In a pivotal moment in the world of international finance and technology, the United States Treasury Department is closing the comment period on its long-anticipated proposal for new outbound investment screening rules. These rules are designed to curtail US investors’ involvement in sensitive technology companies and activities in China that the US government deems detrimental to national security interests. While the exact outcome remains uncertain, these provisions could potentially impact European investments in China’s semiconductor and microelectronics, quantum information, and artificial intelligence sectors.
Challenges in the EU’s outbound investment strategy
The European Union (EU) is closely watching these developments and formulating its own economic security strategy to address threats stemming from outbound investments. The European Commission aims to propose an initiative by the end of 2023, with a focus on identifying “critical technologies” requiring risk-mitigating measures, likely aligning with sectors identified by the Biden administration.
However, the implications of the US’s Advance Notice of Proposed Rulemaking (ANPRM) extend beyond its borders. The ANPRM clarifies that the administration will treat an investment as a covered transaction only if “US persons” are directly responsible for the investment decision. This criterion seeks to avoid undue interference in cases where US citizens associated with European investment funds recuse themselves from decisions related to Chinese investments. Nonetheless, some European funds may still face operational disruptions, potentially affecting their investments in China.
One example of such disruptions is Dutch lithography giant ASML, which has had to restrict its US staff from servicing customers in China due to similar rules under the US Export Administration Regulations. The extent to which the Treasury defines a “US person” under the ANPRM remains uncertain, and this definition could potentially include US limited partners of European funds investing in Chinese companies above a yet-to-be-defined threshold.
Nevertheless, the ANPRM also indicates that the US administration intends to introduce exceptions to the rules. For instance, a carveout may spare most US investments in European firms whose Chinese subsidiaries engage in the activities outlined in the proposal. This approach aligns with the US’s interest in maintaining strong foreign economic relations.
For EU entities considering investments in China, these rules could have significant implications. The Treasury’s authority may extend to prohibit subsequent US investment in European companies if their Chinese subsidiaries account for at least 50 percent of the parent company’s consolidated revenues, net income, capital expenditure, or operating expenses. As the regulation proceeds through Congress, its scope may expand further under pressure from vocal China critics in Congress.
In light of these developments, the European Commission is preparing to evaluate a potential outbound investment screening initiative by year-end. However, several crucial steps and considerations remain before proposing any measures. The EU faces two primary tasks: Understanding the impact of the forthcoming US regulation on EU businesses and engaging with Washington to mitigate potential consequences. The EU must establish its position on outbound investment screening to avoid a passive acceptance of US regulations.
Taking the middle ground appears to be the most likely outcome, with the EU clarifying the narrow policy objectives of a potential European instrument. Using data as a foundation for policy formulation will be crucial. For example, research by MERICS indicates that European investors contributed to 3.7 percent of 2,165 transactions in Chinese privately-held AI companies between 2017 and 2022, with only a few companies focusing on public security and military applications. However, the required information to assess risks associated with outbound investments remains incomplete and must be gathered to inform risk assessments accurately.
Implications for transatlantic relations
As the US screening instrument evolves, possibly encompassing more sectors like biotechnologies, which account for approximately 10 percent of EU direct investments in China, the EU should consider adopting guidelines to map its outbound investments into China. This process should involve collaboration between the European Commission and member states, given that investment screening policies necessitate active engagement for efficient implementation. Without a clear position and active cooperation, the EU may find itself on the sidelines in the evolving global economic security landscape.
