Biden plan to curb China investments focuses EU minds as deadline looms

South China Morning Post has published an article arguing that without a multilateral approach, experts warn dollars banned from funding Chinese hi-tech development could be replaced with euros. Caliber.Az reprints the article.

As European officials slowly trickle back from summer holidays, the latest US move to curb investments in China will be burning a hole in their in-boxes.

In Brussels, some early returnees are already taking a fine-tooth comb to last week’s executive order, mindful of the arduous task the European Commission faces in pulling together its own outbound investment screening initiative by the end of the year.

While there is no immediate strategy to replicate US President Joe Biden’s plan, there is some relief among senior officials that it is “much narrower” than expected. Earlier legislative proposals were seen as more hawkish, and there is hope that this one could be clarified even further before it comes into force.

“We want to protect our European citizens and businesses from risks that could arise from sensitive technology and investments flowing out in a way that can threaten international peace and security,” said EU trade spokeswoman Miriam Garcia Ferrer.

“We are in close contact with the US administration and look forward to continued cooperation on this topic,” Ferrer said.

Experts say that if Biden’s plan to block venture capital and private equity flowing into China’s semiconductors, quantum computing and artificial intelligence sectors is to work, it is essential that partners are on board – otherwise banned dollars could be theoretically replaced with euros.

Emily Benson, a trade and technology expert at the Centre for Strategic and International Studies, pointed to last year’s export ban on cutting-edge chips to China – that the Netherlands was cajoled into complying with – as an example of the problem.

“I think there’s a broad recognition, especially with hard lessons learned ... that all of these trade and investment controls are naturally much more effective when they’re multilateral,” she said.

For European capitals that are sceptical of US claims to be pursuing a “small yard, high fence” approach to China, the narrow policy may be seen as a carrot – much like its co-opting of the voguish EU term “de-risking” in lieu of “decoupling”.

“It’s actually quite lean and mean,” said Maaike Okano-Heijmans, a senior research fellow at the Clingendael Institute, a think tank linked to the Dutch government.

“The difference with this US action compared to the export controls is really remarkable. I think it was a mistake to just unilaterally throw out export controls. There is a realisation in the US that this can only be successful if trusted partners are on board.”

But it remains to be seen whether the restrained US approach will convince Europe’s many doubters that a mechanism is necessary.

Washington has been urging the EU for some years to restrict investments in China’s hi-tech sectors, arguing that they inevitably flow to the military complex and risk forfeiting Western head-starts on crucial industrial areas.

Exploratory discussions were held at the insistence of the US last year at meetings of the Trade and Technology Council. Buttonholed on the sidelines in Paris, EU officials downplayed the significance, insisting there was no immediate plan to screen China-bound investments.

This year, however, something changed.

On a trip to Washington in March, European Commission chief Ursula von der Leyen released a joint statement with Biden that signalled a hardening of the bloc’s attitude towards investments in China.

“[We] have a common interest in preventing our companies’ capital, expertise, and knowledge from fuelling technological advances that will enhance the military and intelligence capabilities of our strategic rivals, including through outbound investment,” it said.

At the end of that month in a speech on China, von der Leyen said “we are currently reflecting on if and how – Europe should develop a targeted instrument on outbound investment”.

Her trade team was told it had less than three months to come up with a proposal, leaving them scrambling to understand thorny technical issues, such as tracking capital into the opaque Chinese system, which one official described as a “black box”.

Early drafts of the proposal – part of a broader economic security strategy – were panned by some of the bloc’s 27 member states as “too American”.

Some worried that Brussels was taking a protectionist turn, others fretted that it was launching a power grab to control matters of national security, which reside in their capitals.

There is a feeling in Brussels that von der Leyen put the cart before the horse in announcing the strategy before convincing members of the risks investments carry – a tactic she has deployed before on China policy.

Her own top trade officials were surprised when she announced the launch of a trade and technology council during a trip to India. Nor were they informed about plans to pursue a ban on goods made using forced labour, announced during her State of the Union address in 2021.

“She says jump, we say how high,” was how one official described the pattern.

Now, trade officials will devise a list of technologies deemed to be critical in the coming months, with a more concrete plan on outbound investment screening due by the end of this year.

Speaking privately, some are pessimistic about convincing 27 countries to get on board by then. Brussels will embark on risk assessments with each capital with a view to understanding their exposures to China.

During these “therapy sessions”, it is hoped that members will learn about their own vulnerabilities and see the benefit of screening investments.

Benson, the CSIS analyst, said that on a recent trip through Berlin to meet relevant ministries, there appeared to be little interest. “The best way I can describe it is just a huge eye roll,” she said.

Elmar Hellendoorn, a specialist in economic statecraft at the Atlantic Council, suggested that the EU is caught between a rock and a hard place.

Dallying could result in the US using long-arm tactics it has deployed on export controls and sanctions, much to Europe’s ire, while banning investments will draw retaliation from China.

“The Europeans need to think carefully about outbound investment,” Hellendoorn said.

“Otherwise, the Americans are simply going to say that European companies in which American capital is locked in, well there might be extraterritorial reach for this new executive order.”