Outbound Investment Screening: Time to Establish an International Legal Framework

    Recently, “outbound investment screening” is under scrutiny, as it is increasingly considered the weapon of choice amidst the smouldering trade war between the US and China. 

    In this context, the US has strengthened export controls, inbound investment screening mechanisms, and relations with its allies. Now, Washington is moving to restrict outbound investments. 

    Outbound investment screening focuses on investments abroad. This mechanism supervises investments in certain sectors and can prohibit them if certain criteria are not fulfilled. The purpose of such constraints is to reduce geopolitical dependencies, establish supply chain resilience, and, most importantly, ensure economic and national security.

    On July 25, the US Senate approved the National Defense Authorization Act amendment to establish a notification system for investments in certain sectors in China and a few other countries. The declared purpose for this act is the protection of critical and emerging technologies. Similarly, the EU committed to developing an outbound investment screening mechanism in June, as the Joint Communication on a European Economic Security Strategy shows. 

    Such developments suggest that outbound investment screening is under the spotlight. Discussions abound about the screening’s scope and impact, but many contributions miss the mark. What is needed is an international legal framework that covers this aspect. 

    Without such a framework, issues around investments will continue. Many governments would carry on using investments as power tools amidst geopolitical struggles. Moreover, the dichotomy between national domains and international ones will impact the non-justiciability of outbound investment screening, impacting countries and businesses. Furthermore, the dilemmas covering investments and the quest for development would not be solved.

    Stopping the Misuse of Investments that Fuel Power Struggles

    On the face of it, investment is all about commercial interests and profit-making. But the reality is different. Investments have often represented mere tools for asserting power over other countries. 

    History has proven this aspect repeatedly. For example, the start of decolonisation efforts coincided with the rise of bilateral investment treaties. This was not a mere coincidence. While the era of direct exploitation ended, developed countries sought to continue asserting their power over the developing world. Investment became a tool for this purpose.

    However, as investments increased, so did the problems experienced by investors in the developing world. To resolve this, countries increasingly employed bilateral investment treaties. Such treaties included provisions protecting investors against host countries, facilitating the ‘lawful’ exploitation of resources. Countless disputes arose from bilateral investment treaties, but the developing world lacked the adequate legal expertise, losing badly in the process.

    Similarly, present investments in critical industries of other countries are a means of acquiring others’ knowledge and,therefore, power. On the other hand, outbound investment screening is a means to have an economic edge and protect developed countries’ national security. In other words, this mechanism aims to maintain power. 

    Establishing an international legal framework will help redefine the relationship between power and investment. Moreover, such a framework can introduce a system of checks and balances to prevent abuse and misuse of funds to fuel geopolitical endeavours. 

    Ensuring Justiciability 

    Nowadays, issues around investment have entered national domains. In the US, instead of bilateral and multilateral treaties, the President’s executive orders now determine the scope of, for instance, outbound investment screening. Moreover, the remedies available against decisions on outbound investment screening are also determined at the national level. 

    Remaining in the national domain creates the risk of arbitrariness. Because only some countries are willing to establish adequate safeguards to challenge decisions on outbound investment screening, this position leaves other countries and businesses entangled in a web of uncertainty. That is why an internationally agreed legal framework that sets clear rules and provides predictability is needed.

    Redefining the Relations Between Development and Investment

    Investment as a tool has long been associated with developing other nations or entities. Many developed countries regarded their investments in a developing country as an opportunity for the recipient countries. However, experience has demonstrated that investment is not always an opportunity. Certain investments have contributed to exploiting theirnatural resources while harming indigenous communities. 

    Today, investment and restrictions around investment are associated with developing national industries. Accordingly, they foster a country’s economy while limiting others’ growth. For instance, outbound investment screening restricts thedevelopment of China’s military and technological industries. 

    Neither the past nor the current relationship between development and investment is kosher. Neither approach serves the general interest. The first approach ignores the needs of developing countries. The second approach ignores the benefits that can be derived for all from the developments facilitated by a less protectionist and more collaborative environment.

    An international legal framework for outbound investment screening can establish a healthy relationship between investment and development. Such a relationship balances protectionism and collaboration, removes obstacles before development, and aspires to benefit all.

    Before it is Too Late 

    Outbound investment screening was in place for a long time but has just started to be in the spotlight. Therefore, many regulations around outbound investment screening are new. While these regulations are not yet a “spaghetti bowl”,establishing an international legal framework is important. Because otherwise, the situation will become a set of political and bureaucratic imbroglios, and the issues described will not be addressed.

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