Juncker’s New FDI Screening Mechanism Seeks to Corral Differing European Attitudes Toward China

Jean-Claude Juncker, President of the European Commission (EC), called for the EU to launch a more robust foreign direct investment (FDI) screening mechanism in his State of the Union Address on September 13th.  The announcement comes after Chinese investment flows into the European Union grew by more than a third in 2016.  Juncker has been careful to strike a balance between his calls for potentially restrictive screening and the message that the EU remains open for business.  The intended new measures emphasize “collective security” and will likely target Chinese and other foreign state-owned and ‑controlled enterprises aiming to acquire European critical infrastructure assets and advanced technologies (most with military applications).  Although no formal structure has yet been tabled, Chinese investors can expect to face new layers of scrutiny before acquisitions within the EU’s 28 member states are approved.

China has already made political overtures designed to ensure unimpeded access to the European market.  For example, it has placed a premium on upgraded diplomatic relationships across the EU, with its the most ambitious initiative being the 16+1 partnership with investment-hungry Central and Eastern Europe (CEE).  It is reasonable to expect that Beijing will seek to mobilize its 16+1 partners to serve as a “spoiler” to the extent possible.

Eleven members of the 16+1 partnership have won accession to the European Union, providing China with a broader political base (underpinned by economic and financial largess) from which to defeat or dilute EU policy decisions – like this one — it deems contrary to its interests.  The Xi Administration has not placed equal emphasis on each of the 16 countries, instead focusing on relations with the Czech Republic, Hungary, Poland, and Serbia.  Competition for investment created by this unequal treatment within the 16+1 arrangement has already delivered important political dividends for China.  The best-known case of this is Hungary and Croatia’s veto of a strongly-worded joint EU statement condemning Chinese illegal island-building, and militarization of same, in the South China Sea.

The 16+1 structure also lies on one side of a fault line in the approach of European governments to “economic security” vis a vis Beijing.  Whereas Western Europe has expressed growing caution toward Chinese acquisition activities, Central and Eastern European countries have largely embraced Chinese investment as a source of capital from heaven.  That said, many are CEE countries are recipients of EU transfer payments.  This leverage, however, has not been employed to date, as EU institutions tend to be wary of upsetting the Union’s delicate balance by censuring select member states.  Hungary and Croatia, for example, faced no material penalty for their veto of the EU’s South China Sea statement.  Violations of even a voluntary FDI screening mechanism designed to protect the economic well-being and security of EU member states, however, may well be a different matter.