Regulatory Challenges Arising from Sovereign Wealth Funds and National Security: Exacerbate Great Power Competition between China and the United States?

Charles Ho Wang Mak* and I-Ju Chen**

China is now a major player in some of the United States’ (US) most important sectors. China’s impact can be found through the acquisition by some of its most influential companies, which are later acquired by the sovereign wealth funds (SWFs) of China. US’ companies, for example, Apple and IBM, and their distributors, are indirectly controlled by China. This dynamic and tension of the two great economic power may play a significant role in the US-China trade war. Moreover, concerns about regulations of the SWFs and national security have never ceased in the US. While the US presidential election is in fall 2020, the foreign relationship between China and the US is an essential agenda in both Trump and Biden’s campaigns. This post examines regulatory challenges arising from the SWFs and national security under this new era of great power competition between China and the US.

National security is closely associated with the concept of state capitalism. This is because the states’ governments mostly control the enterprises that existed in states that adopted state capitalism. Therefore, investors (with political agendas) may invest in some state enterprises, which might affect national security. National security will be negatively affected by the SWFs made by state-owned enterprises. Inward SWFs might affect individual strategic firms (investing in infrastructure) and different sectors in the host countries. This is because those state-owned enterprises, which invest in those host countries by SWFs, can access sensitive information and technology of those strategic firms and then misuse that information. States investors seek to get improved access to sensitive technologies of other countries through investment. Therefore, to safeguard national interests, policies and strong regulations are necessary.

The Santiago Principle could be a reference for governments to govern international investment. Establishment of the Santiago Principle aims to depoliticise foreign investment flows and to structure and implement transparent and sound governance.[1] The Santiago Principle covers the following areas: legal framework and coordination with macroeconomic policies; institutional framework and governance structure; and investment and risk management framework.[2] Hence, the Santiago Principle is one of the most important features in reframing international perceptions of SWFs.

The balance between the protection of national security and open investment policy of SWFs is complex. In addition, SWFs raise ‘potentially controversial questions for international financial regulation and governance’.[3] China’s SWFs, such as the China Investment Corporation (CIC), have sought more access to markets in the US after Chinese deals are under more and stricter scrutiny. Chinese firms have criticized the US’ investment regulations imposing unfair restrictions on funding coming from China. Moreover, in a high-profile talk with the US government in 2015, Xi Jinping raised the issue of SWFs and relevant regulations in the US. Xi addressed that the US government should relax regulations of foreign investment in high-tech sectors.[4]

However, the investment flow of China into the US has prompted US’ concerns about the government of the People Republic of China’s influence. This is because, from the perspective of the US government, there is a potential risk of national security of SWFs. Although it is clear that the national interest ensures long-term capital availability – because much of it must come from SWFs now – several US pressure groups still urge restricting foreign investors’ choices lest they ‘steal’ technology, trade secrets or jobs.[5] On this controversial point, Bu’s research, however, indicated that China has no intention of investing in sensitive sectors pursuing the controlling stake because it has steered away from deals that would trigger any political backlash.[6]

The US has a series of critical legal regimes applicable to SWFs. The US adopted a protectionist approach towards the SWFs inward investments. Since 2000, the companies in the US that were invested by SWFs became a major issue. In the US the principal regulations that burdened SWFs are the Securities Exchange Act 1934, Foreign Investment and National Security Act (FINSA) 2007, Foreign Corrupt Practices Act of 1977 and Defense Production Act of 1950. FINSA codifies the contemporary views of the Committee of Foreign Investment in the United States (CFIUS). FINSA has dramatically strengthened the regulations introduced by CFIUS, those about inward investment, particularly for state-owned entitled such as SWFs. For instance, critical infrastructure needs to be protected against those SWFs that are invested with a political purpose, since those critical infrastructures will give rise an issue of national security. However, with respect to the unpredictability for the transaction parties, an issue arises as to whether the FINSA can strike a balance between the economic benefits of foreign investment and national security concerns about technology and critical infrastructure.[7] Nonetheless, Chinese scholar, Feng, comments that FINSA is unnecessary and even likely to be detrimental to the US capital markets and the overall economy.[8]

Furthermore, the case of Cede & Co. v. Technicolor, Inc. showed that directors and managers owe the duty of loyalty to both the company and shareholders by providing protections from SWFs’ geopolitical agendas. [9] The US government has treated inward investment by SWFs as an issue of national security. Therefore, Congress has greatly strengthened the regulations on equity investment, especially of state-owned bodies. Also, regarding the definition of strategy towards the notion of national security between the US and China, the US is the most protectionist jurisdiction. Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which predecessor (Trans-Pacific Partnership Agreement, TPP) was led by the US, pertains to regulations of SWFs. Definitions for SWFs are at the start of Chapter 17 of CPTPP.[10] In addition, SWFs must be member(s) of the International Forum of Sovereign Wealth Funds or endorse the Santiago Principles, or such other principles and practices as may be agreed to by the parties of the CPTPP.[11]

The US might adopt the European Union (EU) model in the future. To regulate foreign direct investment (FDI) into the EU within the context of SWFs, the EU and its Member States rely on the treaties and EU legislation. The free trade theory – the free movement of capital within the European Common Market is the most fundamental feature of the EU approach to regulating the SWFs. However, this fundamental freedom is restricted in a limited number of cases. This is because the Treaty on the Functioning of the European Union (TFEU) awarded the EU with the competence to adopt different measures to regulate the establishment of foreign investors within the EU. There are two ways to regulate the movement of capital. According to Article 64 of the TFEU, firstly, the EU can impose measures on the movement of capital from third countries involving direct investment, by a qualified majority; secondly, direct investments can be restricted by measures that are introduced by the EU.[12] Since the TFEU explicitly covers the relationship between the Member States and the so-called third party countries, it seems that the EU laws are favourable to the foreign investors in terms of their important rights vis-à-vis their investments in the EU. However, the principle of free movement of capital is subject to two limitations. The limitations are derogations and safeguard clauses respectively. The scope of the limitations determines the extent to which the governments could restrict FDI within their territories. The narrower these limitations are, the easier it is for SWFs to enter the EU market. On the other hand, if the limitations are broader, governments can impose more restrictions to limit access to the Common Market.

In terms of the securitisation of national security, Article 65 of the TFEU is the most important provision as it describes the power retained by the Member States to restrict the concept of free movement of capital within the European Common Market in the name of protection of public order or public security. It also sets out potential obstacles to SWFs that invest in the EU. O’Donnell acknowledged that there are several Member States in the EU which had adopted various measures to restrict investments of SWFs in the defence sector.[13] In Sanz de Lera and Others, the Court of Justice of the European Union (CJEU) produced mixed results for the development of the EU law on capital movements.[14] In this case, CJEU clarified the unconditional nature of Article 65 TFEU, that the principle of free movement of capital prohibits those obstacles between the Member States, and between third countries and the Member States. Until mid-2015, Article 65 had never been applied by any of the Member States to regulate SWFs. In October 2020, an EU regulation establishing a framework for the screening of FDI into the Union has entered into force.[15] This new EU regulation aims to better scrutinise direct investments coming from third countries on the grounds of security or public order. It enhances the European Commission’s existing powers to review foreign investments under the existing merger control rules and sector-specific legislations of the EU.

Currently, some commentators might argue that there are only a few rules that can be applied to regulate SWFs within the EU. Nonetheless, in no small extent, it seems that the legal framework of the EU has provided a comprehensive regime to tackle the phenomenon that the US can take as a reference. For instance, the US can take the new free trade agreement between the EU and, Singapore and Vietnam, and the parallel EU-Vietnam Investment Protection Agreement as a reference, to incorporate SWF provision in the future free trade agreement with China.

To conclude, it is a well-established principle of international law that sovereign immunity does not extend to a state’s commercial activities in another jurisdiction. Thus, SWFs are subject to be assessed by investment host countries’ national laws. However, too excessive scrutiny of SWFs investment is likely to fuel nationalism, and will further hamper the free foreign capital flow. Hence, it has been suggested that the potential consequence of protectionism caused by strict examinations of SWFs should be avoided.[16] Nevertheless, it has been unclear whether the Trump administration would take a tougher stance on trade and investment with China. Since the trade war between China and the US has not ceased yet, the new president of the US would have to deal with the SWFs issue for a mutually beneficial future of the two countries.

*Charles Ho Wang Mak is a PhD Candidate in international law at the University of Glasgow. He studied law at the University of Sussex in England (LL.B. (Hons.)), The Chinese University of Hong Kong (LL.M. in International Economic Law), and the City University of Hong Kong (LL.M.Arb.D.R.(with Credit)).

**Dr I-Ju Chen is assistant lecturer at Birmingham City University in the UK. She holds PhD in law from the University of Birmingham and LLM from University College London. She studied law at National Chung Hsing University in Taiwan (LLB and LLM).

  1. International working group of sovereign wealth funds: Generally accepted principles and practices, “Santiago Principles” 3, 2008. https://www.ifswf.org/sites/default/files/santiagoprinciples_0_0.pdf
  2. Id. at 5.
  3. Benjamin J. Cohen, Sovereign Wealth Funds and National Security: The Great Tradeoff 85(4) International Affairs (2009) 713, 713.
  4. Sui-Lee Wee, China’s $800 Billion Sovereign Wealth Fund Seeks More U.S. Access, Nytimes.com (2020), https://www.nytimes.com/2017/07/11/business/china-investment-infrastructure.html (last visited Aug 30, 2020).
  5. Patrick DeSouza & W. Michael Reisman, Sovereign Wealth Funds and National Security, in SOVEREIGN INVESTMENT: CONCERNS AND POLICY REACTIONS 283, 290 (Karl P. Sauvant, Lisa E. Sachs, and Wouter P.F. Schmit Jongbloed ed., 2012).
  6. Qingxiu Bu, ‘China’s Sovereign Wealth Funds: Problem or Panacea?’ 11(5) The Journal of World Investment and Trade (2010) 849, 868.
  7. Id, at 870.
  8. Zhao Feng, How Should Sovereign Wealth Funds be Regulated?, 3(2) Brook. J. Corp. Fin. & Com. L. 483, 484 (2009).
  9. Cede & Co. v. Technicolor [1988] 542 A.2d 1182.
  10. See Article 17.1, CPTPP.
  11. Id.
  12. Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community [2007] OJ C306, Article 64.
  13. O’Donnell C. M., ‘How should Europe respond to sovereign investors in its defence sector?’ (Centre For Euroopean Reform- Policy Brief, September, 2010), PAGE <http://www.cer.org.uk/sites/default/files/publications/attachments/pdf/2011/pb_swf_defence_sept10-203.pdf> accessed 21 June 2020.
  14. Sideek M Seyad, European Community Law on The Free Movement of Capital and EMU (Kluwer Law International 1999) 101-102.
  15. Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union, OJEU, L 79I , 21.3.2019, p. 1–14, https://eur-lex.europa.eu/eli/reg/2019/452/oj.
  16. Bu, supra note 6, 871.

Practical Implications of the New Legal Framework for Foreign Direct Investment in the European Union

By Dr. Philipp Stompfe, LL.M. (London)*

In March 2018, following an initiative of Germany, France and Italy, the Council of the European Union (“EU”) approved a Regulation on establishing a framework for screening of foreign direct investments (“FDI”) into the European Union (“Regulation”).

The new Regulation entered into force on 10 April 2019 and will apply from 11 October 2020.

The Regulation creates an enabling framework for Member States to screen foreign direct investments on grounds of security and public order. The Regulation does not require Member States to adopt a screening mechanism for foreign direct investment, nor does it exhaustively mandate the substantive or procedural features for screening mechanisms. It only sets out basic requirements that should be common to Member States’ screening mechanisms.

Furthermore, the Regulation creates a co-operation mechanism between Member States to share information about foreign direct investment planned or completed on the territory of one or several Member States. It also provides the possibility for other Member States and the Commission to comment on such investment, but leaves the final decision on the appropriate response to the Member States in which the investment is planned or completed.

Moreover, the Regulation introduces the possibility for the Commission to screen foreign direct investments which are likely to affect projects or programmes of Union interest on security and public order grounds.

At least according to official EU announcements, the new Regulation does not attempt to harmonize the existing investment screening mechanisms of the Member States or to introduce an EU-wide screening mechanism. However, there is no doubt that the Regulation will have a very practical impact on foreign direct investments into the EU, both in substance and procedure.

Background

The European Commission (“EC”) constantly emphasizes that the EU maintains an open investment environment and welcomes foreign investment.

In its recent Reflection Paper on “Harnessing Globalisation” issued on 10 May 2017, the EC confirmed that openness to foreign investment remains a key principle for the EU and a major source of growth, but at the same time it recognised that there have been some concerns about foreign investors, notably state-owned enterprises, taking over European companies with key technologies for strategic reasons, and that EU investors often do not enjoy the same rights to invest in the country from which the investment originates.

The list of controversial company takeovers and acquisitions of major European companies is getting longer and longer. Kuka, Aixtron or OSRAM light are just a few examples.

Against this backdrop, the growing political will to more actively screen, control, and ultimately even prevent foreign direct investments flowing into Europe does not come as a surprise.

In this regard, screening mechanisms on the national level are not a novel tool. Rather, almost half of the EU Member States maintain foreign investment control regimes, i.e. Austria, Denmark, Germany, Finland, France, Latvia, Lithuania, Italy, Poland, Portugal, Spain, and the United Kingdom.

In particular, the new EU Regulation is to be seen in the context of recent amendments to foreign investment review laws in Europe’s major economies, Germany and France.

On 19 December 2018, the German government passed amendments to the German Foreign Trade and Payments Act (“AWG”) and to the German Foreign Trade and Payment Ordinance (“AWV”).

In this regard, the German legislator has lowered the threshold for the screening of FDI to the acquisition of 10% of the voting rights of a German company being active in the military and encryption sector and of German companies which are operating in the field of critical infrastructure according to the Regulation for Identifying Critical Infrastructure.

At first, the French foreign investment review regime was limited to a small number of business activities, in particular to gambling, private security services, weapons, warfare equipment and cryptology. However, due to serious amendments to the French Monetary and Financial Code by Decree No. 2014-479 dated 14 May 2014 and Decree No. 2018-1057 dated 29 November 2018, the right of the French Ministry to review and restrict foreign investment has been substantially increased.

With solid and reasonable arguments it can be concluded that the Regulation as well as the relevant national laws seriously struggle to establish an appropriate balance between addressing legitimate concerns with regard to certain FDIs, in particular those originating from state-owned enterprises and sovereign wealth funds, and the need to maintain an open and positive regime for such investment into the EU.

The new EU investment screening regime

In general, the overriding objective of the Regulation is to provide a framework of substantial and procedural rules for the Member States, and the EC to screen and control FDI in the EU. The precondition for issuing any screening decisions are impairing grounds on “public order and security”.

The main features of the Regulation are the following:

Scope of application

One main characteristic of the Regulation is a broad definition of FDI.

The Regulation defines FDI as an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available, in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity.

In addition, “foreign investor” means a natural person of a third country or a legal entity (undertaking) of a third country, intending to make or having made a foreign direct investment.

It must be highlighted that any post-Brexit UK investors are going to be qualified as “foreign investors” within the meaning of the Regulation.

Relevant economic sectors

The Regulation introduces a wide scope of economic sectors that may be controlled and reviewed:

  • critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
  • critical technologies and dual use items including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;
  • supply of critical inputs, including energy or raw materials, as well as food security;
  • access to sensitive information, including personal data, or the ability to control such information; or
  • the freedom and pluralism of the media.

In that regard, it is also possible for Member States and the EC to take into account the context and circumstances of the FDI, in particular whether a foreign investor is controlled directly or indirectly by foreign governments, for example through significant funding, including subsidies, or is pursuing State-led outward projects or programmes.

No minimum threshold

It must explicitly be pointed out that the Regulation, contrary to national regulations such as in Germany and France, does not impose any minimum threshold for the screening of FDI, neither regarding the total amount nor pertaining to the corporate stake.

Minimum requirements

The Regulation establishes framework rules which Member States must adhere to that already maintain an FDI screening regime or wish to adopt one. These rules, inter alia, include the following:

  • Member States shall set out the circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules;
  • Member States shall apply timeframes under their screening mechanisms;
  • Confidential information, including commercially-sensitive information, made available to the Member State undertaking the screening shall be protected;
  • Foreign investors and the undertakings concerned shall have the possibility to seek recourse against screening decisions of the national authorities;
  • Member States which have a screening mechanism in place shall maintain, amend or adopt measures necessary to identify and prevent circumvention of the screening mechanisms and screening decisions.

Co-operation mechanism regarding FDI undergoing screening

The Regulation introduces a co-operation mechanism between Member States and the EC. In this context, Member States shall notify the EC and the other Member States of any foreign direct investment in their territory that is undergoing screening by providing the following information as soon as possible:

  • Whether the ownership structure of the foreign investor and of the undertaking in which the foreign direct investment is planned or has been completed;
  • the approximate value of the foreign direct investment;
  • Whether the products, services and business operations of the foreign investor and of the undertaking in which the FDI is planned or has been completed;
  • Whether the Member States in which the foreign investor and the undertaking in which the foreign direct investment is planned or has been completed conduct relevant business operations;
  • the funding of the investment and its source, on the basis of the best information available to the Member State;
  • the date when the foreign direct investment is planned to be completed or has been completed.

Based on the information received, Member States are entitled to make comments on FDI in another Member State, if that FDI is likely to affect its security or public order, or has information relevant for such screening.

Where the EC considers that a foreign direct investment undergoing screening is likely to affect security or public order in more than one Member State, or has relevant information in relation to that foreign direct investment, it may issue an opinion addressed to the Member State undertaking the screening. The EC may issue an opinion irrespective of whether other Member States have provided comments.

Generally, comments or opinions shall be addressed to the Member State undertaking the screening and shall be sent to it within a reasonable period of time, and in any case no later than 35 calendar days following receipt of the information stated above. It must be considered though, that this timeframe may be extended to an additional 20 days in cases in which additional information were requested.

In any event, the Member State undertaking the screening shall give due consideration to the comments of the other Member States and to the opinion of the EC. However, the final screening decision shall be taken by the Member State undertaking the screening.

Co-operation mechanism regarding FDI not undergoing screening

Where a Member State considers that an FDI planned or completed in another Member State which is not undergoing screening in that Member State is likely to affect its security or public order, or has relevant information in relation to that foreign direct investment, it may provide comments to that other Member State.

The same applies to the EC which is entitled to issue an opinion in cases where FDI is not undergoing screening in the relevant Member State.

The most controversial element in this regard, resulting in great legal uncertainty for planned and even completed FDI, is that making comments and issuing an opinion is allowed up to 15 months after the FDI has been “successfully” completed.

FDI likely to affect projects or programmes of Union interest

Where the EC considers that an FDI is likely to affect projects or programmes of Union interest on grounds of security or public order, the EC may issue an opinion addressed to the Member State where the foreign direct investment is planned or has been completed.

In this regard, projects or programmes of Union interest shall include those projects and programmes which involve a substantial amount or a significant share of Union funding, or which are covered by Union law regarding critical infrastructure, critical technologies or critical inputs which are essential for security or public order.

In particular, this includes the following projects or programmes: Galileo & EGNOS, Copernicus, Horizon 2020, TEN-T (Trans-European Networks for Transport) and TEN-E (Trana-European Networks for Energy).

Practical implications

The mechanisms on foreign investment screening have become an increasingly relevant issue in cross-border transactions that require in-depth legal risk assessment and management prior to concluding the transaction. As a direct consequence thereof, foreign investors are well-advised to seek comprehensive legal and legal policy advice prior to conducting any investment activities in the EU.

In particular, the new reguation will lead to the following:

  1. The lack of any minimum threshold grants the EC and other Member States wide authority to directly interfere in the screening process of FDI in a specific Member State.
  2. Due to the right to directly interfere in the FDI screening of a particular Member State it cannot be ruled out that major European economies are going to force smaller Member States to impede certain FDI, in particular in sensitive sectors.
  3. The Regulation in conjunction with the current amendments of relevant national laws in major European economies further enlarges legal policy protectionism towards FDI.
  4. The new Regulation establishes a dual-system of review and control of FDI on the European level. In addition to screening acquisition transactions under a merger control perspective pursuant to the EC Merger Regulation, the EC now has the competence to review transactions and issue opinions from an FDI perspective.
  5. The Regulation will have a serious impact on the timing of FDI screening. Due to the right of other affected Member States to provide comments and the right of the EC to issue an opinion, flanked by the obligation of the host state (the state where the investment is made) to properly consider those comments and opinions, national scrutiny procedures are likely to be delayed. Furthermore, as a direct consequence, the Regulation will decouple national scrutiny procedures from the short initial review phase pertaining merger control pursuant to Article 10 EC Merger Regulation.
  6. The statutory right of Member States and the EC to provide comments, and to issue an opinion, respectively, for up to 15 months after the relevant transaction has already been completed, creates great legal uncertainty. Especially taking into consideration that, e.g. in Germany and France, the transaction shall remain pending and ineffective until the final approval of the competent government authority. In consequence, this procedural element by itself may further tremendously delay the finalization of cross-border M&A transactions.
  7. The Regulation, inevitably, will raise further awareness of the sensitivities originating from FDI, which in turn may lead to an alignment of substantial and procedural rules of Member States that, until now, have a less comprehensive investment review regime.
  8. This is not the end – it is just the beginning: until today, the new Regulation only grants the EC a “coordinating role”. However, the EC, on a regular basis, in its own publications, emphasizes that other elements will be further assessed accompanying the Regulation. Therefore, considering the unstoppable regulatory craze in Brussels, it is to be expected that the competences of the EC, regarding the review and control of FDI, will be substantially enlarged in the near future.
  9. One major missing element: the Regulation does not contain any default provision for cases where Member States fail to duly consider the comments of other Member States or the opinion of the EC, or even completely fail to duly inform other Member States likely to be affected by the FDI in question.

*Dr. Philipp Stompfe, LL.M. (London) is attorney at law at Alexander & Partner (Berlin/Stuttgart/Paris/Vienna/Doha/Riyadh/Ras Al Khaimah/Cairo/Muscat). Within the team of Alexander & Partner, Dr. Philipp Stompfe is primarily involved in international litigation and arbitration. He is constantly acting as counsel in commercial and investment arbitrations before all of the major arbitral institutions mainly related to construction, energy, distribution, real estate and M&A disputes. He is specialized in international investment law and further advises on international contract and corporate law and on the structuring and implementation of cross-border investment projects, in particular in the Near and Middle East.

The new EU Regulation on the screening of foreign direct investments: A tool for disguised protectionism?

Prof. Nikos Lavranos, Secretary General of EFILA

In December 2018, the EU institutions agreed on the text for an EU Regulation establishing a mechanism for screening all foreign investments into the EU.

In just over a year the EU institutions adopted this Regulation, which is unusually fast and reflects the apparent political will of the institutions involved to deliver something tangible that would address the fear against Chinese investments that would essentially take over the European economies.

The Regulation is in particular noteworthy because it introduces an EU-wide screening mechanism at the EU level as well as at the Member States’ level, which in many ways is similar to the US screening mechanism (CFIUS) whose scope of application was recently also significantly expanded. (The revised CFIUS text is part of the very extensive National Defense Authorization Act for Fiscal Year 2019, sections 1701 et seq.)

The EU Regulation is also significant in that it gives the Commission and other Member States the power to directly interfere in the screening of FDI in a particular Member State.

At the Member States’ level, it should be noted that there is a disparity among them regarding their approach of whether or not to screen FDI, and if so, under which conditions and procedures.

According to the Commission, about half of the Member States have currently no screening mechanism at all, while the other half does have one. In addition, the conditions and procedures of the existing screen mechanisms differ.

Accordingly, the Regulation aims to harmonize this situation by grandfathering all existing screenings mechanisms and by encouraging all Member States, which have not yet one, to establish such a mechanism. In addition, common basic criteria for the screening of FDI are laid down in this Regulation. Indeed, all Member States are required to register all incoming FDI and to report them to the Commission and to all other Member States. In fact, the Member States and the Commission are required to set up a dedicated contact point for that purpose.

At the European level, the Regulation gives the Commission – for the first time – the power to actively screen FDI – not only those that are “likely to affect projects or programmes of Union interest on grounds of security or public order”, but also those that are “likely to affect security or public order in more than one Member State”.

The Commission may issue opinions, which the Member State concerned is required to duly take into consideration. Similarly, Member States can comment on the screening of FDI in other Member States.

However, what is most interesting is the wide scope of the sectors that may be screened, which covers, inter alia, the following areas:

(a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, as well as sensitive facilities and investments in land and real estate, crucial for the use of such infrastructure;

(b) critical technologies and dual use items as defined in Article 2.1 of Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, quantum, aerospace, defence, energy storage, nuclear technologies, nanotechnologies and biotechnologies;

(c) supply of critical inputs, including energy or raw materials, as well as food security;

(d) access to sensitive information, including personal data, or the ability to control such information; or

(e) the freedom and pluralism of the media.

Also, noteworthy is the fact that there is no minimum threshold of the amount of the FDI for screening, which means that potentially any FDI from 1 to 100 billion euros could be screened.

While the fear against a Chinese takeover of the European economies is widespread and understandable, it is not supported by facts. Indeed, as a recent study by the well-respected Copenhagen Economics institute shows that countries other than China invest much more into the EU.

According to this study the US is by far the largest investor in the EU and accounted for 51.1% of the M&As by third country investors, followed by Switzerland (10.8%), Norway (4.6%) Canada (3.8%), while China comes only fourth with a meager 2.8%.

When it comes to investments by State Owned Enterprises (SOEs) from third states, Russian investors accounted for 16.6% of M&As, followed by Norway (15.8%), Switzerland (11.8%), while Chinese SOEs account only for 11% of the M&As.

In other words, the amount of Chinese FDI are far lower than from several other third countries, but which seemingly are considered friendlier and thus approached with less hostility.

Be that as it may, the real risk of this Regulation is not so much the screening of FDI but that it could be abused as a tool for disguised protectionism and classic state-governed economic nationalism.

This is so because the big Member States will be able to force smaller Member States to block FDI, for example from China, in order to give preference instead to French, German or Spanish investors.

Similarly, the Commission may force a Member State to block an FDI for unrelated more important geopolitical reasons.

This can also raise the tension among EU Member States which are competing for FDI. For example, if the Rotterdam harbour wants to attract Chinese investments for upgrading and expanding its facilities in order to be able to better compete against the harbour of Hamburg, Germany might very well use the argument of “security or public order” in this Regulation to force the Netherlands to block the Chinese investor and rather accept a European investor instead, or forget about the whole project altogether.

This is not to say that one should be naïve about Chinese, American or Russian investments, which are often connected with geopolitical aims or potentially (business) espionage. The example of Huawei, which has been restricted in developing the 5G network in some Western countries, is telling. At the same time, one should not forget that EU Member States are competing with each other to attract FDI and have the vested interests of their national champions always in mind.

Thus, the line between genuine protection of “security and public order” and disguised protectionism is very thin and tempting to cross for short term political and/or economic gains. However, this Regulation – unsurprisingly – does not contain any effective mechanisms to mitigate this risk.

Therefore, when this EU Regulation enters into force, foreign investors are well-advised to seek proper in-depth advice prior to investing into the EU.