Europe’s China gambit

Just as 2020 was ending, the European Union and China announced the completion of a Comprehensive Agreement on Investment (CAI) between the two economic giants. This "will be the most ambitious agreement that China has ever concluded with a third country," boasted the official announcement from the European Commission.

The CAI gives European firms enhanced access to the Chinese market, removes (or relaxes) Chinese government requirements on joint ventures and technology transfer in some sectors, and promises equal treatment with state enterprises and greater regulatory transparency. Moreover, the Chinese government has undertaken some obligations on environmental sustainability and labor rights, notably by agreeing to make "continued and sustained efforts" to ratify the Forced Labor Convention.

On paper, this is a win not only for European industry, but also for human rights. But the reception the CAI has received has not been uniformly positive. The US reaction ranged from disappointment to outright hostility. For hardliners, including officials of the outgoing Trump administration, Europe's decision looked like caving in to Chinese economic might and handing the country an important diplomatic win.

But many moderates, including President-elect Joe Biden's designated national security adviser, were dismayed as well. The incoming Biden administration would have preferred presenting a unified front against China, by striking an economic deal with Europe first.

For others, it was the EU's apparent naivete on China's human rights promises that rankled. Guy Verhofstadt, a former Belgian prime minister and member of the European Parliament, tweeted that "any Chinese signature on human rights is not worth the paper it is written on."

The Europe-China agreement underscores a fundamental question of the post-pandemic world order: How should strategic and economic relations between major powers with very different institutional and political arrangements be managed? In particular, can democracies remain true to their values while engaging in trade and investment with China?

EU is already fairly open to Chinese investment. That raises the question of what the Chinese government thinks it is getting with the agreement. The photo shows European Council President Charles Yves Jean Ghislaine Michel. Photo: Dursun Aydemir/Anadolu Agency via Getty Images/Project Syndicate

To answer this question, we must recognize two facts. First, it is impossible to envisage a significant decoupling of the Chinese economy and the economies of the West that does not induce economic catastrophe. Second, there is little that Western countries can do, individually or collectively, to reshape China's state-driven economic model or repressive human- and labor-rights regime.

Trade and investment agreements cannot transform China into a Western-style market economy or turn it into a democracy. Our best hope, then, is to seek a new global regime that recognizes the diversity of economic and political settings without severely undermining the gains from international trade and investment.

None of this implies that Western countries should put human rights or political considerations aside when they engage China in the economic sphere. It simply means that the US and Europe should pursue more limited, more attainable, and ultimately more defensible goals.

Two such goals are paramount. First, trade and investment rules should ensure that Western firms and consumers are not directly complicit in human-rights abuses in China. Second, such rules should safeguard democratic countries against Chinese practices that could undermine their domestic institutional arrangements on labor, environment, technology, and national security. The objective ought to be to uphold and protect the West's own values, rather than export them.

So, the important question on the CAI is not whether the EU will be able to alter the Chinese economic system or improve China's human rights and labor regime. Even if the treatment of the mostly Muslim Uighur minority improves, the repression of dissidents and free speech will continue. And even if China ratifies the Forced Labor Convention and enforces its provisions – a doubtful matter – Chinese leaders do not plan to recognize independent unions. The relevant question is whether the EU has given up its freedom to pursue policies that limit complicity in human rights and labor abuses or safeguard European national security and labor standards.

The European Commission has claimed that the CAI allows the EU to maintain its "policy space," especially in "sensitive" sectors such as energy, infrastructure, agriculture, and public services. In the remaining areas, the EU is already fairly open to Chinese investment. That raises the question of what the Chinese government thinks it is getting with the agreement.

The answer seems to be that China is buying insurance against future restrictions in Europe. The agreement contains an arbitration scheme that enables the parties to bring violation complaints against each other. If consultations fail to resolve the matter, disputes are to be brought to arbitration panels with specific compliance procedures. While the European Commission views this as a mechanism to prevent Chinese backsliding from commitments, it could also serve as a means for the Chinese government to challenge specific entry barriers against Chinese firms.

A dispute resolution framework is essential to any workable global order. But what if, say, a European country wants to bar a Chinese firm that treats its workers badly or operates in Xinjiang? France already requires that large French companies abide by international human rights and environmental norms in their foreign operations.

What happens if European countries adopt tougher measures preventing Chinese firms with problematic labor or environmental practices from operating in the EU? Would the arbitration mechanism find these regulations compatible with the CAI? Similarly, how much deference will panels show to exceptions to market access based on "national security" considerations?

The answers to such questions are not clear. Much will depend on the final text of the CAI, and the degree to which arbitration panels choose to prioritize market access over countries' self-described "public purpose."

In any case, neither the US desire to forge a united front against China, nor the reality that the CAI will fall short of creating a freer, more market-oriented China is a valid argument against the CAI and other similar trade and investment agreements. We should not judge the CAI by whether it enables Europe to export its system and values. We should judge it by whether it allows Europe to remain true to its own.

Dani Rodrik, Professor of International Political Economy at Harvard University's John F. Kennedy School of Government, is the author of Straight Talk on Trade: Ideas for a Sane World Economy.

 Disclaimer: This article first appeared on Project Syndicate, and is published by special syndication arrangement