Economic Security in Action: Outbound Investment Screening in the US and EU

Investment screening has traditionally focused on protecting national interests by scrutinizing foreign investments coming into a country. However, the focus is now expanding to include outbound investments, as major economies like the US and the EU rethink their global economic strategies in light of national security concerns. This change represents a further move from the post-war focus on economic integration and unrestricted capital movements, towards a paradigm that prioritizes security.

This post explores the evolving landscape of outbound investment screening in the US and the EU, highlighting their approaches, motivations, and potential implications for global trade and investment.

From Economic Integration to National Security: A New Focus

For decades, the global economy was driven by efforts to liberalize trade and investment. Countries entered into treaties to protect foreign investors, ensuring fair treatment and the free movement of capital. However, the rise of new global powers, particularly China, has prompted a re-evaluation of these open-market policies. Concerns have grown that certain investments, especially in advanced technologies, could pose risks to national security.

Following the footsteps of countries such Taiwan, Japan, South Korea and China, who have already introduced outbound investment screening regimes, the US has taken significant steps in this direction, motivated by a desire to safeguard its technological edge against potential adversaries. The EU, while traditionally more focused on maintaining open markets, is also beginning to consider similar measures, albeit with a different emphasis and a more cautious approach.

The US’s Aggressive Strategy: From CFIUS to "Reverse CFIUS"

In the United States, the concept of screening outbound investments has gained considerable traction. The Committee on Foreign Investment in the United States (CFIUS) has long been responsible for scrutinizing foreign investments into the US, but recent discussions have introduced the idea of a “reverse CFIUS.” This would involve screening American investments flowing out to other countries, particularly those that could bolster the technological capabilities of potential rivals like China.

Although legislative efforts to establish a reverse CFIUS have not yet succeeded, President Biden’s 2023 Executive Order effectively sets the stage for such a regime. This order is part of a broader strategy that integrates economic and national security objectives, focusing on preventing American companies from inadvertently enhancing the technological prowess of adversarial nations. The targeted technologies include semiconductors, quantum computing, and artificial intelligence—areas considered critical for both economic and military power.

Under this new regime, US companies will face increased responsibilities. They will be required to notify the government of certain transactions and avoid others altogether. This approach places significant compliance obligations on businesses, requiring them to carefully assess the potential national security implications of their investments.

The EU’s Emerging Approach: Cautious but Strategic

The European Union, known for its constitutional commitment to open markets, is approaching outbound investment screening with more caution. The EU’s journey towards developing such a framework began in 2023 with the European Commission’s Economic Security Strategy. While still in the early stages, a full legislative proposal may be adopted by 2025.

The EU’s approach is likely to be more decentralized, reflecting the complexity of its constitutional structure. Instead of a single, centralized authority, individual Member States will likely play a significant role in the screening process, within an overarching EU framework that ensures consistency and coherence across the Union.

Mindful of the Commission’s recent proposal to reform the EU’s existing inbound investment screening framework, the EU’s framework will likely be based on a combination of trade policy and internal market rules. This approach would allow the EU to address both investments within the Union by companies with foreign ownership, and those going out to other countries, ensuring that security concerns are met without undermining the EU’s commitment to open markets.

US vs. EU: Different Strategies, Common Goals?

While both the US and the EU are moving towards greater scrutiny of outbound investments, their approaches reflect different priorities. The US is focused on national security and maintaining its technological superiority, with a centralized system that places the onus on companies to ensure their investments do not compromise national security, and that applies (for the time being) only to US investments in China.

The EU, on the other hand, is likely to adopt a broader approach that is not limited to any specific country, and which may include a slightly broader range of sectors, such as biotech. The EU’s framework is expected to grant Member States an important role in screening investments, reflecting the Union’s decentralized governance model.

A significant concern for both the US and the EU is how these new rules will impact global trade. There is a risk that increased scrutiny could further slow down cross-border investments and trade more broadly, particularly in sectors crucial for innovation and economic growth. If companies perceive these regulatory hurdles as too burdensome, they may reduce their investments in these areas, which could have negative implications for global economic development. (There are signs that inbound investment screening regimes have indeed had a chilling effect on global investment.)

The EU's oversight on outgoing investments might also provoke reactions from nations such as China, which may respond to what it might view as an antagonistic, though largely symbolic due to the minor scale of EU investments in Chinese high-tech sectors, action. It would be notably ironic given that China has similar mechanisms for monitoring its outbound investments.

Looking Ahead: The Future of Outbound Investment Screening

As the EU continues to develop its outbound investment screening framework, changes in global investment patterns may very well emerge. This shift signals a further move away from the unbridled globalization of the past towards a model where national security considerations and unilateral action play a more prominent role in economic policy.

For the EU, the challenge will be to find the right balance between protecting its strategic interests and maintaining its principles of openness and cooperation. The deep economic ties between the EU and countries like China add complexity to this task, as any new rules will need to navigate these relationships carefully to avoid unnecessary economic disruption.

In a world where technology and geopolitics are increasingly interconnected, outbound investment screening may very well become a permanent feature of the global regulatory landscape. However, to be effective without stifling economic growth, these regimes will require careful design, smart regulation, and a high degree of international cooperation.