EU Reaches Consensus on Investment-Screening Rules Amid Concern About China

November 21, 2018 Updated: November 21, 2018

Wary of Chinese investment, the European Union has provisionally agreed on rules to coordinate scrutiny of foreign direct investments in Europe.

Representatives for the European Parliament and EU’s 28 member states struck the deal at a meeting with the European Commission on Nov. 20, ending 14 months of deliberations.

The European Commission first unveiled a proposal to screen foreign investment into Europe in September 2017, in response to concerns that foreign investment in European companies that perform critical functions in society could be “detrimental to security and public order of the EU or its member states.” European officials especially took notice of Chinese acquisition deals in Europe’s key technology and auto sectors.

“Europe must always defend its strategic interests and that is precisely what this new framework will help us to do. This is what I mean when I say that we are not naïve free traders. We need scrutiny over purchases by foreign companies that target Europe’s strategic assets,” Jean-Claude Juncker, president of the European Commission, said in a press release.

The rules would allow the European Commission to investigate investment in critical areas, including energy, communications, and financial infrastructure, as well as key technologies, such as artificial intelligence, robotics, and semiconductors.

“It will mark the end of European naivety,” said Franck Proust, who heads the Parliament’s negotiating team, ahead of the talks, according to Reuters. “All the world powers—the United States, Japan, China—have a method of screening. Only Europe does not.”

In the United States, the government entity responsible for reviewing national security implications in foreign investment deals is the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee established by former U.S. President Gerald Ford in 1975.

CFIUS was strengthened by the National Defense Authorization Act passed by Congress in August, which broadened the scope of transactions reviewable by the committee and is aimed at curbing Chinese investment in 27 sensitive industries, including semiconductors and aircraft manufacturing.

On Oct. 10, the U.S. Treasury Department released rules on foreign investment as part of its enforcement of the new U.S. law, giving CFIUS the option to either approve an investment deal within 30 days or open a fuller investigation.

The newly proposed European rules don’t identify China by name, but its backers’ complaints over investments by state-owned enterprises and for technology transfers are clear references to Beijing.

The proposal still needs to be approved by all 28 EU states at a meeting on Dec. 5. France, Germany, and other nations thus far have backed the proposal, but a number of countries have expressed opposition, including Cyprus, Greece, Luxembourg, Malta, and Portugal. The EU Parliament will then vote on the proposal in February or March next year.

Chinese investments in certain European countries have already reaped benefits for Beijing, as money often holds sway over regional politics. In June 2017, Greece, whose strategic port Piraeus is majority-owned by China’s state-run COSCO Shipping, blocked an EU statement critical of China’s human-rights record and its crackdown on activists and dissidents.

In April 2018, Hungary was the only EU country that refused to sign a report criticizing China’s “One Belt, One Road” initiative (OBOR, also known as Belt and Road) for flouting international transparency norms.

Beijing announced OBOR in 2013 to build up Beijing-centered land and maritime trade networks through financing infrastructure projects in Europe, Southeast Asia, Africa, and Latin America. According to the U.S.-based National Public Radio (NPR), COSCO has strategically invested in seaports throughout Europe, including Belgium, Spain, Turkey, and Italy.

China’s foreign direct investment in Europe reached 65 billion euros ($79 billion) in 2017, a dramatic increase from less than 2 billion euros ($2.5 billion) in 2010, according to the Tokyo-based magazine The Diplomat, citing statistics from law firm Baker McKenzie.

EU lawmakers succeeded in pushing through tougher screening than initially proposed, such as obliging the commission to screen deals and requiring EU countries to cooperate among each other.

The new system wouldn’t interfere with current screening mechanisms in the 14 nations that have one. All countries will be required to inform other EU members and the commission if they screen an investment. If a third of member states express concerns about a planned foreign investment, the commission would be required to give its opinion.

However, individual EU countries, and not the commission, would make the final decisions on whether to block foreign investments on security and public interest grounds.

In addition, all member nations must provide an annual report to the commission.

Beijing hadn’t officially commented on the European proposal at the time of writing. But a Nov. 21 editorial published in Reference News, a Chinese daily newspaper published by China’s state-run media Xinhua, claimed that China’s investments in Europe were strictly business without any political ambition. The article suggested that the EU didn’t have to be vigilant about Chinese investment.

Reuters contributed to this report.

Follow Frank on Twitter: @HwaiDer