In the wake of increasing geopolitical tensions and rapid technological advancements, the European Commission has recently unveiled communication detailing the European Economic Security Strategy, which was published in 2023. The approach focuses on enhancing the security protocols around sensitive technologies and sectors by strengthening the control over the export and transfer of critical technologies and capital. This article outlines the framework for a series of forthcoming regulatory and policy updates under this strategy, exploring its implications especially for companies operating in advanced technology, military, dual-use, and other critical sectors.

This article is written by Herman Annink ([email protected]) and Sefa Gecikli ([email protected]). Herman and Sefa are both part of RSM Netherlands Business Consulting Services with a specific focus on international Trade and Sustainability. 

As the global landscape of technology and trade continues to evolve, the European Union is stepping up efforts to safeguard its technological assets and maintain international security standards. Because the export of advanced technologies, military hardware and dual-use items can have far-reaching consequences, the EU is increasingly watchful about how and where these technologies are disseminated. Promoting innovation while preventing technological misuse formed the backdrop to a series of new regulatory measures aimed at tightening controls and enhancing the monitoring of outbound investments and technology transfers. In 2023, 

The European Commission published a communication on a European Economic Security Strategy and last month a new announcement detailed this initiative. The strategy focuses on minimizing risks arising from certain economic flows in the context of increased geopolitical tensions and accelerated technological shifts, while preserving maximum levels of economic openness and dynamism. Recently, the Commission shared the action points under this strategy. Summarizing the developments up to now:


 

Impact on Companies in Advanced Technology, Military, Dual-Use, and Other Critical Sectors

Outbound investments

Regarding the initiative on monitoring and risk assessment of outbound investments, the Commission states that when EU companies invest in advanced technologies in third countries, there is a risk that these technologies could get into the hands of certain countries that may use EU technology and know-how to enhance their military and intelligence capabilities. This technology leakage could undermine international peace and security. As there is currently no systematic monitoring or control of investments that flow out of the EU to third countries. The Commission is initiating a process to evaluate potential risks through a series of steps, beginning with a 12-week public consultation to gather input on the monitoring and risk assessments that Member States will conduct. This will be followed by a Commission Recommendation in the summer of 2024, urging Member States to monitor outbound investments in critical technologies for 12 months and report their findings. Based on these reports, a joint risk assessment will be conducted by the Commission and Member States to assess any security risks from these transactions, leading to appropriate policy responses if required.

Export controls

In line with this, the Commission also states that it is critical for international security that EU goods and technologies with both civilian and military uses do not get into the wrong hands. In this regard, a whitepaper on export control has been published, which aims to launch a discussion on the current EU export control system and sets out actions to address some of the existing gaps. The EU is considering alternative approaches to introduce uniform controls for items agreed upon at the multilateral level. Additionally, a forum for political level coordination on export controls will be established between the Commission and Member States to foster common EU positions. By summer 2024, a Recommendation will be adopted to improve coordination at the technical level on new National Control Lists of dual-use items before their adoption by individual Member States, enhancing the EU’s ability to identify security and supply chain risks. Furthermore, the evaluation of the Dual-Use Regulation has been advanced to the first quarter of 2025.

Investments within the EU

The initiative extends beyond regulating the flow of investments and goods leaving the EU, incorporating a more stringent proposal for screening foreign investments within the EU. Building on the existing framework established under Regulation (EU) 2019/452, the proposal aims to tighten the current system based on a comprehensive evaluation and the lessons learned over the past three years. It seeks to ensure that all Member States implement a screening mechanism and to harmonize national rules for more effective collaboration with other Member States and the Commission. This includes covering transactions within the EU involving direct investors established in the EU but controlled by non-EU entities and setting a minimum sectoral scope for mandatory screening by all Member States. 

The proposal prioritizes the protection of sectors vital to EU security and public order, including those involved in Trans-European Networks, the European Defence Fund, Space Regulation, and Horizon Europe. All Member States will be required to screen foreign investments in EU companies participating in these key projects and programs, as well as those active in critical areas such as semiconductors, artificial intelligence, critical medicines, and dual-use and military items. Furthermore, the revision proposes the harmonization of national rules, including mandatory criteria to assess the potential negative impacts of investments on critical infrastructure, technologies, supply of essential inputs, protection of sensitive information, and the freedom and pluralism of the media. These criteria will help determine if an investment poses security or public order risks, considering factors related to the foreign investor.

Forward Thinking

Companies operating in advanced technology, military, dual-use items, data, or software should pay close attention to the new EU economic security strategy and its implications. Although there is currently no direct obligation in force, these developments should already be incorporated into companies' future strategic planning. Changes to the EU Dual Use Regulation could introduce licensing requirements for exports, potentially impacting global market access. Moreover, the possibility of stricter measures on outbound investments could restrict companies' operations outside the EU. Additionally, measures on foreign direct investment could influence these companies' ability to attract foreign investments, potentially affecting the timelines of such engagements. 

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