The EU-China Comprehensive Agreement on Investment: A First Glance - McDermott Will & Emery

The EU-China Comprehensive Agreement on Investment: A First Glance


On 30 December 2020, the leaders of China and the European Union jointly announced the completion of the negotiation of the EU-China Comprehensive Agreement on Investment (CAI) as scheduled1. Following the post-Brexit trade agreement with the United Kingdom, the European Union is finalizing an extremely important agreement at the last minute of the scheduled deadline. The enactment remains subject to the consent of the member states and the European Parliament.

Many might wonder what this agreement is about and how investors from both the European Union and China can benefit from the signing of this agreement. This article sheds some light on the issues.

In Depth

The EU-China Comprehensive Investment Agreement (CIA) has held 35 rounds of negotiations since its launch in 2013. At the beginning of the negotiations, it was also known as the EU-China Bilateral Investment Treaty (BIT)2, an agreement in which both sides agree to provide protections for the other’s foreign investments that they would not otherwise have. However, starting with the 24th round of negotiations, the two sides decided to upgrade the “Bilateral Investment Treaty” to the “Comprehensive Investment Agreement”. According to a researcher from the Academy of China Council for the Promotion of International Trade, most BITs concluded by China in the past focused mainly on the aspect of dispute settlement, while the CAI will be the first comprehensive investment protection agreement concluded by China, covering four aspects: investment liberalisation, investment protection / fair competitive conditions, dispute settlement3 and sustainable development.4  5

European investment in China

The most relevant pillar to European companies with business in China is investment liberalisation, i.e., market access. Market access determines the extent to which one contracting party will open the domestic market to investors of the other party. A “negative list” lists industries in which foreign investment remains restricted.6 Within the framework of CAI, China is granting European companies considerably greater market access than before. In the future, European entities will be able to invest in all sectors of the economy, including the automotive industry, the market for cloud services, financial services and healthcare.7

In the automotive industry, for example, in the past, German original equipment manufacturers (OEMs) were required to form joint ventures with a Chinese partner to enter China. In the near future, such Chinese subsidiaries can be wholly owned by the German OEMs, earning the profit without having to share it with a Chinese partner.8 Previously, most European investments in China were concentrated in traditional manufacturing, food and agricultural products and other fields, and investments in high-tech fields such as biomedicine were relatively limited, but these industries have been developing most rapidly in China in recent years. In this regard, a managing director and president of the Asia Pacific China division of a western private equity fund said in an interview: “In the future, with the entry into force of the CAI, it is expected to promote the European biotechnology, medical and health, new energy, internet and finance and other modern service sectors to open a new situation in the Chinese market.”9

Still, there are criticism from some EU member states that in terms of market access, China’s concession is a small step forward only. The agreement is said to fail on addressing a fully advanced equal market opening and clear and binding rules.10

Secondly, the grant of fair competitive conditions (“level playing field”) would be postponed. This is opposed to the European Union’s desire to ensure the rules against the forced transfer of technology, non-discriminatory regulatory treatment of European companies vis-à-vis Chinese State-Owned Enterprises (SOE) and its demand for greater transparency in state aid. However, China wants to subject SOEs to the “level playing field” with various reservations, in order not to affect the important position of the state-owned economy in the socialist market economy. For example, China has still not committed to opening up its public procurement markets. As a result, European companies will not be treated equally in public tenders; this in light of China’s annual government procurement totaling hundreds of billions of dollars.11

It is also worth mentioning the potential improvement of intellectual property rights of European companies in China. On 29 December 2020, one day before the completion of the negotiation of CAI, the criminal case of a renowned copyright infringement was adjudicated in a second trial in Shanghai High Court. The court sentenced the main defendant to six years of imprisonment and a fine of RMB 90 million for copyright infringement, while the remaining eight defendants were sentenced to three to four years of imprisonment with a corresponding fine. The case signals that, along with the promise to further level up the protection of intellectual property rights for foreign companies, the intellectual property cases with criminal liability will increase accordingly and the same protection measures and strengths as those of domestic enterprises will be adopted for foreign companies without difference.12

Thirdly, standards for “sustainable development” are to be met. China is committed to improve in the areas of labor, such as not to lower the standards of protection to attract investment, to respect its international obligations, as well as to promote responsible business conduct by its companies. China has also agreed to effectively implement the International Labour Organisation Conventions (ILO) it has ratified and make continued and sustained efforts to ratify the ILO fundamental Conventions on forced labor.13

Chinese investment in Europe

On the other side, the CAI also guarantees Chinese companies the same treatment in their largest overseas market – the European Union.

In the past few years, investment protectionism in the European Union has risen significantly. The new EU framework for the screening of foreign direct investments officially entered into force on 10 April 2019 and was e.g. fully implemented in October 2020 in Germany14, an instrument safeguarding Europe’s security and public order concerning foreign direct investments in the European Union. The acquisition of European targets by Chinese investors in sectors including energy, transport, water, health, communications, media, data processing or storage, artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, elections or financial infrastructure are all likely to trigger security reviews. This poses a major challenge for Chinese companies doing business and expanding in the European Union.

In total, the amount of Chinese direct investment in the European Union from 2016 to 2019 remained at around $10 billion, with the volume of investment almost stagnating. Against this background, the importance of the CAI is self-evident. CAI can provide a more unified and definite legal protection framework for China’s investment into Europe, whether it is in the mergers and acquisitions (M&A)15 investment phase, in the operation stage after the establishment and/or acquisition of an entity, or even in the dispute16 settlement after the occurrence of investment disputes. The opportunities for Chinese companies mainly lie in the business sectors in which China has strengths. One of the first to benefit from CAI should be photovoltaic, as China’s photovoltaic industry has an absolute advantage in the entire global industry chain. Another is cross-border e-commerce. The CAI will give Chinese cross-border e-commerce companies a huge advantage in terms of market access to the purchasing power in the European Union, and grant them more legal protection, although the issue of aligning Chinese cross-border e-commerce practices with EU cross-border e-commerce rules, including local compliance issues, will remain a major challenge.

One of the most pressing questions remains how the CAI interacts with the recent European tightening of the foreign investment control regime.17 E.g., as regards Germany, the draft amendment of the German Foreign Trade and Payments Act (AWG) has been enacted on 17 July 2020. The rationale of the CAI (enabling of investment activities) and that of foreign investment control (prohibition of foreign investment in given industries) contradict with respect to given sectors. Given these opaquely opposed rationales, one would have thought that the CAI explicitly addresses its interaction with foreign investment control.

Well, it does not. Section II (Liberalisation of Investment) Article 2 (Market Access) of the draft CAI18 notes a, not yet specified, Annex providing for restrictive “terms, limitations and conditions” to the principle of liberalised market access and Section VI (Institutional and final provisions) Article 10 (Security Exception) of the draft CAI19 provides for a lapidary statement, according to which the CAI shall not prevent a Party from taking an action which it considers necessary for the protection of its essential security interests. It seems unlikely that, in the course of the finalisation and conclusive negotiation of the CAI the European Union will insert all exclusions under the up to 27 national foreign investment control regulations into said Annex; the German AWV already covers a massive list of restricted sectors. Also said Article 10 mentions “actions” rather than “regulations” such that one would expect it rather to apply case-by-case actions and not to generic legislation.

Against this background, it remains to be seen how the CAI will finally be put in harmony with European foreign investment regimes and what the underlying drivers on a European political level will be. It seems quite possible that against the background of creating a level playing field Europe will cut back recent investment obstacles raised under foreign investment control regimes. To be seen.



  The package deal reached now includes a commitment by both sides to try to complete negotiations on investment protection and investment dispute settlement within 2 years of the signature of the CAI.

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– 10   The Article on 中欧全面投资协定据报将至 欧盟应该签不签引热议

– 11   The Article on 中欧全面投资协定据报将至 欧盟应该签不签引热议

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– 14   McDermott article: Amendment of Germany’s Foreign Trade and Payments Act│ Further Tightening of Germany’s Investment Control

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