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On June 17, 2020, the European Commission published a White Paper on foreign subsidies in the EU. The measures proposed aim to level the playing field by putting forward new legal tools to deal with distortions in the single market. They are part of a wider set of instruments recently introduced by the EU to regulate foreign investment and subsidies in the bloc. One of the most important of these tools is the foreign direct investment (FDI) screening framework which entered into force in 2019.

The FDI screening framework aims to create a cooperation mechanism between member states to allow information sharing about foreign investment within the borders of the EU. The policy was adopted against the backdrop of mounting anxieties about Chinese companies investing and taking over European assets in strategically sensitive sectors. Despite criticism voiced by some that the framework is not stringent enough, it is successful in sending a strong message that the Commission is willing to put actual policies in place to back its plans and promises.

Mounting fears and increasing FDI barriers

The FDI screening framework grew out of security concerns, as Chinese investment started increasingly targeting sensitive sectors within  EU member states. These companies are often state-owned, further exacerbating worries. Throughout the 2010s, Chinese investments became less diverse, and by 2019, Chinese FDI in the EU was overwhelmingly concentrated into sensitive sectors, such as automotive, information and communications technology (ITC), and financial and business services.

The EU takes pride in the freedom of investment it provides within its borders as well as being the most attractive destination in the world for FDI. On one hand, the recent measures have been interpreted as Brussels taking a step towards protectionism. On the other hand, these instruments are admittedly about striking balance between the EU’s open investment regime and protecting its interests. The nature of the single market makes a concerning investment in one member state a problem for all.

How are these measures going to work?

The new framework is rooted in knowledge-sharing. Upon request, a member state receiving an investment has to share information with other member states and the European Commission about the investing company and the nature of the investment taking place. Other member states can provide their comments and the Commission can issue opinions. While the host member state has to consider these, it has the authority to decide whether to act against the investment.

The framework relies on already existing national screening mechanisms that are in place in 14 member states. These are different in scope and procedure but predominantly give power to national government bodies to review foreign investment in certain sectors. Investment thresholds and sensitive sectors differ between member states as government bodies have different levels of veto power.

Although the design of the framework has been subject to criticism, FDI legislation in the EU is a complex issue. FDI falls under the common commercial policy, and according to the Treaty on the Functioning of the European Union, the EU has exclusive competence over it. However, national security is the exclusive responsibility of member states, and the current FDI discourse is predominantly centered around the security threats posed by foreign investments.

The framework has several positive aspects worth mentioning. It allows for a direct flow of information between member states, which speeds up the entire screening process. The framework can also foster cooperation among EU members, encouraging them to share best practices and to align their interests. This could be particularly important as it could make the member states most concerned about foreign investments feel more at ease. Most importantly, this framework is a statement. The EU has been voicing its intention to take a more assertive and unified stance against China in recent years, yet there have been very few tangible results. This framework is one of them.

The most recent addition to the EU toolbox, complementing the FDI regulation, are the competition measures proposed in the European Commission’s White Paper. These include preliminary reviews, in-depth investigations, and redressive measures. The instruments seek to address potential distortions in the single market and importantly, their scope would not be limited to sensitive assets. These measures can  also target foreign subsidies that are not specifically linked to an investment. The White Paper and FDI screening regulations are not mutually exclusive and in case of an overlap there can be independent parallel procedures conducted.

After the publishing of the White Paper, there will be a 14-week consultation period, during which the Commission invites comments and proposals from the public. After the impact assessment, the Commission plans to introduce the new legal instruments in 2021.

Frictions with China

While the Commission is not always explicit about measures targeting Chinese investments, it is widely known that they were designed with China in mind. In April, as the COVID-19 pandemic triggered concerns about foreign investments in the bloc, EU competition chief Margrethe Vestager warned member states about the threat of Chinese takeovers of struggling European businesses. While cautioning against rushing legislation, she stressed that the EU needs to work actively on rolling out regulations to deter takeovers, stressing that “[t]his is one of our main priorities.” The Commission also published a Communication specifically dealing with the “increased risk of attempts to acquire healthcare capacities,” encouraging member states to put their already existing investment screening mechanisms to use or set up a new one.

Increasing FDI barriers in the EU have not gone unnoticed by China. In April 2020, the China Council for the Promotion of International Trade (CCPIT), China’s national agency for trade and investment promotion, published a report about how Chinese companies hold a negative view on increasing FDI restrictions in the EU. The CCPIT called on the EU to lift the unreasonable market barriers, stop discriminating against Chinese companies and interfering with companies’ order of business. The CCPIT contended that their recommendations serve “to help the EU solve its problem with its deteriorating business environment caused by excessive overregulation.”

What to expect?

As it stands, it is unlikely that the EU will stop drawing up regulations. The FDI screening framework has the potential to become the most efficient tool for the bloc to protect its strategic assets – especially if the Commission keeps strengthening it with complementing measures. The newly proposed legal instruments targeting foreign subsidies is a good example of this.

But these measures will continue causing frictions with China. We might see tensions emerge in the negotiations around the EU-China Comprehensive Agreement on Investment. This can be an opportunity for the EU to further address its grievances about the lack of reciprocity in EU-China investment and trade relations.

Although these frictions should be an important consideration for the EU, the main focus, for now, should be on how to improve and complement the framework. A well-designed framework could leave the bloc with the best of both worlds. It could allow the EU to efficiently mitigate risks of investment in sensitive sectors while remaining as open to investment as possible.