US, EU Should Develop Joint FDI Screening List, Commission Hears

The U.S. and Europe should create a shared list of companies subject to investment restrictions, which would help both sides better harmonize their inbound and outbound screening rules and create a “level playing field” for investors, said Zongyuan Zoe Liu, a China studies fellow at the Council on Foreign Relations. She also said the two sides could create a shared “white list” of foreign investors that would be exempt from the restrictions, streamlining filings before the Committee on Foreign Investment in the U.S. and reviews conducted by EU member states.

She said the white list, coupled with a new, restrictive foreign direct investment entity list, would help the U.S. better communicate its China strategy to Beijing, which believes the U.S. is introducing policies solely designed to stymie China’s development (see 2308140018).

“The idea is not to constrain China's growth -- it is really to put a boundary with regards to what is off-limits,” Liu said during a U.S.-China Economic and Security Review Commission hearing this week. She said the current U.S. de-risking strategy isn't being “delivered” well to Chinese officials. “Having a white list and another restricted list, perhaps, would be a good way to communicate America's intention.”

Liu said the list also would help the U.S. and the EU better align their inbound and outbound investment rules. Procedures for reviewing FDI can vary among member states, and while President Joe Biden signed an executive order this month to eventually restrict certain outbound investments in China (see 2308090066), the EU is still formulating its outbound investment plans (see 2306260056 and 2306200052). The EU isn’t implementing investment “to the same expertise or the same extent” as the U.S., Liu said.

In written remarks, she said the list should be overseen by “commonly adopted and enforced ground rules for determining which industries and segments of companies’ supply chains are off-limits to FDI.” The two sides should seek input from “legal professionals specializing in cross-border mergers and acquisitions,” she said, adding that foreign state-led investors have “increasingly spared no expense in hiring top-flight legal representation to help navigate FDI screenings and bring to close their cross-border mergers and acquisitions.”

“Thus, Western governments must work with legal service professionals to develop and enforce industrywide best practices to successfully fend off foreign investment from undesired foreign entities.”

More broadly, the U.S. and the EU also should work together to “identify hidden sources of state-owned or state-sponsored investors” through a “multijurisdictional FDI reviewing process,” including by pinpointing Chinese sovereign funds that may operate through an offshore subsidy or joint investment fund, “partnering with reputable Western investment brands to mask the source of capital for their investments and ultimately obscuring their connections to the Chinese state.”

“This hidden state-owned capital requires that regulators conduct a forensic audit during the FDI review process,” Liu said. “There ought to be more formal cooperation between CFIUS and authorities from other countries going forward,” she said, noting that the Treasury Department has already “engaged with dozens of countries” in FDI screening.

“The whole idea is not to implement protectionist policies,” Liu said, “but really to strengthen U.S. leadership in shaping the FDI investment environment in the world.”