The idea of raising a great firewall to protect Europe’s open market against Chinese high-tech acquisitions is gaining traction within the European Union. Germany, France and Italy recently sent a joint letter to the European Commission in which they called for the introduction of new and more severe EU rules for inbound foreign direct investment.
The request from the economic ministers in Berlin, Paris and Rome came amid rising concerns about the growing number of foreign takeovers in their advanced technology and infrastructure sectors. The euro zone’s three largest economies want more powers to curb this trend, particularly when state-owned companies or state-subsidized private firms from non-EU countries point to buy strategic industries in the Old Continent, possibly operating for their governments’ national interest and not by market logic.
The unfair investor
The proposal was formulated in general terms and made no direct mention of China, but the reference to Beijing is quite evident. In the end, Germany, France and Italy urged the EU executive body to grant all member states a veto right to block hi-tech purchases by Chinese state-controlled companies, notably those regarding dual-use (such as civil and military) industries.
Such a policy is not so dissimilar to the one that is taking shape in Washington vis-à-vis Chinese inbound investment. In advocating it, EU heavyweights aim to halt sensitive technology transfer to China, whose unfair investment practices at home – they say – distort the market environment. This, along with Beijing’s repeated violations of intellectual property rights, has led to a stall in negotiations on a bilateral investment agreement between the European grouping and China.
The European bloc is devoid of a common vetting system for foreign investments and member states have their own regulations on the subject, though in the framework of EU general rules. As EU countries have in large part norms regulating the foreign purchase of national security-related assets, they have less capacity to scrutinize and, if need be, block industrial acquisitions by state-controlled investors from non-EU nations in all the other sectors.
Ensuring a level playing field
EU countries, and in particular Germany, have stepped up pressure on Beijing for it to secure a level playing field for European businesses that invest or are interested in investing in China. Foreign investors in China are indeed subject to strong limitations and are also barred from acquiring determined industrial assets. In response to this situation, Berlin reciprocated last fall, blocking the takeover of its chip-equipment maker Aixtron by China’s Fujian Grand Chip Investment Fund; a move that was reportedly dictated by Washington, fearful that its know-how – part of Aixtron’s technology – fell into Chinese hands.
The asymmetry in two-way investment between the EU and China is now outright. Chinese foreign direct investment in Europe was worth around US$52 billion in 2016, nearly one-fifth of Beijing’s total, estimated at some $245 billion, according to the China Global Investment Tracker. Britain was the first recipient of Chinese foreign investment with $12.7 billion, as Germany ranked second with $11.4 billion. Chinese investors principally focused on Europe’s technology industries, in which they channelled $13.2 billion, and then on entertainment, energy and transport sectors.
EU foreign investment in China, by contrast, reached $8.5 billion last year, in constant decline since 2012, the Mercator Institute for China Studies reports.
In the face of these figures, Germany, France and Italy say they want reciprocity. EU companies have to be treated in China in the same way as Chinese investors in Europe. The EU is open to foreign competition and calls on China to do the same. Coherently with this vision, at a forum in Brussels on February 6, EU Commissioner for Trade Cecilia Malmström plainly said that China had to “walk the talks” and match rhetoric with reform. Malmström’s concept was reiterated by German Foreign Minister Sigmar Gabriel on February 16, during a meeting with his Chinese counterpart Wang Yi on the sidelines of a summit of G20 foreign ministers in Bonn, Germany.
The Trump card
In this context, some question the effectiveness of the initiative from the euro zone’s “Big Three”. There is the problem of how to define correctly what is really “strategic” in the European industrial system in the first place. Still, EU countries should wonder how they could enforce technological reciprocity with developing nations that often lack adequate high-tech knowledge, even if this particular case affects China only in part. Then there is the European business community that is afraid of losing the contribution of Chinese money to capital creation at a time when intra-European investment is still quite depressed.
US President Donald Trump, however, could indirectly help Beijing and the EU narrow their differences on two-way foreign investment. Should Trump’s threats to confront Beijing on bilateral trade and the yuan’s alleged devaluation become reality, in fact, Chinese leaders could look to the EU and team up with it against this protectionist drift by the new US president (Brexiteers, namely supporters of the United Kingdom’s exit from the EU, do not deceive themselves; their country will never be able to replace the European club in China’s strategic calculus).
But reaching out to Europe would have its own cost, because in return the EU will ask for Beijing finally to ease market restrictions for European investors. And top EU countries believe the proposed foreign investment firewall can be their trump card in the absence of significant Chinese economic overtures.