European Union institutions agreed on Tuesday to terms of a planned mechanism to screen foreign direct investment within the bloc. The EU has said several times that the new framework is not aimed at countering China’s acquisition of high-tech European businesses, but its efforts actually seem to go in that direction.

It remains to be seen if debt-ridden EU countries such as Italy, Greece or Portugal, which are all keen to attract Chinese investment to spur economic growth and balance their books, will support the proposed vetting system. Relevant legislation must be adopted by EU member states with a qualified majority and approved by the European Parliament before it can enter into force.

The EU leadership is working to finalize an agreement by next May, when European parliamentary elections will be held and a new European Commission (the EU executive branch) will be appointed.

EU regulators say they do not aim to harmonize the different national screening mechanisms, but want to step up cooperation and exchange of information among member states and the Commission. Currently, fewer than half of EU countries have legislation in place that allows them to vet inbound foreign investments on grounds of public order and national security.

Concern about theft of European know-how

EU leaders are concerned that state-owned or state-financed foreign enterprises could steal European know-how in a variety of areas, such as research, space, transport, energy and telecommunications. In their view, acquisitions in a European country by an external investor should not jeopardize EU-wide programs and projects, or threaten the security of other member states.

Italy has recently been more reluctant to coordinate with the European Commission on foreign investments. The Mediterranean country is struggling to recover from a deep economic crisis, and its Euroskeptic and anti-establishment government hopes that Chinese investments will help the country close its infrastructure gap. It has been reported that Rome is against an extension of the list of investment sectors that can be scrutinized, as well as an obligation by a member state to share information with the Commission about negotiations with non-EU investors.

Chinese companies have invested US$24.7 billion in the European technology industry since 2005. However, China’s EU-bound investments in this sector have slumped to $200 million this year from a peak of $12.5 billion two years earlier, according to China Global Investment Tracker. This fall can partly be attributed to the changed attitude of Germany, the EU’s leading power, which has vetoed a number of Chinese investments in its security-sensitive industries over the past two years.

European Greens co-chair Reinhard Bütikofer, who is also a member of the EU Parliament’s delegation for relations with China, told Asia Times the regulation the EU is working on did not have an anti-Chinese bias. “However, it is a fact that China is pursuing a ‘splittist’ policy vis-à-vis the EU, and there are obvious examples of Chinese efforts of trying to use influence in specific member countries to block European decisions that Beijing opposes,” he said. Bütikofer cited China’s nine-dash claims in the South China Sea, human rights abuses and unfair trade practices as cases in which the Chinese had been able to prevent the EU from reaching a common position against their policies.

The European Conservative and Reform (ECR) Group in the EU Parliament pointed out that the screening framework for foreign investments was “country neutral and not specifically directed at China, although certain concerns over foreign direct investments in strategic sectors prompted the debate and the European Commission’s initial legislative proposal.”

It is significant that the main political force behind the ECR group is the British Conservative (Tory) Party, which is currently in power in London, sees China as a backstop against possible negative impacts from Brexit, Britain’s bid to withdraw from the Union.

The lack of reciprocity in the EU-China investment relations has likely played a significant part in Brussels’ decision to expand its control over foreign acquisitions of strategic European industries.

EU investors restricted in China

EU leaders accuse China of failing to ensure a level playing field for European enterprises that want to operate in its vast market. Chinese companies can acquire assets in Europe, while access for EU investors to China is restricted by the local government. European investors are currently obliged to partner Chinese counterparts and, in many cases, share their know-how with them.

Furthermore, talks between Brussels and Beijing on a bilateral investment agreement have not been making progress. Against this backdrop, it comes as no surprise that EU investments in China have decreased in recent years.

The EU’s new investment policy will add pressure to China, which is also dealing with US President Donald Trump’s trade challenges. However, the very Byzantine and consensual nature of the EU decision-making process could hinder European attempts to rein in Chinese foreign direct investments.

The Union has made it clear that decisions on authorization and a veto of a specific investment from a non-member state is the “sole responsibility” of single EU countries. In this respect, the EU does not plan to set up its version of the Committee on Foreign Investment in the United States. This evidently plays into China’s hands, given that it could better advance its investment interests while negotiating with an EU country bilaterally than the European bloc as a whole.