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By: Insa Ewert

 

While China is raising its global profile, the EU is rethinking its engagement with the great power to the east. Recently, increased Chinese investments have created new conflict lines between member states, making a common approach towards China more difficult. While Germany’s Chancellor Angela Merkel has been one of the supporters of such a common approach, the recent difficulties she faces in building a new government after the September elections may affect the equation.

The debate on Chinese influence and interests in Europe has centered on this question: Is it necessary to tighten investment screening mechanisms to protect European security interests? In particular, concerns have been raised over state-funded acquisitions of key technologies, as well as investments in strategic infrastructure or technology with potential for dual-use. Investment screening instruments are well-established in Australia, Canada, Japan, and the US; however, EU member states regulate foreign direct investment (FDI) individually, and less than half of EU member states have such legislation in place. In addition, they neither share a common definition of what constitutes a national security threat, nor which sectors might be considered strategic. No surprise, then, that China has found dealing with individual member states more convenient than engaging with Brussels.

Joint investment screening by Europe

Following an initiative led by Germany, France, and Italy earlier this year, the European Commission (EC) published a proposal for a European investment screening law, which would enhance the coordination of national screening efforts. According to the proposal, member states would be required to notify the EC of their existing screening instruments and report on their application annually. Member states with no screening mechanisms to-date would be required to collect information on FDI. Additionally, member states would need to inform each other about initiated screenings, giving others the chance to comment, and the EC would retain the possibility to issue non-binding opinions on investments under review.

However, the EC has since softened its proposal compared to the initiative by Germany, France, and Italy. Several countries, such as Finland, the Netherlands and Portugal, have voiced concerns about the EU intervening in an area seen as exclusive national competence. In June 2017, Greece blocked an EU statement at the UN condemning China’s human rights conduct, a move that was considered to be part of a Greek effort to court Chinese investment in the country. Similar concerns have been voiced in the context of the “16+1” framework group, China’s forum for engagement with Central and Eastern Europe, namely that increased Chinese investment poses a threat to EU cohesion.

A weakened coalition undermines the European approach

Prominent Chinese acquisitions of German companies late last year—in particular the acquisition of robotic engineering firm Kuka by the Shenzhen-listed Midea Group and the abandoned takeover bid of technology company Aixtron by the Fujian Grand Chip Investment Fund—alerted the German government to the low level of scrutiny of its current investment screening practice. While German companies have welcomed Chinese investors and voiced concerns over increasing protectionism, business associations are now starting to warm up to the idea that certain regulations may increase their leverage towards China, where they continue to face stark barriers in certain markets. In Germany, a broad consensus seems to be emerging over the need to reinforce investment screening instruments. As such, investment screening or Chinese investment were not raised as controversial issues during the German electoral campaign in August and September 2017, nor in the fall-out of collapsed coalition talks in late November 2017.

Despite a German consensus, Merkel’s domestic setbacks have weakened the uniting force of Germany within the EU, whose member states remain far from a common position regarding Chinese investment. The Chancellor has so far failed to build a new Government coalition with the Green Party and the liberal FDP. The outcome of her current efforts, negotiating with previous partner SPD, is still uncertain; if they fail, this will result in either a minority government or new elections.

While any German government coalition will support the current course of reinforced European investment screening, its internal negotiations divert resources from pursuing a stronger European approach. The current EC proposal is now under review in the European Parliament and the Council of the EU. Time will have to tell if, to paraphrase the words of EC President Jean-Claude Juncker, the wind is in Europe’s sails or China’s.

 

 

Germany’s Domestic Setbacks Weaken EU Consensus on Chinese Investment
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