Foreign Finance Fears and Covid-19
By Bianca Ritter
While the British government is perhaps not unfamiliar with accusations of xenophobia, until recently, legislative policies towards foreign direct investment (referred to as FDI) have been impressively lenient. As proudly noted by the 2018 National Security and Investment consultation, “As of 2017, the UK had the third-highest inward foreign direct investment stock in the world. This is not just a fact. It is a reflection of the values on which our economic approach is based.” However, these economic values seem to be shifting.
In the wake of Covid-19, an environment once renowned as an investor’s paradise is increasingly suspicious of foreign buyouts and bailouts. Such a shift is timely, to say the least. During the distraction of Brexit negotiations, Britain was hesitant to reform any legislation that might negatively impact the foreign direct investment market. Thus, the 2018 NSI Consultation was quietly pushed to the side as the government sought to focus on more pressing issues. Nevertheless, as essential industries struggle to stay afloat in the present recession, the government has turned its attention to FDI legislation reforms with renewed urgency.
Driving the recently tabled National Security and Investment Bill (NSI) are underlying concerns that foreign investments in/acquisitions of essential British industries will undermine British security and sovereignty.
Growing mistrust of foreign industries has been highlighted through the tech industry’s withdrawal of support from Huawei’s proposed stake in the UK’s 5G network (though critics might argue this is merely a reaction to American sanctions of the Chinese tech giant). Arguably, such concerns cannot simply be dismissed as baseless and reactionary. After all, preventing a “high risk” vendor, recently investigated for unprecedented data mining, from owning a 35% stake in Britain’s 5G network appears to be a reasonable security measure. However, do foreign investments in other essential UK industries hold the same risk? If so, is the proposed NSI Bill a reasonable solution?
An Industrial Case Study
March 2020 saw the conclusion of one of the most significant foreign investments to date, as Chinese company Jingye Steel purchased British Steel in a historic £1.2bn investment. However, the deal was not without significant controversy. British Steel, which entered insolvency in May 2019, was kept afloat by the UK Insolvency Service while the government sought a suitable buyer. Despite Jingye’s credentials, the French government actively sought to prevent the deal due to British Steel’s ownership of France’s Hayange plant, deemed a critical French asset due to its supply of the military. French and British critics still note that Chinese ownership of British Steel presents a threat to the EU’s steel market. Crude steel imported from China and finished by British Steel could be used to wholly circumvent the EU’s 73.7% tariff on imported Chinese steel products. While Jingye’s acquisition of British Steel protected British jobs and revived an essential industry, it also reopened the European steel market to China.
In short, the motivations behind foreign direct investment are rarely clear cut. However, it is not xenophobic to recognise potential security threats in unsupervised foreign investment, especially with many industries currently clamoring for a FDI lifeline.
Potential Ramifications of the NSI Bill
Acknowledging this, one must finally address the most pressing question: Are the risks presented by foreign direct investment significant enough to discourage foreign support and investments in British businesses in a time of crisis?
The government, without entirely denying support, has certainly given a lukewarm response to foreign-owned companies seeking governmental aid following the pandemic induced shutdown. After turning a blind eye to the appeals of Virgin Atlantic and Tata Steel, Project Birch readily supplied a £30m rescue package for steel company Celsa.
The NSI Bill will likely maintain this trend, treating FDI with increasing scrutiny and limiting governmental support of foreign-owned/maintained companies. Its stated aims are “to scrutinise investments and consider the risks that can arise from hostile parties acquiring ownership of, or control over, businesses or other entities and assets that have national security implications.”
As the bill goes on to detail, this will be achieved by creating a notification system which will flag FDI deals that may interfere with national security. Even if the bill flags less than 200 FDI deals per year (as outlined in its white paper), it could mark a significant change in foreign investment levels. Nor will such scrutiny be limited to the “traditional” essential industries such as manufacturing and technology. As legal advisor Herbert Smith Freehills summarizes, “The focus continues to stretch well beyond acquisitions by certain Chinese companies, and the concept of “national security” continues to be extended, to include critical infrastructure, communications assets, advanced technology and data, and – influenced by the pandemic – healthcare.”
Conclusion:
In summary, the NSI bill reforms will likely extend beyond merely limiting the aid available to
struggling UK industries. Rather, it will redefine which industries the UK deems as “essential” and increase surveillance into the cross-border deals that drive London’s thriving financial market. It must be noted that such legislation is not exclusive to Great Britain, with similar bills being considered by the US, Germany, and Italy. The NSI bill will protect security interests at the cost of discouraging direct international investment in the market, inevitably resulting in avoidable cases of insolvency and unemployment.
Finally (and perhaps most importantly) under the present climate, the bill will introduce significant concerns over sharing the ownership of international health data and medical treatment procedures. While such legislation may be timely (or even necessary), it has the potential to delay more than mere financial remedies.