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CvT: EU-China Investment Deal – Will Economics Price Out the Trans-Atlantic Alliance?

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Germany’s Chancellor Angela Merkel headlined a virtual summit meeting with President Xi Jinping last month to expedite the Comprehensive Agreement on Investment (CAI) between the European Union and China. The September 2020 summit was meant to conclude seven years of protracted talks surrounding the expansion of Chinese market access for EU investors, the removal and reduction of forced technology transfers (FTT), and future trade relations between the two partners. While patience may be virtuous, particularly when commercial diplomacy talks can cement trade rules for decades at a time, this current round of talks revealed a conspicuous reality for the world’s largest trading bloc – its uncomfortable position between the US and China.

Stuck between a rock and a hard place

In 2019, China was the EU’s third largest purchaser of exports and largest supplier of imports of goods. This economic reality, to the tune of a €164 billion trade deficit in favor of China, outlines the importance of a mutually beneficial EU-China relationship. As the Middle Kingdom is projected to outpace total US GDP and become the world’s largest economy by 2024, European leadership desperately needs this partnership to maintain and revive an EU economy which contracted by 11.9% in Q2 2020 due to the coronavirus pandemic. Although a global outbreak of another infectious disease is unlikely in the near-term, the current economic environment finds Europe at odds with US leadership’s geopolitical concerns within the Indo-Pacific region.

The implications of a changing global dynamic

The US’ August 2020 sanctions targeting China’s semiconductor and defense industries, in particular, reveal Washington’s strategy of containment against China’s rising power. These export controls are testing the US foreign policy’s presumption that the EU – and other historical allies – will continue to enforce Washington’s campaign of economic coercion against the Chinese state indefinitely due to shared ideological values and favorable terms of financial inclusion. While the United States was the largest and second largest partner for EU exports and imports, respectively, in 2019 and drove a €153 billion trade surplus in favor of the EU, recent comments from EU Commission President Ursula von der Leyen suggest the political will exists within Europe to build a closer and more strategic relationship with China.

The EU official statement from the prior June 2020 virtual summit, “EU-China Summit: Defending EU interests and values in a complex and vital partnership,” should serve as a reminder to the US that practical needs, including economic security, trump ideological values and historical relations. Particularly with the transatlantic alliance at its lowest point of cooperation since the NATO’s establishment in 1949, the EU-China CAI represents an opportunity for European nations to maintain their economic relationship with China while leveraging equal concessions from the US Trade Representative. The real question remains as to whether the growing EU-China strategic partnership and investment deal will challenge the diplomatic utility of the historic transatlantic alliance.

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