Foreign Direct Investment (FDI) from third countries―a desirable form of investment to boost the EU’s economy or a threat to important EU and Member State interests that must be mitigated via FDI screening mechanisms? FDI screening is a complex, controversial and highly topical subject at the intersection of law, politics and economics. This book analyzes the political rationale behind FDI screening in the EU, reveals the legal limitations of current FDI screening mechanisms based on security and public order, and identifies legislative options for broader screening mechanisms in accordance with EU and international economic law.
In particular, the book identifies the four main concerns in the EU regarding FDI from third countries: distortive competition effects; the lack of reciprocity on FDI treatment between the EU and the investor’s home country; objectives of the investor or their home country that may be detrimental to EU interests; and safety of private information. On this basis, the book analyzes the Screening Regulation (Regulation (EU) 2019/452) and its newly introduced screening ground “security or public order” and asks whether this and other similar screening grounds based on the notions of security, public order and public policy can address these concerns with regard to foreign investors. Based on an analysis of WTO law and EU primary law, it argues that they cannot.
Thus, the question arises: Do the EU and Member States have the flexibility to adopt broader FDI screening mechanisms? To answer this question, the book examines the freedoms of capital movement and establishment in EU primary law, as well as various sources of international economic law such as, first and foremost, the WTO’s General Agreement on Trade in Services, but also other bi- and plurilateral trade and investment treaties, including the EU-China Comprehensive Agreement on Investment. In closing, the book identifies various legislative options for broader FDI screening mechanisms―and their shortcomings.
Author(s): Jens Velten
Series: European Yearbook of International Economic Law, 26
Publisher: Springer
Year: 2022
Language: English
Pages: 370
City: Cham
Acknowledgements
Contents
List of Abbreviations
Chapter 1: Introduction
References
Chapter 2: Setting Out the Background of FDI Screening in the EU
2.1 Political Background
2.1.1 Competition Concern
2.1.2 Reciprocity Concern
2.1.3 Harmful Investor Concern
2.1.3.1 Defence Sector
2.1.3.2 Critical Infrastructure, Technology, Inputs
2.1.3.3 Strategic Infrastructure, Technology, Inputs
2.1.4 Private Information Concern
2.1.5 Conclusion
2.2 Economic Background
2.2.1 What Is FDI from an Economic Perspective?
2.2.1.1 FDI as MNE Activity and as Capital Movement
2.2.1.2 Different FDI Categories
2.2.1.3 Categorizing the EU and Member States Concerns Vis-à-Vis Foreign Investors
2.2.2 Host Country Effects of M&A FDI
2.2.2.1 FDI as Source of Capital
2.2.2.2 Technology and Knowledge Transfer
2.2.2.3 Enhancing Production and R&D Capacities, Employment, Competition
2.2.2.4 Access to Foreign Markets and Integration in Global Production Networks
2.2.2.5 Mixed Effects of M&A FDI from Developing Countries
2.2.3 Consequences of Mixed Host Country Effects for Legal Analysis
2.3 Legislative Background
2.3.1 Screening Regulation
2.3.2 Foreign Subsidies Regulation Proposal
2.3.3 Fragmented FDI Screening Landscape in the EU with an Additional Security-Based Screening Ground: `Security or Public Ord...
2.4 Defining FDI and FDI Screening Mechanism in Light of the Concerns Vis-à-Vis Foreign Investors
2.4.1 Foreign Direct Investment
2.4.2 Foreign Direct Investment and Foreign Investor
2.4.3 FDI Screening Mechanism
2.5 FDI Screening Mechanisms as a Reflection of the Political, Economic, and Legislative Background
References
Chapter 3: FDI Screening Mechanisms on the Grounds of `Security or Public Order´ and `Public Policy or Public Security´
3.1 FDI Screening Mechanisms Based on the Screening Regulation´s Notion `Security or Public Order´: An Interpretation in Accor...
3.1.1 Interpreting `Security or Public Order´ in Accordance with the GATS
3.1.2 General Remarks on Interpreting the GATS Exceptions `Essential Security Interests´ and `Public Order´
3.1.2.1 Interpretative Means in WTO Law
3.1.2.2 Point of Departure to Interpret `Essential Security Interests´ and `Public Order´
3.1.3 `Essential Security Interests´ Pursuant to Art XIVbis GATS
3.1.3.1 Definition
3.1.3.1.1 Russia-Traffic in Transit and Saudi Arabia-Protection of IPR
3.1.3.1.2 Developing a Test for Subparagraph (i)
3.1.3.1.3 Significant Limits for Non-hard-core Services of Subparagraph (i)
3.1.3.2 Consequences for Screening Regulation´s Scope: Focus on Harmful Investor Concern Regarding Hard Core and Dual-Use Defe...
3.1.4 `Public Order´ Pursuant to Art XIV(a) GATS
3.1.4.1 Fundamental Interest of Society
3.1.4.1.1 Case Law
3.1.4.1.2 Developing the Case Law Further
3.1.4.1.3 Pursued Interests According to Concerns Vis-à-Vis Foreign Investors
3.1.4.2 Genuine and Sufficiently Serious Threat
3.1.4.2.1 EU-Energy Package: Lenient Interpretation of `Genuine Threat´
3.1.4.2.2 Further Elaborating the Definition of a Genuine and Sufficiently Serious Threat
3.1.4.2.3 Concerns Vis-à-Vis Foreign Investors
3.1.4.3 GATS Notion of `Public Order´: Unfit for the Vast Majority of FDI of Concern
3.1.5 `Security or Public Order´ Pursuant to WTO Law: Appropriate Screening Ground Only in Parts
3.2 FDI Screening Mechanisms Based on the TFEU Exception `Public Policy or Public Security´
3.2.1 Fundamental Interest of Society
3.2.1.1 ECJ Case Law: Little Clarity
3.2.1.1.1 The Clear ECJ Judgments
3.2.1.1.2 The Unclear ECJ Judgments
3.2.1.2 Interpreting Case Law: `Public Policy or Public Security´ Narrower Than Their GATS Counterpart
3.2.1.3 Consequences for FDI Screening Mechanisms: Narrower Scope
3.2.2 Genuine and Sufficiently Serious Threat
3.2.2.1 ECJ Case Law Poses High Threshold of Genuine Threat
3.2.2.2 Developing Case Law Further
3.2.2.3 Consequences for FDI Screening Mechanisms: Significantly Higher Hurdles
3.2.3 `Public Policy or Public Security´ as Screening Ground: Significantly Narrower Than `Security or Public Order´
3.2.4 Broader Interpretation of `Public Policy or Public Security´ in Third-Country Settings?
3.2.4.1 The Fundamental Freedom Protection of Third-Country FDI: Broader Interpretation of Art 65(1)(b) TFEU as One of Several...
3.2.4.2 Broader Interpretation of Art 65(1)(b) TFEU: Inappropriate Gateway for Taking Third-Country Particularities into Accou...
3.3 FDI Screening Mechanism Options Largely Unfit to Address the Concerns Vis-à-Vis Foreign Investors
References
Chapter 4: Flexibility for FDI Screening on Broader Grounds Than `Security or Public Order´
4.1 Competence for FDI Screening Mechanisms: EU or Member States?
4.1.1 Common Commercial Policy Pursuant to Arts 3(1)(e), 207(2) TFEU
4.1.2 Shared Internal Market Competence Pursuant to Arts 63(1), 64(2) and (3) TFEU
4.1.3 Reconciling the Conflict Between Exclusive Common Commercial Policy and Shared Internal Market Competences
4.2 Flexibility for FDI Screening Mechanisms Pursuant to EU Law
4.2.1 EU Legislator as Addressee of the Fundamental Freedoms
4.2.2 Personal Scope of Freedoms of Capital Movement and Establishment
4.2.2.1 Sufficient Link Between Foreign Investor and EU
4.2.2.1.1 Freedom of Capital Movement Pursuant to Art 63(1) TFEU
4.2.2.1.2 Freedom of Establishment Pursuant to Arts 49 and 54 TFEU
4.2.2.2 Foreign States and Public Undertakings
4.2.2.2.1 Member States in the Personal Scope of the Fundamental Freedoms
4.2.2.2.2 Foreign States as Beneficiaries of the Fundamental Freedoms
4.2.2.2.3 Foreign Public Undertakings as Beneficiaries of the Fundamental Freedoms
4.2.2.3 Indirect Fundamental Freedom Protection for Foreign Investors?
4.2.2.3.1 Freedom of Establishment
4.2.2.3.2 Freedom of Capital Movement
4.2.2.4 Limited Personal Scope with Minor Consequences for the EU´s Flexibility to Screen FDI
4.2.3 Substantial Scope of the Freedoms of Capital Movement and Establishment
4.2.3.1 Capital Movement Within the Meaning of Art 63(1) TFEU
4.2.3.2 Establishment Within the Meaning of Art 49 TFEU
4.2.3.2.1 General Concept of Establishment
4.2.3.2.2 Defining Establishment in Case of Partial M&A Transactions
Important Decisions
That Cannot Be Taken Without the Investor
4.2.3.2.3 Partial M&A Transactions as Establishment If They Give Definite Influence
4.2.3.2.4 The Freedom of Capital Movement Notion of FDI in Art 49 TFEU
4.2.3.3 Delimiting the Freedoms of Capital Movement and Establishment: Parallel or Exclusive Application in Light of the Erga ...
4.2.3.3.1 Making Sense of Case Law on Delimiting the Freedoms of Capital Movement and Establishment
Point of Departure for Delimiting Arts 49 and 63(1) TFEU: Intent of Legislation
Exclusive or Parallel Applicability of Arts 49 and 63(1) TFEU?
4.2.3.3.2 Developing a Delimitation Test
Criticism on the Delimitation Test
Delimitation Method: Assessing the Legislative Intent
Delimitation Criterion: `Personal, Entrepreneurial Activity´
4.2.3.3.3 Summarizing the Delimitation Test for Arts 49 and 63(1) TFEU
4.2.3.4 The Non-Investor Perspective: Jeopardizing the Delimitation Test?
4.2.3.5 Arts 49 and 63(1) TFEU: Widely Overlapping Substantial Scopes for FDI, Exclusive Applicability of Art 49 TFEU in Third...
4.2.4 Applying the Findings to FDI Screening Mechanisms: Two Policy Options
4.2.5 Art 64(2) and (3) TFEU: Wide Substantial Flexibility to Regulate FDI with High Procedural Hurdles
4.2.5.1 `Movement of Capital to or from Third Countries´-What Is Third-Country Capital Movement?
4.2.5.2 No Significant Substantial Limits
4.2.5.2.1 Art 64(2) and (3) TFEU Limited to Grandfathered Measures Pursuant to Art 64(1) TFEU?
4.2.5.2.2 Proportionality Requirement as a Substantial Limit to Art 64(2) and (3) TFEU?
4.2.5.3 Procedural Limits for Measures `Which Constitute a Step Backwards´ in Liberalization
4.2.5.4 Consequences for FDI Screening Mechanisms: Additional Flexibility with Limitations
4.2.6 Excursus: Fundamental Rights as Minor Limitations to FDI Screening Mechanisms
4.2.7 Wide EU Flexibility for FDI Screening Mechanisms Beyond `Security or Public Order´-But Compromises on Their Personal and...
4.3 Flexibility for FDI Screening Pursuant to International Economic Law
4.3.1 Relevant International Economic Law: Agreements on FDI Establishment to Which the EU Is Party
4.3.1.1 Exclusion by Content: Agreements Covering the Establishment of Foreign Investors
4.3.1.2 Exclusion by Party: Agreements to Which the EU Is Party
4.3.1.2.1 Agreements Concluded by the EU or the EC
4.3.1.2.2 Member State Agreements with Third Countries
4.3.1.3 Focus on EU Agreements Liberalizing the Establishment of Foreign Investors
4.3.2 International Economic Law Obligations on Foreign Investor Establishment
4.3.2.1 Bi- and Plurilateral Agreements
4.3.2.1.1 EU-Vietnam FTA
4.3.2.1.2 CETA
4.3.2.1.3 Recent Developments: EU-UK Trade and Cooperation Agreement and EU-China CAI
4.3.2.1.4 FTAs as Significant Limits for EU FDI Screening Mechanisms Vis-à-vis Partner Countries-EU-China CAI as an Outlier
4.3.2.2 WTO Agreements: GATS with the Potential to Widely Liberalize FDI
4.3.2.2.1 Agreements on Trade in Goods: GATT 1994 and TRIMs Agreement
4.3.2.2.2 TRIPS Agreement
4.3.2.2.3 GATS
4.3.2.3 Focus on the Multilateral GATS as Legal Limitation to the EU´s Flexibility to Screen FDI
4.3.3 The Scope of the GATS
4.3.3.1 Measures
4.3.3.2 Affecting
4.3.3.3 Trade in Services
4.3.3.3.1 Supply of a Service Through FDI
4.3.3.3.2 FDI as Commercial Presence
4.3.3.3.3 (Potential) Trade in Services
4.3.3.4 FDI Screening Mechanisms Largely Fall in the GATS´s Scope
4.3.4 Relevant Specific GATS Commitments: National Treatment, Market Access, and Domestic Regulation
4.3.4.1 Art XVI GATS: Market Access Obligation
4.3.4.1.1 FDI Screening Mechanism as Legislative Measure
4.3.4.1.2 Individual Screening Decision
4.3.4.2 Art XVII GATS: National Treatment Obligation
4.3.4.2.1 De Jure Differentiation Between Like Foreign and Domestic Investors
4.3.4.2.2 Less Favourable Treatment
4.3.4.2.3 FDI Screening Mechanisms as De Jure Discrimination
4.3.4.3 Art VI GATS: Obligations for Domestic Regulation
4.3.4.4 The EU´s Sectoral Commitments
4.3.4.4.1 Test to Determine Relevant NT Sector Commitments for FDI
4.3.4.4.2 Electricity Transmission and Distribution Services
4.3.4.4.3 Artificial Intelligence Services
4.3.4.5 De Jure NT Discrimination Preventing Cross-Sector FDI Screening Mechanisms
4.3.5 General Obligation: Most-Favoured Nation Clause
4.3.5.1 De Jure Discrimination of Investors from Non-FTA Countries
4.3.5.2 De Facto Discrimination of Investors from Countries of Concern
4.3.5.2.1 Like Service Suppliers
4.3.5.2.2 Less Favourable Treatment
4.3.5.2.3 An Alternative Approach to the Non-discrimination Test
4.3.5.3 FDI Screening Mechanisms as De Jure and De Facto MFN Discrimination
4.3.6 Preliminary Result: Wide GATS Scope, Significant Limitations from the NT Obligation, Potential MFN Violation
4.3.7 Relevant Grounds of Exception for MFN Violation: Arts V(1) and XIV(c) GATS
4.3.7.1 Art V(1) GATS: Differentiating Between FTA Partners and Other Third Countries
4.3.7.2 Art XIV(c) GATS: Justifying De Facto Discrimination of Investors from Countries of Concern
4.3.7.2.1 To Secure Compliance with GATS-Consistent Laws and Regulations
4.3.7.2.2 Necessity Test
4.3.7.2.3 Art XIV(c) GATS: No Promising Ground of Exception for MFN Discrimination
4.3.8 The Implications for FDI Screening Mechanisms
4.4 Legal Limitations for FDI Screening Mechanisms According to Four Scope Variables
References
Chapter 5: Conclusion
References
Tables of Cases
European Court of Justice: Judgments and Opinions of Advocates General
WTO Adjudicating Bodies: Reports and Related Documents
European Court of Human Rights
National Courts
Tables of Legislation
EU Primary Law
EU Secondary Law
International Treaties
National Legislation
Tables of Official and Policy Documents
EU Documents
WTO Documents
Documents of the UN and Related Organizations
Documents of Other International Organizations
Bibliography
