Business groups have criticised the European Commission’s plans to investigate a new policy to screen outbound investment, highlighting the EU’s uphill battle in following the US’s lead into scrutinising investment into China.

The Commission’s pledge to propose an outbound screening initiative by year-end is the strongest signal yet that the White House’s push to limit capital flows into critical technologies in foreign adversaries is creeping into Europe. 

The commitment, which was released as part of the European Economic Security Strategy on June 20, does not identify which sectors, technologies or recipient countries will be targeted. But, like the US’s rumoured draft executive order, its overarching objective is to prevent EU critical technologies and know-how being used by third countries to undermine national security. 

The Commission’s announcement has received backlash from trade groups concerned that outbound screening will hit their members’ competitiveness, and is an attempt to appease the US administration as it rallies international support for its crackdown on investment in China.

“So far, we know of no plausible example under which circumstances an outbound investment [would] be safety-critical for Europe,” said Klaus Friedrich, foreign trade representative at VDMA, which represents 3600 European engineering companies. “The only reasoning we’ve received at the moment is that the Americans are thinking about this, so we have to think about it too.”  

VDMA’s members have been investing in China to gain market share and improve their technological competitiveness. Manufacturers in the country, the world’s biggest industrial machinery market according to Statista, “will keep getting better” and “if you don’t try to go into this market now … you will be lost in 10 years,” Mr Friedrich added.

His comments follow a recent survey of 300 global business leaders, carried out by law firm Ashurst and Economist Impact, which found that protectionism is their top-ranked geopolitical and macroeconomic concern over the next decade.

BusinessEurope is another industry group opposed to limitations on outbound investment. Its deputy director general, Luisa Santos, noted that while the US executive order is expected to target venture capital (VC) by restricting American investment into Chinese start-ups, Europe’s VC industry is significantly smaller and less active in China. Pitchbook data shows that EU-based VC funds have raised $191bn over the past decade — less than a quarter of that raised by their peers across the Atlantic. “When Europe invests, it invests via industrial projects, so the [Commission’s] reasoning for outbound screening cannot be the same as the US’s,” she said.

A European Commission spokesperson told fDi that while it is still assessing security risks from outbound investments, at present it considers the main risk to be “the leakage of sensitive emerging technologies and know-how from the EU to countries that operate civil-military fusion strategies”.

More on FDI investment screening:

• US finalising imminent outbound FDI screening rules
• Pirelli's saga signals high volatility for Chinese investors in Europe
• Opinion | 'Friendshoring' is coming to venture capital

Convincing member states

Lawyers have noted that introducing outbound screening in the EU will face more regulatory and political hurdles than in the US. While the White House plans to unilaterally issue an executive order, an EU regime requires the backing of its 27 countries.

On July 13, Germany issued its first Strategy on China which states that in addition to cooperating with the Commission, it is “conducting its own analyses of the matter.” However Andrea Hamilton, a London-based partner at law firm Milbank, said “member states have their own diverse interests from a national security perspective, and outbound investment may be more important to some of their business communities than others.” Finding an EU-level consensus could be difficult, she added.  

Alexander Rinne, who heads Milbank’s European antitrust practice, said national governments will want a “clear say on any regulation that impacts their most important industries.”

Even if an EU-level consensus can be reached, it is not clear whether governments would have the final say on screening outbound deals. National security falls within member states’ jurisdiction, which is why nearly three years after the EU’s regulation on foreign direct investment took effect, seven of its members still lack an inbound investment screening tool. 

However the Commission’s spokesperson said work on the topic is at a “very early stage” and it is too soon to say if the EU needs a new instrument, strengthening of existing instruments or another approach for tackling outbound investment risks. The Commission “is fully aware” that screening outbound investment “could be a significant risk to investment … and so has likely made this intentionally broad,” added Mr Rinne.