Protection or Protectionism? Assessing the EU’s New Investment Screening Measures Against State-Driven Foreign Investment Risks

Abstract

Foreign direct investment (FDI) can be used by sovereign states for strategic goals, including as a mechanism for exploitation, technology transfers, espionage, and political influence. The EU’s recently adopted foreign investment screening regulation (the Regulation) is a response to fears that state-led investment could strategically exploit the openness of the common market. The Regulation applies the concepts of ‘security’ and ‘public order’ as guidance to Member States restricting FDI. However, these concepts have no clear definition, raising concerns they may be abused for protectionist purposes. This article aims to contribute to the debate on whether these screening concepts are a reasonable response to state-based investment threats. It does so by taking a ‘threats-based’ approach to identifying relevant FDI risks for Member States’ economic and national security. China, the world’s second largest and heavily state-capitalist economy, is considered a key justification and yardstick for the EU’s new investment screening measures. Hence, identifying risks relating to Chinese FDI is a good starting point for assessing the Regulation. Drawing on institutional analysis of China’s economy, this article identifies unique threats arising from the country’s rule-by-law socialist system of governance, where traditional public–private distinctions are heavily blurred, if not obliterated. The nature of those risks suggests that the undefined concepts of ‘security’ and ‘public order’ are reasonable to achieve the goals of the Regulation. Furthermore, a threats-based approach to screening Chinese FDI leans towards a presumption of risk for sensitive sectors, for both SOEs and nominally private firms, due to deep institutional public–private linkages.