An Indirect Encounter: Outbound Investment Screening and the Quiet Reach of International Investment Law
Author: Yanqin Mao (PhD Candidate, Durham Law School, Durham University)
I. When Commercial Logic Meets Economic Security
On 26 March 2026, German multinational BASF inaugurated its Zhanjiang Verbund site in China’s Guangdong province. At roughly €8.7 billion, the integrated chemical complex is the largest single investment in BASF’s more than 160-year history. From the company’s perspective, the commercial logic of the investment is straightforward. BASF’s core customers in the transportation, electronics, and consumer goods sectors are heavily concentrated in Guangdong, which hosts major Chinese automakers such as BYD, GAC, and Xpeng, as well as key electronics manufacturing hubs. Zhanjiang, with its deep-water port, well-developed industrial infrastructure, and strategic location in southern China, provides an ideal platform for BASF’s “local-for-local” strategy serving South China and the wider Asia-Pacific region. Accordingly, this project proceeded smoothly from its announcement in 2018 through groundbreaking in 2019, initial production in 2022, and full operation by 2026, now running 18 plants and 32 production lines with more than 2,000 employees.
From a German and broader European perspective, however, the same investment appears far more ambivalent. Every euro BASF commits to Zhanjiang can be seen as deepening Europe’s industrial entanglement with a country that the European Union (“EU”) has officially described not only as a partner and economic competitor, but also as a ‘systemic rival’ (European Commission and HR/VP, Eu-China – A Strategic Outlook, 2019, p. 1). Although BASF’s project proceeded smoothly, it crystallises a broader tension between firms and States in their understanding of outbound foreign direct investment (“OFDI”): firms tend to treat OFDI as an ordinary commercial decision, whereas States increasingly view at least some outbound investment as a matter of economic security.
The tension illustrated by BASF is not merely a company-specific story but reflects a broader turn toward economic security in Europe. In the European Union, this shift is commonly framed as ‘de-risking, not decoupling’ (European Council Conclusions, 2023, para. 32), a strategy aimed at reducing strategic dependencies, protecting sensitive technologies, and mitigating economic coercion. Within this framework, outbound investment is no longer treated as a purely private matter of corporate strategy. Instead, at least some forms of OFDI are increasingly assessed through the lens of resilience, strategic dependence, and technological vulnerability.
Against this background, the EU has begun to consider whether outbound investment in sensitive sectors should be subject to closer scrutiny on economic-security grounds (European Commission, White Paper on Outbound Investments, 2024, section 3.1, p. 7). Its approach, however, remains cautious and exploratory rather than fully institutionalised (European Commission, Recommendation (EU) 2025/63, 2025, recitals 7, 11, 17). By contrast, the United States has moved further and faster, developing a more concrete model that explicitly invokes national security to justify restrictions on narrowly defined sensitive technologies, particularly advanced semiconductors, artificial intelligence, and quantum-related activities (U.S. Treasury, Final Rule, 2024, pp. 1-4, 9-10). Despite differences in pace and institutionalisation, both developments point in the same direction: outbound investment is increasingly viewed not simply as a private commercial decision, but as a potential matter of national and economic security.
II. The Legal Puzzle: Outbound Investment Screening and Investment Law
Framing outbound investment screening as a matter of economic security is one thing; understanding how it fits within the existing architecture of international investment law is another. That body of law is largely structured through international investment treaties, which are built around a specific legal relationship: that between a foreign investor and the host State in which the investment is made. Their core obligations: national treatment, fair and equitable treatment (“FET”), protection against expropriation, and free transfer of funds, all run from the host State to the foreign investor whose capital it has admitted.
Within this framework, foreign direct investment (“FDI”) screening sits squarely and is therefore directly constrained by the treaty obligations owed by the host State. Outbound investment screening, by contrast, intersects with international investment law in a far more fragmented and indirect way. Formally, it regulates the outbound investment activities of entities under the regulating State’s jurisdiction, rather than the entry of foreign investors. As a result, the immediate object of regulation appears to be a domestic actor, and the treaty link is correspondingly less direct.
III. When the ‘Domestic’ Investor Is Not Truly Domestic
This is why outbound investment screening is often understood as a straightforward exercise of a State’s authority over its own nationals. This apparent simplicity, however, can be misleading, because the category of ‘domestic actor’ used by outbound investment screening regimes is broader than nationality alone. This can be seen clearly in the U.S. outbound investment regime, which defines ‘U.S. person’ to include not only U.S. citizens, lawful permanent residents, but also persons in the United States and entities organised under U.S. law (U.S. Department of the Treasury, Final Rule, 2024, §850.229). As a result, a U.S.-incorporated subsidiary may qualify as a ‘U.S. person’ even where its ultimate parent is foreign. In other words, outbound screening reaches well beyond the regulating State’s own nationals in the traditional sense and can capture entities whose ultimate ownership lies elsewhere. This expansive reach has important consequences for how outbound screening interacts with international investment law, and those consequences differ sharply depending on the identity of the affected investor.
Where the affected party is a purely domestic investor, for example, a U.S. corporation with no foreign ownership that is prohibited from acquiring an interest in a Chinese semiconductor firm, the situation falls outside international investment law. Investment treaties govern the treatment of investors of one State in the territory of another; a home State regulating its own nationals’ outbound activities does not engage that legal relationship. Such measures may raise questions of domestic constitutional or administrative law, but they do not, properly speaking, give rise to claims under international investment law.
The picture changes where the affected entity is a locally incorporated subsidiary whose ultimate parent is a foreign investor protected by an investment treaty. Consider, for example, a German subsidiary incorporated under German law and owned by a Kuwaiti parent company. If Germany implements outbound investment screening and prohibits that subsidiary from acquiring assets abroad in a designated sensitive sector, the measure would formally be addressed to a domestic company. However, because investment treaties commonly define ’investment’ to include shares, equity participation, and other interests in locally incorporated companies, the Kuwaiti parent’s shareholding and associated rights in the German subsidiary may constitute a protected investment in Germany under the Germany-Kuwait BIT (Germany – Kuwait BIT, 1994, Article 1). In such cases, outbound investment restrictions imposed on a ‘domestic’ company may also affect a foreign investor’s protected investment in the regulating State.
Once the shareholding is understood as the protected investment, the analysis is not limited to whether that investment continues to exist as a formal legal asset. Many treaty standards are concerned with the investor’s ability to manage, use, enjoy, operate, and derive economic value from the investment as a going concern. Treaty language often refers expressly to the ‘operation, management, maintenance, use, enjoyment or disposal’ of investment (Czech Republic – Netherlands BIT, 1991, Article 3.1). Arbitral tribunals have similarly treated serious interference with the use, enjoyment, control, or reasonably expected economic benefit of an investment as legally relevant when assessing treaty breaches, especially indirect expropriation (Metalclad Corporation v. Mexico, Award, 2000, para. 103). A restriction on a subsidiary’s ability to deploy capital or enter into transactions abroad may therefore be treaty-relevant insofar as it impairs the management, use, enjoyment, operation, or economic value of the protected investment. The key point is not that such a restriction automatically breaches investment treaty obligations, but that it may bring outbound investment screening within the analytical framework of investment treaty protection and international investment law.
IV. When Outbound Investment Screening Meets Investment Treaties
The question, then, is how such effects should be assessed under international investment law. Once outbound investment screening reaches a locally established subsidiary that constitutes a treaty-protected investment, it may engage at least three distinct lines of treaty exposure, each corresponding to a different standard of protection.
1. FET
First, the FET standard. Most investment treaties require host States to accord foreign investments fair and equitable treatment without defining the standard in detail. Decades of arbitral practice, however, have developed a more concrete understanding of FET, often requiring States to act transparently, consistently, and without arbitrariness (Tecmed v. Mexico, Award, 2003, para. 154), to provide basic due process, and to respect the investor’s legitimate expectations (Saluka v. Czech Republic, Partial Award, 2006, paras. 302, 308).
Outbound investment screening regimes put pressure on these requirements where their design and application lack sufficient clarity, predictability, and procedural safeguards. If the definition of ‘sensitive sectors’ is vague or evolving, or if restrictions are framed in overly broad or indeterminate terms, a foreign-owned local subsidiary may find it difficult to plan and structure its outbound investment activities. In such circumstances, investors may argue that the predictability and stability they could legitimately expect in the operation of their investment have been undermined, engaging the protection of legitimate expectations under the FET standard.
These difficulties are compounded when screening decisions are taken without adequate reasoning or a meaningful opportunity for the investor to be heard, raising concerns about procedural fairness and due process. Although outbound investment screening is typically justified on national-security or economic security grounds, such justifications do not automatically displace the State’s FET obligations where the measures affect a treaty-protected investment. In particular, the due process shortcomings may conflict with, or amount to a breach of, FET obligations (Voon and Merriman, 2022, pp. 101-103). Global Telecom Holding S.A.E. v. Canada illustrates the same point in practice. The tribunal examined Canada’s national security review under the FET framework, even though parts of the relevant reasoning were redacted and the claim was ultimately rejected on the merits (Award, 2020, paras. 573-648). Accordingly, outbound investment screening may breach FET where it affects a protected investment and is adopted or implemented without basic procedural fairness, transparency, or rational justification.
2. Free Transfer of Capital
Second, free transfer of capital. Most international investment treaties contain transfer-of-funds provisions guaranteeing investors the right to move capital freely in connection with their investment, including capital contributions, profits, dividends, capital gains, and proceeds from the sale or liquidation of the investment (See, for example, U.S. Model BIT, 2012, Article 7(1)(a)-(b)). However, whether such provisions also protect a treaty-protected subsidiary’s ability to deploy capital onward to a third country for new investment purposes remains unsettled and depends heavily on the specific wording of the treaty in question.
Outbound investment screening nevertheless places pressure on precisely this less-settled edge of the transfer obligation. By preventing a treaty-protected subsidiary from channelling capital toward particular sectors or destinations abroad, such measures may affect how the investor is able to organise and allocate its financial resources. In such circumstances, investors may argue that the blocked capital movement is a transfer related to the existing investment, particularly where it is closely connected to the subsidiary’s operation, management, or expansion. This characterisation is less straightforward than in a classic repatriation case, where the transfer concerns profits, dividends, sale proceeds, or liquidation proceeds moving out of the host State. Here, the capital movement is not simply the extraction of value from an existing investment, but the deployment of capital by that investment into a further transaction abroad. The legal tension lies precisely in this difference, because it remains unclear whether such outbound capital movements fall within existing transfer-of-funds provisions, and treaty interpretation has yet to fully adapt to the emerging generation of outbound investment screening.
3. Indirect Expropriation
Third, indirect expropriation. The most demanding of the three exposures is also the most conceptually interesting. Indirect expropriation traditionally requires a measure whose effect is equivalent to direct expropriation, typically involving a substantial deprivation of the investment’s value, use, enjoyment, or control (Tecmed v. Mexico, Award, 2003, paras. 115-116). In the ordinary case, an outbound screening regime will not meet this threshold: the subsidiary continues to exist, its existing operations remain intact, and the measure merely forecloses one of several possible commercial channels. Tribunals have generally been reluctant to find expropriation where the investor retains control of the investment and the business remains capable of operating, even if state measures reduce profitability or restrict particular business opportunities (Feldman v. Mexico, Award, 2002, para. 152).
The analysis may differ, however, where a subsidiary is established primarily to deploy capital abroad, not as one activity among many, but as the central purpose of the investment. In such cases, a sufficiently broad outbound investment restriction may undermine the core economic function of the investment to such an extent that the ‘substantial deprivation’ threshold comes into view. The subsidiary may continue to exist as a legal entity, and its formal ownership may remain unaffected. However, if it is no longer able to perform the function for which it was established, investors may argue that the investment has been effectively stripped of its economic function or reasonably expected economic benefit (Metalclad v. Mexico, Award, 2000, para. 103). This would remain an exceptional case, because the investor would need to show not merely a lost business opportunity, but a substantial deprivation of the protected investment’s economic function.
Taken together, these three exposures show that outbound investment screening is not automatically outside the reach of international investment law merely because its structure is indirect. The strength of the potential claim varies across treaty protections. FET provides the most plausible and established route, particularly where screening decisions lack procedural fairness, transparency, or rational justification. Transfer-of-funds provisions raise a narrower and less settled question, namely, whether a subsidiary’s outward deployment of capital can be characterised as a protected transfer connected with the existing investment. Indirect expropriation remains the most exceptional route, requiring a restriction so severe that it substantially deprives the investment of its core economic function. These distinctions matter for regulatory design. Outbound screening regimes may be framed as instruments of national or economic security, but where they affect a foreign investor’s protected investment, they also raise questions of international investment law.
4. The Impact of Security Exceptions
None of this means, however, that outbound investment screening will inevitably be found to violate investment treaties. Many modern investment treaties contain exception clauses (See, for example, the Argentina – United States BIT, 1991, Article XI), and States imposing outbound restrictions would almost certainly invoke one or more such justifications, most prominently national security. Some treaties include explicit security exceptions, including clauses drafted in self-judging terms that give States considerable discretion to determine what they consider necessary for the protection of essential security interests (U.S. Model BIT, 2012, Article 18). Investment arbitration arising out of Argentina’s economic crisis shows, however, that security and necessity clauses are not always treated as automatic trump cards. Their effect depends on treaty wording, factual context, and the applicable standard of review (CMS Gas Transmission v. Argentina, Award, 2005, paras. 350-374).
The critical question, therefore, is not whether national-security justifications will be invoked; they almost certainly will. It is whether the justification can bear the weight placed upon it. Where outbound screening targets investments in advanced semiconductors, artificial intelligence, or other technologies with clear military or dual-use applications, the security rationale is specific and identifiable (U.S. Department of the Treasury, Final Rule, 2024, pp. 1-4, 9-10). In the language of recent WTO security-exception jurisprudence, such a connection is more likely to appear plausible (Russia – Measure Concerning Traffic in Transit, Panel Report, 2019, paras. 7.138-7.139). By contrast, where the same regime extends to conventional industrial investments with no discernible connection to sensitive technologies or military-relevant capabilities, the security justification becomes increasingly attenuated, even under a deferential standard of review.
V. Drawing the Boundary: How Far Should Screening Go?
It is precisely because these treaty exposures are real, and because national security justifications, though available, cannot bear unlimited weight, that States designing outbound investment screening regimes must think carefully about their limits. It is in this respect that the BASF scenario becomes instructive once again. BASF’s Zhanjiang Verbund site is a large-scale petrochemical complex producing consumer goods, industrial intermediates, and speciality chemicals. It does not involve frontier or dual-use technologies such as advanced semiconductors or quantum computing.
If an outbound investment screening regime were broad enough to capture industrial investments of this kind, it would be difficult to articulate a sufficiently specific security rationale under the FET standard. It would be even harder to justify the resulting interference with a subsidiary’s commercial activities. A regime that extends beyond clearly defined sensitive technologies to encompass conventional industrial projects begins to resemble not targeted risk management, but industrial policy framed in the language of security.
The broader and less targeted such regimes become, the more difficult it is to demonstrate that specific restrictions are genuinely linked to identifiable security concerns. At the same time, the space for treaty-protected investors to challenge such measures correspondingly expands. They can invoke the erosion of legitimate expectations under FET, the uncertain boundary of transfer protections, or, in more extreme cases, a substantial deprivation of the investment’s economic value, use, or enjoyment amounting to indirect expropriation. A regime that is genuinely calibrated to economic security objectives must therefore remain anchored in clearly defined sensitive sectors, applied through transparent and predictable criteria, and supported by reasoned decision-making.
The BASF Zhanjiang project, now fully operational, illustrates how the gap between firms’ commercial objectives and States’ evolving security concerns is widening. How that gap is managed, and whether it is managed in a manner consistent with the treaty commitments States have spent decades constructing, will be one of the defining questions for the next phase of economic statecraft.
