The EU Should be Cautious in Following the US Footsteps on Outbound Investment Screening

Şeymanur Yönt, Researcher, TRT World Research Centre

On January 24, 2024, the EU announced its strategy on outbound investments with the objective of establishing a comprehensive outbound screening policy. The strategy sets out steps first, to understand the EU’s outbound investment reality, and then to assess the related risks. The final step will be to shape an outbound investment policy addressing EU’s concerns over potential security risks arising from sensitive technology and know-how leakage from the EU to third countries that may use such technologies in a way that could jeopardize international peace and security. 

Though the outbound investment policy outcome will not be known until 2025 at the earliest, the EU is likely to introduce an initiative resembling the US outbound investment screening regime. The Dutch government’s agreement to a US request to block exports of chip-making machines to China and the vision of the EU Commission President von der Leyen to have an outbound screening regime highly similar to that of the US are signs of this. But the EU is not the US. Neither the EU’s form as a union nor its approach to international commercial relations is similar. That is one of the many reasons why the EU should avoid fervently following in the US footsteps and give second thoughts to a similar initiative. This is especially so given that the US initiative itself poses potential risks including damage to competition and innovation, driving investors away, and having a chilling effect on Foreign Direct Investment (FDI) through increasing the cost of doing business and decreasing profits as well as causing a retaliation spiral and over-politicizing FDI.  

Seeing the Big Picture

FDI may be utilized as a strategic tool, enabling access to natural resources, new markets, and research and development opportunities. The inbound and outbound screening of it accordingly may prove equally strategic. Thus, when FDI provides strategic advantage for a country to foster politically and economically, that country supports FDI and subjects it to minor restrictions. But when it is the other way around, states tend to heavily control FDI and to introduce restrictions such as investment screening regimes.  

The US outbound investment screening regime should be assessed in this context. Though statements indicate otherwise, the ultimate objective of the US seems to be to contain China. Not just because of the threat China poses to the US national security, but above all because of the risk it poses to the US position in the global economy. Hence, such steps make sense for the US, but for the EU, with the softer objective of de-risking or managing the risks from China and maintaining international peace and security, they do not. Then why would the EU fervently follow the US steps, which seem to be aimed at coercing China to maintain US leadership? This is the case especially since such steps, including introducing outbound investment screening, have many risks and costs for the EU. 

A Union versus a State: What Difference Does It Make for Outbound Investment Screening Regimes?

Introducing an outbound investment screening regime will be a challenge for the EU. Unifying member states around an understanding on national security is difficult. This is especially so given the distribution of competences in the area of investment policy between the EU and member states which allow member states to introduce investment screening mechanisms for national security reasons while the EU      handles FDI policies on behalf of the EU members.      

In fact, this is not the first time the EU has had to unify member states around a definition and a coherent action plan within the remit of an investment policy. On March 19, 2019, the EU adopted the FDI Screening Regulation to establish a framework to screen inbound FDI into the EU. The regulation, which is directly applicable in member states, gives them freedom to choose among options: maintaining their own mechanism, adopting new mechanisms, or living without one. Finally, the motive of the regulation is to protect security and public order, terms that are shaped around the European Security Strategy. To this day, the EU continues to review its screening regime, and to push for better coordination among members.

Now the EU is seeking to strengthen the economic dimension of notions of security and public order. This seems likely to further complicate the EU efforts to coordinate member states, especially without antagonizing the EU member states with concerns over the EU’s interference in members’ sovereignty. The EU solution for that seems to be to design the outbound screening mechanism as an initiative. Classifying the regime as an ‘initiative’, the EU gives member states wide elbow room without pressuring them with detailed and binding rules as an EU Directive would do. Such a designation may address members’ concerns over the EU’s interference in their sovereignty by giving EU members the freedom to design their outbound investment policy as they wish. However, such framing, resulting in friction, may cause more problems. Not prescribing a binding outbound investment screening framework for      members and giving members freedom to establish their own regimes may lead to different and sometimes conflicting regimes among member states. This may prevent the development of  a precise and clear EU outbound investment screening approach, which in turn may create uncertainty for investors and third countries. This is especially an issue of concern considering that the EU, compared to the US and countries like Canada and Japan, has a highly decentralized and rather new FDI regime. 

This is not a risk without a solution. But to overcome this, close cooperation between the EU and member states is necessary to guarantee consistent decision-making and prevent conflicting results. This will be a difficult task given that the national screening mechanisms vary greatly among member states not just in terms of the sectors, obligations, and thresholds, but also in terms of the conditions under which such mechanisms will be used. Considering that there are many different rules and practices within the EU member states, cooperation efforts to find a common ground for an outbound investment policy among member states will take time.

Cooperation is Necessary, but What if Trump Wins?

Cooperation with allies is as important as cooperation with members. Unless there is real cooperation, states will seek to fill the breach created by another country’s screening of outbound investments. Therefore, having the EU on board with the US is to the benefit of both, and unavoidable for an effective policy. So far, with the Biden administration in the US, the EU seems to be acting with this cooperative      spirit by highlighting its willingness to partner with other countries sharing similar interests in protecting economic security. However, depending on the US elections, the tide may turn against the EU. 

The US elections are very soon, and based on media projections, a Trump victory is likely. Without a doubt, Trump will pursue extremely tough and unpredictable trade policies during a second term. His first term already showed that the ‘America First’ approach does not bestow a privilege on the EU. In addition to China, Trump has serious  animosity towards the EU. The imposition of Section 232 Tariffs on Steel and Aluminum on imports from almost all countries including the EU is proof of that. That being the case, the US is unlikely to cooperate with the EU. In that case, it is also unrealistic to expect the EU to trust Trump’s alliance and maintain its cooperative spirit. 

There is also a significant difference between the US and the EU in their approaches to global commercial relations. This is likely to become more divergent if Trump wins. The US is inclined towards maintaining a more protectionist approach, not accepting China’s rise thanks to its use of the global commercial system dynamics, of which the US once benefited the most. The Appellate Body crisis within the World Trade Organization (WTO) is an example of this. The US, asserting its concerns over judicial activism of the WTO, and threats to its national security, has been blocking the appointment of Appellate Body judges for many years. Such an act paralyzes a system that is a cornerstone of  trade liberalization and the resolution of global commercial disputes.

The EU, on the other hand, keeps repeating its commitment to an open and rules-based commercial environment. Considering all these dynamics, the EU cannot rely on the US alliance and its potential benefits while introducing an outbound investment screening regime. The EU should carefully answer the questions whether and how an outbound investment screening initiative might be worth the effort, despite the big picture of a decentralized EU system, and unreliable US policies. 

Is an Outbound Investment Screening Initiative Really Worth It? 

Two things are obvious: the US has better reasons and grounds to adopt an outbound investment screening regime, and the EU's motivation in introducing the initiative to collaborate with the US is a slippery slope. In addition, there are inherent risks to an outbound investment screening regime. These risks, which are about damaging competition and innovation and increasing the cost of doing business,      were also raised before the US regime was introduced.                                                                                                

In light of these risks and costs, the most important question, to which the EU is also seeking an answer, is whether enhancing the export control regime would be sufficient to achieve the objectives of the EU. This is especially the case given that it is more difficult to circumvent export controls compared to outbound investment controls. The answer to this question is not there yet and requires accurate information about the frequency and seriousness of the dangers that the initiative seeks to eliminate. 

What to Do?

One cannot always make it up as one goes along. Besides, what works for one does not necessarily work for another. Therefore, the EU should avoid bold steps, and must sustain its careful approach, as announced on January 24, 2024, towards establishing an outbound investment policy.

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