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National security protections against foreign investment

National security protections against foreign investment

Investment is a double-edged sword: it is sorely needed, particularly for countries with a market size posing difficulties in attaining self-sustainability, but at the same time poses certain security risks, not only for investment areas normally considered as falling within the purview of national security, but also for practically anything, including the supply chain process. Even the act of making an investment or loan itself could be considered a possible threat to a country.

Thus, investments inevitably come with “the potential risk for the host country’s national security or public order. This is why international instruments and agreements recognize countries’ rights to manage such risks,” wrote Jonathan Masters, James McBride, and Noah Berman last January in a backgrounder, “What Happens When Foreign Investment Becomes a Security Risk?,” on the Council for Foreign Relations website.

To illustrate, a “foreign company’s decisions [could] become an extension of the government’s policy decisions rather than the company’s commercial interests,” they wrote, and a cautionary example is “a move by Russian energy giant Gazprom in 2006 to cut gas supplies to Ukraine, which some Western observers considered a politically motivated decision. More recently, leaders in Europe and the United States have raised concerns about investments by large Chinese firms whose operations are influenced by the governing Chinese Communist Party.”

In the latter instance, “US policymakers have become sensitive to Chinese attempts to acquire critical technologies, or advanced technologies that the government deems significant to national security. Officials have accused Beijing of forced technology transfers, or requiring Western firms to share technology in order to do business with Chinese companies.”

It’s with the foregoing that international investment agreements allow for the protection of a country’s essential security interests, usually in form of exception provisions for circumstances relating to war, arms traffic, and other such related security contingencies.

Additionally, many Bilateral Investment Treaties (BIT) contain provisions for the protection of a State’s essential security interests. Complications indubitably arise due to the self-judging nature of many of these security provisions, whereby a State asserts the right to implement measures that “it considers necessary” to protect its security interests. Article 3 of the OECD Codes of Liberalization of Capital Movements and of Current Invisibles Operations, for example, provide that investment commitments shall not prevent a Member from taking action it “considers necessary for the ii) …protection of its essential security interests.”

Notably, the ICSID (International Centre for Settlement of Investment Disputes) tribunal for the 2002 LG&E Energy Corp. case declared that an economic crisis can also constitute a security matter: “To conclude that such a severe economic crisis could not constitute an essential security interest is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of the Government to lead. When a State’s economic foundation is under siege, the severity of the problem can equal that of any military invasion.”

Finally, the International Law Commission’s (ILC) Draft Articles on State Responsibility (Articles 20-25) provide circumstances whereby a State may be held free from responsibility for breaching international investment obligations: self-defense (Article 21), countermeasures (Article 22), and necessity (Article 25, presupposing a measure the State employed is “to safeguard an essential interest against a grave and imminent peril”).

Bearing in mind these investment-related security issues, the United States in 1975 established the Committee on Foreign Investment in the United States (CFIUS), an “interagency panel that screens foreign transactions with US firms for potential security risks.”

The 2006 sale giving port management businesses in six major US seaports to the United Arab Emirates’ DP World, which commentators declared as increasing the risk of a terrorist attack on US territory, prompted an amendment to the CFIUS via the Foreign Investment and National Security Act of 2007 (FINSA). The latter “provided Congress greater oversight of CFIUS, expanded the legal meaning of ‘national security’ to include critical infrastructure, and required CFIUS to investigate all foreign investment deals in which the overseas entity is owned or controlled by a foreign power.”

A 2022 executive order then made “explicit articulation of specific risks that CFIUS must consider. The order established five criteria for reviewing a potential deal: effect on US supply chains, including those unrelated to defense; effect on US leadership in advanced technologies; how the transaction is situated within industry investment trends; cybersecurity risks that could emerge from the transaction; and risks to the private data of people in the United States.”

On the Philippine side, Republic Act No. 11647 authorized the Inter-Agency Investment Promotion Coordination Committee, in coordination with the National Security Council (NSC), and the National Economic and Development Authority (NEDA), to review foreign investments involving military-related industries, cyber infrastructure, pipeline, transportation, or such other activities which may threaten territorial integrity and the safety, security and well-being of Filipinos, when: a.) Made by a foreign government-controlled entity except independent pension funds, sovereign wealth funds, and multinational banks; or, b.) Located in geographical areas critical to national security. The president, however, has final decision on whatever appropriate action to take regarding recommendations to suspend, prohibit, or limit a reviewed foreign investment.

Jemy Gatdula is a senior fellow of the Philippine Council for Foreign Relations and a Philippine Judicial Academy law lecturer for constitutional philosophy and jurisprudence

Twitter  @jemygatdula

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