China And Geopolitical Considerations For Investment .

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This policy brief analyses whether there are grounds for the Dutch government toconduct critical assessments of direct investments, particularly from China, from ageopolitical perspective. The economic consequences of the COVID-19 pandemicwarrant continued critical oversight of Chinese foreign investments and screening ofsuch investments. In particular, the challenging times for the Dutch economy causedby the COVID-19 pandemic, and the need for new capital inflow may translate intoopportunities for Chinese investors on the Dutch market. This policy brief arguesthat from a geopolitical perspective there are two grounds for the Dutch governmentto screen investments: the Netherlands’ need to keep pace with changes in thegeopolitical stance of the US and other Western countries towards China; and therisk of greatly diminished capacity for autonomous action in a geopolitical context forthe Netherlands and the EU. Hence there are two criteria that investment screeningmust fulfil. Firstly, it must take account of the security and geopolitical implications ofinvestments in high-tech companies. Secondly, it must be aimed at preventing a highdegree of strategic dependence on a single operator.1IntroductionSince several years, geopolitical develop ments have fuelled a debate on the extentto which the European Union ( EU) shouldbe open to foreign direct investment. TheEU is the world's foremost destination for*This policy brief is a republication of: Chapter 1.“Geopolitieke factoren in relatie tot China alsgrond voor toetsing van buitenlandse directeinvesteringen”, in: P.L.H. Van den Bossche etal., Toetsing van buitenlandse investeringen ingeopolitiek en juridisch perspectief, preadvies vande Vereeniging Handelsrecht, Uitgeverij Paris:Zutphen, 2020.foreign direct investment.1 From a regulatoryperspective, almost all EU countries are moreopen to foreign direct investment than theUnited States (US) and considerably moreopen than China, globally the two largest1Expertisecentrum Europees Recht, 2019.‘Nieuw EU-kader screening buitenlandseinvesteringen van kracht’, Ministry of ForeignAffrairs, https:// ndse-investeringen-van-kracht(retrieved on 23 July 2020).Policy BriefChina and geopoliticalconsiderations for investmentscreening in the NetherlandsFrans-Paul van der Putten, Brigitte Dekker & Xiaoxue MartinDECEMBER 2020*

Clingendael Policy Briefeconomies apart from the EU.2 The rise ofChina as a new global power, and the UnitedStates’ response to that rise, have raisedthe importance of investment screening inthe EU as a means of curbing undesirableeffects of foreign direct investment.3 Thisdevelopment also affects the Netherlands,which the OECD rates as one of the mostopen economies in the EU.4 The Dutchgovernment has initiated various changeswith regard to investment screening. Thispaper focuses on the question of whetherthere are grounds for the Dutch governmentto conduct critical assessments of directinvestments, particularly from China, from ageopolitical perspective.2  The rise of China and reactionsin the US and the EUChina’s very rapid development since thestart of the economic reforms in 1979, whichsince 2010 has made the country the world'ssecond-largest economy, has led to a shift inthe international balance of power. China is astrong proponent of the Westphalian modelof sovereignty as a basis for internationalrelations and of the central role of the UNin the international system.5 Increasingly,the Chinese government is overtly pursuinga world order in which the US and itsWestern partners are no longer the dominantcountries.6 China’s increasingly prominentposition on the world stage coincides withchanges in transatlantic cooperation, partlydue to the US retreat from the multilateralsystem.7 The West’s ability to mount aconcerted response to China’s growinginfluence has been diminished. Anotherimportant factor is the shift from the Westerndominated status quo towards a powerbalance in which non-Western powers alsoincreasingly have more influence, amidwhich the rise of China is now taking place.The Chinese government is enjoying moresuccess than its Western opponents inwinning support from developing countriesin multilateral bodies, of which the GeneralAssembly of the United Nations is theprime example.The geopolitical rivalry between China andthe US has grown increasingly intense inrecent years. In June 2016 Donald Trump,then still a presidential candidate, announcedthat as president he would raise import tariffson Chinese products to bring about a shift inthe trade balance that for decades had been52342European Court of Auditors, ‘The EU’s responseto China’s state-driven investment strategy’,10 September 2020, p. 18, https://www.eca.europa.eu/Lists/ECADocuments/RW20 03/RW EU response to China EN.pdf (retrievedon 23 July 2020).Joshua Kirschenbaum et al., ‘EU Foreign InvestmentScreening – at last, a start’, GMFUS, 26 September2019, nvestment-screening-%E2%80%93last-start (retrieved on 23 July 2020).European Court of Auditors, ‘The EU’s responseto China’s state-driven investment strategy’,10 September 2020, p. 18, https://www.eca.europa.eu/Lists/ECADocuments/RW20 03/RW EU response to China EN.pdf (retrievedon 23 July 2020).67The cornerstones of the Westphalian model ofinternational relations are state sovereignty andthe principle of non-intervention. Vincent Chang& Frank Pieke, ‘China, de EU en Nederland – eenChinees perspectief’, LeidenAsiaCentre, 14 June2017, 7/06/LAC-rapport-CN-EUNL-2017.07finaal.pdf (retrieved on 23 July 2020).Charles Grant & Tomas Valasek ‘Preparing for themultipolar world: European foreign and securitypolicy in 2020’, Centre for European Reform, ations/attachments/pdf/2011/e783 18dec07-1376.pdf(retrieved on 23 July 2020).Adája Stoetman et al., ‘Economic Security withChinese Characteristics’, Clingendael StrategicMonitor, 2019. cteristics/ (retrievedon 27 July 2020).

Clingendael Policy Briefstrongly in China's favour.8 The heralded tradewar began in March 2018, on the initiative ofthe Trump administration. Whenever the USgovernment raised import duties on Chineseproducts, China retaliated with increasedlevies on imported American products.9As the trade war intensified, the USalso introduced measures in the field oftechnology transfers. Attention was focusedpartly on Chinese direct investment into theUS. In the summer of 2018 President Trumpsigned the Foreign Investment Risk ReviewModernization Act (FIRRMA) into law.This legislation is aimed at tightening andexpanding the national security assessmentsby the Committee on Foreign Investmentin the United States (CFIUS) and cameinto force on 13 February 2020.10 CFIUS,a committee made up of representativesof various parts of the US government,assesses foreign investments in terms of theirrelevance to national security. The new act,FIRRMA, is a response to three concerns ofthe US government: i) foreign acquisitionscould jeopardise America’s technological leadand national security; ii) foreign operatorscould gain access to sensitive personal datathrough acquisitions;11 and iii) by acquiringreal estate (for example around airports orseaports) foreign operators could more easilyconduct espionage activities against USgovernment facilities.In order to address these concerns, thejurisdiction of CFIUS has been expandedand now also covers foreign minoritystakes in companies associated withcritical technology, critical infrastructure8‘Twaalf fases in de handelsoorlog tussen de VSen China’, De Volkskrant, 6 August ina b2abaf66/ (retrieved on 23 July 2020).9 Ibid.10 Farhad Jalinous et al., ‘CFIUS finalizes newFIRRMA regulations’, White & Case, 22 January2020, -finalizes-new-firrma-regulations(retrieved on 23 July 2020).11 Skadden, ‘CFIUS Final Rules: Broader Reach,Narrow Exceptions and Foretelling Future Change’,Skadden, 16 January 2020, /01/cfius-finalrules (retrieved on 23 July 2020)3or companies with sensitive personal data,as well as certain types of real estatetransactions.12 FIRRMA is driven largely,although not exclusively, by concerns aboutinvestments from China.13 The same appliesto the reform of the American export controlregime under the 2018 Export Control ReformAct (ECRA). In that regard the tightening ofinvestment screening and export controls, likethe trade conflict with China, reflects a Chinastrategy in which economic instrumentsare deployed to curb the rise of China as apower factor and redirect it in a way that isless threatening to US interests. This policyhas been intensified under President Trumpbut continues the policy line maintained byhis predecessor President Obama and enjoysbroad support from both the Republican andDemocratic parties.In the EU, as in the rest of the world, theproportion of Chinese investors has grownrapidly in the wake of the global financialcrisis. The value of China's outward directinvestments exceeded the value of inwardinvestments for the first time in 2015.14 TheEuropean credit crisis led to growing demandfor Chinese direct investments from 2008.The inflow of Chinese investments to the EUgrew very rapidly from 2012. But 2016 saw areversal in what had hitherto been a mainlyopen attitude towards investments. Thatwas the year in which China's ambitions inadvanced manufacturing (known as Made inChina 2025) became evident worldwide. Theacquisition of the renowned German roboticsfirm Kuka by a Chinese air conditionermanufacturer in that year marked a turningpoint in German attitudes towards Chinese12 Davig Fagan, ‘CFIUS and China: The FIRRMAfactor’, 17 October 2018, e-firrma-factor/(retrieved on 23 July 2020).13 Source: informal discussion with a member ofCFIUS, 2019.14 AIV, ‘China en de strategische opdracht voorNederland in Europa’, Adviesraad InternationaleVraagstukken, June 2019, ische-opdracht-voor-nederland-in-europa/China en de strategische opdracht voorNederland in Europa AIV-advies-111 201906.pdf(retrieved on 26 July 2020).

Clingendael Policy Briefinvestments.15 Kuka supplies robots for themanufacturing of vehicles and other Germanexport products. Whereas the Germangovernment previously considered Chinamainly as a strategically important exportmarket (i.e. as an opportunity), there was nowa prevailing view that China was on its way toreplacing Germany as an exporter of vehiclesand precision machinery (and hence posed athreat). The shift in the German government’sattitude was prompted particularly by thenow more prominent belief that Chineseinvestors, encouraged by strong backingfrom the Chinese state, were systematicallybuying up German family businesses with keytechnologies.16After a political and public debate onthe Kuka acquisition, against which thegovernment took no action due to a lackof relevant instruments,17 followed by anumber of other high-tech acquisitions inGermany, the German government tightenedits policy on foreign investments. In order toprevent Chinese investors playing Germanyoff against other EU countries, the Germangovernment joined with France and Italy inpublicly calling for investment screeningat EU level in 2017. In September 2017, theEuropean Commission heeded this call witha proposal for a coordination mechanism,which, with some amendments, was adoptedby the European Council and the EuropeanParliament in 2019.1815 John Seaman et al., ‘Chinese investment inEurope’, the European Think-tank Network onChina, December 2017, es/etnc reports 2017final 20dec2017.pdf (retrieved on 26 July 2020).16 It is likely that regional governments and Germanbusinesses themselves nevertheless continuedto see China primarily as an opportunity, not asa threat.17 The government had tried in vain to elicit a counterbid from German industry.18 AIV, ‘China en de strategische opdrachtvoor Nederland in Europa’, AdviesraadInternationale Vraagstukken, June 2019, https://www. ht-voor-nederland-in-europa/China en de strategische opdracht voorNederland in Europa AIV-advies-111 201906.pdf(retrieved on 26 July 2020).4The resulting screening framework comprisesa mechanism for coordinating the screeningof foreign direct investments at EU level ifthey pose a threat to national security orpublic order in the Union and one or moreof its member states.19 Member states mustprovide information on request, report thescreening of an actual or potential acquisitionand can request feedback from othermember states or the European Commissionin order to take an informed decision.20The mechanism came fully into force on 11October 2020. As in the case of FIRRMA,the new regulations are not formally linkedto China but were motivated primarily byconcerns about Chinese investments. Inaddition, the 2016 China strategy,21 combinedwith the EU-China Strategic Outlook 2019,remains the cornerstone of the EuropeanCommission’s China policy.22 The latterdocument clearly shows the EU’s ambivalentview of China, with the country being seenas both a partner and a rival: ‘[China issimultaneously] an economic competitor inthe pursuit of technological leadership, anda systemic rival promoting alternative models19 European Commission, ‘Guidance to the MemberStates concerning foreign direct investment andfree movement of capital from third countries, andthe protection of Europe’s strategic assets, aheadof the application of Regulation (EU) 2019/452 (FDIScreening Regulation)’, European Commission,Brussels, 25 March 2020, tradoc 158676.pdf(retrieved on 27 July 2020).20 European Commission, ‘Screening of Foreign DirectInvestment – an EU framework’, Brussels, EuropeanCommission, 2019, y/tradoc 157683.pdf(retrieved on 27 July 2020).21 European Commission, ‘Elements for a new EUstrategy on China’, European Commission, 22 June2016, nt communication to the europeanparliament and the council - elements for anew eu strategy on china.pdf (retrieved on 30July 2020).22 European Commission, ‘Joint Communication tothe European Parliament, the European Counciland the Council, EU-China – A strategic outlook’,European Commission, 12 March 2019, k.pdf(retrieved on 30 July 2020).

Clingendael Policy Briefof governance.’23 The European Commissiondoes not precisely explicate the conceptof ‘alternative models of governance’, but itappears to be referring to China's politicaleconomic system. This is characterised bythe combination of a permanent monopolyfor the Communist Party in the exercise ofpolitical power and a highly influential rolefor the government in business. The Englishversion of the EU document states that Chinais a systemic rival, by which the Commissionindicates, more explicitly than in the Dutchversion, that China's model is incompatiblewith the European model.243  China as a source of foreigndirect investmentsAs a source of direct investments, Chinadiffers in significant ways from other sourcecountries. China has a unique position asthe largest competitor and challenger ofthe West, and promotes a world view thatclashes with the European view in variousrespects.25 The Chinese government alsoplays a dominant role in the Chineseeconomy and economic relations with othercountries. Foreign investments usually takeplace as part of a targeted government policyto enable Chinese businesses to secure adominant position in global value chains.Whereas Chinese investors have a highlevel of access to the European investmentmarket, European direct investments intoChina face numerous barriers. The limitedreciprocity in terms of market access and theuneven playing field for foreign businessescompared to their Chinese competitors(as a result of state aid) weakens Europe's23 European Commission, ‘Joint Communication to theEuropean Parliament, the European Council andthe Council’, European Commission, Strasbourg, 12March 2019, p. 1, .pdf (retrieved on 26 July 2020).24 It is unclear why the Dutch and English versionsdiffer on this point.25 ETNC, 2017. ‘Chinese Investment in Europe:A Country-Level Approach’, 17-12/ETNCReport 2017.PDF (retrieved on 10 August 2020).5competitive position with regard to China,with consequences for the balance of powerin the international system.China’s role as a global investor hasincreased rapidly. This was partly triggeredby a targeted strategy of the Chinesegovernment to encourage Chinese foreigninvestments under the Go Out (also knownas Go Global) policy deployed from the endof the 1990s.26 Foreign investments increasedpartly due to the exponential growth of theChinese domestic market. In order to wintenders in China, Chinese companies hadto supply evidence of their track record todemonstrate their knowledge and expertise.Local Chinese players met the requirementsby acquiring experienced foreign players.27The expansion of China's internationaleconomic presence received fresh impetusin 2012 when Xi Jinping entered office asChina's paramount leader. This was reflectedparticularly in the Belt and Road Initiative(BRI) launched in 2013 as a continuation ofGo Out. The BRI is focused on promotingintercontinental ‘connectivity’, among otherthings by building and improving transport,energy and communication infrastructure,for which the Chinese government grantslarge loans to foreign governments. With thisworldwide initiative China meets the strongdemand for infrastructure loans in developingcountries.28 Against the background of BRI,the Chinese government also created theAsian Infrastructure Investment Bank (AIIB),a multilateral development bank establishedin 2015 of which the Netherlands will also26 Zhiqun Zhu, ‘Going Global 2.0: China’s GrowingInvestment in the West and its Impact’, AsianPerspective, 2018, 42(2), pp. 159-182, https://muse.jhu.edu/article/713817 (retrieved on 27 July 2020).27 Joris Kooiman, ‘De geestdrift voor het Chinesegeld is alweer voorbij’, NRC Handelsblad, 26 April2019, -voor-het-chinese-geld-is-alweervoorbij-a3958294 (retrieved on 24 July 2020).28 Asia Europe People’s Forum, ‘The Belt and RoadInitiative (BRI): an AEPF Framing Paper’, November2019, https://www.tni.org/files/publicationdownloads/bri framing web en.pdf (retrieved on23 July 2020).

Clingendael Policy Briefbe a member.29 The Chinese government’sambition with the Made in China 2025policy is also to enable Chinese companiesto become world leaders in technologicallyadvanced sectors such as IT, artificialintelligence and robotics.30 This is partof the reform of Chinese industry from adominant secondary industrial sector toa leading tertiary high-tech sector. Thestrategy influences Chinese foreign directinvestments, particularly in Europe and NorthAmerica, with acquisitions of high-techbusinesses playing a major role.4  Chinese direct investments inthe NetherlandsThe Netherlands is one of the world’slargest recipients of direct investments,with

geopolitical stance of the US and other Western countries towards China; and the risk of greatly diminished capacity for autonomous action in a geopolitical context for the Netherlands and the EU. Hence there are two criteria that investment screening must fulfil. Firstly, it must take account of the security and geopolitical implications of

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