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You can look but you can't buy. Picture source: Reuters

The European Commission is poised to follow through on its plans to make it harder for China to buy up European companies in key technologies. In his State of the Union message Wednesday, Commission President Jean-Claude Juncker will unveil measures to allow European Union member states greater latitude in blocking acquisitions and provide a mechanism for the commission and other member states to weigh in.

The EU will remain open to foreign investment, according to the legislative proposal made available to Handelsblatt, but it is valid “to protect critical European assets from investments that run contrary to the interests of the Union and its member states.”

Germany, France and Italy have been among the member states pushing for more protection under EU law, but not everyone is happy about the commission’s plans. Some smaller members – such as Netherlands and the Scandinavian countries – worry that the new restrictions could become barriers to a valued source of investment in their countries.

“Chinese investors are investing heavily in German sites. Workers don’t get the feeling at all that companies are being hollowed out.”

Thilo Bordtmann, CEO, Mechanical Engineering Industry Association (VDMA)

The new measures expand the concept of national security – the current basis for blocking a purchase – to include important infrastructures like energy and telecommunications as well as “critical technologies” such as artificial intelligence, robotics, semiconductors and cybersecurity.

That shift goes to the heart of the German government’s concerns with the current state of affairs. For instance, Berlin blocked the Chinese acquisition of chipmaker Aixtron over national-security concerns highlighted by the United States. but failed to stop the takeover of robot maker Kuka last year because it didn’t have a legal basis for doing so.

Some EU members are worried that China’s ambitions to dominate certain technology sectors will lead to a damaging transfer of technology developed in Europe. The new measures specifically mention companies controlled by foreign governments, a particular concern with regard to China.

In Germany itself, some business groups are critical of the new restrictions. “Chinese investors are investing heavily in German sites,” said Thilo Bordtmann, chief executive of the Mechanical Engineering Industry Association (VDMA). “Workers don’t get the feeling at all that companies are being hollowed out.” Besides, the head of Europe’s largest industry association added, the restrictions are incompatible with property rights, restricting an owner who wants to sell his firm.

There is a certain irony in the protectionist measures from the EU after European leaders have been so critical of what they see as protectionism under the new US administration. Wolfgang Sturm, from the leading German law firm Linklaters, warned that they could lead to countermeasures from Beijing. “That could give rise to risk of a spiral in the direction of a trade war,” he said.

But part of Mr. Juncker’s calculation may be to get more leverage against China in negotiations that are languishing. Talks for an accord on investment protection, for instance, are not advancing.

Under the new measures, the final decision on an acquisition remains with the individual state. But other member states will have 25 business days to register their opinion if they feel an acquisition has an impact in their country. In addition, the commission is seeking the right to intervene when it feels EU interests are at stake. One example given is the Galileo satellite project, which is financed by the EU. In those cases, the national government can overlook the commission’s concerns only if it provides a strong case.

Those countries that are less worried about Chinese investment still will have no requirement to create a mechanism for reviewing foreign investments. Only about half of EU members currently have such a review mechanism in place.

As a final sweetener to alleviate concern about protectionism, Mr. Juncker is also expected to announce initiatives to open talks for bilateral trade agreements with Australia and New Zealand. Other pending trade accords are with the Mercosur bloc in South America and with Japan.

Till Hoppe is a Handelsblatt correspondent in Brussels. Klaus Stratmann is a Handelsblatt reporter based in Berlin. This article was adapted to English by Darrell Delamaide, a Handelsblatt Global editor in Washington, DC. To contact the authors: hoppe@handelsblatt.com and stratmann@handelsblatt.com

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