The imposition of preliminary tariffs by the EU against Chinese electric vehicles (EVs) manufacturers and the ongoing investigations that may lead to further tariffs have an impact on greenfield investments in Europe. What that means for the EU is a pressing matter that links into debates on economic security, the green transition and how the two can work together, yet the matter remains widely under-discussed.
Greenfield investments are direct investments that set up a business from scratch in a foreign location. For example, the investments in Germany and Hungary by the Chinese battery manufacturer Contemporary Amperex Technology Co (CATL) are greenfield investments. They are mostly looked at in opposition to mergers and acquisitions (M&A), which have absorbed a large part of the debate about investment screening and the security implications of foreign investments.
How to identify and manage the risks linked to greenfield investments is a matter that has long been marginalized compared to the debate related to M&A. The return of tariffs, however, requires the matter to be analyzed and tackled.
In order not to lose the acquired market, companies that are hit by tariffs—or that may be hit in the future—will be incentivized to invest within the EU to localize production and avoid said tariffs. Chinese EV companies and suppliers already grew their presence in the EU ahead of the recent imposition of tariffs to counter what the EU says are unfair Chinese subsidies; these tariffs will further boost the trend.
Pushbacks with Downsides
The EU and member states could push back against these investments by using the investments screening mechanism at their disposal, when these cover greenfield investments. However, that would have three undesired outcomes. The first is to slow the EU’s green transition. The second is to weaken the EU’s position in the production of technology related to the green transition. The third is to push Chinese companies to invest in neighboring countries and then import the final products in the EU.
Chinese companies are already investing in countries geographically close to the EU which can be used as production hubs for export to the EU market, such as Morocco and Turkey, the latter also imposed tariffs on imports of Chinese EVs. The Chinese EV manufacturer BYD has announced a $1 billion investment in a plant in Turkey. In Morocco, Gotion High-Tech will invest $1.3 billion in the construction of Morocco’s first EV battery gigafactory. Gotion High-Tech had already achieved Europeanization of part of its products when in 2023, it launched the first battery product as Gotion Germany Battery GmbH.
To prevent Chinese companies from bypassing tariffs via production in third countries, the EU could impose tariffs on companies rather than on location. If BYD’s cars from China must pay an extra 17.4 percent of duties(on top of the existing 10 percent), so should BYD cars imported from Morocco.
Instead of exclusively pushing for an expansion of tariffs to include any production from targeted companies, however, the EU and its member states can address the greenfield elephant in the room and turn it into an advantage for the EU by imposing clauses and guardrails to greenfield investments directed to strategic assets in the EU.
Clauses and Guardrails
The guardrails should include the imposition of joint venture with European firms, the design of quotas in the board composition and in the veto power that this has in decision-making, local (European) employment targets, guarantees in terms of longevity of the local production with fines to be paid if the agreement is not respected, as well as quotas to boost the presence of European suppliers in the supply chain.
Boosting the presence of European suppliers does not mean cutting out non-European suppliers. The aim of the quota for suppliers would be to prevent or break processes of vertical integration among Chinese companies and, thus, increase diversification and resilience in a given supply chain. Such an effort would not only be in line with the EU’s economic security strategy, but also with other EU strategies that seek to de-risk supply chain dependencies. For example, the target present in the EU Critical Raw Material Act of not supplying more than 65 percent from a single third country could be embedded in the clauses for greenfield investments.
The elements above would prevent the EU’s green transition from slowing down because of the lack of imports. They would help strengthen the EU’s position in the production of technology related to the green transition—all while safeguarding the EU’s economic security and interests.
However, the proposed clauses would not prevent Chinese companies from investing in neighboring countries and then importing the final products in the EU. After all, why would Chinese companies accept such clauses when they can invest in neighboring countries which possibly offer cheap labor and the ability to then import the final product in the EU for a larger revenue? That is where tariffs and harmonization of legal frameworks come to play a central role.
Company, Not Location
The EU can maintain the possibility to impose tariffs based on companies rather than on geographical location. In the long term, the EU and neighboring countries should work together to adopt similar regulations regarding the origin of components to avoid boosting dependencies from vertically integrated companies and increasing regional (and global) resilience.
In that way, developing economies could keep benefitting from foreign investments while avoiding major risks for their economy and economic security. First, foreign investments would not curtail the possibility to create local production—as it has happened to Brazil’s battery production following the growing presence of Chinese companies in the country. Second, the EU and neighboring countries could benefit from an increasingly resilient and reliable supply chain, triggering a process that can have positive implications for global supply chains. All this can be achieved by the development of a discipline to manage the economic security risks and opportunities of greenfield investments.
In the framework of the debate on greenfield investments, the risks they carry, and how to manage them, it will be even more important to address the difference between strategic assets for national security and strategic assets for economic security. Especially when it comes to greenfield investments, the two will require different treatment. Greenfield investments in strategic assets that have implications for national security must be blocked. Those can include geographical proximity to military bases and presence in the sectors identified in the EU framework for FDI screening, to mention a couple.
Greenfield investments that have implication for the economic security of the EU or a member state can be managed by applying the clauses mentioned above in order to reduce the power of the company and to guarantee its full integration into the European system without renouncing the investment or taking away the commercial advantages for the investing company.
In conclusion, the EU must navigate the delicate balance between encouraging greenfield investments to support the green transition and ensuring these investments do not undermine its national and economic security. By adopting comprehensive strategies and collaborative frameworks, the EU can turn the challenge of greenfield investments into an opportunity for sustainable growth and resilience.
Francesca Ghiretti is a non-resident fellow at the Center for Security and International Studies (CSIS).
