Can Europe “Be Open But Not Stupid” on Foreign Acquisitions by China?

Like the United States, the European Union (EU) and its member states are concerned about potential security threats posed by foreign acquisition of firms, especially by Chinese investors, in sensitive sectors of the economy. The United States’ experience ought to be instructive. European officials are already looking at the experience of the Committee on Foreign Investment in the United States (CFIUS) for possible guidance. They would be well advised to adopt the current narrow focus CFIUS takes toward identifying plausible national security threats, while avoiding broader efforts to prevent technology transfer to non-EU firms.

A number of proposals to design a screening mechanism for foreign acquisitions of EU-headquartered firms were discussed at a special conference at the Bundestag in Berlin on March 10, and also at a meeting at the EU Parliament in Brussels the previous day. Matthias Machnig, SPD leader and State Secretary at the German Federal Ministry for Economic Affairs and Energy, noted in Berlin that the EU and its member states have no mechanism to review foreign acquisitions of EU-headquartered firms unless such acquisitions involve companies that have sensitive military and defense contracts.

Machnig proposed that the EU and its member states require foreign companies to register their intention of acquiring EU firms and they broaden surveillance procedures to cover more than defense suppliers. He also proposed that individual EU states be allowed to block foreign acquisitions, subject to appeal by other EU members and adjudication at the EU level. Machnig argued that EU states need to adopt procedures to share confidential information developed by national intelligence services about foreign firms proposing acquisitions.

Following is a summary of my presentation at each of these meetings. CFIUS adopts a deliberately narrow focus to assess when foreign acquisition of a US firm might pose a credible national security threat to the United States, and when apprehensions about national security are implausible. The paper I prepared for Brussels and Berlin can be found here.

For example, CFIUS tries to identify specific national security threats within industries and does not exempt entire sectors from foreign acquisitions. Loud voices in the US Congress have urged, from time to time, that foreign acquisitions from certain countries be blocked in energy, semiconductors, telecommunications, infrastructure, financial services, agribusiness, media, and movie studios. If such industrywide protectionism is permitted in one economy, like the United States, other countries would certainly retaliate and imitate. The EU might best follow a similar narrow path since exemption of entire sectors opens the door to a political process that has no logical end.

Nor does CFIUS condition approvals or disapprovals on whether there is equivalent reciprocity in the home markets of the foreign firms, or whether foreign companies (especially state-owned enterprises) have unfair access to low-cost capital and other subsidies. Rather, in the United States, a united front led by the White House, US Trade Representative, and the Department of Commerce push for reciprocity, and for reform of state-owned enterprises, rather than trying to rely on CFIUS to apply pressure via individual cases where no national security threat exists. EU efforts would similarly be most potent using nationwide and EU-wide mechanisms of negotiation. At the same time, the United States and the EU should use their domestic and multilateral tools to combat foreign subsidies and not try to use approval or disapproval of individual foreign acquisitions as punishment.

These arguments were generally understood and acknowledged in Brussels and Berlin, but it was also clear that European leaders see a strategy by China to capture industrial leadership away from European companies as well as leading firms in other countries. Their concerns focus on the lack of reciprocity for foreign investors in China and in the subsidies provided to Chinese firms, including subsidies to acquire important non-Chinese companies around the world. This Chinese strategy to capture industrial leadership is now encapsulated in the Chinese portfolio of policies called “Made in China 2025.” A report on China’s policies by the German think-tank MERICS was presented to participants at the Bundestag conference in Berlin.¹

In particular, the 2016 acquisition of Kuka, the leading robotics manufacturer in Germany, by the Chinese industrial powerhouse Midea, with strong backing from the Chinese government, has served as a wake-up call generating broad demands for an EU response to prevent Chinese acquisitions from transferring cutting-edge technological know-how out of Europe.²

Stefan Mair, member of the Executive Board of the Federation of German Industries (BDI), who joined Machnig on the panel in Berlin, voiced fear that EU reaction to the Chinese acquisition of Kuka might lead to protectionist industrial policies on the part of European member states.

In response to Mair’s concern about protectionism, Machnig announced, in English, “We want to be open, but not stupid!” which became the closing recommendation for EU strategy—both humorous and serious—from the meeting at the Bundestag.