Introduction: Long Awaited, Much Longed-For!
Over the past six months, the EC has been gradually releasing bits and pieces of information about possible initiatives to scale up and revamp the EU’s foreign trade and investment policy toolbox, creating a sense of anticipation in the trade and investment law community.
The publication of the European Economic Security Strategy in June 2023 offered a glimpse of possible future initiatives. Among other things, the EC announced that it would present a proposal for an overhaul of the Foreign Direct Investment (“FDI”) Screening Regulation (the “FDI Screening Regulation” or “Regulation”) which has been fully operative since October 2020, by the end of 2023. The EC also mentioned the possibility of taking action regarding outbound investments, as discussed in a recent CELIS Blog Post. In October 2023, the EC released its Third Annual Report on the screening of foreign investments into the Union, which confirmed that a reform proposal for the FDI Screening Regulation was in the making. On 28 November 2024, the EC published the results of a stakeholder consultation, as discussed in a recent CELIS Blog Post. These results were expected to provide valuable input to the reform proposal. On 11 December 2023, the EU Commission released a list of topics to be discussed by the College of Commissioners between 10 January 2024 and 27 February 2024. This announcement quashed all hopes of having a proposal for the reform of the FDI Screening Regulation on the table by the end of 2023.
On 24 January 2024, the EU Commission (“EC”) presented its long-awaited “Economic Security Package”. The package features no less than five initiatives, which are guided by the “3 Ps”: promoting the EU’s competitiveness, protecting against risks, and partnering with a wide array of countries to pursue common economic security interests. The draft was apparently leaked about a week before the College of Commissioners’ deliberation, limiting its surprise effect.
Updating and Adding to the EU’s Unilateral Trade and Investment Policy Toolbox: An Overview
The five initiatives relate to inbound foreign investment, outbound investments, export controls, research and development (“R&D”) in technologies with dual-use potential, and research security. This blog post is intended to provide only a brief and cursory overview of some key aspects of the EC’s initiatives and is without prejudice to future, more in-depth analyses.
FDI Screening Regulation 2.0
The European Court of Auditors published a special report on FDI Screening in the EU, a summary of which has recently been posted on the CELIS Blog. The report highlighted the significant efforts made to ensure a smooth implementation of, amongst other things, the cooperation mechanism under the FDI Screening Regulation. However, it also identified important shortcomings in terms of effectiveness and efficiency. The EC’s Proposal for a new regulation on the screening of foreign investments aims to address some of the weaknesses of the current framework. It upholds the current framework’s decentralised modus operandi and leaves the ultimate responsibility for the screening of FDI in the hands of the Member States.
First, the current framework has been criticised for lacking clarity on key concepts and terminology. The proposal aims to clarify, amongst other things, the notion of “FDI”. It seems to explicitly refer to greenfield investments (see Art 2 para. 2 of the Proposal which mentions Union targets “to be established”; but see Recital 17 which states that Member States are “encouraged” to screen greenfield investments). Importantly, Art 2 para. 3 of the Proposal seeks to address the gap in the current Regulation’s scope of application, which, according to the ECJ’s judgement in Xella Magyarország, is “limited to investments in the European Union made by undertakings constituted or otherwise organised under the laws of a third country” (para. 32).
Second, Member States are not currently required to establish screening mechanisms. Art 3 para. 1 of the Proposal, by contrast, ups the ante by obliging (“shall”) Member States to establish screening mechanisms in accordance with the Regulation. Furthermore, Article 4 para. 4 of the Proposal specifies the minimum sectoral scope of national screening mechanisms. The Proposal also suggests a tightening of rules regarding the criteria for determining the likely impact on security or public order. The current Regulation uses optional language as regards the criteria for the assessment of investments. The Proposal features mandatory criteria to determine if an investment is likely to negatively affect security or public order. Additionally, it stipulates that the Member States must consider risks related to the foreign investor.
Finally, the Proposal aims to bring some order into the regulatory maze of national screening procedures and timeframes by including additional minimum procedural requirements for national screening mechanisms. It also tackles the matter of multi-country transactions, strives to increase the fit with other regulatory instruments, notably those involving pre-notification requirements, and seeks to improve the effectiveness and efficiency of the cooperation mechanism.
Outbound Investment Screening: A New Player Has Entered the Game
The publication of a White Paper on Outbound Investment addresses the alleged regulatory gap associated with EU outbound investments. Concerns are growing that outbound investments in certain advanced technologies could fall prey to misuse. More specifically, there is a risk that funds originating in the EU could be used as a means of improving the military and intelligence capacities of actors who may end up putting them to use against the EU, or to threaten international peace and security.
The EU identified a lack of data at both EU and Member State level regarding the volume of outbound investments, their destinations, and their potential risks . The absence of monitoring systems at either EU or Member State level makes it difficult to undertake a risk assessment. To gain a better understanding of investment patterns and resulting pitfalls, the EC adopted a non-binding initiative consisting of several steps for the purposes of analysis. The analytical exercise has two parts: a three-month stakeholder consultation and a 12-month monitoring and assessment of outbound investments at the Member State level. The insights gathered during this process will be used to compile a joint risk assessment report. This report will then form the basis for a joint deliberation on whether a policy response is necessary and, if so, what it should entail.
Export Controls of Dual-Use Items: Stronger Together
The White Paper on Export Controls of dual use items critically assesses the existing legal framework based on Regulation (EU) 2021/821 (the “Dual-Use Regulation”). Although only adopted in 2021, the EC identifies several shortcomings and limits of the current framework amidst rising geopolitical tensions. EU export control rules are based on the commitments undertaken in multilateral export regimes (the Australia Group, the Wassenaar Arrangement, the Nuclear Suppliers Group, the Missile Technology Control Regime, and the Chemical Weapons Convention). According to the White Paper, Russia has blocked the decision-making process in multilateral fora and vetoed the adoption of control regimes as regards important emerging technologies. As the list of dual-use items in Annex I to the Dual-Use Regulation is linked to these multilateral regimes, this blockage has direct implications for the EU’s controls. As a result, both third states and EU Member States have adopted new national controls instead. This includes export control rules in the area of sensitive technologies and critical raw materials. For the EC, this could increase the risk of fragmentation in the Single Market and reduce the effectiveness of the multilateral export controls system
The White Paper responds to calls for more rapid and coordinated action at EU level in the European Economic Security Strategy and proposes short and medium-term action. In the short term, the EC seeks to amend Annex I to the Dual-Use Regulation to include new items that were not adopted by the multilateral export control regimes. The EC sets out two options to introduce such controls in the current EU control list in Annex I to the Dual-Use Regulation. First, a legislative proposal by the EC to allow an update of Annex I. Second, a Commission Delegated Act, provided that such an amendment reflects international commitments taken by the Member States. Moreover, the EC endeavors more coordination between member states on new National Control Lists. An export control policy forum shall allow the EU and the Member States to foster common positions. In the medium term, the EC wants to remedy the shortcomings of the Dual-Use Regulation. While the evaluation of the Regulation is envisaged between 2026 and 2026, the EC deems it necessary to advance this process to the first quarter of 2025.
Fostering R&D in Technologies with Dual-Use Potential
The White Paper On options for enhancing support for research and development involving technologies with dual-use potential stresses the relevance of developing dual-use technologies as a material component of the EU’s economic security. The objective of the White Paper is to “explore options to improve the integration and cross-fertilisation of civil and defence technologies in the European industry”. For this purpose, the EC has reviewed the R&D support offered by existing EU funding programmes. These are, on the one hand, the Horizon Europe Specific Programme focusing on civil applications and, on the other hand, the European Defence Fund focusing on defense applications. According to the EC, the EU struggles to ensure the commercialisation of results of R&D investments including technologies with dual-use potential. Moreover, it identifies the lack of a common definition of the notion of “dual-use” in context of R&D support as a core problem.
In the White Paper, the Commission outlines three possible options to address the current need to increase synergies and spill-overs between civil and defense R&D support: Option 1 focuses on improvements within the current set-up. Option 2 intends to remove the exclusive focus on civil application in selected parts of the successor programme to Horizon Europe. Option 3 envisages the creation of a dedicated instrument with a specific focus on R&D with dual-use potential. The adoption of the White Paper also marks the commencement of a broad consultation which is to involve public authorities, civil society, industry, and academia to assess further options for strategic support of technologies with dual-use potential. In particular, this public consultation is meant to address the lack of a common definition of dual-use technologies in light of R&D support.
Securing R&D Results
In its Economic Security Strategy, the EU found that not only business but also research activities may serve as a gateway for interferences with the EU’s security interests. Research & innovation structures are becoming particularly vulnerable in a changing geopolitical landscape. The Proposal for a Council Recommendation on enhancing research security shall guide Member States and academic institutions in identifying and addressing research security risks while preserving academic freedom and research integrity. The EC has decided against a legally binding instrument given the division of competences and to ensure academic freedom and institutional autonomy.
The notion of “research security” relates to risk management in three areas. The first relates to the undesirable transfer of critical knowledge, know-how, and technology that may affect security interests. The second area concerns malign influence on research instrumentalised by third states that may eventually infringe academic freedom and integrity. The third area addresses ethical and integrity violations in the sense that knowledge and technology are misused to supress or undermine fundamental values. The proposed recommendations include stronger cooperation between Member States in order to adopt a coherent set of policies, the creation of a Research Security Advisory Hub, engagement with research funding organisations, and the support of higher education institutions and research organisations. Upon adoption by the Council, the EC shall monitor the implementation of the recommendations and assess whether further steps are necessary.
Conclusion and Outlook: An Upgrade Ready for Installation?
An in-depth assessment is required to determine if the EC has presented an upgrade “ready for installation”, particularly in the field of inbound FDI screening. Several contributions to the CELIS Blog will examine some of the constituent elements of the Economic Security Package in more detail over the next few weeks. In any case, the recent EU initiatives and legislative proposals represent a continuation of a trend towards autonomous measures that has been building up in the last couple of years. The EU’s trade and investment policy is increasingly unilateral, largely due to EU’s growing frustrations with the current state of the multilateral framework and mounting geopolitical hostilities. Solo efforts mostly aim to promote the EU’s security interests, economic interests, or “European values” such as sustainability.
Interested in the future of the EU’s Economic Security? Then come and join the upcoming webinar organised by the CELIS Institute. We will talk about the package as a whole, dive into the key components and objectives and explore the looming geopolitical context with renowned experts. Please fill out the registration form to receive the link to the webinar.