The EU should speed up negotiations about a Bilateral Investment Treaty with China. With US trade policy in limbo after the election of Donald Trump, there is an opportunity for Brussels to move ahead with Beijing.

A Chinese containership in the port of Hamburg.

The future of US international trade and investment policy has been thrown into extraordinary uncertainty after the election of Donald Trump. In line with his campaign pledges the president-elect has announced to withdraw from the Trans-Pacific Partnership (TPP), which was concluded this year. Under US law, such unilateral action on trade policy would not require Congressional approval.

Trump may still compromise on some trade and investment issues, but as of today we have to assume that he will suspend all multilateral and bilateral talks on trade and investment liberalization – from the TTIP negotiations with the EU to the negotiations over a Bilateral Investment Treaty (BIT) with China.

US withdrawal creates vacuum in global trade policy

The US withdrawal will create a serious vacuum in international trade diplomacy. The Asian TPP members will have to decide whether to implement TPP without the US or to join China in setting up its proposed Regional Comprehensive Economic Partnership (RCEP) or an even larger trade pact called the Free Trade Area of the Asia-Pacific (FTAAP). RCEP was designed to exclude the US, FTAAP was an initiative by APEC, including the US and China. Both agreements would be much less ambitious than the TPP.

The vacuum may end up bringing China and Europe closer together. With US-China BIT negotiations on hold, China is likely to approach the EU with the aim to reach a bilateral agreement for freer trade and investment flows. And the end of the TTIP negotiations will free up capacity in Brussels to take a stab at tricky trade issues with a much more difficult, yet inevitable trading partner. China’s importance for the EU may even grow as the US may loose its attractiveness for Chinese exports and investment in the Trump era, diverting Chinese exports and investments from the US to Europe.

Investment Treaty first, Trade Agreement later

Difficulties start with timing and sequencing. So far, seven rounds of negotiations between China and the EU since January 2014 have yielded little progress. Chinese observers have therefore recommended to speed up the BIT negotiations and to integrate them into broader talks over a full-fledged Free Trade Agreement (FTA).

The EU has resisted this proposal, for good reasons. Traditional exports or imports are increasingly substituted by foreign investment allowing businesses to produce close to the consumer and to acquire local technology. Traditional trade agreements should therefore come in second place after clear rules for foreign investment have been put in place.

Chance for the EU to define rules for Chinese investment

In EU-China relations, this sequence is even more relevant in light of the recent substantial increase of Chinese investment flows into the EU. China’s FDI in the EU has not reached the same level as EU investment in China. Yet, given the financial leverage of Chinese companies, the significantly more liberal entry conditions for Chinese investment into the EU than vice versa, and Chinese government’s declared intention to acquire and bring foreign technological knowledge to China, it is in the EU’s interest to create a level playing field and to define clear entry-rules for allowing foreign investment on either side.

A BIT between the EU and China is not an easy project, as both sides bring long and complex wish lists to the table – from visa requirements to investor protections.  Negotiators will look to the principle of reciprocity as their bottom line; they will not want to be seen to make a concession without an equivalent counter concession. Unless compromises in a BIT can be found, negotiations on a FTA should not begin. Many controversial trade issues – including European concerns over social and environmental standards – could be more easily settled once the rules for bilateral investments have been defined.

To make this very clear: investment and trade negotiations between the EU and China are bound to be controversial and there is no guarantee for success. Yet Donald Trump’s decision against TPP and his US-centric strategy may provide the most powerful nudge so far for the EU and China to join forces against a rise in global protectionism.