The European Union (EU) led by German Chancellor Angela Merkel and French President Emmanuel Macron concluded a Comprehensive Agreement on Investment (CAI) with China on 30th December, 2020 ignoring a request by President-elect Joe Biden%u2019s team in the USA for early consultations on China%u2019s unfair policies. 

Discussions on the CAI had been going on for 7 years but China was more focused on meeting USA%u2019s terms for a trade deal making EU negotiators frustrated; situation changed in July 2020 when the Chinese President Xi Jingping decided to accord priority to the EU over a recalcitrant Washington and directed his negotiators to %u201Cmake enough concessions%u201D to snatch the deal before the German presidency of the EU concluded on 31st December and Biden%u2019s takeover on 20th January, 2021. 

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Xi realised that USA%u2019s opposition to China was much deeper (USA wants to retain its global dominance) than that of the EU countries and it would be much easier to conclude an investment agreement with them thus dividing the transatlantic alliance. After Biden%u2019s taking over, Xi had been fearing China%u2019s diplomatic isolation due to its crackdowns in Hongkong, Tibet and Xinjiang. 

Germany%u2019s Angela Merkel wanted this deal as it would help its car makers and other manufacturers to operate in China without going through the joint ventures with the Chinese partners and sharing their sensitive technologies. She had also been upset with President Trump for his recurrent jibes about Germany not spending 2% of its GDP on its defence and taking several major decisions including reduction in the number of American troops in Germany, without consulting her. 

Merkel personally ensured the approval of EU%u2019s 26 Head of States with the dissenting Poland (having close relations with USA) being sidelined. Merkel%u2019s task became easier with the departure of Britain, which had always wanted that Washington%u2019s views should found resonance in the EU decisions. 

Under the CAI, the European businesses would get better market access than their American counterparts to China%u2019s market in new energy vehicles (of importance to Germany), health care, telecom, finance and air transportation services. EU was more successful than the USA in obtaining some concessions from China on ending forced technology transfers and publishing a list of subsidies provided to certain sectors annually. 

For the first time, China has agreed to open up its services sector partially. How much China would actually implement these decisions remains to be seen, in the absence of any specific monitoring or dispute settlement mechanism. Xi will sell this agreement as an example of his determination to boost economic reforms which he has promised several times but rarely implemented.

In view of the EU%u2019s demands, China has agreed to seek ratification of four ILO conventions on forced labour, but no date has been agreed for it. There was no progress on improved labour rights, as China did not agree to allow independent trade unions or give them the right to collectively bargain with the employers. In return China will get relatively free access to the EU market, responsible for 16% of the global economy in 2019. 

USA has been disappointed with CAI with its Deputy National Adviser Matthew Pottinger saying that China could hardly be expected to honour labour rights as it was building camps for forced labour in Xinjiang. Political leaders in both parties in the US are stunned that the EU is moving towards a new CAI on the eve of a new administration taking over in Washington. CAI will put added pressure on the Biden administration to convince its European allies in joining it to resist China%u2019s abusive behaviour. 

The deal still needs to be approved by the European parliament where some members are very hawkish on China; the European Commission led by its (German) President Ursula von der Leyen is canvassing for supporting this %u201Cgood and solid%u201D deal saying that it is the %u201Cmost ambitious outcome that China has ever agreed with any country%u201D.

Who benefits from this deal more, EU or China? Probably, China in the short term. Big EU economies such as Germany and France, which have substantial manufacturing and other presence in the Chinese market, will be the long term gainers. After Britain%u2019s departure, the EU is now being driven increasingly by the Franco-German partnership which has become more independent of the USA in its political, economic and strategic outlook. 

The deal is a signal that the EU would negotiate its own terms of engagement with China when its interests so demand. USA would push the EU to seek earnest implementation of the forced labour and subsidy issues by China; if the latter renege, the EU would join the USA in putting pressure for the restructuring of China%u2019s unfair policies. 

CAI with the EU is part of Xi%u2019s efforts to open up China%u2019s economy selectively, in some areas, to foreign investors from the West encouraging them to set up more manufacturing facilities and take a bigger stake in its market. Xi is trying to pushback USA%u2019s efforts for decoupling and shifting supply chains away from China. CAI, RCEP and efforts to seek new free trade agreements with Japan and South Korea are part of this strategy. 

The deal illustrates the difficulties of dealing with an authoritarian China, which is both a strategic rival and lucrative market for most countries. For India and others, the lesson is that the economic interests of other countries would often, be an important determinant in shaping their attitude towards a resurgent China. 

Due to shifting power dynamics, the traditional alliances and relationships are in a state of flux and nimble manoeuvrings may be required to clinch agreements on different issues with major countries.

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