EU needs better business with China

China’s prominence in global affairs has been on an unstoppable trajectory, and the nation is increasingly in the foreground of major political, social and economic events.

This is true for business as well, as Chinese companies pursue increasingly greater acquisitions overseas. Beijing seeks to rebalance its economy and to shift from an export- and investment-driven model to one supported by domestic consumption.

A key element to that transition is for China to upgrade its domestic economy and raise disposable incomes. For that, China needs advanced technology and the know-how necessary for adding value to its products, which it must acquire from technologically superior foreign companies.

However, there is often strong resistance to Chinese investments abroad. Much of this is because Chinese companies often struggle to adapt to local labor laws and business norms.

Performance review

A few examples will help show why foreign direct investment from China often has a less-than-stellar reputation.

Shortly after China’s Cosco assumed control of the Greek shipping terminal Piraeus in June 2010, Chinese managers were accused of suppressing wages and the undermining the collective bargaining with unions. The domestic Chinese labor environment is radically different from those in Europe or the U.S.; workers there do not get the same bargaining power.

In Italy, Suntech Power Holdings, the Chinese solar panel manufacturer that filed for bankruptcy last year, has been accused of illegally constructing solar farms in return for state subsidies under its majority-owned Global Solar Fund. As of late last year, 47 of its plants were seized by the court in the southern Italian city of Brindisi.

This case highlights a common failure of Chinese managers to respect local legislation and a general disregard toward authorities. Others just lack familiarity and knowledge concerning foreign laws, politics, social norms and environmental regulations. In 2012, China Overseas Engineering Group, also known as Covec, withdrew from a high-profile highway construction project because it simply could not handle the work. In Australia, Citic Pacific has been plagued by regulatory hurdles and accusations of labor violations at its Sino Iron project.

The problem is compounded further by the Chinese government’s failure to collaborate with foreign investigations into alleged criminal activities of its nationals. In a recent interview with Hong Kong’s South China Morning Post, the former Mexican ambassador to China spoke out against Beijing’s refusal to help stem exports of ingredients used to make methamphetamine in Mexico.

It has been over 30 years since China’s economy started integrating with the rest of the world, but many international investors are still questioning whether there has been adequate progress in the country’s management and business practices. As Chinese companies expand, many are fearful that their domestic corruption, disrespect for labor laws and lax environmental regulations are being exported along with capital.

The European Union should establish an interagency committee capable of evaluating foreign investments, much like the Committee on Foreign Investment in the U.S.

Works for all

A committee like this for the EU would be empowered to prohibit purchases that are a menace to the union’s security interests as well as help preserve European business standards and the environments in which they operate. Regardless of whether the threats arise from corruption or inexperience, both are financially and socially detrimental and ultimately bad for local economies.

The varied and divided interests of EU member states make them more vulnerable to abuses by foreign investors as countries entrenched in financial crises might be easily persuaded to sign unreasonable agreements. If they end up allowing lower wages and more rule breaking, for example, the effect could spread to the more economically stable EU states that then might lower their standards to stay competitive.

Distressed countries like Greece, Spain, Italy, Cyprus and Eastern European nations are especially vulnerable. A unified investment policy and an organization capable of making sure that local laws are being respected are necessary. A body to check that proposed investments are feasible and beneficial for the recipient countries across the EU is also required.

Unity among European states will prove to be a critical issue when it comes to prosecuting regulatory and legal transgressions committed by foreign investors, and an EU committee on foreign investment could help structure a response to violations that individual member states are too weak to execute alone.

The objective is not to turn the EU against China or any other nation, but to create a framework capable of addressing any mistake made by foreign investors.

The establishment of more stringent rules governing investments and explicit consequences for noncompliance would help China become a more responsible business partner, and in the long run, it will work in China’s favor by improving its economic environment.

Elena Forchielli is a research fellow at Osservatorio Asia, a research center based in Bologna, Italy.

Published on Nikkei Asian Review