Krajewski, Markus

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Dancing with the DragonMarkus Krajewski 2021-01-05T18:20:13On 30 December 2020, the EU Commission announced that the EU and China “inprinciple” concluded the negotiations on a Comprehensive Agreement on Investment(CAI). The announcement was met with applause from Germany’s car industry andcritique from Reinhard Bütikofer, chair of the European Parliament’s delegationfor relations with China. The geopolitical rationale of the agreement has beenquestioned by commentators suggesting that the EU handed China a “strategicvictory” while others claimed that the CAI would open the Chinese market in sectorsso far closed to European traders and investors.When comparing the CAI with other trade and investment agreements of the EU,it becomes apparent that the CAI is an agreement sui generis. The CAI is neithera typical free trade agreement as it lacks any rules on trade in goods nor is it aclassical investment agreement as it does not contain any rules on investmentprotection. A point of contention is the potential impact of the CAI on sustainabledevelopment and labour rights. This leads to the question: How does the CAImeasure against the standards of the constitutional law of the EU relating to itsexternal relations?  It appears that there has been only a limited assessment ofthe CAI from a human rights perspective, which is especially problematic in light ofrecent political developments in China. Once finalized, the agreement will requireconsent by the European Parliament which maintained a critical position to thenegotiations and listed a number of requirements including repeated references tohuman rights. Based on the terms of the CAI currently publicized, it is doubtful thatthese requirements will be met.An agreement in investment and servicesliberalisation but not on investment protectionAt the outset, it should be noted that a (draft) text of the agreement is not yet publiclyavailable. While earlier drafts have been seen by journalists and some researchers,no text has been officially released or leaked to the public. An assessment thereforeneeds to be based on the press release of the Commission of 30 December and onwhat is known about earlier drafts including prior statements by the Commission. Itshould be noted that despite promises towards increased transparency, no officialdraft texts were released since the beginning of the negotiations seven years ago.The commercial essence of the CAI will be the market access for investment andservices. This means that investors and exporters will face fewer obstacles anddiscrimination when offering their services on and investing in the markets of theEU and China. Market access is a typical feature of trade agreements and can befound in all recent EU Free Trade Agreements, including the EU-UK Trade andCooperation Agreement. Technically, the CAI will therefore contain provisions- 1 -prohibiting quantitative and other restrictions on market access such as monopoliesand quotas as well and non-discrimination obligations, in particular the obligationto treat foreign investors and services no less favourable than domestic investors/services (national treatment) or other foreign investors/services (most-favourednation treatment). These obligations will, however, not apply without exceptions asboth sides will be able to exclude certain measures and sectors from their scope. Intrade parlance, this technique this referred to as the “negative-list approach” (Moredetails can be found in a recent study)Apparently, the EU obtained concessions from China in some sectors of keyinterest to European industries, including car manufacturing and services (such ascloud services, financial services, private healthcare and environmental services,international maritime transport and air transport-related services) but other sectorswill be excluded from the agreement. A full assessment of the commercial value andpolitical impact of the agreement will only be possible once the Annexes with thelimitations and specific concessions will be released and can be compared to otheragreements concluded by the EU and by China respectively.The CAI will also contain rules on subsidies and regulatory procedures, but thedetails are not yet known. As a consequence, it remains to be seen if and to whichextent the EU Commission’s claim that the CAI “help to level the playing field for EUinvestors” can be sustained.Unlike the name of the CAI suggests, the agreement does not include rules oninvestment protection. Instead, the EU and China agreed to continue to negotiate onsuch rules including investment dispute settlement within two years of the signatureof the CAI. In other words, the standards which are typically included in bilateralinvestment treaties (BITs) and which can also be found in the agreement betweenthe EU and Canada (CETA) on investment protection such as compensationfor expropriation or fair and equitable treatment will not be part of the CAI. Yet,concluding an investment protection agreement was a major negotiating goal of theEU and an essential element of the EU’s negotiating objectives. In particular, the EUsought to conclude such an agreement with China to replace the BITs China haswith most EU Member States. This will not be possible with the CAI and thereforethe Member States’ BITS remain in place.The lack of an agreement on investment does not come as a total surprise in lightof the significant divergences of both sides on the topic. The EU intends to followits modernised approach which includes a Multilateral Investment Court (MIC) whileChina seems to favour the traditional investor-state dispute resolution (ISDS) basedon ad hoc tribunals. This mechanism was, however, considered inconsistent withthe right to access to an independent tribunal according to Article 47 para 2 of theEU Charter on Fundamental Rights by the ECJ in its Opinion 1/17 on CETA (Forcomments see here and here). It is therefore unclear if the EU has any scope formanoeuvre in this regard.To conclude, the CAI is neither a typical free trade agreement as it lacks any ruleson trade in goods (tariffs, non-tariff barriers, technical standards, trade remedies)and on trade-related intellectual property rights (TRIPS) nor is it a classical- 2 -investment agreement as it does not contain any rules on investment protection.Even if such rules will be added later, the CAI will remain unique as agreementscovering trade and investment, but not addressing goods or TRIPS are uncommon ininternational trade law.Sustainable development and labour rights – in anagreement with China? As most recent EU trade agreements, the CAI will contain provisions on sustainabledevelopment and labour standards. Typically, these provisions contain commitmentsnot to lower environment and labour standards in order to attract investment andto respect existing international obligation of the respective party. The Commissionclaims that “this is the first time that China agrees to such ambitious provisions witha trade partner.” Yet, obligations to maintain existing obligations are of limited legalvalue. If China “agreed to effectively implement the Paris Agreement on climatechange as well as to effectively implement the International Labour OrganisationConventions (ILO) it has ratified” as the Commission states, China basically restatedan international obligation it has anyway.However, according to the Commission “China has also agreed to make continuedand sustained efforts to ratify the ILO fundamental Conventions on forced labour”.This refers to ILO Conventions 29 of 1930 and 105 of 1957 which China consistentlyrefused to sign and ratify even though they are two of the eight ILO FundamentalLabour Conventions. While a change in this policy would be revolutionary, it seemshighly unlikely that the CAI will incentive China to engage in such a change. Treatylanguage referring to efforts to ratify conventions does not confer any bindingobligations on the party of an agreement. The issue of forced labour has longbeen a key area of divergence during the negotiations, yet observers agree thatChina remains firm on rejecting any international obligations in this field. Hence,the obligations on sustainable development and labour in the CIA may not changeanything on the ground.“Guided by the principles which have inspired itsown creation”?The last point leads to the more fundamental question if the CAI meets the standardsof EU constitutional law on external relations. Article 21 TEU holds that EU’s foreignpolicy shall be “guided by the principles which have inspired its own creation,development and enlargement” which include the universality and indivisibility ofhuman rights and fundamental freedoms. As these principles also apply to thecommon commercial policy (see Article 207 para 1 TFEU) trade and investmentagreements can also be measured against that standard.One instrument to ensure that these principles are observed are impactassessments of the relevant agreements. In this regards, the EU Commissionundertook a Sustainability Impact Assessment (SIA) evaluating the CAI in 2017- 3 -aiming at identifying potential risks to human rights, the environment, and labourstandards caused by the agreement. The SIA identified certain risks but did notaddress fundamental human rights problems in China. The SIA has also beencriticized on methodological grounds as the study only consulted with a limitednumber of stake-holders in the human rights field and fails to provide data on theimpact of the agreement on indigenous and minority groups such as the Uyghurs.Hence, the SIA provides an incomplete picture of the potential impact of theagreement on human rights.The limited assessment of the CAI from a human rights perspective is especiallyproblematic in light of recent political developments in China, including the HongKong National Security Law adopted in June 2020 which has been criticised as aviolation of Hong Kong’s Basic Law and of international human rights standardsas well as the most recent sentence of Chinese journalist Zhang Zhan to fouryears imprisonment for challenging the Chinese government’s narrative about thecoronavirus pandemic only two days before the announcement of the agreement onthe CAI.What’s next?As pointed out above, a text of the agreement has not yet been published.An agreement “in principle” only suggests that there are no major substantialcontroversies any longer on the contents of the agreement. However, the negotiatingteams need to finalise the text which will then undergo legal and linguistic reviews(sometimes called “legal scrubbing”). Once the text has been agreed on, it needsto be signed by the representatives of the parties, which is the Council in the caseof the EU. As long as the CAI contains no provisions on investment protection, theagreement will fall into the exclusive competence of the EU and Member States donot have to sign and ratify the agreement.The agreement also requires consent by the European Parliament which hasmaintained a critical position to the negotiations and listed a number of requirementsfor the CAI in 2013 including repeated references to human rights. Whether theseare met can only be fully assessed once the text has been released. Yet, doubtsseem in place based on what is known so far.- 4 -

Dancing with the Dragon

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Dancing with the Dragon

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