The EU-China Investment Deal: Perspectives of the European services sectors on new opportunities in the world’s second largest economy

Trade and investment between the EU and China have increased dramatically in the last decade, but foreign direct investment to and from China from and to the EU seems to have declined in the last three years. China has become the EU’s biggest source of imports and has become the EU’s fastest growing export market, but their relationship in FDI is less prominent. The new CAI should open the way to allow more FDI both ways, with new opportunities for European services firms.

Services commitments in trade agreements are directly linked to investment. Indeed, a large part of Market Access commitments for the services providers in trade agreements are about “commercial presence abroad” commitments (GATS Mode 3).

The largest part of the FDI figures are from and to the services sectors. In the CAI, China has for the first time taken commitments to open up and secure FDI in manufacturing sectors, which is welcomed in these times of political tensions, but the main progress is registered in the services sectors, with new conditions for the EU to increase investment in many services sectors in China.

The EU is by far the biggest investor in the world, with EU FDI outward stock totaling $US12.97 trillion, or 37.1% of Global FDI in 2018, compared with China’s 2018 figure of $US1.93 trillion outward stock. Perhaps surprisingly, not much of this FDI is between the EU and China. According to Eurostat, as of 2018, China only received 1.4% of global EU FDI (€190 Bio stocks). And only 0.55% of Inward FDI in the EU came from China (€62 Bio). It is interesting to note that investment by EU services sectors in China represent only 40% (€72 Bio stocks in 2017) where the EU global average is +60%; and that the trend has been flat for the last 5 years.

On the contrary, investment in services sectors by Chinese businesses in the EU is up to 80% (€48.7 Bio stocks in 2017), close to the world average, and that China quickly adapted itself by significantly increasing this share from 28% in 2013.  This is clear evidence that there remain many market access barriers to EU firms in China, while the reverse is not true. As a result, a trade and investment agreement between the EU and China could greatly benefit the European services industry.

China services sectors remain essentially closed to foreign competitors. China joined the WTO in 2001. However, in China’s GATS Schedule, most of the commitments relating to establishment of foreign enterprises were generally limited by restrictions such as compulsory joint ventures, limitations on geographic location, limitations in the form of establishment to name but a few. Some of these limitations have been phased down over a six-year period, but many restrictions remain in place in many sectors, including banking, life insurance and telecommunications.

China participated in the Doha Development Agenda (DDA) Services talks and tabled an initial and a revised GATS offer but only a few of these offers were of any real interest. China expressed interest in joining the Trade in Services Agreement (TiSA) negotiations. But the TiSA negotiations fell into abeyance in 2016. The agreement with the EU will confirm better access to the Chinese market, will provide legal certainty to their operations there and will rebalance the economic relationship with China, given that the latter already has open access to much of the EU market.

In recent years, China has started to unilaterally open up some sectors to foreign investors via the reform on it “negative list”. The CAI is an additional tool to provide new opportunities and legal security to European investors.

Among the services sectors in which China took commitments, one can highlight financial services. Joint venture requirements and foreign equity caps have been removed for banking, trading in securities and insurance (including reinsurance), and asset management.

China will offer new market opening by lifting joint venture requirements for private hospitals in key Chinese cities, including Beijing, Shanghai, Tianjian, Guangzhou and Shenzhen. China has also agreed to lift the investment ban for cloud services. They will now be open to EU investors subject to a 50% equity cap. China has agreed to bind market access for computer services.

For International maritime transport, China will allow investment in the relevant land-based auxiliary activities, enabling EU companies to invest without restriction in cargo-handling, container depots and stations, maritime agencies and more. China will open up in the key areas of air transport-related services, such as computer reservation systems, ground handling and selling and marketing services.

China will also eliminate joint venture requirements in many business services sectors, such as real estate services, rental and leasing services, repair and maintenance for transport, advertising, market research, management consulting and translation services.

China will remove joint venture requirements in most environmental services.  In construction services, China will eliminate the project limitations currently reserved in their GATS commitments. 

Finally, commitments have been made to allow greater mobility for business personnel. Managers and specialists of EU companies will be allowed to work up to three years in their Chinese subsidiaries, without restrictions such as labour market tests or quotas.

In the CAI, beyond market access, China is also making commitments to ensure fair treatment for EU companies so they can compete on a better level playing field in China, including in terms of disciplines for state owned enterprises, transparency of subsidies and rules against the forced transfer of technologies. This is a very important aspect of the deal.

Importantly, and for the first time, China has also agreed to ambitious provisions on sustainable development, including commitments on forced labour and the ratification of the relevant ILO conventions. Issues related to the enforcement of these commitments, notably those related to human rights, will likely be fiercely discussed by the EU member states and the Members of the European Parliament prior to the ratification of the agreement. European firms support the setting up of relevant tools to ensure the respect of these fundamental rights.

Dr Pascal Kerneis is Managing Director of the European Services Forum, Brussels

The views expressed here are the author’s, and may not necessarily represent the views of the Institute for International Trade.

Photo credit: Christian Lue on Unsplash