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Is Europe Finally Pushing Back On Chinese Investments?

 
 

The first half of 2018 saw a mixed picture for foreign direct investments in Europe from China. While overall figures for Chinese FDI in Europe were down by almost a third compared to 2017, the value of Europe-bound Chinese investment now dwarfs comparable figures in the United States. Chinese FDI in Europe is now nine times greater than in the United States. The two main drivers behind this development are the Trump administration’s efforts to take China on economically and Beijing’s own attempts to impose tighter capital controls. Nevertheless, these developments have also given rise to new debates in Europe surrounding Chinese economic influence.

At the root of European scrutiny of Chinese investments is a concern that these are not guided solely by business imperatives but are rather part of a concerted state-driven strategy. The predilection of Chinese investors for European companies with specialized technology has stoked fears that their purchases are really aimed at siphoning European know-how and at squeezing Western companies out of key industries as part of the “Made in China 2025” initiative. Another concern is the possibility of unwitting transfers of cutting edge or dual-use technologies. Compounding these other issues is the question of reciprocity for European companies in China. However, despite new measures to scrutinize Chinese investments, Europe still remains an attractive destination for Chinese investors, especially when compared to the United States.

The fact that several European countries are moving to impose restrictions on Chinese investments is noteworthy and represents a major change from just a few years ago. Yet, internal disagreements within Europe on how to approach FDI remains an impediment. Efforts to promote a common EU approach toward China must therefore be a priority. Ultimately, any European initiative will also need to be coordinated with other players such as the United States and Japan in order to be effective.

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Recent Policy Developments in Berlin, Paris, and London

Europe’s three major powers — Germany, France, and the U.K. — have all recently taken steps to more closely scrutinize Chinese investments.

German business and political elites have grown warier of Chinese investments in recent years — especially following the acquisition of German robotics firm Kuka from by Chinese appliance maker Midea in 2016 and a dubious $2 billion investment by the chairman of Chinese automaker Geely in Daimler in February 2018. However, no Chinese investment in Germany had actually been blocked until this summer. The Merkel government’s recent decision to block the sale of Leifeld Metal Spinning, a small manufacturing firm in North Rhine-Westphalia, sends an unmistakable message that Berlin is now determined to do more to scrutinize foreign investments in strategic sectors. German authorities justified their decision to veto the Chinese takeover of the firm by citing national security concerns (Leifeld produces high-strength metals used in cars, space, and nuclear industries). This veto followed another recent move to prevent a Chinese takeover of a German energy company, by directing the state development bank KfW to take a 20 percent stake in the firm 50Hertz. These efforts must be seen in the light of new legislation being discussed in Berlin to tighten investment screening in Germany. There are plans to lower the threshold for deals to be subject to ministerial veto from 25 percent to 15 percent of equity by a non-EU companies. This follows Germany’s adoption in July 2017 of an amendment to the German Foreign Trade Regulation to allow Berlin to screen and ultimately block a wider range of foreign takeovers.

While investment screening is a relatively new phenomenon in Germany, France passed legislation as early as 2003 enabling the government to scrutinize and veto certain foreign investments, notably those pertaining to the defense sector. The Ministry of Economy’s powers were further expanded in 2014 to cover other sensitive sectors such as energy, water, transportation, health, and electronic communications, although this expansion was primarily triggered by General Electrics’ acquisition of Alstom, a “crown jewel” of French high technology, rather than concerns about China. However, in the first months of Macron’s presidency, China’s economic influence played a role in the temporary nationalization of French shipbuilder STX. Fincantieri, an Italian company that wanted to acquire STX, had a joint venture with China State Shipbuilding Corp. Guarantees to prevent leaks of dual-use technologies were put in place. The French government has announced its intentions to further strengthen the screening mechanism. As it now stands, the mechanism will be extended to cover artificial intelligence, cybersecurity, robotics, space, big data, and semi-conductors. Macron’s latest proposed package of economic reforms (PACTE) includes two articles targeting forced intellectual property transfers. One covers the expansion to new fields (such as space and nanotechnology) while the other one reframes the government’s ability to block certain moves in strategic companies even after they are bought by foreign groups.

In July, the U.K. government announced plans to introduce a new series of measures aimed at scrutinizing foreign investments in sensitive industries. If approved, the new legislation would increase the government’s ability to block investments, regardless of the size of the company or the sector. The remit would also be extended to include investments in intellectual property or company shares. While vetting of investments on national security grounds is extremely rare in the U.K., the number of deals subject to government scrutiny under the new law is expected to be around 50 annually. There is no minimum size for a deal and the additional scrutiny will be based on national security grounds, giving the government the right to impose certain conditions or block a deal altogether. The move follows a number of controversial and high-profile Chinese investments in the United Kingdom, including notably the Hinkley Point nuclear power plant in July 2016. The latest move suggests Prime Minister Theresa May’s government is more skeptical of trade with China than the previous David Cameron government was.

Toward a Common European Approach on Chinese FDI?

While several EU countries already have some form of investment screening mechanism in place, with more member states contemplating following suit, some EU countries still resist moves to curb Chinese investments. A combination of free trade-oriented northern European states and a group of southern and central and eastern European states are skeptical of such measures. The Nordic and Benelux countries are worried that the procedure could be a Trojan horse for protectionism. Ailing southern economies are anxious to preserve the flow of investment they rely on following the 2008 European debt crisis. Nevertheless, Europe is currently trying to define a joint position regarding FDI screening. Investment screening was first proposed in February 2017 when Germany, France, and Italy sent the European Commission a letter urging the EU to rethink its approach to foreign investment. In his September 2017 “State of the Union” address, Jean-Claude Juncker, president of the European Commission, declared that Europeans were not “naïve free traders” and presented a Commission proposal for an EU foreign investment screening procedure. The Commission’s proposal is currently making its way through the European Parliament.

The eventual legislation, if adopted, would establish an EU framework for analyzing FDI in strategic sectors and would create a coordination mechanism between member states and the Commission. It would also provide guidelines to help countries who want to set up their own national screening mechanisms but would not impose any binding requirements or limitations. Although the impact would be mainly symbolic, it would still give more salience to the issue of Chinese investments in Europe’s strategic sectors. Moreover, it would mark a shift in the EU’s free trade policy and stress its growing determination in the face of one-sided Chinese trade practices.

Balancing Free Trade and Protecting European “Economic Interests”

It is notable how the mood in Europe is shifting when it comes to China’s economic practices. Several European states — especially Germany, France, and the U.K. — are now tightening their rules for inbound Chinese investments. The EU is also in the process of developing a more stringent approach.

However, limiting Chinese investments should not just be a reactive effort. Forging a common European approach is even more important. The lack of a unified approach toward FDI in the EU continues to be an issue. In shaping such a common European approach, it is vital to strike the right balance between protecting national security interests and maintaining commitment to free and open commerce — Europe must defend its principled commitment to free and open commerce.

At the same time, the EU should not give up on dialogue with China. The EU-China summit in July did manage to deliver a joint communique which, among other things, pledged to continue working toward an EU-China Comprehensive Agreement on Investment. Still, Europe must be clear-eyed about what it can realistically achieve in its dialogue with Beijing.

Finally, as the EU seeks to define its own approach toward China, it is vital to ensure close coordination with United States and to work with Japan and other “multilateralists” on addressing shared concerns pertaining to China’s economic practices. Ultimately, for Beijing to commit to liberalize and open up its economy and become more transparent, a unified Western approach is a must.

Erik Brattberg is the Director of the Europe Program and a Fellow at the Carnegie Endowment for International Peace in Washington, DC.

Etienne Soula is a Brussels-based analyst and a former Research Assistant with the Europe Program at the Carnegie Endowment for International Peace.

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