EU-China Comprehensive Agreement on Investment opens manufacturing options, dodges forced-labor issues


European companies looking to get a foothold in China's manufacturing sector without losing their intellectual property (IP) rights have reason to rejoice at the recent deal struck between the EU Commission and Beijing. Companies hoping to get a stake in the massively growing energy sector come away empty-handed. 

After seven long years, the European Union and China finally concluded their Comprehensive Agreement on Investment (CAI), in late December. Criticism came in quickly within Brussels and other European capitals, amid claims the CAI fails to appropriately address the forced labor situation of the Muslim Uyghur minority in China and that the final push to the finish line came at the behest of Germany, which leveraged its presidency of the European Commission and Council of the European Union.

The investment pact seeks to establish legal grounds for European companies to compete on a level playing field in China. European policymakers argue that the deal would provide unprecedented access to the Chinese market. Hitherto, European investors struggled to make foreign direct investments (FDI) in certain Chinese industries or without a technology transfer to a Chinese partner. Even in those industries where FDI was generally possible, IP protection was inadequate, as were bilateral dispute settlement mechanisms.

Around €7 billion of the cumulative FDI from Europe to China, accrued over the last two decades, went into the energy sector. This figure will likely not grow on the back of the agreement, as the energy sector has been left untouched by the agreement. 

Previously existing legal uncertainties and lack of investment protection or discriminatory economic practices remain. So far, China's energy market has been largely closed to foreign companies and investors. 

With China's government having recently pledged to decarbonize its economy by 2060, a boost in demand for renewable energy projects is anticipated. Also, the 14th five-year plan, scheduled for publication later this month, is expected to incorporate ambitious targets on renewable energy and non-internal combustion engine vehicles.

In the sectors pertinent to the agreement, European businesses will enjoy more legal certainty, predictability and be accorded legal remedy if required, the statement asserts. Also, discriminatory economic practices that prevent European companies from meaningfully engaging in commerce in China will be ruled out with the CAI in place.

While direct stakes in China's booming energy sector remain a risky business, manufacturing is among the sectors included in the deal. With the CAI, the EU claims, it will be easier for EU based companies to set up shop in China and enjoy an explicit prohibition of mandatory transfers of technology, a practice by which foreign manufacturers are compelled to share proprietary business and product information. In addition, improved access to China's market will also be granted by providing equal access to standard-setting bodies for EU companies and enjoy more robust transparency on rules for regulatory and administrative measures.  

Over the last 20 years, FDI from the EU to China reached a cumulative €140 billion, with Chinese FDI into the EU reaching €120 billion. The level of bilateral FDI remains small, the EU claims, given the two massive markets' size and financial might. Europe's FDI into the US in 2019 alone reached $2.8 trillion, with the latter investing $3.5 trillion into Europe that same year.

“Today's agreement is an important landmark in our relationship with China and for our values-based trade agenda,” President of the European Commission, Ursula von der Leyen said. “It will provide unprecedented access to the Chinese market for European investors, enabling our businesses to grow and create jobs. It will also commit China to ambitious principles on sustainability, transparency, and non-discrimination. The agreement will rebalance our economic relationship with China”.

Manufacturing opportunities

In the sectors covered, European businesses will gain certainty and predictability for their operations as China will no longer be able to prohibit access or introduce new discriminatory practices. These sectors include manufacturing, the automotive industry, financial services, health, R&D of biological resources, telecommunications, computer services, international maritime transport, air-transport related services, business services, environmental services, and construction services. 

The CAI covers China's extensive fleet of state-owned enterprises. China has agreed that information can be made available upon request to prove that such enterprises have acted in conformity with the agreement.

Disputes under the agreement will be solved in a state-to-state dispute settlement mechanism, which will be accompanied by a monitoring mechanism for pre-litigation phase issue solving at the political level.

“This deal will give European businesses a major boost in one of the world's biggest and fastest-growing markets, helping them to operate and compete in China,” executive vice-president and commissioner for trade Valdis Drombovskis said. “It also anchors our values-based trade agenda with one of our largest trading partners. We have secured binding commitments on the environment, climate change, and combatting forced labor. We will engage closely with China to ensure that all commitments are honored fully.”

 Uyghur region

Several human rights bodies, such as Amnesty International, Human Rights Watch and the UN Human Rights Council have accused China's government of engaging in forced labor practices against the Xinjiang province's Muslim Uyghur minority. 

The matter promises to impact the solar sector in a similar manner as it has impacted the textile and consumer electronics industries over the course of last year. The production of certain raw materials and components used in a range of solar hardware is carried out in Xinjiang province. 

Members of the minority are reportedly sent to labor camps within Xinjiang, but also elsewhere. Human rights organizations believe that more than 1 million Uyghurs are being detained in labor camps, with their children reportedly subjected to “re-education” programs. The official Chinese position on these matters is a mixture of denial and the claim that “re-education” camps fulfill the need to de-radicalize the Muslim population.

The EU Commission contends that as part of its obligations under the CAI Beijing is on course to ratify respective international treaties, which explicitly prohibit the practice of forced labor, and that China will effectively implement the International Labour Organization (ILO) Conventions it has already ratified. Of the 190 ILO Conventions, China has ratified 26, though it has legally denounced five of those and abrogated another one, meaning that only 20 are in force. Whether ratification of Convention No. 122, on Employment Policy and No. 29, on Forced Labour would spell an end to the labor camps is another question.

“China also commits to working towards the ratification of the outstanding ILO (International Labour Organisation) fundamental Conventions and takes specific commitments in relation to the two ILO fundamental conventions on forced labor that it has not ratified yet,” the EU announcement reads, without specifying further which specific commitments and actions China will take, and what will happen if China fails to adhere to such standards.

Solar not guilt-free

In March 2020, a lengthy report by the Australian Strategic Policy Institute titled Uyghurs for sale – ‘Re-education,' forced labor and surveillance beyond Xinjiang was published. The researchers lay out a grim picture of the practice and list 83 companies which they claim have exploited Uyghur forced labor, also beyond the Xinjiang province, through forced resettlement. 

AcBel Polytech Co. Ltd, for example, produces DC/DC and AC/DC converter stages, but the manufacturer has not disclosed its list of customers. Avary Holding Co. Ltd. makes printed circuit boards and has been accused of forced labor of 111 people. Jinan Gude Electronic Device Co. Ltd. manufactures diodes, rectifiers, and semiconductors – components that can be found in solar inverters. Similarly, Sichuan Mianyang Jingweida Technology Co. Ltd and Ningbo Aoboer Electric Appliance Co. Ltd. produce components utilized further downstream in the solar industry.

However, the Australian researchers were able to identify the customers of Hubei Yihong Precision Manufacturing Co. Ltd, a supplier of battery components. These include, companies such as Apple and Cisco, but also solar players like BYD, Toshiba, Kyocera, Huawei, Panasonic, and Siemens.

Apart from semiconductor and electrical components, Xinjiang is also popular with the world's polysilicon producers, which are attracted to the region by low energy prices. In fact, Xinjiang is host to about 40% of the world's polysilicon production.

Market intelligence provider S&P Global Market Intelligence reported in October 2020 that GCL-Poly Energy Holdings Ltd. disclosed in its “staff localization report” that it employs 120 workers from minorities in the region. The polysilicon producer responded to the allegations stating that its “Uyghur employees are provided with special benefits, including holidays and access to a halal restaurant.”

Similarly, Daqo New Energy Corp., another large Chinese polysilicon producer, has significant production capacity in Xinjiang. Repsonding to S&P Global Market Intelligence's investigation of the matter and inquiries as to Daqo's safeguard mechanisms to ensure no forced labor was used in its factories, the company stated: “The cities/region in question are in southern Xinjiang.”

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One day after S&P Global Market Intelligence' reporting, Daqo issued a press release in which the company said: “The Company wishes to clarify that it does not tolerate any use of forced labor under any circumstances whether in its own facilities or throughout its entire supply chain. The company regularly monitors the compliance with its policies by its suppliers and will promptly address any issues if and when they arise.”

European Discord 

The European Commission's lackluster performance in addressing the issue more effectively was palpable in sessions of the European Parliament. MEPs raised a joint motion, sponsored by the Greens/EFA, S&D, ECR, Renew, and EPP caucuses, on December 19, 2020.

“The Commission has folded on the issue of workers' rights,” said Member of the European Parliament Reinhard Bütikofer (European Greens) and the chair of Parliament's delegation for relations with China. “It is ridiculous to try selling that as a success.”

In particular, Bütikofer criticized that the outcome of the negotiations with China fails to respect the parliament's criterion with regards to forced labor practices. In contrast, the “superficial lip service” of ratifying the ILO conventions would not suffice anyway; according to Bütikofer, it is particularly startling that the Commission failed to insist on a timeline for ratification and implementation.

It is not just Bütikofer of the Greens that voiced concerns over the new agreement. Guy Verhofstadt of the Renew Europe caucus was similarly outspoken against a premature signing of the deal without ensuring an end to the forced labor practice.

Criticism of the deal also regards it as a missed opportunity to rebuild the trusting transatlantic partnership with the incoming Biden Administration.

National Security Advisor appointee to President-elect Joe Biden, Jake Sullivan put out the incoming administration's hand to Brussels, expressing that the Biden-Harris administration had a great interest in developing a joint course of action in dealing with the issue of forced labor.

That public comment was left unanswered by the European Commission.

“Explain why three weeks ago the EU — which likes to call itself the flag bearer of multilateralism — said it wants to coordinate with the Biden administration vis-à-vis China, and now it tries to push through this deal just before Biden is inaugurated as president,” Bütikofer adds.

The Commission fends off the criticism stating that the U.S. under the Trump administration reached a “Phase 1” trade deal with China without reaching out to the EU beforehand. The position in Brussels is that the CAI can be seen in part as an effort by the EU to ensure a level playing field with American investors after the conclusion of the “Phase 1” trade agreement.

Section 307 import bans

The United States has taken action with regards to the alleged Uyghur labor camps. Already in 2019, Florida Senator Marco Rubio introduced legislation with measures to provide some protection to Chinese Uyghurs. The Uyghur Human Rights Policy Act passed on September 22 and gave the Chinese government time to respond to the allegations with transparency and reporting. The 120 days period provided by the legislation elapses on January 20, 2021.

After the January 20 date specified, Section 307 of the Tariff Act will apply to goods from Xinjiang province, as part of the law prohibits the import of goods made in part or wholly by forced labor. With 40% of the world's solar polysilicon production located in Xinjiang, such import bans would significantly impact the Chinese solar industry. 

Official U.S. language regarding the measures is clear: “the U.S. Department of State, along with the U.S. Department of the Treasury, the U.S. Department of Commerce, and the U.S. Department of Homeland Security issued a business advisory to caution businesses about the risks of supply chain links to entities that engage in human rights abuses, including forced labor, in the Xinjiang Uyghur Autonomous Region (Xinjiang) and elsewhere in China.”

It's worth noting that the EU also stepped up its legal toolbox to address human rights issues. On December 7, 2020 the EU adopted Council Decision 2020/1999 and Regulation (EU) 2020/1998 (EU Global Human Rights sanctions regime), which for the first time allows the EU to impose non-country-based sanctions for human rights violations committed anywhere in the world. This new regime is part of the EU Action Plan on Human Rights and Democracy (2020-2024). While this new legislation is without doubt an improvement, it is also limited in that sanctions don't apply automatically and can only be imposed by unanimous country support within the Council of the European Union. A single vote against such sanctions on the grounds of forced labor allegations would thwart widespread support for such measures. With the Commission and Council now having sealed, in principle, the CAI this concern remains, and the Council has yet to show that it is ready to apply its new legal measures to this particular situation.

What's next? 

The deal reached during the video conference on December 30, 2020, is not complete and not set in stone. The EU and China will need to finalize the text, and on the EU side, the EU Council and Parliament will need to approve the agreement, with national parliament ratifications also necessary.  

It is likely that the discord within EU bodies will become increasingly loud and visible during these secondary processes. Much of the EU Parliament has supported the joint motion to push China harder to end forced labor, and the joint motion has been preceeded by individual motions from single caucuses of the parliament.

“The deal now proposed by the EU Commission is no deal until the European Parliament says it's a deal,” said Bütikofer. “The public debate on the advantages and disadvantages of the negotiated outcome must be as broad as possible in the run-up to it.”

In this vein, Guy Verhofstadt of the European Parliament's Renew caucus joins fellow MEP Bütikofer in raising doubts on the parliaments readiness to support the agreement. On Twitter Verhofstadt said that the “[European Parliament] would never ratify the China Comprehensive Agreement on Investment”. The MEP said that he needs commitments and proof of improvements of the human rights situation of among others the Uyghur population.




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