In the final days of 2020, the EU and China struck a quietly momentous deal. The Comprehensive Agreement on Investment (CAI) is the culmination of talks that began in 2013. Secured in the dying gasp of the Trump presidency, the deal will help shape the geopolitical dynamics of incoming US President Joe Biden’s era. But what does it mean for the global race for tech dominance of the 21st century?
For Europe, the CAI is designed to permit fairer access to the Chinese market. Although details of the deal remain confidential, the EU said it will “significantly improve the level playing field for EU investors”, including by “prohibiting forced technology transfers and other distortive practices”.
This includes removing caps on the levels of European investment in China, as well as lifting requirements for companies to partner with Chinese firms on joint ventures. Affected sectors include the highly coveted automotive sector, telecoms, cloud-computing, private healthcare and financial services.
Despite these boons for the EU, the deal has been widely framed as a coup for China. “China didn’t really concede much in the CAI,” says Nick Marro, lead analyst for global trade issues at the Economist Intelligence Unit. “It avoided difficult commitments on disclosing its industrial subsidies, or pledging fairer access to EU firms in areas like government procurement.”
Marro says that while the EU has boasted that European firms will now be able to control up to 50% of a cloud services joint-venture, this was already the case. And a change in the rules will do little to alter the fact that the Chinese cloud-services market is dominated by Tencent and Alibaba. “EU firms will have a hard time competing with these giants in their home market,” says Alexis Leggeri, a PhD candidate researching China’s foreign policy and EU-China relations at the City University of Hong Kong.
“In fact, a big gripe of the foreign business community more generally has been reducing these equity caps further, as well as addressing China’s difficult tech regulations in areas such as data localisation, restrictions over cross-border flows, and protectionist industrial policy,” says Marro. “The CAI doesn’t immediately move the needle on any of these topics.”
Business as usual for China
For China, the deal represents a commitment to business as usual. “The deal is a clear sign that the EU will not follow the US in decoupling from China and that it will not ‘weaponise’ its market for strategic purposes, as the US did through export control measures aimed at cutting Huawei’s semiconductor supply,” says Leggeri. “In other words, Beijing got a tacit guarantee that the EU does not plan to isolate China in terms of global trade.”
The incoming Biden administration has signalled that it wishes to continue President Trump’s push to build an alliance of democratic countries as a bulwark against China’s rising dominance on the world stage. The US has successfully pressured a number of countries including the UK to drop Huawei from their 5G networks and, through moves such as building a coalition of democratic allies (the “D10”), is advancing a Cold War narrative to outflank China in the shifting world older. But the CAI “showed that building a coherent Western stance towards China will be more difficult than some expected,” says Leggeri.
Comprehensive Agreement on Investment and what it means for tech
For the Chinese technology sector, the deal is welcome. In the lead-up to its sign-off, on 16 December, the German government agreed to implement a law saying it won’t exclude Huawei from its 5G rollout, putting it at odds with the UK, US, Australia and several other countries. The following day, Huawei signed-off on plans to open a €200m 5G manufacturing plant in France, despite the country’s curbs on using the equipment. “The deal is yet another sign in this direction,” says Leggeri. “In short, globalisation will continue between the EU and China and the EU will not take part in any attempt to create a decoupled western technological realm.”
Forced technology transfers – wherein a foreign company is forced to hand over IP as a prerequisite of doing business in China – and other distortive practices have been the principal bugbears of international companies doing business in China. “These are both long-standing problems and were right at the heart of the US-China trade war. They also remain challenges which that trade conflict wasn’t able to fully address.”
Do we need another regulatory framework, or should we be pushing China to honour its existing pledges?
Nick Marro, Economist Intelligence Unit
It is not known exactly how the CAI cracks down on these. But in theory, Marro says, China already prohibits forced technology transfers through its foreign investment law, which came into effect in 2019. “The question is, do we need another regulatory framework, or should we be pushing China to honour its existing pledges? That’s a recurring issue for every trade and investment deal with China. Without some type of strong enforcement mechanism, these challenges are likely going to persist.”
The deal has also allowed Europe to exert its autonomy from the US. In late November, the bloc called on the US to coordinate action in global tech norm-setting to curb China’s influence in emerging tech markets. “This, and the [CAI] is consistent with the EU aspiring for a multilateral rules-based order where the EU would be able to compete,” says Leggeri. The EU is aiming for technological sovereignty, and to be an equal, rather than subordinate, partner to the US.
“If we manage to reach this deal, it would put the US and the EU at the same level,” a senior European diplomat told Politico before the CAI was signed, in reference to the US’s Phase One deal with China. That trade agreement, which has vexed Europe, balances improved intellectual property protection and increased access to the Chinese market for US companies, with the relaxation of additional tariffs on China.
China and Europe’s technological entanglement
China has invested heavily in Europe over the past several years, particularly targeting the high-tech and infrastructure sectors. However, recently the investment landscape has begun to shift, and China’s FDI in the bloc has fallen each year since 2016 as a result. Many countries in Europe, as well as the UK, are making it more difficult for Chinese companies to purchase their homegrown firms and adding more controls on equity investment.
But China has become more creative in getting around such rules, by setting up R&D partnerships with universities, companies and governments instead. For example, Huawei will set up a private 5G network for Cambridge Science Park (owned by Cambridge University and home to 120 tech companies), despite being blocked from the UK’s national public infrastructure.
While China’s FDI in Europe is likely to continue receiving increased scrutiny, especially in ‘sensitive’ areas such as AI, biotechnology, the internet of things and national infrastructure, the CAI signals that it will not be shut out completely. Europe’s anti-China rhetoric might be in line with the US, but at the end of the day, money talks louder.