Wins and Losses in the EU-China Investment Agreement (CAI)

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Wins and Losses in the EU-China Investment Agreement (CAI)

Author

Special Advisor and Resident Senior Fellow - U.S. and Asia

François Godement is Institut Montaigne’s Special Advisor and Resident Senior Fellow – Asia and America. He is also a Nonresident Senior Fellow of the Carnegie Endowment for International Peace in Washington, D.C. and was, until the summer of 2024, an external consultant for the Policy Planning Staff of the French Ministry for Europe and Foreign Affairs

This policy note was published on January 20. Its sources are research interviews, and what was known of early drafts of the EU-China Comprehensive Agreement on Investment as of mid-December 2020. The actual text of the political agreement between the EU and China has now been released on January 22.

Changes to our analysis are as follows:

A preamble now mentions a common commitment to fight "climate change and forced labor". The text also states that "each Party shall make continued and sustained efforts on its own initiative to pursue ratification of the fundamental ILO conventions No. 29 and 105, if it has not already ratified them". In our view, the mention "on its own initiative" should be read as a qualifier, since it seems to exclude the review of this commitment between the Parties.
Our analysis mentioned a commitment to finalize the negotiation of the missing investment chapter within a maximum of two years after signing the agreement. The final text states that "the two Parties will endeavour [italics added] to complete such negotiations within two years of the signature of this agreement".
There are two distinct processes for implementation of the agreement: one for general investment issues and another for issues pertaining to sustainable development. What our note described applies only to general investment issues. The "Investment Committee" constituted by the participants in the High Level Economic and Trade Dialogue (HED) meets once a year, and can "adopt binding interpretations of the provisions of this Agreement". The Working Group on investment meets twice a year – or within 30 days on "urgent matters". This strengthens the path of political arbitrage that seems to be the preferred path in the CAI. For those issues under sustainable development, the text merely mentions that another Working Group consisting of "senior officials" shall meet once a year.

Finally, a key part of the CAI is still missing from the text published on January 22: most of the Annexes, which should actually list the sectors that are open to investment, and make eventual reservations and exclusions.

The negotiations on the EU-China Comprehensive Agreement on Investments (CAI) concluded with breakneck speed on December 30, 2020. The CAI text, including a "legal scrubbing" and items that are reportedly still under negotiation, as strange as it may sound, is supposed to be released very soon. Given that several articles in the agreement remained unwritten as of mid-December, this is a testimony to the pressure now felt by the European Commission: promoting the agreement at the highest level as a success for our "values and interests" while not disclosing its content was clearly not helping its cause, including with the European Parliament.

In fact, enough is known about its likely content that we can lay down criteria for judging where the CAI indeed promotes these values and interests, and where it may be a defective or underpowered attempt at bridging the enormous asymmetry between our market democracies and China’s party-state driven economy.

This note starts by placing the agreement in its geopolitical and economic context. It then moves on to what has been won, or conceded in terms of market access. This is followed by an assessment of changes of norms and rules, and the issue of a level-playing field. The special case of terms falling under the topic of sustainable development is dealt with separately - because many arrangements differ in that case. Finally, the note looks at the various means provided for implementation, dispute resolution and eventual remedies.

The geopolitical and economic context

In the European Union’s vision, a major trade or investment agreement is also a political act, advancing European norms and values or recognizing the adequacy of the partner’s legal system, starting from the rule of law itself. From this perspective, the agreement couldn’t have been concluded at a worse time. China’s authoritarian and even totalitarian drive has never been so thorough since 1978. It affects each and everyone: from Hong Kong residents deprived of the rights guaranteed by treaty until 2047, to Xinjiang’s populace subject to crimes against humanity including sterilization, break-up of families and forced labor, to the hostage-taking of two Canadian nationals, to the heavy hand used against China’s new entrepreneurial class, to an ever-growing personality cult, and finally to the official obfuscation of the origins of the coronavirus pandemic. This is, after 1989 and the crushing of a democratic movement, the worst political years since the era of reform and opening up began in 1978.

An argument made by some EU and member state officials is that the conclusion of the CAI negotiation helps to position the EU as a major power able to project its strategic autonomy vis-à-vis the United States. Future discussions with the US on trade could benefit from this power position. But Europe’s nod to an agreement in the very short time frame between two US administrations, rather than projecting "strategic autonomy", is likely to be interpreted by China as a sign of Europe’s flexibility. One Chinese diplomat sees Europe as a "balancer" between the United States and China. A major think tank director points out to Europe’s weakness: "the CAI is for Europe like a delivery of coal in the harshness of winter (雪中送炭)".

Economically, the agreement also comes at a moment when mercantilism, state-driven innovation and growth, and control over private entrepreneurs reach new heights. Thanks to a commendable success in containing the pandemic so far, China’s economic growth in 2020 was 2.3% - the only positive figure for all industrialized countries, except Taiwan. But that rebound is entirely lopsided: China’s liquidity and credit creation, and its stimulus to the economy have been far smaller than that of its top partners, unlike during the global financial crisis of 2008-2009. And state funds and credit have flowed more towards production and to large companies, especially SOEs, than to demand and small firms.

Instead, the global pandemic has massively increased demand for Chinese goods – medical, digital, household. The country is breaking in the second semester of 2020 its historical trade surplus record for a six month period, at USD 360 billion. At the same time, China’s overall imports actually decreased over the year. And although everyone talks of the Trump administration’s failure to stop the trend, it is Europe that has seen the relative gap widen most - because EU exports to China increased by only 2.3% in 2020 while US exports grew by 9.8%.

In this context, economic policy trends in China run counter to the goals promoted by the CAI: improving market access for investment, obtaining national treatment, the neutrality of China’s SOEs in their commercial dealings, and at least the transparency of state subsidies. Meanwhile, the reality on the ground is that official policy is increasingly treating private companies as equally subject to Party and state control, and that the catchword of "circular economy" translates better as "open up where you must, close up whenever you can".

To these objections pertaining to geopolitics and timing, the promoters of the agreement retort that after seven years, a window of opportunity opened in the final weeks before the deadline set by both sides. It is impossible not to see the tactical motivation of China’s last minute concessions, part of an initiative to stave off a better coordinated approach by the incoming Biden administration. And to the geoeconomics criticism, the advocates of the agreement oppose two arguments. First, that an investment agreement cannot achieve by itself the huge goal of moving China: in short, the achievement can only be modest, which contradicts some of the optimistic statements made by the EU itself... And second, that the EU has nonetheless managed to weave into the agreement WTO-plus clauses, on which more can be built later, and which could only be locked in now - or never.

Once we set aside abusive claims of a trade or investment agreement being a promoter of "European" values, one must look at the balance between gains and concessions inside the agreement. This balance, as well as the issues of implementation and enforceability, are key criteria to judge the CAI.

Scope and breakthroughs

The CAI is based on three pillars with one important omission: market access (probably one of the most obvious gain for economic operators), level playing field (this includes disciplines notably on technology transfers and SOEs - here a big question will be on application of these clauses), sustainable development (one of the most controversial parts to date), and the inexistent investment protection. After seven years of negotiations, decision-makers were facing a dilemma: continue negotiating a comprehensive deal or accept to postpone the negotiations of the investment protection to later. The political decision was made to focus on addressing asymmetries by accepting the market offer and liberalization offer, while renouncing the EU’s leverage on investment protection.

Market access

The first pillar or market access component, as it is known so far, lists an impressive number of manufacturing sectors that are open to European investment - a positive list which includes sectors ranging for example from agriculture processing, wearing apparel and paper, to "instruments" - following Standard International Trade Classification (SITC) codes. It is almost entirely a confirmation of earlier openings by China, either under the aegis of WTO, or through the successive issuance of several "negative lists" for foreign investment: these have been published since 2014 for Special Investment Zones (SEZs) and turned into national negative lists, the last of which was published in January 2020. Even the 100% ownership of auto manufacturing plants, granted in 2019 to BMW and Tesla, have been generalized in the last published list. This follows a pattern where China first makes transactional case-by-case concessions, either because of a specific need or as part of a larger negotiating strategy, and later mutualizes the concession - first to a bilateral partner and then multilaterally. Such is the case with the liberalization of financial services, which was granted to US companies in the Phase One US-China trade agreement. Ceilings for foreign ownership of securities and investment fund management companies and life insurance companies were lifted in general in 2020. In any case, the European Union had been arguing that because investment in services is covered by the General Agreement on Trade in Services (GATS), any concession granted to one party must be mutualized. This obligation, however, does not apply to investment in manufacturing, because the GATT is older and limited to trade. We shall see this also has an important consequence for dispute resolution.

Therefore, the supposed list of "wins" by the EU in sectoral investment opening may be much more limited. It consists of long-term leasing of land (there is no unlimited land property right in China), digital consulting services, research and development services (excluding stem cell and genome research, biological resources of Chinese origin and, unsurprisingly, social sciences and humanities!), company level market research, personnel firms, and, most importantly, many telecoms and digital services – except end user internet access. For cloud services, it is not known whether the EU has obtained 50% or 100% foreign ownership: 50% would merely be an alignment with the US Phase One trade deal (which the EU claims anyway under GATS); 100% would be an improvement – which could be claimed by all other WTO parties.

In services, the other win is the right to create wholly-owned private clinics in eight cities, and more generally "human health services" - which perhaps might cover medicalized retirement homes? France and Germany are top health providers. An opening for foreign private hospitals had been announced as early as March 2019 by Prime minister Li Keqiang. A further opening of the automotive manufacturing sector has also been talked about. It should be noted that one-fifth of all cars sold in China are German. But what is known of this opening seems very limited: new car factories with combustion engines are prohibited, and extension is severely curtailed; electric car plants - except in the case of an investment exceeding USD 1 billion - is limited to provinces where quotas for electric car production have already been exceeded. In other words, there will be no foreign start-ups and a clear lead is granted to Chinese or already established companies in this sector.

Strikingly, China does not obtain significant new openings in the European market. However, this should not surprise anyone since it was always much more open than China’s. "Rebalancing our economic relationship with China" has been a major goal of EU negotiators. A clear win appears the right for Chinese investors to go into bulk and retail energy distribution - excluding power generation and grids. It is unclear whether opening retail networks of road charging stations will be considered to be included, as gas stations would presumably be, or if they remain in the infrastructure sector.

The political decision was made to focus on addressing asymmetries by accepting the market offer and liberalization offer, while renouncing the EU’s leverage on investment protection.

There are rumors - unsubstantiated at present - that there have been some transactional concessions on the side for specific companies in the aerospace and telecom sectors. Of course, the reassurance from Europe that investment remains open is clearly a win, in a moment when China, which practices economic decoupling under the guise of the "dual circulation" economy, fears more restrictions by its partners. This does not include sectors covered by investment screening for security reasons, a reservation amply matched by China’s 2019 Foreign Investment Law, which defines in broad and general terms the sectors for which transactions can be blocked.

Some other concessions, because they are reciprocal, may also be regarded as a win for China. That is especially the case for the residency and work permits granted for up to 3 years to senior managers and specialists working locally for a foreign investor. Although visa and work permit hassles are an important issue for European and other foreign investors in China, reciprocity given to Chinese employees - even if their contract has to conform to local rules - will result in wage competition. A feature of the CAI is that it prohibits employment quotas by nationality (except for private clinics where Chinese doctors must be a majority).

Overall, the gains for European – or mutualized – investment market access appear minimal, but neither can the result be described as negative. They concentrate in large measure in services because investment in manufacturing and non-services remains far less covered than trade by WTO related agreements. The agreement is also limited to local entry and operation – cross-border services are not in any way part of the agreement. This matters, for example, over the huge issue of data localization. While it seems unlikely that European (rather than American firms) can effectively invest and compete with local cloud giants in China, it would be more important for European investors to get guarantees on data transfer and storage. Inversely, Alibaba, Tencent and Huawei have the investment resources to compete with American and other firms over clouds in Europe. One reason why it is difficult to assess the potential of the CAI in terms of market access is that the impact assessment of an investment agreement has been performed in 2013, before the negotiations started. In the meantime, China’s economy and policies have undergone huge changes.

Leveling playing field

The CAI’s ambition is not limited to market access, but puts a big emphasis on a level playing field in many areas - the second pillar. This comes under various headings. In Brussels’ own words, "in addition to rules against the forced transfer of technologies, CAI will also be the first agreement to deliver on obligations for the behavior of state-owned enterprises, comprehensive rules for transparency on subsidies and commitments related to sustainable development" (which is the third pillar). This claim must be verified from the content of the CAI, and by drawing comparisons from other agreements by the European Union: the Economic Partnership Agreement with Japan (2018), the Free Trade Agreement with Korea (2017) and Vietnam (2019).

Indeed, while the CAI is a unique agreement and has no template per se, there is a pattern for the EU’s trade and investment negotiations. The EU has aimed in recent years at crafting ambitious "new generation" and WTO-plus agreements, including often similar approaches to the issue of state support and subsidies, to intellectual property rights and sustainable development, encompassing both environment and labor ethics, if not actual standards. There is often a word for word repetition of dispute arbitration and resolution mechanisms in these agreements that in fact follows a WTO compatible model, with only deadlines for each step differing from one case to another. Evidently, EU negotiators have worked from a common mold and applied this to China’s case. This is consistent with the claim to have brought China, for the first time, to sign its "most ambitious agreement ever concluded with a third country".

This is literally true, although we should always remember that China in the past has been extremely generous with non-binding, or non-sanctioned, or non-precisely defined commitments. Even in commercial endeavors, letters of intent often remain without follow-up. One only needs to look at the text of China’s 2001 accession protocol to the WTO as a reality check. For example, the text already included commitments on transparency, subsidies and state enterprises. And China has shown recently that respecting international agreements, laws or conventions, when not suitable to its interests, was not a problem (Hong-Kong). In addition, the EU has launched in June 2020 a consultation around a Trade Policy Review. New keywords, such as resiliency, industrial policy, new tools, and upgrading of the WTO’s dispute settlement mechanism, are appearing. One may wonder if the present generation of trade and investment agreements will long remain a model.

The reassurance from Europe that investment remains open is clearly a win, in a moment when China, which practices economic decoupling under the guise of the "dual circulation" economy, fears more restrictions by its partners.

Among improvements, three areas will likely stand out. One is the so-called "binding and ratcheting" clause which prevents China from reversing concessions, and obligates it to mutualize later concessions to another partner. This is in effect the Most Favored Nation (MFN) rule. It is worth noting that it does not prevent China (or the EU) from establishing new regulations, and it applies only to services, to the exclusion of manufacturing and to that of norms (environment, labor) that fall under sustainable development. Therefore, this is the literal implementation of WTO rules – including with their very extensive limitations. There seems to be no improvement on the US-China Phase One trade deal regarding forced technology transfer.

It may be argued that the Phase One deal itself reflected coordinated thinking among Europe, the United States and Japan - and that the US moved alone in January 2020.

Another concession is that of national treatment, which under WTO rules is mandatory for goods but not for services. This covers the behavior of state enterprises, which are not allowed, except in their public role, to discriminate in their purchase or sales of services. There will likely be also an extension of the criteria for state ownership to companies where a state entity holds a significant minority stake, and to companies formed at the local government level. A wide definition of SOEs, together with the obligation to provide information on SOEs, would close a loophole. It is also important because of the hybrid nature of China’s economy, and the move towards even more control of private companies since 2017.

To the leveling of the playing field described above, the EU has let important exceptions be made, although the final negative list and reservations are not yet fully known. It is clear that government services (outside the remiss of GATS in any case) and procurement, news organizations, social services, education, health will be mostly on that negative list. There is also ample room for new legislation, which may be justified by the EU’s own intent to put more defensive measures in place. In particular, the application of anti-subsidy competition rules to third parties - and especially state-backed companies from outside the EU seeking acquisitions or mergers in Europe - is the EU’s next step after foreign investment screening. And it seems clear that the negotiators have not yielded on Chinese requests to exempt infrastructure investment in Europe from screening, as well as most of the energy sector.

Overall, the concessions gained by the European Union over terms of investment appear more significant in principle than those related to sectoral openings. As we know them for the time being, they do not appear to be matched by a very large European offer. Investment screening and future legislation, including anti-subsidy competition rules applying to non-European investors, have not been given up. The mutual liberalization and opening is much larger in the case of the EU-Japan free trade agreement (FTA). We shall see that these commitments, besides their value in principle, are worth only the process to enforce them, and in particular to lodge complaints and resolve disputes.

Sustainable development

This is the third pillar, which has been widely criticized by the media and civil society. It includes provisions on labour, climate, corporate social responsibility (CSR). There is a commitment not to lower norms and rules in order to attract investment or to prevent investments from happening. One needs to acknowledge that within CAI, China has taken new international commitments, notably to "make sustained and continuous efforts" to ratify ILO conventions on forced labour. One may have doubts about China’s willingness to implement what is an open-ended commitment without a set deadline. The CAI has the merit to open the conversation officially. But as we see in the next section, the main issue with commitments made under the issue of sustainable development is that they have much weaker implementation provisions, and next to no enforcement or remedial capacity.

Enforcement and dispute resolution

Herein lies the devil. On the surface, the CAI mirrors arrangements made with other Asian partners - Japan, Korea, Vietnam. And some of its gaps are also common to those treaties. But China is a partner of a different nature and scale.

The first shortcoming is the lack of an investment protection section - which would seem to be the first requirement for any investment agreement. This is not entirely unknown - the EU-Japan FTA also had a delayed investment protection chapter. The politically expedient reason is that the European Court of Justice (ECJ) has ruled, after the issue came up in the EU-Singapore FTA, that investment protection is a shared EU and member state competence. As a result, a CAI that would include investment protection would need to be ratified by national parliaments in addition to the European Parliament. Moreover, the EU, since the difficulties incurred over the EU-Canada Comprehensive Trade Agreement (CETA), has excluded traditional investor-to-state dispute settlement (ISDS). The ECJ has in fact ruled out any legal process opposing an EU citizen with a state that does not implement the rule of law - and that clearly includes China. Even today, CETA is only partially in force, and several EU member state legislatures have yet to ratify it. Instead, the EU promotes an International Court System (ICS) that was part of the final deal with Canada. It is currently present in the FTAs with Singapore and Vietnam – none of which have been ratified by all member states as of now. The negotiation of an investment protection chapter with Japan has been stalled since April 2019 over the ICS issue. And China - which has basically accepted WTO dispute resolution because it is a key interest for the world’s largest exporter to seek legal protection - is notoriously reluctant towards international legal processes in many areas. For instance, it has established its own arbitration courts for disputes connected with One Belt One Road financing and projects.

Absent this chapter, bilateral investment treaties concluded at various times by all member states (except Ireland) with China will remain in force. Probably because it is very risky to leave it for a later negotiation with China, the agreement specifies a deadline to conclude the investment protection section - a maximum of two years after the signature of the CAI. This will certainly depend on the EU’s leverage, and also on its overall policy regarding dispute settlement.

A second shortcoming regards the process that applies to issues coming under sustainable development. This shortcoming is common to other EU deals involving sustainable development: it is the vague nature of some commitments, and a specific process for dispute resolution that is much weaker than the general provisions described in the previous section. The agreement cites general declarations or agendas of the UN, ILO or OECD, rather than specific rules or conventions. Even with partners such as Japan or Korea - full rule of law democracies - a commitment to "work towards", "make efforts" to ratify any ILO convention amounts in practice to little.

Even with partners such as Japan or Korea - full rule of law democracies - a commitment to "work towards", "make efforts" to ratify any ILO convention amounts in practice to little.

And for a good reason: "new generation" trade and investment treaties involving labor, environment and sustainable development are for the most part not subject to WTO enforcement, including any legal recourse. As of now, trade norms still don’t mix with legal norms. At the most, these are subject to a process of bilateral arbitration, usually without sanction unless precisely specified. Moral suasion or naming and shaming may work with state of law democracies. But China has given ample notice that it is entirely immune to this type of argument. In the last stretch of the negotiations before December 30, China is said by the EU to have committed to making "continued and sustained efforts" to ratify these conventions. But no timeframe was set. While a somewhat similar pledge was made by Vietnam, a new labor code and the ratification of ILO conventions on workers’ rights and forced labor was obtained between the signature and ratification of the EU-Vietnam FTA. Unavoidably, this and the Xinjiang issues - which in fact overlap - will be an object of debate at the European Parliament. Viewed in a geopolitical rather than purely economic perspective, the high level dialogue planned between the EU and China will have to obtain a resolution of this issue. Its actual implementation will always be doubtful, but not obtaining ratification from China would take all the air out of the argument that Europe is promoting its values with the CAI.

For investment issues not falling under sustainable development, a complex mechanism applies, governing dispute resolution, arbitration, recourse to WTO and remedies. It is focused around state-to-state dispute resolution, with a process that is very close to that of WTO. Obviously, both sides followed this precedent. It involves arbitration panels of experts (presided by a third party), deadlines for each phase, a complaint process. At the end of the road, if the decisions are not followed with remedies by the target of the complaint, the complainant may retaliate by suspending other concessions under the CAI in proportion to the damage incurred. Importantly, this last phase does not include the issue of state subsidies, for which only transparency is mandated. The process - which is present in other treaties involving investment that the EU has signed - does not exclude a direct recourse to the WTO, although the two paths are mutually exclusive: one must choose at the beginning of the process.

Seasoned experts of international trade and investment disputes will note in any case that in practice, there are very few appeals on these lines within the scope of existing investment agreements. And in China, almost no foreign firm has gone down the road of international arbitration since 1979, because to do so would kill all of the future firm prospects in China.

The third shortcoming is that this path for dispute resolution and enforcement does not apply to items falling under sustainable development, such as corporate social responsibility, environment and labor. For these items, another arbitration and consultation mechanism, that has one redeeming virtue, applies: the hearings are meant to be transparent when no confidential data are involved. But there is no appeal, no sanction and no enforcement mechanism. Again, this does not contradict WTO rules, which simply have not taken in these new norms for services, and have no provisions for disputes around investment in manufacturing. And in the case of the EU-Korea FTA, the EU is indeed using a similar mechanism to argue that Korea has not fulfilled its commitments regarding labor.

To complement what is a hazardous route for arbitration over service investment disputes, and possibly to improve a toothless resolution process for disputes related to sustainable development issues, the EU negotiators seem to have obtained a political road: working groups meeting at the commissioner for Trade and Minister of Commerce level twice a year, and a high level dialogue involving once a year a vice-president of the Commission and a Chinese vice-premier, presently Valdis Dombrovskis and Liu He. This is hailed as a political coup by the Commission.

Other European FTAs generally include a political review mechanism at the level of commerce minister or trade commissioner. Liu He, who has directly conducted all economic negotiations with the United States, had not graced Europeans with his participation in talks before July 2020. Hopefully, in the Chinese system, reaching to a higher level may help with problem-solving. One should note that Europeans have had access to President Xi Jinping only with the presence of Angela Merkel. Relying on a personal or member state leverage in negotiations rather than on a clear institutional process vested in EU institutions may backfire. Other presidencies of the European Union may again find it difficult to access China’s paramount leader, and the leverage exercised by the American executive branch is likely to be more compelling.

Conclusion

Overall, the EU-China CAI has been oversold and underpowered. Absent a coordinated front among China’s leading trade and investment partners, the CAI is stacked up against immense odds. Perhaps the cardinal sin of the Commission - egged on by Chancellor Angela Merkel’s wish to claim a stellar record for the German presidency and her long tenure - is to have oversold the agreement. A number of Commission officials are now busy backpedaling, saying that any investment agreement cannot change China’s system and solve the overall asymmetry. Hype and modesty do not go well together.

Defenders of the deal argue it is the best that Europe could possibly get, in a short window of political opportunity. They emphasize that the EU will use many other policies and tools to level the playing field with China - and, perhaps, to advance some of our values in the process. Crucially, the CAI does not undersell existing international rules on investment or the Most Favoured Nation clause, in contrast with the January 2020 Phase One Trade Agreement between the US and China - which was largely about import quotas for China, and concessions meant to be preferential.

There are three wins for China. One is to obtain what it often calls "certainty", an implicit commitment against economic decoupling by limiting the grounds on which restraints on Chinese FDI in Europe can be based. Given the CCP’s fear of a front on this issue, this is important. In terms of public diplomacy, separating the EU from the US - even if it follows years of trade threats from the top of the outgoing US administration - is also a win, at least in the short term. The third win is that China can build on Europe’s claims to have advanced its values while escaping enforcement and remedies on the issues that are at the heart of current public debates - environment and labor.

In exchange, China has made minor sectoral openings on investment, in what is a continuing process of investment liberalization once the Chinese champions have been well established. And it has made important concessions in principle - national treatment, inclusion of state firms, transparency of subsidies, banning forced technology transfer, committing to move towards the ILO convention on forced labor.

For its part, the European Union has scored wins over these above-mentioned issues. It has also raised its profile as a negotiating partner. For seven years of negotiation, China’s off-hand attitude had seemed impossible to breach, because the EU has not enough negative leverage at its disposal.

Given China’s track record, it is impossible to rely on goodwill to implement commitments and unwise to believe that on key issues, a top-down political process between both parties can be substituted to legal arbitration. On WTO-plus issues, it fails to put a secure mechanism of implementation in place, and this concerns many value-related issues. But on matters governed by WTO as it stands, it has not renounced the possibility of retaliation. And for the most part, the EU has protected its future legislation or "policy space".

For its part, the European Union has scored wins over these above-mentioned issues. It has also raised its profile as a negotiating partner.

A policy conclusion is that the CAI first needs to undergo the test of democratic ratification by the EU Parliament (after formal approval by the European Council). Even there, some items and the investment chapter may need later ratification by all national parliaments, a higher hurdle. China’s increasingly damaging political actions, most significantly over Xinjiang and Hong Kong, may still make these steps very difficult.

During and beyond this phase, what is needed is for Europe to use fully the liberty it has preserved to act unilaterally against unfair competition and continuing malpractices by PRC entities. Reinforcing its defensive toolbox, as prescribed by the March 2019 Joint Communication to the Parliament and Council is needed, if only to gain leverage with respect to China. And the European Union must use the other window of opportunity offered by the start of a new US administration to find common interests again, and to act jointly on values. Going it alone by overestimating the present potential for "strategic autonomy" risks disaster over interests, and irrelevance over values.