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The EU Investment Deal With China Means the US Can’t Trust Brussels

January 08, 2021

By Kenneth Rapoza, CPA Industry Analyst

The European Union's bilateral investment treaty with China is an example of how a key ally really isn't going to put itself in a position to have to choose between Washington and Beijing. 

The European Union signed what amounts to a bilateral investment treaty (BIT) with China on December 30. Little is known about the details as it is still going through a “legal scrubbing”. Despite that, it has been mostly panned on this side of the Atlantic. Or called a boon for China. What does it mean for the US?

Europe has opted to go it alone, just as the income Biden Administration has been saying for months that it wants to work with allies, of which the EU is the most important. But this agreement demonstrates that EU interests are not US national interests.

“EU wants strategic autonomy, and not to follow the US,” says Michael Stumo, CEO of CPA. “But they want our security guarantee on Russia via NATO. The EU has demonstrated that it can’t be trusted to want the right thing on China.  Their business class pushes through the agreement despite China’s abuses in Hong Kong, Uyghur concentration camps, military aggression and other human rights violations.”

The president of European Chamber of Commerce, Joerg Wuttke, said of the bilateral investment treaty, “We managed to get through the door” in China.

New National Security Advisor Jake Sullivan is cold to the idea of a BIT with China signed by the Europeans. Sullivan told CNN in an interview over the weekend that Biden’s goal to meet with his European counterparts early to “work out a common agenda regarding Chinese trade practices.”  

Sullivan, who is considered a China hawk, or at least skeptical of China as a good-actor in terms of trade practices, says that the new Administration’s goal is to talk with the EU “right away” and “end the multi-front trade war.”

That could mean tariffs coming off on any European goods, home to our second largest trade deficit, but keeping them on China. Europe will surely ask for tariffs to be removed if Washington wants it to play ball against Beijing. Overcapacity from Europe (led by Germany) as well as China has harmed our domestic industries. Giving away the tariffs in return for no protection for US workers would be problematic for Biden’s Build Back Better goals.

It was European officials themselves who  described the deal as part of their pursuit of “strategic autonomy” from Washington, a policy pushed by President Emmanuel Macron of France that may have been better understood in a Trump second term than in a Biden first term. Biden has come forward almost instantly asking to play nice.

Although details about the BIT with China are unknown, it implicitly assumes that China will comply, which the last 20 years of Beijing noncompliance belies. The US has tons of BITs with countries around the world. These are conducted by the State Department. They give countries rules on what their home corporations can buy into in each respective nation, and which body will handle the dispute settlement should an investor lawsuit pop up. The World Bank’s International Center for Settlement of Investment Disputes handles a lot of these, for example.

For EU corporates, the idea that they can invest in China – perhaps without requiring a local partner – is interesting. But China has promised these things before.

In 2001, just before entering the World Trade Organization, China and the EU – during a September summit – welcomed the rising levels of direct investment by EU companies into China, which of course was fantastic for Chinese manufacturing and its local job market. They also discussed the issue of the EU trade deficit with China and agreed that it was important to exert further efforts to expand EU-China trade so the commercial relationship wasn’t so out of whack. 

The trade deficit has gotten worse with China for the Europeans, and while their exports have indeed gone up, their imports have gone up even more in dollar terms ending 2019. China accounts for at least 19% of Europe’s total imports. 

“The EU thinks China will comply with an agreement despite 20 years of evidence otherwise,” says Stumo.

Jake Sullivan says that Biden’s foreign policy will work for the American middle class. He may find that the heavily subsidized European economies are not as concerned about the same things in regards to their own labor force, and maybe not China. Europe’s negotiating starting point to go along with Washington on China policy will likely require a total removal of tariffs on European exports, most of it tied to the auto industry and pharma.

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