National security concerns have been cited by some countries as the motivation behind recent legislative and policy changes directed at regulating foreign investment. The creation of new or the bolstering of existing national security investment review regimes raises the question as to whether these changes are solely based on legitimate national security concerns or whether some countries are using national security as a guise for more protectionist practices.

For example, while critical infrastructure has long been considered as needing protection from foreign threats to security, the COVID pandemic has brought such concerns to the forefront, at times perhaps overshadowing the concerns more typically associated with national security such as threats of terror and espionage. Unfortunately, if an overly broad definition is given to what is considered to be “critical infrastructure”, or what constitutes a threat or risk to critical infrastructure,  government protective actions may also appear anti-globalist.

How COVID-19 changed the ‘national security’ review process

Rarely in recent memory have domestic resource vulnerabilities been as obvious as they have been during the pandemic. Supply chains have been shaken and availability of necessities such as vaccines and other pharmaceuticals, food, energy, etc. has becomes a serious concern for many nations.

Canada faced the direct consequences of relying on non-domestic sources of supply at the outset of the pandemic when it needed to obtain personal protective equipment not just for health care workers, but also for the general population. Where Canada had historically relied  on foreign suppliers, including on its close relationship with its largest trading partner, the US, the global crisis drove home the fact that in a time of shortages of critical goods such as PPE, every country has a primary obligation to first protect its own citizens.

Because of supply issues caused by the global crisis, countries worldwide are creating or strengthening their national security review regimes to guard against unwanted foreign investment. As we move forward, perhaps at some point with the pandemic in our collective hindsight, the question may be asked whether countries were, in fact, directly responding to the pandemic, or whether they were taking advantage of the opportunity to pursue a more protectionist approach to trade.

How ‘national security’ is expanding

Whether related to the pandemic entirely, partially, or not at all, the fact is that countries are strengthening their foreign investment laws in the name of national security, in part, by expanding the list of investment categories that could potentially attract national security reviews. Germany, which had been developing a stronger foreign investment review process to apply to the pharmaceutical industry and other related sectors in response to the pandemic, now intends to apply its new rules to additional sectors including robotics, aerospace, autonomous driving, artificial intelligence, quantum and nuclear technologies, and cybersecurity.

The United Kingdom’s National Security and Investment Bill, currently working its way through the UK Parliament, originally applied to defence industries but was subsequently broadened to include critical infrastructure, advanced technology and personal data.

China’s new Measures for Security Review of Foreign Investment, which came into effect in January 2021 provides a broad and open-ended list of key sectors to which its investment regime applies.

Beyond simply strengthening legislation, developed nations around the globe have taken and continue to take actions that raise questions of whether countries are pursuing economic objectives under the guise of ‘national security’ – less welcoming to foreign investment and moving away from globalism. For example, Australia and New Zealand have blocked a number of Chinese investments on national security grounds in recent years. China’s reaction has been to question the true motivation behind such actions.

Even Canadian investment proposals have been impacted.  Notably, in January 2021, Canadian convenience store operator, Alimentation Couche-Tard Inc., abandoned its proposed $20-billion+ acquisition of France’s largest grocery chain, Carrefour SA, after the French government, upon being informed of the deal, immediately reacted by publicly promising to block it. While the French government has insisted that its resistance to the deal was grounded in a concern over food security, it is also possible that, with Carrefour being a flagship of French business, the decision was also politically motivated, with fear of support coalescing around the government’s political opposition, which has consistently maintained a nationalist economic platform.

How Canada’s approach measures up

In contrast to some of the national security measures being taken by other countries, one might suggest Canada’s rules-based national security review process is much more reasonable and predictable. While “national security” is not defined in the Investment Canada Act, Canada’s national security review guidelines provide for a number of factors used to determine whether a national security review will be conducted. Where legitimate national security concerns exist, Canada may intervene, but even in such cases, parties may be able to reach a mediation agreement to mitigate concerns, allowing a transaction to proceed.

On March 24, 2021, Canada announced updates to its national security review guidelines, which expanded the list of factors the government will consider during the national security review process, and provided some added clarity with respect to some of the pre-existing factors (see Fasken’s bulletin on the updates here). Although the list is structured as a non-exhaustive list of factors to be considered (and thus, other factors can and likely will come in to play), the recent updates to the guidelines have provided more clarity around what may constitute a national security concern.

While one cannot entirely mitigate against the risk of a national security review even in Canada, in the wake of the pandemic with countries world-wide reimagining the scope of ‘national security’ and responding unpredictably to possible foreign investment, Canada’s fair and steady approach to welcoming most foreign investment proposals may positively distinguish it from other jurisdictions.