Brussels seeks new controls to limit China’s high-tech purchases

The EU is exploring ways to control how European companies invest in manufacturing capacity abroad, following similar US moves aimed at limiting the ability of China and other competitors to acquire advanced technology from the West.

Valdis Dombrovskis, a trade spokesman for the bloc, told the Financial Times that new restrictions are needed to prevent companies from circumventing export bans on sensitive technologies by making them elsewhere.

The EU has banned its companies from selling products that could help the Russian military in their war in Ukraine, but loopholes for re-export remain.

The new measures come as Washington has long insisted that its allies comply with its bans on the export of sensitive technology to China. After months of direct talks with the Biden administration, the Netherlands said last week it would ban most advanced silicon chip making machines from reaching China.

The White House is working on legislation that would create a narrow-scope outbound FDI screening agency to prevent offshore production after USA congress so far it has not been possible to agree on a text with a broader scope.

“Control of outbound investment is the other side of the export control coin,” Dombrovskis said. “Because you can effectively ban the export of so-called dual-use technologies — which we did, for example, to prevent the Russian war machine from being fed — but that still leaves room for sensitive technologies to leak through local investment.

“Therefore, we need a pan-European discussion on how to fix this possible bypass in a way that achieves the desired outcome, while being very mindful of any unintended consequences for the financial markets and the EU’s own investment environment.”

Officials acknowledge that the plans are at an early stage and could take years to materialize, despite member states’ skepticism. They are responsible for export and investment controls, and countries like the Netherlands and Germany want to maintain their close economic ties with China. Bulgaria does not even check domestic investments. But Russia’s war in Ukraine has led to closer cooperation.

European countries are expanding their definition of economic security after years of laissez-faire politics have left them open to Russian energy blackmail and Chinese involvement in a green economy transition, officials say. The bloc is moving closer to a US approach seeking to maintain key capabilities and technological superiority over rivals.

In 2020, new rules oblige governments to notify Brussels of inward FDI that may threaten security or public order.

In 2021, Member States submitted 414 notifications in accordance with FDI Verification Regulation on commission, 10 percent of the 4,000-plus transactions in the EU this year, according to the annual report. They are encouraged, but not required, to follow the opinion of the commission.

Overall, only 1 percent of all EU cases have been blocked, with 3 percent withdrawn by parties after issues have been raised.

A quarter received a permit with attached conditions, while the rest were approved. The information technology and manufacturing sectors are likely to be tested.

Dombrovskis also said the EU needs a more cohesive approach to export controls, especially as international forums that used to enforce rules are blocked by Russia’s presence.

“We are facing a rapidly changing geopolitical and technological environment characterized by new risks. They come from “new” technologies such as high-tech semiconductors, artificial intelligence, quantum technology, hypersound and biotechnology,” the Latvian politician said.

“At the same time, the current approaches to export control in the EU are under pressure. Events in Ukraine have also highlighted the risk of Member States taking national control measures without much coordination to address their pressing “national security” concerns.

He said that initially this would include an “EU approach” with governments agreeing on their controls.

“In the medium term, we need to think about how we can strengthen the structure of the EU and create the capacity to put in place appropriate export controls at the EU level, while respecting the priority given to the adoption of controls, whenever possible, by multilateral export controls. regimes,” Dombrovskis said.

Some EU officials are pushing for this to give the region more bargaining power. The Netherlands announced the introduction of export licenses for the “most advanced” chip manufacturing tools after strong pressure from the US and the Belgian Prime Minister. Alexander de Croo accusing Washington of bullying.

Dutch Trade Minister Lie Schreinemacher called on other EU countries to follow the upcoming Hague rules, which will be laid out in the next few months. But she became clear last week this coordination is the most that Brussels needs to do, as export control decisions remain in the hands of the national authorities.