The odds that the European Union and China finalize a bilateral investment agreement in the near future have dropped to almost zero. On Tuesday, the Chinese Foreign Ministry called on the EU not to move forward with its proposed scheme to vet inbound foreign investment in security-sensitive sectors.
The investment-screening framework was advanced by European Commission (EC) President Jean-Claude Juncker on September 13. To be definitely approved, it must be adopted by member states with a qualified majority and by the EU Parliament.
Only a dozen EU countries have their own vetting mechanisms for foreign takeovers of local industries. EU institutions aim to prevent state-owned or state-financed foreign enterprises from stealing European know-how, particularly in defense technology, energy infrastructure, semiconductors, automation and robotics.
However, Brussels is not trying to set up the European equivalent of the Committee on Foreign Investment in the United States. Unlike the CFIUS, which has a considerable power of intervention, the recommendations of the EC will not be binding and member states maintain the final say on relevant foreign investment.
Lack of reciprocity
The main target of the European grouping is obviously Beijing. Since 2005, Chinese investments in the European high-tech industry have been worth US$26 billion (with a peak of $12.8 billion in 2016), making it the most attractive sector for investors from China after energy, agriculture and transport, according to the China Global Investment Tracker.
The problem for the EU is not free-market competition with China, but the lack of reciprocity. Chinese investors can buy up assets in Europe, while access for European enterprises to the Asian giant’s market is restricted by local authorities. This imbalance was certified by the EU Chamber of Commerce in China in a position paper published on Tuesday. In the first half of this year, the EU Chamber reports, Chinese investments in Europe were stable at $10.4 billion, while those in China by EU investors saw a 23% decrease to $3.7 billion.
The EU wants a level playing field in China for its investment-focused companies. The Chinese government contends that European investors have benefited greatly from its overtures, urging the Union to comply with World Trade Organization’s rules and abandon protectionist measures.
The EU Chamber of Commerce in Beijing says Chinese leaders should deliver on their promises and really open the internal market of their country. Currently, European firms that want to invest in China must partner with local companies and, in many cases, share their technology with them.
Deep divide within the EU
Many European enterprises act like American investors and agree to exchange technology transfer for greater access to the Chinese market. So they are content to ensure short-term gains, even if this means losing a competitive advantage in the long run.
Germany, France and Italy, the engines of Europe’s integration, support the EU’s draft investment regulation. The Netherlands and Scandinavian countries, on the other hand, basically oppose it. They have a free-trade tradition and fear that an EU-level system to vet foreign investments will create a negative spiral and force China and other developing countries to take countermeasures. In their view, the EC could be sowing the seeds of a global trade war.
Furthermore, as the investment-screening scheme will not be binding, Northern European states say it will boil down to more bureaucracy, and nothing more. Even southern countries such as Portugal, Spain and Greece, which have relied on Chinese money to weather the global economic crisis, are against the introduction of an EU-wide scheme to control inbound foreign investment.
Some think the European Union and United States should team up against China’s aggressive investment policy. This could also be conducive to improving ties between Brussels and Washington, which have reached a low point under Donald Trump’s presidency, not least over trans-Atlantic trade.
European and US industries are dying of the same disease. Much like their respective governments, they have no strategic foresight. It seems they prefer short-term, contingent advantages rather than structural improvements. This is nonsense, as a true free trader should actually seek to eliminate market distortions.
It is doubtful that the EU and its policies will change this mindset in the foreseeable future. But time is running out. Indeed, Europe’s negotiating strength with Beijing is doomed to decline as South and Southeast Asia’s markets grow in importance for the Chinese dragon. The EU bloc will no longer be treated as a peer competitor by China if it loses its scientific and technological edge.