Protectionism vs. free trade in the UK

January 2021 | SPOTLIGHT | GLOBAL TRADE

Financier Worldwide Magazine

January 2021 Issue

The UK government’s official stance is to “champion free trade, fight protectionism and remove barriers at every opportunity”. This approach to negotiations with overseas would-be trading partners is, of course, expected as the UK seeks strategic partnerships and alliances after the conscious decoupling with the EU. However, the government has simultaneously passed a series of protectionist-focused new laws, and there have been public calls from British businessowners for increased government intervention in order to protect British businesses and industry.

Post-Brexit trading landscape

Some may have envisioned Brexit as an opportunity to protect and promote UK home-grown businesses and trade; others may view being freed from EU regulation and trade agreements as a step toward establishing Britain as an independent global proponent of free trade. In an impending era of post-Brexit Britain (and an economy impoverished by the effects of the coronavirus crisis) and the government identifying the maintenance of London as the HQ of European FinTech and innovation as a top priority, one can probably expect further protections for goods and services of UK origin, in both the public and private sectors. As the UK government forges ahead with negotiating free trade agreements with foreign nations, while simultaneously trying to stimulate the COVID-19 battered economy and protect the livelihoods of the nation, a balance must be struck. Free trade and protectionism are not mutually exclusive. It will be crucial to ensure that the legal regime in the UK preserves its commitment to multilateral trade and fosters the City of London’s well-earned reputation for welcoming new investment and innovation on a truly global scale.

Calls for increased government involvement

The unprecedented reliance by the private sector on the government during the COVID-19 pandemic and the various lockdowns imposed has been extraordinary in terms of scale and duration. The diverse stimulus package implemented by the UK government to address the economic impact of the coronavirus (including the UK Coronavirus Job Support and Retention Schemes, establishment of the Future Fund scheme and Bounceback loans for start-ups and small businesses, tax and business rates reliefs for affected sectors) has united the public and private sectors in a common goal: to rebuild the UK economy and consumer confidence. It is interesting to note the calls for increased government involvement in dealmaking, such as the proposed $40bn takeover of Cambridge-based company ARM Holdings by NVIDIA. Hermann Hauser, co-founder of ARM, has publicly expressed concern that British jobs will be lost overseas. Intriguingly, Mr Hauser has implored the government, via an open letter to prime minister Boris Johnson, to either block the deal, impose legally-binding job guarantees for all ARM employees in the UK or has alternatively recommended that ARM be floated on the London Stock Exchange (LSE) as a British company with a ‘golden share’ (to be issued to the government) in order to protect national economic security and protect tech sovereignty. The UK government has typically been reluctant to intervene in commerce or private business deals, unless it is on the grounds of protecting public interest or national security.

New controls of foreign investment on national security grounds

On 11 November 2020, the UK announced new powers pursuant to the National Security and Investment Bill 2020 (NSI Regime) which will allow the government to screen takeovers and investments by foreign buyers in a range of industries from defence and technology to energy, transportation and communications (including a proposal to intervene retrospectively in certain circumstances). These powers mirror those adopted by an increasing number of countries around the world to guard against foreign direct investment (FDI) in strategic sectors – and reflect growing protectionist tendencies amid increasing concern about the ability of foreign companies (often with state backing) to acquire critical infrastructure and assets.

These powers are intended to “modernise government’s powers to investigate and intervene in potentially hostile foreign direct investment”. The government hopes that these new rules will stimulate foreign inward investment by providing legal certainty and transparency to investors and businesses, while also increasing the number of sectors subject to national security review.

New merger control powers in public interest cases

In an effort to address concerns about protecting the public interest, new competition laws have also come into force which grant the government the power to intervene or impose conditions on a takeover or merger of a business in order to protect financial stability, media plurality, national security (it should be noted however that the NSI Regime, once implemented, will replace the secretary of state’s ability to scrutinise takeovers and mergers which give rise to a national security consideration under the Enterprise Act 2002, as amended), or if in response to a public health emergency (this category was added in response to the COVID-19 outbreak).

The government’s focus on the burgeoning UK tech industry and enhanced regulation and protection for this sector are apparent from the lowering of the threshold at which the secretary of state may intervene or scrutinise completed or potential mergers or takeovers in three subsectors of technology crucial to protecting national security, namely artificial intelligence (AI), cryptographic authentication technology and advanced materials. However, the impact on foreign inward investment is likely to be limited as the Competition and Markets Authority (CMA) or secretary of state interventions only apply in limited scenarios where safeguarding the public interest is paramount.

Protectionism: transatlantic comparison

The UK has traditionally been far less bullish in protecting its homegrown creations and inventions, compared to the US. The US already maintains a far more comprehensive review regime for FDI and continues to bolster its export controls, particularly on emerging and foundational technologies, in order to protect its technology advantage both domestically and in conjunction with its allies and partners.

In the realm of FDI, the broadening of the authority of the Committee on Foreign Investment in the United States (CFIUS), pursuant to the August 2018 passage of the Foreign Investment Risk Review Modernization Act (FIRRMA), has enabled CFIUS to better address national security concerns arising from certain types of investments and transactions that were previously outside of its jurisdiction, specifically non-controlling investments by foreign parties into certain US businesses involved in critical technology, critical infrastructure or sensitive personal data, as well as certain real estate transactions. This has given CFIUS even greater power to review for national security considerations investments involving foreign governments, particularly through state-owned enterprises, as well as acquisitions involving cutting-edge or foundational technologies, and when such concerns cannot appropriately be mitigated, to require that they be blocked or unwound.

Meanwhile, as part of the National Defense Authorization Act for Fiscal Year 2019, the US Congress enacted the Export Control Reform Act of 2018 (ECRA), which grants the Bureau of Industry and Security (BIS) of the US Commerce Department greater authority to establish appropriate controls, including interim controls, on the export, reexport, or transfer (in-country) of ‘emerging’ and ‘foundational’ technologies that are essential to US national security. While the rulemaking process remains ongoing, BIS has already identified a number of representative categories of technology for which additional export controls may be required to protect national security, including in biotechnology, AI and machine learning technology, additive manufacturing, advanced materials, and advanced surveillance technologies. In addition, the US has issued a flurry of new export control measures in just the last few months aimed at preventing foreign adversaries, notably China and Russia, from acquiring US technology that could be used in development of weapons, military aircraft or surveillance technology, particularly through civilian supply chains or under civilian-use pretenses.

These measures have been further enhanced in an ‘America First’ campaign that has been at the forefront of the Trump administration’s agenda, aimed at protecting US industry and creating a level playing field for American workers. 2021 looks set to herald a new era for the US, in the form of the Biden/Harris administration – it will be interesting to see to what extent this rhetoric shifts.

Concluding remarks

Just one year ago it would have been impossible to predict an almost global economic shutdown in 2020, but as Britain looks ahead to life post-COVID-19 and post-Brexit, the government will be seeking to strike a balance between rebuilding the nation’s businesses and weakened economy, and establishing an independent global trading power to be reckoned with.

The influence of the practices of the US and other key allies on the UK’s new proposed FDI regime can already be seen and will likely continue to shape the narrative as the government moves forward with establishing trade deals in the new world order. The overriding message is clear: Britain is open for business, not exploitation.

Matthew Levitt is a partner, SJ Beaumont is an associate and Jason Wilcox is a special counsel at Baker Botts. Mr Levitt can be contacted on +44 (0)20 7726 3453 or by email: matthew.levitt@bakerbotts.com. Ms Beaumont can be contacted on +44 (0)20 7726 3443 or by email: sarah.beaumont@bakerbotts.com. Mr Wilcox can be contacted on +1 (202) 639 7853 or by email: jason.wilcox@bakerbotts.com.

Matthew Levitt, SJ Beaumont and Jason Wilcox

Baker Botts