EU moves towards outbound investment controls: a geopolitical European Commission shifts gear

The European Commission has become extremely active in creating new instruments to deal with actual and impending geopolitical challenges and threats. We have previously commented on the adoption of various measures including the Foreign Subsidies Regulation, the FDI Screening Regulation, the Carbon Border Adjustment Mechanism, the Anti-Coercion Mechanism, the Critical Raw Materials Act and the Forced Labour Regulation.

However, the latest Communication on European Economic Security Strategy from the European Commission (issued jointly with the High Representative for Foreign Affairs) takes a more systematic and comprehensive approach.  It sets out a strategy to identify and respond to geopolitical threats and, most strikingly, announces an initiative to address security risks related to outbound investments before the end of 2023.

The Strategy to enhance European Economic Security

The Communication brings together the EU's emerging industrial policy and ever more complex trade defence policies.  The connecting concept is economic security. The priorities of the proposed Economic Security Strategy are:

• Promotion of innovation and industrial capacity, especially in strategic areas such as advanced semi-conductors, quantum computing, biotechnology, net-zero industries, clean energy or critical raw materials;
• Protection from identified economic security risks, by better deploying the existing tools on trade defence, foreign subsidies, 5G/6G security, foreign direct investment screening, export controls and against economic coercion as well as expanding the toolkit to tackle new risks linked to exports or outward investments in key enabling technologies (e.g. in the areas of Quantum, Advanced Semiconductors and Artificial Intelligence); and
• Partnering with countries with similar concerns on economic security or with common interests.

The promotion limb of the strategy is being implemented through a number of industrial policy initiatives including the proposed Chips Act, Critical Raw Materials Act and Net Zero Industry Act.

The protection limb of the strategy refers to a number of existing EU initiatives, including the ongoing evaluation of the current EU FDI screening mechanism, but also intriguingly announces a possible brand-new initiative to tackle risks linked to outbound investments (which we return to below).

The partnering limb highlights how EU external relations are changing focus away from broad trade liberalisation objectives to more focussed objectives involving like-minded (G7 and other partner) countries and targeting specific sectors or technologies.  The Communication announces the objective of "having as large a geo-economic toolbox as possible – from Free Trade Agreements to Digital Partnerships, Green Alliances and Partnerships, Raw Materials Partnerships, and the Raw Materials Club and strengthened cooperation with countries in the EU neighbourhood".

According to the European Commission, the principles underlying this strategy will be proportionality and precision, aiming to ensure that any measures adopted are targeted to limit unintended spill-over effects on the European and global economy.

The outbound investments initiative

The most novel element in the Communication is an "initiative" on outbound investments.  The Communication considers that controls on the export of goods are insufficient in themselves and expresses a concern over "the leakage of sensitive emerging technologies, as well as other dual-use items, to destinations of concern that operate civil-military fusion strategies, and to avoid the backfilling of any controlled exports and investments." As noted above, the Communication refers to a narrow set of advanced technologies that could enhance military and intelligence capacities (e.g. in the areas of Quantum, Advanced Semiconductors and Artificial Intelligence).

Although the Communication does not expressly mention China, it is clear that China is the primary "destination of concern" when it comes to controlling outbound investments.  Indeed, the President of the European Commission already announced that the Commission was considering making a proposal on outbound investments in a speech on EU-China Relations on 30 March 2023 that called for "de-risking" not "de-coupling" from China, and referred to the very sectors and technologies mentioned in the Communication.

The issue will be discussed in a new dedicated group of Member State experts with a view to putting forward a proposal by the end of 2023, following a consultation process with businesses and other stakeholders, as well as partner countries.

Following the EU's Communication, on 13 July 2023 the German government published its Strategy on China. Echoing the EU’s policy that China is simultaneously a partner, competitor and systemic rival, the publication goes so far as to explicitly name China as one of the countries operating a civil-military fusion policy alluded to by the European Commission. In this context, the German government notes that it will constructively engage in the EU consultation process for an outbound investment initiative, whilst also conducting its own analysis of the matter, including by liaising with industry stakeholders and global partners.

Parallels with proposals in the United States

It is significant that the EU proposals follow an extensive and ongoing debate in the United States on the subject of outbound investment control. The idea of a "reverse CFIUS" focussed on vetting of outbound investment from the US was first proposed in 2018, and has been revived in recent years as part of discussions on various US industrial policy initiatives.

It is anticipated that an outbound screening regime will be introduced imminently through an Executive Order of the President, with a particular focus on investments in artificial intelligence, semiconductors and quantum technology. However, many questions remain about the detail of any such new regime, and there has been a degree of domestic pushback recently, exemplified by an open letter sent by the then-ranking member of the House Committee on Financial Services urging the White House to forego unilateral action in favour of a “transparen[t] and thoughtful[]” collaboration with Congress to ensure development of a “responsible” approach to regulation of certain US investment flows to China.

A parallel legislative solution has also recently come back into play, following the re-introduction to Congress of the proposed National Critical Capabilities Defense Act on 9 May 2023. The current draft of the Bill is significantly broader in scope and would be of more general application, but it has gained limited traction to date.

Separately, an amendment to the National Defense Authorization Act backed by the Senate on 25 July 2023 seeks to introduce a mandatory reporting requirement for certain investments by US companies in sensitive sectors (including artificial intelligence, semiconductors and quantum technology) in North Korea, China, Russia and Iran. However, this would not involve any review or enforcement action.

Next steps

Controlling outbound investment is clearly a difficult task since such controls are much more easily circumvented than controls on inward investment. This is an issue for any jurisdiction contemplating introducing such measures but for the European Commission there is an additional complication - although "foreign direct investment" is supposed to be an exclusive competence of the EU (Article 207 of the Treaty on the Functioning of the European Union), Member States consider it their competence, in particular because of the links to the concept of "national security".

These difficulties are already reflected in the approach adopted to inward investment controls under the EU FDI Screening Regulation (currently under review), which creates a framework for the coordination of FDI screening but leaves enforcement powers with Member States and simply "strongly encourages" all Member States to adopt an investment screening regime.

Against this backdrop, many questions are currently left unanswered, including the form any EU proposal will take, whether this will impose further regulatory obligations on EU businesses, as well as the sectors, investments and countries which may ultimately be covered. Notably, European Commissioner for Trade Valdis Dombrovskis has suggested that any EU proposal should be narrow and focused on economic security, rather than broader competitiveness or level-playing-field objectives, which aligns with the proportionality and precision principles set out in the Communication.

Ultimately, the kind of EU outward investment control regime that emerges will depend on a combination of the approach ultimately adopted in the United States, the outcome of the ongoing evaluation of the FDI Screening Regulation governing inward investment, and discussions with the EU Member States and other partner countries. Highlighting the timeliness of this issue, outbound investment regulation was on the agenda of the recent EU-US Trade and Technology Council meeting on 31 May 2023, following which the EU and US have proposed to coordinate, share lessons, and seek to align their approaches to addressing risks from outbound investments in coordination with their G7 allies.

We will be keeping a close eye on developments in this field and will publish further updates in due course.