April 1st, 2020

The following is the full text of a piece by Asia Society Policy Institute Vice President Wendy Cutler and Senior Program Officer Andrew Chatzky.

In recent weeks, much attention has been given to the proliferation of export curbs on essential goods, including medical supplies and food, due to COVID-19 concerns. Now, we are seeing restrictions pop up in a related area — investment screening mechanisms — also attributable to worries associated with the pandemic.

Just in the past few days, the EU and Australia have each announced tighter investment screening measures as a direct result of fears that stem from the pandemic. The European Commission sent new guidance [PDF] to member states, alerting them to a new risk to strategic industries. In the Commission's words, "In the context of the COVID-19 emergency, there could be an increased risk of attempts to acquire healthcare capacities (for example for the productions of medical or protective equipment) or related industries such as research establishments (for instance developing vaccines) via foreign direct investment." Brussels' concerns came on the heels of reports that the White House was looking to move a German biotech firm's research work to the United States. Across the world, Australia also instituted temporary changes to its foreign investment review framework, announcing this week that all proposed investments would require approval, "regardless of value or the nature of the foreign investor."

A global health emergency might seem like an odd time to tighten investment restrictions. However, it's natural for countries to want to safeguard their critical assets if they are worried that the pandemic will lead to a recession and weaken some of their prize businesses. Declining market values for companies in key strategic sectors might make them more attractive candidates for acquisition, including by foreign entities. In a global recession, where money will be tight and investors afraid to take on risk, those most willing to make large investments might be the ones with state support.

Yet as governments consider such moves, it's important they do so in a way that is not overly restrictive and does not discourage overall investment. After all, foreign direct investment has been and will continue to be instrumental in economic recovery and resilience. Investment brings a range of benefits and is one of the most surefire ways to boost jobs.

We have also learned that once new restrictions are put in place, they often become difficult to lift, even if they are meant to be stop-gap solutions. As Milton Friedman reportedly said, "Nothing is so permanent as a temporary government program." Another word of caution: as in the case of export restrictions, there is a real danger that moves to restrict investment could have a similar cascading effect. Other countries may be tempted to follow the EU and Australia's lead. Indeed, according to Simon J. Evenett of the University of St. Gallen's Global Trade Alert team, just ten days after the World Health Organization declared a pandemic, 54 countries [PDF] had implemented coronavirus-related export restrictions. Today, that number continues to grow.

Over the past few years, multiple countries had already been updating and expanding regulations on investment screening, largely due to concerns about new, "dual-use" technologies. The United States introduced new rules mandated by the Foreign Investment Risk Review Modernization Act (FIRRMA) earlier this year and Japan's Foreign Exchange and Foreign Trade Act enters into force this spring. The EU's newest guidelines, scheduled to come into effect in October, will provide a formal process for members to raise concerns about foreign investments in other EU member states, who each remain in charge of their individual investment screening regimes.

As governments crafted new investment screening regulations, some concluded that they would benefit from more multilateral coordination on these policies, leading to some initial international cooperation. For example, the G20 has called on international organizations to produce reports on new screening rules, and the OECD has published research on ongoing trends. Many advanced countries know that, in order to prevent sensitive technological know-how from ending up in adversarial hands, they must ensure none of them serve as a weak link that continues to welcome predatory investment. Furthermore, each country benefits from sharing what they discover works (or doesn’t), in terms of drafting watertight regulations and preventing loopholes. The United States is particularly well-placed to engage actively in these multilateral efforts, with expanded resources at the Treasury Department’s Investment Security office dedicated to working with other countries.

With growing calls for investment restrictions potentially on the horizon due to the coronavirus and the economic downturn, countries should not forget these lessons. Multilateral discussions on foreign investment regulations should continue on both an ad-hoc basis and through international organizations, which will give countries a perfect opportunity to discuss shared concerns about COVID-19-related investment screens, the implications for investment in strategic sectors, and ways to ensure that any new investment screening regulations that are borne out of the pandemic are constructed in a thoughtful and proportional manner. In the grip of a pandemic-induced downturn, the last thing countries need is a race to see who can unilaterally restrict more investment from abroad.