The European Commission announced five initiatives on January 24, 2024 to enhance the economic security of the EU amidst escalating geopolitical tensions and significant technological transformations. These address foreign investment (FDI), export controls, outbound investment, technologies with dual use potential and research security, to strengthen the EU’s economic security while emphasizing the notion of free trade.
EU Commissioner for Competition Margrethe Vestager emphasized the need to avoid “a conflictual discussion” with member states during the unveiling of the proposal. Among the five initiatives, only inward investment screening stands as an actual legislative proposal, necessitating approval from EU member states and projected to require approximately two to three years for implementation, as indicated by officials. Conversely, the initiative on outbound investment exists solely as a white paper. This means the EU Commission has decided to refrain from actively pushing tighter controls on outbound investment.
This text will examine the proposal on foreign direct investment screening and on the White Paper on outbound investment.
Foreign Direct Investment (FDI) Screening:
One of the initiatives, a legislative proposal by the EC, aims to adjust the foreign investment screening process across the EU. The proposal improves upon the existing EU legal framework, which has applied since 2020. This strategic initiative seeks to introduce stronger regulations for assessing foreign investments, alongside fostering increased cooperation and the exchange of vital information among member states. The initiative encompasses three main goals.
First, it will mandate the implementation of an FDI screening mechanism across all member states. While the European Commission has been actively advocating for Member States to adopt national FDI regimes, the current FDI Regulation itself does not mandate their implementation. Currently, five countries (Ireland, Croatia, Cyprus, Greece, and Bulgaria) are in the process of developing screening mechanisms. Under the proposed framework, all member states will be required to establish screening regimes in alignment with the updated minimum standards within 15 months from the enactment of the proposed reforms.
Secondly, it establishes a minimum sectoral scope that encompasses all sectors subject to screening, promoting comprehensive oversight. This initiative seeks to harmonize the FDI mechanisms across member states. Prior notification and screening of foreign investments are mandatory under the proposed framework if they are (i) engaged in projects or programs of EU significance, or (ii) undertaking activities crucial for the security or public order interests of the European Union. These activities encompass the acquisition of military equipment listed on the Common Military List of the European Union, dual-use items subject to export controls, critical technologies, essential medicines, critical entities, and operations within the European Union’s financial system. This goes in line with Minister Habeck’s call to increase scrutiny towards Chinese FDI in critical sectors such as semiconductors.
Third, the initiative includes indirect investments. The existing FDI Framework Regulation solely addresses foreign direct investments made in EU companies by non-EU investors. The proposed framework seeks to expand its scope to include investments in EU companies made by subsidiaries of foreign investors established within the EU. This proposed expansion of the FDI screening mechanism aims to address instances of circumvention within the existing legal framework. Specifically, it closes a loophole identified by the Court of Justice of the European Union's Xella ruling (C-106/22 – 13 July 2023).
Outbound Investment screening:
The European Commission released the White Paper on Outbound Investments, on January 24, 2024, delineating non-binding propositions for an in-depth examination of EU outbound investment. A key finding of the White Paper on Outbound Investment is that there are substantial knowledge gaps around risks of outbound investments. For instance, there's a notable absence of specific or systematic monitoring of outbound investments at both the EU and Member State levels. There is no monitoring of outbound investment as of February 2024. This deficiency leaves considerable uncertainty regarding potential risks, such as the misuse of EU technology and expertise in third countries.
The Commission seeks to identify whether the existing limited regulatory framework surrounding outbound investments is fostering the outflow of strategic technologies, consequently posing potential security risks. Any findings from this review will play a pivotal role in shaping potential EU policy actions, potentially including the adoption of EU-wide regulations pertaining to the scrutiny of outbound investments into third countries.
In the U.S., President Biden issued an executive order on outbound investment in August 2023 to prevent "countries of concern" from exploiting specific U.S. outbound investments. The objective is to curb the proliferation of sensitive technologies and products in nations that may use them against U.S. interests.
AmCham Germany’s take:
The EU Commission's proposal regarding the screening of FDI and Outbound Investment is tasked with the delicate balance of enhancing and consolidating the current FDI screening mechanism among member states while mitigating the introduction of unnecessary complexities into the market.
The dynamics of international trade policy are evolving, shifting from the traditional focus on market expansion and trade barrier reduction to strategies aimed at addressing broader political goals. For instance, as a component of the Atlantic Declaration in June 2023, both the U.S. and UK pledged to undertake measures aimed at mitigating security risks associated with specific categories of outbound investments. In this environment, it is crucial for governments to advocate for the adoption of initiatives that enhance trade and promote robust supply chains.
AmCham Germany advocates for the economic integration of markets, advocating against tendencies towards bloc formation and economic isolationism. Recognizing that global trade plays a central role in the prosperity of both regions, its significance remains paramount.
Author: Raphael Schmieder
