EU and China resume investment talks

Third round of talks start on an investment treaty that could pave the way for a free-trade deal.

Negotiators from the European Commission and China are today starting a third round of talks intended to lead to the signing of an investment treaty.

The current round, which is being held in Beijing, will last three days.

The investment treaty has been flagged up by both sides as a stepping stone towards a full free-trade agreement, though the European Union has so far resisted Chinese calls to start a study on the feasibility of a free-trade deal.

No target date has been set for the conclusion of the talks and, after the first two rounds of talks, the negotiators remain in the early phases of discussions. The pace of talks will, however, indicate to both sides how far and fast they wish to develop ties, while the markets will treat the talks as a test-case of the seriousness of China’s stated intention to open up its economy substantially during its current long-term plan.

The EU’s pursuit of a stand-alone agreement with China is in itself an indication of the challenges in the relationship. This is the first time that the EU has sought an investment agreement outside the framework of a free-trade deal.

Trade relations between China and the EU have been marred in recent years by some of the biggest disputes yet in a trading relationship that has burgeoned since China began in 1978 to liberalise its economy, in particular over the sale of Chinese solar panels at below cost on the European market. That dispute was largely resolved last summer, but related clashes – over European exports of wine and polysilicon, an element used in high-quality solar panels – were settled only this spring. Issues relating to state subsidies have also been a central, recurrent problem. While some European industries enjoy large-scale subsidies, China’s extensive use of subsidies are among the reasons why China has yet to be recognised by the World Trade Organization, or by the EU, as a market economy.

The investment negotiations could also inject momentum into the development of a broader economic relationship between the EU and China. Top-level contact on economic issues has been particularly limited in the past two years, in part because of personnel changes in Beijing, ahead of the once-in-a-decade transfer of power to a new president and prime minister last November.

The investment-treaty negotiations, which were formally approved last October after two years of preparatory talks, could see China open up sectors that have previously been largely closed to European investors. Just 2% of the EU’s foreign direct investment around the world goes to China. Some sectors of the Chinese economy remain largely or fully closed to European firms. These include transport, telecoms, health and a range of services. Other obstacles for EU investors include Chinese requirements on knowledge transfers, equity, joint ventures, and administration.

The treaty, which the Commission is negotiating for EU’s 28 member states under powers that it gained in 2009 through the Lisbon treaty, would replace 26 existing bilateral investment agreements of varying age, range and quality struck between China and the EU’s member states. The centralisation of negotiating power potentially provides the Commission with greater leverage as it seeks to open up markets in China for EU investors.

The aim is to give Chinese and European companies equal access to each other’s markets, an objective that would have more immediate benefit for EU companies as the Europe’s markets are more open than China’s. The benefits for China are seen as predictability and the potential support that foreign investment could provide as China seeks to reform sectors, including services, that are dominated by state enterprises.

China’s level of investment in Europe remains low, at 1.5% of foreign investment in Europe, but it has been snapping up infrastructure, energy, utilities and telecoms assets in southern Europe and central Europe, leading to suggestions that it is pursuing geopolitical objectives through its investment. Shortly before Xi Jinping became the first Chinese president to visit the EU’s institutions on 31 March, China’s ambassador to the EU, Yang Yanyi, told an audience in Brussels that “suggestions that we want to split the EU are entirely groundless”, continuing: “We believe that our co-operation with countries in central Europe will be helpful to build up the strength of the European integration process”.