EU set to tighten rules on foreign investment to fend off China

The European Union is hammering out the first bloc-wide rules to prevent foreign investments from threatening national security, as Chinese acquisitions foster political unease.

Negotiators representing EU governments and the European Parliament may agree on draft legislation to screen foreign direct investments on Nov. 20, according to Franck Proust, a French member of the 28-nation assembly.

Both sides have settled on 95 percent of the text and the goal at the meeting in Brussels is to bridge differences over the remaining part, which includes the politically sensitive matter of how far EU members can push concerns about FDI with their peers, said Proust. The deliberations show how a large degree of EU business is progressing in the shadow of the Brexit drama, which will include a special European summit on Nov. 25 to endorse a divorce deal.

“Everybody has the common will to work in the same direction,” Proust, the chief negotiator for the EU Parliament, said in an interview last week at the assembly’s headquarters in Strasbourg, France. “I remain positive.” Concerns are mounting across the western world about national-security risks tied to foreign investment, particularly by China.

Last year, U.S. President Donald Trump blocked a Chinese-backed investor from buying Lattice Semiconductor Corp. as a result of national-security worries and Germany moved to shield cutting-edge technologies after a bid by China’s Midea Group Co. for robot maker Kuka AG prompted an outcry. Earlier this year, the German government stopped a Chinese bid for the first time by vetoing the potential purchase of machine-tool manufacturer Leifeld Metal Spinning AG.

“We are making up for lost time,” Proust said. “All the world’s other powers have their own investment-screening systems. Only Europe doesn’t have such a tool.”

The European Commission, the EU’s regulatory arm, proposed in September last year a bloc-wide “cooperation mechanism” for foreign direct investments through a combination of data collection, information exchange and peer pressure.

The law would create an alert mechanism for future foreign investments in Europe and a centralized database of ones that occur after the system enters in force without taking the ultimate power of approving deals away from individual EU governments. While having ceded power over monetary, competition and trade policies to the EU, member countries still jealously guard their sovereignty in areas including investment and security.

The goal of the proposed European investment-screening framework, according to the commission, is to limit foreign threats to “critical infrastructure,” including in the energy, transport, communications, data, space and financial industries, and to “critical technologies” such as semiconductors, robotics and artificial intelligence.

In backing these provisions, the negotiators for EU governments and Parliament have agreed to add such areas as water, health, defense, media, biotechnology and food security to the scope.

EU governments would be allowed to request information and offer comments on a foreign investment in a particular member country. In addition, the commission could ask for information and issue an opinion.

The nation in which the investment was planned would have to give “due consideration” to any comments and opinion as well as take “utmost account” of any commission view regarding a foreign investment deemed to affect a European project or program.

A key sticking point is an amendment introduced by Proust to bolster these provisions. He effectively wants an extra red flag to be raised when at least a third of EU governments believes a foreign investment in another member country is likely to affect their security.

“We are making good progress in the talks and are confident of wrapping up work by the end of December,” Economy Minister Margarete Schramboeck of Austria, which as current holder of the EU’s rotating presidency is negotiating on behalf of the bloc’s governments, said in an emailed statement. “It will be extremely important that member states continue their support for our efforts. There are still some open issues we need to tackle.”

Proust signaled room for compromise exists.

“Attitudes have evolved,” he said. “A certain number of countries were fearful of losing decision-making control, were fearful that Europe would impose a decision on them. No. What we are putting in place is a system of information exchange to bring about the best assistance for the national decision.” Jonathan Stearns, Bloomberg