EU Commission Publishes Text of EU-China Comprehensive Agreement on Investment

On 30 December 2020, the European Commission and the People’s Republic of China reached an agreement in principle on the terms of a Comprehensive Agreement on Investment (CAI). The text of the CAI has now been published on the website of the European Commission.

The CAI comprises a number of key commitments, including greater Chinese market access for European investors, fair competition provisions directed at state-owned enterprises (SOEs), transparency on subsidies, prohibitions on the forced transfer of technology, equal access to standard setting bodies, sustainable development, and ratification of certain International Labor Organization (ILO) conventions.

According to European officials, the agreement will benefit EU investors by giving “European businesses a major boost in one of the world's biggest and fastest growing markets, helping them to operate and compete in China”. But the CAI has also drawn criticism. In the EU, some have called the CAI a “strategic mistake”. In the US, the Trump Administration raised questions about the agreement’s timing, while President Biden’s staff stated the Biden-Harris administration welcomed consultations with the EU.

The CAI in Detail

The CAI marks the culmination of seven years of negotiations and is meant to open China to greater levels of EU investment. The parties must still adopt and ratify the agreement, but the CAI is scheduled to enter into force in early 2022. If adopted and ratified, the provisions in the CAI will apply to both China and the EU, although it might be said that the EU already adheres to many of the principles contained in the agreement. Key aspects include:

Market Access. China agrees not to impose quantitative restrictions on market access by European investors. Specifically, China pledges not to impose limitations on:

• the number of enterprises that may carry out a specific economic activity, agreeing to lift quotas on licenses available to European investors and not to condition market access upon the fulfilment of certain economic criteria;
• the total value of transactions or assets in an economic sector;
• the total output in non-agricultural sectors; or
• the total number of natural persons that may be employed in a particular sector, or that may be employed by an enterprise.

China promises an “unprecedented level of access to EU investors” in several sectors, notably manufacturing (half of EU investment in China is in manufacturing), automotive (which accounts for 28 percent of EU investments alone), healthcare, R&D, and international maritime transport. China has made more limited commitments for access in the agriculture, fisheries, mining and energy sectors.

With respect to financial services, China is removing foreign equity caps that had limited the amount of European investment permitted in the banking, securities, insurance, and asset management sectors. For telecommunications and cloud services, China has reduced the equity cap to 50 percent, while it is eliminating the equity cap for computer services sold online. Other sectors in which European investors have greater access include certain air transport-related services (e.g. aircraft repair and maintenance services, the selling and marketing of air transport services, computer reservation system services, and ground handling services), certain business services (e.g. real estate services, advertising, and management consulting), environmental services (e.g. sewage, noise abatement, and solid waste disposal) and construction services.

Significantly, China agrees to lift the requirement in a number of sectors that European investors operate in China through a specified type of legal entity or a joint venture with local firms—a constant source of complaint for foreign investors in China. Impacted sectors here include automotive, financial services, healthcare, business services, and environmental services.

The parties excluded audio-visual services, most air transport services (i.e. other than the air transport-related services discussed above), government activities and procurement from the market access provisions.

The CAI also prohibits various performance metrics as requirements for market access, including setting targets for the export of goods and services, or the amount of R&D that must be conducted in the territory.

Fair Competition. The CAI aims to establish fair competition and the creation of a level playing field for European investors. In particular:

• China promises that its SOEs will act based on commercial considerations and will not discriminate against European companies active in the Chinese market. If the EU believes an SOE violates this commitment, the EU can request, and China is obligated to supply, information about the operations of that SOE with a view to resolving the situation.
• The CAI removes nationality requirements for senior management (and clarifies requirements for their entry to and temporary stay in China), and eliminates certain investment bans.
• The CAI provides for added transparency regarding subsidies related to the service areas mentioned above.
• The CAI prohibits the forced transfer of technology and interference with the contractual freedom to license technology, while providing additional protection for confidential information.
• The CAI requires that regulatory bodies act impartially, and that EU investors should be treated the same as Chinese investors in like situations. To that end, the agreement calls for a comprehensive set of transparency rules for regulatory and administrative measures to enhance legal certainty, predictability, procedural fairness and the right to judicial review, including in competition law cases. In the competition law context specifically, the agreement recognizes the importance of a variety procedural rights:
  • “[I]n the application of its rules on competition, including the control of mergers and acquisitions, each Party shall ensure that the prohibitions, penalties and or any other remedies provided for in these rules shall be imposed only following the adoption of a formal decision.”
  • “Prior to the adoption of such a decision, the competition authority shall notify, in writing if so provided by domestic law, the addressee of its competition concerns or objections, including the facts and legal basis on which the proposed decision will be based.”
  • “The address[ee] of the decision shall, prior to its adoption, be informed, to the extent provided for in the domestic law, of the evidence on which the decision will be based.”
  • “Prior to the adoption of the final written decision, the addressee of the decision shall have the right to submit written comments to the competition authority in relation to the competition authority's competition concerns or objections.”
  • “The addressees shall have the right to appeal the final decisions of the competition authorities to a competent court of law.”
• While both parties have these procedures in their laws today, the intent of the CAI (and particularly the EU party) is clearly to encourage their development in practice. For example, parties to a merger control review in China are not afforded an opportunity to submit written comments to the competition authority in relation to its competition concerns before remedies are sought. Typically, the process is much less structured and somewhat informal.
• The CAI provides that European companies will also have equal access to standard setting bodies, including their standardization working groups and technical committees (in particular in the telecommunications and semiconductors sectors).
• China made a number of commitments relating to sustainability and corporate social responsibility, in particular not to lower labor standards or environmental protection but to ensure that its laws and policies provide for and encourage high levels of labor and environmental protection. On labor, China committed to implementing ILO conventions, and to work towards ratification of outstanding ILO “Fundamental Conventions”, including on forced labor. China also committed to fully implementing the Paris Climate Agreement.

Dispute Settlement. The CAI includes a detailed “State-to-State” or party-to-party settlement mechanism for disputes concerning the interpretation and application of the agreement (excluding those CAI provisions related to sustainable development, which are subject to a separate mechanism with lesser commitments). At this point, however, the CAI does not include Investor-State Dispute Settlement (ISDS) but provides that the “Parties agree to continue, on the basis of the progress already made, their negotiations with a view to negotiate [sic] an agreement on… investment dispute settlement. In such negotiations the Parties shall work towards… state of the art provisions in the field of investment dispute settlement, taking into account progress on structural reform of investment dispute settlement in the context of the United Nations Commission for International Trade Law (UNCITRAL)”. The stated intention is that these further negotiations will be complete within 2 years of the parties signing the CAI.

As regards dispute settlement between the parties, the agreement encourages the parties to resolve disputes via good faith consultations and gives them the option to mediate at any time. If no mutually agreed solution can be reached, the parties may proceed to arbitration by identifying a breach of a particular CAI provision. If the appointed arbitration panel finds a breach, the parties must unconditionally accept the ruling, and the offending party must take any measure necessary to comply with the decision of the arbitration panel within a reasonable period. The CAI also provides for compliance review and mutually agreed compensation if compliance is not possible. The complaining party may ultimately suspend certain of its obligations under the CAI as retaliation if the parties fail to reach an agreement on compensation.

Comments and Critiques

Although the EU is China’s second largest trading partner, and China is the EU’s largest trading partner, investments from the EU only account for around 5 percent of foreign investments in China, while investments from China account for only about 3.4 percent of foreign investment in the EU. The CAI is certainly intended to provide more opportunities for bi-directional investments between the two trading blocks in the years ahead.

In this context, the agreement has been praised by several heads of EU member states, including by Chancellor Angela Merkel of Germany, which held the rotating presidency of the European Council until the end of 2020. The EU’s trade commissioner has said the CAI represented a “levelling up” with the US following the China-US Phase 1 trade deal.

But the CAI has drawn a number of criticisms as well. Some in the EU have said that the European Commission “oversold the agreement”, that the agreement “couldn’t have been concluded at a worse time”, and the CAI does not go far enough in terms of labor rights in China. Reinhard Bütikofer, MEP, criticized the CAI by stating that “Europe has handed China a strategic victory”.

In the US, the Trump Administration criticized the timing of the CAI. Then-Deputy National Security Advisor Matt Pottinger issued a statement saying, “Leaders in both U.S. political parties and across the U.S. government are perplexed and stunned that the EU is moving towards a new investment treaty right on the eve of a new U.S. administration.” President Biden’s National Security Advisor, Jake Sullivan, took a more measured approach stating the “Biden-Harris administration would welcome early consultations with our European partners on our common concerns about China’s economic practices.” However, the CAI may present a particular challenge for the Biden Administration, as it has pledged to re-engage with its EU partners, and seeks to work “with our allies rather than unilaterally” in its China policy. At the same time, Secretary of State nominee Antony Blinken has also said, “President Trump was right in taking a tougher approach to China,” and the Biden Administration is likely to continue certain of the Trump Administration’s policies toward China. As Biden Administration foreign policy begins to develop, we are likely to see these potentially competing factors play out in the U.S.’s approach to the EU and China.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ben Bradshaw, an O’Melveny partner licensed to practice law in California and the District of Columbia, Ian Simmons, an O’Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, Riccardo Celli, an O’Melveny partner licensed to practice law in the Capital Region of Brussels, the Law Society England & Wales, and Roma, Courtney Dyer, an O’Melveny partner licensed to practice law in the District of Columbia and New York, Andrew Frackman, an O’Melveny partner licensed to practice law in New Jersey and New York, Greta Lichtenbaum, an O'Melveny partner licensed to practice law in the District of Columbia, Yoji Maeda, an O’Melveny partner licensed to practice law in Japan and New York, Stephen McIntyre, an O'Melveny partner licensed to practice law in California, Philip Monaghan, an O’Melveny partner licensed to practice law in the Capital Region of Brussels, Hong Kong, the Law Society England & Wales, and the Law Society Ireland, Anna T. Pletcher, an O’Melveny partner licensed to practice law in California, Katrina Robson, an O’Melveny partner licensed to practice law in California and the District of Columbia, Youngwook Shin, an O’Melveny partner licensed to practice law in California and New York, Michael Tubach, an O’Melveny partner licensed to practice law in California and the District of Columbia, Philippe Nogues, an O’Melveny counsel licensed to practice law in the Capital Region of Brussels and Paris, Charles Paillard, an O’Melveny counsel licensed to practice law in France and Hong Kong, Christian Peeters, an O’Melveny of counsel licensed to practice law in the Capital Region of Brussels and Germany, Rechtsanwalt, David J. Ribner, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, Scott Schaeffer, an O’Melveny counsel licensed to practice law in California and the District of Columbia, and Lining Shan, an O'Melveny counsel in the firm's Beijing office contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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