The CAI Will Strengthen EU-China Ties, With Credit Effects
Source: Moody
The EU (Aaa stable) and China (A1 stable) late last year agreed in principle to the Comprehensive Agreement on Investment (CAI), which represents a major advance in their trade and investment relationship. The agreement, if approved and enforced, likely would be credit positive for China but result in short-term negative credit effects for some of its sectors. Implemented measures likely would also benefit many sectors in the EU and some individual economies in the bloc.
Agreement requires China to open further to EU businesses in an array of sectors.
The CAI includes commitments on expanding market access, leveling the playing field, and addressing sustainability and dispute resolution. China has committed to opening to EU businesses in manufacturing and service sectors, and, to some extent, cloud computing.
The CAI likely will have positive effects overall for the EU and its companies.
The increased access to China's market will be credit positive for EU sectors including automotive, chemicals, high-end manufacturing of machinery and equipment, finance, and biological sciences. It will also benefit European countries with the largest concentration of these sectors. Credit implications will depend on the details to be determined, the implementation and enforceability of the agreement.
China will gain political and economic benefits, but short-term challenges likely for some sectors.
The immediate impact for China likely will be more political than economic. The agreement likely will allow it to improve international cooperation with the EU, potentially promoting market transparency and fairness, and driving its long-term productivity growth. The positive effects could be larger if the CAI helps accelerate China’s domestic structural reforms.
The CAI also has broader geopolitical implications.
The agreement has potential to strengthen China’s economic and geopolitical position, while complicating US-EU coordination. The agreement could herald a further shift away from multilateralism in favour of bilateral or regional deals, which will strengthen China's economic and political position in the emerging global tripolar system.
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