On February 14, 2019, the European Parliament voted to approve the proposed regulation “establishing a framework for screening of foreign direct investments into the European Union.” With this vote, the EU moved one step closer to enacting an EU-wide mechanism to screen inbound foreign direct investment (“FDI”) on the basis of national security.
Originally proposed by the European Commission in September, 2017, the regulation is in large part a response to an influx of Chinese FDI into the EU. In 2016, Chinese investment into the EU grew at an unprecedented rate of 77 percent over the previous year, totaled €35 billion, and made Europe a key destination for Chinese FDI. These investments centered on areas of concern for many countries around the world, specifically high-tech acquisitions, advanced manufacturing and service sectors, and infrastructure.
In turn, this influx created a heightened perception in Europe—as it has elsewhere around the world—that such investment constitutes a potential threat to national security and economic interests. Particularly, concerns mounted in Europe after the 2016 purchase of KUKA, Germany’s biggest and most advanced maker of robotics, by Midea Group, a Chinese company acting in accordance with the Made in China 2025 plan. This type of investment is perceived by countries around the world as an appropriation of cutting-edge technology and a drain on domestic knowledge and expertise. As China continues to invest in ports, railways, and other strategic infrastructure under the One Belt One Road Initiative, fear has only intensified in the EU. In Greece, for example, China has transformed Piraeus into the Mediterranean’s busiest port after investing over $500 million through China Ocean Shipping Company, also known as COSCO, a state-owned shipping conglomerate. COSCO now controls the entire waterfront through its majority stake in the port. While such investment may stimulate the Greek economy and generate jobs for Greek citizens, it is not without its downsides, including potential risks to national security that inherently result from foreign control over critical infrastructure.
However, while all countries face similar potential risks associated with inbound FDI, the EU struggles with these risks not as an independent nation, but as a supranational entity with an internal single market. In fact, China’s aim in Greece is to use Piraeus as its European entry point, allowing Chinese goods to travel along a new network of railways and roads through Central European nations to larger, more prized destinations, such as Germany. Therefore, the EU must address the cross-border economic and physical security implications of inbound FDI, and it must do so not with a sole, unitary voice, but with all 28 EU Member States voicing their own concerns, or lack thereof.
Within the EU, the poorer Southern and Central European countries that benefit from Chinese FDI in times of financial crisis, such as Greece and Hungary, have generally opposed strict scrutiny of FDI for fear of discouraging Chinese FDI. While the proposal represents a significant remedial step towards addressing the ineffectiveness of the EU’s current decentralized and fragmented FDI screening system—under which FDI screening is the exclusive responsibility of each individual EU Member State, with only 12 of the 28 Member States having any screening mechanism in place at all—the proposal does not, and arguably cannot, purport to grant the EU exclusive competence over the screening of FDI inflows; nor does the proposal allow the EU to issue binding decisions on Member States or commercial actors. Moreover, the proposal does not, and again, arguably cannot, seek to establish a unified review process or even to harmonize the screening of FDI. Thus, without that formal decision-making authority, the question then becomes whether the relative economic and political realities of individual Member States and the EU as a whole will sufficiently fill that gap. In other words, whether the struggle between larger, richer Member States and smaller, poorer Member States enhance or hamper the proposal’s effectiveness. And, moreover, whether it will benefit or harm the EU’s long-term interests.
Viewed in this light, it quickly becomes clear that the effectiveness of the proposal will likely be dictated by the relative economic and political realities between Member States. The proposal may give the EU a greater hand in reviewing acquisitions, such as the 2016 takeover of German robotics maker KUKA by the Chinese company Midea Group; however, in the case of Chinese investment in the Greek port of Piraeus, Germany lacks any formal mechanism under the proposal through which it can compel a resistant Greece to screen such FDI. Yet Germany, Italy, and France, the countries which originally called for the creation of an FDI screening system, collectively account for nearly half of the EU’s total GDP. Germany alone comprises over one fifth of the EU’s total GDP. These numbers translate into an economic and political reality which favors larger, richer Member States, such as Germany, over smaller, poorer Member States, such as Greece.
Thus, while Germany may certainly be able to flex its soft power in order to gain cooperation from Greece, it remains to be seen whether Germany possesses enough power to overcome the attractiveness of Chinese FDI to a struggling economy. And even if larger Member States do possess the soft power necessary to overcome the will of smaller Member States, would doing so be equitable, or in the best interest of the EU? Probably not. So, in order to effectively implement the proposal and ensure long-lasting stability, the EU must first address this internal political and economic imbalance. For example, the EU could create a system of incentives designed to secure the consent and cooperation of smaller Member States in implementing the proposal. Having done so, the EU can then begin to strengthen the proposal itself, and thereby achieve its ultimate goal of cross-border security without sacrificing cross-border unity.