Trade and Investment Controls: The Transatlantic Toolkit


In recent years, the European Union and United States have witnessed an increase in the injection of national security concerns into economic and trade policy, which the Russian invasion of Ukraine has only amplified. Both Brussels and Washington have become more serious about trade enforcement and the long-term geopolitical challenges presented by China. Both capitals have pursued the rapid development of multilateral and domestic trade responses, including the joint effort on export controls, as well as unilateral tools, such as the European Union’s proposed anti-coercion instrument and efforts in the United States to create an outbound investment review mechanism. Despite renewed enthusiasm for leveraging trade and investment policy to level the playing field and protect national security interests, key differences emerge in the EU and U.S. approaches to combatting coercive economic behavior, which in turn imperils security interests. An examination of current and proposed trade and investment tools on both sides of the Atlantic helps to elucidate some of the commonalities and outstanding challenges in transatlantic cooperation at the nexus of economic and security concerns.

Domestic Technology Investments

After more than a year of debate, Congress has reached the finish line on semiconductor funding legislation, known colloquially in Washington as the “China competition package.” The U.S. Senate and House passed the “Chips and Science” bill in late July, garnering more bipartisan support than initially anticipated. A major sticking point in negotiations evolved over how to define “guardrails”—or spending constraints—on funds received from the legislative package. Certain lawmakers sought to limit chipmakers from using federal funds for investments abroad, particularly in China and other countries of geopolitical concern. These proposed guardrails included a prohibition on companies investing in semiconductor manufacturing in China for 10 years after receiving funding from the U.S. government, and barring recipients from “significant transactions … involving the material expansion of semiconductor manufacturing capacity in the People’s Republic of China.”

Another challenge that has emerged in the debate over spending parameters in the chips legislation is the extent to which guardrails can be designed as either static or flexible. For example, one proposal sought to limit the production of sub-28 nanometer chips in China. However, a legal limitation on investment in chip-producing capability in foreign countries could prove irrelevant if 28 nanometer nodes are no longer cutting-edge in the coming years, in which case the net effect of the proposal would be to have dampened U.S. private sector profits, and therefore, reinvestments in next-generation technology. Another proposal—the one that ultimately prevailed—is more flexible and would allow the U.S. Department of Commerce to determine, on a sliding basis, which microchip sizes should be controlled. This would permit chipmakers to produce older, legacy chips in China, such as those commonly used in consumer goods.

Underscoring the Biden administration’s approach to trade—one which infuses national security and social concerns into trade and investment policy—White House press secretary Karine Jean-Pierre said that the funding is meant to “generate more semiconductor investment here in the U.S., not in China, and guardrails help slow the growth of investment in China.” However, some Republican lawmakers have argued the proposed guardrails are insufficiently strict, claiming instead that certain potential exceptions—such as permitting companies to produce analog chips in China—could adversely affect U.S. strategic interests.

However, this debate over geostrategic use of funding, for now at least, does not appear to be occurring with the same fervor in the European Union. Across the Atlantic, the European Union has proposed similar funding for semiconductor manufacturing. The European Commission formally introduced the EU Chips Act in February 2022. European leaders are especially concerned about innovation in the European semiconductor industry, which has seen a sharp decline in global share over recent decades. The proposal aims to quadruple European semiconductor production, support supply chain resiliency, and enhance European leadership in cutting-edge technologies.

Without going so far as to institute the same level of guardrails supported in the United States, the European Commission chips proposal outlines a vetting process for entities seeking funding, which is in large part intended to reduce EU internal state aid and subsidy concerns. For example, firms must demonstrate that the facilities will be “first of a kind” in Europe, that funding will not crowd out existing private initiatives, and that the public support covers a maximum of 100 percent of the funding gap. Geostrategic competition with adversaries is not explicitly mentioned in the packages, which instead focus on encouraging domestic investment in the European Union.

Outbound Investment Screening Proposals

Another geopolitically consequential provision that has arisen during the chips debate in the United States—and one which is, to date, absent in the European Union—is the policy debate over the creation of an outbound screening review mechanism. The policy debate over outbound investment largely originated over concerns that venture capital funding from Silicon Valley was helping to finance cutting-edge technological development in China with dual-use applications. Senators Bob Casey (D-PA) and John Cornyn (R-TX) have proposed the establishment of an interagency process, led by the Office of the U.S. Trade Representative (USTR), to review outbound investment in areas of “national critical capabilities” to “countries of concern.” A similar proposal has also been included in the House of Representative’s companion legislation, the America COMPETES Act.

The senators’ bill has received backlash, however, and has since evolved, although not satisfactorily so from the standpoint of the private sector. In June, leading business groups criticized the bill, seeking one with a far narrower scope. The revised bill grants the president the authority to decide which agency would head the committee screening outbound investment, as opposed to assigning the task to USTR. Other revisions include attempts to close supposed loopholes, such as using joint ventures between U.S. and Chinese companies to transfer knowledge or technology to the Chinese partner, or Silicon Valley venture capital firms using Chinese affiliates to invest in China. The revised proposal also includes exemptions for ordinary transactions that do not involve advanced technology or U.S. intellectual property. However, opposition to the proposal remains strong despite several iterative changes. A trimmed down version of the bill has also recently been proposed that instead emphasizes transparency requirements for firms receiving funding from the broader Bipartisan Innovation Act, which includes the $52 billion CHIPS Act. This version also removes presidential authority to block transactions or investment, which a previous version had explicitly allowed.

Proponents of an outbound investment screening tool argue that the outflow of U.S. investment to China bolsters Chinese critical industries, threatening U.S. national security interests. Critics of the proposal argue it would duplicate the authority of the Department of Commerce to control exports, which is designed to ensure that critical technology is not transferred even if investments are. Proponents believe this could be a useful mechanism for ensuring that U.S. funds are not used to enhance technological capabilities of foreign adversaries, including bolstering advanced semiconductor manufacturing.

While the White House has long supported an outbound investment review mechanism, it has largely opted to do so from behind the scenes. However, in mid-July, the White House publicly supported the congressional outbound investment screening proposal for the first time, providing its own input on the suggested bill. However, the bill still faces significant opposition in Congress. Senator Pat Toomey (R-PA) has criticized the lack of public hearings regarding the bill and claims that existing export control measures are sufficient, while Banking Committee chair Sherrod Brown (D-OH) stated that outbound investment issues should be addressed through a vehicle other than the COMPETES Act..

On July 19, the proposal was left out of the version of the bill that ultimately passed both the House and Senate. However, Senator Cornyn identified the possibility that Commerce Secretary Gina Raimondo and the White House could craft their own administrative rules to screen outbound investment. Indeed, it is rumored that White House enthusiasm for establishing an outbound review instrument is so strong that National Security Advisor Jake Sullivan has urged the president to consider drafting a separate executive order on outbound investment should the legislation in Congress fail. Furthermore, if the Biden administration were not to impose their own executive action on outbound investment screening, Senators Casey and Cornyn have also purportedly considered including the proposal in the National Defense Authorization Act, the annual defense spending bill.

In addition to these ongoing efforts, the Treasury Department floated an alternative proposal to monitor outbound investment. This proposal would have created a pilot program to help the government ascertain the nature of national security risks stemming from outbound investment and what authority and mechanisms might be needed to address these risks. This alternative proposal would have significantly narrowed the transactions subject to review and would not have given the president authority to block investments. However, this proposal did not garner much interest. The Treasury Department is likely happy to have the issue of outbound investment disappear, even if temporarily.

Brussels, understandably, remains fearful of becoming “collateral damage” in U.S. anti-China efforts, whether that is through attempts to block the sale of Dutch lithography equipment to China or through potential European ensnarement in a future outbound investment review mechanism. Intended in part to combat exactly this dynamic, in December 2021 the European Commission proposed a new anti-coercion instrument, a comprehensive set of trade tools combined into a single instrument intended to deter economic bullying. Although it is now largely intended to combat Chinese coercion, the instrument was originally conceived as a counterweight to U.S. Section 301, which provides broad authority for the application of trade remedies such as tariffs. The European Commission has not signaled plans to put forth an equivalent outbound investment mechanism, though its creation of the anti-coercion instrument indicates that where Brussels sees the need for trade equivalence in the transatlantic context, it will not demur. Brussels will undertake a review of its FDI screening mechanism in 2023, at which point considerations about an outbound investment tool are likely to rise to the surface.

Inbound Investment Screening

Controlling inbound investment is not a new policy in the United States. The Committee on Foreign Investment in the United States (CFIUS) is led by the Department of the Treasury and functions under the authority of the Defense Production Act of 1950. CFIUS functions as an interagency review process that screens inbound investment into the United States. If CFIUS determines there is a national security risk from a foreign investment, it possesses the authority to refer the decision to the president, who may then block the transaction. In 2018, alongside ECRA, the Foreign Investment Risk Review Modernization Act (FIRRMA) granted CFIUS additional authority over foreign investments. According to the latest CFIUS report , which covers 2020 transactions (the report on 2021 is yet to be released), there were 187 notices of transactions filed with CFIUS in 2020, out of which CFIUS investigated 88. Of these 88 investigations, CFIUS recommended only one be rejected.

The EU FDI Screening Regulation entered into force in April 2019 in what was the first authority granted to the European Commission to review inbound investment. This regulation does not revoke the authority of member states to undertake their own review processes but seeks instead to consolidate screening capabilities of the European Union, creating a “cooperation mechanism” for protecting EU interests. It has since been updated, including building out the operational structure for the regulation, for example by clarifying procedures and notification processes for foreign investments.

In a somewhat similar vein, the European Union’s proposed “Regulation on Foreign Subsidies” (FSR) introduces a notification tool that flags concentrations where the revenue of the EU targeted enterprise exceeds €500 million ($500 million), and the financial contribution by the foreign entity exceeds €50 million ($50 million). This screening tool materialized after a series of complaints regarding Chinese takeovers in the European Union and fears over what were perceived to be potentially hostile acquisitions, such as the Chinese takeover of German robotics company Kuka. One report by the European Commission found that market conditions in China are highly distorted due to state subsidies; another noted that acquisitions of EU enterprises by Chinese entities may be done not for commercial purposes but rather for strategic reasons, such as facilitating the transfer of technology.

Unilateral Trade Controls

Another area of trade policy that has considerable effects on foreign capabilities as well as domestic economic health and innovation is export controls. While the Russian invasion of Ukraine has ushered in a period of unprecedented collaboration on export controls, particularly among transatlantic allies, the United States has maintained a robust export control policy for longer than the European Union, meaning it has had first-mover advantage in building the architecture of the contemporary export control regime.

The U.S. Export Control Act, passed in 1940, authorized the president to restrict the export of war materials. The International Emergency Economic Powers Act (IPEEPA), originally passed in 1977 but amended several times in ensuing years, also granted the president with sweeping authority to carry out trade and economic tools intended to restrain the economies of foreign adversaries, while dampening their ability to develop next-generation technology with military applications. In 2018, Congress passed the Export Control Reform Act of 2018 (ECRA), which enhanced government capabilities to review both foreign investments and domestic outflows and comprehensively updated U.S. export control provisions.

In the European Union, on the other hand, export controls and regulatory control over investment flows have historically been the remit of member states. It was only in 2009 that the European Union laid the foundations for shared restraints on dual-use exports. European Commission authority over export controls was significantly expanded in 2021 with the EU Dual-Use Regulation, which consolidated authority over export controls and made the licensing program more transparent.

Export controls in the United States have focused primarily on restraining the ability of foreign adversaries to develop technology with cutting-edge military capabilities or to prevent the proliferation of nuclear and chemical weapons and their means of delivery. However, the United States may be shifting to a system that seeks not only to dampen but to degrade foreign military capabilities through the use of trade and economic measures, a shift that appears not to be surfacing yet in Europe.

Bilateral Cooperation

While Brussels and Washington have enhanced their domestic toolkit for combating unfair trade practices and safeguarding technological development, the parties have made significant progress on policy convergence within the Trade and Technology Council (TTC). The TTC is a U.S.-EU bilateral diplomatic framework dedicated to closer transatlantic cooperation on trade and technology related issues and consists of specific working groups, some of which focus explicitly on investment screening and export controls. Working Group 7, on export controls, is tasked with exchanging information on best practices and risk assessments, in addition to harmonizing regulatory and legislative developments on export controls. This working group is largely credited with facilitating the united export control response following Russia’s invasion of Ukraine by starving Russia of the technology it needs to keep its war machine up and running.

Working Group 8, on investment screening, is tasked with administering the coordination and exchange of investment trends affecting national security and sensitive industries. Working Group 8 has pledged to begin “developing a holistic view of the security risks related to specific sensitive technologies and the policy tools addressing them,” while enhancing best practices of investment monitoring at a more “practical level.” There have been no further updates on investment screening coordination since the last TTC ministerial.

In addition to increased collaboration on investment screening and export controls, as CSIS has previously written, another area ripe for closer transatlantic cooperation is transnational subsidies—those routed through third countries. While the World Trade Organization’s Agreement on Subsidies and Countervailing Measures (SCM) seeks to ensure a level playing field among all actors by preventing and disciplining subsidies, transnational subsidies present a fresh challenge. China has pioneered this practice through its Belt and Road Initiative, which has invited the introduction of legislation on both sides of the Atlantic aimed at combating this practice.


The Russian invasion of Ukraine has forced a rapid decoupling of Russia with the European Union and United States. This decoupling has illustrated practical challenges that arise from halting trade in today’s connected global economy, such as the ongoing energy crunch in the European Union or the rise in fertilizer prices that have increased global food insecurity. Emblematic of ongoing differences in the EU and U.S. approaches to trade relations with China, Dutch prime minister Mark Rutte said in June 2022 that he did not favor cutting trade ties with China, arguing instead that “the EU should be more of a geopolitical powerhouse, that we have to develop our own policies toward China, in close connection with the US.” What remains to be seen is the extent to which the United States and European Union will converge around a common trade and investment policy that capitalizes on current momentum following Russia’s invasion of Ukraine and whether EU enthusiasm would mirror this support in the case of a Chinese incursion into Taiwan.

Emily Benson is a fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

The Scholl Chair in International Business thanks Elizabeth Duncan, Kaycee Ikeonu, and Grant Reynolds for their research and thoughtful input.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2022 by the Center for Strategic and International Studies. All rights reserved.
Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business