By Robert Tyler, Senior Policy Advisor at EU affairs think tank New Direction
After months of protests, on May 21st, the European Parliament voted to freeze the “EU China Comprehensive Agreement on Investment” (CAI). Whilst this was an encouraging first step, it’s only half the battle in terms of setting out a firmer line of action when dealing with China.
The proposed investment deal between the EU and China risks opening the way for China to carry out the same predatory strategies that it has employed in other parts of the world. The terms offer China too many opportunities to take advantage of European industries and enterprises in an unfair manner.
It makes no sense whatsoever that under EU law, EU governments are being prohibited from unfairly propping up their companies with subsidies and other means, while Chinese state-backed competitors are allowed generous access to the lucrative EU market. The reality is, that without the right control mechanisms – which should of course stay well clear of uncompetitive protectionism – China may well manage to end up dominating certain European markets, not because of the superiority of Chinese companies but because of unfair trading practices.
China’s new style of diplomacy
China’s new “Wolf warrior diplomacy”, an aggressive style of diplomacy adopted by Chinese diplomats in the 21st century, under Chinese leader Xi Jinping’s administration, makes it a wildly unpredictable, and an entirely unreliable partner. The Asian superpower seems no longer interested in straight forward cooperation but rather in dominating regional markets. This is perhaps most evident in the development of China’s “Belt and Road initiative”.
China presents “Belt and Road” as an effort to build a cooperative network of trade partners around the world, linking them with new large-scale infrastructure projects, but in reality, this simply is a neo-colonialist scheme. The infrastructure built in the context of Belt and Road often isn’t for common use, but instead to exclusively benefit Chinese enterprises.
While China’s true objective is to increase the ability of Chinese companies to export goods, it is showing hardly any interest in opening up its own economy and allowing import flows from the rest of the world to increase. China’s ultimate goal is to further widen the trade deficits already run up by many countries, to increase political dependence on China.
We have already seen this new mercantilist strategy play out in a number of places, including in Africa, South Asia, and the Western Balkans.
For example, in Sri Lanka, China offered to construct a new port at Hambantota. The Chinese government offered generous loans to pay for the construction of this new port, but Chinese contractors were brought in to finish the construction, thereby depriving locals from those jobs. As it was struggling to keep up with the costs of the project and the repayment of the loans, the Sri Lankan government decided to partly privatise the port. This however resulted in China Merchants Port Holdings – a state owned enterprise – buying an 80% stake in the project. As it continued to struggle with the cost, the Sri Lankan government offered a 99-year lease to the company – in effect handing over the land as well as the port.
The Sri Lankan government has since announced it would attempt to reverse the lease and it has been looking for ways to pay back the initial loan, given how it is no longer able to keep up with the debt repayments. All the while, Chinese goods are flooding the Sri Lankan market, thereby driving out local competition.
What looked like a well-intended infrastructure project in Sri Lanka has ended up becoming a financial disaster and a fundamental risk to the country’s sovereignty. It illustrates how opening up for investment is obviously a good idea, but not when the investment partner is wealthy state actor with all kinds of non-commercial, political considerations.
Perhaps some would claim that this is Asia, and something like this could surely never happen in Europe’s own back yard.
The fact of the matter is that it already did happen. Increasingly, we are witnessing China ensnaring Western Balkan countries in into debt traps.
A prime example of this is the Montenegrin motorway project, which saw Montenegro, an EU candidate country, borrow the equivalent of a quarter of its annual GDP from the Export-Import Bank of China, another Chinese state company. This happened despite feasibility studies claiming that there was no economic benefit, as compared to the cost, to building new roads between the Montenegrin Port City of Bar and the Serbian capital of Belgrade.
The whole point of the project is not only to support Chinese trade in the region. By increasing Montenegro’s debt to GDP ratio to over 80%, the mammoth loan is putting EU accession talks in jeopardy, thereby taking the country out of the EU’s sphere of influence.
These kind of Chinese tactics can also be played on EU territory. Under the last Greek government, the country increasingly turned towards Chinese investment. China purchased a large stake in Greece’s shipping industry – including in key ports across the country. Almost €5bn was invested by the Chinese into the strategic port of Piraeus, which is the fastest growing port in Europe. Also this is part of China’s push to increase capacity, to allow for more Chinese goods imports, which pushes up the trade deficit, all financed by Chinese state actors with deep pockets.
Time to renegotiate the EU-China Investment deal
Because of this, the EU needs to seriously reconsider the terms that it has negotiated with China for the “Comprehensive Agreement on Investment”. It should use the time available now that the deal has been frozen to go back to the negotiating table and negotiate stricter terms, to prevent Chinese state-funded mercantilist strategies being employed on EU territory.
This should include tougher measures against state-run enterprises buying up key infrastructure. At the moment, there are very few controls included. Also, there should be stricter terms to prevent predatory loans by Chinese banks to European companies. Such measures should of course not cross the line into protectionism, which is always a risk when it comes to EU Trade terms, but should serve to guarantee an equal playing field, very much similar to how EU rules do not permit state funded cronyism to distort fair competition within the EU.
Last month, European Commissioner Margrethe Vestager came up with proposals to block foreign governments from distorting the EU internal market by unfairly subsidizing takeovers of—or investments in—European companies. However, this doesn’t cover a sufficient amount of areas. What is being ignored, is the reality that in the last few years, foreign powers have shifted from direct investment to indirect investment.
In particular, the Chinese government has done so, allowing State Enterprises to do the economic heavy lifting. Under Vestager’s new framework, Chinese firms will simply be able to claim that they do not represent the state and therefore would not be covered by the proposed framework which requires companies to report to the European Commission if they intend to make an acquisition or if they plan on bidding on public procurement contracts.
The terms of the EU-China Comprehensive Agreement on Investment make it far easier for Chinese companies to bid on European firms and bid on public tenders. This poses a major risk to public services, especially in the realm of digital infrastructure, which the Chinese government has earmarked as a primary target for state enterprises. The battle over Huawei in Germany and the United Kingdom highlights the problems that can arise from allowing Chinese companies to bid on public infrastructure.
Chinese forced labour
It is for these reasons that freezing the EU-China Comprehensive Agreement on Investment should be welcomed across the board. The risks of doing business with China, without setting out terms for a level playing field when it comes to state-run enterprises, but also when it comes to workers’ rights – given the problem of Chinese forced labour – are too high. .
The ultimate reason for the EU freezing CAI was not concerns over trade, but over human rights, as China had sanctioned MEPs in response to EU targeted sanctions of Chinese officials violating human rights. that the spotlight had been cast on China’s human rights record. Freezing ratification offers an opportunity to reflect on what is really going on inside the Communist state.
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