Commentary - 25 February 2021

What Does the EU-China Comprehensive Agreement Mean for European Businesses?

Labelled ‘the most ambitious agreement that China has ever concluded with a third country’, the EU-China Comprehensive Agreement on Investment concludes 35 rounds of negotiations between delegations from the two sides over a course of around six years.

Fabio Stella

Associate Director of Sales & Business Development

Concerning more than €140 billion of EU FDI in mainland China and €120 billion of Chinese investment in the EU, the covenant aims to grant European businesses better access to the opportunities of China’s soaring market, eliminating forced technology transfers in exchange for market access and clarifying the framework in which Chinese state-owned enterprises (SOEs) operate and access subsidies.

A Long Wait for Great Expectations

The complexity of the deal and the length of its negotiations can be traced back to an initial Sustainability Impact Assessment exercise carried out between 2015 and 2018 by the EU to assess the potential economic, social and environmental impacts of the agreement on its member states and economies.

Eager to develop a comprehensive text, in 2016, China agreed to go beyond the traditional backbone of investment protection agreements covering various important disciplines as well as provisions on sustainable development, labour standards and CSR principles under a dispute resolution mechanism.

The Latest Push

Pushed to a successful conclusion by the impetus granted by the revolving presidency of the Council of the EU, in the hands of Germany with its Chancellor Angela Merkel, and China’s President Xi Jinping in their commitment to simplifying future negotiations with the Biden administration, the deals’ acceptance in principle is a first step in the approval process.

Each side’s legislative bodies shall run plenary deliberations for the ratification of the agreement over the next few months, with the EU’s approval needing to include the European Council and the European Parliament.

In the words of the President of the European Commission, Ursula von der Leyen: ‘[the] agreement is an important landmark in our relationship with China and for our values-based trade agenda. It will provide unprecedented access to the Chinese market for European investors, enabling our businesses to grow and create jobs. It will also commit China to ambitious principles on sustainability, transparency and non-discrimination.

The agreement will rebalance our economic relationship with China’ (Dec 2020).
China’s President, Xi Jinping, confirmed the country’s decisive path towards opening up the local economy saying that ‘The agreement will provide greater market access, a higher level of business environment, stronger institutional guarantees and brighter cooperation prospects for mutual investment’ (Dec 2020).

Gains for European Investments

Optimising market access far beyond the recent shortening of the so-called negative list on foreign investment, China has made significant commitments to manufacturing, the most important sector for EU investment in the country, making up more than half of total EU investment in China. Clauses of the agreement will be specifically dedicated to the liberalisation of the production of electric cars, chemicals, telecommunications and health equipment, among other fields.

Another source of gains for EU businesses, according to European Chamber of Commerce President Joerg Wuttke, can be found in various service sectors, with cloud services, finance, private healthcare, environmental solutions and international maritime/air transport-related providers benefiting the most.

Legal and Regulatory Certainty For All

When looking at their investments in each other’s jurisdictions, Chinese and EU businesses will gain certainty and predictability with a regulatory framework nullifying any attempt by local authorities to obstruct access to market opportunities or promote discriminatory initiatives.

In terms of fair competition in both markets, the investment agreement will level the playing field for EU investors in China by indicating clear parameters to judge subsidies to Chinese SOEs as already occurs among EU member states through the pre-approval of the European Commission and rulings of the EU Court of Justice.

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Cutting Red Tape, Immigration Quotas and Discriminatory Practices

By providing equal access to standard-setting bodies for European companies, China has committed to enhancing transparency, predictability and fairness in procedures for additional authorisations and further licensing on local subsidiaries.

Professionals and technicians sent over by the HQs of EU companies will be able to work up to three years in their Chinese subsidiaries, with no restrictions being implemented like tests on the labour market or quotas for industry representatives or local staff. During negotiations and the incorporation of local investments and for future subsequent entries, the representatives of EU investors shall be allowed to visit freely.

For this and other issues in the application of the clauses of the investment agreement, a monitoring mechanism set at a pre-litigation phase shall be run at a political level between delegations from both sides.

A Sectorial View: What Changes and Where?

The investment agreement’s basic principles already highlight some of the matters and sectors that will be directly influenced by the overall consensus reached on 30 December 2020, specifically regarding current caps and market access barriers in mainland China:

  • Automotive sector: Removing and phasing out joint venture requirements for EU businesses, providing market access for new energy vehicles. 
  • Financial services: Keeping the current market opening curve and granting access to EU investors as per recent removals of foreign equity caps in the banking, trading in securities and insurance (including reinsurance) and asset management sectors. 
  • Healthcare (private clinics): Lifting joint venture requirements for private hospitals in key Chinese cities such as Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen. 
  • Telecommunication/cloud services: Lifting the investment ban for cloud services, now open to EU investors with a 50% equity cap. 
  • Computer services: Ensuring market access for computer services by EU investors, while caps imposed for value-added telecom services will not be applied to other sectors’ services when offered online. 
  • International maritime and air transport: Allowing investments in relevant land-based auxiliary activities with no restrictions, including cargo-handling, container depots and stations, and maritime agencies. For aviation logistics, China will open up in the key areas of computer reservation systems, ground handling, and selling and marketing services. 
  • Business services: Eliminating joint venture requirements in real estate services, rental and leasing services, repairs and maintenance for transport, advertising, market research, management consulting and translation services, etc. 
  • Environmental services: Removing joint venture requirements in environmental services such as sewage, noise abatement, solid waste disposal, cleaning of exhaust gases, nature and landscape protection, sanitation and other environmental services.

Regional Masterplans and Bilateral Agreements 2.0

The EU's explicit objective for this much-awaited milestone was to modernise and immediately replace its existing member states' bilateral investment treaties with China to create a shared and multilateral approach that would take note of the common interest of the 27 economies.

During a related press conference, China’s Ministry of Commerce Spokesman Gao Feng signalled that the deal could help set the stage for restoring normal trade relations with the US, and additional trade agreements with Japan and South Korea. China was also portrayed as willing to deepen existing agreements with Singapore, Chile and New Zealand after the launch of the RCEP in 2020.

How Can Hawksford Help?

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With more than 100 professionals, we offer tailor-made corporate Chinese administration services with an on-the-ground presence in Shanghai, Beijing, Guangzhou, Shenzhen and Changshu.

We have the local knowledge, robust administration framework and international client experience to guide you through the steps of starting and managing a business in China.

We help you understand the regulatory and tax environment, explore the best structure for your business and manage company registration obligations, helping you get the most from your Asian business decisions.

*Disclaimer: 
This article is written upon release of the Comprehensive Agreement on Investment which was signed between the EU and China on 30 December 2020. This article is intended for general information only and is not intended to apply to constitute legal advice. Hawksford accepts no liability for any errors or for any loss, of any nature, to any person by reliance on this article.

 

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