The EU’s foreign investment screening proposal: Towards more protectionism in the EU

by Prof. Nikos Lavranos, Secretary General of EFILA

Last September, European Commission President Juncker presented a proposal for a European foreign investment screening regulation – apparently following a request by Germany, France and Italy.

The proposal fits the protectionist mood that has taken hold in Brussels and in many EU Member States. The backlash against TTIP, CETA and ISDS – suddenly supported by once free trade minded countries such as Germany and the Netherlands – has prepared the ground for this proposal.

Indeed, the EU has failed to deliver so far anything on its competence on Foreign Direct Investment (FDI). TTIP has been put in the freezer; the CETA investment chapter is on hold because it is awaiting adjudication by the Court of Justice of the EU (CJEU) and in the new envisaged trade agreements with Japan, New Zealand and Australia the investment chapter is left out altogether.

So, instead of promoting and protecting foreign direct investments – especially European foreign direct investments abroad – the EU has followed suit on populist calls for protecting Europe from perceived dangerous Chinese and other foreign investors, which aim at supposedly buying up strategic European companies.

As often is the case, the main argument for this European screening mechanism for foreign investments is “harmonization”, since several EU Member States already have a national screening mechanism while other Member States don’t.

Accordingly, the proposal first and foremost claims to provide legal certainty for Member States that maintain a screening mechanism or wish to adopt one. In other words, this Regulation would empower Member States to maintain their mechanisms or to create new ones in line with this Regulation.

Second, the Regulation aims at creating a “cooperation mechanism” between the Member States and the European Commission to inform each other of foreign direct investments that may threaten the “security” or “public order”. This cooperation mechanism enables other Member States and the Commission to raise concerns against envisaged investments and requires the Member State concerned to take these concerns duly into account. In other words, this “cooperation mechanism” is an “intervention mechanism” in disguise by given the Member States and the Commission a tool to review and intervene against planned foreign investments in other Member States.

Third, the proposal also enables the Commission itself to screen foreign investments on grounds of security and public order in case they “may affect projects or programmes of Union interest”.

In short, Member States and the Commission will effectively be enabled to review any screening of any foreign investments and to intervene if they think that their interests may be affected.

If one looks at the description of the screening grounds (“security” or “public order”), it immediately becomes clear that this proposal essentially can cover any investment.

Article 4 Factors that may be taken into consideration in the screening of the proposal states:

In screening a foreign direct investment on the grounds of security or public order, Member States and the Commission may consider the potential effects on, inter alia:

  • critical infrastructure, including energy, transport, communications, data storage, space or financial infrastructure, as well as sensitive facilities;
  • critical technologies, including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology;
  • the security of supply of critical inputs; or
  • access to sensitive information or the ability to control sensitive information.

In determining whether a foreign direct investment is likely to affect security or public order, Member States and the Commission may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.

Moreover, in order to be effective, this Regulation essentially will require all Member States – in particular those which have not yet a screening mechanism in place – to create one, otherwise these Member States and the Commission will not be able to share the required information about planned new foreign investments and the review them.

As a result, if this proposal is approved, the screening of foreign investments will become a standard procedure in all Member States.

The question arises to what extent this proposal may be damaging for the economies of the Member States. In this context, it is telling that this proposal is not accompanied by an impact assessment study. This proposal contains the following justification for the lack of the impact assessment:

“In view of the rapidly changing economic reality, growing concerns of citizens and Member States, the proposal is exceptionally presented without an accompanying impact assessment. The proposal targets specifically the main issues identified at this stage in a proportionate manner. Other elements will be further assessed in the study announced in the Communication accompanying this Regulation. In the meantime the Commission proposal for Regulation is accompanied by a Staff working document providing a factual description of foreign takeovers in the EU on the basis of the available data, as well as a brief analysis of the issue at stake.”

This “justification” reveals that the need to satisfy populism quickly is considered more important than performing a proper impact assessment.

Apart from this, there are significant reasons to reject this proposal.

Firstly, the question arises whether such a screening mechanism would be compatible with the 1,500 extra-EU BITs which the EU Member States currently have in place with third states. The proposal does not discuss the potential incompatibility with BITs and neither does it discuss the potential claims based on the BITs by foreign investors against such screening decisions. This is very surprising since one of the main aims of BITs is to promote foreign investments and to protect them against unfair or discriminatory treatment. Prima facie, it seems that such a screening mechanism could lead to breaches of these BITs and thus to subsequent claims.

Secondly, there are many countries within the EU, in particular in Central, Eastern and Southern Europe which actually are in dire need of foreign investments – including also Chinese investments. Creating more obstacles against such investments is not going to help these countries economically.

Thirdly, one may wonder whether it is in the interest of the EU to send out such a protectionist signal to the world – in particular in light of the current US Administration’s protectionist attitude. Indeed, the experience with the American CFIUS mechanism shows that the screening of foreign investments is mainly used for domestic political gains rather than for economic benefits.

Finally, one wonders who will be financially responsible if foreign investments fail to materialize due to the market distorting interventions by other Member States and/or the Commission.

So, for all these reasons, the EU Member States should resist riding on the populist protectionism wave that may be helpful to satisfy short-term political gains, but which will be damaging for the EU as an attractive FDI dentition. The EU Member States are in dire need for more foreign investments, for example in renewable energy but also for large infrastructure projects such as connecting to the One Belt one Road (OBOR) project, which is currently pushed by China.

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