Asia Eur J (2014) 12:143–158

DOI 10.1007/s10308-014-0382-x
O R I G I N A L PA P E R

A Faustian bargain or just a good bargain? Chinese

foreign direct investment and politics in Europe

Sophie Meunier

Published online: 8 March 2014

# Springer-Verlag Berlin Heidelberg 2014

Abstract This article explores the political challenges posed by the recent influx of
Chinese outward foreign direct investment (OFDI) into the European Union (EU),
which has become in 2011 the top destination for Chinese investment in the world. The
central political question facing European states welcoming the influx of Chinese
capital is whether this is a good bargain—a positive-sum game where both investor
and investee benefit—or instead a Faustian bargain—a zero-sum game in the long term
where capital is accompanied by implicit conditionality affecting European norms and
policies, from human rights to labor laws. The novelty of Chinese FDI has the potential
to affect politics in Europe in three different venues: inside European countries,
between European countries, and between Europe and third countries. This article,
whose main goal is to launch a research agenda on the political implications of Chinese
FDI, explores in turn its potential impact on foreign and domestic policy, institutional
process within the EU, and transatlantic relations.

Introduction

Iconic European brands, from fashion houses Aquascutum of London and Sonia Rykiel
of Paris to Swedish automaker Volvo and even the quintessentially British Weetabix
breakfast cereals and French Gevrey-Chambertin wine from Burgundy, have been
purchased by Chinese parent companies. Indeed, the European Union (EU) has very
recently become a favorite destination for foreign direct investment (FDI) from China,
initially more concerned about countries rich in natural resources. Chinese FDI in
Europe tripled between 2006 and 2009 and tripled again by 2011 (Hanemann and
Rosen 2012; Hanemann 2013). By some estimates, Europe represented 48 % of all
Chinese outward FDI (OFDI) in the first half of 2012 and absorbed 95 % of all non-
resources Chinese investment (A Capital Dragon Index 2012). In 2012, the volume and
number of mergers and acquisitions (M&As) conducted by Chinese companies in
Europe surpassed for the first time the number of M&A transactions conducted in

S. Meunier (*)
Princeton University, Princeton, NJ, USA
e-mail: smeunier@princeton.edu
144 S. Meunier

China by European companies (PricewaterhouseCoopers 2012). All of this happened in

a depressed context for global FDI whose flows had fallen in the first half of 2012 by
8.4 % since the previous year (UNCTAD 2013).
Why Europe? Europe has been attractive to Chinese investors for resources of a
different nature: technology, know-how, established and reputable brands, as well as a
gigantic consumer market. Europe has also been attractive because the crisis of the euro
and the general economic downturn on the continent have created opportunities for
bargains, with a multitude of distressed companies ready for an influx of fresh capital
and lessened political resistance if foreign investment means saving or even creating jobs.
Finally, Europe has been particularly attractive to Chinese investors because of a perception
that, despite some bureaucratic hurdles, it is overall an easy political process, especially in
comparison to the United States where China has become an electoral politics scapegoat
and where Chinese investments have been politicized (Scott 2013; Rapoza 2013).
For Europeans, this Chinese “scramble for Europe” (Godement and Parello-Plesner
2011) has represented welcome economic opportunities. Chinese investment has given
some European companies on the verge of bankruptcy a new lease on life, often
making additional investment in order to improve operations and enable a turnaround
and providing access to new markets for these companies, notably in China—it is a
positive-sum game where both investor and investee benefit. Overall, it sounds like a
good bargain. But this sudden appetite for Europe by Chinese companies is also
accompanied by worries that this investment is actually a zero-sum game in the long
term. For the moment, Chinese investment seems like money falling from the sky, but it
could turn either into a Trojan horse introducing Chinese politics and values into the
heart of Europe or into, to paraphrase American politician Ross Perot, a “giant sucking
sound” siphoning off technology and know-how back to China in order to better
compete against, and eventually kill European companies—or both. Instead of just a
good bargain, accepting Chinese investment now could be in reality a “Faustian
bargain,” that is, a dangerous deal whereby Europe trades in its moral principles and
social-democratic policies in exchange for immediate economic relief.
On one hand, these worries are nothing new. Previous waves of FDI into Europe
have similarly triggered fears that investment represented a beachhead from where
parent companies could spread the values and practices of their own countries: the
“coca-colonization” of Europe by American multinationals in the 1960s (Servan-
Schreiber 1968) and the “Disneyfication” of Europe in the 1980s (Kuisel 2012) created
massive existential anxieties, especially in France, where it was portrayed as a direct
assault on national culture; the surge of Japanese investment in the late 1980s was also
viewed with suspicion, even if slightly less hysteria than in the USA; the current wave
of investment coming into Europe from Arab sovereign wealth funds, especially Qatar,
is also creating strong reactions, sometimes bordering on xenophobic. But there is an
added perception that there is something radically different about Chinese investment
and that the economic benefits which historically have followed FDI, such as techno-
logical spillover and higher wages, somehow might not happen this time (Meunier et al.
2014). The combination of an emerging economy investing in advanced economies, of
an opaque Communist regime controlling many equally opaque state-owned enter-
prises, and of the geopolitical and security uncertainties surrounding China’s rise
reinforces the fear that, unlike previous instances of FDI, this time, it may well be a
zero-sum game.
A Faustian bargain or just a good bargain? 145

Most analyses of the politics of FDI ask what determines investment flows and why
parent companies choose to expand in particular countries and particular sectors. In the
case of Chinese FDI in Europe, the most interesting puzzle is not why Chinese
companies choose to invest and where they locate (a quick answer may be wherever
and whenever they can), but more how that investment can potentially reshape politics
in Europe. The surge of Chinese FDI in Europe is a phenomenon too recent to
determine whether it will turn out to be a positive-sum or zero-sum game. The goal
of this paper, instead, is to ask questions, explore the arguments made for its potential
implications, and hopefully launch a research agenda for when more data and more
hindsight will be available.
The novelty of Chinese FDI has the potential to affect politics in Europe in three
different venues: inside European countries, between European countries, and between
Europe and third countries. The first section of this paper investigates the potential
political implications of Chinese FDI in Europe, both on foreign policy and domestic
policy. Section two analyzes the potential pressures that Chinese FDI may exert on
institutional processes in the EU, notably the recently transformed foreign investment
policy. Section Three argues that the surge of Chinese FDI in Europe could potentially
affect relations with third countries and examines more specifically the potential
implications of Chinese FDI on transatlantic relations. The conclusion reflects on the
conditions under which European countries are more likely to interpret Chinese FDI as
a gamble overall worth taking.

Potential policy implications of Chinese OFDI in European states

The combination of the global financial crisis, the massive accumulation of Chinese
currency reserves, and the sovereign debt crises in Europe has turned China into a
potential savior, seemingly dropping “helicopter money” in national economies that
have few alternative prospects of cash influx, but also into a potential predator. In this
scenario, China begins by preying on the weaker EU countries before insidiously
penetrating the rich European economies, using direct investment as part of its master
plan to take over the world. In any case, whether China is seen as a deus ex machina or
a devil to whom weak European economies have sold their souls, the increasing
willingness of Chinese entities to invest in Europe, directly and indirectly, raises the
question of a Faustian bargain. Is Chinese investment, through explicit or implicit
conditions, buying more than goodwill?
To be sure, all FDI involves a bargain, Faustian or not. FDI is an alien reach from
behind borders into a domestic policy, society, and economy. It carries with it concerns
about sovereignty, dependence, loss of autonomy, dispossession of local firms, and the
creation of interests aligned with the home rather than the host country. As a result, all
foreign firms, regardless of which country they come from, face costs of doing business
abroad, which has been conceptualized in the international business literature as the
“liability of foreignness” (Hymer 1976; Zaheer 1995; Eden and Miller 2001). Foreign
firms are put at a disadvantage compared to firms from the host country because of
geographic distance, as well as unfamiliarity with the cultural and political environment
and sometimes outright discrimination (Eden and Miller 2004). The question has
always been whether the benefit/cost balance of sending and hosting FDI is positive.
The liability of foreignness is even greater for Chinese investors who lack international
146 S. Meunier

experience, have to surmount a greater regulatory and institutional gap, and have to
overcome the negative reputation of their own country (Sauvant 2011).
An additional liability faced by Chinese investors is that the current surge of FDI
feeds into a preexisting narrative about the decline of the West. FDI becomes a proxy
for the rise of China and is interpreted as more than a mere transfer of capital, but rather
as an instrument of coercion to extract policy concessions from European governments
and to transform the nature of Europe. In this narrative, in accepting Chinese funds,
Europeans are making a Faustian bargain—or, as French sovereignist politician Nicolas
Dupont-Aignan suggests, “we’re going to put ourselves in the wolf’s mouth, once
we’ve taken this money that I call dirty money. […] it is like ‘prostituting’ Europe.”
(Lauter 2011). Various statements by Chinese investors are not reassuring to Euro-
peans, such as COSCO chairman Wei Jiafu’s declaration that “by going global, we are
also transferring our culture to the rest of the world” (Lim 2011).
Chinese FDI is still minuscule as a percentage of total FDI in the EU and can hardly
be expected to make a major impact on European policies. But a big difference with
FDI coming from market economies with no “Chinese characteristics” is that the
Chinese state is much more involved in the FDI decisions of its companies and,
therefore, more likely to establish linkages between specific investment decisions and
specific policies—both at the foreign and domestic levels. This section investigates the
issue of the implicit and explicit conditionality of Chinese FDI in Europe in both
foreign and domestic policies.

Implications on foreign policy

One worrisome political implication of Chinese FDI in Europe is its potential to be used
by China as a tool for economic statecraft in order to achieve foreign policy goals.
States have many carrot-and-stick economic tools at their disposal to influence the
behavior of other states, from sanctions to foreign aid (Baldwin 1985). Though outward
FDI has traditionally not been included as one of these tools in most studies of
economic statecraft, the way China deploys its FDI suggests that it should be analyzed
as such a tool for the following reasons. First, outward investment is an explicit policy
goal of the Chinese government through its “going out” policy, which can manipulate it
as a means to serve political ends. Second, most Chinese outward FDI, in Europe as
elsewhere, is indeed realized by state-owned enterprises (SOEs), which are more prone
to link economic goals to political goals than privately owned firms (Davis, et al. 2012).
And third, China has a pattern of having used a blurred blend of foreign aid and
investment in other regions of the world, such as in Africa or the Caribbean, to ensure
support for Chinese positions in various international fora.
Are Chinese investors in Europe linking their influx of capital with implicit or
explicit conditions about foreign policy, whether in the domain of “high politics” or
foreign economic policy? The Chinese government has explicitly asked European
countries for policy changes on two foreign policy issues, but these are not explicit
conditions for investment. One is the lifting of the arms embargo against China which
was imposed after the Tiananmen crackdown in 1989. Several EU countries, including
France, Greece, and the UK, have expressed interest in the past in relaxing the arms
embargo, so it might take only a small Chinese push (or investment) for it to happen.
The second issue is that of granting “market economy status” to China in the WTO. In
A Faustian bargain or just a good bargain? 147

September 2011, Premier Wen argued that the EU should grant China market economy
status in exchange for continued purchase of member state sovereign debt—
presumably the argument could also apply for continued influx of FDI into
European countries. Indeed, Iceland was, in April 2012, the first European (though
non-EU) country to recognize China’s market economy status at the same time as
the launching of negotiations for a bilateral free-trade agreement and promises of
Chinese investment into Iceland.
Nevertheless, even in the absence of explicit conditions posed by China to host its
outward FDI, European politicians could still soften their stance on various policy
issues, or even reverse them altogether, in a competition to attract Chinese investment,
as well as a willingness to retain existing Chinese investment.
When it comes to the issue of Tibet, the Chinese government does not hesitate to
punish countries whose leaders meet with the Dalai Lama. In June 2012, for instance,
China cancelled ministerial meetings with Lord Green, the UK Trade and Investment
Minister, and suspended other ministerial level meetings in retaliation for David
Cameron’s meeting with the Dalai Lama the previous month. More systematically,
Fuchs and Klann found that countries whose leadership receives the Dalai Lama are
punished by a temporary reduction of exports to China (Fuchs and Klann 2011). It is
conceivable that European politicians may consciously or unconsciously self-censure in
order to attract Chinese capital, in addition to securing Chinese markets for their
exports. Indeed, many German observers were very critical of Chancellor Merkel’s
apparent reluctance to tackle the issue of human rights when she visited China in
August 2012, on a mission to sell German goods and attract Chinese investment in
Germany. “Artist Ai Weiwei, China’s most prominent dissident—along with a
Bundestag delegation that recently canceled its own planned visit to Beijing over
China’s treatment of dissidents—fault[ed] Merkel for subordinating human rights
issues to commercial deals” (Gordon Smith 2012).
The fear of an implicit conditionality of FDI, though not articulated in mainstream
political rhetoric in Europe, is reinforced by the uncertainty as to the real motives of the
investors. First, going out through investment is officially encouraged by the Chinese
central government, which made this a centerpiece of three successive 5-year plans.
Second, more than two-thirds of Chinese investments in Europe have been conducted
by state-owned enterprises (SOEs). Even privately owned companies need to obtain the
authorization of the Chinese government to invest abroad. Third, Chinese companies
investing in Europe have paid a premium of 28.8 %, compared to an average under
26 % for other foreign investors (PricewaterhouseCoopers 2012)—this may be due to
their inexperience, but it may also be due to a political decision to win the deal no
matter what. These three points suggest that a broader objective could be at stake and
that maybe Chinese leaders are investing in more than businesses, but also international
goodwill and even more.
Future research on this question of a Faustian bargain in foreign policy should
analyze in more detail the issue of conditionality, attempting notably to highlight the
circumstances (before vs. after the investment, high politics vs. foreign economic
relations, good vs. bad economic times, etc.) under which the investor is more likely
to impact the policy positions of the host country. In a few years, when more data is
available, it would be useful to correlate the hosting of and jockeying for Chinese FDI
with policy positions on a variety of foreign policy topics in particular European
148 S. Meunier

countries, including frequency of meetings with the Dalai Lama, number of complaints
about Chinese human rights abuses, and position on the arms embargo and market
economy status.

Implications on domestic policy

In spite of its still small share of total FDI in Europe, Chinese FDI could also have an
impact on domestic policies in EU countries as a result of competition between member
states to attract investment, which could result in a regulatory race to the bottom,
especially with respect to environmental and labor standards. Concerns about the
“bidding wars” waged by states at all levels (national and subnational) to attract FDI,
both through incentive subsidies and through a relaxation of standards, have been
studied in other contexts (Oman 2000). The dangers associated with such bidding wars
could potentially happen in the European case, where governments, faced with the
bleak state of their economy, may be tempted to accept whatever capital comes along,
no matter what the origin or the long-term implications—“beggars can’t be choosers”.
One policy area in which inter-state competition could potentially lead to a relaxa-
tion of standards is the environment. One of the thorniest issues in the China-Europe
relationship currently is that of emission standards, which makes foreign airlines liable
to pay for CO2 emissions when entering European airports. One could imagine that
some countries might want to soften their stance on this issue, and other environmental
standards as well, in order to court Chinese investment. However, the downward
pressures on environmental standards are mitigated by the fact that many competences
regarding environmental policies have been transferred over the years from the EU
member states to the supranational level.
The fear that China may try to play regulatory arbitrage among various European
locations for its FDI is more pronounced in the case of labor standards, both de facto
and de jure, which are still mostly a national competence. This is reminiscent of the fear
in the 1960s when American multinationals invested massively in Europe and Latin
America (Mandel 1970; Servan-Schreiber 1968). Indeed, some analysts have claimed
that FDI leads to a deterioration in labor rights, also referred to as “social dumping,”
which was one of the central argument of the anti-globalization movement that defeated
the proposed multilateral agreement on investments in 1998 (Klein 1999).
One issue specific to Chinese FDI is that Chinese companies investing abroad,
especially construction companies, have a tendency to bring their own labor with them,
which not only does not create jobs in the host country but also can give rise to
domestic and even potentially racial tensions. In Africa, these tensions have become a
common place, from Algeria to Zambia. In Europe, this was the case, for instance, with
the construction of the A2 highway between Warsaw and Lodz in Poland by the
Chinese company Covec which tried to bring workers from China instead of hiring
locals, resulting in immigration violations and strong local resentment (Millner 2012)
(Jacoby 2014).
The most worrisome potential implication of Chinese FDI on labor policy is the
potential softening of labor standards in the host country, which may become more lax
about enforcing its own standards, including workers’ rights and job safety, and turn a
blind eye to labor violations in order to court and keep Chinese investment. Again,
examples of the sort abound in African countries, where the working conditions in
A Faustian bargain or just a good bargain? 149

Chinese-owned companies and projects are often very poor, as was shown, for instance,
in Zambia where Chinese managers have fired guns at local workers and a Chinese
manager was murdered over horrible working conditions and not paying workers the
wages they were due. Such cases do not appear to exist in Europe, though the example
of the Chinese management of the main pier in the port of the Piraeus in Athens was
initially watched closely. One condition put forth by the Chinese port operator COSCO
was that they would get the new commercial pier “clear” of workers—that is, of
unionized workers bound by decades-old special labor agreements. Numerous acci-
dents and abuses of working conditions have been reported, such as 8-h shifts with no
meal or bathroom breaks, workers having to be available 24/7, no overtime pay for
working night or weekend shifts, and salaries half of what they are at the neighboring
Greek-operated pier (Lim 2011).
The fear exists that these initial Chinese investments represent a beachhead from
which China will spread its own labor model into Europe and that companies which are
run by Chinese masters will inevitably influence those that are not. As the president of
the dockworkers union at the Piraeus declared, “the result is that companies not run by
the Chinese are being influenced by what the Chinese are doing in lowering the labor
costs and reducing workers’ rights” (Lim 2011). A declaration of the chairman of the
China Investment Corporation Jin Liqun about European labor practices suggests that
this might become a major political issue in the future: “I think the labour laws are
outdated. The labour laws induce sloth, indolence, rather than hardworking. The
incentive system is totally out of whack. Why should, for instance, within [the]
eurozone some member’s people have to work to 65, even longer, whereas in some
other countries they are happily retiring at 55, languishing on the beach? This is unfair
(Liqun 2011).”
So far, however this dreaded impact on European labor has not happened, neither in
Piraeus, nor beyond. After 3 years of operation, an impressive increase in the through-
put volume now going through Piraeus, and more than 1,000 jobs created, the fears
have dissipated and the general assessment is that the benefits overall outweigh the
costs (Author interview with Piraeus port officials and workers 2013). As Burgoon and
Raess show, Chinese FDI has not engaged in regulatory arbitrage by locating in the
least regulated labor markets (Burgoon and Raess 2014). As for governments not
enforcing their own labor standards, the story of the port of the Piraeus seems to be
the exception rather than the norm. Even there, the Greek employees seem to be
happier than they were 2 years ago (Alderman 2012). Overall, Chinese investors have
kept local employees and sent few Chinese staff to manage their European operations,
since the acquisition of local know-how and talent was often one of the primary
incentives to invest in the first place. Indeed, many Chinese investors accepted acqui-
sition contracts that mandated them to keep local employees and local facilities.
One common source of anxiety provoked by FDI historically has been the presence
of foreign managers. Having a foreign boss, who comes in with foreign practices and
expectations, can be a difficult psychological experience for workers (Makin 1988).
This contributed to the anxieties provoked in the USA in the 1980s by the surge of
Japanese investment, which was often accompanied by Japanese managers who
descended seemingly en masse on the American factory and dictated new ways of
working. But so far, Chinese investors have not sent armies of managers to Europe. On
the contrary, the parent companies are the ones interested in learning the know-how
150 S. Meunier

from their subsidiaries, which is one of the main motives for investment in the first
place (with some exceptions, such as COSCO and Huawei). As a result, the impact on
labor has so far been minimal.
Moreover, Chinese acquisitions have often been accompanied by investment in
equipment and facilities by the Chinese parent company to modernize the existing
European company. As an example, Weichai Power has invested 21 million euros into
the French engine maker Moteurs Baudouin, which it acquired in 2009. “Weichai is
like Santa Claus,” said a Moteurs Baudouin employee (de Montalembert 2011).
Overall, for many European workers, the risks of letting Chinese investors in is worth
taking in the short term, especially when it means rescuing ailing companies about to go
bankrupt. “The Chinese are coming, and for some in Europe, like the 3,800 workers at
Saab’s Trollhattan plant in Sweden, they cannot come fast enough” (The Guardian 2011).
But the fear subsists that in the long term, this may prove to be a fool’s bargain. How
much leverage can China exert from this new found interdependence—or dependence?
The fear of implicit conditionality always lurks in the background, reinforced by
statements such as these:“Europeans need to better value the support China is giving.
In fact, China feels that its efforts are being overlooked by European leaders. In times of
crisis, Chinese leaders have shown their confidence in European countries, not only by
making supportive statements and visiting Europe, but also by buying European bonds
en masse. Contrary to the United States, China does not laugh at European countries or
point the finger at them when they are in trouble. But this approach by China seems to
receive little appreciation, with leaders from Europe continuing to criticize China and
describing it as a threat to Europe. Europeans should not take China’s support for
granted—as China diversifies its trade relations, its need for Europe might decrease
(Zhiqin 2012).”
Future research on this question of a Faustian bargain in domestic policy should
examine whether there is evidence of a bidding war leading to a regulatory race to the
bottom, notably with respect to environmental standards and labor practices, and
whether new cleavages are opening up on this question in domestic politics.

Potential impact of Chinese OFDI on European institutional processes

In addition to changes in policies inside European countries, Chinese FDI in Europe

could also potentially affect politics between European countries, and notably the
process of European integration in the field of investment policy. The USA possesses
robust formal procedures for vetting in bound foreign investment, which have been
designed and refined in the wake of successive crises provoked by specific instances of
FDI, from the initial creation of the Committee on Foreign Investment in the United
States (CFIUS) in 1975, following fears generated by investment from the Gulf states,
to the Exon-Florio amendment passed in 1988 in the midst of fears about Japanese
investment, through to the 2007 Foreign Investment and National Security Act
(FINSA) enacted in reaction to the Dubai Ports controversy. In the EU, by contrast,
no commonly agreed procedures existed until recently for dealing with foreign invest-
ment (Meunier 2013). Yet, the surge of Chinese FDI in Europe, which is occurring
simultaneously to institutional changes in the competence over foreign investment
policy in the EU, will undoubtedly put pressures on European institutional processes.
A Faustian bargain or just a good bargain? 151

Some of these pressures will be centripetal, leading Europeans to unite their investment
policy, while others will be centrifugal, leading to further European fragmentation and
the ability for Chinese investors to “divide and rule” (Meunier 2014b).

The disunited states of Europe

Disunity and cacophony were, until recently, hallmarks of the European approach to
foreign investment. The 1957 Treaty of Rome, which created the European Economic
Community, did not bring foreign investment policy under supranational reach, like it did
for trade policy. Instead, the rules governing foreign investment policy in the EU were
extremely complex, with what seemed to be an intractable mix of competences between
the national and supranational levels. When it comes to outward FDI, the EU was in
charge of liberalization, defending market access for European investments in the context
of the preferential trade agreements that the EU negotiates with third countries. As for
inward FDI, each member state deals with it independently and has been free to negotiate
and conclude its own bilateral investment treaties (BIT). National legal regimes vary
considerably, with their own national rules and obligations, including those deriving from
the 26 BITs with China.1 Both the promotion and the vetting of inbound foreign investment
have been left entirely to the national level. Some member states (e.g., France) have rules
for vetting investment, either because of their size or their potential impact on national
security, which are far more constraining than others (e.g., Bulgaria). Yet, there were also
some cases in which the EU could indeed be involved, in a unified way, in reviewing some
proposed M&A deals under the purview of competition policy and rejecting them on anti-
trust grounds (Zhang and Van Den Bulcke 2014).
The 2009 Lisbon Treaty changed this complex, multi-layered situation and radically
reformed, de jure, the competences over foreign direct investment policy. According to
Article 207, foreign direct investment (though not portfolio investment) is now exclu-
sively part of the common commercial policy: In principle, it is up to the Commission
to negotiate BITs, to protect EU outbound FDI abroad, and presumably to regulate
inbound FDI on behalf of the member states. For the past 3 years, however, the letter of
the law has been different from the practice (Meunier 2013). The move to exclusive
supranational competence did not come from the member states, and there has been no
political appetite from them to surrender sovereignty and move investment policy up to
the supranational level in practice, especially in the current climate of suspicion and
disillusionment regarding European integration. As a result, there has been no coherent
or coordinated response to the influx of Chinese investment in Europe so far during this
transition period from the old to the new policy regime, which is more preoccupied
with outbound than inbound flows. I argue that this investment can exert both centrip-
etal and centrifugal pressures on the EU efforts to implement the Lisbon provisions and
move to a unified response to inbound investment.

Centripetal pressures

The political challenges posed by the surge of Chinese FDI could potentially provide a
centripetal push for Europeans to overcome their fragmented approach to inbound

1
Ireland does not have a BIT with China.
152 S. Meunier

investment, with the expectation that a more united Europe is also a stronger Europe.
The current competition between the member states to attract Chinese investment,
which could turn into a regulatory “race to the bottom,” not only does not enable the
EU to realize its potential but can also weaken the EU.
Since the EU now has exclusive competence over FDI, it is a matter of political will
to implement a more unified policy. Trade and investment are deeply intertwined, so
the spillover logic would dictate this evolution. Since the EU is the one responsible for
conducting anti-dumping investigations and filing anti-subsidies actions, it might seem
both a small and a logical step to have the EU also take care of negotiating investment
agreements and ensuring that reciprocity is enforced. The negotiation of a bilateral
investment treaty (BIT) between the EU and China, which started in January 2014, will
indeed be the first opportunity for the EU to exert its new exclusive competence over
foreign investment policy in a standalone investment agreement.
When it comes to screening inbound investments, however, a supranational solution
is not easy to achieve, even within the new institutional framework. Currently, a foreign
investor can be turned down by one member state on grounds of national security and
try its luck in another one instead, with the result that the national security of the first
one would be compromised anyway. Once a Chinese company has invested in one
member state, the entire European single market suddenly opens to this company—so
in many cases, it might not really matter so much where the investment is located.
Indeed, the number one reason cited by three quarters of Chinese companies surveyed
for locating their investment in a specific European country is access to the local market
and/or entry point to the EU (European Union Chamber of Commerce in China 2013).
Yet, the response to the current fragmentation cannot be the establishment of an EU-
wide body to vet foreign investments on national security grounds, à la CFIUS, because
“national security” is not an exclusive competence of the EU in spite of the Common
Foreign and Security Policy. Institutional innovation is needed for a common invest-
ment policy to occur. A complementary avenue is to strengthen the monitoring of
foreign investment on grounds of competition policy, which applies particularly to the
case of China, given the great number of investment deals proposed by state-owned
companies. Both responses would reinforce the “actorness” of the EU in global
economic policy.

Centrifugal pressures

The influx of Chinese FDI can also have a reverse effect, exerting centrifugal pressures
on European integration and enabling China to divide and rule over the fragmented EU
member states. Chinese companies have so far exploited the high level of fragmentation
and lack of coordination within the EU to obtain the best conditions, thanks to the
competition that member states are waging against each other with all kinds of policy
incentives to attract Chinese investment. These incentives include fiscal breaks, new
infrastructure, and even residency and citizenship deals (Meunier 2014a). Indeed,
China has become adept at exploiting European divisions to its advantage and at
bypassing Brussels to deal directly with national capitals when convenient.
As Parello-Plesner notes, “even before the euro crisis, China knew how to employ
the EU’s multi-level governance to its advantage based on differences between member
states within the EU. For example, China knows that southern European countries
A Faustian bargain or just a good bargain? 153

aren’t likely to be frontrunners on EU’s human rights policy, and that free-traders in the
north, spearheaded by the UK, Netherlands, Denmark, and Sweden will work to block
strong retaliatory moves on trade that smack of protectionism. The EU’s policy often
ends up in a lowest common denominator which is comfortable for China. The euro
crisis and China’s growing bonds with individual member states can reinforce that trend
(Parello-Plesner 2012).”
China exploits this lack of coordination and plays up this internal EU competition on
purpose. This is evident in the multiplication of visits by Chinese leaders to individual
European member states: Wen Jiabao in Poland, Germany, and Sweden in April 2012;
Li Keqiang in Hungary in May 2012; and Hu Jintao in Denmark in June 2012. This
playing off one member state against another was also evident in the Poland-Central
Europe-China trade and investment summit in April 2012, where Central and Eastern
European countries and companies were competing to attract Chinese capital and
business. In so doing, Chinese investments have started to create a pro-China lobby,
which will make it more difficult for member states to agree to common rules for
overseeing foreign investment, which China may find constraining. States with high
levels of Chinese FDI, or hoping to attract high levels, will not argue in favor of a
supranational investment regime that might restrict certain investments. This can
“encourage the belief in Beijing that, rather than having to deal with the EU collec-
tively, it can get its way by buying off vote-seeking European politicians one by one
with promises of economic and commercial rewards” (de Jonquières 2012). This is a
typical divide and rule strategy.
Another centrifugal force is the fear of reciprocity, both in trade and investment,
especially in an already tense political context of greater international pressure on
China to accelerate its efforts to open up to foreign businesses and avoid distorting
practices. For export-oriented countries like Germany, the worry is great that a supra-
national regime that reviews and constrains investments will trigger restrictions on
imports from Europe. Staying open for Chinese investors is essential to prevent
protectionist reactions in China. Another fear of reciprocity comes from member states
which are themselves big investors abroad, such as France. Their large companies
worry that a EU-wide regime will prompt more restrictions on their own foreign
investments in China, especially in China which is gradually liberalizing its own
domestic market to foreign investors per the December 2011 “Foreign Investment
Industrial Guidance Catalogue” (Hanemann 2012a, b, c) and recent indications that it
may soon raise the investment quota for foreign companies (Reuters 2012). Moreover,
all member states, as well as European institutions, are afraid that the creation of a
supranational procedure or body for reviewing foreign investment will send a mislead-
ing signal to China and other investors that the EU is stepping back from its commit-
ment to an open investment regime.
Future research on the implications of Chinese investment on relations between
European countries should probe whether Chinese investors are purposely choosing to
locate their acquisitions and greenfield investments in some EU countries rather than
others in order to divide and rule. So far, there has been no evidence of a master plan to
turn EU countries one against the other, and it has not been a big puzzle to understand
the localization of these investments: Until now, Chinese companies have invested in
Europe wherever and whenever opportunities arose. But this could change and we
could expect to see more strategic decisions.
154 S. Meunier

Potential impact of Chinese OFDI on transatlantic relations

Finally, the surge of Chinese FDI could potentially affect relations between Europe and
third countries, for instance, Japan and other BRICS. I focus here on the impact on
relations between the EU and the USA, which are being upgraded through the
negotiation of the Transatlantic Trade and Investment Partnership (TTIP) simultaneous-
ly to the surge of Chinese FDI. While that surge can have a divisive effect within the
EU, will it also have a divisive effect on the transatlantic relationship or, on the
contrary, will it lead to more cooperation as the EU and the USA increasingly find
themselves “in the same boat” in the new world of globalization?

Potential for different European and American trajectories

As China seeks to diversify its assets, both the USA and the EU are attractive
destinations for investment, but very recent trends point to a faster growth of Chinese
FDI in the EU than in the USA. Europe became the first destination for Chinese OFDI
in 2011, while the momentum slowed at the same time in the USA. Indeed, Chinese
investments had settled into a roughly equivalent distribution between European and
American projects from the start of the going out policy on, but the trajectories sharply
diverged in 2011, which saw $4.5 billion Chinese FDI in the USA and a record high of
almost $10 billion in the EU, a threefold increase from about $3 billion in 2010
(Hanemann 2012a, b, c). The trend continued in 2012. In 2013, Chinese FDI increased
in both the EU and the USA.
This differential trajectory could continue in the years to come as perceptions grow
in China that Europe is a much more hospitable environment for its foreign investment
than is the USA. To be sure, Chinese companies find it difficult to invest in Europe,
mostly because of bureaucratic hurdles and red tape: travel visas, work permits, and
bureaucratic fragmentation (European Union Chamber of Commerce in China 2013).
The successive failures by Chinese companies to acquire Swedish automaker Saab
and rescue it from bankruptcy are a case in point. But these companies are
increasingly learning how to navigate these hurdles, in a large part with the help
of major Western services companies, from tax specialists to public relations
firms. And these hurdles are of a different nature from the perceived political
hurdles they face in the USA.
The EU is the USA’s most readily available substitute when it comes to Chinese
OFDI, for greenfield projects as for acquisitions, because they can both provide
Chinese investors with brands, know-how, technology, qualified labor, and distribution
channels to a very large and affluent consumer market. This could lead to either
transatlantic competition or cooperation.

Potential for transatlantic competition

Europeans could attempt to exploit as comparative advantage their apparent positive

outlook towards Chinese investment. Some European countries, such as Greece and
Italy, already tout their millenary history as a lure for Chinese investment, suggesting
that they have more in common with China than do the “new” USA. This competitive
exploitation of comparative advantage could damage the transatlantic relationship.
A Faustian bargain or just a good bargain? 155

Chinese government and corporate officials perceive, rightly or wrongly, that the
USA is an inhospitable environment for Chinese investment, based largely on the
widely publicized failure of the CNOOC takeover of UNOCAL in 2005, the two failed
investments by Huawei in 3Com and 3Leaf in 2011, and the executive order
blocking Chinese investment in Oregon wind farms and the US Congress’
release of a negative report against Huawei and ZTE in 2012. The CFIUS
process is interpreted as lacking transparency and predictability and as discrim-
inating against Chinese investors—a perception which stems partly from the
mandatory requirement to review deals involving state-owned enterprises. This
was compounded by the 2012 American electoral climate in which China was
scapegoated and fingerpointed.
By contrast, Chinese investors have raised very few national security concerns in
Europe. Only 7 % of Chinese companies recently surveyed listed “national security
concerns” as an obstacle they faced when investing in the EU (European Union
Chamber of Commerce in China 2013). EU member states can capitalize on this
perception and exploit the lack of restrictive investment controls and the inexistence
of an EU investment review process in order to attract potential investment away from
the USA. EU member states are engaged in aggressive investment promotion efforts,
which often insist on the ease with which investments are approved, such as the April
2012 Poland-Central Europe-China forum.
The recent start of negotiations for an EU-China bilateral investment treaty (BIT)
could also drive a wedge between Europe and the USA. Such a treaty would help
European investors gain larger market shares in China while facilitating mergers and
acquisitions by Chinese multinationals in Europe. Meanwhile, negotiations over a
USA-China BIT, stalled since 2009, are resuming simultaneously—though the chances
of reaching an agreement soon are slim given the stringent standards usually included
in American BITs. If China quickly concludes a bilateral investment framework with
the EU but not the USA, this would probably increase further the divergence in Chinese
FDI trajectories in Europe and the USA and lead to some damaging consequences on
the transatlantic partnership.
The USA could interpret this competition coming from Europe as free riding: EU
countries enjoy the influx of capital while the USA is the one worrying about security
and ultimately guaranteeing the security of its European allies. Worse, the USA could
also interpret this competition as endangering its own national security. China is known
after all for its espionage and for being a proliferator of sensitive technologies. By
bypassing the American vetting of FDI for national security concerns, Chinese firms
can get access to potentially threatening technology from Europe and acquire firms that
develop technology for the US military. For example, in fall 2010, an Italian
fiber optic cable manufacturer finalized a deal to purchase a Dutch rival, Draka
Holding NV. The US Navy and several other Western militaries use Draka’s
products for secure communications. One week after the deal was finalized, a
Chinese investment corporation put in a counter offer 30 % higher than the
Italian one, totaling $1.3 billion. It is widely suspected that the Chinese govern-
ment secretly backed the investment corporation’s counteroffer (Miller 2011). As
for Huawei, which has faced many roadblocks in the USA, it continues to
massively expand its presence in Europe, while it has decided to no longer
pursue the US market for now.
156 S. Meunier

Potential for transatlantic cooperation

Europeans and Americans publics and elites have so far reacted differently to a
phenomenon that has posed similar political challenges in both regions. This may be
a temporary divergence only, one caused by the severity of the economic and euro crisis
in Europe and by the still relative smallness of the numbers involved. Europe has not
experienced its CNOOC moment yet and Chinese investment has not really appeared
as an issue in domestic politics. The potential for the continued growth of Chinese
OFDI to prompt more transatlantic cooperation is twofold.
First, because this European scramble for Chinese investment can have serious
ramifications for US national security, it could prompt strong demands for transatlantic
cooperation from the Americans—for instance, as part of the TTIP negotiations.
European and American security is deeply intertwined, and what is in the interest of
one partner is often in the interest of the other as a result. Issues such as the transfer of
sensitive technology to rogue regimes and economic espionage are more likely to be
addressed by China if Europeans and Americans present a common front. Obviously,
this is harder to achieve because national security is not a competence of the EU, and
some member states, especially in the east and the south, may be less worried about
potential Chinese security threats. Europeans could also leverage the promise of a more
unified response towards Chinese investment to score some points in the current
negotiation on a transatlantic free-trade area.
Second, the opportunities and dangers posed by the influx of Chinese OFDI could
also press the EU and the USA for more regulatory cooperation, which again could be
included as part of TTIP. Many of the challenges represented by Chinese investment,
from the state-owned nature of the investors to the absence of a level-playing field for
Western investors in China, are better addressed in a cooperative fashion which could
be tackled by the OECD, for instance. Indeed, the EU and the USA, each other’s largest
recipient and source of FDI, agreed in April 2012 on a Statement of Shared Principles
for International Investment, which shows a growing commitment to cooperation, not
competition (Bierbrauer 2012).
Future research on the implications of Chinese investment on transatlantic relations
should look for evidence of American pressures for cooperation and for domestic
political debates in Europe about China as a national security threat.

Conclusion

Respected magazines all over Europe have used on their cover pages menacing images
of fiery dragons spewing banknotes or contemporary Maos with imperialistic designs
on the continent. These images cohabit with pictures of smiling European heads of state
shaking hands with Chinese officials. This contrast illustrates the challenge posed by
the surge of Chinese investment into Europe: How to ensure the benefits from FDI,
from job creation to productivity gains, while protecting from its harmful effects, and
how to ensure that Chinese investment is a good bargain and not a Faustian bargain.
European publics are for the moment ambiguous towards this unprecedented situ-
ation. Opinion polls show that Europeans are split when it comes to viewing China as
an opportunity or a threat. Of individuals in the 12 EU countries surveyed in the 2011
A Faustian bargain or just a good bargain? 157

edition of the Transatlantic Trends poll, 41 % see the Chinese economy as a threat
while 46 % see it as an opportunity (German Marshall Fund 2011). In 2012, the fears
had increased: 45 % saw China as a threat, while 42 % saw it as an opportunity
(German Marshall Fund 2012). This reflects vast differences among countries, the
French at one end of the spectrum with 65 % seeing China as a threat (vs. 56 % in
2011), the Dutch on the other end with only 23 % interpreting China as a threat (vs.
22 % in 2011).
A further research question is to investigate how much of this fear is genuine
concern, motivated either by actual economic conditions or by xenophobia, and how
much is manufactured by the media (to sell copy) and politicians (to scare Chinese
companies into giving them more).
Chinese investors find themselves at the right place at the right time. The predicted
surge of Chinese FDI in Europe presents great opportunities; after all, it is better for the
EU if Chinese companies come to Europe and employ local workers than if European
companies go east to employ Chinese workers. But in order for this investment to truly
rescue European economies, Europeans have to be careful to present a unified response
so that China does not end up ruling by dividing, carving out concessions in the heart of
Europe as an irony of history.

Acknowledgement Many thanks to Brian Burgoon, Adeline Hinderer, Wade Jacoby, Justin Knapp, Stephen
Kobrin, Jing Men, Werner Pascha, and Herman Schwarz for comments on an earlier version of this paper, as
well as to the participants to the workshops on “The politics of hosting Chinese investment in Europe” held at
the University of Amsterdam, June 29–30, 2012 and at Princeton University, November 2–3, 2012.

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