Investment Screening

– Safeguards in third countries are not always imposed in accordance with WTO rules. Some industries report that they are regularly confronted with safeguard investigations or measures, sometimes of a retaliatory nature, in third countries. The EU should closely monitor the use of safeguards by third countries in consultation with industry and, in the event of new investigations, support the EU companies concerned in taking decisive action against obviously illegal and improper measures (for example, dispute settlement procedures).

– The notification of safeguards to the WTO and the transparency this creates is of great importance to allow foreign trade to adapt to the changed situation and, if necessary, to participate in investigation proceedings as early as possible. BDI considers the notification of safeguards to the WTO to be necessary. It is in fact problematic that not all countries comply with their notification obligation. A more effective enforcement mechanism including stronger incentives for notification should be implemented by the WTO.

Investment Screening

Status quo

The German economy is globally interconnected through direct investments abroad. More than eight million employees work abroad for companies in which German investors hold significant shares. On the other hand, Germany as a business location also depends on the trust of investors from abroad. In Germany, 3.2 million employees work for 16,817 companies in which foreign investors are important shareholders (2018). However, investments and acquisitions from third countries in Germany have also led to controversial discussions in this country in recent years. In Germany, the takeover of the German robot manufacturer KUKA and the Chinese entry into companies in the automotive industry, among others, led to controversial discussions. According to UNCTAD, the volume of Chinese direct investment abroad has increased tenfold in the last ten years (2009 to 2019).

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Advocates of stricter state control of investment warn that foreign investment could endanger security and public order. They also see the competitiveness of the business location in danger if foreign investors acquire future technologies through acquisitions. They also consider how other states can be persuaded to give in on political issues by strengthening their own rights of intervention ("reciprocity").

In response to the debate, the German government expanded its options for screening and prohibiting foreign investments in 2017, 2018 and 2020, despite strong protests from business representatives. For example, a notification requirement was introduced for corporate acquisitions in critical infrastructure. In spring 2020, in response to the Covid-19 pandemic, the 15th amendment to the Foreign Trade and Payments Ordinance included companies in the industrial health sector. The participation threshold above which investments from third countries can be prohibited was also lowered from 25 percent to 10 percent for critical infrastructures. For the remainder of the year, further extensions of the state's rights to intervene in certain technology sectors have been introduced by the 17th amendment.

The European Union is also working on stricter screenings of investments from third countries. In October 2020, an EU regulation on the Europe-wide handling of investment controls, which had already been adopted in 2019, came into force in the EU Member States. With this, the EU has created a

30 UNCTAD, <http://unctadstat.unctad.org> (accessed 1 September 2020).

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European framework for investment screenings. The regulation lays the foundations for a systematic exchange of information between Member States and with the European Commission on acquisitions from third countries. In doing so, the regulation explicitly emphasizes that the only reason for restrictions on foreign investment is a threat to national security and that the final decision on restrictions on specific investments is always in the hands of the Member States. In spring 2020, the European Commission also explicitly called on Member States to use their legal instruments for investment screening to critically review strategically relevant acquisitions of companies in the healthcare sector from third countries. In recent months, the EU has taken the first steps toward a coordinated European approach to investments from third countries. It remains to be seen what further steps will be taken toward greater unity in Europe in dealing with investors.

However, understandable security concerns must be weighed against economic risks. Germany and Europe benefit considerably from open markets for goods, services and investments. 31 Investment screenings are a profound encroachment on property rights and freedom of contract, which are a cornerstone of our successful social market economy. Moreover, new restrictions on foreign direct investment (FDI) are also painful because FDI is in any case increasingly attracted to the growth markets in Asia. In addition, the global wave of protectionism is not stopping at investment. UNCTAD's latest report on international investment policy shows that one-third (34%) of global investment policy measures recently restricted investment. 32 In the wake of the Covid-19 pandemic, this trend has intensified, partly because many states wanted to ensure control over the production of health-related goods. The stricter laws are already reflected in the practice of states in dealing with foreign investments. 33 Globally, three times as many takeovers were prohibited in 2018 as in the previous year to protect national security, according to UNCTAD. 34 The restrictions on foreign investment, which are mainly motivated by security policy, reinforce the global trend of declining FDI flows, which has already accelerated in connection with the pandemic in the course of 2020. FDI flows to industrialized countries, for example, fell by 75 percent in the first half of the year.

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At the same time, however, Berlin and Brussels must ensure security and public order when dealing with foreign investors. State control of takeovers of security-relevant companies, such as war weapons or infrastructures, is both permissible under EU law and necessary in terms of regulatory policy but must in each case be the subject of a comprehensible security policy balancing of interests. However, a continuous dialog between stakeholders from business, security policy and foreign trade policy is necessary to precisely define such sectors, as technologies and threat scenarios change over time. The BDI rejects any intervention in private property and freedom of contract that goes beyond the

31 The foreign sales generated by German companies through their locations abroad exceed Germany's exports by about twice that amount. Foreign companies are similarly involved with us. In Germany alone, 3.2 million employees work for 16,817 companies in which foreign investors have a stake (2018). However, foreign involvement in Germany is declining. The year before (2017), there were 17,167 companies. The number of companies in Chinese hands and the number of employees there have also been declining recently. Source: Deutsche Bundesbank, Direktinvestitionsstatistiken, <https://www.bundesbank.de/resource/blob/804098/507b44231439ce3bf4402a9c5d1d084f/mL/ii-bestandsangaben-ueber-direktinvestitionen-data.pdf> (accessed 7 December 2020). 32 This is the highest level in many years. Both UNCTAD and the Organization for Economic Co-operation and Development (OECD) note a trend in the G20 countries to broaden the framework for government investment reviews. Source: UNCTAD, Investment Policy Monitor Issue 23, <https://unctad.org/system/files/official-document/diaepcbinf2020d1_en.pdf> (accessed 07 December 2020). 33 OECD/UNCTAD, Twenty-fourth Report on G20 Investement Measures, <https://www.wto.org/english/news_e/news20_e/g20_oecd_unctad_report_nov20_e.pdf> (accessed 07 December 2020). 34 UNCTAD, Investment Policy Monitor Issue 23, <https://unctad.org/system/files/official-document/diaepcbinf2020d1_en.pdf> (accessed 7 December 2020). 35 UNCTAD expects global investment flows to decline by up to 40 percent by 2020. Source: UNCTAD, Investment Trends Monitor Issue 36, <https://unctad.org/webflyer/global-investment-trends-monitor-no-36> (accessed 7 December 2020).

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protection of public security and is motivated by industrial policy. After all, the competitiveness and innovative strength of German industry are based on the protection of private property and freedom of contract, not on state protection of certain technologies. Germany must therefore not participate in the acceleration of a spiral of investment protectionism.

Recommendations

▪ Foreign investments are welcome in Germany. They create prosperity and jobs. In Germany, three million employees work for foreign-owned companies. Germany benefits greatly from open borders.

▪ The screening mechanisms currently enshrined in the Foreign Trade and Payments Act and the

Foreign Trade and Payments Ordinance to protect public order and security are adequate. In addition, the general laws regulating the economy (for example, competition law) can also prevent negative effects of companies' economic activities.

▪ German industry opposes the use of investment screening to achieve industrial policy goals. A fundamental extension of the intervention criterion "protection of public order and security" in the Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance to economic criteria could open the floodgates to protectionist instrumentalization.

▪ The transparency and reliability of the screening process should be improved. A more transparent and precise definition of what is meant by "national security and order" in the context of foreign direct investment can increase legal certainty for investors and thus be beneficial for Germany as a business location.

▪ BDI welcomes political initiatives to reduce investment restrictions. Investment protection and promotion treaties (IIAs/BITs) and free trade agreements (FTAs) are the most suitable instruments for opening foreign markets to investors. Dialogue in the WTO and within global governance fora such as the G7 or G20 must also be used to promote greater openness. Threatening to introduce market access restrictions for foreign investment ("reciprocity"), on the other hand, is unsuitable to induce states to open their markets. Germany can only lose in such a scenario.

▪ Property rights and freedom of contract as cornerstones of the social market economy in Germany must be guaranteed and strengthened. The decision of owners to whom they sell their company shares should not be restricted any further than it already is.

▪ The European regulation on the handling of foreign investments in the EU reconciles the needs for openness and security well. The regulation emphasizes that interventions may only be made to protect national security. The decision-making authority on investment screenings remains in the hands of the Member States. The experience gained from the newly created cooperation mechanism between Member States can later be used to consider further steps towards a more coordinated EU investment policy. Unilateral national tightening of investment screenings beyond the level specified in the regulation should not lead to competitive disadvantages for Germany as a business location (level playing field). In addition, the EU should be able to act more strongly as a global driver of international investment policy in the interests of German investors and capital seekers.

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