June 21, 2024

The Art of Investment

Mastering the Stock Market Strategies

New dual-use export control and outbound investment approach as part of the EU’s Economic Security Strategy

6 min read

Continuing the work from the Joint Communication on a European Economic Security Strategy published in June 2023, the European Commission unveiled a comprehensive package with five proposed initiatives to strengthen the EU’s economic security on 24 January 2024. This alert provides an overview of the key initiatives related to dual-use export controls and outbound investments included in that package.

Five key initiatives

The new package consists of five pieces focusing on the EU’s inbound and outbound investment, export controls and research. This includes a legislative proposal for the revision of the EU Foreign Direct Investment (FDI) Screening Regulation, a proposal for a Council Recommendation which, if adopted by the European Council, would inform additional steps to enhance the EU’s research security at national and sector levels, and three white papers laying out the challenges, goals, and possible next steps for EU investment in third countries and the export control and research & development aspects of “dual-use” items (i.e., goods, software and technology that can be used for both civilian and military applications).1

Improving coordination on export controls for dual-use items (and supporting related EU research)

The proposed initiative to enhance the EU’s export controls on dual-use items aims to harmonize and coordinate related efforts within the EU in order to address geopolitical challenges and the acknowledged lack of uniform export controls.2

Currently, the EU’s export control framework for dual-use items is largely dependent on implementation of multilateral export control regimes (such as the Wassenaar Arrangement), and the EU does not speak with one voice in relevant fora. This creates risks that a patchwork of national export controls will grow across the EU, current coordination efforts are insufficient to ensure harmonized EU export controls, and there may be possible supply chain disruption or “forum shopping” in relation to export controls.

To address these risks and challenges, the Commission has proposed four key steps to consider in the short- to medium-term:

  1. Facilitate EU-level adoption of new export controls by leveraging different legislative procedures, so the EU would be able to swiftly update its harmonized export controls and avoid the need for individual Member State controls in response to related developments;
  2. Ensure EU coordination on export controls through the creation of an export control policy forum to bring together senior stakeholders across Member States and the EU;
  3. Provide better coordination of national export control measures by building on current EU systems to publish national export control lists for increased transparency and coordination; and 
  4. Conduct earlier evaluation of the existing Dual-Use Regulation by moving the scheduled evaluation of the regulation from 2026 to 2024.

Related to these efforts, on 25 January 2024, the Commission issued new guidelines3 on data collection and processing in relation to export controls, which aim to increase transparency by facilitating public reporting of Member States’ export licensing decisions.

Another initiative in the new EU Economic Security package focuses on new funding possibilities for R&D involving potential dual-use technologies,4 which would complement the new export control approach. This initiative has launched a public consultation, which will be open for the next three months.5

Careful approach on screening outbound investments

The EC White Paper on Outbound Investments is no surprise, having been much anticipated by the business community.6 While the EU already restricts the export of dual-use technologies and encourages Member States to screen inbound investments, there is currently no monitoring of outbound investment flow. There are growing concerns that EU sensitive technologies or know-how could be made available to certain investors by means of these transactions. The US is already developing a framework to screen outbound investments pursuant to a long-awaited executive order issued by President Biden in August 2023.7 The executive order established a new “Outbound Investment Program” that will require prohibitions or notifications for certain US investments into China, or Chinese-owned or controlled entities, in three sectors: semiconductors and microelectronics; quantum information technologies; and artificial intelligence. Details of the US Outbound Investment Program will be set out in forthcoming regulations, but it represents a major change that will impact a variety of transactions with parties in China or that are Chinese owned. 

The Commission launched a debate on the issue of outbound investment controls with relevant authorities of Member States in the spring of 2023 and set up an Expert Group last July. The Commission findings in the White Paper are that there are substantial knowledge gaps around the potential risks that could accompany relevant investments (e.g., in relation to potential misuse of EU technology and know-how in third countries) due to a lack of specific or systematic monitoring of outbound investments at the EU or Member State levels. The Commission also acknowledges that this is a complex and sensitive policy area, meaning that a gradual approach is required to gather data and evidence on potential risks and determine any policy response. The Commission also underlines that before designing any specific policy measures, the EU will need to make full use of existing instruments first.

The proposed next steps over the next couple of years include:

  • Public consultation on the proposed monitoring and review of existing outbound investments and related activities will be available until April 2024;8
  • The results of the consultation will be assessed, and the Commission expects to issue a Recommendation to Member States that would launch a proposed monitoring and review over the summer 2024;
  • The monitoring and review risk assessments of transactions will be finalised by summer 2025; and
  • The Commission’s assessment of the need for policy responses and possible proposals will be announced in autumn 2025.

The scope of the proposed monitoring set out in the White Paper is open and does not give specific directions. It suggests that there is no consensus to date for an outbound investment screening regime to be adopted in the EU even if there seems to be an intention to keep exploring some sort of instrument. We will be tracking the review initiated by the Commission to monitor how this may evolve in the future.

Updates to EU’s Foreign Direct Investment screening

The EU has an existing coordination framework for FDI screening, under the EU FDI Screening Regulation adopted in 2019. The Regulation required the Commission to complete a review of its implementation during 2023. Following that review, there were several updates suggested. As such, the Commission has put together a number of proposed amendments to the EU FDI Screening Regulation9 as a part of this package. The proposal aims to update the current Regulation to bring it in line with the new mindset of the economic security strategy with a focus on expanding the scope of investments in range and harmonising processes and procedures. Our client alert reviewing those proposals in detail is available here.

Ruth Benbow (Knowledge Manager) contributed to the development of this publication.

1 The European Commission’s summary of the new EU Economic Security package and links to all related materials is available here.
2
European Commission, White Paper on export controls, available here.
3
The guidelines are available here
4
European Commission, White Paper on options for enhancing support for research and development involving technologies with dual-use potential, available here.
5
See here
6
European Commission, White Paper on outbound investment, available here.
7 Executive Order 14105 of August 9, 2023, Advance notice of proposed rulemaking of 14 August 2023.
8 When the comment period is opened it will be found at
https://ec.europa.eu/info/law/better-regulation/have-your-say_en.
9
European Commission, Proposal for a Regulation of the European Parliament and of the Council on the screening of foreign investments in the Union and repealing Regulation (EU) 2019/452 of the European Parliament and of the Council, available here.

White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.

This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

© 2024 White & Case LLP

link

Leave a Reply

Your email address will not be published. Required fields are marked *

Copyright © All rights reserved. | Newsphere by AF themes.