Research
Published
Abstract: This chapter outlines political, legal and economic aspects of Australia’s inward foreign investment screening regime, taking account of the historical development of the legislative framework and its practical implementation to date. Australian screening is characterised by high levels of discretion in the Treasurer, within broad policy parameters regarding the meaning of ‘national interest’ and ‘national security’. The impact of the most recent changes as of 2021 is difficult to assess, but they have clearly increased the number of investment proposals that are subject to review. Although most applications are approved, approval with conditions is common, while other applications may be withdrawn following informal feedback, obviating the need for formal rejection. The increasing restrictiveness of Australia’s approach and its continuing differentiation between investors from different countries create risks of violating one of Australia’s 30+ international investment agreements in force, the majority of which include investor–state dispute settlement mechanisms. The economic and diplomatic rationale for such restrictiveness and differentiation (particularly in the form of higher screening thresholds for some but not all of Australia’s preferential trade agreement partners) is unclear.
Abstract: Screening of inward foreign investment in numerous countries worldwide has heightened in recent years for a range of reasons, one of which is the volume of Chinese outward investment. Moulding screening policies around concerns about Chinese investment has been a common pattern, particularly among developed countries and allies of the United States. The application of screening measures to Chinese investments in particular is also seen in recent practice in numerous countries. These developments create potential inconsistencies with international investment law, at least for those countries with an international investment agreement with China. The 2020 arbitral award in Global Telecom v Canada shows that even a provision that explicitly excludes investment screening decisions from a bilateral investment treaty may not apply to prevent all related investment treaty claims. The increased use of screening as a policy tool, with respect to China and otherwise, also raises questions about economic rationale and impact. Put simply, blocking a foreign investment proposal may have negative effects on shareholders, jobs and the economy itself, while even the existence of a restrictive screening regime and the threat of the imposition of conditions on a deal may dampen the appeal for foreign investors.[Link to our Investment Treaty News piece]
Abstract: Domestic screening of foreign investment, often on national security grounds, has intensified in recent years. More countries are introducing such regimes, while others expand their scope or allow retrospective screening. These developments increase the potential for investor–State claims under international investment agreements, even sometimes regarding investments that are not yet established. Host States need to be aware of the potential for adverse screening decisions, the imposition of conditions, or due process shortcomings to conflict with investment obligations, such as fair and equitable treatment or most-favoured nation treatment. Although tools exist in some treaties to exclude or exempt investment screening, these may not prevent a successful investment claim. For example, listing a screening regime as a non-conforming measure may not cover all future amendments, and general and security exceptions are subject to considerable uncertainty. Host States need to ensure compliance with international investment law in creating and developing screening regimes.
Abstract: Significant changes to Australia’s foreign investment screening policy came into effect in 2021, modifying the Foreign Acquisitions and Takeovers Act 1975 (Cth). These changes establish a framework for national security reviews of proposed foreign investments in Australia, including the potential for review of investments that have already been lawfully admitted into the country. These developments increase the risk of conflict with international investment law, as reflected in Australia’s obligations under more than thirty international investment agreements, in the form of bilateral investment treaties and preferential trade agreements with investment chapters or associated investment agreements. Traditionally, these agreements shielded Australia’s foreign investment policy by restricting themselves to investments that had already been established in Australia. In more modern agreements, a range of reforms add explicit and implicit protections to Australia’s foreign investment policy. However, the co-existence of traditional and modern approaches and the inconsistency with which reforms have been adopted across different treaties complicate the assessment of Australia’s compliance with international investment law in its foreign investment screening policy. Potential remains for claims to be brought against Australia in this regard by home states or investors themselves.
In Progress
Abstract: Efforts to restrict Inward FDI (IFDI) have traditionally been modest. Recently there has been a dramatic increase in the number of countries screening IFDI. The costs imposed by screening raise concerns about the consequences for IFDI. In this paper, we leverage a structural gravity framework to quantify the effect of screening on the level of FDI in a host country, and on the distribution of IFDI across countries. We address these issues from three perspectives. First, partial equilibrium estimates suggest that screening reduces IFDI by 35-37%, on average. Second, general equilibrium estimates reveal that the unilateral adoption of screening reduces the aggregate IFDI of a new screener by, on average, 10%, but the impact varies from -0.2% to -33%. Finally, we consider a world where all non-screening hosts adopt screening. We find that IFDI is reduced on average by 11.4% for new screening hosts but this effect differs across hosts ranging from -0.2% to -34%. The impact on bilateral IFDI from the adoption of screening is even more varied, with the largest increase recorded as 6% while the largest drop is 64%. Third-country effects are also pronounced, with bilateral IFDI changes for bystanders ranging from -50% to 7%.
Abstract: Countries are increasingly screening foreign direct investment to ensure it aligns with the national interest. Each investment is reviewed on a case by case basis to allow maximum flexibility to achieve the desired outcome. Governments also claim that since only a few investments are blocked, screening doesn’t reduced foreign investment. However, a lack of explicit criteria when implementing the policy along with broad scope for imposing mitigation measures on investments creates uncertainty for foreign investors. This uncertainty imposes costs that potentially alter the level and/or composition of foreign investment. To gain insight into the consequences of screening, we quantify the cost of Australia’s well-established mechanism. We find that screening imposes a loss of approximately 20% of the surplus created by the reviewed foreign investments. At the aggregate level, this cost is five times greater than impediments to goods trade. There are also important dynamic considerations, with foreign ownership of an Australian firm introducing frictions to subsequent domestic acquisitions. These costs are predominantly imposed on the Australian economy, although there is some evidence of international spillovers, with Chinese investors in particular bearing part of the cost.