Introduction

The present synthesis[1] highlights a number of new features of the international relations system and reveals restrictive measures taken by both developed and developing/emerging countries in the field of foreign direct investment (FDI), before the COVID-19 pandemic and also under its influence.

Since 2018, there has been remarked a strong trend towards stricter FDI control regimes, especially in terms of investment in strategic industries and critical infrastructure, in response to Chinese investments, closely linked to national security motivations. The COVID-19 crisis has once again emphasized the inclination towards economic nationalism and even the goal of achieving strategic economic autonomy, not only in developed countries but also in developing ones (of particular interest in this regard are case studies on China and India).

The propensity for economic nationalism and strategic autonomy in many parts of the world falls into the category of “harmful protectionism”, in contrast to the restrictive measures imposed in order to enforce necessary environmental, social and governance standards associated with “good protectionism”. Most developing/emerging countries continue to liberalize their FDI regime in certain sectors that do not affect national security, as FDI represents their main source of capital. But starting from a higher level of restrictions, developing countries continue to be more protectionist than the developed ones. The uncertainty regarding the economic recovery after the COVID-19 crisis is also reflected in the field of the FDI regimes, the protectionist tendencies becoming more and more prominent, although their negative effect is obvious.

Determinants of the Current Protectionist Trends

Experts from the United Nations Conference on Trade and Development (UNCTAD), the World Trade Organization (WTO) and the International Monetary Fund (IMF), in their reports on the state of the world economy, trade and international investment, point to a worrying inclination towards interventionism, protectionism and the transition from a multilateral regulatory model to regional and bilateral frameworks (UNCTAD, 2020a; WTO, 2020; IMF, 2020).

The literature reflects that, during a serious crisis, many governments resort to protectionist measures in order to defend national interests. In such circumstances, the probability of a “copycat” protectionist behaviour rises (Evenett, 2019). But the US-initiated trade war against China, even in the absence of an international crisis, has had similar domino effects of protectionist measures, over which the COVID-19 crisis has overlapped.

The various facets of the US-China trade war point out that trade disputes and tensions between the two world leaders do not take the form of a simple trade war, but are associated with an ideological one and one for global domination, not limited to trade but including also economy at large, technology, investments, security and political values. Barriers to FDI flows are not only related to regulations, measures and restrictive rules, which protect certain sectors of the national/regional economy, but also to geopolitical motivations. At the same time, in the field of industrial policies, there is a major change worldwide, from the “laissez-faire” approach, to the increase of interventionism and the role of the state. The digital economy is also threatened by protectionism, with countries participating in the international debate on the taxation of digital services being far from a consensus, with the US withdrawing from the negotiations under the auspices of the Organization for Economic Cooperation and Development (OECD) in June 2020. At the same time, the COVID-19 pandemic is accompanied by new protectionist tendencies, which are not limited to trade in medicines, medical devices and sanitary materials. All these factors will be addressed in the following sections.

Close Links between National Industrial Policies, Structural transformations in the World Economy and Protectionist Trends

Protectionist tendencies overlap with the deep structural changes in the world economy. These transformations reflect the fourth industrial revolution, based on both new technologies and the digitalization of economies and the fact that in total production costs, the importance of labour costs is declining. The competitive advantages of the manufacturing industry concentrated in low-cost labour areas have begun to diminish with the increasing presence of industrial robots, which has already led to a change in the configuration of global production networks (GPNs).

To this is added the increase in labour costs in emerging economies and the geopolitical risks on the rise, which creates solid preconditions for moving production activities to countries of origin. But developing/emerging countries, such as China, India, Brazil and Mexico, also have significant stocks of industrial robots, new technologies and digitalized economies. Multinational companies present in these countries may decide to stay, in order to continue to benefit from the workforce skills and to avoid the additional costs generated by the relocation of productive capacities. Although the trend of relocation of production (repatriation of production facilities to countries of origin or elsewhere) will intensify in the coming years, amid automation of international production and global value chains (GVCs), it will not impact all industries and countries uniformly, and technology-driven relocation will remain limited (UNCTAD, 2020a). Innovation is both a central element of companies’ strategies and national economic growth and development strategies (Cornell University-INSEAD-WIPO, 2020). This is also reflected in the positioning of world economies in the international ranking taking into account the global innovation index (Table 1).

Table 1: Rankings of the top ten economies by income group according to the global innovation index[2] for 2020 (in paranthesis, the position occupied in the world ranking of the 131 economies analyzed)

Source: Cornell University-INSEAD-WIPO (2020).

Notes: Since 2011, Switzerland ranks 1. South Korea entered the top 10 for the first time in 2020. In 2020, China maintained its 14^th position, in 2019 entering the top 15 for the first time. It is the only middle-income economy in top 30. Over the past seven years, China, the Philippines, India and Vietnam are the top 50 economies with the most significant advances in innovation. Although Brazil ranks only 62^nd in the world ranking of economies according to the global innovation index for 2020 (up 4 positions from 2019), however it has a research and development intensity comparable to European countries (such as Spain and Portugal), has multinational companies in the field of research and development and hosts major clusters in the field of science and technology.

Given that international trade and investment revolve around global value chains, through the circuit of inputs generated and received for export production, it is expected that any new wave of protectionism will generate significant costs, amplified by a number of factors: (1) hyperspecialization in tasks and production of parts and components, which involves multiplying costs along the GVCs; (2) protectionist measures directed against a country affect all GVC participants, including their initiators, having not only effects on countries directly targeted by the imposed barriers (for instance, China’s exports to the US have significant added value from countries such as Japan, South Korea, the United States of America and Germany, while the US exports to China incorporate high added value from countries such as Canada, China, Japan, Mexico); (3) the uncertainty generated is reflected on the behaviour of the companies, reluctant in initiating new investments; (4) the remodelling of supply chains, through their reorganization (relocation, shortening, etc.), has direct effects on partner companies, including the impossibility of some of them to provide parts, components and services or to meet delivery deadlines; (5) the increase of transaction costs is accompanied by the decrease of trade flows, and the trade carried out through GVCs has a much higher effect on the economic growth and the labour market than that outside the GVCs; (6) the increase of production costs generates a price spike, the final consumers being directly affected (IBRD-WB, 2020).

In terms of industrial policies, there is a major change, from the “laissez-faire” approach, to increasing interventionism and the role of the state, not only in developing but also developed countries. In the last decade, at least 110 countries have presented industrial development intentions or explicit policies, not only for reasons related to economic development and job creation, but also for poverty reduction, participation in the industrial revolution and the GVCs, and achieving sustainable development goals. To these objectives are added those of national security, but also the competition for gaining the dominant position in advanced technologies and strategic GVCs, with a strong protectionist touch (UNCTAD, 2020a). Recently, concerns about the situation of companies in strategic sectors that, weakened by the health crisis, could face the risk of being taken over by companies from other countries such as China (including state-owned or state-controlled enterprises) have worsened (Solís, 2020). Economic nationalism is therefore on the rise.

Developing countries fear premature deindustrialization, while developed ones envisage rebuilding the industrial base (through subsidies, fiscal incentives, public investment to increase domestic productive capacity), but especially strategic positioning in the field of advanced technologies. Special economic zones, focused on attracting FDI, continue to increase in number and diversify, currently being over 5,400 such zones in about 150 economies, compared to 4,000 in 2015. Many such special economic zones target the concentration of know-how and technology in capital and innovation intensive industries (in China and South Korea, exempli gratia, are clusters specializing in electronic components, batteries, semiconductors, in India clusters specializing in IT services). Such initiatives not only generate protectionist tendencies, but also measures to stimulate technology transfer and to modernize national productive capacities through trade and investment facilitation programs. The COVID-19 pandemic has led to new measures in key areas, highlighting the strategic importance of the pharmaceutical and medical equipment industries, for example (UNCTAD, 2020a).

Rising interventionism and protectionism in advanced countries means blocking access to technologies for developing/emerging countries, which stimulates South-South partnerships, but also national efforts of research, development and innovation, such underscored by China. A trend that could accelerate in the coming years is the intensification of regional, bilateral and even ad hoc economic integration efforts, to the detriment of international economic cooperation (UNCTAD, 2020a).

Concomitant Changes at Multiple Levels

Reconfiguration of international production. International production, under the impact of new technologies, economic policies and stricter environmental, social and governance standards (the acronym ESG in English), may have several trajectories: (1) Relocation from host countries to countries of origin, leading to shorter and less fragmented value-added chains, as well as a higher geographical concentration of added value. The most affected are technology-intensive industries, export-oriented economies and those participating in global value chains. Relocation means the withdrawal of investment from the host country, for some economies this implies the need for reindustrialization or counteracting the effects of premature deindustrialization. (2) Diversification leads to a greater distribution of economic activities, increases opportunities for new entrants (economies and companies) in the direction of participation in global value chains. Digitalizing supply chains requires both high-quality hardware and software infrastructure. (3) Regionalization contributes to the reduction of the length of supply chains, but not the decrease of their fragmentation, meaning a transition from global efficiency-seeking investment to regional market-seeking investment. It requires cooperation with neighbours in industrial development, trade and investment. (4) Replication means the transition from investment in large-scale industrial activities to more geographically distributed manufacturing and shorter value-added chains, with the production of goods being as close as possible to where they are used and according to the customers’ exigency. This requires a digital network of decentralized production sites, in several locations, connected by digital technology. On-demand production means flexibility and rapid adaptation to customer demands, in contrast to mass production of goods (UNCTAD, 2020a).

Changing development strategies. The recent general trend in international production indicates shorter GVCs, a higher concentration of added value and a decrease in international investment in productive physical assets. All of these are accompanied by major challenges for developing countries. For decades, their development and industrialization strategies have depended on attracting FDI, increasing participation and capturing as much value as possible in the GVCs, technological advancement and digitalizing the economy. The deep transformations in terms of international production are long term and require a change in development strategies (UNCTAD, 2020a).

On this basis, it is necessary to rebalance towards growth based on domestic and regional demand and to promote investments in infrastructure and domestic services, taking into account the Sustainable Development Goals. Investors are no longer looking for opportunities associated with manufacturing projects, but aim instead value-added projects in infrastructure, renewable energy, water and sanitation, food and agriculture and health care, taking into account priorities induced by: the new industrial revolution, digitalization of the economy, sustainable development, but also the intensification of economic nationalism (UNCTAD, 2020a). The COVID-19 crisis is manifesting itself in a period of profound changes and transformations in the world economy, contributing to their amplification and acceleration.

Figure 1: Priority sectors for investment nowadays

Source: Based on the literature review.

Against the background of simultaneous demand and supply shocks and their adverse effects, it has been revealed once again how interconnected are international trade and investment flows, various countries rethinking their economic policy strategies to reduce vulnerability to global economic shocks (Seric, Hauge, 2020a; 2020b; Coveri et al., 2020). Moreover, the outlook has become even more uncertain under the impact of the COVID-19 pandemic. This has been accompanied by new restrictions, with some countries tightening investment regulations and introducing temporary measures to prevent foreign takeovers during the crisis (Seric, Hauge, 2020a; UNCTAD, 2020a).

The more prominent the challenges and risks from the outside, the stronger the temptation to resort to measures to protect companies and sectors of the national economy. It is clear that protectionist measures in one area affect other sectors (for instance, those related to trade also affect FDI flows), as these measures discourage the activities of global production networks, in which the free movement of goods and services between companies from different countries is vital (Görg, Labonte, 2011). Given that the evolution of the world economy is uncertain at the moment, under the impact of the COVID-19 crisis, on this also depend the decisions of the economic actors to continue investing or, on the contrary, to disinvest or wait for a more favourable period to launch new investment projects.

”America First” and the Pursuit of National Interest

At the 2018 World Economic Forum in Davos, Donald Trump stressed in his speech that the US would take into account the national interest, urging other countries to do the same. But which may be the result if the national interest of a major player on the international stage violates the rights of other states? In the US relations with the EU, to the frictions generated by factors such as subsidies in the aeronautics and agriculture industry, others have recently been added, such as the digital services taxation, among the big companies affected by such measures being GAFA (Google, Amazon, Facebook and Apple). Moreover, during the COVID-19 pandemic, the US and the EU took positions diametrically opposed to the new risks induced by the new coronavirus, the US being accused even of acts of “piracy” in its actions to obtain sanitary materials and equipment, needed by the American population, to the detriment of European partners, which raised a number of questions about how much confidence remained in bilateral relations.

The comparison of the two current trade wars, the one between the USA and China, on the one hand, and the one between the USA and the EU, on the other hand (which will probably be tempered and even abandoned by the new US administration), indicates two relevant aspects of international relations.

(1) Despite differences of opinion, developed countries are working together to strengthen international rules governing key areas such as subsidies and forced technology transfers. Currently, the only emerging country that has the capacity to catch up with developed countries is China.

(2) Unlike the US-China trade war, that between the US and the EU is more like a war of declarations and threats, each party being cautious when it comes to implementing de facto protectionist measures. At the same time, the US’ measures do not appear to have affected EU exports of goods. The US’ trade deficit with the EU in terms of trade in goods continued to grow between 2017 and 2019, despite the intensification of economic nationalism during Donald Trump’s term and unprecedented trade restrictions, reflected by the intense recourse by the US President to Section 301 of the Trade Act of 1974 (referring to “unjustifiable acts, policies or practices, defined as incompatible with US international law and burdening or restricting US trade”) and Section 232 of the Trade Act of 1962 (concerning national security). Statistical data show how interdependent the two economies are, an undeniable evidence in this regard being the share of over 30% of EU-US FDI stocks in the EU total inward and outward FDI stocks (Eurostat, 2020). Bilateral relations are “the largest and most complex” in the world (USTR, 2020), but the elimination of uncertainty is a sine qua non condition for further strengthening them.

The trade and investment policies of the key actors in the field of international relations were marked by an obvious amplification of the protectionist tendencies, even before the manifestation of the COVID-19 pandemic. Many restrictive measures have directly targeted China, which is and continues to be considered by international organizations as a developing country, and under this status is exempted from certain obligations, which gives it a competitive advantage over competitors, both among developed and developing countries.

The recent period has been dominated by the US-China confrontation, the growing constraint on international cooperation in science and technology and new forms of investment barriers for reasons of national security.

From 2018 onwards, one can remark a new wave of protectionism, fuelled by tensions between the United States and China, given their significant share in international trade flows. In 2018, the two countries imposed each other, successively, increased customs duties, covering more than half of their bilateral trade (about 70% of US exports to China and almost half of the US imports from China). The US imports of intermediate goods from China are expected to fall by more than 40% in the long run, a much sharper decline than that of imports of consumer goods (9%) and capital goods (26%). The US has also imposed additional tariffs on other countries (on various products, such as solar panels, washing machines, steel and aluminum), causing retaliation from affected trading partners (IBRD-WB, 2020).

The Effects of the COVID-19 Pandemic

International experts consider that while temporary national protectionism can serve a country’s urgent interests and stimulate domestic production, there is a danger of slipping into uncontrolled nationalism, with long-term repercussions on international trade and investment and, implicitly, on relations between nations (World Economic Forum, 2020). We are therefore far from a “capitalism of stakeholders” [3]  that takes into account the interests of states, companies and society alike, given a set of environmental, social and governance objectives.

The intensification of protectionist tendencies in international trade and investment has become all the more evident during the COVID-19 pandemic, and consequently the term deglobalization is increasingly used. However, while the process of “physical” deglobalization has been accelerated by the current crisis, on the contrary, the online, digital globalization has been markedly stimulated.

The COVID-19 epidemic turned into a pandemic (confirmed by the World Health Organization on March 11, 2020), considered by IMF experts “a rare disaster” (Gopinath, 2020). The world has changed radically in just a few months. As countries have implemented the necessary quarantine and social distancing measures to prevent the spread of the pandemic, the world has reached a “Great Isolation” and the world economy has entered a recession (IMF, 2020). The economic situation has changed and continues to change profoundly around the world, necessitating the direct involvement of the state and central banks in the economy. The IMF has confirmed that the current crisis is the worst since the Great Depression of 1929-1933, far exceeding the international financial crisis of 2008-2009.

An important aspect to consider is the behaviour of consumers and companies during the COVID-19 pandemic: consumers choose to save rather than spend, and a significant share of investors chooses to postpone planned investments, which keeps inflation low. At the same time, broad fiscal measures to stimulate the economy, estimated at over USD 11 trillion at the G20 level, accompanied by rising fiscal deficits (17% of GDP in OECD countries) and an average public debt of 140% of GDP in developed countries, associated with a new role of central banks (that of supporting massive packages to stimulate national economies) induce risks, but not of the nature of a sovereign debt crisis (EIU, 2020).

Strategic Autonomy, a Solution?

Economic autonomy is not a new concept. This term was frequently used in the social field, but had a sporadic presence in the theory of international economic relations. In the first case, it is considered to be a “product of capitalism”, because “the market and not the state generates opportunities to earn a living”, in terms of the economic independence of the population, as a guarantor of the capacity to exercise democratic rights (McMann, 2012). In the second case, economic autonomy is defined as “the ability of companies and states to make independent decisions about their economic future” (Sarooshi, 2004). The need for economic autonomy has been perceived as more and more stringent together with the countries’ increasing economic dependence on China and energy dependence on Russia, but the peak has been reached during the COVID-19 pandemic, by the temporary interruption of the supply along the global production chains.

In recent decades, global value chains have increased in both length and complexity as companies have expanded around the world. Since 2000, the value of intermediate goods traded globally has tripled, reaching over USD 10,000 billion annually. But multinational companies have not only benefited from efficiency, reduced production costs and proximity to major markets. They also have faced risks, the most serious being the disruption of supply chains. Companies can expect such outages, with an average duration of one month or more, to occur every 3.7 years, with the worst such events having a major financial impact on them (McKinsey Global Institute, 2020).

Recent reports from international organizations indicate a clear trend towards the increase of the focus of G20 Member States on safeguarding key national security interests from 2018 onwards. These include access to sensitive personal data and the acquisition of advanced dual-use technologies, civilian and military. Between October 2018 and May 2019, France, Germany, Italy, the USA, the EU adopted new policies or tightened existing legislation (except for the EU, the other economies already had FDI monitoring policies) (OECD-WTO-UNCTAD, 2019a). Reviewing the cases of restrictive measures adopted between 2018 and 2020, [4] it is worth noting: (1) the adoption of protectionist policies – in the first instance by developed countries, then by developing/emerging countries and (2) the intensification of protectionist measures during the COVID-19 pandemic, both at the level of developed and developing/emerging countries, either in the direction of FDI monitoring to avoid the takeover of strategic assets by foreign companies, or in that of obtaining strategic economic autonomy (OECD-WTO-UNCTAD, 2019b; 2019c; UNCTAD, 2020b).

The path to strategic autonomy is seen by China as a normal response and a form of defence against decoupling from the United States, although this is to its disadvantage. In turn, India announced the Self-reliant India Mission (Atma-Nirbhar Bharat Abhiyan), in the context of the COVID-19 pandemic and excessive dependence on certain categories of imports.

Once the devastating effects of COVID-19 became apparent, Prime Minister Narendra Modi resorted to a program of firm measures to revive the Indian economy. It relies on the support of the local manufacturing industry and local supply chains, in the wider context of India’s excessive dependence on certain categories of imports[5] and the objective of ensuring the country’s strategic autonomy. His speech on May 12, 2020 was a strong nationalist one, based on the slogan “Vocal for Local”. The Prime Minister announced Self-reliant India Mission[6] (Atma-Nirbhar Bharat Abhiyan), accompanied by a package of economic stimulus measures worth 20,000 billion rupees (about 265 billion dollars), representing 10% of India’s GDP.

The five pillars of the Mission are: rapid economic transition, not gradual changes; world-class infrastructure, representing modern India; a system based on modern technology; dynamic demographics and demand that contribute to the use of the power of demand and supply to its full potential. The reform measures to achieve India’s economic independence include: reform of agricultural supply chains, a rational tax system, simple and clear laws, capable human resources (labour market reform) and a strong financial system. For the military industry, the aim is, among others, to reduce imports and stimulate foreign companies to produce in India, but also to encourage public procurement from domestic sources.

However the country’s economic independence is difficult to achieve, as production costs are much higher in India than in neighbouring countries (China, for example). On the other hand, supporting the local manufacturing industry and local supply chains is a long, complex and difficult process, given not only domestic but also regional and international challenges.

As for China, its reaction to the protectionist measures adopted by key partners has been to lean towards strategic autonomy. A statement summarizing the main directions of action that will be included in China’s 14^th Five-Year Plan for 2021-2025 shows that innovation is the key to modern development, “making technological self-reliance a strategic support for national development”. Chinese leadership sees dependence on foreign technologies, such as semiconductors, as a major weakness, especially following the expansion of the US export control policies (Price et al., 2020). This is all the more so since the USA, during the Trump administration, expressed its intention to “decoupling” of the Chinese economy. The aim is to reduce dependence on foreign suppliers for strategic products such as food, energy and semiconductors. The path to strategic autonomy is seen by China as a form of defence against decoupling by the US and its allies, although Chinese experts believe it would be to China’s advantage not to resort to this path (McDonald, 2020).

But the economic independence of a country is difficult to achieve, given: (1) the deep interdependencies between the world’s economies, at least regionally; (2) the prospect of giving up the advantages of internationalization, taking into account the reasons that have led over time to increased international trade and investment flows (comparative and competitive advantages in terms of labour, purchasing power and demand, technological advancement, level of infrastructure development, connectivity, knowledge economy, legislative framework, progress of reforms, political stability, etc.); (3) national constraints, existing even in the absence of the COVID-19 pandemic; (4) new synchronized challenges: the reduction of private consumption, productive investments, trade and investment flows, in parallel with the increase of the unemployment rate, the fiscal deficit and the public debt, with the entry into recession and the need to adopt anti-crisis measures.

Major Determinants of the FDI Protectionist Trends

The motivations for restricting FDI are various, from protecting advanced technologies, maintaining jobs and encouraging local production (through local content requirements), to maintaining control over national companies and stimulating technology transfer at the national level, with developing countries generally more protectionist than developed ones (De Bolle, Zettelmeyer, 2019).

The international financial crisis of 2007-2008 generated a wave of protectionist and interventionist tendencies, a gradual decrease in the FDI rate of return and a shift from multilateral to regional and bilateral negotiating frameworks (UNCTAD, 2020a). But other studies show that until 2016-2017, there is no trend of abrupt intensification of protectionism, which appeared only in 2018 (Evenett, 2019). The UNCTAD Report on FDI Policies in 2009 shows that measures to promote FDI coexist with those of discrimination against foreign investors, including through hidden actions (referring to public procurement with a high local content, especially in the case of public infrastructure projects, preventing banks from granting loans to foreign economic agents, invoking exceptions for reasons related to national security, etc.). The Report also mentions fears about the takeover of “national champions” by foreign investors (UNCTAD, 2009). It should be emphasized that this dichotomy, liberalization-promotion of investments versus the intensification of FDI regulation in order to achieve economic policy objectives is noticeable in all countries of the world, in some more pronounced, in others less intensely. The UNCTAD Report with analyses for 2016 shows that 80% of the measures adopted globally are in favour of FDI liberalization and only 20% restrict FDI (UNCTAD, 2017).

Especially since 2017-2018, after a wave of Chinese investment led Chinese players to take control of foreign high-tech companies and other strategic assets, there has been a growing concern among countries (especially developed, led by the USA) on the effects of these takeovers in terms of national competitiveness and the protection of national interests.[7]

Developed countries are the ones that “set the tone” for the new wave of protectionism in the field of FDI, being worth mentioning the measures to monitor foreign investment in EU member states, but also in the US and Japan. Although they are considered by countries that adopt them as ways to eliminate “harmful” FDI, it is difficult to draw a precise line between simple protection of the economy and forms of protectionism aimed at blocking the access of investors from other countries to strategic assets, to slow down their technological advancement.

In the Communication from the European Commission, Welcoming Foreign Direct Investment while Protecting Essential Interests (European Commission, 2017), it is highlighted that “Foreign direct investment is an important source of growth, jobs and innovation. It has brought significant benefits to the EU as to the rest of the world. This is why the EU wants to maintain an open investment environment. At the same time, the reflection paper on Harnessing Globalization recognised increasing concerns about strategic acquisitions of European companies with key technologies by foreign investors, especially state-owned enterprises.” Internationally, the EU‘s investment regime is among the most open ones, but as new investment trends emerge (including in terms of the role played by some emerging economies as suppliers of FDI, such as China, but also by private companies that have access to financing or other state support measures, which allow them to be more competitive than others, the risk is that “in individual cases foreign investors may seek to acquire control or influence in European undertakings whose activities have repercussions on critical technologies, infrastructure, inputs, or sensitive information”).

This Communication must be linked to the “EU-China - A Strategic Outlook” of March 2019, which highlights that “China’s economic power and political influence have grown with unprecedented scale and speed, reflecting its ambitions to become a leading global power. China can no longer be regarded as a developing country. It is a key global actor and leading technological power. Its increasing presence in the world, including in Europe, should be accompanied by greater responsibilities for upholding the rules-based international order, as well as greater reciprocity, non-discrimination and openness of its system”.

The EU Regulation 452/2019 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of FDI into the Union (applied from 11 October 2020) lays down the general framework for the examination of FDI from the perspective of security or public order. FDI will be analyzed from the perspective of their impact on: “(a) critical infrastructure, whether physical or virtual, including infrastructure in the fields of energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure; (b) critical technologies and dual-use items as defined in Article 2 (1) of Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies; (c) supply of critical inputs, including energy or raw materials, as well as food security; (d) access to sensitive information, including personal data, or the ability to control such information; or (e) the freedom and pluralism of the media”. The first criterion taken into account in determining whether an investment may affect security and public order is related to the control of the investor “directly or indirectly by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding”. The control exerted by the EU authorities over FDI in each Member State will be exercised by the annual reporting on the FDI carried out on their territory by 31^st of March.

Romania, as an EU member state, has prepared a draft Emergency Ordinance (OUG), which modifies the current mechanism for examining FDI, so as to apply the provisions of EU Regulation 452/2019. In this sense, it is envisaged to set up a Commission for the Examination of Foreign Direct Investment (CEISD), attached to the Romanian Government, composed of representatives of: the Prime Minister’s Office, the Presidential Administration, the Ministry of Economy, Energy and Business Environment, the Ministry of Public Finance, the Ministry of Foreign Affairs, the Ministry of National Defence, the Ministry of Justice, the Ministry of Internal Affairs, the Romanian Intelligence Service, the Foreign Intelligence Service and the Competition Council. The normative act also provides for requesting the approval of the Cyber Security Operational Council (COSC), in the situation where FDI targets or involves IT technologies that may affect or harm the security or public order of Romania. If it is considered that there are major security risks, the opinion of the Supreme Council of National Defence will be sought. Foreign investors from outside the EU (individuals or companies) must notify the intention regarding FDI (in areas such as energy, transport, agriculture, and communications, military) to the Romanian authorities. CEISD will issue an opinion based on the information received, the decisions being taken unanimously, after which the Government will issue a decision authorizing or rejecting the investment. The entities directly involved can challenge the government’s decision in court. Failure to notify such an investment or the transmission of false/incomplete information is punishable by fines of 1-5% of the investor’s turnover.[8]

Although China is not explicitly mentioned in the Regulation 452/2019, it is clear that Chinese investment in infrastructure, energy, technology and other sensitive areas at the EU level will be hampered. This is even in the light of the adoption in the near future of the EU-China Comprehensive Agreement on Investment (although the agreement in principle was reached on 30 December 2020, its text needs to be finalized, signed by the Member States and ratified by the European Parliament).

Since 2018, there is a strong and growing trend towards adopting stricter FDI control regimes, especially in terms of foreign investment in strategic industries and critical infrastructure. Many countries, most of them developed (but also emerging, such as India), have resorted to protectionist measures, with the main objective of protecting their national security, many of them representing reactions to Chinese investment, and more recently to the COVID-19 pandemic (UNCTAD, 2020a). Although, statistically, the year 2018 appears to be the “peak” of FDI restriction measures in the recent period (Chart 1), an analysis of the attitude of world countries towards FDI, especially in sectors considered to be sensitive, shows that the protectionist trend continues and it even intensifies.

 Chart 1: The number of measures adopted in the field of FDI, Three main categories, 2004-2019

Source: UNCTAD (2020a).

The COVID-19 pandemic has exacerbated fears about the plight of companies in strategic sectors that, weakened by the health crisis, could face the risk of being taken over by countries such as China (Solís, 2020). The current crisis and uncertainty about the duration and intensity of the shock (IMF, 2020) also affect FDI, given the evolution of demand, the possibility of supply disruption and uncertain revenues. Exacerbation of export restrictions has become a reality since March 2020, not only for medicines and protective equipment, but also for food (Espitia, Rocha, Ruta, 2020).

New investment restrictions and regulations in recent years reflect the concerns of some countries around the world about national security and the scenario of excessive takeover of high-tech firms, strategic assets, land or natural resources by foreign investors. Several countries have tightened control over FDI or are considering new investment review procedures. National security arguments are now widely used to protect national interests, core technologies and know-how, which are considered essential for national competitiveness (UNCTAD, 2020a). But this term is not clearly defined (Ufimtseva, 2020), so that under its “shield”, discriminatory restrictions can be imposed, to the detriment of free competition. In the coming years, intellectual property in certain industries, such as financial services, telecommunications, electronics, biotechnology and even agriculture, is expected to be increasingly protected, which may lead to new investment restrictions (UNCTAD, 2020a).

Although measures to promote FDI outnumber those of restraint or additional regulation, their evolution indicates a firm inclination towards protectionism (Chart 1).

These data must also be correlated with the evolution of FDI flows worldwide. According to the OECD and UNCTAD, the value of total FDI flows worldwide has fallen by 40% for the whole of 2020, falling to below USD 1 trillion for the first time since 2005 (compared to USD 1,540 billion in 2019 and the highest level in 2015, of about USD 2.042 billion) (Chart 2). For 2021, a new decrease of 5-10% is forecasted, and for 2022, a gradual recovery. In 2022, a return to the pre-COVID-19 pandemic is possible, but only in the optimistic scenario (OECD-WTO-UNCTAD, 2020).

Chart 2: Inward FDI flows, 1970-2019 (USD million, current prices)

Source: UNCTAD (2020c).

In the first half of 2020, total FDI flows worldwide decreased by 49% compared to the same period in 2019, amid the COVID-19 pandemic and the restrictions that were imposed. Developed economies were the worst affected (-75%), with the decline in developing economies being moderate (-16% overall, -12% in Asia, -28% in Africa and -25% in Latin America and the Caribbean), even lower than initially forecasted (UNCTAD, 2020d).

UNCTAD data show that between 1970 and 2019, the longest period of uninterrupted growth in FDI flows received worldwide was 1992-2000, followed by a new beneficial period between 2004 and 2007, succeeded by ups and downs and an obvious downward trend between 2016 and 2018. It is worth noting that in 2016, China marked the highest value of its global FDI flows generated, with nearly USD 200 billion, ranking second globally, after the USA, but in the following period the value of these flows decreased from year to year, one of the main determinants being the restrictions imposed by the advanced economies. In contrast, the financial crisis of 2007-2008 did not discourage China’s FDI flows, with an increasing trend until 2016.

Chart 3 shows the evolution of the FDI flows received and generated by the USA, China, Japan, the EU-27 and the United Kingdom in the period 2008-2019.

Chart 3: Inward and outward FDI flows, US, China, Japan, EU-27 and United Kingdom between 2008 and 2019 (USD million, current prices)

 Outward FDI                                                            Inward FDI

Source: UNCTAD (2020c).

We consider that the growth of international production, interrelated with that of FDI in the first two decades of the third millennium, was stimulated by four main categories of factors: (1) economic policies (trade liberalization initiatives and measures associated with export growth, investment, but also boosting demand); (2) opportunities outlined in the field of economic transactions (decrease of production costs and also  of other costs associated with international business); (3) technological advancement (factor with a major role in decreasing costs of transport, communication, management, coordination of supply chain activities); and (4) the progress made in terms of the human development index (from a dual perspective, the quality of the workforce and new trends in terms of demand, given the increase in digital literacy of the population, the acceleration of financial inclusion, the change in consumption habits, increasing interest in new technologies, the driving force of young people of generations X, Y and Z).

In 2019, Asian developing countries continued to be leaders in the number of new investment policy measures, being even more active than in 2018 (50 measures, compared to 42 in 2018). These were followed by African countries (17 measures, but decreasing compared to the 27 measures adopted in 2018). However, the nature of the measures adopted is different in developing regions compared to those developed. Of the measures adopted in 2019 in developing economies, 52 were to liberalize, promote and facilitate investments and only 11 were to restrict them. In contrast, in developed countries, more than half of the measures adopted in 2019 were restrictive. The different approach to FDI is explained by the fact that they remain the main source of capital for developing countries (UNCTAD, 2020a; 2019). But another explanation lies in the regime with a higher degree of openness to investment in developed countries, compared to those in developing/emerging countries, the continuation of openness in an already more permissive economy being more difficult to achieve compared to a more protected economy (Mixture and Roulet, 2019).

But beyond the reactions of developed countries (the USA, Australia, Japan, but also at EU level) and several emerging economies (India) to the intensification of China’s acquisition of state-of-the-art critical technologies, beyond the general trends towards deglobalization manifested under the Trump administration and the new fears that accompany the COVID-19 pandemic, there is a need for businesses to adhere to strict environmental, social, and governance standards. The ESG approach, which must also be interpreted from the perspective of the 17 Sustainable Development Goals, is accompanied by new investments in infrastructure and services, as well as in the green and blue economy (in sectors such as renewable energy, water and sanitation, health), new ways financing (project financing, not traditional FDI) and attracting new categories of investors, not just from the category of multinational enterprises. A distinction must therefore be made between “good protectionism” (in terms of compliance with the necessary environmental, social and governance standards) and “harmful protectionism”, but this complex issue may form the basis of another research paper.

The Amplitude of FDI Protectionism According to the Regulatory Restrictiveness Index

The FDI regulatory restrictiveness index, calculated by the OECD experts, measures FDI restrictions for 22 economic sectors in 69 countries (including OECD and G20 countries). Four categories of restrictions are taken into account: (1) foreign equity limitations; (2) screening or approval mechanisms that are discriminatory; (3) restrictions on the employment of foreigners as key personnel; (4) other operational restrictions, such as those on capital repatriation or land ownership. Restrictions are rated on a scale from 0 (open economies) to 1 (closed economies). Although the FDI regulatory framework plays a significant role in investor decision-making, a number of other determinants are also taken into account: ease of doing business, quality of governance, quality of infrastructure, macroeconomic environment, quality of education and human resources, efficiency and market size, stage of technological development, etc.

Chart 4 shows the FDI regulatory restrictiveness index in ten developing/emerging G20 countries (China, India, Brazil, Russia, Mexico, Indonesia, Saudi Arabia, Turkey, Argentina and South Africa), with two main groups: the protectionist one (above the OECD average - Indonesia, Russia, China, India, Saudi Arabia, Mexico) and the open one (South Africa, Turkey and Argentina), Brazil having a level similar to the OECD average.

Chart 4: FDI regulatory restrictiveness index in 2019 – OECD average as compared to ten developing/emerging countries, members of the G20

Source: OECD (2020).

Note: Mexico and Turkey are members of both the OECD and G20.

At the level of the three main sectors of activity (primary, secondary and tertiary), in Indonesia, China, Mexico, Saudi Arabia and Brazil, the primary sector is the most heavily protected, while in Russia, India, Turkey, South Africa and Argentina, the tertiary sector is the most severely restricted, with notable differences between the primary and tertiary sectors being particularly noticeable in the case of: India, Russia, Mexico, Indonesia, Turkey and South Africa. The secondary sector is less protected compared to the other two, and among the countries analyzed, Indonesia, Russia, Mexico, China and Saudi Arabia have the secondary sector more protected than the other countries included in the analysis.

Mistura and Roulet (2019) show that countries such as China, India, Indonesia, Russia and Turkey have made substantial progress towards reducing FDI restrictions over the period 1997-2017. Progress by countries with a higher level of protection is possible at a faster pace. In contrast, countries with a low level of restrictions mark a slower pace of liberalization reforms, as there are fewer barriers to remove and, moreover, restrictions that were easier to remove were among the first to be removed, but restrictions supported by some major actors persist. Chart 5 shows the positive developments in the liberalization of the FDI regime in nine of the ten countries analyzed, with the exception of Argentina (which already has the lowest level of restrictions among the ten).

Chart 5: FDI regulatory restrictiveness index in 1997, 2003, 2013-2019 – OECD average as compared to ten developing/emerging countries, members of the G20

Source: OECD (2020).

According to OECD data, in 2019, the countries with the highest rate of FDI regulatory restrictiveness index were: Indonesia, Russia, China, Saudi Arabia, India and Mexico, despite reforms adopted to liberalize their FDI regime.

OECD data do not go beyond 2019, but it should be noted that the new wave of protectionist measures adopted at the level of advanced economies has also “inspired” developing/emerging economies. The protectionist measures implemented by the latter can be classified into several major categories: related to national security (South Africa, Russian Federation, but also China); restricting FDI received from neighbouring countries (India); support for local producers (Indonesia); control of relations with “unreliable entities” (China). Although not as detailed as those adopted at the EU level, for instance (through the FDI screening framework, regulated by the European Commission, which can decide when an investment is considered a threat to the overall interests of the EU), their effects are equally strong on relations with trade and investment partners.

China. On 19 September 2020, China published the provisions on the “Unreliable Entity List”, which entered into force on the same date. However, the Chinese government did not provide a list of names or a timetable for its implementation. A foreign entity or natural person may be designated as a “non-trustworthy entity”, which involves, inter alia, the restriction or prohibition of engaging in import or export activities from/to China and investments in China. The main actions taken by a “foreign entity” (an enterprise, another organization or a person from a foreign country) are primarily concerned with: jeopardizing China’s national sovereignty, security or development interests; suspension of normal transactions with a Chinese company, organization or individual; the application of discriminatory measures against a Chinese company, organization or individual, which violates the normal principles of market transactions and seriously harms the rights and legitimate interests of Chinese economic operators (Global Trade Alert, 2020).

China has made progress on investment liberalization through the Foreign Investment Law, which entered into force on 1^st of January 2020, providing a much shorter “negative list” of protected sectors. However, Articles 6 and 35 include provisions related to national security and national interest, which may lead to unexpected restrictions on investor access to certain sectors (UNCTAD, 2020b). At the same time, through the corporate social credit system (SCS) only trusted companies have access to the Chinese market. The behaviour of companies becomes the key element taken into account in the process of further liberalization. The screening process is a complex system, with corporate ratings, sanctions and reward mechanisms that have a direct impact on market access and the activities of companies active in China: (1) higher scores can mean lower tax rates, better access to credit, easier market access and more public procurement opportunities for companies; (2) lower scores, on the other hand, lead to limited access and even blacklisting; and (3) market access for unreliable and blacklisted entities will be limited and even banned (European Chamber-Sinolytics, 2019).

India. On 17 April 2020, the Government of India revised its foreign direct investment policy to discourage takeovers/acquisitions of Indian companies “for opportunistic purposes” amid the current COVID-19 pandemic and decided to introduce the so-called “governmental route” to all investments originating in countries that have common borders with India. This means that all foreign investment originating from Afghanistan, Bangladesh, Bhutan, China, Nepal and Pakistan requires the prior approval of the government.

Indonesia. On 19 May 2020, the Ministry of Trade issued a new regulation, MOT 50/2020, taking effect on 19 November 2020, requiring e-commerce actors to support government programs by prioritizing locally produced goods and services, increasing the competitiveness of local goods and services and, in particular, for national e-commerce service operators, providing space for the promotion of locally produced goods and services.

Russia. On 11 August 2020, an amendment to the Federal Law on Foreign Investment Procedures in Business Entities of Strategic Importance for national defence and state security entered into force. Its purpose is to subject even the temporary foreign acquisitions of voting stakes in strategic companies to FDI screening procedures.

South Africa. The competition regime was significantly changed on February 14, 2019, with the introduction of the FDI screening mechanism. The new law requires the establishment of a special committee responsible for assessing mergers involving a foreign company, from the perspective of the effect that the merger may have on national security interests. The opinion of the committee shall then be forwarded to the Minister for Trade and Industry, who shall, within 30 days, publish a notification of the decision to authorize, grant authorization or prohibit the implementation of a merger. As of 12 July 2019, the amendments to the South African Competition Law give the President the power to establish a list of national security interests and to set up a committee to monitor FDI to protect the country’s key security interests.

Such measures highlight the inclination towards economic nationalism and protectionism, to the detriment of liberalization and cooperation on a multilateral basis. Protectionist trends affect both trade and all four major types of FDI: horizontal (market-seeking), vertical (efficiency-seeking, involving active trade in intermediate inputs between different subsidiaries of the multinational enterprises), resource-focused investments, and strategic asset-oriented investments.

Conclusions

 Two completely new and unexpected factors have severely affected the system of international relations recently: (1) the “Trump factor”, associated with a tough confrontation between the US and China, the decisions, actions and options of the two powers being the determinants with the widest consequences internationally, including from the perspective of trade and investment, and (2) the COVID-19 pandemic, which highlighted and exacerbated many of the older economic challenges, aggravated by the intensifying withdrawal of the world’s nations from international cooperation, and the general slowdown in the growth of global production and international trade.

Compared to the US-China trade war, the COVID-19 pandemic is an even deeper shock to international relations. This leads to a reconfiguration of production and supply chains around the world, as states and multinational companies alike seek to reduce their dependence on certain foreign suppliers (especially for single sources of supply) and increase their own capacity and resources in the strategic industries.

Analyzing the restrictive measures from 2018-2020, one can remark: (1) the adoption of protectionist policies in the first instance mainly by developed countries, after which developing/emerging countries have followed their example; and (2) the intensification of protectionist measures during the COVID-19 pandemic, both at the level of developed and developing/emerging countries, either in the direction of FDI monitoring in order to avoid the takeover of their strategic assets, or in that of obtaining a strategic economic autonomy.

Therefore, the new wave of protectionist measures adopted at the level of advanced economies has led developing/emerging economies to adopt a series of similar retaliatory measures. These can be classified into several major categories: related to national security (South Africa, Russia, China); restricting FDI received from neighbouring countries (India); support for local producers (Indonesia); control of relations with “unreliable entities” (China).

The COVID-19 crisis underscored the inclination towards economic nationalism and even the ambitious goal of obtaining strategic economic autonomy, not only in the case of developed countries, but also in developing ones. For instance, the path to strategic autonomy is seen by China as a normal response and a form of defence against decoupling from the US and its allies, although this is to its disadvantage. For its part, India announced the Self-reliant India Mission (Atma-Nirbhar Bharat Abhiyan), in the context of the COVID-19 pandemic and excessive dependence on certain categories of imports.

Transatlantic relations will remain a key element of the world order, despite obstacles that are difficult to overcome. The economic policies promoted by President Trump, starting from the “America first” strategy, have stimulated protectionism, unilateralism and economic nationalism and have severely affected the EU’s confidence in its most important strategic partner. The mission of the new president, Joe Biden, to return to multilateralism, will be able to lead to regaining the trust of the partners in the USA, but it will be a lengthy process. The European Union, with a geopolitical Commission and its major goal of enhancing the EU’s role internationally, is ready to take initiatives without US approval. The adoption of the EU-China Comprehensive Agreement on Investment at the end of 2020 (even if its text is not final and will have to be signed by the Member States and ratified by the European Parliament), is an example in this regard. China, which has already proven its ability to react quickly to the crisis, is consolidating its position as a key global player. Russia continues to be severely affected by the sharp drop in oil prices and the repeated extension of sanctions by hitherto “strategic” partners, such as the United States and the EU. These factors will also be reflected in the evolution of FDI in the coming years.

The system of international relations is at a crossroads, and the choice of the path of deglobalization, economic nationalism and strategic economic autonomy would have far-reaching negative consequences for both developed and developing/emerging countries. A possible return of the US to a more balanced attitude, in support of multilateralism, would be a necessary impetus for a reorientation towards cooperation and the rejection of an international economic order of rivalries and confrontations.

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[1] Synthesis of the author’s contribution to the study “Reconfiguring the priorities of the emerging economies under the impact of new international trade and investment policies”, Oehler-Şincai, I.M. (2020) (coordinator), Institute for World Economy, Romanian Academy, November, 156 pages.

[2] The main pillars of the global innovation index are: institutions, human capital and research, infrastructure, market and business sophistication, knowledge and technology outcomes and creative industry outputs.

[3] The founder and executive chairman of the World Economic Forum, Klaus Schwab, defines three types of capitalism: (1) “shareholder capitalism”, supported by most Western companies, whose main objective is to maximize profits; (2) “state capitalism”, which entrusts the government with the task of establishing the direction of the national economy and which is not only present in China but in many other world economies; and (3) “stakeholder capitalism”, recommended by the founder of the World Economic Forum since 50 years ago. (Schwab, 2019).

[4] Related to: critical infrastructure (energy, transport, water, health, communications, media, data processing or storage, aerospace and defence, electoral or financial infrastructure and sensitive facilities); dual-use critical technologies (artificial intelligence, robotics, semiconductors, cybersecurity, aerospace and defence technology, energy storage technology, quantum and nuclear technology, nanotechnology and biotechnology, and health, medical, and pharmaceutical technology); providing critical resources, including energy or raw materials, food security, medical and protective equipment; access to or control of sensitive information, including personal data; media freedom and pluralism, etc.

[5] For instance, in the electronics industry, India imports most of its core components, including printed circuit boards. About 88 percent of mobile phone components are imported from countries such as China, according to the Confederation of Indian Industry. The solar energy industry is heavily dependent on the import of photovoltaic cells and modules, the electric vehicle industry on the import of chemicals for batteries, and the paint and dye industry on imported raw materials. At the same time, over 60% of the medical equipment is imported. Even the pharmaceutical industry, although well developed, imports certain active pharmaceutical ingredients for antibiotics and vitamins.

[6] Please consult: https://indianexpress.com/article/explained/narendra-modi-coronavirus-economic-package-india-self-reliance-6406939/. https://indianexpress.com/article/explained/self-reliant-india-which-are-the-sectors-dependent-on-imports-which-are-not-6408407/. https://www.oneindia.com/india/the-five-pillars-for-a-self-reliant-india-3087682.html. https://www.narendramodi.in/what-are-the-five-pillars-of-a-self-reliant-india-read-to-find-out-more-549630. https://economictimes.indiatimes.com/news/defence/view-modis-mission-self-reliance-can-go-a-long-way-in-making-india-a-major-hub-for-defence-manufacturing/articleshow/75813584.cms. https://pib.gov.in/PressReleasePage.aspx?PRID=1624661.

[7] Led by the US, Western countries have stepped up monitoring of Chinese investors, leading to the cancellation or blocking of 21 Chinese acquisitions, totaling about $ 25 billion in 2018, up 28% from 2017. Please consult: https://www.fxstreet.com/analysis/china-five-facts-about-outward-direct-investment-and-their-implication-for-future-trend-201903210827.

[8] Please consult: https://financialintelligence.ro/proiect-de-oug-se-modifica-actualul-mecanism-national-de-examinare-al-investitiilor-straine-directe/, https://www.profit.ro/stiri/politic/statul-va-putea-obliga-investitorii-straini-non-ue-considerati-periculosi-pentru-securitatea-nationala-sa-si-vanda-afacerile-din-romania-focus-special-pe-mass-media-19483864, https://www.g4media.ro/exclusiv-marile-investitii-economice-din-afara-ue-trebuie-sa-treaca-de-un-nou-filtru-administrativ-format-din-guvern-presedintie-servicii-secrete-proiect-de-transpunere-a-legislatiei-europene-provo.html.