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Will CAI shift the economic global balance East?

The EU and China have agreed in principle to commit to the Comprehensive Agreement on Investment (or CAI). 
This was just after an online conference between Chairman Xi Jinping, President Ursula von Der Leyen, President Charles Michel, Chancellor Angela Merkel and President Emmanuel Macron.
After five years of work, the policy makers are working now on the final drafts of the agreements, that will have to be approved then from both sides.

What CAI means to China

China is using CAI as a way to boost its trade partnerships, just like the work done with the RCEP. Through these deals, China can prevent trade wars or even embargoes from threatening its economic growth and stability.
For this deal, China decided to open further her doors to European investment. Furthermore, China promised to not add new regulations that may limit EU companies on key fields more than Chinese companies. This will make it simpler for EU companies to invest in the Chinese market. Other points include the continuation of the Strategic Agenda 2025 for China-EU cooperation, which follows the one on 2020. An agreement that shows a willingness from the Chinese side to strengthen the relationships with European countries. This is regardless of their presence inside the BRI project.

The five leaders involved in the conference prior to the agreement of CAI. Source: Asia Times

The interest from the Chinese side as a deterrent to the recent American (among others) hostility is evident. But that’s not all. EU investment may also help China recover from the coronavirus crisis. Although China is the only major country that achieved a growth during 2020, the pandemic is not over and China – as any country – needs all the investment it can get, provided it doesn’t hurt the national security somehow.

What CAI means to EU

President of the European Commission, Ursula von der Leyen said: “The agreement will rebalance our economic relationship with China”.
For EU, agreements with China and other countries are extremely important. As a Union without real political power, economic influence is its best way to project importance on the world stage. The more deals the EU can make, the more the member nations will feel empowered by staying inside the Union. Internationally, EU will also gain importance for its trade partners, including, for example, the US and Russia. It may not be a case that this deal, after five years of work, happens just after Brexit. China is, after all, one of the biggest trading partner of EU, with the USA being first.

European investment in China by category. Source: European Commission

Furthermore, in such an instable period, China made many compromises to suit EU’s needs.
China agreed to improve the relationship with her EU partners by providing more transparency about the work done by state owned enterprises and provide better explanations on how national subsidies work. Another important point to be discussed is to stop the forced transfer of technologies in certain fields. Joint ventures will no longer be required for certain businesses: automotive is an example. In the past, foreign companies used to have to create joint ventures with Chinese businesses to be able to sell their vehicles made in China to Chinese customers. For this reason, for example, VW cooperates with SAIC. The technological transfer that came out of this 50-50 cooperation let China develop more quickly its own local automotive industry.

Will the economic balance shift Eastwards?

Considering the global economic balance used to lay on the West – on the shores of the Atlantic Ocean, things seem to be changing now. China closed the important RCEP deal that is worth 30% of global trade with ASEAN and other Pacific nations. If CAI can get completed and applied properly, the amount of influence China can project, combined with its foreign investment elsewhere, will be much greater. Potentially, these moves could shift the economic balance to the Eurasian continent, to the benefit of the member countries and their allies and partners. The European side invited President Xi to go to Brussels for the yearly meeting between China and the EU in 2021. Date is not set yet – as COVID makes things harder to define – but the invitation has indeed its value.

CAI may determine the future of the European Union

Last, but not least, the fact that both the European Congress and European Parliament will need to both approve the final deal increase the importance of having a strong and cohesive European Union. It is very likely that there will be pressures from countries hostile to such a deal.
Whether the deal will be or not signed, managing to unite the European Union around such an important decision may become an incredibly important step forward for the European Union as a political entity that will change the future of global politics – even more valuable than CAI itself.

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