Summary of Key Points
In 2026, the European Union (EU) will introduce a series of protectionist measures under the banners of "Europe First" and "digital sovereignty," focusing on economic security, supply chain resilience, investment review, and industrial localization. Restrictions on non-EU companies, particularly Chinese firms, will be significantly intensified. These policies include consolidating internal economic security mechanisms, expanding the scope of foreign investment review, setting barriers for industrial localization, and regularizing the supervision of foreign subsidies. As a result, 81% of Chinese companies operating in the EU have already felt an increase in uncertainty.
Detailed Analysis
1. The EU seeks a unified approach to economic security
Previously, EU countries handled economic security issues independently—some were more stringent than others, leading to potential loopholes. Now, the EU aims to unify these efforts and establish a "cross-member state economic security coordination mechanism":
- Each member state is required to appoint a "National Economic Security Advisor" to facilitate timely information sharing;
- The EU is expanding "Key Technology Observation Posts" to monitor sensitive technologies such as AI and semiconductors to prevent their theft by foreign companies;
- It is also assisting universities and research institutions with due diligence to prevent the leakage of technology through cooperation with foreign partners.
For Chinese companies, this means that investments in sensitive industries across EU countries will face more unified and stringent EU-level reviews, making it harder to exploit loopholes (e.g., investing in a less strict country and then transferring the operations to a stricter one).
2. Investment review to close loopholes
The EU previously only reviewed "direct investments" (e.g., Chinese companies purchasing shares of European companies directly). However, some Chinese companies used intermediaries (e.g., subsidiaries registered in the EU) to invest in sensitive industries, avoiding scrutiny. The EU is addressing this by revising the "Foreign Direct Investment Regulation" to include "indirect investments" in the review scope. Any investment where the ultimate controlling party is a Chinese company will be subject to review, regardless of the channel used. Sensitive industries include AI, semiconductors, critical infrastructure (e.g., power grids), and defense-related sectors. This means that Chinese companies will no longer be able to use clever investment structures to evade EU regulations.
3. Industrial localization requirements
The EU is working on the "Industrial Accelerator Act," which, although postponed to January 2026, still emphasizes the principle of "Europe First":
- Key products (e.g., solar panels, electric vehicles) must have at least 70% of their components manufactured in Europe;
- Public institutions (e.g., government departments) are encouraged to prioritize purchasing local European products;
- Foreign investors are required to contribute to the local economy (e.g., by transferring technology, hiring local workers, and creating local jobs).
In short, Chinese companies looking to sell products in the EU or win government contracts must localize their operations—using European materials, transferring technology, and hiring local staff. This effectively sets a barrier for Chinese companies.
4. Regularized subsidy review
The EU has a "Foreign Subsidies Regulation" (FSR) to monitor whether foreign companies receive government subsidies. This review has become more frequent:
- Enforcement has become more consistent; the number of submissions received in the past year and a half has been seven times the expected amount;
- The EU has gained more power to investigate non-EU subsidies; even subsidies not used in the EU can be subject to review if there is suspicion that they benefit EU-related activities;
- Ireland and the Netherlands are likely to be hotspots for such inspections.
Chinese companies operating in the EU will need to be more cautious, proving that they are not receiving subsidies and being prepared for sudden inspections, which will increase compliance costs.
Overall Impact on Chinese Companies
EU policies in 2026 will pose three major challenges for Chinese companies operating in the EU: stricter reviews (in investment and subsidies), higher barriers (localization requirements), and increased uncertainty due to rapid policy changes. Chinese companies will need to adjust their strategies in advance, such as strengthening compliance management, increasing local cooperation, and reducing direct and indirect investments in sensitive industries to better navigate these challenges.