National Security Concerns Shake up Australia’s Foreign Investment Laws

Move comes during rising China tensions . . .

Australia plans to implement a tough new screening regime for foreign direct investment (FDI), citing national security concerns. While the list of sectors in the scope of “sensitive national security” will be determined after further consultation, Canberra has signalled these could range from defence-manufacturing and energy to telecommunications, all of which would face automatic reviews for FDI of any kind. The overhaul will expand the Treasurer’s review powers and tighten compliance measures. The changes could have implications for Australia’s relationship with China, a historically significant investor in Australia, and come in the wake of Beijing’s new tariffs and bans on Australian exports.

A history of chilly investment relations . . .

While Australia did not single out any country in its announcement, in recent years, it has introduced new rules following news of large Chinese investments, whether realized or proposed. After Chinese firms made deals for ports and electrical grids in 2017 and 2018, Canberra promptly identified and secured strategic assets and implemented stricter conditions on inbound FDI, including for state-owned investors. Partly in response, new Chinese investment in Australia dropped to its lowest level in a decade last year, falling from C$7 billion in 2018 to C$3 billion. In March, amid concerns that Chinese firms would buy out Australian firms at the height of the COVID-19 crisis, Canberra announced temporary prescreening rules for all foreign investment.

Canada in the crossfire?

In 2018-19, China dropped from Australia’s second- to fifth-largest investor, with Canada taking China’s second-place spot. As APF Canada flagged last month, heightened scrutiny of FDI, even if focused on China, also creates greater legal and wait-time costs and uncertainty for Canadian investors. As state-owned investors, Canadian public retirement funds, pension boards, and investment managers may also face specific challenges. According to the APF Canada Investment Monitor, Canadian state-owned entities have invested C$18.9 billion in Australia, including in sensitive sectors such as ports, farms, and electrical grids. Private investors have also made big plays in Australia’s railways, energy, and mining sectors. As Canada mulls broadening its own FDI national security rules, we should expect more ‘friendly fire’ to come.