The EU Enters the Geoeconomic Arena

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Tobias Gehrke, Early Stage Researcher, Egmont Institute; PhD candidate, Ghent University

Abstract: This post discusses the newly agreed EU legislation on an investment screening mechanism in light of the ever-increasing convergence between states’ security and economic concerns. The EU-China investment relationship is a case in point of this convergence. The ushering in of a geoeconomic era helps explain why states leverage economic interdependencies and why economic flows are becoming increasingly securitized. With the US-China economic and strategic rivalry in full swing, the EU and its Member States will increasingly be confronted with security motivated economic actions. While European leaders have shown resolute action to arising risks of interdependencies, a balanced approach which can mitigate risks while staying committed to an open international economic system must be found.



About €30 billion worth of foreign direct investment (FDI) from China flooded into European Union (EU) member states (MSs) in 2017 – the second highest amount ever recorded, second only to the previous year’s numbers (Hanemann & Huotari, 2018). FDI – a crucial economic activity for economies in our globalised world – from Chinese investors has long been an irresistible welcomed blessing in an austerity-ridden European investment landscape; a Europe that since the financial crisis in 2008 has been eagerly vying for foreign cash fluidity.

Yet true to the motto ‘All that glitter is notgold’, unease across European governments has been growing. Exercises of risk-flagging concerning steepening Chinese economic and political engagement in Europe steadily increased. Several Chinese investment cases with a high public profile had an impact on economic, political, and security actors and the question of strategic interests. The adoption of first-time national investment screening legislation in some countries – from Luxembourg to Hungary and Czechia – and more rigorous legislative reform acts in others – Germany, the United Kingdom (UK), and France for instance – answered to the changing assessments of the relationship between economics and security.

An EU Investment Screening Mechanism

An EU-wide breakthrough came on a misty November afternoon in Brussels. Less than 18 months of negotiations between MSs and EU institutions concluded into a provisional agreement on an EU-wide investment screening mechanism. The legislation will allow to coordinate scrutiny of foreign investments at the EU level in cases including ‘strategic infrastructure assets’ and ‘cutting-edge or dual use technologies’ investments. While MSs remain sovereign in their decision to intervene, or not, in sadinvestment activities, they are required to inform the Commission about foreign investments in the agreed sectors. The Commission, on the other hand, receives the prerogative to issue advisory opinions if it considers potential security or public order issues (Commission, 2018a).

A timely success, given the notable contention from several EU MSs on the scope and division of competencies of the new legislation. The law addresses some of the key concerns raised by MSs and business – the potential risks to national security and the strategic importance of advanced technologies in an ever-more competitive economic and security environment. Although formal mentions of China regarding the policy goals of the legislation have been almost absent, the underlying directions can hardly be overlooked.

Economic Security Concerns

The EU-law was sponsored most ardently by the likes of Germany, France, and Italy – economies with a robust domestic Research & Development (R&D) environment, advanced high-tech industries, abundant industrial know-how, and Small and Medium Enterprises (SME) ‘hidden champions’in niche tech-sectors for seminal key technologies. While the newly elected Italian government seems to have changed its public policy course, Germany and France have rallied in strong support for a European approach to investment screening.

China’s industrial strategy Made in China 2025(MIC2025) – which identifies ten key industrial sectors for priority promotion and investment[1]– has consistently singled out European high-tech companies most commonly located in the Big-three.[2]The numbers substantiate China’s strategic acquisition pattern. Between 2014 and 2017, 64% of Chinese corporate stake investments above 10% in German companies were in line with sectors identified under MIC2025 (Jungbluth, 2018). Across the EU, the share of Chinese FDI subsumed under merger & acquisitions (M&A) – brownfieldover greenfieldinvestments in financial business jargon – stands at 94% of total investments. Meanwhile 68% of investments in 2017 were executed by state-owned enterprises (SOEs) (Hanemann & Huotari, 2018). Although both these numbers are lower in the Big-three, they indicate the potential connection between the strategic acquisition of know-how by state actors in pursuit of the MIC2025 strategy.

Next to strategic know-how and seminal technologies, national security risks emanating from foreign take-overs closely linked to the Chinese government have been flaring up in the past years. In France for instance, the purchase of a 49.9% stake in Toulouse airport by Chinese-led consortium Casil Europekick-started this debate back in 2014. In Sweden, Hong Kong-based Sunbase International Holdings and state-owned China Communications Construction Company (CCCC) plans to build a deep harbour in Western Sweden again fuelled its public debate about national security risks. Belgium, Germany, the Netherlands, the UK, Denmark, and others all experienced Chinese investment cases which have been flagged as potentially compromising national security risks – at least in some circles (Seaman, et al, 2017).

The Grail of Reciprocity

Meanwhile, economic security concerns at home are coupled with a crystallised focus on the un-reciprocal EU-China investment relations. The Chinese narrative around its ‘commitments towards reform’ was more often than not appreciated and anticipated with an eventual market economy structured Chinese economy. Despite substantial discriminations, in-transparent subsidy regimes, forced-technology transfers, and the overall lack of a level playing-field in China, European businesses and investors reaped the benefits of an enormously expanding market in which profit margins skyrocketed.

Today, Chinese companies have become not only more competitive, but many discriminatory practices remain in place (or have become more obscure) (Feigenbaum, 2017). That does not necessarily equate to a slimming of profit margins however. Not least because of the ensuing Sino-US trade war has German trade and investment in China increased to record highs in 2017 and 2018. Growing trade and investments of French companies in China have equally been recorded (French Chamber of Commerce Beijing, 2018). Regardless, outcry of European investors in the Chinese market is becoming louder (EU Chamber of Commerce in China, 2018a).

Despite sustained public diplomacy efforts by Chinese officials and some reform effort having taken place in recent months (EU Chamber of Commerce in China, 2018b), a shifting momentum among business and political leaders on the issue of reciprocity could hardly be slowed in industrial powers like Germany and France, but also Italy. In Germany, whose globalised industry is heavily exposed to the Chinese market – global German car sales in 2017 for instance stood at 23,4 million units out of which 9,2 million received Chinese license plates (Car Sales Statistics, 2018) – Chinese market access and strings-attached to investment decisions have rallied business, governmental, and civil actors.

The issue of reciprocity in EU–China investment relations – both in market access barriers and behind-the-border discriminations – has been instrumental in shaping the interests and policy initiatives behind the EU legislation.

Entering the Geoeconomic Arena

There are arguably few traditional foreign policy instruments EU leaders have at their disposal which could exert substantial pressure on China to change course – to progress with liberal market reforms in the case at hand. An EU FDI screening mechanism is thus not least to be understood as a domestic economic instrument motivated by strategic foreign policy interests – interests which themselves have seen a strong convergence between the realms of economy and security.

Yes, the EU has a range of other instruments at its disposal through which the EU – China economic relationship is sought to be addressed. A bilateral investment treaty, the EU-China Comprehensive Agreement on Investment (CAI), is still under negotiation and has been taken up steam in progressing in the negotiations (European Parliament, 2018). An EU – China bilateral WTO Working Group has also been set up in the Summer of 2018, aimed to co-develop concrete reform proposals for the WTO and international trade rules (Commission, 2018b).

But the EU screening legislation steps in the footprints of increasing geoeconomic developments around the globe – that is, the ushering in of a geoeconomic era. Leveraging economic instruments and interdependencies for strategic interests is at the heart of this era. It is characterised by states’ recalibration between economic and security interests and an increased willingness to leverageeconomic interdependencies in pursuit of strategic objectives (Robertset al, 2018a; Wesley, 2016). Great Power rivalry between the US and China shapes and advances the contours of this new world. Increased state control of financial and economic flows (or a willingness to do so) lies at its other end.

The convergence between economics and security interests has already had a profound impact on the US and China – among them and between them. The tariff-enabled trade war, efforts to re-route supply chains, increased export constraints, surging investment screening activities, and data & tech nationalism have been featuring high on both competitors’ policy lists. The security of the economy vis-à-vis rivals’ ambitions is a key convergence of the past years and constituent feature of this era.

These observations stand in stark contrast to the assumptions held by classical economic and political liberal theories regarding economic interdependence, free trade, and absolute gains rationale, which – broadly speaking – consider economic interdependence and free trade as a force for peace and stability; a force which would allow integrating China and others into existing structures (Gartzke, 2007).But today, these assumptions seem to peril, as a declining United States is increasingly willing to forego narrow economic interests for strategic interests against its strategic competitors (Roberts et al, 2018b).  They lay bare thevulnerabilities and opportunities economic interdependence may pose for states.

Leveraging Interdependence

The EU is increasingly pressured to position itself in this order and to develop policies which can cope with these new realities. The screening mechanism legislation is – whether we like it or not – an instance of an EU answer. It constitutes the EU’s acknowledgement of its own strategic assets and economic security which are vital in an increasingly competitive environment. It also acknowledges the Union’s geoeconomic levers which may be employed for strategic interests.For China’s MIC2025 strategy, unrestricted FDI access to the European Market remains crucial for its operationalization. By increasingly concentrating authority over financial and economic flows of incoming FDI, the EU and MSs are positioning authority over an important economic node.

At the same time, a clear convergence of what is considered security and what is considered economic is evident, exemplified by widening definitions of critical infrastructure to include high-tech sectors, such as robotics or artificial intelligence.

Down the Rabbit Hole?

The screening mechanism is not the only instance of a Union increasingly at unease of geoeconomic pressures. Earlier this year – and since then unfolding – the Trump administration’s upending of the Joint Comprehensive Plan of Action (JCPOA), commonly referred to as Iran deal, has sparked both realization and drive in European leaders to diminish the vulnerabilities of economic interdependence. In this case, the soft and hard-reach of US economic sanctions is amplified by the financial interdependence of European and US business and finance.

‘We must strengthen European economic autonomy’, German foreign Minister Heiko Maas plead (Financial Times, 08/2018), and ‘assure European economic sovereignty’ French Finance Minister Bruno Le Maire added (Financial Times, 11/2018) in response to the Union’s obvious struggle to soften and limit the impact of the US economic statecraft practices. Creating autonomous financing instruments which are less vulnerable to interdependences has been featuring prominently in the European debate since. The investment screening mechanism follows along this line.


What lies beyond these policy and legislative initiatives remains to be seen. Much will depend on the context of the US-China rivalry. The Union must be careful to walk the fine line: on the one hand, it must strengthen and solidify its economic instruments in light of a rapidly changing international political and economic environment. On the other hand, it must not go down the rabbit hole of economic nationalism and remain committed to an open international economic system, that is: managing the risks of interdependencies in a geoeconomic era, while also staying connected among all players, vying for global or multilateral solutions. It will be an increasingly difficult task. This difficult relationship and structural change must be represented in policy debates.


Car Sales Statistics (2018) 2017 (Full Year) China and Worldwide German Luxury Car Sales.

EU Chamber of Commerce in China (2018a) European Business in China – Position Paper.

EU Chamber of Commerce in China (2018b) 18 Months since Davos.

European Commission (2018a) Commission welcomes agreement on foreign investment screening framework, 20 November 2018, Press release.

European Commission (2018b) EU and China discuss economic and trade relations at the 7th High-level Economic and Trade Dialogue, 25 June 2018, Press Release.

European Parliament (2018) EU-China Comprehensive Agreement on Investment (CAI). Legislative Train Schedule, 20 October 2018.

Feigenbaum (2017) Is Coercion the New Normal in China’s Economic Statecraft? Carnegie.

Financial Times (21 August 2018) Germany calls for global payments system free of US.

Financial Times (7 November 2018) France vows to lead Europe in defying US on Iran sanctions.

French Chamber of Commerce Beijing (2018) Conference information.

Gartzke (2007) The Capitalist Peace, American Journal of Political Science,Vol. 51, No. 1.

Hanemann & Huotari (2018) EU-China FDI: Working towards reciprocity in investment relations; Merics, Mercator Institute for China Studies.

Jungbluth (2018) Kauft China systematisch Schlüsseltechnologien auf? Chinesische Firmenbeteiligungen in Deutschland im Kontext von „Made in China 2025“, GED Studie, Bertelsmann Stiftung.

Roberts, Choer Moraes, Ferguson (2018a) The Geoeconomic World Order. Lawfare.

Roberts, Choer Moraes, Ferguson (2018b) Geoeconomics: The Variable Relationship Between Economics and Security. Lawfare, 27 November 2018.

Seaman, Huotari, Otero-Iglesias (eds.) (2017) Chinese Investment in Europe A Country-Level Approach. French Institute of International Relations (Ifri), Elcano Royal Institute, Mercator Institute for China Studies.

Wesley (2016) Australia and the Rise of Geoeconomics. Centre of Gravity series, Strategic and Defence Studies Centre (SDSC), Australian National University’s College of Asia and the Pacific.

  • Endnotes

  • [1] These sectors are (1) next-generation information technology, (2) high-end numerical control machinery and robotics, (3) aerospace and aviation equipment, (4) maritime engineering equipment and hightech maritime vessel manufacturing, (5) advanced rail equipment, (6) energy-saving and new energy vehicles, (7) electrical equipment, (8) agricultural machinery and equipment, (9) new materials, and (10) biopharmaceuticals and high-performance medical devices.

[2] Germany, France and the UK.