The EU continues to self-sabotage its economy by targeting Chinese investment

Economic defence driven by fear and protectionist reflexes will only deepen stagnation

Co-authored with Fabio Massimo Parenti, Associate Professor of International Studies.

In the latest escalation of global trade tensions, the EU is preparing to introduce significantly stricter rules on Chinese investment in the bloc. Under the current 2019 framework, member states enjoy substantial discretion in how they screen foreign direct investment. But a new package — endorsed by the European Parliament in May 2025 — would now make screening mandatory across a range of strategic sectors, including media, critical raw materials, transport, energy, semiconductors, artificial intelligence and emerging technologies. It also extends scrutiny to greenfield projects — not just acquisitions — and grants the Commission more authority to intervene in disputes or close loopholes. By December, the Commission aims to consolidate the new rules, with an explicit focus on China.

This marks yet another step toward the further supranationalisation of the EU’s trade and investment policy. Yet there is no evidence that concentrating even more power in the hands of the Commission would do anything to improve the bloc’s competitiveness. Over the past decade, the Commission has steadily expanded its executive reach across virtually every policy domain, but this centralisation has not yielded any tangible economic gains. On the contrary, Europe’s economic strength has eroded. The EU’s industrial heartland — Germany, France, and Italy — now exhibits clear symptoms of structural stagnation: industrial contraction, declining innovation capacity and a steady loss of global competitiveness. Even Mario Draghi’s competitiveness report acknowledged these problems, urging massive public-private investment to revive the real economy. Ironically, this comes from one of the main architects of the neoliberal model now being abandoned in favour of protectionism and state-led industrial policy. The West, once the champion of open markets, now mirrors the policies it long condemned in China.

These new regulatory moves are likely to depress foreign direct investment (FDI) inflows even further. By weakening the EU’s own commitment to market openness, Brussels also undermines its long-standing criticisms of China’s investment restrictions. After all, if Beijing truly blocks foreign access, as the EU claims, how do we explain the fact that the stock of European FDI in China is vastly higher than Chinese FDI in Europe? Eurostat data show that in 2022, European investments in China totalled €247 billion, while Chinese investments in Europe were just €54 billion — a €192 billion gap. Moreover, Chinese FDI in Europe has fallen sharply, down 77% since 2016, due largely to the 2020 FDI Screening Regulation and the increasingly restrictive national regimes introduced since then.

By requiring foreign investors to prove “local benefits” — in jobs, technology transfer, or R&D — Europe is effectively embracing the same interventionist logic it once condemned in Beijing. And Beijing will not remain passive. It has already shown it can retaliate against US and Japanese measures by slowing approvals, tightening regulation on foreign firms or restricting exports of key inputs such as rare earths and battery materials — areas where Europe is structurally dependent. Beijing could also redirect investment flows to other regions, deepening Europe’s marginalisation.

Meanwhile, Europe’s own industrial progress is stalling. In sectors like automotive, AI, green technology and advanced manufacturing, China continues to advance while the EU remains bogged down in bureaucratic regulation. The pursuit of “de-risking” and partial decoupling has backfired, turning the EU’s dependence into a self-imposed constraint. Europe is solidifying its role as a normative power — issuing rules rather than shaping technological or industrial breakthroughs.

The EU’s evolving doctrine of “economic security” now includes potential outbound investment controls to prevent European firms from aiding rivals in sensitive sectors. This mirrors the US debate on outbound screening, signalling another step toward a protectionist security paradigm. While a uniform mechanism could close loopholes between member states — preventing investors from exploiting jurisdictions with weaker oversight — enforcement will remain difficult. Complex ownership structures, offshore holdings and round-tripping through third countries obscure ultimate beneficiaries. If the rules become too rigid, Europe risks driving away not only Chinese capital but all foreign investment, worsening its economic stagnation.

Beijing will not stay idle if the European investment environment turns more unpredictable or discriminatory. China has multiple levers to apply pressure — from delaying European acquisitions and imposing regulatory barriers to restricting exports of critical components. Such countermeasures would intensify the EU’s economic decline and reinforce its dependency on others. The new rules may thus accelerate a vicious cycle of mutual suspicion and vulnerability.

Ultimately, the EU faces a strategic dilemma: how to balance legitimate security concerns with its need for growth and competitiveness. A rigid, politically charged investment regime will not deliver either. Instead, Europe should focus on rebuilding trust, pursuing cooperative frameworks and maintaining openness within a strategic, mutually beneficial model. Economic defence driven by fear and protectionist reflexes will only deepen stagnation. To avoid self-isolation, the EU must restore constructive engagement with China — or risk completing its transformation from a global economic power into a self-caged bureaucracy.

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Thomas Fazi

Website: thomasfazi.net

Twitter: @battleforeurope

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