Commission proposes defensive economic measures + CAI + Belgium's investment screening mechanism

On May 5, the European Commission released two policy proposals addressing economic and strategic challenges posed by China: The foreign subsidies instrument and an update of the EU’s industrial policy. 
 
What you need to know 

• Based on a white paper released by the Commission in May 2020, the foreign subsidies instrument targets distortions in the EU’s single market caused by companies benefiting from non-EU state subsidies. If implemented, the instrument would force companies to notify the Commission of takeovers of over EUR 500 million and public procurement of over EUR 250 million. The Commission would then have the right to open an inquiry into suspected subsidies-related distortions with subsidies over EUR 5 million and also have the right to prohibit the deal, fine companies or force them to repay subsidies with interests. 
• In the industrial strategy update, the Commission stipulated that half of 137 strategically sensitive product EU supply chains are dependent on China and highlighted six sectors: batteries, cloud and edge technologies, hydrogen, pharmaceutical ingredients, raw materials and semiconductors. To reduce dependency, the Commission proposes diversifying supply chains, stockpiling and pooling resources into the provision ‘important projects of common European interest’ (IPCEI). These projects are to be linked to key emerging technologies such as next-gen batteries, clean energy technologies, pharmaceuticals and semiconductors. The Commission also voiced its ambition to lead the emerging tech standard-setting processes.  

Quick take 

Other defensive measures are on the horizon with the proposal for supply chain due diligence mechanism expected in June and the work on an international procurement instrument expected to be revived by the Portuguese Presidency.  In the unpublicized progress report on the implementation of the EU-China Strategic Outlook, shared with the capitals on April 21, the Commission reportedly lobbied European capitals to focus their efforts on implementing these autonomous measures addressing China-related challenges. 

Read more 

• Financial Times: Brussels prepares new rules to clamp down on foreign public subsidies 
• Reuters: EU aims to cut foreign reliance on chips, pharma materials - Document 
• European Commission: Commission proposes new Regulation to address distortions caused by foreign subsidies in the Single Market 
• European Commission: Updating the 2020 Industrial Strategy: towards a stronger Single Market for Europe's recovery 

On April 28, the European Parliament conducted a plenary hearing on Chinese retaliatory sanctions attended by High Representative Josep Borrell. Over 30 MEPs condemned the sanctions and commented on prospects of ratification of Comprehensive Agreement on Investment (CAI).  
 
What you need to know 

• High Representative Borrell expressed his “full solidarity” with those affected by the Chinese sanctions and ensured the MEPs that both Brussels and European capitals have been voicing their dissatisfaction with sanctions to Beijing. Borrell, however, also argued that the EU’s “multi-faceted approach [on China] remains valid” and that the engagement between the two actors remains necessary to “advance on issues of common interest.”
• All but one MEP addressing the plenary criticized the Chinese counter sanctions stating that the move targets the freedom of speech and of European democratic process. Most of the MEPs vowed – in emotionally charged words – to oppose discussion on CAI as long as China’s sanctions remain in place. A position reportedly also endorsed by the Conference of Presidents of political groupings at the European Parliament. Only a handful of MEPs called for abandoning the agreement altogether.  

Quick take 

Political tensions between the EU and China make CAI’s ratification highly challenging, as acknowledged by the European Commission, which has suspended political outreach promoting the deal. What’s more, Bernd Lange, the chair of the European Parliament’s International Trade Committee, confirmed that the Committee has no plans to discuss CAI until further notice. Still, while the political discussions are on hold, the technical preparations (e.g., legal scrubbing and translation) continue. As they were originally scheduled to run until the fall of 2021, this gives parties interested in seeing CAI ratified a few months for exploring creative diplomatic solutions to political tensions. 

Read more

• EEAS: China: Speech by High Representative/Vice-President Josep Borrell at the EP debate on the Chinese countersanctions on EU entities and MEPs and MPs 
• SCMP: EU lawmakers vow to kill China investment deal over Beijing’s sanctions 
• Tweet: Statement by Vannessa Mock - Communications adviser for Commissioner Valdis Dombrovskis 

On April 28, German and Chinese government ministers and representatives (and CEOs of leading German companies) convened for their sixth bi-annual consultations co-chaired by Chancellor Angela Merkel and Premier Li Keqiang. The Chancellery attempted to use this meeting to stabilize EU-China relations, but a more assertive China policy is being debated in Germany.

What you need to know

• During the consultations Chancellor Merkel expressed her support to ratify the Comprehensive Agreement on Investment, while also mentioning the importance of committing to international labor law. She expressed hope for the human rights dialogue with China to resume but did not address China’s retaliatory sanctions. In turn, Premier Li praised the pragmatic approach of the German government but advised it to refrain from “interfering” in China’s internal affairs.
• The wider German political landscape paints a complex picture on China. On April 21, the German Foreign Office circulated a confidential report advocating to pick up the pace on creating a European counterproposal to China’s Belt and Road Initiative. On April 23, the Bundestag passed “IT Security Law 2.0” increasing supervisory measures over critical components of 5G networks largely seen as aimed at Huawei. On May 4, at the sidelines of the G7 meeting, Foreign Minister Heiko Maas hailed a “broad agreement” with the US on the need to defend values in “East-West” tensions while remaining “ready to negotiate.” On May 17, the Bundestag is set to vote on a memorandum on oppression of Uighurs in Xinjiang. 

Quick take

Germany is undergoing an intense internal debate evaluating the pragmatic engagement policy of Chancellor Merkel’s cabinet. Media coverage focuses on the potential reassessment of priorities on China, should the Green Party increase its influence in the September election. However, the debate is ongoing across the political spectrum as advocating to maintain the “business as usual” approach is subject of increasing controversy.

Read more:

• Bundeskanzlerin [DE]: Virtual German-Chinese Government Consultations - Continue dialogue and expand collaboration
• MERICS: Sino-German Government Talks: Dialogue and cooperation with China - the German Sonderweg?
• Handelsblatt [DE]: Confidential government report: Berlin warns of China's silk road and calls for a European response
• Internationale Politik [DE]: Decisively disentangle

Belgium became the latest EU state to introduce a national foreign investment screening mechanism (FISM). Since, EU’s FISM became operable in October 2020 the following eight member states are yet to introduce the needed national regulations: Bulgaria, Croatia, Cyprus, Estonia, Greece, Ireland, Luxembourg and Sweden.

What you need to know

• The Belgian government announced its FISM on April 30 with ministers referencing Chinese investments in strategic sectors as a key point of concern. The regulations force foreign investors to inform a dedicated screening commission should they acquire over 25 percent of voting rights in a Belgian company. The commission will unite representatives of seven governmental departments as well as regional authorities. The security services will also be involved in the review, which will take into account solely security considerations.
• Belgium joins 18 EU member states that have already introduced national FISMs. The mechanism allows the Commission and other member states to gather information on controversial investment and ones that are undergoing national screening giving them the right to issue recommendations on the case. 

Quick take

While the discussions surrounding the EU-wide FISM have been focused on security-related assessment, the issue of economic security and related competitiveness of European economies are becoming an increasingly important aspect of the mechanism. This trend is reflected not only in the EU’s industrial strategy, but also in the recent decision by the German government to expand its FDI screening to new emerging technology sectors and visible in the robust deployment of Italian golden powers law on tech cases.

Read more

• L’Echo [FR]: Belgium will scrutinize foreign investments
• European Commission: List of screening mechanisms notified by Member States (update from 30 April 2021)

G7 foreign ministers - including High Representative Josep Borrell - met together with representatives of India, South Korea and Australia on May 4 to discuss developing a common front to address the challenges posed by the rise of China on the “international rules-based order.” 

• Euractiv: G7 seeks common front on China in first talks since pandemic
• SCMP: China tops agenda as G7 foreign ministers meet in London

The European Medicines Agency (EMA) launched its review of Sinovac’s vaccine that was deployed in Hungary and Serbia on May 4. The EMA has yet to specify a timeline for the review.

• Politico: EU regulator starts review of China’s Sinovac vaccine 

A cyberattack on May 4 that targeted Belgian Belnet, the internet traffic operator that manages governmental institutions, pushed the Belgian Parliament to postpone its debate on human rights abuses of Uighurs in Xinjiang.

• VRT.be [NL]: Cyber attack "of unprecedented magnitude" in our country: "Not yet resolved, although attack seems to be diminishing"
• Euractiv: Belgium suffers major cyberattack 

According to an annual report by the European Commission, China remains “priority 1” for intellectual property protection concerns. The report recognized an improvement in legislation, but the concerns remain.  

• European Commission: Report on the protection and enforcement of intellectual property rights in third countries

A report by the China Council for the Promotion of International Trade investigated the sentiments of Chinese enterprises active within the EU. Over 77 percent of the interviewed enterprises state that they plan to limit their investments over screening practices targeting Chinese companies.

• China Daily: EU should drop discriminatory practices: China Daily editorial
• China Council for the Promotion of International Trade [CN]: EU business environment report 2020