EU Is 'Frozen in Action' on China Export Controls, US Commission Hears

The EU has so far been unable to place any meaningful export controls or sanctions against China despite urging from the U.S., leading to competitive disadvantages for American companies, Ivan Kanapathy, a China studies expert, said during a U.S. government commission hearing last week. Other experts at the hearing said much of Europe remains strongly opposed to any economic restrictions that would hurt their businesses and were skeptical that the bloc can stand up an EU-wide outbound investment screening mechanism.

Although some European countries are “gradually conceding that the China dream is over,” the bloc “remains relatively frozen in action, unable to implement a meaningful change in policy direction,” said Kanapathy, a senior associate with the Center for Strategic and International Studies and former National Security Council official. Speaking during a U.S.-China Economic and Security Review Commission hearing, Kanapathy noted the European Commission hasn’t yet proposed “actual restrictions” to counter China's military-civil fusion strategy despite “repeatedly” expressing support for new controls.

Even if the EU were able to move forward with a new export controls framework aimed at China, Kanapathy said the restrictions would be nowhere near as powerful as the U.S. would like. “Given individual member states' varying interests and Europe's consensus-oriented culture,” he said, “any future EU export control regime would likely be non-binding, toothless or both.”

Janka Oertel, Asia program director at the European Council on Foreign Relations, said many EU businesses remain firmly opposed to adopting export controls on advanced technologies that are similar to some of the restrictions recently announced by the U.S. “When I spoke to businesses in Europe, the immediate reaction was one of outrage and anger” around U.S. controls, she said, adding that they are worried “European businesses would suffer.”

She said the U.S. and EU leaders need to better communicate to European companies “that businesses in America are suffering as well, that they will take a hit first, if not to a greater extent.” The EU’s approach to China “is not always unified and in line with strong messaging from EU leadership,” Oertel said. “That is something that European officials can work on and that is something that American officials can work on.”

If the EU doesn’t join the U.S. export controls, Kanapathy said Europe and other “foreign competitors will gain uncontested markets,” including in China. “As long as Europe remains relatively passive, U.S. business concerns about offshoring are justified,” he said, adding that multinational companies could be incentivized to shift development and production outside the U.S. to better service China.

Europe, Japan and the U.K. would be the "primary jurisdictions that could benefit in such a situation,” Kanapathy said, especially surrounding advanced technologies. “Of those, Europe is the least aligned with the U.S. national security concerns about China, and therefore most likely to exploit regulatory advantages.”

He said the same can be true of outbound investment restrictions, especially if the Biden administration follows through on a plan to soon introduce a new screening program (see 2305310075). Several experts during the hearing said they aren’t expecting a similar regime from the EU anytime soon. Discussions in the U.S. are “farther ahead than they are in the EU,” said Lindsay Gorman, a senior fellow at the German Marshall Fund.

“We're not really at the point where we're going to, I think, jointly develop these outbound investment screening mechanisms,” she said. “Although, for my money, I think we should.”

Alicia Garcia-Herrero, chief economist for Asia Pacific at investment bank Natixis, noted that even if the EU were to create an outbound investment screening tool, it could follow the same path as its foreign direct investment screening regulations, which aren’t mandatory and suffer from a lack of member state participation and coordination (see 2211140020). “So even if we push that further,” Garcia-Herrero said, “defensive measures are not going to be enough.”

Kanapathy said he expects EU actions to “continue to lag in both time and rigor,” adding that the U.S. shouldn’t wait before continuing with new controls. “To protect vital U.S. interests, including the preservation of U.S. military advantages,” he said. “Washington should not hesitate to employ unilateral and extraterritorial economic tools when necessary.”