The European Union’s Economic and Trade Legislation:New Developments and Implica

The European Union is a major trading partner, source of inbound investment, and destination of outbound investment for China.The adjustment to its foreign economic and trade strategy thus bears direct and profound significance for China-EU economic and trade relations and China’s open economy.Since 2020, the EU has successively formulated and adopted a series of economic and trade legislation over foreign investment review, foreign subsidies, international public procurement, supply chain due diligence, products made by forced labor, the carbon border adjustment mechanism (CBAM), export control of dual-use items, and anti-economic coercion.While these measures address different issues and are apparently unrelated, they are in essence complementary and constitute an organic whole.They are not explicitly directed against a specific country; however, observers generally agree that the restrictions are aimed squarely against China.

In China, while there have been in-depth analyses on foreign investment review, foreign subsidies, the CBAM and other specific concerns of the EU’s economic and trade legislation, there remains room for improvement.In terms of content, the majority of the existing academic research focuses on specific EU regulations, while systematic and holistic analysis that looks beyond individual pieces of legislation is rare.1Hu Zinan, “The Motivation, Measures, Impact and Chinese Countermeasures of the EU Strengthening Its Economic and Trade Defense Tools Against China,” Pacific Journal, No.3, 2022, pp.53-63; Fredrik Erixon et.al., “The New Wave of Defensive Trade Policy Measures in the European Union: Design,Structure, and Trade Effects,” ECIPE Occasional Paper, No.4, 2022, pp.1-142.In terms of perspectives, most research is limited to the scope of economy and trade, without due consideration of the EU’s industrial policy, internal politics, and foreign relations.All this has prevented us from seeing the full picture of the EU’s adjustment to its economic and trade strategy, and clearly understanding the new normal of a reshaped economic relationship between China and the EU.Based on a consistent analytic framework,this article will observe the new developments of the EU’s strengthened economic and trade legislation, explore the commonalities between the diverse legislative documents in different issue areas, and evaluate its profound implications for China and the China-EU economic and trade relations in particular.

New Developments of EU Economic and Trade Legislation

Amid the dual transformation of the international economic and geopolitical landscape, the EU has been replenishing and upgrading its legal toolbox in economics and trade, in order to enhance its economic competitiveness and achieve its so-called “open strategic autonomy.” This demonstrates the EU’s aptness in agenda-setting and rules-making.With the changing balance of power between China and the EU and the evolving European perception of China as a “systemic rival,” China has become a major factor that the EU does not explicitly acknowledge but finds hard to ignore when drafting its laws and regulations.

Strengthening foreign investment review on security and public order grounds

In the context of intensifying major-power competition, the EU and its member states have increasingly viewed the mergers and acquisitions(M&A) by foreign capital through a security-oriented lens.The rapid elevation of China’s international competitiveness and the steady materialization of its Belt and Road Initiative (BRI) have aggravated the EU’s sense of insecurity about its critical industries and infrastructure.This is particularly the case when Chinese companies completed multiple landmark M&A in Europe, including the acquisition of German robotics manufacturer Kuka by China’s Midea Group, the purchase of a billion-euro stake in German automaker Diamler by Geely Holding,the acquisition of the Piraeus port of Greece by COSCO Shipping, and the purchase by COSCO of a minority stake in a container terminal at Germany’s Hamburg port.There has been a major shift of opinion about Chinese capital in the governments, business communities, and the general public of Germany, France, and Italy, among other countries,which directly led to the strengthening of their foreign investment security review systems.2Zhang Huailing, “US and EU Tightening of Foreign Investment Security Review and Its Implications,”China International Studies, No.5, 2019, p.78.Out of the worry that Chinese state-owned enterprises would obtain the advanced dual-use technologies of Europe through M&A and bring security risks, the EU and its member states have been actively promoting the establishment of a common foreign investment screening mechanism.According to Valdis Dombrovskis, Executive Vice President of the European Commission and the European Commissioner for Trade, “The EU is and will remain open to foreign investment.But this openness is not unconditional…If we want to achieve an open strategic autonomy, having an efficient EU-wide investment screening cooperation is essential.”3“EU Foreign Investment Screening Mechanism Becomes Fully Operational,” European Commission,October 9, 2020, https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1867.

The EU framework for foreign direct investment (FDI) screening was adopted in 2019 and became fully operational in October 2020.In terms of jurisdiction, the European Commission is allowed to issue opinions when an investment risks undermining the interests of the whole EU or poses a threat to the security or public order of more than one member state,while member states reserve the final decision-making power on specific FDIs.In terms of scope, factors that may be taken into consideration by member states and the Commission fall into five categories: 1) critical infrastructure, including energy, transport, water, health, communications,data processing or storage, aerospace, defense, financial infrastructure, and sensitive facilities; 2) critical technologies and dual-use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace,defense, nuclear technologies as well as biotechnologies; 3) supply of critical inputs, including energy or raw materials, as well as food security; 4) access to sensitive information; and 5) the freedom and pluralism of the media.In terms of screening criteria, the major concerns include: 1) whether the foreign investor is directly or indirectly controlled by the government; 2)whether the foreign investor has already been involved in activities affecting security or public order in a member state; and 3) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.4Council of the European Union and European Parliament, “Regulation (EU) 2019/452 Establishing a Framework for Screening of Foreign Direct Investments into the European Union,” Official Journal of the European Union, March 21, 2019, L79, pp.1-14.Under the promotion of the European Commission, Germany, France,Italy, Spain, and Poland, among other countries, have reformed their FDI screening regulations or created new ones, and the general tendency is to expand the scope of screening and lower its threshold.As of the end of 2022, only Bulgaria and Cyprus among the EU’s 27 member states have yet to launch an FDI screening mechanism.Since the proposed China-EU Comprehensive Agreement on Investment has put in place exception clauses, the EU’s investment restrictions on security and public order grounds would remain unaffected even if the deal found a way through to ratification and came into effect.

Promoting legislation on foreign subsidies and international procurement under the pretext of fair competition

Since the eruption of the Covid-19 pandemic and especially the outbreak of the Ukraine crisis, the EU has been increasingly worried about the M&A of its core assets by foreign enterprises, and the relentless efforts by foreign governments to encourage the relocation of European companies, both of which it blindly attributes to national strategies and government subsidies of foreign states.In this context, the European Commission proposed a draft regulation on “foreign subsidies distorting the internal market” in May 2021.The regulation, which will start to apply on July 12, 2023, is in essence a protection for EU local industries by preventing foreign enterprises from gaining a competitive edge through government subsidies.

The EU Foreign Subsidies Regulation will mostly target foreign stateowned enterprises (SOEs), but will also cover private companies supported or funded by the public sector.This means that Chinese SOEs and those American firms that have benefited from the US Inflation Reduction Act will be placed under special scrutiny.At the 2023 World Economic Forum in Davos, European Commission President Ursula von der Leyen accused China of “openly encouraging energy-intensive companies in Europe and elsewhere to relocate all or part of their production” and of “heavily subsidizing its industry and restricting access to its market for EU companies.” She vowed to use all the tools, including the new Foreign Subsidies Regulation, to deal with the alleged unfair practices.5“Special Address by President von der Leyen at the World Economic Forum,” European Commission,January 17, 2023, https://ec.europa.eu/commission/presscorner/detail/en/speech_23_232.According to the regulation, an M&A transaction must be notified with the European Commission if the party carrying out M&A received financial contributions of more than 50 million euros from third countries in the three years preceding the deal, and the EU company to be merged and acquired generates a turnover of at least 500 million euros.Public procurement procedures must also be notified with the Commission if the company participating in the procurement or its affiliates received a financial contribution of at least 4 million euros per third country in the three years prior to notification, and the value of the public procurement is at least 250 million euros.For small- and medium-sized enterprises (SMEs) that have yet to meet the thresholds for notification, the European Commission may launch ex-officio reviews on its own initiative and exempt those subsidies that do not exceed 4 million euros per undertaking over any consecutive period of three years.

In terms of punitive measures, the European Commission is authorized to prohibit an M&A transaction or the award of a public procurement contract if a company is found to receive a foreign subsidy distorting competition in the EU.It may also request the “subsidized entity” repay the foreign subsidy and offer redressive fair competition commitments to the Commission.Breaches of the commitments may be subject to fines of up to 10% of the company’s aggregate turnover in the preceding financial year.6Council of the European Union and European Parliament, “Regulation (EU) 2022/2560 on Foreign Subsidies Distorting the Internal Market,” Official Journal of the European Union, December 23, 2022,L330, pp.1-45.

The EU has also devised an international procurement instrument in order to open up third-country government procurement markets for EU firms, which took effect in August 2022.According to the regulation on international procurement instrument, once the European Commission finds that a third-country measure or practice impairs the access of EU enterprises to the public procurement or concession markets, it may require the contracting party to impose a score adjustment of up to 50% of the evaluation score on tenders submitted by economic operators originating in that third country, or even exclude such tenders.However, economic operators, goods or services from third countries or regions that are parties to the WTO Agreement on Government Procurement or to government procurement agreements concluded with the EU will be exempt from these restrictive measures.7Council of the European Union and European Parliament, “Regulation (EU) 2022/1031 on International Procurement Instrument,” Official Journal of the European Union, June 30, 2022, L173, pp.1-16.

Regulating supply chain due diligence, anti-forced labor and carbon tax for human rights and environmental objectives

In recent years, the EU has been making efforts to incorporate human rights and environmental agendas into its economic and trade legislation.Multiple EU member states have also passed laws to promote corporate social responsibilities and achieve sustainable development, but a unified legislative and enforcement framework at the EU level has yet to take shape.To bridge the gap, the European Commission successively proposed regulations concerning supply chain due diligence, rejection of products made with forced labor, and taxation on carbon-intensive imports.

In terms of supply chain due diligence, the proposal for a directive on corporate sustainability due diligence released by the Commission in February 2022 requires relevant companies operating within the EU to take appropriate measures to identify and prevent, end or mitigate adverse impacts of their activities on human rights and the environment.Failure to do so would be subject to administrative penalty and civil liability.The EU Council adopted a general approach on the proposal in November 2022,and once the directive is formally adopted, EU member states will have two years to implement it into national legislation.As issues related to China’s Xinjiang are constantly being played up in Europe, the proposed directive on supply chain due diligence is deemed to target China to a significant extent.According to the Commission proposal, the diligence rules will apply to two groups of companies: those with more than 500 employees and at least 150 million euros in net turnover generated worldwide (for EU companies) or in the EU (for non-EU companies), and those in defined high-impact sectors, which do not meet the above thresholds but have more than 250 employees and at least 40 million euros in net turnover generated worldwide (for EU companies) or in the EU (for non-EU companies).8“Just and Sustainable Economy: Commission Lays Down Rules for Companies to Respect Human Rights and Environment in Global Value Chains,” European Commission, February 23, 2022, https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1145.

Complementary to the due diligence regulation, the European Commission proposed a regulation on prohibiting products made with forced labor on the Union market in September 2022, under which products found to be made by forced labor can neither be sold in the EU, nor exported from the EU.Legally founded on the EU’s common commercial policy, the regulation will be implemented by different member states after its entry into force to ensure no product made with forced labor would enter the EU internal market.To avoid violating the WTO’s non-discrimination principle, the proposed regulation covers all goods made in the EU and all of EU exports and imports, without targeting specific companies or industries.The European Commission will also set up a public database named the EU Forced Labor Product Network to facilitate coordination between member states.9European Commission,“Commission Moves to Ban Products Made with Forced Labour on the EU Market,” September 14, 2022, https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5415.

To sustain the EU’s industrial strength and hold the moral high ground for global reduction of carbon emissions, the European Commission put forward the draft legislation for the CBAM in July 2021, which would require importers to declare greenhouse gas emissions embedded in their imports, and surrender the corresponding number of CBAM certificates under the EU Emissions Trading System (ETS).This is equivalent to a “carbon tariff” on foreign exporters.In April 2023, the European Parliament and the EU Council successively adopted the CBAM,according to which the obligations for importers to pay a levy will kick in as of 2026 and become fully operational in 2034.The mechanism will apply to imports of certain goods and selected precursors whose production is carbon intensive and at most significant risk of carbon leakage, including cement, iron and steel, aluminum, fertilizers, electricity and hydrogen.Certain downstream products may also be included in the scope of the CBAM, subject to a review of the mechanism’s functioning during the transitional phase.

Revising export control of dual-use items for security and human rights reasons

As a critical instrument to limit foreign access to advanced technologies,export control has been increasingly applied by developed economies such as the US, the EU and Japan in their economic competition with China.In September 2021, the regulation on setting up an EU regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items formally entered into force.The new regulation introduced the concept of human security, imposing stricter export controls on cyber-surveillance technologies that are or may be used to support human rights violations, and listing China as its primary focus.Peter Altmaier, then Economy Minister of Germany in the capacity of President of the EU Council, said that “The new rules strike the right balance between strengthening the competitiveness of the EU, ensuring our security interests and promoting human rights.”10“New Rules on Trade of Dual-use Items Agreed,” Council of the EU, November 9, 2020, https://www.consilium.europa.eu/en/press/press-releases/2020/11/09/new-rules-on-trade-of-dual-use-items-agreed.Multiple members of the European Parliament claimed in their debate that human rights would be put at the forefront of the EU’s export policy with the new regulation in place and that the EU’s most advanced technologies should not be used by China and other countries that “go directly against EU values.”11European Parliament, “Control of Exports, Brokering, Technical Assistance, Transit and Transfer of Dual-Use (Debate),” March 25, 2021, https://www.europarl.europa.eu/doceo/document/CRE-9-2021-03-25-ITM-013_EN.html.

In terms of the target of export control, the new regulation expanded the definition of “exporter” to include “any natural or legal person or any partnership” that sends dual-use items out of the EU customs territory, and revised the definition of “broker” to cover “any natural or legal person or any partnership that provides brokering services from the customs territory of the Union into the territory of a third country,” whether the person or partnership concerned is resident or established in the EU or not.The concept of “provider of technical assistance” was newly added and involves those that provide technical assistance from EU customs territory into the territory of a third country, or those resident or established in a member state that do the same within a third country’s territory.Regarding the coverage of export control, the updated EU export control list includes dual-use items and relevant software and technology that fall into ten categories: nuclear materials, facilities and equipment; special materials and related equipment;materials processing; electronics; computers; telecommunications and“information security”; sensors and lasers; navigation and avionics; marine;and aerospace and propulsion.The export of items in the list beyond EU borders requires an export license from the competent EU member state authority.Non-compliance with the export authorization requirement may be subject to administrative or even criminal penalties, including fines, confiscation of goods and profits gained by illegal transaction,disqualification from corporate directorship, suspension or revocation of export license, temporary or permanent ban to perform related economic activities, and imprisonment.12Council of the European Union and European Parliament, “Regulation (EU) 2021/821 Setting Up a Union Regime for the Control of Exports, Brokering, Technical Assistance, Transit and Transfer of Dual-use Items (Recast),” Official Journal of the European Union, June 11, 2021, L206, pp.1-461.Besides, the EU regulation does not adopt the“de minimis rule” and the “foreign direct product rule” as seen in the United States’ export control laws, and has no jurisdiction over the items made outside the EU.

Advancing anti-foreign sanctions law to counter alleged economic coercion

Discussions on countering the so-called “economic coercion”have long been underway within the EU.While it was the Trump administration’s imposition of tariffs on EU exports that triggered such discussions in the first place, China’s trade countermeasures against Lithuania after the country opened the “Taiwanese Representative Office”in violation of the one-China principle have accelerated the EU’s legislative process.13Jonathan Hackenbroich, “Defending Europe’s Economic Sovereignty: New Ways to Resist Economic Coercion,” European Council on Foreign Relations, October 2020, https://ecfr.eu/publication/defending_europe_economic_sovereignty_new_ways_to_resist_economic_coercion; Luisa Santos, “EU-China Opinion Pool: What Should the EU’s Anti-coercion Instrument Look Like?” MERICS, March 3, 2022,https://merics.org/en/opinion/eu-china-opinion-pool-what-should-eus-anti-coercion-instrument-look;Marcin Szczepański, “China’s Economic Coercion: Evolution, Characteristics and Countermeasures,”European Parliament Research Service, November 2022, https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)738219.In December 2021, the European Commission proposed a regulation on “the protection of the Union and its Member States from economic coercion by third countries,” in which “economic coercion” was defined as a third country “applying, or threatening to apply, measures affecting trade or investment” to “pressure the Union or a Member State into making a particular policy choice.” This legal instrument, according to the Commission, is “in response to the EU and its Member States becoming the target of deliberate economic pressure in recent years,” and“strengthens the EU’s toolbox and will allow the EU to better defend itself on the global stage.”14European Commission, “EU Strengthens Protection Against Economic Coercion,” December 8, 2021,https://ec.europa.eu/commission/presscorner/detail/en/ip_21_6642.Legally based on the EU’s common commercial policy, the regulation will fall under the purview of the EU Directorate-General for Trade once it takes effect.

In terms of its scope of application, the regulation not only targets the actions taken by third countries within their own territories as well as the implications of these actions, but also covers the actions taken within the EU by entities controlled or directed by third countries and the damage caused.Regarding countermeasures, once the European Commission determines that a third-country action fulfills the conditions of “economic coercion,” it will directly engage with the coercing country.Should the multiple engagements fail to achieve the EU’s expected results, the Commission may, depending on specific circumstances, impose additional tariffs on the products and limit the imports from the third country, ban its access to items under the EU’s export control and to the EU’s public procurement and financial markets, and suspend scientific cooperation.Additional measures may be put in place through authorization.15European Commission, “Questions and Answers: Commission Proposal for an Anti-Coercion Instrument,” December 8, 2021, https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_6643.On the day the proposal was released, Valdis Dombrovskis, Executive Vice President of the European Commission and the European Commissioner for Trade, and Josep Borrell, High Representative of the Union for Foreign Affairs and Security Policy, issued a joint statement on China’s alleged rejection of customs clearance applications by Lithuania, saying “The EU is ready to stand up against all types of political pressure and coercive measures applied against any Member State.”16European Commission, “Joint Statement by High Representative/Vice-President Josep Borrell and Executive Vice-President Valdis Dombrovskis on China’s Measures Against Lithuania,” December 8, 2021,https://policy.trade.ec.europa.eu/news/joint-statement-borrell-and-dombrovskis-chinas-measures-againstlithuania-2021-12-08_en.

Common Characteristics of EU Economic and Trade Legislation

While the series of EU economic and trade legislation target different issue areas, there are multiple underlying characteristics in common, which reflect the EU’s current basic thinking on its foreign economic and trade strategy,and also herald its priorities in advancing and strengthening its economic and trade legislative architecture for some time to come.

The core objective to protect and strengthen EU industrial competitiveness

Industrial and technological competition has become the focus of current major-power competition.For the US and Europe, the traditional model of economic globalization based on trade and investment liberalization is no longer always beneficial, and causes problems such as industry hollowing and supply chain vulnerability, which makes it difficult for them to effectively address the industrial competition with emerging powers like China.Resetting the agenda, rewriting the rules,and reorganizing the layout of economic globalization thus become an urgency for them.In this context, the economic and trade legislation and policies constantly introduced by the US and the EU have witnessed a close interaction and coordination with their industrial policies, with the former directly serving the core objective to reshape their industrial competitiveness.For the EU, the series of economic and trade regulations it has adopted is not only aimed at adjusting the economic relations with other countries, but is also likely to influence the relations in industrial competition.

On the one hand, it prevents the EU’s own critical industries from foreign M&A or impacts of other kinds, and avoids a stranglehold by foreign-dominated industries or supply chains.Under the dual impacts of the Covid-19 pandemic and the energy crisis, many European enterprises have seen their costs rapidly rise and their operation plunge into difficulty,which makes them become the targets of foreign M&A.By introducing regulations on foreign investment review and foreign subsidies, the EU and its member states have built a firewall against the investment and M&A activities of foreign companies, especially SOEs, making it far more difficult for them to access the EU’s core assets.China’s advantageous position in green industries such as electrical vehicles, solar panels and wind turbines is attributed by von der Leyen to “unfair competition”boosted by so-called “massive and hidden subsidies.”17European Commission, “Statement by President von der Leyen at the Joint Press Conference with Prime Minister Kristersson on the Occasion of the College Visit to the Swedish Presidency,” January 13,2023, https://ec.europa.eu/commission/presscorner/detail/en/statement_23_205.The EU Foreign Subsidies Regulation, which she vowed to wield to address the allegedly unfair practices, will apply not only to Chinese enterprises but also to US companies in the EU.Supported by the proposed Net-Zero Industry Act,the Critical Raw Materials Act, and the European Sovereignty Fund, it can cope with the pressure of industrial competition brought by the provisions on subsidies in the US Inflation Reduction Act.18Kim Mackrael, “EU Foreign-Subsidy Limits Target China but Also Hit U.S.Companies,” The Wall Street Journal, December 28, 2022, https://www.wsj.com/articles/eu-foreign-subsidy-limits-target-chinabut-also-hit-u-s-companies-11672234980.This also means,however, that the EU is formulating its own subsidy scheme all the while opposing the subsidies from foreign governments, which is obviously an act of double standards.

On the other hand, by playing a leading role in the formulation of high-standard economic and trade rules, the EU can rein in its competitors and gain a comparative advantage in specific industries.In recent years, the high standards adopted by the EU and its member states in human rights and environmental areas have facilitated the sustainable development of local enterprises, but have also increased their operational costs and undermined their international competitiveness.Given this, the EU has successively proposed the supply chain due diligence directive, the antiforced labor regulation, the CBAM, and the dual-use export control, in a bid to significantly increase the access threshold and operational costs of foreign competitors and ensure the so-called “level playing field.” As a study by the European Parliament Research Service admits, “EU-based companies would be put at competitive disadvantage towards other companies” because of their social responsibility obligations, and “one way to address this would be to oblige all companies active on the EU market to respect due diligence requirements.”19Ionel Zamfir, “Towards a Mandatory EU System of Due Diligence for Supply Chains,” European Parliament Research Service, October 2020, p.6, https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/659299/EPRS_BRI(2020)659299_EN.pdf.This reveals that the EU’s economic and trade legislation,which is a defensive instrument on the surface with China as a major target,is in essence an attempt to translate its industrial policy into law and enhance its competitive edge.

The prominence of political and ideological considerations

The EU’s foreign economic and trade strategy in recent years has been increasingly tarnished by politicization, securitization, and moralization,with the role of political and ideological factors becoming more prominent in relevant legislation.The economic and trade regulations that the EU has successively proposed in the name of security, human rights,environment and values reflect two outstanding orientations of its foreign economic strategy under new circumstances.On the one hand, the EU has attached more importance to the balance between openness and security amid the volatile transformation of global geopolitics.In its new trade strategy unveiled in February 2021, the EU expressed concern for alleged“strategic dependencies,” and instead advocated “open strategic autonomy”and “well-functioning, diversified and sustainable global value chains.”20European Commission, “Trade Policy Review - An Open, Sustainable and Assertive Trade Policy,”February 18, 2021, https://trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159438.pdf.Looking from the legislative moves on foreign investment review, export control of dual-use items, and anti-economic coercion, the concerns of the EU and its member states are not only about industrial security, but also about political and military security.The legislation aims to prevent foreign governments and the companies under their control from threatening the EU’s security interests through M&A and imports, and limit the capacity of foreign governments to impose economic sanctions on EU member states, enterprises and entities.On the other hand, driven by its internal political agenda, the EU has also given more attention to the balance between economic interests and values.As an ardent pioneer in human rights and environmental areas, the EU has been consistently incorporating its value preferences into its political and economic relations with other countries.Looking from its proposed supply chain due diligence directive,the anti-forced labor regulation, and the CBAM, the EU and its member states are not only pursuing economic interests but also attempting to take the moral high ground and dominate at a global level the formulation of high-standard economic and trade rules.As President of the European Council Charles Michel claimed, “As one of the main trading powers, we are setting global standards that reflect our values.”21European Council, “Going Big for EU Industry - Op-Ed Article by President Charles Michel,” January 16, 2023, https://www.consilium.europa.eu/en/press/press-releases/2023/01/16/going-big-for-eu-industryop-ed-article-by-president-charles-michel.

What is noteworthy in the current decision-making mechanism of EU institutions, the European Parliament, which is a long-time close follower of human rights, environmental and value issues, has seen its influence and discourse power rapidly on the rise in the organization’s internal economic and trade legislation and its approval of foreign treaties.The relative expansion of power has in turn contributed to politicizing and ideologizing what are originally economic issues, making the EU’s foreign economic and trade strategy far more complex and uncertain.The delicate balance between openness and security, and that between economic interests and values, are running the risk of being undermined.

Concurrent with the prominence of political and ideological considerations in the EU’s economic legislation is the changing balance of power between China and the EU.Relations between the two sides have been increasingly overshadowed by security, human rights, and value issues, while China has become a major target of EU legislation and law enforcement.This is not only reflected in the EU’s pressure and trade restrictions on China on grounds of alleged human rights issues related to Xinjiang and Hong Kong,but also demonstrated in its exaggeration of the threat posed to European economy and security by Chinese SOEs, the BRI, and the military-civil fusion strategy of China.Once political and ideological factors are embedded into economic and trade regulations, they are prone to becoming some kind of“political correctness,” which is difficult to be separated again or be mitigated in the short term.In fact, this will be part of the “new normal” of the EU’s economic ties with other countries, particularly with China.

The abuse of long-arm jurisdiction and discretionary power

The EU’s series of economic and trade legislation is both a protective policy instrument and an aggressive weapon, leveraging its market advantages and regulatory thresholds to limit the industrial development of other countries.Through complicated legislative procedures and enforcement mechanisms, the EU has cloaked what are in essence restrictive economic and trade measures that violate market economy and fair competition principles with some kind of legitimacy, thus greatly expanding its policy toolbox in foreign economic competition.

The EU’s regulations or directives on foreign investment review, foreign subsidies, supply chain due diligence, and anti-forced labor directly target the enterprises or entities operating within its borders, but also unilaterally empower itself with some kind of long-arm jurisdiction that goes beyond its geographical reach by involving the foreign companies, entities and even natural persons in the upstream or downstream of the supply chain.Foreign enterprises that invest or export to the EU market, and the wholly-owned subsidiaries or joint ventures established by EU-based transnational corporations outside the EU may both fall under the purview of these regulations.With regard to implementation,whether the EU’s long-arm jurisdiction can be effective depends to a large extent on the reliance of these foreign companies and entities on the EU market as well as their vulnerability to EU restrictions.Those more reliant on the EU market and with fewer alternative options are more susceptible to the jurisdiction of the EU’s economic and trade legislation.

Besides, since the criteria for a controlled object and the scope of application in these regulations remain ambiguous without adequate legal certainty, the European Commission and the EU member states are left with great discretionary power on the direction and intensity of law enforcement.For example, the EU thresholds for security review in foreign M&A, including“whether the foreign investor is directly or indirectly controlled by the government” and “whether the foreign investor has already been involved in activities affecting security or public order in a member state,” are in fact short of objective and clearcut references, thus making the judgement completely depending on the subjective perceptions of member state governments.Once the normal M&A activities of foreign enterprises are politicized, they are vulnerable to negative opinions within the EU and more likely to be closely scrutinized by member state governments.For another example, the concept of “government subsidies” in the EU Foreign Subsidies Regulation is broadly defined, with the sources of subsidies not limited to the government but also involving foreign financial institutions, SOEs and government-authorized private businesses.The forms of subsidies to be regulated also include interestfree loans, capital injections, grants, and tax preferences or credits.Such a definition is highly flexible, and almost all foreign major enterprises operating in the EU can be interpreted to fall within its range.This is tantamount to requiring these companies to sever their economic ties with the public sector of their respective home countries, otherwise they may be subject to the European Commission’s review.A third example is the identification of alleged foreign “economic coercion” under the anti-coercion regulation, which can be rather arbitrary and cover almost all economic and trade restrictive measures imposed by a foreign country on EU member states, enterprises,entities, and individuals.This blurs the boundary between reasonable and legitimate “economic countermeasures” and peremptory and arbitrary“economic coercion,” and amounts to empowering the European Commission to intervene in different economic and trade disputes and impose its own political preference.It is another bargaining chip created out of nowhere for the institution to compete globally.

Implications for China

The series of economic and trade legislation proposed by the EU has greatly enriched and improved the organization’s legal toolbox, serving both to protect its own critical industries and to cripple its competitors.Before formally being adopted, the regulations have undergone repeated bargaining within the EU, and reflect the compromise and the greatest denominator of consensus among EU institutions (the European Commission, the EU Council, and the European Parliament) and the member states, which makes them highly representative and stable.For some time to come, the legislation will have profound implications not only for China-EU economic and trade relations,but also for China’s economic cooperation with other countries as well as its participation in the rules-making of international economy and trade.

Increasing the compliance costs of exporting to the EU

The EU is China’s second largest export destination only after the United States, while China is the EU’s top source of import.In 2021, 15.4%of China’s total goods exports went to the EU, while the EU’s goods imports from China accounted for 22.4% of its total.22General Administration of Customs of China, “Total Value (in RMB) of Imports and Exports of Goods by Countries (Regions) in December 2021,” January 14, 2022.http://www.customs.gov.cn/customs/302249/zfxxgk/2799825/302274/302275/4122133/index.html; Eurostat, “China-EU - International Trade in Goods Statistics,” February 2022, https://ec.europa.eu/eurostat/statistics-explained/index.php?title=China-EU_-_international_trade_in_goods_statistics.Nevertheless, according to the European Commission’s annual report on the use of trade defense instruments (TDI), China has become the primary target of the EU’s trade remedy measures.Of the 140 anti-dumping investigations initiated by the EU in 2021, as many as 96 were directed against China, much higher than Russia (10) and the US (5) and far beyond the reasonable range for protecting EU products and markets.23European Commission, 40th Annual Report from the Commission to the Council and the European Parliament on the EU’s Anti-Dumping, Anti-Subsidy and Safeguard Activities and the Use of Trade Defense Instruments by Third Countries Targeting the EU in 2021, September 19, 2022, p.5.As a series of economic and trade regulations related to China successively come into force, Chinese exports to the EU will face more systemic barriers.

The EU supply chain due diligence directive and anti-forced labor regulation put the whole supply chain under scrutiny.Nominally, they target enterprises registered or operating in the EU with a certain scale; however,it also transmits the pressure and cost of security review to all enterprises in the upstream and downstream of the supply chain.The EU and its member states are thus empowered through internal legislation to exercise de facto cross-border investigation and long-arm jurisdiction over Chinese exporters.After the entry into force of these regulations, Chinese exporters have to comply with European human rights and environmental requirements, while the power of investigation, interpretation and discretion belongs entirely to the European side.Notably, the EU’s anti-forced labor regulation confers huge discretionary power on the member states, stipulating that competent authorities may make decisions based on other available facts when it is impossible to gather all the relevant and necessary evidence.Due to the differences in human rights and environmental standards between China and Europe, the EU economic and trade instruments are bound to substantially increase Chinese exporters’ compliance costs and, in worse cases, bring political risks to Chinese enterprises at every turn.In fact, some Chinese enterprises have already expressed concerns that they may be embroiled in the possible problems of their affiliated suppliers that they have little control over.

In light of the US and the EU’s continued speculation about the issue of alleged “forced labor,” Chinese exporters in Xinjiang-related supply chains may face more unfair treatment in the EU.Unlike the US Uyghur Forced Labor Prevention Act, the EU supply chain due diligence directive and anti-forced labor regulation do not explicitly target specific countries,regions or products, nor do they adopt the US approach of enforcement featuring “presumption of guilt.” Nevertheless, the EU may still strictly scrutinize Chinese exports in the future under the political pressure of the US government and so-called “human rights organizations.” With the EU market as a major export destination, Chinese industries related to photovoltaic, clothing, cotton and tomato products are also vulnerable to the impact of EU regulations.Where European importers are required to cooperate on investigations by member state authorities, the relevant companies in China may need to provide various types of information such as purchase orders, invoices, bills of materials, certificates of origin,payment records, inventory records of buyers and sellers, shipping and logistics records, production records, and even the employee payroll, which may involve, in whole or in part, China’s national security, business secrets and citizens’ personal privacy.The submission of such data to the European side may breach China’s legal provisions on anti-foreign sanctions, national security, data security and personal information protection, which will likely cause conflicts of judicial supervision between the two sides.

It is noteworthy that the European Commission vowed in the 2021 trade defense instrument annual report to close all regulatory loopholes,making special mention of the “circumvention” of EU tariffs by Chinese exporters via third countries, which the EU sees is emblematic of “the challenges posed by China’s Belt and Road Initiative.”24European Commission, 40th Annual Report from the Commission to the European Parliament and the Council on the EU’s Anti-Dumping, Anti-Subsidy and Safeguard Activities and the Use of Trade Defense Instruments by Third Countries Targeting the EU in 2021, pp.6-7.In other words,Chinese exports via third countries or made in third-country factories may be subject to stricter EU scrutiny in the future.In addition, after the EU anti-economic coercion regulation enters into force, China’s legitimate countermeasures against Lithuania and other countries will face political,economic and trade pressure at the entire EU level.

Raising the access threshold for Chinese investors in Europe

The EU is an important destination for Chinese investment.By the end of 2021, China’s direct investment stock in the EU’s 27 member states amounted to US$95.9 billion, accounting for 3.4% of its outward FDI.The investments mainly flew to manufacturing (30.2%), mining(19.9%), finance (14%), leasing and business services (8%) and information transmission, software and information technology services (6.1%).25Ministry of Commerce of China, National Bureau of Statistics of China and State Administration of Foreign Exchange of China, 2021 Statistical Bulletin of China’s Outward Foreign Direct Investment, China Commerce and Trade Press, 2022, pp.37.However, according to the survey conducted by the China Chamber of Commerce to the EU (CCCEU) and Roland Berger in 2022, the ratings of the EU business environment by Chinese enterprises recorded a decline for the third consecutive year, with the political environment, economic environment and business service environment being the main factors.The EU’s economic and trade instruments raise concerns among Chinese enterprises that they might morph into protectionist measures.26China Chamber of Commerce to the EU and Roland Berger, Striving for A Common Future: CCCEU Report on the Development of Chinese Enterprises in the EU in 2022, pp.38-52.

By adopting complex and stringent screening procedures, the EU regulation on foreign investment review has significantly raised the market access threshold for investment in critical infrastructure, critical technologies and dual-use items, and critical supplies, which highly overlaps the priority areas of Chinese investment in Europe in recent years.As EU member states tighten their access policies for foreign investment, the risk of rejection or retroactive review grows for Chinese companies.Once the screening procedures are initiated, multiple hearings by the European Commission and member state authorities are inevitable, resulting in higher compliance and time costs as well as more uncertainty for individual projects.Since investments made by enterprises operating within the EU but controlled by foreign capital are also deemed as FDI, enterprises with Chinese equity backgrounds, such as Volvo and Pirelli, are likely to be targeted for review under the new legislation, thus posing challenges to the re-investment decisions of Chinese investors in the EU.27China Chamber of Commerce to the EU and Roland Berger, Report on the Development of Chinese Enterprises in the EU (2019), pp.42-50.

Like the regulation on foreign investment review, the EU’s foreign subsidies regulation implies a “presumption of guilt” that the investments in Europe by Chinese SOEs are in service of “national strategies”and “under government control.” Given the ambiguous criteria for“government subsidies,” EU executive bodies have great discretion to impose more stringent reviews on Chinese enterprises, especially SOEs.The additional review can lead to significantly higher investment risks and a more hostile public opinion environment.Worries have arisen among Chinese companies that their investment and M&A activities in the EU will be subject to the triple scrutiny in terms of anti-monopoly,foreign investment and foreign subsidies.28China Chamber of Commerce to the EU and Roland Berger, Striving for A Common Future: CCCEU Report on the Development of Chinese Enterprises in the EU in 2022, p.46.Forced to comply with EU regulations, Chinese companies in Europe may be caught in a dilemma over contradictory regulation between the European Commission and Chinese authorities.

Besides, the EU regulations on foreign subsidies, international procurement instrument and anti-economic coercion create various kinds of obstructions for the access of Chinese companies to the EU public procurement market.Many Chinese enterprises have been subject to additional discriminatory treatment by the EU and its member states,such as the requirement to produce statements of “no Xinjiang-related elements” and “no forced labor.” Moreover, the public procurement documents of some countries are vague and discretionary, often setting up invisible barriers by unreasonable means, excluding Chinese enterprises through discriminatory requirements and even forcing the companies to voluntarily give up by delaying or not awarding bids to them.29Academy of China Council for the Promotion of International Trade, Business Environment of the European Union 2021/2022, 2022, pp.50-51.Considering the complexity of EU public procurement bidding procedures,Chinese enterprises will find it difficult to bid normally once the European Commission imposes foreign subsidy investigations or other punitive measures.They will likely be eased out from the EU public procurement market in the future.

With the successive application of its economic and trade instruments,the EU will erect a long-term institutional barrier to Chinese investment.Even if the China-EU Comprehensive Agreement on Investment found a way through to being approved and coming into effect, the market access which the EU shall grant to Chinese enterprises under the agreement would still face de facto revocation.

Hindering EU investment and technological spillovers to China

The EU is an important source of foreign investment and advanced technology for China.In 2021, the top five industries of EU investments in China were manufacturing, leasing and business services, scientific research and technical services, wholesale and retail trade, and mining, with more than 50% of the investment directed to manufacturing.30Ministry of Commerce of China, Statistical Bulletin of FDI in China 2022.September 2022, p.11.Meanwhile, the top three groups of EU exports to China were machinery and vehicles (52%),other manufactured goods (20%) and chemicals (15%), and the Chinese market represented 10% of the EU’s total foreign exports.31Eurostat, “China-EU - International Trade in Goods Statistics,” February 2022.The investments and exports have brought huge economic returns to the EU and contributed to China’s economic growth, stable employment and technological progress.Nevertheless, with the introduction of economic and trade instruments, EU companies face many obstacles to investment and technological spillovers to China.

EU legislation such as the supply chain due diligence directive and the anti-forced labor regulation will not only constrain the behavior and preferences of companies within the EU, but also produce a far-reaching impact on the rationale and expectations of European companies investing and operating in China.For example, considering the potential risk of investigations and penalties by the European Commision and member state authorities, some European companies in China will have to eliminate Xinjiang-related elements in their upstream and downstream supply chains or reduce their investments in Xinjiang-related industries.That is to say,many European companies will be subject to the long-arm jurisdiction of EU law in China, which undermines China’s active efforts to attract and utilize foreign investments and related advanced technologies.At the same time, Germany, as the EU’s economic engine and leading investor in China, has announced to tighten the investment guarantees for German companies in China materially.Following the US example, the Federal Ministry for Economic Affairs and Energy of Germany may even attempt to apply reporting and disclosure requirements to German companies investing in critical industries, planning to open new bases in China or establishing joint ventures with Chinese partners.This move paves the way for subsequent investment review and intervention against China-bound investments.32Bojan Pancevski, “Germany Debates Naming Businesses with Large China Exposure,” The Wall Street Journal, November 23, 2022, https://www.wsj.com/articles/germany-debates-naming-businesses-withlarge-china-exposure-11669057478.

In addition, the regulations on foreign investment review and export control of dual-use items have created new barriers for China’s access to critical and emerging EU technologies.Advanced technologies brought by EU member states have long played a positive role in the technological innovation of Chinese enterprises.The critical technologies covered by the two regulations are generally important to China’s industrial upgrading.Restricting Chinese enterprises from acquiring and importing EU technologies will impede cross-border technological dissemination,exchange and spillover.Given that China is not included in the list of destinations in the Union General Export Authorizations No.EU007 and No.EU008, exporters must apply for export authorizations from member state authorities, which increases the costs and uncertainty of technology imports for China.33China Chamber of Commerce to the EU and Roland Berger, Striving for A Common Future: CCCEU Report on the Development of Chinese Enterprises in the EU in 2022, p.52.In particular, the new dual-use export control regulation enables the EU to exercise greater discretionary control over a wider range of “providers of technical assistance,” which are defined as any natural or legal person or partnership that provides technical assistance from EU customs territory into the territory of a third country,or those resident or established in a member state that do the same within a third country’s territory.The restrictions make technical exchanges and cooperation more difficult between China and Europe.In the future,as the US and the EU accelerate their coordination on high-tech export control policy towards China, the EU is likely to further expand the list of emerging technologies subject to control along with more stringent screening and enforcement.

Restricting Chinese involvement in international rules-making on leading economic and trade issues

With the accelerating reconstruction of international economic and trade rules, the focus of attention and great-power rivalry has extended from traditional issues such as tariffs to “new issues of the 21st century” such as labor, environment, subsidies and SOEs.The EU’s positions, views and regulatory arrangements on the frontier issues of international economy and trade are reflected in its economic and trade legislation.They intend to erect new barriers for foreign investment and trade in Europe and establish new rules for developing countries, including China, at the global level to enhance and solidify the EU’s competitive edge.

Regarding labor and environment, the EU requires economic and trade partners to meet the corresponding corporate social responsibility standards in bilateral and multilateral free trade and investment agreements.However, such requirements are negotiable or noncompulsory.In conjunction with the Decent Work Agenda and the European Green Deal, the EU has developed the regulations on supply chain due diligence, the CBAM and anti-forced labor.These Europeanstyle rules are designed to raise manufacturing costs for developing countries such as China by setting new industrial standards to shape the global supply chain landscape in the EU’s favor.On the issues of subsidies and SOEs, the EU has enacted regulations on foreign subsidies,international procurement instruments and anti-economic coercion under the pretext of “fair competition” and, in combination with the foreign investment review regulation, sought to internationalize its legal system on competition.In particular, with the development of the foreign subsidies regulation, the EU has extended its focus beyond SOEs to private enterprises deemed to receive national strategic support and oriented financial subsidies from the government.The move is close to the US government’s current crackdown on Chinese companies.

It is worth noting that the EU has continued to align with the US on economic and trade policy towards China while vigorously internationalizing its European-style economic and trade rules.Since the Biden administration took office, the transatlantic political relations have been repaired, and coordination on China policy between the two sides has become increasingly frequent.The EU regulations on foreign investment review, export control of dual-use items, anti-forced labor and antieconomic coercion have all proposed enhancing dialogue and cooperation with third countries, which paves the way for the US and the EU to jointly take measures against China on investment review, export control and import restrictions.The two sides are also actively coordinating their economic and trade policies concerning China through platforms such as the Group of Seven (G7) summit, the US-EU Trade and Technology Council (TTC) and the US-EU Dialogue on China.Among them, the ten TTC working groups, covering investment screening, export control, trade and labor cooperation, are implicitly targeted at China.For example, the investment screening working group focuses on exchanging information on investment trends affecting national security and discussing security risks related to specific sensitive technologies and critical infrastructure,based on which policy instruments to address the risks are comprehensively assessed.34European Commission, “EU-US Joint Statement of the Trade and Technology Council”, December 5,2022, https://ec.europa.eu/commission/presscorner/detail/en/statement_22_7516.The US-EU coordination complements the EU’s internal legislation and closes its regulatory loopholes that may arise during enforcement, implying a bloc-based and unilateralist tendency in the EU’s endeavor to internationalize its own economic and trade rules.Once the European and American versions of rules are incorporated into the WTO rules or other multilateral rules on labor, environment, subsidies and SOEs,China and other developing countries will be thrown into an unfavorable situation, and inevitably, China’s existing industrial and trade advantages will be impaired.

Conclusion

To cope with great-power economic competition, the EU has launched a suite of internal legislation that set forth European-style solutions on various leading issues of international economic and trade rules.By relying on the advantages of its huge internal market and the coordination with its external allies, the EU is vigorously internationalizing its unilateral rules.In this process, the EU has instituted direct restrictions,especially against Chinese enterprises, entities and supply chains, in the name of security, human rights, environment and fair competition,which unilaterally extends the long-arm jurisdiction and discretionary authority of its laws and regulations, and creates new regulatory barriers in an attempt to enhance the competitive edge of EU industries.The new developments signify dual changes in the global geopolitical and economic landscapes, especially the latest changes in the shifting power balance between China and the EU and the EU’s perception of China.With their successive enactment, these regulations will not only pose challenges to economic and trade relations between the two sides, but also negatively impact China’s national security, industrial development and technological innovation.

In response, China must monitor the latest developments of EU economic and trade legislation and US-EU coordination on economic and trade policy towards China, and counteract holistically with more targeted,flexible and powerful measures.These measures should safeguard the legitimate rights and interests of Chinese enterprises and entities and the security and stability of supply chains, and promote the sound development of China-EU economic and trade relations.

First, it is important for China to enrich and improve its legal toolbox to deal with increasing foreign economic and trade issues.In particular,the enforcement mechanism for effectively countering the EU’s long-arm jurisdiction should be refined and enhanced with clear expectations of rewards and punishments.The mechanism should provide specific remedies for Chinese enterprises affected by the EU’s economic and trade instruments and resolutely crack down on European enterprises and entities that cause serious harm to China’s national interests.

Second, it is possible to fully use the “flexibility” of the EU’s decisionmaking and enforcement mechanism.Based on the division of competence defined under the EU’s economic and trade legislation, communication and coordination with European legislators and law-enforcing institutions should be improved.Efforts should be made to urge the EU side to remove or modify the discriminatory restrictive provisions against China before the regulations are implemented; even after the regulations come into effect,relevant aid should be available to help Chinese enterprises respond in a flexible manner.

Third, it is crucial to assist Chinese enterprises in strengthening their risk monitoring and compliance system.By pooling resources from various parties, accurate information on EU economic and trade legislation,including the latest developments, should be made available timely to examine the EU and its member states’ business environment in real-time.Besides, relavant enterprises should strengthen their bottom-line thinking,develop their risk awareness in their European business, and stay away from the internal political strife of the host countries to avoid becoming a target of European public debates.

Fourth, it is necessary to improve the business environment for EU investors in China.Market access can be further relaxed for EU investors to stabilize their expectations and confidence and facilitate their deep integration into the Chinese business ecosystem.Taking notice of the tendency of concentration of EU investment in China in terms of countries of origin, industries and enterprises,35Statistics show that huge German automobile and chemical multinationals have dominated the EU investment in China.Germany accounted for about 43% of European investment in China on average during 2018-2021.Five sectors--automobiles, chemicals, food processing, pharmaceuticals/biotechnology and consumer goods manufacturing--made up nearly 70% of European FDI in China, compared to 57% during 2008-2012 and 65% during 2013-2017.The automobile sector represented about one-third of that total.This proportion was even higher in 2022 as BMW increased its stake in its China joint venture from 50% to 75%.See Agatha Kratz et al., “The Chosen Few: A Fresh Look at European FDI in China,” Rhodium Group,September 14, 2022, https://rhg.com/research/the-chosen-few.it is important to actively respond to the concerns of the EU enterprises and encourage them to play a constructive role in China-EU economic and trade relations.

In addition, China should table its proposal on reconstructing international economic and trade rules as early as possible.While strengthening coordination with the Shanghai Cooperation Organization(SCO), BRICS and Belt and Road countries, China should actively speak out in bilateral and multilateral economic and trade negotiations as well as in other multilateral occasions to prevent the US, the EU, Japan and other developed economies from pre-empting the development of globally uniform rules without its participation.At the same time, the reasonable elements in the EU’s economic and trade legislation should be viewed objectively and accepted as appropriate to enhance the consensus and interests of China and the EU in reconstructing international economic and trade rules.