China has largely been cut off from direct transfers of military systems and technologies since the announcement of the EU arms embargo in 1989. Nevertheless, the EU and its member states remain a major source of high technologies for China, namely, by means of trade, investment, and scientific cooperation. This is mainly because the EU-China relationship continues to be dominated by the economic interests of individual member states, both in trade and increasingly in investments. Furthermore, due to a lack of direct security interests in the Asia-Pacific, Europeans do not generally see China as a security threat or a strategic competitor. Therefore, the EU has so far failed to develop a strategic approach toward the potential security implications of transfers of European militarily sensitive technologies that goes beyond the existing arms embargo and currently lacks effective mechanisms to control the flow of such technologies to China.

The Clean Development Mechanism (CDM) offers abatement cost savings under the Kyoto Protocol by allowing credits for emission reductions obtained in signatory developing countries. The paper argues that technology transfers can improve incentives for cost-effective emission reductions under bilateral CDM contracts when there is asymmetric information between the investor and the host party.

JEL classification: Q20; D82