As new U.S. rules are being debated on investment screening of outbound investment destined for China, a recent statement by a German minister may suggest action there as well, although the issue has not progressed as far in Germany.

In remarks reported by Reuters last week, two German ministers weighed in recently on economic relations with China, including on investment flows.

Reuters noted that Economy Minister Robert Habeck said Germany is changing the way it deals with China and will give higher priority to human rights issues. In response to new information about treatment of Uyghurs in Xinjiang, Habeck said: "It has long been clear that while China is a major trading partner, there are very relevant problems, including when it comes to respecting human rights." Reuters also characterized him saying that "Germany is diversifying more, reducing its dependency on China, and will closely examine applications from German companies wanting to make investments in China to rule out human rights violations and forced labour in the supply chain."

Reuters then said that "Habeck's comments, along with remarks made by German Foreign Minister Annalena Baerbock earlier on Tuesday, reflect a tougher stance towards China than the previous government."

The reference to "closely examine applications from German companies wanting to make investments in China to rule out human rights violations and forced labour in the supply chain" could suggest some sort of outbound investment screening mechanism. Outbound investment screening is a big issue in U.S. policy-making right now, as various competing proposals are being debated within the Biden administration and in Congress. It is possible, and perhaps even likely, that this debate will come to Germany and other countries as well. In this regard, U.S.-EU cooperation through the Trade and Technology Council is a specific avenue through which the Biden administration could raise the issue with European allies.

CTM reached out to German law professor Christoph Herrmann to discuss specific aspects of this issue, focusing on investment screening related to outbound German investments in China. In particular, we asked about existing German law related to outbound investment screening, and whether changes might be coming.

Herrmann indicated that while Germany operates a rather strict inbound investment screening scheme, it doesn't have one for outbound investment. However, there are some conditions that could apply to German investments in China, as Germany does grant investment guarantees for outbound investments under certain circumstances (e.g. the existence of a BIT with the target country), and it recently adopted a supply chain law that requires undertakings of a certain size to ensure that their Tier-1 suppliers "act diligently" with regard to environmental and labor standards.

With regard to investment guarantees, German media sources reported last week that the Ministry of Economic Affairs denied investment guarantees for a Volkswagen investment in China due to human rights issues in Xinjiang. (Last month, U.S. Senator Marco Rubio (R-FL) sent a letter to VW's Chairman of the Board, asking for further information regarding Volkswagen’s partnerships with Chinese companies that, Rubio said, "are implicated in egregious human rights abuses around the world, including participation in the Chinese Communist Party’s genocide of Uyghur Muslims in the Xinjiang Uyghur Autonomous Region (XUAR) and the forced labor of trafficked children in the Democratic Republic of the Congo (DRC).")

In terms of concrete proposals for new rules on outbound investment screening, Herrmann was not aware of measures in the government's pipeline. He noted that while "there is talk about outbound investment control in academic circles," he has not come across "any concrete government initiatives" in this area.

More broadly, though, he said that "the regulatory environment for business between the EU/Germany and China is getting stricter and more difficult, as German politicians increasingly realize that their strategy of 'Change through Trade' isn‘t working."