Safeguarding national security
Global trade agreements and international trade and investment law have long recognised the delicate balance required to maximise the free movement of goods, money and people while at the same time enabling individual countries to protect their national security and preserve their economic priorities, through both tariff and non-tariff measures. But after decades of a general trend towards liberalisation, with fewer controls on imports and exports and fewer restrictions on the foreign ownership of assets, some governments, prompted principally by national security concerns, have started to adopt a less permissive line.
Like the US – where the overhauled Committee on Foreign Investment in the US (CFIUS) system had its first full year in 2021 – nations such as France, Germany, Switzerland and Australia have all pursued policies involving more scrutiny of incoming FDI in recent years. The general experience with these tighter FDI rules is that, although additional due diligence has been required on these investments, in most cases the new rules did not prevent them from going ahead.
The UK has had a slightly different experience. Its FDI legislation, the National Security and Investment Act (NSIA) came into force in January 2022 but applied retrospectively to November 2020 when the legislation was first proposed. The reach of the NSIA is not strictly limited to FDI transactions. It also potentially applies to other commercial and financing arrangements on the assumption that these too could be a route for an adversary to damage the UK’s national security.
The NSIA resulted in five prohibitions during its first year of operation, three of which related to the semiconductor industry. Of the five prohibitions, four related to investors from China or Hong Kong. In addition, to date there have been 11 clearances based on stringent conditions being imposed, including requirements for UK government board observers, continuity of supply to UK government programmes, and information sharing restrictions.
The areas of the economy where the UK government has intervened include energy, satellite and space technology, communications, quantum technologies, computing hardware, advanced materials, cryptographic authentication, critical suppliers to the government and emergency services, academic research and development in higher education, military and dual use, and defence. Whether such far-reaching enforcement will become a model for other countries remains to be seen.
Groundbreaking EU rules target subsidies
The EU’s Foreign Subsidies Regulation (FSR) is now in operation, introducing new tools to tackle foreign subsidies that cause distortions and undermine the level playing field in the internal market. The FSR requires disclosure of government subsidies that have been received up to three years previously by foreign businesses seeking to participate in EU M&A deals valued at over EUR 500 million or public procurement contracts worth more than EUR 250 million. (The European Commission can also launch ex officio investigations if it believes such subsidies may be distorting the internal market.) Where there have been subsidies, appropriate FSR approvals are needed before the transaction can complete or the procurement contract be awarded.
EU companies are already restricted in terms of state aid requirements and are often denied EU funding for projects because of those rules. The FSR is an attempt to close loopholes which allow other firms to take part in significant EU-focused M&A or procurement despite receiving subsidies from their own governments which provide them with an unfair advantage when participating in the EU marketplace against non-subsidised EU market players.
Filings for FSR-related activities began in October 2023. Companies involved in cross-border tenders must now plan for these requirements and undertake appropriate due diligence on foreign subsidies received – preferably far in advance of a first potential filing, which could otherwise cause significant delays.
Levelling the carbon playing field
The EU has also now embodied its decarbonisation policy in its international environmental policies. The transition period for its carbon border adjustment mechanism requirements (CBAM) has begun. The goods that have been currently identified as falling within the CBAM are important for infrastructure, including cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. However, the EU envisages extending the scheme to cover other categories.
Without the CBAM, goods imported from outside the EU would clearly have a cost advantage over those produced by EU-based companies which incur the higher costs of carbon pricing in the EU’s Emissions Trading System (ETS). When the CBAM is fully phased in, it should capture significantly more than 50% of the emissions in sectors covered by the ETS. Importers now have to register with the Transitional Registry, and both importers and third country exporters have to comply with very detailed compliance and reporting requirements. Importers must submit a quarterly CBAM report detailing the previous quarter’s quantity imported, total direct and indirect embedded emissions, and the carbon price paid in the origin country. As a result these new requirements must be factored into supply chains.
The CBAM will not begin to levy fees on contained carbon until January 2026. After that point, a fee will be charged on the imported carbon, bringing its cost in line with that of the EU. The end result is that non-EU goods, which are not subject to the requirements of the EU’s ETS, will effectively no longer benefit from a cost advantage arising from less strict carbon policies in other countries. The EU’s intent with the CBAM, and its green legislation more broadly, has been to enact a regime that can be replicated around the world, thereby eliminating carbon leakage globally in those industries which are the greatest emitters. Since companies outside the EU will need to certify the level of carbon contained in their goods, this type of regime is likely to expand, as no country will want its own companies to continue to be disadvantaged in its home markets by cheaper, more carbon-intensive goods. For example, the UK is already considering its own CBAM to preserve the competitiveness of its own firms against cheaper higher-carbon imports.
