EU to tighten investment rules to stand up to China – Financial Times

European Union Initiative to Align Foreign Direct Investment with Sustainable Development Goals

Context and Rationale for Revised Investment Framework

The European Commission is preparing to revise its foreign investment regulations to better align with key Sustainable Development Goals (SDGs). The initiative aims to bolster the EU’s industrial base and promote sustainable economic growth (SDG 8, SDG 9) by ensuring foreign direct investment (FDI), particularly from China, contributes positively to the European economy. Key drivers for this policy shift include:

• An influx of inexpensive Chinese products placing pressure on European industries.
• Concerns that foreign industrial projects may increase geopolitical leverage and circumvent EU tariffs without contributing to local sustainable development.
• The need to ensure that the EU’s open market principles are balanced with the goals of creating local value and fostering a resilient industrial sector.

Core Objectives and Alignment with SDG 8: Decent Work and Economic Growth

The proposed regulations are designed to ensure that foreign investments directly support the principles of SDG 8 by promoting full, productive employment and decent work for all. The new criteria will mandate that FDI projects actively contribute to sustainable economic growth within the Union.

1. Local Employment Generation: A primary stipulation will be the requirement for foreign investors to recruit local workers, directly addressing SDG Target 8.5 for full and productive employment. This counters practices where a large contingent of foreign labor is imported, as seen in the case of CATL’s planned facility in Spain.
2. Value Chain Integration: According to Industry Commissioner Stéphane Séjourné, the rules will “ensure that foreign investments don’t just go into components that are assembled abroad” but contribute to “the functioning of the whole European value chain.” This supports SDG Target 8.2 by promoting economic diversification and high-value-added sectors.
3. Productive Investment: The framework will ensure that FDI is “productive for European growth and not just an entry point to the European market,” thereby maximizing the contribution of foreign capital to the EU’s sustainable economic objectives.

Fostering Sustainable Industrialization and Innovation (SDG 9)

A significant focus of the revised rules is to advance SDG 9, which calls for building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation. The proposals seek to transform FDI into a vehicle for technological and industrial progress within Europe.

• Technology Transfer: In strategic sectors such as electric vehicle batteries, the rules will likely mandate the transfer of technological know-how. This directly supports SDG Target 9.5, which encourages scientific research and upgrading the technological capabilities of industrial sectors.
• Local Content and Sustainable Production: The initiative includes a push for “made in Europe” clauses and a clear definition of “local content.” This aims to strengthen local manufacturing capabilities and create more sustainable and transparent supply chains, aligning with the goals of sustainable industrialization.
• Strategic Sector Oversight: The focus on battery maker CATL and investments in hydrogen projects highlights the EU’s intent to apply these rules to critical green and digital transition industries, ensuring that their development within Europe is sustainable and benefits the local innovation ecosystem.

Promoting Equitable Partnerships and Reducing Inequalities (SDG 10 & SDG 17)

The new framework also addresses the broader goals of equitable global partnerships (SDG 17) and reducing inequalities (SDG 10). By establishing clear, Union-wide standards for FDI, the EU aims to create a more balanced and mutually beneficial relationship with foreign investors.

• Fair Partnership Terms: The legislation, while not explicitly naming any country, is a direct response to investment patterns from China. It seeks to redefine the terms of this economic partnership to ensure it is more reciprocal and aligned with the EU’s sustainable development priorities.
• Preventing a “Race to the Bottom”: As noted by the Central European Institute of Asian Studies, standardized and tighter rules could “reduce the race to the bottom between European countries.” This would prevent member states from competing for FDI by lowering regulatory, labor, or environmental standards, thereby supporting SDG 10 by promoting more equitable development across the bloc.
• Ensuring Compliance: The initiative is expected to gain strong support from member states like Spain, which view it as a crucial step to “advance Europe’s economic security and resilience, and also ensure that FDI creates strong value added, technology and domestic employment.”

1. SDGs Addressed in the Article

• SDG 8: Decent Work and Economic Growth

  The article directly addresses this goal by focusing on the EU’s efforts to bolster “flagging economic growth” and its “ailing industrial base.” The proposed rules aim to ensure that foreign investments generate “benefits for local workers” and create “strong value added… and domestic employment in European nations.” This aligns with the goal of promoting sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all.

• SDG 9: Industry, Innovation, and Infrastructure

  This is a central theme of the article. The EU’s plan to tighten foreign investment rules is part of a broader strategy to support its industrial base. The push for “made in Europe” clauses, requirements for “local content,” and the mandate for foreign companies to “transfer technological knowhow” in sectors like batteries are direct efforts to build resilient infrastructure, promote inclusive and sustainable industrialization, and foster innovation within the EU.

• SDG 17: Partnerships for the Goals

  The article discusses the dynamics of global partnerships, specifically the financial relationship between the EU and China through Foreign Direct Investment (FDI). By revising its investment rules, the EU is attempting to create a more equitable and mutually beneficial partnership, ensuring that investment contributes to its sustainable development goals rather than just serving as an “entry point to the European market.” This involves creating systemic policies (investment rules) to achieve policy coherence for sustainable development.

2. Specific SDG Targets Identified

1. SDG 8: Decent Work and Economic Growth

   • Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading and innovation.

     The article connects to this target through the EU’s requirement for foreign investors in “certain sectors like batteries” to “transfer technological knowhow.” This is a direct policy measure aimed at technological upgrading to boost the productivity and competitiveness of the European industrial base.

   • Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation.

     The proposed rules stipulating that foreign investors must “recruit local workers” and create “domestic employment” are a clear example of a development-oriented policy aimed at job creation, as highlighted by the Spanish government official’s support for the initiative.

2. SDG 9: Industry, Innovation, and Infrastructure

   • Target 9.2: Promote inclusive and sustainable industrialization and, by 2030, significantly raise industry’s share of employment and gross domestic product.

     The entire initiative described in the article—to bolster Europe’s “ailing industrial base” and use “FDI conditionality to be able to produce in Europe”—is a direct attempt to promote and protect European industrialization and its contribution to the economy and employment.

   • Target 9.b: Support domestic technology development, research and innovation… by ensuring a conducive policy environment.

     The EU’s plan to make technology transfer a condition of investment is a policy designed to support domestic technology development. The concern that a Chinese company might be “reluctant to share its most valuable technological secrets” underscores the importance of this target for the EU.

3. SDG 17: Partnerships for the Goals

   • Target 17.b: Enhance North-South, South-South and triangular regional and international cooperation on and access to science, technology and innovation and enhance knowledge-sharing on mutually agreed terms.

     While the article describes a North-North investment relationship (China-EU), the principle of creating rules for knowledge-sharing on “mutually agreed terms” is central. The EU is moving from a purely open market to one where investment is conditional on the “transfer [of] technological knowhow,” thereby defining the terms of the partnership to ensure mutual benefit.

3. Indicators Mentioned or Implied in the Article

1. Foreign Direct Investment (FDI) Inflows

   The article explicitly mentions this indicator when stating that “Foreign direct investment flows from China to the EU increased 80 per cent to €9.4bn in 2024 compared to 2023 levels.” This is a direct quantitative measure used to track the scale of investment that the new rules will govern.

2. Definition of “Local Content”

   This indicator is explicitly proposed in the article. Industry commissioner Stéphane Séjourné states that the new rules “should set out a definition of what constituted ‘local content’, potentially based on customs codes.” This would create a new, specific metric to measure the degree to which foreign investments contribute to the local value chain.

3. Local vs. Foreign Employment Ratio

   This indicator is strongly implied in the discussion about the CATL plant in Spain. The article contrasts the plan to use “3,000 mostly Spanish workers to run the plant” with the company’s desire to “bring 2,000 Chinese workers” for construction. The proposed rule to “recruit local workers” suggests that the ratio of domestic to foreign employees in FDI projects will become a key measure of compliance and success.

4. Summary Table: SDGs, Targets, and Indicators

Source: ft.com