Semiconductor products on display at the 2023 World Semiconductor Congress in Nanjing, China
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Why Europe can’t ignore Biden’s new plan for US investment in China 

The United States' forthcoming regulation to screen outbound investments may have implications for European investments in China's semiconductor and microelectronics, quantum information, and artificial intelligence sectors, say Rebecca Arcesati and Francesca Ghiretti. 

The comment period on the long-awaited proposal for new US outbound investment screening rules is closing this week. The new rules, formulated by the United States Treasury Department, aim to prevent US investors from contributing to sensitive technology companies and activities in China that the government deems harmful to national security interests. Although much can still change following the comment period and later during legislative process, some of the provisions may have implications for European investments in China’s semiconductor and microelectronics, quantum information, and artificial intelligence sectors. 

The EU’s economic security strategy includes an assessment of the threats emerging from EU outbound investments and the European Commission aims to propose “an initiative” by the end of 2023. A list of “critical technologies” deserving risk-mitigating measures is in the making and will likely also include the sectors identified by the Biden administration. However, what the mentioned initiative will look like remains very unclear. 

The long arm of US legislation—with carveouts 

Issued at the same time as President Joe Biden’s Executive Order on national security and technology investments, the administration’s Advance Notice of Proposed Rulemaking (ANPRM) contains provisions that could affect European investment funds with general partners who are US citizens, and even those that employ US citizens. The administration seems to be treading carefully, only treating an investment as a covered transaction in the program if “US persons” are responsible for the actual investment decision.  

The idea is to prohibit transactions or impose a notification requirement only in those instances where “a US person orders, decides, approves, or otherwise causes to be performed a transaction that would be prohibited under these regulations if engaged in by a US person,” depending on specific categories of technologies and products of the investment target’s business. For example, if an American citizen sits on the managing board of a German investment fund but has recused themselves from an investment in a Chinese chipmaker, the Treasury would not have a say in the transaction. 

Even then, however, some European funds could face operational disruptions. Due to similar rules contained in the US Export Administration Regulations and covering “US persons”, Dutch lithography giant ASML has had to bar its US staff from servicing customers in China. It still unclear how far the Treasury intends to go in its interpretation of what constitutes a US person for the purpose of the ANPRM. For instance, the current definition could end up capturing US limited partners of a fund headquartered in Europe that makes an investment in a Chinese company above an as-yet undefined threshold. 

That said, the ANPRM also clarifies that the administration plans to make some exceptions to the new rules. For example, there is a carveout which would spare all but a small subset of US investment in European firms whose China subsidiaries are engaged in the activities outlined in the proposal. This would make sense, since hurting US investment in third-country firms would hardly be in the interest of the United States’ foreign economic relations. 

Let’s assume, for example, that the Finnish company Bluefors wanted to enter a joint venture to produce quantum refrigerators in China. Absent any carveouts, the program would grant the Treasury the authority to prohibit subsequent US investment in Bluefors, one of the global market leaders in this field. Fortunately, the Treasury is considering covering non-Chinese firms only if their China subsidiaries are responsible for at least 50 percent of the parent’s consolidated revenues, net income, capital expenditure, or operating expenses. 

As the regulation goes through Congress, the program’s scope could be significantly expanded, especially as a result of pressure by the more vocal China critics in Congress. Such an expansion could potentially broaden the implications for the EU, if either the list and technical parameters of covered technologies or the nature of entities subject to extraterritorial measures were expanded. 

Towards a European outbound investment screening instrument? 

As the United States goes ahead with the adoption of a regulation to screen outbound investments, the European Commission prepares to evaluate a potential outbound investment screening initiative by year-end. However, there are still many important steps and considerations to make before proposing any measures. The EU faces two main tasks, the first being to understand the implications of the forthcoming US regulation for EU businesses and engage with Washington to reduce the potential impact in the EU.  

Secondly, the EU must adopt a position on outbound investment screening. This is long overdue. If Brussels and EU capitals do not want to passively accept the spillover of US regulations, they must clarify where they stand – even if that means that the EU does not see a need to screen capital outflows, which is likely for many capitals. That can protect the EU as whole – as well as member states – from instances where a handful of countries are pushed to adopt regulations unilaterally and find themselves more exposed to potential bilateral retaliation, without the protection and strength of the EU as a bloc. Taking the middle ground is the most likely outcome, where the EU clarifies the very narrow policy objectives of a possible European instrument.  

Using data as a basis for formulating the policy will be key. For example, forthcoming MERICS research found 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 handful of the target companies focusing on public security and military applications. The research also shows that data collected should not only cover direct investments, but all investments in AI companies. Yet despite the Commission’s commitment to assess risks associated with outbound investments, the information required to build an assessment of the types of investments, firms, and sectors to target is seemingly missing. That should come first and form the basis of an informed risk assessment.  

We may expect the US screening instrument to undergo numerous iterations and changes in the future, possibly covering more sectors, like biotechnologies—pharmaceuticals and biotechnologies account for about 10 percent of EU direct investments into China. Perhaps, it would be wise for the EU to start by adopting guidelines for mapping EU outbound investments into China and then set a date for review which may eventually lead to rule making.  

Regardless, any proposals should come from a collaborative effort between the Commission and member states. Since investment screening policies require countries to be actively engaged in their implementation, consultation between Brussels and capitals is essential to efficient action. Absent that and a clear position, the EU will be a bystander in the emerging global economic security order.