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The E.U. will start screening foreign investment. Here’s the full story.

Concerns about Chinese investment may be overrated, however.

- April 10, 2019

The European Union has just introduced a way to scrutinize and, in some cases, reject incoming foreign direct investment deemed dangerous for national security and critical European interests. The E.U.-China Summit also takes place this week. Is this new foreign investment screening simply a protectionist move prompted by fears of a Chinese takeover of Europe? Here are five things to know about the new E.U. policy.

1. The new screening framework isn’t a mirror of the U.S. CFIUS mechanism.

This isn’t a European version of the Committee on Foreign Investment in the United States (CFIUS), the multiagency U.S. government body that vets foreign direct investment to make sure that proposed mergers and takeovers do not threaten national security.

The new European policy does not enable the E.U. to screen and block investment coming into its member states. Neither does it force individual countries to screen at the national level — only 14 of the 28 E.U. members have national screening legislation in place.

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Here’s how it works: For now, the E.U. screening mechanism will facilitate the sharing of information on planned non-E.U. investment in critical technology and infrastructure, such as electric batteries and ports. This will allow any E.U. member to voice concerns about a proposed investment — and in some cases the Commission, the E.U.’s executive body, will give its opinion. Ultimately, however, the E.U. country targeted for foreign investment will make its own screening decision. Germany will not be able to prevent, say, Greece from accepting a deal with a Chinese investor.

2. No, China isn’t taking over Europe.

It is true that the E.U. drafted this policy against the backdrop of surging Chinese investment in Europe over the past decade. Chinese investors have made big-ticket purchases such as the ports of Piraeus in Greece and Trieste in Italy, vineyards in France, robotics in Germany, Sweden’s leading carmaker, power utilities in Portugal, British soccer clubs, solar farms in Hungary and so on.

But Chinese investments in Europe have declined since 2016, in large part because of stricter Chinese controls over capital outflows. China is still a small investor in Europe. In France, for instance, China lags far behind the United States, Germany, the Netherlands and Britain as source of investment. Even in Greece and Portugal, two countries where Chinese companies bought distressed assets for privatization after the euro crisis, China ranks far behind many European countries as a foreign investor.

3. China isn’t dividing European countries through its investments.

When President Xi Jinping visited Italy last month, Italy became the first Group of Seven country to sign on to China’s Belt and Road Initiative. But was it really the next step in a supposed long list of often-cited Chinese efforts to divide and conquer Europe?

In 2016, Greece and Hungary, two recipients of Chinese investment, fought to avoid a direct reference to Beijing in an E.U. statement about the South China Sea. In 2017 Greece blocked an E.U. statement at the United Nations criticizing China’s record on human rights; Hungary derailed E.U. consensus by refusing to condemn the reported torture of lawyers in China. But these are about the only examples to date of a possible link between Chinese investment and change in policy positions in the recipient country.

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In fact, the concept of FDI screening was a divisive issue in the E.U., independent of China. The Netherlands worried that such screening would mean a protectionist turn. Cyprus and Luxembourg want to remain FDI clearinghouses without involvement from their European counterparts. Despite these divisions, the E.U. managed to agree on the new screening framework.

4. But Chinese investment creates new political challenges in Europe.

My research suggests that Chinese investment comes with some political costs. The situation is not dissimilar from U.S. concerns in the late 1980s, when Japanese investments became widespread. The apparent ubiquity of Chinese FDI in Europe, both geographically and by economic sector, has reinforced this sense of worry in some E.U. countries.

FDI from China, a developing country, doesn’t always bring anticipated local benefits in Europe. Technology sometimes flows from European host to home country of investment, instead of the reverse. And Europe is on unfamiliar ground as governments work with Chinese firms from a tightly state-directed economy. How do governments gauge the ultimate objective of Chinese FDI — or whether investors, even private, come under Beijing’s political influence? How does Europe compete with Chinese state-owned enterprises, which have a different attitude to risk and unique sources of financing?

Add to this strategic security considerations — European countries are not used to receiving investment from countries that are not their security allies. Though China is no enemy, it is a superpower with ambitious geopolitical goals that could put it at odds with at least some European countries. This raises several concerns about the ultimate motive of some Chinese investments, including issues of dual-use technology and strategic leverage.

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5. The new investment screening is part of a broader European strategy toward China.

In March, the European Commission revealed its new China strategy, a comprehensive 10-point action plan designed to improve reciprocity with China, labeled as a “systemic rival.” The FDI screening tool is part of this effort, as are proposed new rules on European public procurement and industrial policy — which are likely to prompt controversial discussions inside and outside of Europe in the months to come. This strategy also involves the negotiation of a Comprehensive Agreement on Investment with China.

The new European investment screening policy may seem like a technocratic empty shell at the moment but, as is often the case in E.U. history, the empty shell might become filled in at a later date when crisis strikes, especially now that foreign investment has become a responsibility of the E.U. It represents the first of several other instruments of economic statecraft that the E.U. hopes to deploy over the next few years to end European “naivete” toward China — but also level the playing field for European companies in international economic relations.

Sophie Meunier is a senior research scholar in the Woodrow Wilson School of International Affairs at Princeton University and the co-director of the European Union Program at Princeton.