Despite these regulatory changes, the near-term outlook for Chinese investment in the EU is relatively strong. At the beginning of 2019, Chinese investors had more than EUR 15 billion worth of proposed transactions pending (including Anta’s proposed acquisition of Amer Sports for EUR 4 billion), which shows that the EU remains an attractive investment destination. Chinese investment in Europe is likely to get a further boost from the recent expansion of the US investment screening regime and the broader deterioration of US-China relations, which will cause some investors to divert capital from North America to the European continent. The modernization of EU investment screening regimes will shape the longer term outlook as member states implement reforms over the course of the next 18 months.

Another important variable is to what extent the EU and its memberstates will follow other advanced market economies in taking a more nuanced and defensive stance towards economic engagement with China. European debates about risks from economic engagement with China now extend far beyond FDI reviews. EU institutions, national governments, and businesses are publicly re-thinking past approaches and calling for a “less naïve” stance toward economic and political engagement with China.6 Though the debate is still relatively young in Europe, it is fast-moving and its impact is already visible in many areas including:

Calls for a new approach to EU competition policy to respond to Chinese state-supported conglomerates (with criticism currently focused on the blocked Siemens/Alstom merger)

A more careful interpretation of Europe’s principled openness to Chinese bidders in public tenders (such as in infrastructure projects in Croatia and Poland)

Greater scrutiny of data security compliance of Chinese service providers (for instance bikesharing company Mobike being under scrutiny for a lack of user data protection)

Joint warnings or even sanctions in response to cyberattacks and other espionage efforts (with the UK leading the effort to hold China accountable for cyberattacks by the Advanced Persistent Threat (APT) 10 group)

Enforcement of compliance with money laundering and other financial regulations (see recent cases against major state-owned banks in Italy and Spain)

A backlash against the supply of Chinese telecommunications equipment and services to European markets (with Huawei’s potential role in European 5G networks being the focal point of attention)

These changes in attitudes and growing scrutiny across a range of regulatory and policy areas could severely affect China’s investment footprint in Europe in the coming years. The controversy about Huawei’s role in Europe’s 5G infrastructure illustrates these developments. Huawei has invested heavily in European research and development, 5G trials, and other partnerships to become a major – if not the leading – telecommunications equipment supplier in Europe. If European governments proceed to limit Huawei’s opportunities in servicing European telecommunication markets – or ban Huawei as a provider entirely – it is highly likely that Huawei would shrink its investment in R&D, real estate, and other commercial partnerships across Europe (as it has done in the United States).

Despite the risks of losing investment, the current political realities indicate that the overhaul of investment screening frameworks is probably only the first step in a broader overhaul of the EU’s stance and policy tools in response to growing Chinese economic activities in Europe. The Union and its member states are playing catch up with other advanced economies that have already implemented similar policies in response to concerns about the nature and direction of China’s economic and political system. If other OECD economies serve as a guide, the most likely areas for additional policy action are export controls for dual use and critical technologies, data security and privacy rules, procurement rules, and competition policy.

Instead of emulating the policy of the US and other OECD nations, Europe will have to identify its own solutions to challenges in those policy areas, so they match Europe’s unique interests, values and political realities. The pace and efficiency with which the new EU FDI screening framework was created and adopted shows that collaboration between member states and Brussels can work and yield robust outcomes.

The European election cycle of 2019 could potentially disrupt efforts toward a more streamlined European position on trade and investment with China, but recent efforts to institutionalize bureaucratic coordination in Brussels, similar developments in many European capitals, and coordination with other OECD governments have increased the chances of greater strategic coherence of European external economic policy toward China even under new political leadership.