In recent years, there have been rising political and public concerns about foreign investment in industrialized countries around the world, questioning whether their respective existing screening mechanisms are sufficient. In the United States, a debate is taking place on the question of whether its investment screening mechanism should be updated; in May 2017, Japan already passed an amendment on screening criteria for foreign investments in sensitive fields and the European Union is discussing, for the first time, the establishment of an EU-wide screening mechanism.

Similar to other countries, the debate in Europe has been triggered by concerns about foreign investment, and in particular, sharply increasing Chinese investment and takeovers of European firms with key technologies. As compared to the U.S. or Japan, however, the EU as a whole never had a mechanism for screening foreign investment and its member states rely on their respective national provisions to accept or reject foreign investment. The three largest member states—Germany, France, and Italy—had initiated the debate on a common framework in February, when they presented the European Commission with a joint letter on screening investments. On September 13, the European Commission then proposed to create an unprecedented EU-wide framework for screening foreign investments.

The proposed framework builds on the national review mechanisms that thirteen of the member states already maintain and does not require other member states to adopt a screening mechanism. It provides the member states and the Commission with the option to screen foreign investment on the grounds of security or public order, and sets out basic requirements for screening investment, such as transparency, non-discrimination, or judicial review. The proposed regulation would include a cooperation component on foreign investment issues between the member states and the Commission as well as between the member states. In addition, the framework would enable the Commission to review investment that might affect the “Union’s interests,” such as projects involving EU funding or critical sectors. However, the Commission would not be able to block an investment or takeover deal.

The proposed screening mechanism is different to that of other countries due to its non-binding nature. Member states would have the possibility to screen, accept, or block investment either way. It reflects the diverging interests in foreign investment, from high to non-existent, of the (soon to be twenty-seven) member states and the attempt to balance these interests. Even though the proposed mechanism appears to be toothless, it has already raised concerns among several member states, such as Greece, Finland, Sweden, and Poland. This opposition is important because the proposed framework will need the backing of the member states and the European Parliament. These countries are partly concerned that a screening mechanism would limit the EU’s, so far, all open and free trade stance, and in particular, that it might damage the EU’s foreign investment relations with China.

Indeed, China reacted promptly, warning the EU that the proposed framework would harm the investment environment in Europe. It is worth noting, however, that the underlying issue between the EU and China is not primarily the possibility of member states screening Chinese investment, but other on-going issues, such as anti-dumping or the EU’s refusal to grant China the market economy status. As in the case of other countries that maintain investment screening, such as the U.S., such mechanisms do not imply reducing or opposing foreign (Chinese) investment flows.

Europe’s discussion on the proposed framework now faces the danger of being driven by the race for Chinese investment and of turning into a political debate focused on China’s criticism and U.S. approval. However, the proposed framework should be seen not as a way to align more closely with the U.S. and against China, but instead, as an opportunity to frame a basic common EU approach toward foreign investment. This would not only provide some basic legal certainty for member states that maintain or intend to adopt a screening mechanism, but also for foreign investors.

 

Angela Stanzel as a Policy Fellow for the Asia Program at the European Council on Foreign Relations (ECFR). She is a participant in AICGS’ project “A German-American Dialogue of the Next Generation: Global Responsibility, Joint Engagement,” sponsored by the Transatlantik-Programm der Bundesrepublik Deutschland aus Mitteln des European Recovery Program (ERP) des Bundesministeriums für Wirtschaft und Energie (BMWi).

The views expressed are those of the author(s) alone. They do not necessarily reflect the views of the American Institute for Contemporary German Studies.