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CAI and supply chain webinar

The ECCT arranged a webinar on the topic of the EU-China Comprehensive Agreement on Investment (CAI), decoupling global supply chains and the challenges facing European business in China. The event featured guest speakers (via video conference call from Beijing) Bruno Weill, Chief Group Representative, BNP Paribas China and Jacob Gunter, Senior Policy and Communications Manager at the European Chamber of Commerce in China (EUCCC).

At the event, the guest speakers gave an overview of a report produced by the EUCCC and the Mercator Institute for China Studies (MERICS) titled “Decoupling: Severed Ties and Patchwork Globalisation”. The report examines the expected benefits and limitations of the CAI and gives views on how European companies operating in China will work to navigate the ongoing US-China trade tensions and increase the resilience of their supply chains globally.

EU trade representatives have said that the CAI will improve access in sectors like automotive, financial services, real estate, rental and leasing, and addresses issues such as labour rights, forced technology transfers and unfair competition, especially from Chinese state-owned enterprises. However, the decoupling report cautions that some crucial and structural issues are not addressed in the CAI, such as domestic procurement rules that discriminate against foreign investors or restrictions on cross border data flows. In addition, with regards to human rights and labour issues, the report says that China has so far only committed to “working towards” ratifying the missing International Labour Organization (ILO) conventions in the CAI.

Besides the domestic structural issues, European businesses in China are concerned about being caught in the crossfire of US-China trade tensions and being forced to have to choose between doing business with China or the US and its allies.

The speakers noted that feedback from European companies operating in China revealed that European companies were overestimating awareness, underestimating exposure, and revealing limits of planning in terms of decoupling. According to the speakers, very few companies are thinking about leaving China altogether, but many are increasingly concerned about the growing complications and costs involved in doing business in China.

The report revealed that companies have moderate concerns in terms of political, financial and supply chains issues, and rising concerns about standards and data governance.

Like most businesses, European companies want to avoid getting involved in political issues, but the current global political climate is making it increasingly difficult for businesses to avoid the impact of politics. For example, they will face a direct impact if sanctions are imposed by western governments on companies doing business in Xinjiang Province or with authorities in Hong Kong. According to the speakers, many European companies doing business in Xinjiang, while not yet leaving the province, have postponed projects there.

The speakers said that decoupling will be difficult when so much has already been invested in China. They noted that while there was an initial shock from the US-China trade war, it has been possible for large multinationals with operations in multiple locations to circumvent bilateral tariffs by shifting supply chain arrangements among locations. However, the same has not been true for SMEs without global operations.

On the subject of data governance, both China and the EU are decoupling for different reasons and in compliance with their respective regimes, which limit data transfers. This has created a challenge for global data systems, even for sectors not dealing with sensitive personal data. For example, companies involved in developing autonomous vehicles rely on a global database of tests from multiple locations and conditions in order to improve machine learning and algorithms to make autonomous driving safer and more efficient. If they are restricted by national data protection rules from sharing and analysing data on a global basis, their progress will be limited or at least slowed down. In addition, not being able to share information and consolidate data systems in fewer locations means having to invest much more to replicate the same systems in multiple countries, which raises the costs of IT systems. The implication is that only companies with deep pockets will be able to afford to continue operating in China and many companies are now evaluating whether or not their potential future profits will be worth the investment costs.

On the question of standards, this is not so much of a concern for traditional industries but for certain advanced industries, such as telecommunications and semiconductors, there is concern about the possibility of diverging standards whereby there will be an international standard and a competing one from China. Having to maintain and comply with two sets of standards will tremendously increase the costs of companies operating both in China and globally and undermine hitherto western dominated global standards regimes.

In terms of strategies to deal with the new environment, one option is for companies to create dual systems. The advantage of this approach is relative stability (once in place). The disadvantages are that it is practically very difficult and expensive to implement. The second option is to adopt flexible architecture or maximise tech neutrality and localise as little as possible. The disadvantage of this approach is that this is not stable and subject to disruptions. The third option is to leave China altogether.

On the question of the CAI, according to the speakers, the EU’s approach was to forge a deal that was a slightly augmented version of the US-China phase one trade deal as a way to lay a foundation which could be built on in future arrangements. This was seen as a practical approach to deal with China, which is why the EUCCC supported the CAI. Of course, there was full realisation that there will be questions about China’s compliance but getting a written contract and commitment from Chinese authorities would represent an expression of good will on both sides and make it easier to call them out if they do not abide by the terms of the agreement. It was always acknowledged that the CAI would not solve everything and is a work in progress. It is also hoped that Chinese authorities will realise that good will on their part to follow the terms of the agreement would help to reassure sceptics in the west and offset some of the growing opposition to China, both in Europe and elsewhere.

On the question of the European carbon border tax proposal, the speakers noted that China is in the unusual position of being the world’s largest producer of carbon emissions but also responsible for the largest rollout of renewable energy capacity. According to Bruno Weill there has been a lot of miscommunication about this because those in China and the west see the issue differently. The EU, for its part, mostly talks about cutting carbon emissions [to limit the impact of climate change] but China’s main concern is not about emissions but about the immediate problem of pollution (air, water, soil), even if the means to tackling both problems overlap to a large degree. This is why Europeans refuse to finance new coal investments but China, since it still relies on coal, is more concerned about how to reduce pollution from coal. China recently announced a goal of becoming carbon neutral by 2060 but it is not clear how serious it is since achieving this target will require enormous effort.

As to the investment outlook (for inbound foreign investments in China), speakers said that this is difficult to predict because there is so much variation not only between various industry sectors but also specific companies. Each will make decisions based on their assessments, which may differ widely. However, without continuing investments in China, there is a risk of losing market share. It is hoped that the CAI will create an environment which makes investing easier but individual companies will have to consider whether it is worth increasing their bets in China or giving up the market.