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EU and mainland China sign investment deal

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Both sides win as Beijing and Brussels agree to deepen bilateral links.

After nearly seven years and 35 rounds of negotiations, the European Union and mainland China have agreed in principle a Comprehensive Agreement on Investment that aims to address longstanding barriers to investment between the two markets.

The agreement comprises four key elements: market access, fair competition between foreign and local businesses, sustainable development, and a dispute-settlement mechanism.

It will open up new opportunities for investors by providing greater certainty and dismantling barriers to cross-border investment, which is currently relatively weak compared to bilateral trade flows.

On balance, European companies are likely to be the main beneficiaries, given the EU is already relatively open to Chinese investment, but it represents a strategic win for both parties.

Both sides agreed to liberalise market-access commitments, especially for EU manufacturers, including for electric vehicles, chemicals, telecommunications and health equipment. This is the first time Beijing has agreed to such far-reaching provisions for manufacturing - the sector that accounts for most EU investment in mainland China.

And access to the services sector will be expanded, with joint-venture and equity caps removed for banking and EU firms allowed to own up to 50 per cent of cloud-computing businesses. EU companies will also be free to invest in cargo handling, container depots and maritime agencies without restriction.

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The EU is already relatively open to investment from mainland China but will expand access to some manufacturing sectors beyond its World Trade Organization commitments - though not to sensitive areas such as public services, critical infrastructure and technologies. Meanwhile managers in one territory will find it easier to work in the other.

The parties have agreed to ban investment requirements that compel transfer of technology and to prohibit state interference in the licensing of technology. The deal also includes commitments not to lower labour and environmental protection standards to attract investment and to honour the Paris Agreement on climate change and International Labour Organization conventions.

However, the Comprehensive Agreement on Investment tackles only barriers to investment - not other trade aspects such as goods, services or digital commerce. It does not address overcapacity in steel production, access to public procurement contracts or trade in counterfeit goods.

It is hoped the agreement will be ratified by the end of this year and take effect in early 2022. However, ratification could be affected if Europe thinks it does not go far enough on some issues.

Near-term benefits may be limited, but mainland China’s longer-term economic growth should be boosted by increased investment flows and the likely subsequent flows of people, knowledge and technology. Beijing is likely to accelerate opening and reform measures: its latest Five-Year Plan aims for deeper engagement with the world to support longer-term growth.

Reform measures, including levelling the playing field and strengthening intellectual property rights, should not only incentivise more high-quality investment from the EU, but from other regions too, and encourage more domestic innovation. Progress in sustainable development goals around the environment and labour protections will also boost human capital.

However, once the agreement is implemented, other foreign investors may find themselves at a competitive disadvantage relative to EU companies when investing in mainland China as some clauses are not included in other trade agreements.

First published 12 January 2021.

Authors: Erin Xin, Greater China Economist and Shanella Rajanayagam, Trade Economist, HSBC

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