MERICS Europe China 360°
18 min read

EU-China audit + German coalition agreement + EU FDI screening mechanism

Buzzwords of the week


The exchange of sanctions between the EU and China earlier this year destabilized the bilateral relationship. The majority of participants of a survey conducted by Good Judgement Inc in cooperation with MERICS agrees that the sanctions were a targeted action that would not occur again. New sanctions have not been imposed but last week, the EU decided to extend those same sanctions against four Chinese officials and one Chinese entity in March. Thus, confirming the block’s resoluteness on the matter. China has responded threatening to sink the ratification of the CAI, which had already been symbolically frozen by the European Parliament last May. 

Good Judgment Inc is a consulting company that uses an international team of highly accurate Superforecaster® professionals to provide forecasts to private companies, major organizations, and government agencies. More information is available at www.goodjudgment.com

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211202_Merics-Buzzword_Global-Gateway_WebThe European Commission recently released details about its new European connectivity initiative. The details show that the initiative will prioritize five investment areas including energy, digital, research, education and health, showing how connectivity incorporates more than just transport. The new Global Gateway promotes values, high standards and green projects at its core. 

Brussels aims to attract external matching funding for its investments to total EUR 300 billion by 2027, a typical EU funding strategy. On top of development, it is clear that the Global Gateway will follow a geopolitical agenda. Although we will have to wait to see which pilot projects launch the initiative, it’s likely that they will be implemented in countries that hold a strategic interest for the EU.

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China policy in German coalition agreement: Course correction

Last week the German Social Democrats (SPD), Greens and liberals (FDP) reached a coalition agreement paving the way for the formation of a new government. The content of the agreement signals aspirations to adjust the country’s China policy.

What you need to know:

  • China in focus: The overall outlook on relations with China follows the EU’s multifaceted framework “partnership, competition and systemic rivalry,” while also calling for an increase in China policy consultations at EU-level. In a departure from past rhetoric, even the cooperative agenda is described as conditional on addressing contentious issues related to human rights and international law. In line with this, the coalition agreement states that the Comprehensive Agreement on Investment cannot be ratified under current circumstances. In an unprecedented move, the document also directly references concerns about the situations around the South China Sea, Xinjiang, Hong Kong and Taiwan – at the same time as announcing selective support for Taiwan’s participation in international organizations.
  • Zoom out: Other points that could impact German China policy include: 
    • the ambition to limit the unanimity requirement in EU foreign policymaking (which would apply to cases such as Hungary blocking the package of Hong Kong measures);
    • increased support for the Global Gateway initiative and for growing the EU’s presence in the Indo-Pacific; 
    • coordinating with transatlantic and other like-minded partners to reduce strategic dependencies – including on China.
  • Chinese reactions: The Chinese Ministry of Foreign Affairs criticized the inclusion in the agreement of the South China Sea, Xinjiang, Hong Kong, and Taiwan, which Beijing considers domestic affairs. However, Chinese think tank experts, including He Zhigao and Cui Hongjian, argued, drawing a parallel to the early years of Angela Merkel’s chancellorship, that any potential initial assertiveness of the new government will not fundamentally change the Germany-China relationship in the long run.

Quick take:

The coalition agreement promises a more clear-eyed, realistic, and European approach to China, bringing new language and momentum to debates on German China policy. Particularly noteworthy is the ambition to create a dedicated China strategy. However, those aspirations will still have to be hammered into specific policies, making the coming months crucial for the new administration. This process will likely be complex, but the new government seems to be aiming for a strategic course correction rather than for symbolic gestures with limited substance.

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How did the EU FDI screening mechanism do?

On November 23 the European Commission published the first report on the performance of the EU’s screening mechanism for foreign direct investments.

What you need to know:

  • What is the EU screening mechanism for FDI: The EU FDI screening is a mechanism adopted by the EU in 2019 and operational since October 2020. It allows the European Commission, and member states, to provide an opinion on inbound investments that could pose a risk to the EU’s security and public order. 
  • Highlights: Unofficially, China was one of the triggers for the adoption of the screening mechanism. However, the report shows that China ranks third in inbound investments to the EU, after the United States and the UK. Furthermore, of the many inbound investments 20 percent required scrutiny by the EU, and only 2 percent of them resulted in prohibitions. The inflow of investments from China kept decreasing in 2020. A high number of the cases related to critical infrastructure, technology and dual-use, and access to sensitive information. The cases that received enhanced scrutiny were mainly in the manufacturing, ICT and financial services sectors. To date, there are 18 member states with screening mechanisms. Only Bulgaria, Croatia and Cyprus have no plans to adopt one in future. The others are either in the process of adopting one or discussing potential adoption. 
  • Main issues: The most outstanding problem is that of funding. European capitals have complained about difficulties due to limited funding in screening FDI before notifying them to Brussels. Consequently, Brussels has noticed an excessively high number of notifications that did not require scrutiny, meaning no assessment was done at national level. 

Quick take:

The report comes at a time when the case of the acquisition of the Italian drone-maker Alpi Aviation by the Chinese is back under the spotlight. The acquisition took place before the EU screening mechanism became operational, highlighting a blind spot in the Commission’s knowledge of acquisitions that occurred before 2020, but which can still pose a threat to security and public order. A solution would be for the European Commission to have greater capacity to independently map out existing, as well as incoming, FDI into the region. 

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Short takes

Indo-Pacific will be a priority of the French Presidency according to French Minister of Foreign Affairs Jean-Yves Le Drian while EU leaders express similar ambitions at the 13th Asia-Europe Summit (ASEM).

Exim Bank offers a USD 600 million credit line for Lithuania during a US visit from Gabrielius Landsbergis, Lithuanian Minister of Foreign Affairs. The offer is likely a response to Beijing’s economic coercion over intensification of Lithuania-Taiwan relations.

EU spokesperson calls for a “independent and verifiable proof” of Peng Shuai’s well-being after she, accused former Vice-Premier Zhang Gaoli of sexual assault, and has disappeared from the public since. 

Ten MPs from Estonia, Latvia and Lithuania join 2021 Open Parliament Forum in Taipei. 

Hungary will not renew contracts for China’s Sinopharm and Russia’s Sputnik vaccines, but negotiations on creating Sputnik and Sinopharm vaccine factories in Hungary are ongoing.