A Vacuum in International Economic Law – EJIL: Talk!

Advanced economies, and in particular China and the US, are engaging in a new technological arms race. China is trying to catch up technologically to the US and the US is doing everything it can to prevent that from happening. It perceives Chinese technological advances as a threat to its national security. Outbound investment screening mechanisms are the latest tool being developed to prevent that threat from materializing. Yet, they sit in a vacuum in international economic law, unregulated under both international trade and investment rules.

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1. The emergence of outbound investment screening mechanisms

One way for China and other countries to catch up technologically is to obtain technologies from abroad that can be copied and further developed. These technologies can be acquired in at least three ways: importing the technology from abroad, outbound investment to acquire a company possessing the technology and inbound investment from a company possessing the technology that then shares it with a local entity. Inbound investment can also assist the host State to catch up technologically if the investor provides financing to a local company which is developing a new technology.

Since US President Trump’s first term, a series of restrictive policies have been deployed in the US to prevent the acquisition of technologies by foreign entities. For example, Section 301 tariffs were imposed on a long list of Chinese products on the ground of China “forcing” technology transfer and bans were adopted on the supply of US technology to China’s high tech firms, such as Huawei, etc. These measures were major catalysts of the US-China trade war at the time. More recently, to prevent countries from obtaining technologies through importation, the US and its allies have expanded their export control regime beyond military items to semiconductors, quantum computing and other select technologies. To address the risk of Chinese investment in local companies possessing such  technologies, the US and many other advanced economies have also tightened their inbound investment screening mechanisms.

Mechanisms to constrain outbound investment from the US and its allies to China are now being developed to complement these measures in order to prevent the transfer of advanced technologies. They are relatively new developments. The idea of screening outbound investments to prevent technological leakage caught attention when President Biden issued an Executive Order on the matter on 9 August 2023. The Executive Order directs the Government to establish a program to prohibit or require the notification of certain types of outbound investments into certain entities located in or linked to China that are involved in semiconductors, quantum information technologies, and artificial intelligence. This Order followed a G7 leaders’ statement earlier in 2023 highlighting the need for this type of mechanism.

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On 28 October 2024, the US Department of the Treasury released the final rules to implement the Executive Order of 9 August 2023. Starting on 2 January 2025, these rules prohibit or require the notification of certain US investments in covered foreign persons involved in semiconductors, quantum information technologies, and artificial intelligence. The definition of “covered foreign persons” encompasses not only Chinese entities and citizens or permanent residents of a country of concern (including dual nationals with a non-US country), but also subsidiaries of Chinese companies, some non-Chinese investors in Chinese companies, and some non-Chinese companies that derive 50% or more of their revenue from China or incur 50% or more of their expenses in China.

This is not the only such mechanism in place. An outbound investment screening mechanism has been in place for more than a decade in South Korea. The Korean government can block foreign expansion of companies operating in certain advanced technologies. Japan also requires the prior notification of outward investment in a few industries, such as arms production. China itself has also maintained a rigorous system to scrutinise outbound investment, including investment that may lead to the export of prohibited technologies.

In 2024, the EU also published a White Paper on Outbound Investment, acknowledging that some sensitive technologies and know-how could end up in the wrong hands through outbound investment transactions as these transactions are not currently subject to export control mechanisms. Noting the novelty of this matter, the EU, however, is not yet taking any action but merely embarking on a program to assess what kind of investments in certain critical technologies are made from the EU and whether such investments may effectively put the EU’s security at risk in order to develop a possible mechanism in the future.

While outbound screening mechanisms are still being developed, they may expand rapidly as geopolitical tensions continue to escalate. For example, the growing demand for technology transfers from Chinese companies by other advanced economies, such as the EU,  will give China more leverage if it wishes to rely on its own existing mechanism.

2. Vacuum in international economic law

Unlike restrictions on exports in trade in goods, outbound investment screening is not currently subject to international regulation. In the context of trade in goods, it is an established principle under WTO Agreements and other trade agreements that no restrictions on the importation and exportation of goods should be maintained unless they can be justified under the permitted exceptions provided for in those agreements.

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There is a significant amount of international regulation on inbound investment restrictions. Specifically, under commitments made for mode 3 (meaning commercial presence – or in non-trade law jargon: investment – one of the 4 modes of supply regulated under the GATS), the WTO’s General Agreement on Trade in Services (GATS) regulates inbound investment restrictions through its most-favoured nation, national treatment and market access obligations. These obligations are further expanded to cover more economic sectors through investment chapters in free trade agreements. In addition, bilateral investment treaties provide regulations over established investment (and sometimes during the investment phase) in the form of protection against expropriation, national treatment, etc.

In contrast, no similar rules currently exist under trade or investment treaties to regulate outbound investments. The most-favoured nation, national treatment and market access obligations in the GATS and free trade agreements only apply to measures affecting investments in the State imposing the measures, not investments from that State in other countries. Similarly, bilateral investment treaties only deal with the protection of existing investments and, in some instances, market access for inbound investments. These agreements are silent when it comes to outbound investments.

The recent Trade and Economic Partnership Agreement between the European Free Trade Association (“EFTA”) States and India is perhaps the very first attempt at imposing some rules on outbound investment. Article 7.1 of the agreement provides that the EFTA States aim to increase investment in India by USD 100 billion over 15 years. To achieve this result, the EFTA States are under an obligation to promote investment to India and to cooperate with India, according to Articles 7.2 and 7.3. However, such obligations do not prevent the home States from limiting outbound investment provided that the specific obligations in these provisions are respected.

The focus of international investment law on inbound investment can be attributed in part to the fact that for decades, governments prioritised enhancing market access and protecting investment in host States. Accordingly, international investment law targets host-States’ measures for greater market access and protection of foreign investment, rather than those measures States can put in place to restrict outbound investment to third countries.

Yet, inbound investment, in particular into developing countries, is an important catalyst for development. It creates jobs, generates tax revenues, facilitates technological development, etc. Indeed, technology transfers through inbound investment play a key role in assisting these countries industrialize.

As outbound investment screening mechanisms continue to multiply and negatively impact foreign investment, the demand for oversight over such measures is expected to grow. More broadly, the proliferation of measures by home-States to restrict outbound investment necessitates a rethinking of international investment law and calls for starting discussions to develop some rules to fill the vacuum in international economic law.