Flashpoints | Diplomacy

Think the EU Isn’t Acting on China? Look Closer.

Understanding how the EU is responding to China’s rise requires understanding how the organization actually works.

Think the EU Isn’t Acting on China? Look Closer.
Credit: Flickr/ Friends of Europe

The European Union (EU) tends to get a bad rap in English-language political commentary (and not only there). In an increasingly conflict-prone international system that is being upended by a resurgent China and a United States defending its global primacy, the EU seems ill at ease and takes criticism for issues ranging from ineffectiveness to disunity to poor strategic judgment. It would seem the EU is woefully under-equipped for the return of history.

Criticisms of this sort are sometimes warranted, but at other times they miss part of what is happening on the ground and point to a misunderstanding of what the EU is and how it works. First of all, it is important to recall what the EU is not: It is not a federal state, but an international organization of sovereign states. It was created first and foremost to ensure peace between its members, and secondly to increase prosperity by liberalizing trade. In these goals it has succeeded admirably. The exercise of geopolitical power has not been part of its job description until very recently, and it takes time to adjust to such a role.

Beyond that, the EU can be more effective than it gets credit for because the effects of its activities often elude headlines or are attributed to the national governments of its member states. A good example of this is investment screening. Until 2019, the EU did not have a regional mechanism for the screening of incoming FDI proposals. Some member states had national mechanisms with varying criteria and procedures for screening, while others such as Belgium or Greece, had no procedures in place. A wave of incoming Chinese investments between 2013 and 2016 triggered a debate about the risks of foreign investments, particularly those from an authoritarian state. Chinese acquisitions of high-tech firms and critical infrastructure led to concerns in some quarters about political influencing and threats to long-term competitiveness. Germany, France, and Italy felt the EU as a whole should do more to coordinate investment screening and asked the European Commission to design an investment screening regulation via an open letter in 2017.

The resulting regulation entered into force in April 2019 and became fully operational on October 11, 2020 after a grace period allowing member states to fulfill its reporting requirements. The most notable feature is that it leaves the decision on whether to accept or reject a particular investment proposal in an EU country entirely with its national government. The EU can only issue an advice on whether to accept a proposal in some cases. The only obligation the mechanism imposes is to share information: Governments are asked to inform the Commission of what screening regulations they have in force, and to notify the other member states if they decide to screen an investment proposal. A more forceful regulation was not politically feasible at the time, as member states simply did not want to relinquish national control over investments and the EU, not being a federal state, cannot impose such a decision.

Given the lightness of the regulation it is easy enough to conclude, as the Heritage Foundation’s Ted Bromund did, that the framework is “unlikely to be effective in its current form.” But the story does not end here. While the EU cannot yet do much in terms of screening, its member states can and increasingly do. Since 2017, new investment screening mechanisms have either been introduced or are being designed in Czechia, Hungary, the Netherlands, Romania, Slovakia, and Malta (see the website of UNCTAD for an overview). Meanwhile, Germany has strengthened its existing foreign investment screening regulations. While the EU aims to remain open to foreign investment, it is becoming more selective, a trend which the Chinese Chamber of Commerce in the EU noted with concern in a 2020 report.

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The increasing investment screening by national governments in Europe is not at first sight connected to the EU. After all, the EU’s investment screening regulation does not oblige any member state to adopt regulations of their own. But permanent discussions at all levels between EU member states create awareness among governments of issues they would not otherwise have given much consideration. This example illustrates the essence of the EU’s role in foreign affairs: coordination and information sharing, and facilitating a convergence of policies on issues of shared concern.

When this fails, such as when one small member state stands in the way of a shared position, it generates negative press. The model often does work, but its successes are not always easy to pin down. Important decisions are in many cases taken by national governments and can follow months or even years after an EU policy takes effect. Of course, the EU does not move as quickly and decisively as a national government can, but it doesn’t stand still either.

Besides, the current EU regime on investment screening may well be strengthened in the future when it runs into its own limitations, as Princeton scholars Sophie Meunier and Zenobia Chan point out. Under the present EU mechanism, a member state can under certain circumstances issue an opinion to another member state if they feel their national security (in a broad sense, including economic security) is threatened by an investment proposal in the other member state. However, this opinion need not be followed by the second member state. A hypothetical example: Let’s say a dubious investor from outside the EU aims to acquire the sole producer of a key component for the German, French, and Italian auto industries, situated in Slovakia. These three governments can issue the opinion that Slovakia should block the acquisition. Slovakia could choose to ignore this opinion and allow the acquisition anyway. If a large enough national interest is at stake this would undoubtedly lead to a conflict and likely a push for a more integrated mechanism that leaves less leeway for national governments to do as they please. Meunier calls this dynamic “failing forward.” The EU has often worked like this: a half-measure today leads to a (more) full measure in the future. This may seem far from ideal, but then, for 27 countries to coordinate policies on important issues is no trivial challenge and it’s not clear that there is a better model available.

The Indo-Pacific strategy of the EU’s largest member Germany, as well as the China-policy papers of smaller members Sweden and the Netherlands all emphasize the importance of working through the EU to achieve national goals with respect to developments in Asia. This is quite a change from the previous age of competition, the Cold War, when the EU’s predecessor, the EEC, was barely active in foreign policy and Western European countries looked to the U.S.-led NATO as the main vehicle for protection against the Soviet Union. In the new geopolitical age, the EU is set to occupy a central place in the foreign policies of its member states. How well the organization can adapt to the role will depend mostly on choices made by its member states. However, there are good reasons to be optimistic about the EU’s capacity to adapt to the coming challenges, and it would be a mistake to write it off as irrelevant.