The EU and the Securitization of Chinese Investment
In November 2018, the EU, the European Parliament, the European Council, and the European Commission reached provisional agreement on rules for an unprecedented framework to coordinate the screening of foreign direct investment into Europe. According to the European Commissioner for Trade, Cecilia Malmström, this framework “is an important milestone in the process we initiated only a year ago to protect critical technology and infrastructure in Europe”. The proposed mechanism is the outcome of a demand by France, Germany, and the previous government of Italy in a joint letter addressed to the European Commission in February 2017.
This joint letter was triggered by a sharply increasing Chinese investment flow to Europe, which prompted a debate in several member states on the question of Chinese influence that comes with acquiring major stakes in large-scale European companies. In addition, Chinese investment increasingly targets key future industry sectors, a development seen in the context of Made in China 2025 as a policy initiative to upgrade Chinese industry by boosting innovation and domestic growth. In 2017, Chinese companies made around 250 acquisitions in Europe, which involved an investment of over USD 57 billion, mostly in Germany and the UK. Some of the member states, in particular France and Germany, have been articulate about their concerns and have already reacted to the new development of Chinese investment flows.
France’s Minister for the Economy and Finances, Bruno Le Maire, noted during his visit to China in January 2018 that Paris would welcome investment from China but only after screening deals to ensure that French assets were not ‘looted’. In July, the French government presented to parliament its action plan for business growth and transformation. The plan includes several measures to ensure increased control over foreign investments, and to protect strategic industries by, for instance, strengthening procedures for prior authorization of foreign investment.
Germany’s leading industry group Federation of German Industries (BDI) recently argued in a draft position paper on China that a new EU instrument is needed to prevent state-subsidized takeovers, and provide more transparency when Chinese firms acquire European firms so that their ownership structures and financing can be vetted. In view of the Made in China 2025 policy initiative, the BDI paper, published in January 2019 called on the EU to develop its own industrial strategy for 2030.
Germany amended its national law, the Foreign Trade and Payments Ordinance (AWV), in July 2017. The amendment tightens the rules for foreign investors and enables the German government to screen foreign takeovers if the stakes are 25% or higher. Since even the 25% threshold appears insufficient, Germany’s federal states, represented by the Bundesrat, urged Berlin in April 2017 to lower the threshold to veto foreign investment from its current 25% to 10% of shares. This unanimous proposal by Germany’s federal states illustrates the growing consensus in Germany for more protection from China’s deep pockets and industrial ambitions. In August 2018, Germany’s Finance Minister Peter Altmaier confirmed that the threshold will be lowered, possibly to 15%.
The UK too has proposed legislative reforms on national security and investment, and Italy reformed its investment monitoring system (to reach beyond defense and national security industries) in December 2017.
Following the joint initiative by France, Germany, and Italy, and because of the heated discussion within the EU on the securitization of foreign investment, on13 September 2017 the European Commission proposed
the creation of an unprecedented EU-wide framework for screening foreign direct investments. On 28 May 2018, the European Parliament’s trade committee approved the proposal and drafted a list of critical sectors that should be screened, such as investment in media, election infrastructure, data analysis, biomedicine, and car manufacturers. Shortly thereafter, in June, permanent representatives of the EU member states agreed on the Council’s position and endorsed the proposed regulation for screening foreign investments. On this basis, the presidency commenced negotiations with the parliament. The proposal for screening foreign investment had thus been identified as a legislative priority by all three institutions.
The framework the European institutions have now agreed upon sets out provisions for the EU and its member states to protect their national interests. It builds on the national review mechanisms that 13 of the member states already maintain and does not require other member states to adopt a screening mechanism. It provides the member states and Commission with the option to screen foreign investment on the grounds of security or public order and sets out basic requirements for screening investment, such as transparency, non-discrimination, or judicial review. The proposed regulation includes a cooperation component on foreign investment issues between the member states and the Commission, as well as between the member states.
In addition, the framework enables the Commission to review investment that might affect the ‘Union’s interests’, such as projects involving EU funding or critical sectors. However, the Commission would not be able to block an investment or a takeover deal. The proposed screening mechanism is different from that of other countries due to its non-binding nature. Member states will have the option to screen, accept, or block investment either way. The framework therefore reflects the diverging interests in foreign investment, from high to non-existent, of the member states and the attempt to balance these interests.
In parallel to the screening framework, the Commission is completing an in-depth analysis of foreign direct investment flows into the EU, focusing on strategic sectors and assets that may raise security or public order concerns. In addition, the Commission has set up a coordination group with the member states to assist the Commission with advice and expertise on matters relating to screening foreign investments. The European Parliament and the Council need to formally approve the proposed regulation, which was scheduled for March 2019 (ahead of the EU elections in May 2019).
Even though the proposed mechanism is non-binding, it has raised concerns among several member states, such as Finland, Greece, Poland, and Sweden. These countries are concerned partly that a screening mechanism would limit the EU’s so far open and free trade stance, and in particular that it might damage their foreign investment relations with China. Recently, the new government in Italy also turned on the previous government’s efforts to scrutinize Chinese investment in Europe. Italy reversed its position in order to align itself as a trade and investment partner to China.
China has indeed expressed much concern about the development regarding foreign investment in the EU, describing it as “protectionist trade policy for short-term interests”. However, facing a long-term trade dispute with the USA, and likely not wanting a conflict on two fronts, the Chinese government has (as yet) refrained from harsh criticism of the EU.
For the EU there is a momentum now to show both the doubting member states as well as foreign investors that the proposed framework is an opportunity rather than a protectionist measure. A basic, common EU approach toward foreign investment in fact creates more legal certainty and transparency not only for member states that maintain, or for those who intend to adopt, a screening mechanism but also for foreign investors. As Austria’s Minister for Digital and Economic Affairs Dr. Margarete Schramböck notes, “This is not about closing down our markets but about acting responsibly.”