China Shoots Itself in the Foot – And India Wins

11 May 2021 Lindsay Hughes, Senior Research Analyst, Indo-Pacific Research Programme

As if to demonstrate that it truly is not the infallible power that it purports to be, China has once again snatched defeat from the jaws of victory, this time in regard to its “Comprehensive Agreement on Investment” with the European Union, adding to its economic worries.

 

Background

Towards the very end of 2020, European Union (EU) and Chinese leaders announced that they had reached an in-principle agreement on investment after seven years of negotiations. Given the general suspicion of China throughout the democratic world, that announcement caused a good deal of concern and left Washington ‘perplexed and stunned’. Since this was not a trade agreement but one that settled on the terms of mutual investment, some of which included the removal of caps on investment, Washington was likely concerned that the agreement could see unlimited Chinese investment in European companies, especially companies involved in energy production and distribution in Europe. Some analysts suggested that the Agreement could potentially lead to a larger free trade agreement between the EU and China, which could give China access to the sophisticated European technology that its leader, General Secretary Xi Jinping, sought to obtain as part of his strategy to make China the undisputed global economic power that, Washington feared, would enhance its political and military power.

For its part, the EU leaders claimed that they did nothing that the US had not previously done. In their perspective, the Agreement would give European companies access to the Chinese bodies that established manufacturing and other standards, eliminate the forced transfer of technology to Chinese firms and, importantly, force Chinese authorities to be more transparent in providing data on their subsidies to domestic companies, thereby enabling a more level field. The three European countries that would benefit the most from the Agreement were believed to be Germany, France and the Netherlands, which already accounted for three-quarters of Chinese investment in the EU.

The Agreement was, in short, one of the most important and impressive that China had negotiated, with the potential to generate around $920 billion in two-way trade.

 

Comment

Hardly any economic initiative that China adopts does not have a geopolitical imperative; this agreement definitely did. As one report noted, it split trans-Atlantic relations, leading the incoming National Security Adviser to the Biden Administration, Jake Sullivan, to tweet:

The Biden-Harris Administration would welcome early consultations with our European partners on our common concerns about China’s economic practices.

He was ignored by the EU.

It did not take long for China to defeat its own efforts, however. Under General Secretary Xi Jinping, Chinese hubris has exploded and, with it, Chinese nationalism, fed by the Chinese Communist Party (CCP). This is an organisation that brooks no dissent, imprisoning students who demand democracy, extending their sentences while they are incarcerated and perpetrating genocide on its own citizens. Its effort to encourage that hubris is indicative of the CCP’s insecurity about the legitimacy of its rule over China. Those efforts extend beyond its borders.

In March, the EU, US, Britain and Canada sanctioned four high-ranking Chinese officials for their abuse of human rights in Xinjiang. They accused the Chinese officials, including Zhu Hailun, the former Deputy Party Secretary in Xinjiang, and one of the architects of the mass-detention programme, whose signature was on five of the six documents at the heart of the China Cables, which documented China’s use of prison-like structures and sophisticated mass-surveillance technology to detain and control members of the Uyghur community in Xinjiang, of being ‘responsible for serious human rights violations in China, in particular large-scale arbitrary detentions inflicted upon Uyghurs and people from other Muslim ethnic minorities.’ Canada, the UK and the US then issued a joint statement, noting that they were:

… united in calling for China to end its repressive practices against Uyghur Muslims and members of other ethnic and religious minority groups in Xinjiang, and to release those arbitrarily detained.

China responded by banning eight European politicians and two scholars from Germany, Belgium, the Netherlands, Lithuania and Sweden from China and barred their organisations from conducting business there. It also sanctioned five members of the Inter-Parliamentary Alliance on China, who often criticised Beijing for its human rights violations in Xinjiang. It is likely that in China’s perspective, it is equal if not superior in every way to the EU or, for that matter, any other country. Having nurtured hubris in China, it would have been unthinkable for General Secretary Xi not to react to what was generally seen in China as an insult by a Western power that still saw China in colonial terms.

Whatever his reasons for striking back against the EU and UK may have been, Mr Xi has now witnessed the unravelling of the seven years of negotiations with the EU, which has decided to suspend “political outreach activities”, including the Comprehensive Agreement on Investment, with China. As Valdis Dombrovskis, the Trade Commissioner for the EU, noted:

We now, in a sense, have suspended … political outreach activities from the European Commission side. It’s clear in the current situation with the EU sanctions in place against China and Chinese counter-sanctions in place, including against members of European Parliament, [that] the environment is not conducive for ratification of the agreement.

And, in what will be seen as a stinging indictment of China’s policies, Sophie Richardson, the China Director of Human Rights Watch, quoted Mao Tse Tung to describe Mr Xi’s actions: ‘Lifting a rock only to drop it on one’s own feet.’ The freezing of the Agreement will likely pain China because there is little chance that it can be revived in the foreseeable future. Its most influential European backer, German Chancellor Angela Merkel, is due to retire later this year and for the first time, a candidate from the German Green Party, which is critical of China’s human rights record, is likely to succeed her.

Soon after suspending the agreement with China, the EU turned towards India. Ursula von der Leyen, the President of the EU Commission, Charles Michel, the President of the EU Council, and Chancellor Merkel, sought to revive talks on a free-trade agreement with India at a video-conference with Indian Prime Minister, Narendra Modi. It is a likely outcome that renewed trade negotiations will take place sooner rather than later. One source reported that a draft statement that was to be made after the EU leaders and Mr Modi met virtually would have said, “Our partnership will promote a transparent, viable, inclusive, sustainable, comprehensive, and rules-based connectivity.” The descriptors “transparent” and “rules-based” could only have been drafted with China in mind.

Previous talks on a free trade agreement between the EU and India stalled in 2013 on market access issues, tariffs by India on products like wine, dairy products and automotive parts, and the EU’s reluctance to provide easy access to visas for Indian professionals in fields such as information technology. It is more than likely, however, that this time circumstances will push both sides towards finding a solution to those issues. Mrs Merkel will want to engineer a free trade agreement with India in order to retire on a positive note and, perhaps more pragmatically, to ensure that her political party has another argument as to why it should remain in power after her departure in order to counter the rising support for the Greens in Germany. India, specifically Mr Modi, will need a free trade agreement with the EU in order to counter the growing calls for his resignation due to his perceived mishandling of the pandemic that has ravaged India. Given those motivations, the two sides will likely work towards negotiating a trade agreement. Separately, the UK Prime Minister, Boris Johnson, is also looking to negotiate a similar agreement with India.

If the EU and India do reach an agreement, it would be a major blow to China’s prestige and its economy, a blow that would be compounded if India and the UK also sign an agreement. Beijing ought to realise that it was its own hubris and superiority complex that has led it to this state of affairs. Whether Mr Xi can back down without losing face is, however, doubtful.

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