What happened?
On 20 May, the European Union Parliament passed a resolution to freeze the Comprehensive Agreement on Investment (CAI) with China. It cites the crackdown on democratic opposition in Hong Kong, forced labour and other conditions of the Uyghurs in Xinjiang as major reasons for the freeze. The Parliament halted any discussion or consideration of ratifying the deal because of the sanctions imposed by China. The resolution "demands that China lift the sanctions before the Parliament can deal with the CAI". The Parliament also calls "to use the debate around the CAI as leverage to improve the protection of human rights and support for civil society in China." It has cleared that the Hong Kong situation will be accounted for while considering any discussion on CAI. 

The resolution also called on the EU to "increase coordination and cooperation with the US within the framework of a Transatlantic Dialogue on China" and that "other trade and investment agreements with regional partners, including Taiwan, should not be held hostage to the suspension of the CAI ratification."

What is the background?
First, the EU-China economic dialogue. The economic partnership between the EU and China was established after China entered the World Trade Organization in 2003. Over the years, the dialogue has seen major shifting trends. The High-Level Economic and Trade Dialogue, started in 2008, focused on better market access, reduction of trade barriers, and boosting custom policies in sectors like innovation, technology, intellectual property rights, energy and climate change. Launched in 2012, the negotiations on CAI increased the economic ambitions. However, it has seen multiple disagreements arising out of political issues such as the Dalai Lama visit to France and weak dispute management mechanism. The EU and China are their largest trading partners. Nevertheless, the differences in ideological values have led to the freezing of the CAI.

Second, the issue of investment. The Chinese foreign direct investment in the EU has increased exponentially over the years, but the lack of reciprocity plagues the investment ties. The EU firms have been unable to enter the Chinese market due to an unbalanced playing field, domestic security laws, technology protection laws and other discriminatory regulations. The CAI aimed to provide a legal framework to increase the EU investment in China; however, even after seven years of negotiations, the gap between the two entities continues to widen. Recent efforts at inviting foreign firms by the passing of Foreign Investment Law (2019) in China did not appease the EU as they demand free-market conditions that Chinese firms have access to.

Third, points of EU-China contention. In March 2021, the EU imposed sanctions on four top Chinese officials; China retaliated with hefty sanctions on EU representatives. The EU opposes the following Chinese actions: the crackdown of democracy in Hong Kong, human rights violation of ethnic minorities, assertiveness in the South China Sea, and the disinformation during the COVID-19 pandemic. China's record of violating the international labour organization's regulations have made the EU apprehensive of ratifying the deal. These contentions are influenced by other global factors to some extent and are deeply rooted in the liberal values that the EU proudly holds.

Fourth, the divergence of opinion within the EU member states. The massive majority of the resolution does not speak for all member states. The CAI was "spearheaded" by Germany and has received ample support from France. Many eastern European countries have been benefitting from Beijing and the potential interconnectedness in the region. However, the persisting issue of technology sharing has left the EU internally divided.

What does it mean?
First, China needs to open its economy, which is mainly restrictive and requires the CAI more than the EU does. The EU has witnessed Chinese discrimination and is apprehensive of investing in a certified complication. 

Second, these gaps in trust are not merely bilateral problems but have global roots lying in other links such as US-China, US-EU, and the Chinese perplexity with western democracies.