EU scales back China investment screening plans to avoid ‘turf war’

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The European Commission has scaled back plans for tighter controls on outbound investment and sensitive technology exports to avoid a “turf war” with member states.

Unveiling delayed proposals to enhance the EU’s economic security on Wednesday, EU competition commissioner Margrethe Vestager said Brussels would improve co-ordination with states to help protect the bloc from authoritarian states such as China.

But Vestager stressed the need to avoid “a conflictual discussion” with national capitals that are responsible for their own decisions on investment and export controls.

Vestager discussed three areas: increased screening of both inbound and outbound investments, and tighter export controls for technology that has potential military use. However, the only legislative proposal is a reform of inward investment screening rules. That must be approved by member states and would take about two to three years to implement, officials said.    

The G7 club of leading economies has discussed outbound investment monitoring, which aims to avoid companies skirting controls by producing goods in sanctioned third countries. Vestager said technological knowhow could also leak without tighter controls.

But no EU country has such a regime in place and business leaders warned that reporting deals could give rivals insights into their data and strategies. The commission opted to consult further on this area, in a victory for member states and businesses that feared an increased regulatory burden.

However, there is support for increased co-ordination on outbound investment because of the threat from Russia since its invasion of Ukraine, the rise of China and US moves to boost its economic security.

Since 2020, governments must notify Brussels of foreign direct investment that could threaten security or public order. But Valdis Dombrovskis, trade commissioner, said the wide definition meant too many non-risky deals had to be looked at.

The commission wants to define sensitive sectors such as artificial intelligence and quantum computing and harmonise national schemes. Five member states still do not yet have such regimes. It also intends to cover intra-EU investments by companies owned by entities outside the bloc for the first time.

In 2022, 423 notifications were submitted to the commission under the EU’s FDI screening regulations by member states, a third of all investments they assessed. Just 5 per cent were from China, with a third from the US. They are not obliged to follow commission opinions.

The package also includes plans to improve co-ordination of export controls for dual-use technology since multilateral forums such as the Wassenaar Arrangement group are blocked by countries such as Russia. Speaking alongside Vestager, Dombrovskis said the bloc would set up a forum to align export controls and by summer advise how to co-ordinate lists before the planned adoption of national curbs. 

Stressing the need to avoid “a patchwork of control measures”, he said the “fraught geopolitical climate and race for new technologies mean that the EU must improve the co-ordination, effectiveness and efficiency of its current regime and practice”.

It must ensure “goods, technology and knowhow” do not “get into the wrong hands and ultimately undermine EU or global security”.

A senior EU official said the idea was to “achieve a certain de-risking while retaining openness and dynamism”.  

The commission also recommended that research groups should assess the risk of collaborating with entities from China and elsewhere.

Vestager, who is also the commission’s executive vice-president responsible for digital issues, said “security is a real and growing concern”. She also announced a consultation on how the EU could overcome current limits on military research spending.

Geoffrey van Leeuwen, trade minister of the Netherlands, which has blocked exports of advanced silicon chipmaking machines to China, welcomed the package.

“The tools we have don’t particularly fit the kind of threats and challenges we’re facing,” he told the FT. “This will be an impetus to all our governments to see how we can align, how we can share experience.”

But Péter Szijjártó, Hungary’s trade minister, said on Tuesday the proposals were a “political” attempt by EU countries that were “not competitive” to block the investment it was receiving from China in electric vehicles and other sectors.