America and the EU are both toughening up on foreign capital

“DEAR Donald, let’s remember our common history,” wrote Jean-Claude Juncker, the president of the European Commission, on a picture of a military cemetery in Europe that he presented to President Donald Trump during talks on July 25th. The reminder of shared values and sacrifices may have helped nudge the two men towards a truce in the incipient transatlantic trade war (see article). That truce will help America and Europe to co-operate on another front.

Both suspect that investment from China is a ploy to gain access to advanced technology and undermine domestic security. European officials are thrashing out the details of an EU-wide investment-screening mechanism, proposed by Mr Juncker in 2017. A government white paper on national security and investment published on July 24th suggests that post-Brexit Britain will be no soft touch, either: it was widely seen as intended to increase scrutiny of Chinese buyers. But it is the Trump administration that is moving fastest.

Mr Trump had considered raising barriers to Chinese inward investment in sectors targeted by the “Made in China 2025” development policy. But he decided instead to support a plan to strengthen an existing investment-screening mechanism, the Committee on Foreign Investment in the United States (CFIUS). With votes in both houses of Congress expected shortly, and bipartisan support, he could soon be signing it into law.

CFIUS is already powerful. If it thinks a deal threatens national security, it can propose remedies or recommend that the president blocks the transaction. But security threats have evolved since it was set up in 1975, says Heath Tarbert, assistant secretary of the Treasury. The line between commercial and defence technologies has blurred, and the explosion in personal data has created new vulnerabilities. CFIUS’s workload has more than doubled in a decade. Lawyers complain that even uncontroversial deals are being held up.

The Foreign Investment Risk Review Modernisation Act would give CFIUS greater authority to examine deals where foreign investors gain control of critical infrastructure or technology, or of personal data. Minority investments would be covered if they give investors access to sensitive information. It allows for CFIUS’s budget to be increased. And it tightens export-control rules, which prevent sensitive technology being transferred abroad.

Early drafts were seen by businesses and former CFIUS officials as too draconian. Lawmakers have been surprisingly willing to listen to critics, and unusually bipartisan, says Kevin Wolf, a former assistant secretary to the commerce department under Barack Obama. The latest version should, he reckons, give businesses more clarity on the kinds of technology that will come under CFIUS review.

Other aspects are hazier. Without further regulations, businesses that store personal data may not always know if their deals need review. CFIUS’s remit will expand to include more small firms receiving early-stage investment. Reviews are costly, since would-be buyers and sellers usually hire lawyers and CFIUS is to be allowed to start charging fees. Some fret that the costs could put startups off foreign investment.

Although the new rules set out the kinds of deals that should be scrutinised, CFIUS alone decides if a deal poses a security risk. Among its members are officials from both security-oriented defence and justice agencies, and business-facing departments such as commerce and treasury. That split used to allow CFIUS both to protect national security and to promote foreign investment, says Clay Lowery, a former assistant secretary of the Treasury. Under Mr Trump, though, the economic protectionists now line up alongside the security hawks.

Investment from China has already fallen (see chart). That partly reflects capital controls and crackdowns on dealmaking back home. CFIUS blocked several high-profile deals in the past year, and Mr Trump’s threats on trade and investment will not have helped.

Flows of capital to Europe have held up a bit better. But it too is becoming less welcoming to Chinese investment. Mr Juncker’s proposals, which officials are hoping to finalise by the end of the year, would allow EU countries to share information on the national-security impact of foreign deals. With the tough guys in charge in America and Europe, Chinese investors may have to look elsewhere.

This article appeared in the Finance and economics section of the print edition under the headline “Security screening”