The EU's dilemma with China: free trade or bilateral investment?

The launch of an EU-China bilateral investment treaty is a 'good opportunity' to renew the legal framework between Brussels and Beijing, says Chen Xin.

By Chen Xin

18 Mar 2014

During the 16th EU-China summit held in November 2013 both sides announced the launch of negotiations of bilateral investment treaty (BIT), and also agreed to start the feasibility study of EU-China free trade agreement (FTA) at an appropriate time.

There are 26 investment agreements between China and EU member states. The first agreement was signed in 1982 with Sweden, which was also the first BIT of China.

The latest revision was with France in 2007 which came into force in 2010. There are two approaches to negotiate a BIT between China and the EU. The first one is to integrate the existing 26 BITs into one inclusive pact.

On the one hand, it can consolidate the EU's competence on investment policy provided by in the Lisbon treaty. On the other hand, it can encourage the parties to reach an agreement in a short time and to translate it into practice.

The second approach is to have a high standard new generation BIT, which the EU has not yet signed with any country, including developed economies.

The EU has now initiated a high standard new generation BIT with China because it far exceeds the traditional bilateral investment protection category. It covers market access, government procurement, competition policy, the role of the state owned enterprises, as well as environment, labour and social issues.

Yet, comparing its recent free trade agreements with other partners, including South Korea and Singapore, it is almost the same FTA structure except customs and trade defence elements. Then the question is what the European Union exactly wants with China, a bilateral investment treaty or a free trade agreement?

The trade agreement signed between China and the EU in 1985 plus the 26 BITs remain the legal framework for bilateral trade. Given the rapid development of trade and economic relations between the two governments, it is imperative for both sides to update the legal framework to better reflect the comprehensive strategic partnership.

The launch of the China-EU BIT negotiation this January is a good opportunity to renew the legal framework. But the first thing is to clarify which paradigm should be followed, which can soon be turned into impetus to serve the practical needs.

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