EU-China Investments: Europe’s strategic interest

While Chinese investments in Europe are rising, the topic is increasingly becoming more politically sensitive. In October 2018, Egmont Institute invited several experts to look in detail at the scope, trends and political aspects of Chinese investments in the EU as well as different perceptions of the direct investments across European regions. Is there a unified European strategy towards Chinese investments? And is there a unified Chinese strategy towards the EU? In this series, several of the invited speakers shed their light on EU-China investments. In part II: Programme Manager at Friends of Europe Amanda Rohde, states that as the US-China trade dispute widens, Europe should look to its own strategic priorities.

The Europe-China relationship is evolving, but the context in which it is doing so is strained. The ongoing dispute between the US and China has raised the stakes and pushed Europe and China closer together. What happens between China and the US matters for Europe. It is important, however, that Europe looks after its own strategic interest and avoids getting caught in the US-China crossfire.

Focus points in EU-China relations
Two issues dominate relations between Europe and China: the increase in Chinese investments in Europe and China’s Belt and Road Initiative (BRI) and its impact both within Europe and in the world. On both issues, Europe and China must seek to find common ground and avoid confrontation or competition.

The global economic outlook is already feeling the fall-out from the US-China trade war. The International Monetary Fund (IMF) reports that US protectionist policies have resulted in a downgrade in the organisation’s global growth forecast, and the repercussions will echo further. The trade war is likely to disrupt the global supply chain, with companies investing less in China and Chinese citizens cutting back on spending.

Of course, with US President Donald Trump at the helm, the future is uncertain. But when two of the world’s biggest economies are at odds with each other, Europe should stay out of the fray.

This is the moment for Europe to make strategic choices about its future

This is the moment for Europe to make strategic choices about its future. European leaders should take the opportunity to think critically about ways of working with China which will be beneficial for European growth and jobs – while avoiding being naive about their strategic interests.

The EU-China Comprehensive Agreement on Investment offers an opportunity for such a balanced approach. The agreement offers the EU an opportunity to both improve market access and to push for reciprocity and a level playing field for European investors.

And progress is – finally – being made: after 18 rounds of negotiations, the EU-China Summit in July this year saw the first exchange of market access offers between Brussels and Beijing, taking talks to the next level. Further negotiations should be speeded up.

Possible tools to deal with Chinese investments
If Europe is still concerned about the industries and sectors in which the Chinese are investing – and the sources of those funds – there is another tool available: foreign direct investment (FDI) screening. As it stands right now, the EU has no unified mechanism to screen the types of investment coming into Europe, and many EU member states even lack the legislation which would allow them to review FDI. That should change, and the EU is working to do so.

Screening allows Europeans to be smart about how they deal with their partners and to ensure that investment enters sectors which will benefit Europeans the most

During his 2017 State of the Union address, European Commission President Jean-Claude Juncker proposed a new framework for FDI screening, and negotiations are underway. The proposed regulations would allow the EU to remain open to FDI, while at the same time creating a framework to improve cooperation and information-sharing between the European Commission and Member States - particularly in cases where security and public order may be at risk.

By screening investments, European states can ensure that financing finds its way into the sectors that they believe can benefit from Chinese investments while safeguarding strategic energy infrastructure and cybersecurity. Such a screening mechanism will boost transparency. It also ensures that states know where the money being invested is coming from. In the case of China – where state-owned enterprises are moving into the international sphere – this is especially important.

Such measures should not be viewed as a pushback against China or other states seeking to invest in Europe. Indeed most countries, including China, already impose strict regulations on foreign investors in their own markets, creating a de facto screening process. Rather, screening allows Europeans to be smart about how they deal with their partners and to ensure that investment enters sectors which will benefit Europeans the most.

This is also where the Belt and Road Initiative comes in. Despite its enigmatic beginnings, the BRI now includes an impressive number of projects spanning the globe. These projects are important in building infrastructure and play a role in bringing Europe and Asia closer together.

But it is not all good news. BRI projects are often not regulated according to the same standards as European-funded ones. They are more likely to contract Chinese companies and workers, side-lining European and local businesses. There are questions about the long-term financial impact since BRI project-funding comes in the form of loans, not grants.

If European states are to allow Chinese investments in BRI projects in Europe, they must do so in a smart and strategic way in order to avoid such pitfalls.

Outlook on development of EU-China relations
The EU’s latest communication on a new and comprehensive strategy to better connect Europe and Asia opens up the potential for such cooperation. This strategy, which sets out standards for the EU’s own projects, could also serve as a reference point for all international connectivity schemes. This would ensure that internationally recognised standards and norms are met worldwide.

Indeed, the strategy presents a perfect opportunity for the EU to build up its cooperation with China by ensuring that its member states are able to welcome investments while at the same time avoiding running into some of the stumbling blocks encountered by other countries.

As the US-China trade dispute widens, the EU has to make strategic choices which benefit its citizens while also allowing it to play an important global role and remain an attractive destination for foreign investors.

The connectivity strategy, which underlines the need for fair trade, strengthening regional resilience and support for the international rules-based order offers an opportunity to constructively work with China.

The EU’s commitment to complying with international standards and norms opens the door for this cooperation to take place in a transparent and sustainable way. And with improvements and coordination through FDI screening, Europe can bring in Chinese investment where it is needed and support growth in its own economy.

What is key is that Europe uses these opportunities - for both cooperation and healthy competition - to move closer towards reaching common ground in its relationship with China.