EU firms resist European Commission plan to screen private investment in China

Businesses and governments in the European Union are pushing back against Brussels' plan to screen private companies' investments into China, casting doubt over the policy's viability.

The European Commission plan would "be a major interference in entrepreneurial decisions and international investment flows", the Federation of German Industries (BDI) said in a written submission to the commission's consultation on screening outbound investments into certain hi-tech sectors of the Chinese economy.

"German companies use foreign direct investment (FDI) to gain market shares worldwide. Such investments strengthen the German economy, secure jobs and promote prosperity. BDI therefore rejects any new mechanisms to control foreign direct investment."

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The plan was announced by commission chief Ursula von der Leyen in March last year, and was fleshed out in a white paper in January as part of the EU's proposed economic security strategy (ESS), which does not name China directly but was written with Beijing in mind.

The German politician doubled down on the intention to screen investments in a manifesto published ahead of her re-election last week to another five-year term at the helm of the EU's secretariat.

"We will complete the review of the foreign direct investment screening framework, build a genuine coordinated approach to export controls and address risks from outbound investments," the manifesto said, naming two other key pillars of the ESS, the cornerstone of von der Leyen's plans to de-risk the EU's relationship with China.

Brussels fears that advanced technologies could fall into the hands of the Chinese military, with officials often pointing to a lack of clarity around which buyers have links to the defence sector.

The proposal was coordinated with the United States, which launched its own mechanism to stem the flow of capital into some Chinese industries last year.

Initially, the tool proposed to screen investments in four hi-tech sectors: semiconductors, artificial intelligence, biotechnology and quantum computing. The commission has a second list of six technologies that would follow.

But as it stands, outbound screening appears the pillar least likely to be achieved.

"The introduction of state controls on European companies' outbound investments is not the right policy path to achieve economic security since it would constitute a major interference within the realm of companies' business decisions and international investment flows," read a submission from SEMI Europe, the industry association representing the global electronics manufacturing and design supply chain.

BusinessEurope, an umbrella lobby group representing national-level business chambers in EU member states, said it had a cautious approach towards "any limitations on outbound investment that do not arise from sanctions".

"There is a potential chilling effect that should not be underestimated as this can have a significant impact on research and innovation, operations of European companies globally and inbound investments," its submission read.

Groups from the Netherlands and Sweden also expressed scepticism, joining a chorus of voices against a policy proposal that also remains deeply unpopular among national governments.

According to diplomatic sources, just one of the EU's 27 member states - Lithuania, arguably the bloc's most hawkish towards China - has expressed full support for Brussels' plans to screen outbound investments.

Some capitals struggle to see the need for an instrument that could be administratively burdensome, especially given the low levels of EU investment in these sectors of the Chinese economy.

Tobias Gehrke, an expert in geoeconomics at the European Council on Foreign Relations, said von der Leyen's best chance of passing the tool would be as a "political bargain" with the US.

"[Outbound screening] always had a strong US connection. It was part of a political package that shows EU is serious about tech leakage risks. How it will be taken forward will depend much more on transatlantic politics than on deep rooted evidence of harm," he said.

"There is clearly no strong internal interest to take it forward, but keeping the process alive and technical can come in useful for some later political bargain."

Only three of the 52 participants in the EU's consultations were national government departments (ministries in Austria, Czechia, and Sweden). Two of those said there was a "knowledge gap" on the potential risks of technology leakages via outbound investments.

A recent report by the Institut Francais des Relations Internationales (IFRI), a Parisian think tank, found "very modest" European investments in the four sectors in China, "between 2 per cent and 4 per cent per year" of all capital between 2019 and 2023. Those investments are dominated by German companies, with 49 instances found over the last 20 years, compared to France (36), the Netherlands and Portugal (both 12 instances).

Furthermore, there is a strong feeling in some capitals that if another pillar of the strategy can be achieved - a unified, EU-wide export controls regime - it mitigates the need for outbound screening. It follows the logic that a company is not likely, for example, to build a factory making products in a jurisdiction in which it is forbidden to sell them.

Supporters of an EU-wide export controls regime point to perceived US bullying of Dutch chipmaking equipment giant ASML, which had to stop shipping its top-of-the-range lithographic machines to China under duress from Washington.

The company itself is lobbying for the EU to harmonise the disparate regimes found in its capitals, arguing that 27 voices would be stronger in standing up to the US than one.

"With regards to Europe's economic security, better coordination on export controls should be assessed as the primary instrument to prevent technology leakage in areas that are critical to national security, since these already take into account technology transfers," read the submission from SEMI Europe, of which ASML is a member.

The commission is now set to embark on a monitoring period with the 27 member states when they will note the flows of investments in the four sectors followed by a risk assessment report.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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