Voiceover (00:01):
From Skadden, you're listening to Foreign Correspondent, an FDI podcast where we discuss foreign direct investment reviews and the foreign policy, national security and political issues that drive them. The cross-border investment screening insights you need start now.
Jason Hewitt (00:23):
Hi, everyone. Welcome to this month's episode of foreign Correspondent Skadden's FDI podcast. So as always, we explore the complex world of FDI reviews and the national security policy behind them with monthly conversations amongst leading national security experts, regulators, and Skadden's foreign investment screening team. Today, I'm joined by Brian Egan and Jonathan Benson. Brian is a partner in Skadden's Washington DC office where he advises clients on a broad range of US national security and foreign policy issues, including CFIUS, export control, sanctions, trade and supply chain restrictions. Brian joined us after an extensive career in government, including as the senior-most lawyer at both the National Security Council and the Department of State in the US, where he was also Deputy White House Council to former President Obama. Welcome, Brian.
Brian Egan (01:12):
Thanks, Jason. Great to be here.
Jason Hewitt (01:14):
And we're also joined by Jonathan Benson here in London. Jonathan's council, now London office, he's advised on UK and EU sanctions and export control as well as trade and supply chain restrictions for almost a decade. He draws on his time as a senior lawyer at the UK Department for International Trade and the UK Ministry of Defense, where he's advised on both national security and trade matters. Welcome, Jonathan.
Jonathan Benson (01:37):
Thanks, Jason. Good to be here. Thank you.
Jason Hewitt (01:39):
Excellent. Well, I'm Jason Hewitt. I am here at Skadden in London where I advise on global foreign investment screening and coordinate our non-USFDI screening here in Europe. So today's episode, Economic Statecraft and Foreign Investment Screening. Our aim is to unpack the economic statecraft toolkit, explore how it's being yielded and analyze the role that foreign investment screening plays in it. I'll start with the easy question, I think, or perhaps it's a really hard one. Brian, what do we mean when we talk about economic statecraft?
Brian Egan (02:09):
Yeah, it's a timely question in the United States at least. Our current president just announced a week ago, economic security is national security. And so we're seeing a combination of tools that have traditionally been thought about national security tools growing into spaces that really are hard to connect in some ways to national security. And I'd say this toolkit is broad and continues to grow. So what do I mean by this toolkit? Some things that have been in the toolkit for a while are things like economic sanctions. You think of US, UK, EU sanctions against Russia. That's clearly economic statecraft in some ways. But there are other things in the toolkit as well. Export controls, which used to be a very sleepy area. Technical Cold War regulation increasingly used as a tool of economic statecraft. Supply chain regulations, what can come into a country's borders in the name of national security or economic security increasingly on the table as well.
(03:12):
And then on the positive incentive side, you have things like domestic subsidies. In the US we had a law passed called the CHIPS Act a few years ago that incentivizes domestic manufacturing of semiconductors in the United States, a new area. I think we're going to see more of that in Europe as well. And tariffs, which are both a carrot and a stick in some ways, at least if you hear our president talk about these things where you put a tax on goods coming into your country in order partly to incentivize manufacturing growth within your own borders. So all of these things are under consideration when policymakers are thinking about how to address a diplomatic foreign policy or national security question.
Jason Hewitt (03:55):
Yeah. Thanks, Brian. I think when you talk about economic security, it's national security, it's really fitting for us here in Europe as well. We have our still relatively recent labor government in power here in the UK. And certainly, before the election Chancellor of the Exchequer, Rachel Reeves talked a lot about Securonomics, this concept that it is all part of the same thing. So maybe I'll turn then, Jonathan to you. Here in Europe, and by that I mean both the EU and here in the UK, is the toolkit largely the same? How does economic statecraft look for European actors?
Brian Egan (04:28):
I think it is largely the same, Jason, but there are some significant differences. I think we ought to contextualize this a little though looking first at the European Union. The European Union historically obviously has been a very open, liberal actor, it has been at the forefront of permeating the rules-based order. But we've seen that change a little in recent years with the development of policies that move away from that very open view of globalization. It started I think during the pandemic with the Commission's emphasis on open strategic autonomy, but it's crystallized in the development of the European economic security strategy, which was released in June 2023. And I think that this is only going to grow the very influential Draghi report of last September called for a genuine EU for an economic policy. And that very much fed into the new Commission's political guidelines, which do indeed promise that new economic foreign policy and the new high representative of foreign affairs has an instruction to shape a new foreign economic policy focusing on economic security and statecraft.
(05:47):
Far less explicit in the UK, I think. There's been a significant dialing down in my view of the rhetoric from the Labour Party since it came power. But Securonomics is obviously still something which I'm sure will be featuring in their thinking. And so like in the US, the EU and the UK can impose autonomous sanctions, export controls. They have a full suite of trade-related measures available to them as provided for on WTO [inaudible 00:06:19] anti-dumping, [inaudible 00:06:21] duties and safeguarding measures. There's also been a subsidy scheme, similar to the ones that Brian's just described. The European Chips Act that looks to mobilize 43 billion euros of investment in the EU semiconductor industry by the end of this decade.
(06:37):
And of course we have, like there is CFIUS in the US, we have now investment screening regimes right the way across the EU, a vast majority of the member states now. And of course, in the UK. So, all of that I think is similar, but I think it's fair to say that in at least continental Europe, the EU thinks about these topics even more broadly and is looking to also incorporate policies and associated legal tools related to the climate crisis, sustainability and like in the form of instruments like the corporate sustainability due diligence directive, the CBAM, the Carbon Border Adjustment mechanism.
(07:24):
So it's a slightly broader palette, but in some ways it's also a narrower one. Think for example about outbound investment restrictions, which I'm sure we'll talk about a bit more in a bit. But at the moment there's no European equivalent of the measures that have been introduced by the US in that area, though the EU is slowly moving in that direction.
Jason Hewitt (07:47):
Yeah, there's certainly the recent review that has come out of the EU [inaudible 00:07:52] coming out of the EC to instruct member states to effectively start laying the groundwork it seems for outbound investment screening of some sort. And I think certainly we observe here in Europe that CFIUS and folk from the US are relatively frequently spreading the good word, so to speak, of outbound investment and certainly encouraging a lot of EU member states down that direction.
(08:15):
It's quite interesting, Jonathan, I guess at the moment we've also got these reforms out there around the EUFDI cooperation mechanism. It's anyone's guess as to where they will ultimately end up, although it seems the direction is much more towards I'd say harmonization rather than centralization. That is, there's a need for them to be lined up and work together. But my sense is that member states are still relatively protective of the idea that national security reviews in investment transactions remain national rather than community. The substantive analysis is very much a member state focus.
Jonathan Benson (08:54):
I think that's right. Yeah. So there is a constant tug within the union around these national security related topics with the member states very carefully guarding what they consider to be a core competence of their own. National security ultimately is at the heart of state decision-making and sovereignty. So whilst EU law does of course encroach in certain areas into the national security sphere, my sense is exactly aligned with you, Jason. I think that the member states are going to continue to treat the EU with some degree of caution in terms of the competence creep into areas like foreign investment screening. But I do think that the Trump administration potentially does put a bit of a grenade under the bottoms of the member states. Because it's clear that the direction of travel is that Europe will be able to rely less on US security guarantees in the near future. And I think that that will cause many member states to reappraise their position on some of these topics because clearly, Europe will be able to present a stronger front if it is united.
Jason Hewitt (10:09):
Yeah. I think that leads us really well, Jonathan, into our next topic. Brian, you've laid the groundwork on what the economic statecraft toolkit is. Can you shed any light for us in Europe as to what are the US's policy objectives in wielding its toolkit and how are they going about deploying it at the moment?
Brian Egan (10:26):
Right? What the heck is going on in the United States, is your question, Jason? We're used to that question from our clients in Europe and Asia at this point, and some in our US for that matter. I think in this area of economic statecraft, in some ways our current administration has been very clear about what their objectives are, and in some ways they haven't been clear at all. And let me explain what I mean there. Clarity is you look at the two key memos that the Trump administration has already issued, President Trump himself has issued outlining his own views on economic statecraft.
(10:58):
One is called the America First Trade Policy and one is called the America First Investment Policy. And you'll see a common theme between those two, America first. I think there's a feeling in the new administration that America, in deploying tools of economic statecraft, has been taken advantage of or has been treated unfairly, included by some partners and allies. And so we are seeing a redirection of some of those tools already with that feeling in mind. If you look at the tariff discussions and changes that are going on with our friends in Canada and Mexico right now, 25% tariffs were put into effect earlier this week, a small carve out for autos as of yesterday. We've been told at least, we haven't yet seen the paperwork on that. I think those things are driven by this view that we need to do more to bring manufacturing back to the United States and that the trade policies of the past failed to do that.
(11:57):
Another theme that I think is consistent in these documents is that we need to remain tough on China, and if anything, we have to get even tougher on China. And so if you look at the policies that are currently under review by the Trump administration... We'll get to CFIUS in a moment. But think about things like export controls or supply chain regulations, incoming parts and components and technologies in the United States. All of those things are being reviewed with an eye towards, "Should we be doing more to restrict trade with so-called foreign adversaries?" Which these documents actually define as basically China and a handful of other much less important economies. And so I think that that thread, which I would say is actually a thread that's also in place in Europe is going to continue in the current administration.
(12:47):
And one of the things that is of great interest to me is, to what extent will the US government try to align its policies and use this commonality with Europe moving forward as an area of cooperation? But then there are some areas where the policy just isn't clear at this point. I think Russia is one of the key areas where obviously, on the front pages and on social media, everybody saw the interactions between Trump and President Zelensky a few weeks ago. Whether that will change some of the uses of tools of economic statecraft remains to be seen. It's been publicly reported that the Trump administration is instructing relevant departments and agencies to come up with lists of sanctions reforms that can be put in place to ease sanctions on Russia. Will the Trump administration go alone in that way, where it's an area where the US and Europe have cooperated quite closely over the last three years in particular? I think that remains to be seen, and what our objectives are I think isn't really clear at this point. So I think at least as of the first 45 days of the current administration, that's what we are seeing and what I'm seeing as the policy objectives.
Jason Hewitt (13:59):
So we're speaking in early March, the first week of March, and I think when this episode goes out, it'll be another week or so. So maybe there'll be a new world order by then we don't necessarily know.
Brian Egan (14:10):
I suspect there will, actually. Some of the things I just said I'm sure will no longer be true by the time this podcast is out there in the world.
Jason Hewitt (14:17):
Brian, you touched on China. Is there a sense that Trump's vision is a grand deal with China?
Brian Egan (14:25):
Great question. I think he would love to have a deal with China. What that deal is, it's very difficult to say. And if you look at what happened in the first Trump administration, the so-called grand deal with China was really a rather limited deal around trade exports rebalancing the trade deficit between the United States and China. Some of the broader systemic concerns that the has had with China really were not part of those discussions and have never really been on the table in the past. Now, whether the US and China will find a way to have that discussion under the current administration, I think it's really early to say, but I think that there are no signals from the current government that concerns related to China's military ambitions, for example, would not be something that would have to be resolved in order to remove some of the tools that we've been talking about.
Jason Hewitt (15:22):
It certainly seems that, coming out of the US is a much more... And perhaps unsurprisingly, a much more mercantile bargain-driven approach to wielding these kinds of tools.
Brian Egan (15:31):
I would absolutely agree with that. Now whether there can be a bargain that struck with China that would satisfy those instincts on the US side and be acceptable to China, I think is a different story. China on its own right has gotten more sophisticated in these areas. They have their own economic state crap that's going on at the same time, some of which is actually impacting US companies. They also have a better understanding of some of the tools that the US government has been wielding over the last five years. And I think what they would want in return may turn out to be a little harder to give them than it was the last time around.
Jason Hewitt (16:06):
And I know we'll turn a little bit later in this discussion to CFIUS and ODI in particular, but perhaps before we get there, Jonathan, are we seeing the same enthusiasm out of Europe in how it's wielding its tool kit?
Jonathan Benson (16:18):
I think that for the most part, Europe is reactive rather than proactive in these sorts of matters. Both the UK and the EU are very firmly wedded to the international rules-based order, which does leave them with less room for maneuver than perhaps other states which are prepared to cross a few lines that the Europeans wouldn't necessarily be happy to. But I think one of the really interesting things about this current scenario is the fact that this is the second Trump administration. The Europeans have lived through the first Trump administration and I think that there is now a bit of a playbook in Europe as to how to respond to the sort of trade measures that the Trump administration is wielding.
(17:11):
So if we look at what happened last time, I think we can probably reasonably assume that as before, the EU and the UK will, to the extent that the UK is affected, which it may not be, the UK government remains hopeful on that front, impose countermeasure at tariffs. The legal basis of those I think remains to be seen because it's not clear on what basis the Trump administration is wielding the tariffs against Europe at this stage. I think we can reasonably assume that there will be litigation before the WTO. Ultimately, that litigation is likely to be nugatory, in the sense that even if the Europeans succeed before a panel at the WTO, there's no appellate body and the US would therefore be able to appeal a successful judgment into the appellate body void.
(18:03):
But one twist, and this really does come out of the European's experience of the first Trump administration, is that the EU now has a very powerful new piece of machinery in its armory in the form of the anti-coercion instrument. So this instrument was developed during the first Trump administration. It only became law during the Biden administration. It's never been used by the EU. But what it allows the union and its member states to do is respond to so-called economic blackmail from foreign countries which seek to influence or coerce the EU or a particular member state to adopt or decline a specific policy. And it's already clear that the EU is contemplating using the anti-coercion instrument against the US in this regard.
(18:59):
And the instrument, although it's unwieldy in terms of the process associated with it, I think it's unlikely that anything could be implemented under it with any great speed. But it does confer considerable discretion on the EU in terms of the sort of countermeasures that it would be able to apply. Say for example, it would allow restrictions on trade and services, trade and goods. It would allow IP-related protections to be suspended amongst a whole raft of different measures, all of which prima facie are incompatible with international law. But the EU says when wielded pursuant to this instrument amount to lawful countermeasures. So it will be interesting to see whether the EU does indeed pull the trigger on that new instrument because if it does, then it will have considerable tools at its discretion to deploy it against the US.
Jason Hewitt (20:01):
And perhaps not as new as the anti-coercion instrument. But there is also the Foreign Subsidies Regulation or the FSR which has been enforced now for a couple of years and really is a counter-subsidies measure, which in theory gives the EU an opportunity to review certain larger transactions for investors who have benefited from subsidies in a way that might be distortive in terms of their participation in the market here in Europe. There was a time when we would've thought of that as largely focused on China as with many of the similar tools for the EU, like the foreign investment screening regimes. But certainly, current political environment raises some interesting questions as to where it might also be utilized.
Jonathan Benson (20:49):
It does. I think to Brian's point though, politicians on this side of the Atlantic will be looking the position in the round. I don't think that they're going to look at the tariffs in isolation. They're also going to want to be keen, to the extent they can, bring the Trump administration along in terms of whatever settlement ends up being proposed or indeed implemented in terms of the conflict in Ukraine. And I think that there's also going to be a policy imperative, wherever possible, to continue to engage with the newest administration in the ordinary course of business. There will be a huge number of policy areas where a corporation can and should continue. And there will, in my view, be a real desire for there to be some degree of business as usual.
Jason Hewitt (21:43):
If we think about that speak softly and carry a big stick ideology, the toolkit is expanding what that big stick is for Europe. Whether it gets utilized is a separate question. And I think that leads us really well into our third topic, which is really what role does foreign investment screening play in all of this? Foreign investment screening has a really interesting role. Again, as I was saying, on the FSR, we might've thought of it a few years ago as focused on a very narrow set of countries, China in particular. But the decline in Chinese investment that we're seeing, Europe has a relatively significant need for capital from other sources. If we're going into a world where we're saying there'll be slightly more skepticism around US capital in certain areas, that doesn't really solve problems for Europe, there needs to be some balance in how these regimes are used. FDI needs to strike that balance really well between continuing to attract investment whilst also being an effective screen against challenges. Maybe we'll start with Brian in the US. Has CFIUS been used in this way from a US perspective?
Brian Egan (22:52):
So CFIUS has traditionally been thought of at least as a much more pure foreign policy tool. The agencies that run CFIUS have a foreign policy mandate. I think you're right, Jason, that CFIUS in the recent memory at least has been really focused on threats specifically from China, although not only China, and investors from Canada and from Australia receive very favorable treatment under CFIUS. I would add Japan to that list, but Japan has proven to be a little bit of an inflection point. And this is not a Trump administration development, it's a Biden administration development where Nippon Steel attempted to acquire US Steel and both President Biden and President-elect Trump or candidate Trump at that time said they would oppose that acquisition. And I think that really shook up the business community and the CFIUS community, the bar, because I think that there was really no national security basis. It wasn't as though people really saw Nippon Steel as a threat to the United States. This was much more protecting a US domestic industry.
(24:03):
Now in some ways that has always been on the table for CFIUS. I think one of the more common types of mitigation when CFIUS has a concern with a transaction that they don't want to prohibit but they want to impose some sort of limits is if a contractor is a supplier to the US military and they're one of the only suppliers in the United States, CFIUS will often negotiate a supply assurance agreement where the foreign investor will have to agree to continue supplying the US military or defense department either indefinitely or with some period of time because of a concern about a shortage of supply of that product in the United States. And so there's been some flavor of this in CFIUS for a long time.
(24:45):
I do think though that the US Steel transaction really came in stark contrast and said, "We actually just want to protect this entire industry," including from allied investment. Now that's an area where President Trump has indicated that he may be willing to negotiate some other deal with Nippon Steel, so we'll see where that ultimately goes, but I think that was a signal of a change. If you look at the policy documents that the Trump administration has put out on investment, what the Trump administration has said about CFIUS really doesn't change that much of what has been in place for the last several years. They're doubling down on encouraging investments from US partners and allies. In fact, the Trump administration is promising to create a quote, fast-track approval process for investments from partners and allies in advanced technologies and other areas to be determined where the particular partner and ally company or country has taken steps to distance itself from foreign adversaries, I.E. China. So this is already part of the CFIUS playbook. It's going to be put in more stark contrast under the Trump administration as a signal that is being sent.
(25:58):
Another signal that's being sent, which would be more of a change, is potentially reviewing what are called greenfield investments in the United States. So you're a UK company, pick your country, you want to set up a factory in the United States, you want to set up a lab here. Under traditional CFIUS rules, CFIUS would actually have no jurisdiction to review that investment. The Trump administration has said they are going to work with Congress to think about changing that rule. That would be a big deal if CFIUS had the ability to review new investments in greenfield in the United States. And I suspect if they do wield that authority, it will be directed primarily against China again. But that would be a pretty significant change.
(26:41):
The other point I wanted to bring up was just on... You've referred to it a little bit... On the new outbound investment rules that went into place in the United States in January. So this was a Biden administration initiative aimed actually expressly only at investments in companies in China in a few areas of technology concern. So those rules have now been in effect for about two months. It's the first time the US government has tried to regulate US investors who are investing overseas. And the theory of the case here is that not so much the US government is concerned about capital, because I think China has plenty of capital, they don't need US capital, but the concern is more about what some people call intangible benefits that come along with a capital investment. You're a venture capital fund, you're investing in startups who really don't even know how to run a business. You're going to be incentivized to work with that company to help them succeed. And the US government had a concern in certain areas of China, technology companies in particular, that wasn't an area that the US government wanted US investors to play a role.
(27:47):
And so I think that for both the outbound investments and traditional CFIUS, I think these tools are still being deployed largely in what people generally think of as national security related concerns. And I don't think that the Trump administration is likely to really dramatically change the way that either CFIUS or outbound investment rules are put into play. They may expand restrictions with a particular focus on China, but I don't think they're going to change the rule book or the typical playbook.
Jason Hewitt (28:17):
Yeah. Thanks, Brian. And I think ODI is a really interesting one. As I was saying earlier, we're seeing more focus on that in Europe. There are some elements of the UK regime that apply arguably to outbound investments to a degree, but there certainly seems to be less pace around European regulators taking up similar initiatives. I think what you mentioned around those intangible benefits though is a really interesting theme we see in some of the European decisions. One of the most notable decisions under the UK and SIA, our FDI regime here, was in relation to a Nexperia wafer fab, which is a part of the semiconductor ecosystem here in the UK. But ostensibly, a lot of people would say it was not particularly on the advanced or sensitive end of chip making, it was on the other end. It was really at the wafer stage. The government had said publicly in the disclosures it needs to make around mitigation or at least alluded to this idea that it's really about participating in the same ecosystem. There is a lot of positive benefit to participating in that ecosystem and being in the orbit of the semiconductor clusters here in the UK. And to have the Chinese just in that orbit is of concern.
(29:31):
I wanted to ask, Brian, fast tracking of particular countries in the America First order, is that a prelude to quid pro quo? Is Trump going to look to jurisdictions on that list and say, "Well, where's the US exemption?"
Brian Egan (29:45):
Reading our president's body language, that's a very logical supposition, Jason. And that could be. We already under CFIUS have rules for what are called accepted investors, which are just a handful of countries, including the UK that have sufficient controls in place from the US government's perspective around their own foreign investments that we treat their investors favorably. And so reading the order, at least, it seems like what the US government is going to be looking for are sufficient assurances around China-related restrictions as being one of the key defensive parameters that would lead to fast tracking. But I think that's a very fair point that we could expect something in return for US investors.
Jason Hewitt (30:30):
We'll watch this space in that case.
Brian Egan (30:31):
Yeah, exactly.
Jason Hewitt (30:32):
I think on the European perspective it's similar, although comparatively to the US, European FDI authorities simply just have vastly less mitigation. A much smaller percentage of DLs are subject to conditions and subject to orders, but there is certainly more and more focus on domestic political issues I'd say, or at least national champions. And I think as you said, Brian, there is still a good amount of discipline around those being connected to really national security or perhaps economic security issues rather than what I'll say is pure capital-P politics as between nation-states. There's certainly been a hint of it, and there probably is good reason to watch this space carefully.
(31:17):
Jonathan, you mentioned the Draghi report earlier, which if I read into it, really says that the EU should be using these tools more effectively to play in the global economic markets. And there is a drive to that with Trump 2.0. I think we've seen a few examples in Europe touching on some of the issues. I mean, since the election in the US, we've not seen enough time to really accumulate a lot of orders or rejections on the FDI side, but there are certainly a few interesting transactions over the last couple of years. There's a Flowserve Segault transaction in France which saw France effectively block very swiftly and attempted US investment into Segault, which is obviously a significant player in the nuclear supply chain in France. And that was also against the backdrop of the AUKUS, Australia-UK-US initiative of a couple of years ago.
(32:18):
I think one of the most interesting themes that we see in European FDI processes is really this concern about ITAR and how the US uses it. We often see mitigation or at least questions from authorities around will this European target technology? Is it caught by ITAR today? Will it be caught by ITAR as a result of being acquired by the US buyer? Will the US buyer take steps that might bring ITAR into question for this technology? I think there's a real focus from Europe on the risk that the US gets its claws into that technology, so to speak, and is able to regulate it, whether a compliance or perhaps a diplomatic sense, in the way the US tends to with ITAR when it was previously just European tech that was not subject to ITAR. So I think that's been interesting to observe and I can only anticipate that we'll see more of it.
Brian Egan (33:14):
And I think it's just interesting to think about that issue more broadly too, that notwithstanding the Trump administration and how Europe may react or feel about the Trump administration's initiatives, there have always been areas where even US investment in Europe has been at least subject to some review and it's not always welcomed. Of course, then the same is true in the US. In the most part we get along very well. Investors are favored on both sides of the ocean, but there are already and have always been areas where that has not been true. So that's going to be true even under the Trump administration and obviously maybe even more so.
Jason Hewitt (33:54):
Yeah, absolutely. And maybe Jonathan, you can offer us some thoughts on the UK policy perspective here in particular. I think there are a few interesting transactions around, Brian, you touched on US into Europe. We've seen the Bain bid for Chemring provide at least an interesting transaction to watch for us at the moment here in London.
Jonathan Benson (34:13):
Yeah, I think that's right, Jason. It'll be fascinating to see how that particular transaction plays out, because of course, the target is a key supplier in the naval anti-ship missile defense system space amongst others. And I think that will be a test case for how the labor government will treat US investment in a very sensitive area of the UK economy. I think the reality though is the labor government is unlikely to change very much the overall pattern of review and intervention in investments over the course of the next little while. It has a growth agenda, which is absolutely central to it and will ultimately be the measure on which most of the electorate will judge it come the next general election. So I think its instinct will be to not interfere wherever possible.
(35:16):
But that said, I think you could easily see scenarios where capital-P politics might come into play here in the UK. And you can see an overall trend I would suggest towards more subtle and perhaps expansive remedies being imposed on transactions with a greater emphasis on governance and operation-related controls being put in place, data IT restrictions and the like to ensure that capabilities are not shared with people who the UK government wouldn't want them to be shared with. So I think we can expect more of that as well.
Jason Hewitt (36:01):
And I suppose, Jonathan, that's not to mention very straightforward supply assurances and commitments to maintain capability in particular jurisdiction?
Jonathan Benson (36:09):
Absolutely, yeah. Which I think, as Brian says, business as usual really in certain key sectors.
Jason Hewitt (36:17):
So to summarize what I've heard, I've heard three things. That the economic statecraft toolkit is really broad, but it is one that governments have and continue to wield relatively carefully, trying to balance growth on one hand, security on the other, capital-P politics and diplomacy on the other, and that it's also a really changing evolving environment. So whilst we're sitting here in early March talking about it, there may very well be some interesting different answers in the coming weeks and months given the current geopolitical environment. Before we wrap up, I'd like to give you the thirty-second last word for your thoughts on our conversation today. Brian, what's yours?
Brian Egan (36:59):
Yeah, I think what's good news for lawyers in this space is not necessarily good news for business or for geopolitics. I think we are going to see more regulation. It's going to get more complicated. I don't think anything that new US government is going to do is going to change that. And I think one of the more interesting spaces to watch is going to be Europe's reaction on its side and whether the US and Europe will converge in some of these areas.
Jonathan Benson (37:24):
I would agree. So I think more regulation, more fragmentation. I think my perspective is perhaps a little less optimistic than Brian's. I think it's going to prove quite challenging for the Europeans to meet the Trump administration halfway on many of these topics. And thinking about this in terms of a sanctions position in particular, I think we can reasonably expect that there will be a divergence between the US and the Europeans on the Russia sanctions in the short to medium term, which will cause significant compliance headaches for a great many companies. And that I think will be indicative of a broader trend of Europe and the US parting ways on certain key policy areas.
Jason Hewitt (38:13):
Excellent. Well, thank you so much for joining us today, Brian and Jonathan. It's been a really fascinating discussion.
Brian Egan (38:13):
Thank you.
Jonathan Benson (38:18):
Thank you.
Voiceover (38:21):
Thank you for joining us for today's episode of Foreign Correspondent, an FDI podcast. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at Skadden.com.
From Skadden, you're listening to Foreign Correspondent, an FDI podcast where we discuss foreign direct investment reviews and the foreign policy, national security and political issues that drive them. The cross-border investment screening insights you need start now.
Jason Hewitt (00:23):
Hi, everyone. Welcome to this month's episode of foreign Correspondent Skadden's FDI podcast. So as always, we explore the complex world of FDI reviews and the national security policy behind them with monthly conversations amongst leading national security experts, regulators, and Skadden's foreign investment screening team. Today, I'm joined by Brian Egan and Jonathan Benson. Brian is a partner in Skadden's Washington DC office where he advises clients on a broad range of US national security and foreign policy issues, including CFIUS, export control, sanctions, trade and supply chain restrictions. Brian joined us after an extensive career in government, including as the senior-most lawyer at both the National Security Council and the Department of State in the US, where he was also Deputy White House Council to former President Obama. Welcome, Brian.
Brian Egan (01:12):
Thanks, Jason. Great to be here.
Jason Hewitt (01:14):
And we're also joined by Jonathan Benson here in London. Jonathan's council, now London office, he's advised on UK and EU sanctions and export control as well as trade and supply chain restrictions for almost a decade. He draws on his time as a senior lawyer at the UK Department for International Trade and the UK Ministry of Defense, where he's advised on both national security and trade matters. Welcome, Jonathan.
Jonathan Benson (01:37):
Thanks, Jason. Good to be here. Thank you.
Jason Hewitt (01:39):
Excellent. Well, I'm Jason Hewitt. I am here at Skadden in London where I advise on global foreign investment screening and coordinate our non-USFDI screening here in Europe. So today's episode, Economic Statecraft and Foreign Investment Screening. Our aim is to unpack the economic statecraft toolkit, explore how it's being yielded and analyze the role that foreign investment screening plays in it. I'll start with the easy question, I think, or perhaps it's a really hard one. Brian, what do we mean when we talk about economic statecraft?
Brian Egan (02:09):
Yeah, it's a timely question in the United States at least. Our current president just announced a week ago, economic security is national security. And so we're seeing a combination of tools that have traditionally been thought about national security tools growing into spaces that really are hard to connect in some ways to national security. And I'd say this toolkit is broad and continues to grow. So what do I mean by this toolkit? Some things that have been in the toolkit for a while are things like economic sanctions. You think of US, UK, EU sanctions against Russia. That's clearly economic statecraft in some ways. But there are other things in the toolkit as well. Export controls, which used to be a very sleepy area. Technical Cold War regulation increasingly used as a tool of economic statecraft. Supply chain regulations, what can come into a country's borders in the name of national security or economic security increasingly on the table as well.
(03:12):
And then on the positive incentive side, you have things like domestic subsidies. In the US we had a law passed called the CHIPS Act a few years ago that incentivizes domestic manufacturing of semiconductors in the United States, a new area. I think we're going to see more of that in Europe as well. And tariffs, which are both a carrot and a stick in some ways, at least if you hear our president talk about these things where you put a tax on goods coming into your country in order partly to incentivize manufacturing growth within your own borders. So all of these things are under consideration when policymakers are thinking about how to address a diplomatic foreign policy or national security question.
Jason Hewitt (03:55):
Yeah. Thanks, Brian. I think when you talk about economic security, it's national security, it's really fitting for us here in Europe as well. We have our still relatively recent labor government in power here in the UK. And certainly, before the election Chancellor of the Exchequer, Rachel Reeves talked a lot about Securonomics, this concept that it is all part of the same thing. So maybe I'll turn then, Jonathan to you. Here in Europe, and by that I mean both the EU and here in the UK, is the toolkit largely the same? How does economic statecraft look for European actors?
Brian Egan (04:28):
I think it is largely the same, Jason, but there are some significant differences. I think we ought to contextualize this a little though looking first at the European Union. The European Union historically obviously has been a very open, liberal actor, it has been at the forefront of permeating the rules-based order. But we've seen that change a little in recent years with the development of policies that move away from that very open view of globalization. It started I think during the pandemic with the Commission's emphasis on open strategic autonomy, but it's crystallized in the development of the European economic security strategy, which was released in June 2023. And I think that this is only going to grow the very influential Draghi report of last September called for a genuine EU for an economic policy. And that very much fed into the new Commission's political guidelines, which do indeed promise that new economic foreign policy and the new high representative of foreign affairs has an instruction to shape a new foreign economic policy focusing on economic security and statecraft.
(05:47):
Far less explicit in the UK, I think. There's been a significant dialing down in my view of the rhetoric from the Labour Party since it came power. But Securonomics is obviously still something which I'm sure will be featuring in their thinking. And so like in the US, the EU and the UK can impose autonomous sanctions, export controls. They have a full suite of trade-related measures available to them as provided for on WTO [inaudible 00:06:19] anti-dumping, [inaudible 00:06:21] duties and safeguarding measures. There's also been a subsidy scheme, similar to the ones that Brian's just described. The European Chips Act that looks to mobilize 43 billion euros of investment in the EU semiconductor industry by the end of this decade.
(06:37):
And of course we have, like there is CFIUS in the US, we have now investment screening regimes right the way across the EU, a vast majority of the member states now. And of course, in the UK. So, all of that I think is similar, but I think it's fair to say that in at least continental Europe, the EU thinks about these topics even more broadly and is looking to also incorporate policies and associated legal tools related to the climate crisis, sustainability and like in the form of instruments like the corporate sustainability due diligence directive, the CBAM, the Carbon Border Adjustment mechanism.
(07:24):
So it's a slightly broader palette, but in some ways it's also a narrower one. Think for example about outbound investment restrictions, which I'm sure we'll talk about a bit more in a bit. But at the moment there's no European equivalent of the measures that have been introduced by the US in that area, though the EU is slowly moving in that direction.
Jason Hewitt (07:47):
Yeah, there's certainly the recent review that has come out of the EU [inaudible 00:07:52] coming out of the EC to instruct member states to effectively start laying the groundwork it seems for outbound investment screening of some sort. And I think certainly we observe here in Europe that CFIUS and folk from the US are relatively frequently spreading the good word, so to speak, of outbound investment and certainly encouraging a lot of EU member states down that direction.
(08:15):
It's quite interesting, Jonathan, I guess at the moment we've also got these reforms out there around the EUFDI cooperation mechanism. It's anyone's guess as to where they will ultimately end up, although it seems the direction is much more towards I'd say harmonization rather than centralization. That is, there's a need for them to be lined up and work together. But my sense is that member states are still relatively protective of the idea that national security reviews in investment transactions remain national rather than community. The substantive analysis is very much a member state focus.
Jonathan Benson (08:54):
I think that's right. Yeah. So there is a constant tug within the union around these national security related topics with the member states very carefully guarding what they consider to be a core competence of their own. National security ultimately is at the heart of state decision-making and sovereignty. So whilst EU law does of course encroach in certain areas into the national security sphere, my sense is exactly aligned with you, Jason. I think that the member states are going to continue to treat the EU with some degree of caution in terms of the competence creep into areas like foreign investment screening. But I do think that the Trump administration potentially does put a bit of a grenade under the bottoms of the member states. Because it's clear that the direction of travel is that Europe will be able to rely less on US security guarantees in the near future. And I think that that will cause many member states to reappraise their position on some of these topics because clearly, Europe will be able to present a stronger front if it is united.
Jason Hewitt (10:09):
Yeah. I think that leads us really well, Jonathan, into our next topic. Brian, you've laid the groundwork on what the economic statecraft toolkit is. Can you shed any light for us in Europe as to what are the US's policy objectives in wielding its toolkit and how are they going about deploying it at the moment?
Brian Egan (10:26):
Right? What the heck is going on in the United States, is your question, Jason? We're used to that question from our clients in Europe and Asia at this point, and some in our US for that matter. I think in this area of economic statecraft, in some ways our current administration has been very clear about what their objectives are, and in some ways they haven't been clear at all. And let me explain what I mean there. Clarity is you look at the two key memos that the Trump administration has already issued, President Trump himself has issued outlining his own views on economic statecraft.
(10:58):
One is called the America First Trade Policy and one is called the America First Investment Policy. And you'll see a common theme between those two, America first. I think there's a feeling in the new administration that America, in deploying tools of economic statecraft, has been taken advantage of or has been treated unfairly, included by some partners and allies. And so we are seeing a redirection of some of those tools already with that feeling in mind. If you look at the tariff discussions and changes that are going on with our friends in Canada and Mexico right now, 25% tariffs were put into effect earlier this week, a small carve out for autos as of yesterday. We've been told at least, we haven't yet seen the paperwork on that. I think those things are driven by this view that we need to do more to bring manufacturing back to the United States and that the trade policies of the past failed to do that.
(11:57):
Another theme that I think is consistent in these documents is that we need to remain tough on China, and if anything, we have to get even tougher on China. And so if you look at the policies that are currently under review by the Trump administration... We'll get to CFIUS in a moment. But think about things like export controls or supply chain regulations, incoming parts and components and technologies in the United States. All of those things are being reviewed with an eye towards, "Should we be doing more to restrict trade with so-called foreign adversaries?" Which these documents actually define as basically China and a handful of other much less important economies. And so I think that that thread, which I would say is actually a thread that's also in place in Europe is going to continue in the current administration.
(12:47):
And one of the things that is of great interest to me is, to what extent will the US government try to align its policies and use this commonality with Europe moving forward as an area of cooperation? But then there are some areas where the policy just isn't clear at this point. I think Russia is one of the key areas where obviously, on the front pages and on social media, everybody saw the interactions between Trump and President Zelensky a few weeks ago. Whether that will change some of the uses of tools of economic statecraft remains to be seen. It's been publicly reported that the Trump administration is instructing relevant departments and agencies to come up with lists of sanctions reforms that can be put in place to ease sanctions on Russia. Will the Trump administration go alone in that way, where it's an area where the US and Europe have cooperated quite closely over the last three years in particular? I think that remains to be seen, and what our objectives are I think isn't really clear at this point. So I think at least as of the first 45 days of the current administration, that's what we are seeing and what I'm seeing as the policy objectives.
Jason Hewitt (13:59):
So we're speaking in early March, the first week of March, and I think when this episode goes out, it'll be another week or so. So maybe there'll be a new world order by then we don't necessarily know.
Brian Egan (14:10):
I suspect there will, actually. Some of the things I just said I'm sure will no longer be true by the time this podcast is out there in the world.
Jason Hewitt (14:17):
Brian, you touched on China. Is there a sense that Trump's vision is a grand deal with China?
Brian Egan (14:25):
Great question. I think he would love to have a deal with China. What that deal is, it's very difficult to say. And if you look at what happened in the first Trump administration, the so-called grand deal with China was really a rather limited deal around trade exports rebalancing the trade deficit between the United States and China. Some of the broader systemic concerns that the has had with China really were not part of those discussions and have never really been on the table in the past. Now, whether the US and China will find a way to have that discussion under the current administration, I think it's really early to say, but I think that there are no signals from the current government that concerns related to China's military ambitions, for example, would not be something that would have to be resolved in order to remove some of the tools that we've been talking about.
Jason Hewitt (15:22):
It certainly seems that, coming out of the US is a much more... And perhaps unsurprisingly, a much more mercantile bargain-driven approach to wielding these kinds of tools.
Brian Egan (15:31):
I would absolutely agree with that. Now whether there can be a bargain that struck with China that would satisfy those instincts on the US side and be acceptable to China, I think is a different story. China on its own right has gotten more sophisticated in these areas. They have their own economic state crap that's going on at the same time, some of which is actually impacting US companies. They also have a better understanding of some of the tools that the US government has been wielding over the last five years. And I think what they would want in return may turn out to be a little harder to give them than it was the last time around.
Jason Hewitt (16:06):
And I know we'll turn a little bit later in this discussion to CFIUS and ODI in particular, but perhaps before we get there, Jonathan, are we seeing the same enthusiasm out of Europe in how it's wielding its tool kit?
Jonathan Benson (16:18):
I think that for the most part, Europe is reactive rather than proactive in these sorts of matters. Both the UK and the EU are very firmly wedded to the international rules-based order, which does leave them with less room for maneuver than perhaps other states which are prepared to cross a few lines that the Europeans wouldn't necessarily be happy to. But I think one of the really interesting things about this current scenario is the fact that this is the second Trump administration. The Europeans have lived through the first Trump administration and I think that there is now a bit of a playbook in Europe as to how to respond to the sort of trade measures that the Trump administration is wielding.
(17:11):
So if we look at what happened last time, I think we can probably reasonably assume that as before, the EU and the UK will, to the extent that the UK is affected, which it may not be, the UK government remains hopeful on that front, impose countermeasure at tariffs. The legal basis of those I think remains to be seen because it's not clear on what basis the Trump administration is wielding the tariffs against Europe at this stage. I think we can reasonably assume that there will be litigation before the WTO. Ultimately, that litigation is likely to be nugatory, in the sense that even if the Europeans succeed before a panel at the WTO, there's no appellate body and the US would therefore be able to appeal a successful judgment into the appellate body void.
(18:03):
But one twist, and this really does come out of the European's experience of the first Trump administration, is that the EU now has a very powerful new piece of machinery in its armory in the form of the anti-coercion instrument. So this instrument was developed during the first Trump administration. It only became law during the Biden administration. It's never been used by the EU. But what it allows the union and its member states to do is respond to so-called economic blackmail from foreign countries which seek to influence or coerce the EU or a particular member state to adopt or decline a specific policy. And it's already clear that the EU is contemplating using the anti-coercion instrument against the US in this regard.
(18:59):
And the instrument, although it's unwieldy in terms of the process associated with it, I think it's unlikely that anything could be implemented under it with any great speed. But it does confer considerable discretion on the EU in terms of the sort of countermeasures that it would be able to apply. Say for example, it would allow restrictions on trade and services, trade and goods. It would allow IP-related protections to be suspended amongst a whole raft of different measures, all of which prima facie are incompatible with international law. But the EU says when wielded pursuant to this instrument amount to lawful countermeasures. So it will be interesting to see whether the EU does indeed pull the trigger on that new instrument because if it does, then it will have considerable tools at its discretion to deploy it against the US.
Jason Hewitt (20:01):
And perhaps not as new as the anti-coercion instrument. But there is also the Foreign Subsidies Regulation or the FSR which has been enforced now for a couple of years and really is a counter-subsidies measure, which in theory gives the EU an opportunity to review certain larger transactions for investors who have benefited from subsidies in a way that might be distortive in terms of their participation in the market here in Europe. There was a time when we would've thought of that as largely focused on China as with many of the similar tools for the EU, like the foreign investment screening regimes. But certainly, current political environment raises some interesting questions as to where it might also be utilized.
Jonathan Benson (20:49):
It does. I think to Brian's point though, politicians on this side of the Atlantic will be looking the position in the round. I don't think that they're going to look at the tariffs in isolation. They're also going to want to be keen, to the extent they can, bring the Trump administration along in terms of whatever settlement ends up being proposed or indeed implemented in terms of the conflict in Ukraine. And I think that there's also going to be a policy imperative, wherever possible, to continue to engage with the newest administration in the ordinary course of business. There will be a huge number of policy areas where a corporation can and should continue. And there will, in my view, be a real desire for there to be some degree of business as usual.
Jason Hewitt (21:43):
If we think about that speak softly and carry a big stick ideology, the toolkit is expanding what that big stick is for Europe. Whether it gets utilized is a separate question. And I think that leads us really well into our third topic, which is really what role does foreign investment screening play in all of this? Foreign investment screening has a really interesting role. Again, as I was saying, on the FSR, we might've thought of it a few years ago as focused on a very narrow set of countries, China in particular. But the decline in Chinese investment that we're seeing, Europe has a relatively significant need for capital from other sources. If we're going into a world where we're saying there'll be slightly more skepticism around US capital in certain areas, that doesn't really solve problems for Europe, there needs to be some balance in how these regimes are used. FDI needs to strike that balance really well between continuing to attract investment whilst also being an effective screen against challenges. Maybe we'll start with Brian in the US. Has CFIUS been used in this way from a US perspective?
Brian Egan (22:52):
So CFIUS has traditionally been thought of at least as a much more pure foreign policy tool. The agencies that run CFIUS have a foreign policy mandate. I think you're right, Jason, that CFIUS in the recent memory at least has been really focused on threats specifically from China, although not only China, and investors from Canada and from Australia receive very favorable treatment under CFIUS. I would add Japan to that list, but Japan has proven to be a little bit of an inflection point. And this is not a Trump administration development, it's a Biden administration development where Nippon Steel attempted to acquire US Steel and both President Biden and President-elect Trump or candidate Trump at that time said they would oppose that acquisition. And I think that really shook up the business community and the CFIUS community, the bar, because I think that there was really no national security basis. It wasn't as though people really saw Nippon Steel as a threat to the United States. This was much more protecting a US domestic industry.
(24:03):
Now in some ways that has always been on the table for CFIUS. I think one of the more common types of mitigation when CFIUS has a concern with a transaction that they don't want to prohibit but they want to impose some sort of limits is if a contractor is a supplier to the US military and they're one of the only suppliers in the United States, CFIUS will often negotiate a supply assurance agreement where the foreign investor will have to agree to continue supplying the US military or defense department either indefinitely or with some period of time because of a concern about a shortage of supply of that product in the United States. And so there's been some flavor of this in CFIUS for a long time.
(24:45):
I do think though that the US Steel transaction really came in stark contrast and said, "We actually just want to protect this entire industry," including from allied investment. Now that's an area where President Trump has indicated that he may be willing to negotiate some other deal with Nippon Steel, so we'll see where that ultimately goes, but I think that was a signal of a change. If you look at the policy documents that the Trump administration has put out on investment, what the Trump administration has said about CFIUS really doesn't change that much of what has been in place for the last several years. They're doubling down on encouraging investments from US partners and allies. In fact, the Trump administration is promising to create a quote, fast-track approval process for investments from partners and allies in advanced technologies and other areas to be determined where the particular partner and ally company or country has taken steps to distance itself from foreign adversaries, I.E. China. So this is already part of the CFIUS playbook. It's going to be put in more stark contrast under the Trump administration as a signal that is being sent.
(25:58):
Another signal that's being sent, which would be more of a change, is potentially reviewing what are called greenfield investments in the United States. So you're a UK company, pick your country, you want to set up a factory in the United States, you want to set up a lab here. Under traditional CFIUS rules, CFIUS would actually have no jurisdiction to review that investment. The Trump administration has said they are going to work with Congress to think about changing that rule. That would be a big deal if CFIUS had the ability to review new investments in greenfield in the United States. And I suspect if they do wield that authority, it will be directed primarily against China again. But that would be a pretty significant change.
(26:41):
The other point I wanted to bring up was just on... You've referred to it a little bit... On the new outbound investment rules that went into place in the United States in January. So this was a Biden administration initiative aimed actually expressly only at investments in companies in China in a few areas of technology concern. So those rules have now been in effect for about two months. It's the first time the US government has tried to regulate US investors who are investing overseas. And the theory of the case here is that not so much the US government is concerned about capital, because I think China has plenty of capital, they don't need US capital, but the concern is more about what some people call intangible benefits that come along with a capital investment. You're a venture capital fund, you're investing in startups who really don't even know how to run a business. You're going to be incentivized to work with that company to help them succeed. And the US government had a concern in certain areas of China, technology companies in particular, that wasn't an area that the US government wanted US investors to play a role.
(27:47):
And so I think that for both the outbound investments and traditional CFIUS, I think these tools are still being deployed largely in what people generally think of as national security related concerns. And I don't think that the Trump administration is likely to really dramatically change the way that either CFIUS or outbound investment rules are put into play. They may expand restrictions with a particular focus on China, but I don't think they're going to change the rule book or the typical playbook.
Jason Hewitt (28:17):
Yeah. Thanks, Brian. And I think ODI is a really interesting one. As I was saying earlier, we're seeing more focus on that in Europe. There are some elements of the UK regime that apply arguably to outbound investments to a degree, but there certainly seems to be less pace around European regulators taking up similar initiatives. I think what you mentioned around those intangible benefits though is a really interesting theme we see in some of the European decisions. One of the most notable decisions under the UK and SIA, our FDI regime here, was in relation to a Nexperia wafer fab, which is a part of the semiconductor ecosystem here in the UK. But ostensibly, a lot of people would say it was not particularly on the advanced or sensitive end of chip making, it was on the other end. It was really at the wafer stage. The government had said publicly in the disclosures it needs to make around mitigation or at least alluded to this idea that it's really about participating in the same ecosystem. There is a lot of positive benefit to participating in that ecosystem and being in the orbit of the semiconductor clusters here in the UK. And to have the Chinese just in that orbit is of concern.
(29:31):
I wanted to ask, Brian, fast tracking of particular countries in the America First order, is that a prelude to quid pro quo? Is Trump going to look to jurisdictions on that list and say, "Well, where's the US exemption?"
Brian Egan (29:45):
Reading our president's body language, that's a very logical supposition, Jason. And that could be. We already under CFIUS have rules for what are called accepted investors, which are just a handful of countries, including the UK that have sufficient controls in place from the US government's perspective around their own foreign investments that we treat their investors favorably. And so reading the order, at least, it seems like what the US government is going to be looking for are sufficient assurances around China-related restrictions as being one of the key defensive parameters that would lead to fast tracking. But I think that's a very fair point that we could expect something in return for US investors.
Jason Hewitt (30:30):
We'll watch this space in that case.
Brian Egan (30:31):
Yeah, exactly.
Jason Hewitt (30:32):
I think on the European perspective it's similar, although comparatively to the US, European FDI authorities simply just have vastly less mitigation. A much smaller percentage of DLs are subject to conditions and subject to orders, but there is certainly more and more focus on domestic political issues I'd say, or at least national champions. And I think as you said, Brian, there is still a good amount of discipline around those being connected to really national security or perhaps economic security issues rather than what I'll say is pure capital-P politics as between nation-states. There's certainly been a hint of it, and there probably is good reason to watch this space carefully.
(31:17):
Jonathan, you mentioned the Draghi report earlier, which if I read into it, really says that the EU should be using these tools more effectively to play in the global economic markets. And there is a drive to that with Trump 2.0. I think we've seen a few examples in Europe touching on some of the issues. I mean, since the election in the US, we've not seen enough time to really accumulate a lot of orders or rejections on the FDI side, but there are certainly a few interesting transactions over the last couple of years. There's a Flowserve Segault transaction in France which saw France effectively block very swiftly and attempted US investment into Segault, which is obviously a significant player in the nuclear supply chain in France. And that was also against the backdrop of the AUKUS, Australia-UK-US initiative of a couple of years ago.
(32:18):
I think one of the most interesting themes that we see in European FDI processes is really this concern about ITAR and how the US uses it. We often see mitigation or at least questions from authorities around will this European target technology? Is it caught by ITAR today? Will it be caught by ITAR as a result of being acquired by the US buyer? Will the US buyer take steps that might bring ITAR into question for this technology? I think there's a real focus from Europe on the risk that the US gets its claws into that technology, so to speak, and is able to regulate it, whether a compliance or perhaps a diplomatic sense, in the way the US tends to with ITAR when it was previously just European tech that was not subject to ITAR. So I think that's been interesting to observe and I can only anticipate that we'll see more of it.
Brian Egan (33:14):
And I think it's just interesting to think about that issue more broadly too, that notwithstanding the Trump administration and how Europe may react or feel about the Trump administration's initiatives, there have always been areas where even US investment in Europe has been at least subject to some review and it's not always welcomed. Of course, then the same is true in the US. In the most part we get along very well. Investors are favored on both sides of the ocean, but there are already and have always been areas where that has not been true. So that's going to be true even under the Trump administration and obviously maybe even more so.
Jason Hewitt (33:54):
Yeah, absolutely. And maybe Jonathan, you can offer us some thoughts on the UK policy perspective here in particular. I think there are a few interesting transactions around, Brian, you touched on US into Europe. We've seen the Bain bid for Chemring provide at least an interesting transaction to watch for us at the moment here in London.
Jonathan Benson (34:13):
Yeah, I think that's right, Jason. It'll be fascinating to see how that particular transaction plays out, because of course, the target is a key supplier in the naval anti-ship missile defense system space amongst others. And I think that will be a test case for how the labor government will treat US investment in a very sensitive area of the UK economy. I think the reality though is the labor government is unlikely to change very much the overall pattern of review and intervention in investments over the course of the next little while. It has a growth agenda, which is absolutely central to it and will ultimately be the measure on which most of the electorate will judge it come the next general election. So I think its instinct will be to not interfere wherever possible.
(35:16):
But that said, I think you could easily see scenarios where capital-P politics might come into play here in the UK. And you can see an overall trend I would suggest towards more subtle and perhaps expansive remedies being imposed on transactions with a greater emphasis on governance and operation-related controls being put in place, data IT restrictions and the like to ensure that capabilities are not shared with people who the UK government wouldn't want them to be shared with. So I think we can expect more of that as well.
Jason Hewitt (36:01):
And I suppose, Jonathan, that's not to mention very straightforward supply assurances and commitments to maintain capability in particular jurisdiction?
Jonathan Benson (36:09):
Absolutely, yeah. Which I think, as Brian says, business as usual really in certain key sectors.
Jason Hewitt (36:17):
So to summarize what I've heard, I've heard three things. That the economic statecraft toolkit is really broad, but it is one that governments have and continue to wield relatively carefully, trying to balance growth on one hand, security on the other, capital-P politics and diplomacy on the other, and that it's also a really changing evolving environment. So whilst we're sitting here in early March talking about it, there may very well be some interesting different answers in the coming weeks and months given the current geopolitical environment. Before we wrap up, I'd like to give you the thirty-second last word for your thoughts on our conversation today. Brian, what's yours?
Brian Egan (36:59):
Yeah, I think what's good news for lawyers in this space is not necessarily good news for business or for geopolitics. I think we are going to see more regulation. It's going to get more complicated. I don't think anything that new US government is going to do is going to change that. And I think one of the more interesting spaces to watch is going to be Europe's reaction on its side and whether the US and Europe will converge in some of these areas.
Jonathan Benson (37:24):
I would agree. So I think more regulation, more fragmentation. I think my perspective is perhaps a little less optimistic than Brian's. I think it's going to prove quite challenging for the Europeans to meet the Trump administration halfway on many of these topics. And thinking about this in terms of a sanctions position in particular, I think we can reasonably expect that there will be a divergence between the US and the Europeans on the Russia sanctions in the short to medium term, which will cause significant compliance headaches for a great many companies. And that I think will be indicative of a broader trend of Europe and the US parting ways on certain key policy areas.
Jason Hewitt (38:13):
Excellent. Well, thank you so much for joining us today, Brian and Jonathan. It's been a really fascinating discussion.
Brian Egan (38:13):
Thank you.
Jonathan Benson (38:18):
Thank you.
Voiceover (38:21):
Thank you for joining us for today's episode of Foreign Correspondent, an FDI podcast. If you like what you're hearing, be sure to subscribe in your favorite podcast app so you don't miss any future conversations. Additional information about Skadden can be found at Skadden.com.
