Transatlantic Approaches to Outbound Investment Screening


Discussion of an outbound investment review mechanism first surfaced in the United States during the Export Control Reform Act (ECRA) and the Foreign Investment Risk Review Modernization Act (FIRRMA) congressional debate in 2018. The bid to subject outbound investments to a review process grew out of concerns that U.S.-based venture capital (VC) funds were helping advance Chinese progress on cutting-edge technologies with military applications. As initially proposed, FIRRMA would have provided statutory authority to create a parallel interagency process resembling the Treasury Department’s Committee on Foreign Investment in the United States (CFIUS), which screens inbound investments for national security risks. That proposal ultimately failed.

More recently, discussions accelerated around the creation of an outbound investment screening mechanism as part of the CHIPS and Science legislative debate during the summer of 2022. Senators Bob Casey (D-PA) and John Cornyn (R-TX) emerged as chief proponents of creating this tool. Their proposal in the National Critical Capabilities Defense Act (NCCDA) would have covered investments in foreign “entities of concern” in sectors with national security implications, such as biotechnology, quantum computing, microelectronics, and critical minerals. Countries of concern include China, Russia, North Korea, Iran, Cuba, and Venezuela.

The NCCDA would have established a National Critical Capabilities Committee (NCCC), which the Departments of Defense and Commerce would have cochaired. The choice of these agencies represents a shift from establishing this authority under the United States Trade Representative (USTR), which an earlier proposal had sought to do. The NCCDA was ultimately omitted from the chips package in August 2022, although the topic is unlikely to disappear.

Upon the passage of the Consolidated Appropriations Act, 2023, the Department of the Treasury, in conjunction with the Department of Commerce and other relevant federal agencies, is required to submit a report to Congress that details a potential outbound investment review mechanism program, including what resources would be required over the next three years to implement such a policy. The respective agencies were given 60 days after enactment of the omnibus bill to submit this report, which means it is due at the end of February. While the appropriations omnibus included $21 million in annual funding for the CFIUS, no money was allocated for the establishment of an outbound investment review mechanism.

Overall, there are several outstanding questions surrounding review thresholds, the geographic nature of reviews, and which agency would ultimately oversee the committee, although it is likely that the Department of the Treasury and Department of Commerce will jointly oversee the measure. While Congress is likely to act on outbound investment reviews, particularly as part of the newly created Select Committee on the Strategic Competition Between the United States and the Chinese Communist Party, several legislators have urged the Biden administration to pursue an executive order to establish this new outbound investment screening regime.

Executive Order and Legislative Complement

For the past several months, the Biden administration has worked on drafting an executive order (EO) that would establish outbound investment review screening. The draft EO is currently undergoing an interagency review process. The breadth of the EO remains unclear. Recent reports indicate that the administration is contemplating narrowing the scope of the EO considerably to focus on semiconductors, artificial intelligence (AI), and quantum technology, while omitting biotechnology and battery technology.

While concrete details of the executive order have not yet been made public, there is a broad understanding that an executive order would be further bolstered by a legislative support mechanism. In other words, once the White House issues an EO, Congress will provide additional statutory support for the EO. Whether the administration will be able to achieve bipartisan support for its initiative remains unclear. In a September 2022 letter to the administration, members of Congress asked the White House to take action to protect national security critical industries in the United States. They wrote, “As deliberations continue in Congress, we urge your Administration to move forward with executive action—which can then be bolstered by statutory provisions—to safeguard our national security and supply chain resiliency on outbound investments to foreign adversaries.” A bill that follows an executive order would likely fill in additional details of the executive order. The EO itself may ultimately amount to broad guidance—rather than a detailed roadmap—on how to design an outbound investment review regime. While far from a blueprint for a forthcoming EO on outbound investment, a separate executive order on CFIUS guidance, which President Biden signed in September 2022, provides some clues on sectors that may be covered by future outbound review policies. Although the CFIUS process is governed by statute, meaning substantive changes can only be issued by the legislative branch, the September CFIUS EO urges the Treasury Department to review transactions for national security risks in several categories, including in biotechnology, quantum computing, and climate adaptation technologies, among others.

It is likely these categories will, at a minimum, inform the basis for the Biden administration’s baseline definition of what is critical to U.S. national security interests. It is widely believed that at least some of the categories listed in the EO will overlap with forthcoming export controls on advanced technology to China, such as items for quantum computing.

Benefits and Drawbacks

The first drawback to outbound investment screening is that it would substantially widen the scope of U.S. national security controls over investments that have traditionally been regarded as purely economic objectives. The burden will thus fall on policymakers to develop a regime that is both sufficiently narrow and successful in achieving long-term national security goals. Export control and investment screening experts Sarah Bauerle Danzman and Emily Kilcrease have outlined recommendations for how best to design an outbound investment review mechanism.

In addition to concerns about compliance costs for the U.S. private sector, policymakers should weigh the degree to which a new review mechanism would treat close economic allies. As geoeconomics expert Elmar Hellendoorn notes, a U.S. screening mechanism could reduce the “appetite” for EU firms seeking to expand business in China. Particularly following the October 7 controls on AI chips to China, which were issued without allied buy-in, it is important in both diplomatic and practical terms that the United States to consult sufficiently with its allies in designing policies that directly implicate EU business and investment.

Finally, perhaps the most foundational concern about outbound investment screening is that elements of the proposal are redundant since the U.S. government already possesses a series of trade and investment tools at the nexus of U.S. national security and economic policy. Transferring money is not transferring technology, and if an investment deal included a requirement for tech transfer, such transfers would need approval by U.S. export control authorities at the Bureau of Industry and Security. Investment in startups could be an enabling factor for Chinese companies that could help them develop new technologies even though there is no technical transfer. This redundancy has led some stakeholders to argue that outbound investment screening most clearly parallels CFIUS. Others have highlighted that the very nature of the measure closely resembles export controls since it covers funds leaving the United States.

EU Considerations for Outward Investment Controls

As the design of an outbound investment review mechanism becomes more prominent in the United States, the European Commission has also begun to consider its own equivalent tool. The European Commission has listed outbound investments in its work program for 2023. The language pledges the European Union to holding a debate about it but does not announce a concrete plan to adopt any regulations on the matter. Rather, the European Union will “examine whether additional tools are necessary in respect of outbound strategic investments controls.”

A discussion on a potential regulation to screen outward investments is thus set for 2023, and conversations behind closed doors have not necessarily progressed further than what the European Union working program suggests. In 2022, the commission had its hands full with numerous new regulations either being adopted or debated in Brussels, including how to strengthen its own sanctions regime. Outbound investments are thus likely to play a larger role in policy debates in 2023.

2023 is also the year of the review of the European Union’s framework for screening inbound foreign direct investments. A growing number of member states have gradually adopted their own investment screening regulations, and latecomers include key European players in the technology landscape such as the Netherlands and Belgium. However, differences in the regulations still display high degrees of unevenness throughout the European Union.

One may regard the review of the inbound investment screening regulation and the adoption of a new regulation to screen outbound investments as going hand in hand. Indeed, in the work program of the commission for 2023 they are mentioned in the same paragraph. However, it would be wise to separate the two. Binding the two together risks butchering the review process of the inbound investment screening while not being able to provide the necessary attention to whether the European Union needs an outbound investment screening mechanism and if so, what it should look like. In fact, despite the similarities, outbound investments screening and inbound investments screening should not be treated as two faces of the same coin—they are not.

On one hand, the two processes must be kept separate. On the other, the Technology, Security and FDI Screening unit, which is in charge of inbound investment screening within the European Commission’s directorate general for trade, would be a natural “home” for the debate and eventually the policymaking and enforcement of a potential outward investment review. Also, in light of their competence for export controls, they are the best placed to avoid unnecessary overlaps between the two regulations.

Differences with the United States

If the European Union decides to adopt an inbound investments review, differences with the U.S. review system are likely to surface. Even high levels of coordination may leave the final products with key differences. This contrasts with transatlantic inbound investment screening and export controls, where the differences relate to the distinct legal systems and regional and national needs without necessarily impairing the overall effectiveness of the regulations. With outbound investment reviews, however, crucial philosophical differences could impede more concerted transatlantic progress. It is important that partners coordinate to avoid unexpected costs or exposure to vulnerabilities.

The first difference lays in the existence and power of European Union’s member states. Provided an outbound investments review will operate to defend national security, then, according to the EU constitution, it would be the competence of member states and not Brussels. As has been the case for the inbound investments screening, the outbound investments review would witness a slow adoption by member states and an uneven policy content linked to national interests.

Secondly, the U.S. NCCDA refers to investments as outward capital from the United States. Considering the difficulties in tracking capital once it enters markets such as that of China and the much smaller amount of deep capital in the European Union than in the United States, a future EU regulation to screen outbound investments will likely narrowly focus on outward direct investments. This contrasts to the U.S. legislative proposal, which defines a covered transaction as broadly including a country of concern or “transfers to an entity of concern,” meaning the U.S. scope is significantly larger than would likely evolve out of an EU policy.

Finally, perhaps the starkest difference regards the geographical target of a potential regulation. The NCCDA and the U.S. export controls adopted on October 7 have shown the U.S. desire to target specific countries with their review policies. In Brussels, for now, pursuing a geographic-based approach is not an option. Member states may hold different opinions, but an EU-wide regulation will not discriminate against one actor, and especially, it will not single China out.

The European Union does not officially view China as a security threat. Brussels’ approach remains based on the three-pronged strategy describing China as a partner, competitor, and systemic rival. While the latter elements are becoming increasingly important, they do not enshrine a view of China a security issue. Considering that security would be starting point of any regulations screening outbound investments, a threat to the European Union’s security by China would have to be the evidence for discriminating against China. Furthermore, there are many in Brussels and in EU capitals who do not want to ostracize China. This side prefers to adopt country-agnostic measures that can still protect against risks that China poses but seeks to avoid the diplomatic issues that may arise by targeting China.

Technology Transfers: An Important Point of Contact

The United States and European Union share a fundamental understanding that an outbound investment review would better serve their interests if targeted at specific national security critical sectors rather than encompassing all sectors. The list of technologies presented in the CFIUS EO categories are likely to find the European Union in agreement. These are areas where the European Union also seeks to reduce present and future vulnerabilities and improve its own capabilities.

Furthermore, both actors share concerns about avoiding protectionism and how to avoid redundancy with extant capabilities such as export control tools. Information-sharing via the U.S.-EU Trade and Technology Council (TTC) can expedite processes and avoid duplication of efforts and facilitate bilateral debates between the Biden administration and European Commission.

While it may seem intuitive to associate an outward investment review with an inbound investment screening, it is export controls that share the most similarities and potential overlap. In the European Union, to a certain extent, export controls already cover outward investments in areas of military or dual-use concern, in case of sanctions, terrorist financing, and money laundering. A European company must apply for a license if the outbound investments include the export of tangible or intangible goods and services to a Chinese company that operates in the areas covered by export controls (i.e., military and dual use). What it does not cover is an investment by a European company in a Chinese company that is involved in the production of technology that may have military application or may be used to violate human rights—hence an investment that does not include the export of goods and/or services.

Next Steps for Outbound Investment Reviews

The debate and data collection at the EU level is still nascent. Since new regulations should be based on solid data, the European Union’s first step should be data collection on European outward investments in China. At the moment, there is still too little data available, mostly relating to small transactions. It is not necessarily about the size of the investment as it is about the sector and the impact the investment has on the development of a technology.

Once the data are in, the European Commission, and specifically the directorate general for trade, should evaluate whether the data suggest current investments have led to security or resilience risks for the European Union and its allies. The European Union should then share conclusions with the United States within the framework of the TTC, as well as with other allies and partners, such as Australia, Japan, and South Korea, among others.

If the commission comes to the conclusion that a form of outward investments screening is needed, then it would propose a regulation, which would then pass to the European Parliament and the council. After the two have adopted their positions towards the regulation, the negotiations between the three would take place and the final text would be voted on by the council. Expedited procedures, such as that for the inward investment screening mechanism, usually take a couple of years from proposal to adoption and then, normally, one more year passes before the regulation become operative. This means that if the commission proposes a regulation in 2023, it could enter into force as early as 2026.

On the U.S. side of the debate, now that the 118th Congress has commenced, it is likely that members will introduce another iteration of the NCCDA. Navigating the political waters will prove difficult in a newly divided legislature, but conversations about a potential outbound investment review policy are unlikely to disappear. Regardless, that there are already concerted efforts underway to build deeper transatlantic cooperation on export controls portends a high degree of future collaboration as Brussels and Washington pursue additional trade and investment screening tools.

Francesca Ghiretti is an analyst at the Mercator Institute for China Studies (MERICS) in Brussels, Belgium. Emily Benson is a senior fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Daniel Elizalde is an intern with the Scholl Chair in International Business at CSIS.

Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business

Francesca Ghiretti

Analyst, Mercator Institute for China Studies (MERICS)

Daniel Elizalde

Intern, Scholl Chair in International Business