The European Commission is taking steps to enhance EU powers to screen inbound and outbound investment in strategic economic sectors, but reluctance from member states to increase pressure on China and cede powers to Brussels poses significant constraints. The European Commission on Jan. 24 unveiled a series of initiatives to "strengthen the EU's economic security at a time of growing geopolitical tensions and profound technological shifts." The proposals include new rules for screening foreign direct investment into the EU that will require all member states to have a screening mechanism in place, harmonize national rules, establish a minimum sectoral scope for investment screening to become mandatory and expand the scope of what investments should be scrutinized. The package also includes a series of recommendations to increase the coordination of export controls, support research and development on dual-use technologies, improve research security and develop an outbound investment screening mechanism. The proposal, the first piece of legislation to emerge from the Economic Security Strategy presented by the commission in June 2023, will be subject to a long and complex legislative procedure under the new commission and European Parliament that emerge from June EU elections.

• Inbound Investment If approved, the proposals to strengthen the EU FDI Screening Regulation in place since October 2020 would broaden the scope of the current framework to include indirect investment by EU companies with non-EU ultimate owners/controlling entities and greenfield investments, in which a non-EU parent company starts a new venture in the European Union through the creation of a new subsidiary. Establishing screening mechanisms would also become mandatory for all member states; Ireland, Croatia, Cyprus, Greece and Bulgaria currently do not have such systems. Minimum standards would include advance screening of investments, in-depth investigations, protection of sensitive information and annual reporting requirements. The new framework could take effect 15 months after its formal adoption, meaning new foreign investment screening provisions could enter into force as early as 2026. Upcoming EU elections in June, however, mean the legislative process will likely be delayed.
• Research and Development The package also includes proposals to support R&D of dual-use technologies as well as to enhance research security across the European Union to reduce foreign influence in research and innovation and avoid the leaking of sensitive intellectual property to potential adversaries. These, however, are only recommendations, meaning member states as well as universities and research organizations will maintain a high degree of autonomy when it comes to securing high-risk international research collaboration projects. The package also includes measures aimed at promoting dual-use research, for instance by expanding the scope of Horizon Europe, the EU flagship R&D program, beyond just technologies' civil applications.
• Outbound Investment The package also outlines a road map for the Commission to work with member states to assess risks associated with outbound investments, which will see a public consultation running until April 2024, followed by a commission recommendation for member states to carry out a yearlong review of outbound investments completed since 2019 in the areas of advanced semiconductors, artificial intelligence, quantum technologies and biotechnologies. The findings will contribute to an EU-wide security risk assessment, informing collective policy responses. This may involve new measures at the national and EU level, with further action from the commission expected by fall 2025.
• Export Controls The package includes opinions to amend the current EU export-control regime in place since 2009 and upgraded in 2021 that currently largely focuses on implementing existing multilateral export-control arrangements. The existing arrangements include the Wassenaar Arrangement, a multilateral export control regime for conventional arms and dual-use technologies formed in 1996, to which Russia is party. The recommended upgrade to the bloc's export control regime would enhance coordination between member states and give them the ability to add new items, such as dual-use technologies, to the list of export controls without passing through multilateral regimes. The commission also proposes an evaluation and eventual revision of the current regime anticipated by 2025, brought forward from the previously envisaged 2026-28 deadline. 

The changing geopolitical landscape and the global race to control strategic technologies and economic resources are pushing the European Union to put security considerations at the center of its economic and industrial policies. The Economic Security Strategy is part of a broader trend that sees the EU progressively pivoting away from its traditional free market approach to leverage its economic clout and better pursue its strategic goals and face emerging challenges in an increasingly volatile geopolitical landscape. Over the past few years, the EU has developed tools to counter economic coercion from countries such as Russia and China, tackle foreign subsidies that disrupt its single market, reduce the bloc's economic vulnerabilities and critical dependencies, enhance its industrial competitiveness and scale up its manufacturing capacity for technologies and products needed for the digital and green transition. This has highlighted the trend for an increasingly interventionist and protectionist bloc. With its Economic Security Strategy, the European Union is now also looking outward. It is seeking to control the outsourcing of key industries and technologies that could enable its adversaries to enhance their military and intelligence capabilities and undercut the bloc's competitiveness in strategic sectors. This shows how strategic and security considerations are also taking an increasingly important role at the center of the bloc's trade, economic and industrial policies.

• While China is the main EU concern, the strategy would also equip the bloc with tools to respond to a potential deterioration of relations with the United States, such as in the event of a transition to a less friendly administration in Washington in 2024. 

Despite the commission's push to increase its powers to screen inbound and outbound investments in strategic sectors and control the transfer of sensitive technologies and know-how, the idea remains controversial within the European Union. Many of the European Commission's recent policies, and particularly the Economic Security Strategy, are meant to equip the bloc with the tools to navigate a context of increased geopolitical and technological competition on par with the United States and China, particularly through strengthening Brussels' prerogatives to take strategic decisions on behalf of the bloc's member states. The way the European Union functions via a division of competencies between member states and EU institutions, however, has complicated the process. In fact, any transfer of competences from member states to Brussels — such as granting the commission the ability to determine what constitutes a risk or a threat to EU economic security and implement restrictions accordingly — would amount to crossing a red line for many EU capitals, which could see this as a threat to their sovereignty. Because of this, the Jan. 24 strategy resulted in a relatively modest package of proposals from Brussels.

In light of these constraints, the proposals confirm that Brussels will seek to translate its Economic Security Strategy into concrete policy instruments only gradually. With the exception of the proposal to strengthen the EU FDI Screening Regulation, the rest of the initiatives unveiled Jan. 24 consist of nonbinding opinions and recommendations that will take time to develop into new common rules and whose implementation will remain a member states' prerogative. If the new rules on FDI are approved, the screening of investments into sectors considered of strategic importance would become mandatory for all EU countries, while the commission's roles in assessing the risk of given investments would be expanded. Still, member states would maintain the power to eventually block operations. Meanwhile, eventual measures concerning the development of outbound investment screening mechanisms and export controls for critical technologies will not materialize for at least another three years, with member states set to remain largely in control of the process and likely to remain cautious in their implementation for fears of disrupting trade and economic relations with a likely target for such restrictions, China. In fact, EU capitals' reluctance to cede Brussels prerogatives to assess security threats concerning their companies' exports and investment decisions as well as diverging views within the bloc regarding relations with China will limit the commission's capacity to implement large and effective export controls and investment restrictions.

• While the new rules on FDI would make it mandatory for member states to have an investment screening system in place and create a more collective EU-level approach to assessing the risks associated with foreign investments by giving Brussels as well as other member states a voice in expressing concerns regarding investment in any given EU country, any final decision on FDI remains a prerogative of national authorities.
• On outbound investments, the commission envisions a lengthy consultation and evaluation process that will last until mid-2025, after which designing the appropriate legislation, negotiating it with member states and eventually approving it would take at least another year or two. This means an outbound investment screening mechanism will remain unlikely at least until 2027. 
• Significant divisions also remain among member states regarding eventual restrictions vis-a-vis China, which will likely further delay and water down any legislative proposal on export controls and outbound investment screening mechanisms. Moreover, the eventual implementation of both will remain a member state prerogative. This means the use and scope of such tools in the bloc will likely be limited, as most member states will continue to refrain from measures that would restrict their access to the Chinese market or that could trigger strong Chinese retaliation.