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The EU-China Comprehensive Agreement on Investment

  • China
  • Europe
  • Competition, EU and Trade
  • International trade
  • Litigation and dispute management
  • Sanctions


On 30 December 2020, the European Union and People’s Republic of China announced that they had entered into a Comprehensive Agreement on Investment (“CAI”), in principle. This announcement was somewhat unexpected, as the parties had been negotiating for the past seven years. There has been widespread speculation that the agreement was reached quickly due to political motivations. Nonetheless, the CAI is seen by many as a positive step for EU companies and investors: China is the EU's biggest source of imports and its second-biggest export market of 1.4 billion consumers – it has therefore been the focus of the EU’s international trade initiatives.

Importantly, the CAI is not a free trade agreement; rather, it is an international investment agreement designed to regulate how ‘host’ states treat foreign investors, prevent discriminatory practices and enforce investment protections. Unlike most international investment agreements, however, the CAI does not provide enforceable legal remedies (such as international arbitration) to foreign investors who may have been denied the promised treatment from host states.  

From an EU perspective, the implementation of the CAI is a long way off (it is expected to enter into force in 2022), as it must be submitted for adoption and ratification by the Council of the European Union and the European Parliament. The schedules were finally issued in March 2021. However, since this time, relations between the Parties have been strained, culminating in the imposition of sanctions by the EU on China, and reciprocal measures by China. This could affect EU ratification, and the future implementation of the CAI is uncertain.

Overview of the provisions of the CAI

The CAI is an attempt to re-balance trading power between the signatory state Parties and their foreign investors. Fundamentally, China has committed to ensuring fairer treatment for EU investors to allow them to compete on better conditions in China. However, compared to other investment agreements, the CAI appears to be lacking traditional investment protection wording such as each state committing to provide “full protection and security” and “fair and equitable treatment” to investors of the other state. The Parties have agreed to continue talks in this respect over the next two years.

Key provisions of the CAI

Market Access

Access has been agreed on the basis of a ‘negative list’ approach, which means that all sectors are included unless expressly excluded (for example, the list of excluded sectors covers: audio-visual services, air transportation services (other than specific auxiliary services), and activities in exercise of government authority and procurement (in certain circumstances)).

Most notably, China has made significant commitments in respect of market access for the manufacturing sector, which makes up more than half of total EU investment in China. In respect of services, China has committed to providing access to European investors in the telecommunications sector (including cloud services), financial services, private healthcare and environmental services by lifting its current restrictions, including in respect of:

  • joint venture requirements for EU investors (applicable to hospitals and clinics)
  • economic needs test (in electric cars manufacturing)
  • restrictions on foreign investment (on cloud services)
  • nationality requirements for senior management

State-owned enterprises and Subsidies

The CAI is intended to level the playing field and, as such, includes a commitment to transparency. However, some caution has been expressed as to the value of the CAI due to the lack of specific and enforceable investment protection provisions and the fact that there is no guarantee that the EU and China will be able to agree effective provisions in this space.

  • State-owned enterprises (“SOEs”) – the CAI requires that the Parties ensure that their SOEs act according to commercial considerations - which means that they are required to ensure that their SOEs behave in a way that is expected of a commercial business - and that the SOEs do not discriminate against investors of the other state Party and covered enterprises[1] in the purchase and sale of goods and services.  
  • SubsidiesThe CAI focuses on transparency in the subsidy space by extending the current World Trade Organisation transparency requirements into the services sector and establishing a two-stage consultation mechanism to allow the collection of ‘necessary’ information to assess the effects of specific subsidies.

Technology Transfers

The CAI sets out clear rules to prevent forced technology transfers, including: prohibitions on certain investment requirements which would result in such transfers; prohibitions on direct and indirect interference in contractual freedoms of technology licensing; and enhanced protection of intellectual property, sensitive business information and trade secrets. Commercial operations in China have been plagued by concerns for their confidential information and technology, so this is an important point for EU businesses and investors.

Dispute Settlement

The CAI does not contain the traditional disputes mechanism of investment agreements. Usually, an investor-state dispute settlement (“ISDS”) clause would allow investors to seek compensation if either Party breaches their commitments. Instead, the CAI provides for: (i) arbitration between China and the EU; and (ii) a two-year period for the Parties to reach a further agreement on ISDS.

  • Arbitration between China and the EU - The dispute settlements mechanism has a two-step approach: (i) consultation between the Parties with the goal of reaching a mutually agreed solution; and (ii) move to an arbitration panel procedure if no solution is agreed. The mechanism also provides specific rules relating to the arbitration tribunal, including requirements for the arbitrators to be highly qualified, experienced and independent. It further sets out specific rules of procedure and a code of conduct for panellists. Note that this applies only to disputes between the two states, not for disputes involving any investors.
  • Two Year Period to agree to ISDS – As noted above, investors cannot bring an arbitration directly against either state Party under the CAI in its current form. Instead, the CAI merely states that China and the EU commit to completing their further negotiations on investment protection and investor-state dispute settlement within two years of the signature of the CAI. Presumably, these future negotiations are intended to address whether investors may obtain redress for the host state’s failure to provide the investor protections promised in the CAI.

Separately from the CAI, a number of individual EU Member States have already entered into bilateral investment treaties (“BITs”) with China. The CAI is expected to replace these existing BITs eventually, although the existing BITs will remain in force until China and the EU agree on a new ISDS mechanism. This means that, for the moment, EU investors investing in China may only be able to access international arbitration against China if their home State already has a BIT with China (and vice versa).

Considering the EU’s current focus on reforming investor-state dispute resolution systems and its push for the creation of a multilateral investment court (such as the investment court adopted within the EU-Canada Comprehensive Economic and Trade Agreement), there is at present no clarity as to the potential shape of any future investor-state dispute settlement mechanism for the CAI. Moreover, there has been no settlement of the hotly contested issue of an investor right to bring a claim for alleged breaches of regulatory issues, and a State’s right to self-regulate has already been excluded from the scope of the existing CAI dispute resolution mechanism. As such, foreign investors may consider the CAI in its current form to be ‘toothless’ as investors cannot directly enforce their rights against the host state. However, this may change in the future.

According to critics, the CAI appears to only provide market access and greater investment opportunities in line with general commitments already in place (with very limited, if any, new market access opportunities). However, while China has previously agreed to allow such investment opportunities generally, to date, these have not been meaningfully implemented. The CAI will provide a legal framework for market access, which the Parties will not be able to unilaterally change (although this will not prevent informal local government deviation in either Party).

Access to the Chinese market is conditional upon licences and, to date, obtaining such licences has been a lengthy process. Post-CAI, some economists expect that the granting of these licences to EU businesses and investors will become faster, more efficient and more common place.

As such, the true value of the CAI for EU businesses and investors is greater certainty around market access, although it remains to be seen how the implementation of granting such access will actually work in practice.

The future of the CAI

The controversies around allegations of forced labour and modern slavery in China was a sticking point in the negotiations. Nevertheless, the EU concluded negotiations with very generic obligations on the Parties in these areas, as the CAI states that China will make “continued and sustained efforts” to ratify international conventions and agreements on banning forced labour and sustainability – this is tantamount to a ‘best efforts’ obligation and does not mandate compliance with the same.

Given the already geopolitically charged context of the CAI, the EU has had a precarious balance to strike in responding to claims in relation to human rights violations by China against the Uyghurs and other minorities in Xinjiang. As a result of a co-ordinated effort between the EU, UK, US and Canada, the EU imposed sanctions (including asset freezes and travel bans) on certain senior Chinese officials and companies in Xinjiang accused of serious human rights violations.

In response, on 22 March 2021, China unilaterally imposed sanctions against individuals and entities in the EU that ‘severely harm China’s sovereignty and interests and maliciously spread lies and disinformation’ – including against individuals that are Members of the European Parliament (“MEPs”), scholars, and EU institutions for China Studies. In addition, on Friday 26 March 2021, China also imposed corresponding sanctions on a number of UK politicians, the research group ‘Uyghur Tribunal’ (responsible for investigating the Chinese government’s involvement in the alleged human rights abuses), and some English lawyers.

Certain MEPs and EU Member States have been critical of the CAI. Further, and more importantly for getting the CAI over the line, the European Parliament has been consistently vocal on the need for the CAI to include robust modern slavery provisions. Accordingly, it is likely that the European Parliament may consider the CAI lacking and, therefore, it may not receive the requisite number of votes for consent. Moreover, it has been reported that the EU Trade Commissioner, Valdis Dombrovskis, and the European Parliament’s Socialist and Democrats party, have indicated that the imposition of sanctions by China may have put the ratification of the CAI at risk and the lifting of these measures would be a condition for continuing discussions on the CAI.

In light of the above, the future shape of this agreement is far from certain.

[1] 'covered enterprise’ means an enterprise set up in the territory of a party through establishment, as defined in the CAI, by an investor of the other party, and which is in existence as of the date of entry into force of this Agreement or made thereafter in accordance with applicable laws

If you have any questions regarding how the CAI may affect your business, please get in touch