Britain shouldn’t really be trading with itself. Human rights and labour standards in trade deals are hugely complex issues, and the UK’s made a pretty good start, imposing outright import bans on goods believed to be made with Uyghur labour from China. Let’s not assume it’s wrong about everything just because it’s wrong about Brexit.

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