In a show of resolve, European Commission president Jean-Claude Juncker on September 13 outlined plans to implement more stringent vetting of overseas investment, specifically aimed at empowering EU governments to block takeovers from Chinese and other investors.

Set out in Mr Juncker’s State of the Union speech to the European Parliament, the draft EU screening framework is described as an effort to protect companies in industry sectors deemed sensitive, such as energy and advanced technology.

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In an unprecedented move, the legislation includes an ‘anti-circumvention’ clause, which would allow individual governments to block acquisitions attempted by European shell companies, or those established by foreigners in the bloc – a power normally disallowed due to EU free movement of capital laws.

The added scrutiny comes in response to security concerns and criticism of unequal market access between the EU and China in particular: in 2016, China’s investment into the EU was quadruple that of EU countries into China. A joint report by think tanks Rhodium and the Mercator Institute for China Studies found that in 2016, China made €35.1bn-worth of acquisitions in the EU, while EU acquisitions in China for the same year totalled a mere €7.7bn. This is because many more sectors of Chinese industry are closed to foreign investors compared to their counterparts in Europe.

The draft framework also allows national authorities to share information with one another to examine potential acquisitions and seek opinions from the European Commission. Mr Juncker’s proposal signifies support for French president Emmanuel Macron, German chancellor Angela Merkel and others who have been calling for stronger FDI control measures.

More robust screening for FDI has long existed in other countries: the Committee on Foreign Investment in the US (Cfius) was established in 1975 to examine foreign investments on national security grounds, and has courted controversy for its aborting of Chinese takeovers in areas such as semiconductors and renewable energy.

The ability of EU member states to screen and potentially block FDI already exists, both based on and limited by EU law and the jurisprudence of the European Court of Justice, said Wolfgang Maschek, Brussels-based partner at law firm Squire Patton Boggs. “Depending on its application in practice, the new FDI screening process could provide more transparency and legal certainty for inward FDI into sensitive industry sectors in the EU, and align differing national approaches in this context,” he says.

“On the other hand, it could complicate and politicise matters, as the proposed new EU co-operation mechanism foresees that in addition to the FDI destination country, now also the EU Commission is involved in the screening process and potentially other member states if their interests are affected,” Mr Maschek added. “This could mean protracted procedures based on emotional political discussions taking place in parallel in different EU member states and in Brussels.”

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Added restrictions could become contentious in countries such as Hungary, Greece and Romania, for whom Chinese investment is a boon they do not want to see threatened.

“Any EU framework for investment screening is going to have to balance the tougher stance of France, Germany and Italy with the desire among other members to attract more Chinese investment,” said Anahita Thoms, partner at Baker McKenzie. “As a first step, it might be the easiest option for the Commission to start with a non-binding framework for more co-operation and common standards for investment screening among member states.”

While China has not yet issued an official response, a Chinese ministry of commerce representative said in July: “It’s a country’s lawful right to assess investment in sensitive area. But security reviews cannot become a tool for protectionism.”

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