EU to tighten investment rules to stand up to China

The EU is planning to tighten its foreign investment rules to ensure that Chinese companies do not gain advantage from the bloc’s open market without generating benefits for local workers and sharing technology.

The revised rules, which are still under discussion, are part of a series of proposals that the European Commission will make next month to bolster Europe’s ailing industrial base and flagging economic growth.

The influx of cheap Chinese products into the bloc, which has increased due to the knock-on effect of US President Donald Trump’s tariff regime, is adding to pressure on industries, including steel and chemicals, that already contend with high energy prices and complicated environmental rules.

A wave of Chinese industrial projects in Europe is also stoking concern that Beijing is fostering European dependence on its high-end manufacturing in order to boost its geopolitical leverage, a stated goal of Chinese President Xi Jinping. It is also seen as a way for Chinese companies to circumvent any further EU tariffs on Chinese goods.

The bloc’s industry commissioner Stéphane Séjourné told the Financial Times that the criteria should “ensure that foreign investments don’t just go into components that are assembled abroad” but contribute to “the functioning of the whole European value chain”.

Séjourné, a French politician, has been particularly instrumental in pushing for more local content requirements and “made in Europe” clauses in EU legislation — a long-term preference for France.

He said the revised rules would probably stipulate that foreign investors had to recruit local workers and in “certain sectors like batteries” transfer technological knowhow.

“It has to be productive for European growth and not just an entry point to the European market.”

Séjourné said he had the “same agenda” as Trump on re-industrialisation, adding that the “only thing that is different is that we are going to use different tools for industrial policy than tariffs. We are protecting our market but I prefer to use [foreign direct investment] conditionality to be able to produce in Europe.”

Séjourné was responding to a question about limiting the encroachment of Chinese companies into the bloc. An EU official confirmed that the legislation would not mention China by name, but given the investment flows from the Asian country into the EU, it was clear what the focus of the legislation would be.

FDI flows from China to the EU increased 80 per cent to €9.4bn in 2024 compared with 2023 levels, according to data from the European Commission.

Chinese company CATL, a battery maker with more advanced technology than any European rival, has become a particular focus of attention. Having already opened a plant for electric vehicle batteries in Germany, it is now constructing a €7bn factory in Hungary and a €4bn facility in Spain. CATL was added to a Pentagon blacklist of companies believed to have ties to the Chinese military in January, although it has denied any such links.

To construct the Spanish facility, which is part of a joint venture with Stellantis, CATL wants to bring 2,000 Chinese workers to the Zaragoza region. It is set to use 3,000 mostly Spanish workers to run the plant but some union officials predict that, in line with Chinese government policy, it will be reluctant to share its most valuable technological secrets.

A Spanish government official said Madrid was strongly in favour of the EU initiative to tighten foreign investment rules, saying it expects the move will “advance Europe’s economic security and resilience, and also ensure that FDI creates strong value added, technology and domestic employment in European nations”.

Chinese companies have also made several significant investments in hydrogen projects in Germany, Spain and the Nordics in recent years.

Laurent Donceel, director of the industry group Hydrogen Europe, said it was hard to discern Chinese companies’ “actual degree of involvement” in the sector “as it is virtually impossible to identify the actual entities involved”. Current rules stipulating that companies accessing EU funds for hydrogen cannot source more than 25 per cent of electrolyser components from China were “easily bypassed”, he said.

Séjourné said the rules should set out a definition of what constituted “local content”, potentially based on customs codes.

Martin Šebeňa, chief economist at the Central European Institute of Asian Studies, said tighter rules should “largely reduce the race to the bottom between European countries, especially those in southern, central and eastern Europe, which have been keen to attract FDI into certain sectors by implicitly promising low regulatory intervention”.

In the electric vehicle sector he noted that the tighter rules would also affect Japanese and South Korean companies, which have traditionally built stronger ties with local European businesses. The EU official said Japanese and Korean companies would be more likely to comply with the criteria Brussels would set.

The plans will be proposed on December 10 and could be subject to change.

China supports its companies’ co-operating on trade and investment “based on market principles”, the ministry of foreign affairs said on Tuesday in response to questions from the FT. “China opposes violations of WTO rules and forced technology transfer, and opposes interference in normal business operations.”

It said China hoped Europe would create a fair environment for Chinese companies and “avoid undermining their investment confidence”.

Additional reporting by Andy Bounds in Brussels and Joseph Leahy in Beijing