Last week, United States Trade Representative Robert Lighthizer launched an investigation of Chinese ‘unfair trade practices’ with a focus on alleged Chinese stealing or demanding the handover of US intellectual property and technology as a pre-requisite to allowing foreign investment in China. If the investigation, which could take 12-18 months, condemns China, it could lead to the imposition of retaliatory tariffs on Chinese exports.

This op-ed was originally published by EurActiv.

This move comes after an unexpected US-China honeymoon following the Trump-Xi summit at Mar a Lago in April. Although during his election campaign Trump had attacked China as a currency manipulator and denounced its huge trade surplus with the US, he initially adopted a softer approach in office hoping to secure Chinese support in adopting tougher sanctions on North Korea. Now the White House has concluded there needs to be a warning shot across Beijing’s bows.

This week the European Commission is putting the finishing touches to a set of proposals that would allow for tougher controls of Chinese investments in Europe. It is widely assumed that the proposals will be launched by European Commission President Jean-Claude Juncker during his state of the union speech on 13 September.

The demand for action comes from European business increasingly frustrated with what they term the lack of a level playing field for European and Chinese investors. For some time, the European Chamber of Commerce in Beijing has been lobbying for the EU to seek remedies, including retaliatory tariffs.

Now they have secured the backing of EU heavyweights France, Germany and Italy. In a paper submitted to the Commission at the end of July, the three governments argued that there was growing evidence of discrimination, especially by state owned companies and a determined Chinese strategy to secure the most modern European technologies in key industrial sectors.

The motives were politically driven as part of the ‘Made in China 2025’ strategy. The paper argued that existing national legislation was insufficient to deal with the threat and proposed action at the EU level.

The paper did not propose any changes to the competences of the member states, most of which have national screening schemes. It did suggest that there could be new legislation where a non-EU investor (read China) acquires or increases its voting rights in order to exercise a significant influence in the company.

It further argued that member states should consult the Commission on particular acquisitions ‘with a European-wide relevance that crosses the national dimension and involves value chains, sectors, productions and know-how of the Union (for instance network industries)’.

Each acquisition should take account of the situation in the investor’s own country to ensure there was no discrimination. Any intervention should be decided by the member state taking into account the views of the Commission.

The three governments also proposed that the Commission should be formally given a role of analysing and monitoring of foreign acquisitions operations in Europe based on information and data from member states and other sources. The Commission should then provide a six-monthly report on the state of foreign investment in Europe covering all sectors and highlighting any state aids and other subsidies from foreign governments.

Market forces and reciprocity should be two of the main guiding principles. A member state should be able to examine an acquisition and, where necessary, make it subject to conditions or prohibit it, if the investment conditions for European investors in the investor’s country of origin discriminate against European investors.

Particular attention should be paid to companies that operate in certain strategic sectors and develop or provide key enabling technologies.

The reports and assessments should take account of the international obligations, in particular WTO law, of the EU and its member states as well as third countries. With reference to the ongoing negotiations on an EU-China bilateral investment agreement, the paper concludes that these treaties should not preclude the elaboration of potential new trade defence instruments.

It is not clear how quickly any new procedures will be agreed. While Juncker is thought to favour the Paris-Berlin-Rome proposals, European Trade Commissioner Cecilia Malmström and Jobs, Growth, Investment and Competitiveness Commissioner Jyrki Katainen are more hesitant.

The UK would normally be against any new trade defence measures but it is already considering how to ensure a future FTA with China and is unlikely to wish to be seen as supporting what Beijing will deem an anti-China policy move. There is, however, likely to be a strong majority in the European Parliament supporting a tougher line on China.

China will certainly lobby against new trade defence measures in the US and EU. The internal priority is the 19th party congress scheduled in the coming weeks.

President Xi will not wish for any external problems during the congress. He already has a difficult agenda with North Korea, a sensitive border dispute with India and ongoing disputes in the South China Sea. Internally there are signs of a weakening economy so the last thing he needs is trouble on the trade front.