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EU Should Slash Reliance on Foreign Critical Minerals, Boost FDI Screening, Report Says

The EU needs to strengthen its foreign investment screening rules and develop a new strategy to shore up its supply of critical raw materials, which will help shield EU countries from economic coercion, the European Commission said in a new report.

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The report, published Sept. 9, lists recommendations to shape the “future of EU competitiveness.” It comes about one year after the bloc released an economic security strategy that called for a clearer EU-wide approach to protecting sensitive technologies (see 2306200052) and about eight months after the EU released a package of proposals that could lead to new restrictions over dual-use technology exports and foreign direct investments (see 2401240078).

Commission President Ursula von der Leyen said the report highlights EU challenges in accessing raw materials and “essential components,” adding that the “findings will continue of course to inspire our work for the months and years to come.”

One portion of the 69-page report, authored by Mario Draghi, former Italian prime minister and former president of the European Central Bank, said the EU needs “enhanced coordination” among member states, especially around FDI screening, to protect against economic security threats posed by China.

The report noted that the U.S has “imposed wide-ranging tariffs” on Chinese imports along with “progressive measures tightening inward FDI rules” to protect strategic American industries. “As a result, the economies of the US and China have started to decouple,” the report said.

Though the report said the EU has “pursued a different strategy,” and noted that some Chinese investments are actually helping to boost technology development in Europe, it said there are some cases in which member states need to block foreign investments, and those decisions need to be better coordinated across the EU.

“Asymmetries arising from small Member States negotiating with large foreign investors could lead to unwelcome concessions being extracted by foreign countries, which is particularly concerning when a potential security threat and a geopolitical rival of the EU are involved,” the report said, calling on the EU to “strengthen its Investment Screening Mechanism.”

The bloc currently operates under a patchwork of non-mandatory FDI restrictions that are imposed differently in individual member states (see 2310200038). The report noted that member states are only required to “exchange notifications and information” about their FDI screening, which “prevents the EU from leveraging its collective power in FDI negotiations and complicates the formulation of a common FDI policy.”

The report also called for a “genuine” foreign economic policy centered on reducing EU dependencies on foreign suppliers of both critical minerals and technologies. It urged member states to “rapidly and fully” implement the EU’s recently adopted Critical Raw Materials Act -- which aims to significantly reduce EU reliance on imported critical raw materials by 2030 -- and said the law should be coupled with a new platform that would allow member states to coordinate joint purchases of those materials from producer countries.

Critical raw materials are “subject to a global race to secure supply chains,” the report said, “and Europe is currently falling behind.”

It specifically pointed to the U.S. Inflation Reduction Act (see 2405170045). “The EU is lacking a comprehensive strategy covering all stages of the supply chain (from exploration to recycling) and, unlike its competitors, the mining and trading of commodities is largely left to private actors and the market,” it said.

Foreign countries are increasingly using critical raw materials as a “geopolitical weapon,” the report added, specifically pointing to China, which has recently imposed export restrictions on gallium, germanium and other key minerals (see 2408150022).

China is the "single largest processor" of nickel, copper, lithium and cobalt, accounting for between 35% and 70% of processing, and has "shown willingness to use its market power,” the report said. It added that Chinese export restrictions “grew by a factor of nine between 2009 and 2020.”

The EU also must address its dependencies on foreign-made semiconductors, the report said, which are “dominated by a small number of large players.” Although Dutch company ASML is a leading global producer of advanced chip machines, the report noted the U.S. is specializing in chip design, while South Korea, Taiwan and China are leading in chips manufacturing.

“The EU currently has no foundry producing below 22 nm process nodes and relies on Asia for 75% to 90% of wafer fabrication capacity,” the report said. “Europe has become dependent on non-EU countries for chips design, packaging and assembly as well.”

The EU also depends on foreign suppliers for other advanced technology, especially its artificial intelligence industry, which “relies on hardware produced largely by one US-based company for the most advanced processors.”

The bloc needs a new strategy to increase domestic production of these critical technologies, the report said. “While EU ownership of large foundries may be unrealistic at this stage owing to the required investment levels, Europe should maximise its joint efforts to strengthen innovation in semiconductors and its presence in the most advanced chips segments.”