The notion of “security” in foreign trade law – Theory and Practice

By Dr. Carsten Bormann, Oppenhoff & Partner*

1. Introduction: All about security?

The screening of foreign direct investment has gradually evolved from the traditional protection of vital national security interests through the prevention of outsourcing and the drain of specialized technological capabilities to the protection of geostrategic interests and the enforcement of industrial strategies. The European Commission’s recently published European Economic Security Strategy and the German government’s China Strategy are just two examples of the trend toward broadening regulators’ foreign trade law toolkit. Acknowledging that the concept of security is open to interpretation does not mean, however, that regulators can equate security with any public interest. Most importantly, free trade restrictions governed by the guarantees of international law should once again focus on the concept of security as defined by the jurisprudence of the EU member states and the ECJ.

2. Foreign direct investments and the protection of public order and security

In short, investment screening procedures follow a simple but fundamental rule: Foreign trade is generally free (Section 1 (1) of the German Foreign Trade and Payments Act (AWG)), and restrictions must be sufficiently justified, in particular by the protection of public order and security (Section 4 (1) (4) of the AWG). So far, so good.

At the same time, legislative reforms of existing review mechanisms, recent regulatory practice, and policy concepts such as the European Commission’s European Economic Security Strategy and the German government’s China Strategy have increasingly raised questions about the legal basis for restricting foreign direct investment. More specifically:

• Are restrictive measures against foreign direct investment to protect the public from a “likely impairment of security” still a sufficient justification under sec. 4 par. 1 AWG?
• Is the concept of “security” in foreign trade law, which is influenced by EU law, really different from the concept in purely national administrative law, as some have argued[1]?
• If the substance of “security” is indeed similar to the national concept, e.g. in police law, is it justified to apply different requirements to the taking of preventive measures in foreign trade law?

These questions need to be answered in the light of the paradigm shift in foreign trade law that has been underway for several years. Indeed, nowadays, investment screening procedures will focus not only on security issues, but also on geostrategic interests.

2.1 The traditional concept of ‘national security’

The security architecture of Western countries has long included foreign trade regulations. Traditionally, the primary objective of these existing regulations has been to avert threats to national security and public order. The concept of threats to public security has tended to be shaped from a nation-state perspective. Investment screening to control foreign investment in critical industries was primarily designed to protect national security interests. Third-country investors were to be given no access, or as little access as possible, to national defence technology or critical infrastructure.

In this environment, the concept of security has traditionally been applied in a similar manner to other more traditional and “developed” regulatory security frameworks, such as police law. While it is certainly true that “security threat” in national administrative law is not identical to the concept used in foreign trade law with its trade union influence, the underlying principles are in fact quite similar.

• In German administrative law, the concept has largely been defined by case law. An explanatory memorandum to § 14 of the Prussian Police Administration Act of 1931 stated that, according to established case law, the maintenance of public safety consisted in safeguarding the existence of the state or its institutions or high-ranking individual rights.[2] In order to justify an interference, a threat to one of these qualified legal interests must be sufficiently concrete. Or, as the German Federal Administrative Court puts it, a situation or behavior must be likely to cause harm to a legal interest should the objectively expected course of events proceed unhindered.[3]
• The same applies to foreign trade law: Here, measures restricting fundamental freedoms can only be justified on grounds of public security if “there is a real and sufficiently serious threat to a fundamental interest of society”.[4] Examples of such fundamental interests include, inter alia, the functioning of institutions and essential public services. Hence, the ECJ has held that a threat to the security of supply in the petroleum, telecommunications and energy sectors may constitute such a sufficient serious threat. As a counterexample, the security of supply in the construction sector at a local level does not constitute a fundamental interest of society. A threat in this sector would thus not be regarded as “genuine and sufficiently serious” to justify restrictions of fundamental freedoms.[5]

Ergo, in national administrative as in foreign trade law, the national security ground has traditionally been interpreted narrowly.

2.2. The evolution of ‘security’ in foreign trade law

Continuous adoptions to the regulatory FDI screening framework and the corresponding administrative practice in recent years have shown that the traditional security concept is no longer sufficient to meet the review powers required and applied by regulators.

Restrictions or bans are now based on whether an acquisition of a domestic company could ‘likely impair’ public order or safety (§§ 5 (2) (1), 55 f. AWG and Art. 1 (1), 4 (1), (2) EU screening regulation). This new version of the threat criterion results in a two-step lowering of the assessment threshold:[6]

1. The first step is a reduction in the requirements for the likelihood that the risk will be realised. Instead of an actual risk caused by the acquisition, a probable impairment is now sufficient. This is intended to take greater account of the preventive, protective nature of investment screening. The aim is to be able to restrict or prohibit the acquisition of a German company before the acquisition has been completed in order to avert risks that would only materialize after the acquisition has been completed at the earliest. Therefore, the Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz – BMWK) does not have to prove that the acquisition already poses an actual threat to public security, but that the influence of the foreign acquirer is likely to impair the protected interests after the acquisition has been completed.
2. The second step is a lowering of the requirements with regard to the intensity of the threat. Protected public interests no longer necessarily have to be threatened by the acquisition; it is sufficient if they are impaired. Acquisition-restrictive measures are therefore also permissible if the acquisition has a negative impact on public order or security without actually endangering it.

Lowering the threshold gives the BMWK broad discretion in deciding whether it wants to review a given acquisition. As a consequence, the extent of judicial review has been significantly reduced.[7]

3. Conformity with guiding principles

Assuming that the concept of security in foreign trade law is rooted in national administrative law and developed in line with the interpretation by the ECJ, the decisive question is whether the concept and its current application are in line with guiding principles.

The starting point for any assessment of the legality of the concept of security as it is used in foreign trade law must be the question of whether – and possibly to what extent – the concept differs from that recognized in national administrative law. On this basis, we can take a look at the relevant overlapping principles of constitutional and EU law and discuss their implications for “security” as it is used in FDI investment screening.

3.1 Can there be two versions of ‘security’?

When considering the concept of security in foreign trade law, it is crucial to understand the relationship between national screening regimes and EU law. In a harmonized framework, national screening rules merely implement EU standards. Apart from certain constitutional concerns[8] there would be little or no room for purely national concepts and interpretations.

In this scenario, “security” would be seen as an independent concept of EU law, separate from the existing concept in national administrative law.

However, the current scenario is different. The EU has not (yet) implemented a harmonized framework for the screening of foreign direct investment. Instead, the EU Screening Regulation provides certain minimum standards for its national screening procedures, but clearly leaves EU member states a wide margin of discretion in the design of their regulatory screening frameworks. At the same time, the EU Screening Regulation, EU fundamental freedoms and the jurisprudence of the European Court of Justice play a crucial role for national screening procedures. Since FDI restrictions directly affect fundamental freedoms such as the free movement of capital and the right of establishment[9], national screening mechanisms must certainly take into account the EU dimension and the ECJ’s interpretation of “security”. But does this necessarily lead to the conclusion that “security” in the traditional realm of national administrative law and “security” in foreign trade law are different concepts?

The legal literature on this question goes both ways.[10] Arguably, as is often the case, the truth lies somewhere in the middle. Foreign trade law, and investment screening in particular, is not a harmonized area of law, but remains largely within the legislative sovereignty of the Member States. However, investment screening is special in that its administrative powers cannot be exercised without taking into account the ECJ and its guidelines on the protection of public order and security by Member States. This situation is typical of other “somewhat harmonized” areas of administrative law, such as climate change regulation, where EU law certainly provides the framework for Member States’ legislative efforts, without yet fully harmonizing relevant obligations. In this environment, regulators and courts must adhere to the concepts and traditionally accepted principles while interpreting their powers and obligations in light of the underlying EU dimension.

It is therefore fair to say that “security” in foreign trade law has always been and remains – until now – a concept of national law, subject to recognized constitutional limitations. At the same time, it is a concept which is closely linked to EU law, which can be further developed in the light of the interpretation of the ECJ, and which is also subject to the underlying general principles of EU law.

3.2 Constitutional law

If ‘security’ in foreign trade law therefore remains a national concept subject to an overlaying EU dimension, it must first of all comply with the restrictions developed in the jurisprudence of the German Federal Constitutional Court.

On this basis, the legislator may indeed extend the limits for certain areas with the aim of preventing security threats by reducing the requirements for the foreseeability. However, the basis for intervention must still require a sufficiently concrete, imminent danger in the sense that there are at least factual indications that a concrete danger to the protected interests will arise in the near future.[11] Moreover, the proportionality of measures that are preventive in nature and serve to avert danger depends directly on the importance of the interests to be protected. The less likely the danger and the more serious the interference, the more important the legal interest to be protected must be.

3.3 EU law

According to the jurisprudence of the ECJ, the concept of security should be treated with the same caution. Restrictions on the free movement of goods under Art. 36 TFEU are allowed for reasons of both internal and external security.[12] “However, “security” should be defined narrowly in the context of foreign trade law, as it is part of the common commercial policy (cf. Art. 207 (1), (2) TFEU) and thus an exclusive competence of the EU (cf. Art. 3 (1) (e) TFEU).

As mentioned above, the Screening Regulation allows an interference with fundamental freedoms if public security is “likely” to be affected (cf. e.g. Art. 1 (1) Regulation (EU) 2019/452). At first glance, this might suggest a lower threshold for intervention. However, in the recent Xella case, the ECJ confirmed that measures restricting fundamental freedoms can only be justified on grounds of public security if “there is a genuine and sufficiently serious threat to a fundamental interest of society” and the restrictive measure is necessary and proportionate to protect the interest in question.[13]

4. The need to change the current concept

While national legislators therefore have a relatively wide scope for interpretation, and while foreign trade law may require an expansion of the concept of security compared to its use in national administrative law, “security” may only be invoked as a reason for restricting fundamental freedoms within clear limits.

Indeed, the ECJ’s decision in the Xella case clearly rejected a softening of the standard of review for restrictions on fundamental freedoms. National regulatory authorities, such as the German BMWK, will thus still have to prove a sufficiently serious threat to public security within the meaning of Art. 36, 52(1) TFEU.

Xella should therefore also be seen as a clear instruction to national regulatory authorities to justify their decisions. This will help to prevent Member States from using security reasons to actually pursue their industrial policy.[14] Ultimately, this means that the German legislator should consider reviewing the current use of the concept of public security in foreign trade law in order to prevent a continuous expansion of the concept.[15]

***

* Dr. Carsten Bormann M.Jur. (Oxford) is attorney-at-law and junior partner at Oppenhoff & Partner Rechtsanwälte Steuerberater mbB. The author would like to thank Ms. Johanna Fink for her valuable contribution to this publication.

[1] Gerster in: BeckOK AWR, § 4 AWG, para. 16; Hindelang/Hagemeyer, EuZW 2017, 882 (883); Washington: EuZW 2023, 931 (932).

[2] Kingreen/Poscher, Polizei- und Ordnungsrecht mit Versammlungsrecht, 12th edition, Munich 2022, § 7 II 1 para. 4.

[3] See for example BVerwGE 45, 51 (61).

[4] ECJ, Judgement of 14 March 2000, case C-54/99 – Église de Scientologie (ECLI:EU:C:2000:124), para. 17; ECJ, Judgement of 4 June 2002, case C-503/99 – Commission v. Belgium (ECLI:EU:C:2002:328), para. 47; ECJ, judgement of 13 July 2023 – case C-106/22 – Xella (ECLI:EU:C:2023:568), para. 66 f.

[5] ECJ, judgement of 13 July 2023 – case C-106/22 – Xella (ECLI:EU:C:2023:568), para. 68 f.

[6] Agreeing with this view Schipke/Sichla, EuZW 2023, 559 (562); Washington, EuZW 2023, 931 (933). Some voices in literature take a different view: According to Niestedt, as a restriction on grounds of public security interferes with the fundamental freedoms, the concept must still be interpreted narrowly. The interference must therefore still reach the level of “a genuine and sufficiently serious threat”. Niestedt in: BeckOK AWR, § 55 AWV, para. 23. However, the explanatory memorandum to the new provisions in the AWG, which clearly states that a lower degree of risk will be sufficient, speaks against this view. See German Bundestag, Draft bill by the CDU/CSU and SPD parliamentary groups, Draft of a First Act amending the Foreign Trade and Payments Act and other laws, Printed Paper 19/18700 of 21 April 2020, p. 18.

[7] VG Berlin, order of 27 January 2022, case no. 4 L 111/22-, juris, para. 43.

[8] BVerfGE 37, 271 (285) – Solange I; BVerfGE 73, 339 (387) – Solange II.

[9] ECJ, judgement of 13 July 2023 – case C-106/22 – Xella (ECLI:EU:C:2023:568), para. 59.

[10] According to Pelz, the concept of “public order and security” as prescribed in sec. 4 (1) (4) of the AWG is in fact rooted in national administrative police law. Pelz, in: Sachs/Pelz (eds.), Außenwirtschaftsrecht, 3rd. ed., § 4 AWG, para. 20. As mentioned in the introduction and in footnote 2, for others, it is to be regarded as a concept of EU-law and should therefore be interpreted differently. Gerster in: BeckOK AWR, § 4 AWG, sec. 16; Hindelang/Hagemeyer, EuZW 2017, 882, 883; Washington: EuZW 2023, 931 (932).

[11] BVerfGE 130, 1 (32); BVerfGE 141, 220 (272) – BKA-Gesetz.

[12] ECJ, judgement of 4 October 1991, case C-367/89 – Criminal proceedings against Aimé Richardt and Les Accessoires Scientifiques SNC (ECLI:EU:C:1991:376), para. 22.

[13] ECJ, judgement of 13 July 2023 – case C-106/22 – Xella (ECLI:EU:C:2023:568), para. 66 f.

[14] Which is forbidden according to the ECJ’s established case law. See ECJ, judgement of 13 July 2023 – case C-106/22 – Xella (ECLI:EU:C:2023:568), para. 64, 66.

[15] Reaching a similar conclusion Barth, ZASA 2023, 200 (203); Bungenberg/ Reinhold, ZASA 2023, 314 (316).