Potential curbs

UK signals potential curbs on Chinese investment amid ‘derisking’ push

Deputy PM Oliver Dowden will take steps to deliver on pledge to Joe Biden to confront China trade quandary.

BY GRAHAM LANKTREE

Rishi Sunak’s government will unveil a package of measures ramping up curbs on trade and investment with China, as his top deputy warns the United Kingdom’s open economy faces unprecedented threats.

The measures go some way towards delivering on promises made by Sunak to U.S. President Joe Biden to crack down on British investments flowing into cutting-edge technologies such as AI and facial recognition which could undermine Western national security.

Deputy Prime Minister Oliver Dowden will announce the package during a landmark speech in London Thursday, in which he will say the U.K. must be “clear-eyed” about the threats to its economy amid the highest levels of geopolitical tension since the Cold War.

The U.K. faces “a careful balancing act between our freedoms, our prosperity, and our security,” Dowden will say.

But while “we will not decouple from the global economy” the U.K. “must derisk” by tightening export controls and investment flowing overseas that could fund the technology of strategic rivals such as China, he will add.

The U.K. “needs to be mindful” of outbound investments "that are being used to facilitate and support and aid strategic uplift of adversaries,” Dowden told POLITICO ahead of the speech.

But he added that when it comes to outbound investments, “for me, there’s a high bar for the imposition of any form of restrictions.”

While the U.K.’s historic openness has been a strength, “we must be clear-eyed that one of the great strengths of our system ... also brings vulnerabilities,” Dowden will say.

Tightening up

Britain’s moves come after Biden signed an executive order last August curbing outbound investment in strategic sectors like semiconductors, AI, and quantum.

That followed a visit to the White House by Sunak in June, during which he “committed” the U.K. to setting up an outbound investment screening regime with the ability “to assess the potential national security risks” posed by investment, according to a survey obtained by POLITICO and circulated to firms soon after the visit by the Department for Business and Trade.

Dowden is now directing the department to improve export controls on emerging tech to strategic rivals like China and to assemble a new team to analyze the data the British government got back from the survey on the risk of outbound investments.

It’s an issue Dowden said he’s been “grappling with” alongside Britain’s allies.

The U.K. has roughly £13 trillion worth of external investment stocks, he went on. “That generates hundreds of billions of pounds worth of income for the U.K. So this is hugely valuable for us.”

Rather than creating a new regime, Dowden said the government hopes to use the National Security and Investment Act, introduced to screen foreign direct investment into Britain, to curb the flow of money into sensitive tech in strategic rivals like China.

It will issue further guidance on when investments may flag risks, and consult on adding new categories covering critical minerals and semiconductors.

While the NSIA regime does not name specific nations as rivals, Dowden will use his speech to drive home that leaders are “clear” about which nations currently pose the greatest threat.

At the same time, Dowden will announce mandatory reporting requirements will be amended with “a small number of targeted exemptions” for deals flowing into the U.K.

Don’t follow blindly

British businesses have been urging the U.K. to go slow on imposing additional controls on outbound investments — gumming up government action.

“The U.K. has been fairly good at resisting very obvious U.S. pressures,” a senior British business representative, like others granted anonymity to speak freely, previously told POLITICO.

Firms have told officials: “Don’t do what the U.S. is doing,” the senior business representative said. Legal firms also told officials “this is just going to be a nightmare. So don’t do it,” they added.

Business opposition prompting the government to slow-walk the policy is “a fair assessment,” said a second senior British business representative familiar with the response.

In September, services sector lobby group TheCityUK publicly aired concerns the U.S. executive order would impact British financial institutions, warning it could hit Americans working overseas at firms placing bets on China’s advanced tech sector.

“A careful review of the evidence suggests it's possible that a very small proportion of outbound investments can present national security issues,” Dowden said.

“They might be fueling technological advances that enhance the military intelligence capabilities of countries of concern,” he added. But because “the data is limited, over the next year, we’ll engage with our G7 allies and businesses to better understand this risk.”