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Protection or Protectionism? Assessing the EU’s New Investment Screening Measures Against State-Driven Foreign Investment Risks

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Weaponising Investments

Part of the book series: Springer Studies in Law & Geoeconomics ((SSLG,volume 1))

Abstract

Foreign direct investment (FDI) can be used by sovereign states for strategic goals, including as a mechanism for exploitation, technology transfers, espionage, and political influence. The EU’s recently adopted foreign investment screening regulation (the Regulation) is a response to fears that state-led investment could strategically exploit the openness of the common market. The Regulation applies the concepts of ‘security’ and ‘public order’ as guidance to Member States restricting FDI. However, these concepts have no clear definition, raising concerns they may be abused for protectionist purposes. This article aims to contribute to the debate on whether these screening concepts are a reasonable response to state-based investment threats. It does so by taking a ‘threats-based’ approach to identifying relevant FDI risks for Member States’ economic and national security. China, the world’s second largest and heavily state-capitalist economy, is considered a key justification and yardstick for the EU’s new investment screening measures. Hence, identifying risks relating to Chinese FDI is a good starting point for assessing the Regulation. Drawing on institutional analysis of China’s economy, this article identifies unique threats arising from the country’s rule-by-law socialist system of governance, where traditional public–private distinctions are heavily blurred, if not obliterated. The nature of those risks suggests that the undefined concepts of ‘security’ and ‘public order’ are reasonable to achieve the goals of the Regulation. Furthermore, a threats-based approach to screening Chinese FDI leans towards a presumption of risk for sensitive sectors, for both SOEs and nominally private firms, due to deep institutional public–private linkages.

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Notes

  1. 1.

    European Commission, Proposal for a Regulation of the European Parliament and of the Council establishing a framework for screening of foreign direct investments into the European Union COM(2017) 487 final, 13 September 2017.

  2. 2.

    Graham and Krugman (1995), p. 8, define FDI as involving the ‘ownership of assets in one country by residents of another for purposes of controlling the use of those assets’. Cf. Article 2(1) of the Regulation.

  3. 3.

    Zwartkruis and de Jong (2020), p. 448.

  4. 4.

    Grieger (2021); Nettesheim (2020), p. 498.

  5. 5.

    Hindelang (2009), p. 19.

  6. 6.

    OECD FDI Regulatory Restrictive Index, https://goingdigital.oecd.org/en/indicator/74.

  7. 7.

    Regulation (EU) 2019/452 establishing a framework for screening of foreign direct investments into the Union [2019] OJ L 79 I/1.

  8. 8.

    Meunier (2014).

  9. 9.

    Meunier (2014), p. 1001.

  10. 10.

    Lai (2021), p. 4; Moran (2017).

  11. 11.

    Johnston (2019), McDonagh (2022), Weinhardt and ten Brink (2020) and Weiss and Wallace (2021).

  12. 12.

    Leruth et al. (2022).

  13. 13.

    Grieger (2021); Zwartkruis and de Jong (2020), p. 449.

  14. 14.

    European Commission, Reflection Paper on Harnessing Globalization, COM (2017) 240, 10 May 2017, p. 15.

  15. 15.

    Nölke et al. (2021) and Wu (2016).

  16. 16.

    Chen and Garcia (2016), McDonagh (2022) and Vekasi (2019).

  17. 17.

    Wernicke (2020), p. 30.

  18. 18.

    Nettesheim (2020) and Zwartkruis and de Jong (2020).

  19. 19.

    See Simon (2020) for an overview of the EU’s internal political economy of FDI screening; see National Board of Trade Sweden (2021) report ‘An EU Trade Policy for Geopolitical Ends – clashing perspectives and policy recommendations’ for a discussion of concerns about mixing economic and security goals in policy.

  20. 20.

    See Collins (2016), p. 2.

  21. 21.

    CFIUS has been repeatedly updated legislatively and was notably broadened in scope and power by the Trump administration’s 2018 Foreign Investment Risk Review Modernization Act (FIRRMA) in response to the economic-related security issues discussed in this article.

  22. 22.

    The Commission released its first mandated annual report on FDI screening in November 2021.

  23. 23.

    On cacophony in pre-Regulation EU FDI governance see Meunier (2014).

  24. 24.

    Wernicke (2020), p. 34.

  25. 25.

    It is not the goal of this article to address how the Regulation relates to other EU legal texts, but for a discussion of consistency between the Regulation and existing European law, including CJEU interpretations of the Treaty on the Functioning of the European Union see Zwartkruis and de Jong (2020), pp. 455–457.

  26. 26.

    See Chapter 4, Benyon (2010); Chapter VI, Hindelang (2009).

  27. 27.

    Nettesheim (2020), p. 483, p. 496.

  28. 28.

    Wernicke (2020), p. 36.

  29. 29.

    Barnard (2009) discusses the ECJ’s authority to reject a justification of a derogation of EU law regarding the four freedoms, and lists numerous cases where such rejection is applied, including those involving capital.

  30. 30.

    Ibid, p. 649.

  31. 31.

    Bhala (1998), p. 267.

  32. 32.

    Voon (2019).

  33. 33.

    GATT 1947, Minutes of Meeting Held in the Palaise des Nations, Geneva, on 31 October 1975, GATT Doc. C/M/109, 9 (Nov. 10, 1975).

  34. 34.

    GATT 1947, Sweden—Import Restrictions on Certain Footwear: Addendum, GATT Doc. L/4250/Add.1 (Mar. 15, 1977).

  35. 35.

    Request for the Establishment of a Panel by Ukraine, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/3(Feb. 10, 2017).

  36. 36.

    See Voon (2019), p. 47 for discussion of the United States’ position on Russia—Measures Concerning Traffic in Transit, which states unambiguously that it is the Member’s sole prerogative to determine applicability of Article XXI.

  37. 37.

    Collins (2016) provides an overview on p. 3.

  38. 38.

    Collins (2016), p. 2.

  39. 39.

    Aradau et al. (2008), p. 148; Backman (2022), p. 6.

  40. 40.

    Aradau et al. (2008), p. 148.

  41. 41.

    See Economy (2018), Doshi (2021) for meticulous studies of China’s intentions through detailed textual and discursive analysis of Xi Jinping’s and other Chinese leaders speeches and reform agendas, followed by cross-referencing political discourse with actions designed to implement stated intentions. The latter includes institution-building, re-organization of power hierarchies, as well as the creation and enforcement of new laws.

  42. 42.

    Zwartkruis and de Jong (2020), p. 450.

  43. 43.

    Scholvin and Wigell (2018), see also Blackwill and Harris (2017) and Norris (2016).

  44. 44.

    Scholvin and Wigell (2018), p. 74; Norris (2016), pp. 13–14.

  45. 45.

    Norris (2016), p. 13.

  46. 46.

    Norris (2016), p. 14.

  47. 47.

    See Kurlantzick (2016), chapter 10; Vekasi (2019); Chen and Garcia (2016).

  48. 48.

    See Kurlantzick (2016), p. 207.

  49. 49.

    Wübbeke et al. (2016) and Zenglein and Holzmann (2019).

  50. 50.

    Nölke et al. (2021).

  51. 51.

    Zenglein and Holzmann (2019), p. 9.

  52. 52.

    Zenglein and Holzmann (2019), p. 13.

  53. 53.

    Communist Party of China (2017).

  54. 54.

    Bingham (2011).

  55. 55.

    Zhang (2021), p. 585 ff.; Du and Kong (2020).

  56. 56.

    Du and Kong (2020), pp. 887–888.

  57. 57.

    On the long tradition of paternalism and a principle of unlimited state authority in Chinese political history see Jacques (2009), pp. 194–232.

  58. 58.

    Zhang (2021), p. 586.

  59. 59.

    McGregor (2012), p. 24.

  60. 60.

    Michael Forsythe, ‘China’s Chief Justice Rejects an Independent Judiciary, and Reformers Wince’, New York Times, 18 January 2017, https://www.nytimes.com/2017/01/18/world/asia/china-chief-justice-courts-zhou-qiang.html.

  61. 61.

    Zhang (2021), p. 590, see also McGregor (2012).

  62. 62.

    See Economy (2018) for a comprehensive discussion of Xi’s political reforms.

  63. 63.

    Kurlantzick (2016), pp. 203–224; Vekasi (2019).

  64. 64.

    Blanchette (2020), p. 2.

  65. 65.

    I have outlined the institutional make-up of China’s socialist market economy in McDonagh (2022), including how it generates systemic competition within the multilateral trade order.

  66. 66.

    Blanchette (2020), Economy (2018) and Minzner (2018).

  67. 67.

    Wübbeke et al. (2016).

  68. 68.

    Norris (2021), p. 25.

  69. 69.

    Norris (2021), p. 25.

  70. 70.

    Pearson et al. (2021), p. 209.

  71. 71.

    Blanchette (2020), p. 5; Chen and Rithmire (2020), pp. 260–270; Wu (2016), pp. 274–275.

  72. 72.

    Chen and Rithmire (2020), p. 260.

  73. 73.

    Chen and Rithmire (2020), p. 260.

  74. 74.

    Milhaupt (2020), p. 363.

  75. 75.

    Chen and Rithmire (2020), pp. 265–266.

  76. 76.

    Magnus (2018).

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Acknowledgements

This article was developed from a conference paper presented at the 2022 CELIS Institute Annual Forum on Investment Screening, held at Uppsala University, Sweden. The author thanks the conference organizers for hosting an excellent interdisciplinary event that provided much food for thought. The author also thanks four reviewers who provided expert feedback on earlier drafts that helped greatly improve the article. Any remaining errors are the authors.

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  1. School of Business and Law, Edith Cowan University, Perth, WA, Australia

    Naoise McDonagh

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  1. Naoise McDonagh
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  1. Finnish Institute of International Affairs, Helsinki, Finland

    Jens Hillebrand Pohl

  2. European Parliament, Strasbourg, France

    Joanna Warchol 

  3. Department of Law, University of Cyprus, Nicosia, Cyprus

    Thomas Papadopoulos

  4. University of Passau, Passau, Germany

    Janosch Wiesenthal

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McDonagh, N. (2023). Protection or Protectionism? Assessing the EU’s New Investment Screening Measures Against State-Driven Foreign Investment Risks. In: Hillebrand Pohl, J., Warchol , J., Papadopoulos, T., Wiesenthal, J. (eds) Weaponising Investments. Springer Studies in Law & Geoeconomics, vol 1. Springer, Cham. https://doi.org/10.1007/17280_2023_4

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